-----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, CRGf9W7ZWR5a1PiTqC0VoMes43MfVSbVgdAyxsYSIvdN0/sDE/+9Eem/d4OtbYEn 0NsVjkU3fIpBN25zoccrSQ== 0000950147-97-000486.txt : 19970729 0000950147-97-000486.hdr.sgml : 19970729 ACCESSION NUMBER: 0000950147-97-000486 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 26 FILED AS OF DATE: 19970728 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUM CIGARS INTERNATIONAL LTD CENTRAL INDEX KEY: 0001041479 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 860846405 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-29985 FILM NUMBER: 97646523 BUSINESS ADDRESS: STREET 1: 15651 N 83RD WAY STREET 2: SUITE 3 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 6029228887 MAIL ADDRESS: STREET 1: 15651 N 83RD WAY STREET 2: SUITE 3 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 SB-2/A 1 REGISTRATION AMENDMENT As filed with the Securities and Exchange Commission on July 28, 1997 Registration No. 333-29985 Securities and Exchange Commission Washington, D.C. 20549 Form SB-2/A Amendment No. 2 Registration Statement under the Securities Act of 1933 PREMIUM CIGARS INTERNATIONAL, LTD. (Exact name of registrant as specified in its charter) Arizona 2121 86-0846405 State or jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification No.) Premium Cigars International, Ltd. Steven A. Lambrecht, CEO 15651 North 83rd Way, Suite 3 15651 North 83Rd Way, Suite 3 Scottsdale, Arizona 85260 Scottsdale, Arizona 85260 (602) 922-8887 (602) 922-8887 (Address, including zip code, and telephone (Name, address, and telephone number number, including, area code, of of agent for service) registrant's principal executive office) Copies to: Charles R. Berry, Esq. Christian J. Hoffmann, III, Esq. Michael F. Patterson, Esq. Streich Lang, P.A. Titus, Brueckner & Berry, P.c. Renaissance One 7373 North Scottsdale Road, Suite B-252 Two North Central Avenue Scottsdale Centre Phoenix, Arizona 85004-2391 Scottsdale, Arizona 85253 (602) 229-5200 (602) 483-9600 Approximate date of proposed sale to the public: As soon as practical on or after the effective date of this Registration Statement. If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] Calculation of Registration Fee
================================================================================================= Proposed Proposed Amount Title of each Number of Offering Maximum of class of securities Securities to be Price Per Aggregate Registration to be registered Registered Share(1) Offering Price(1) Fee - ------------------------------------------------------------------------------------------------ Common Stock, no par value 2,185,000(2) $5.25 $11,471,250 $ 3,476.14 Representative's Warrants 170,989(3) $ .01 $ 1,710 $ (4) Common Stock, no par value 170,989(5) $8.40 $ 1,436,308 $ 435.24 ----------- ---------- TOTALS: $12,909,268 $ 3,911.38(6) =================================================================================================
(1) Estimated solely for purposes of computing the registration fee pursuant to Rule 457. (2) Includes 285,000 additional shares of Common Stock which the underwriter has the right to purchase to cover over-allotments, if any. (3) Representative's warrants exercisable at 160% of the offering price. Excludes over-allotments, if any, and includes 19,011 bridge warrants issued to William B. McKee, which are exercisable at $5.25 per share. (4) Pursuant to Rule 457(g) no fee is being paid. (5) Issuable upon exercise of representative's warrants. (6) $4,158.49 was paid with our initial filing. The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. i PREMIUM CIGARS INTERNATIONAL, LTD. CROSS-REFERENCE SHEET
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS 1. Front of Registration Statement and Outside Front Cover Page of Prospectus....................................... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus.. Inside Front and Outside Back Cover 3. Summary Information and Risk Factors..................... Prospectus Summary; Risk Factors 4. Use of Proceeds.......................................... Use of Proceeds 5. Determination of Offering Price.......................... Outside Front Cover Page 6. Dilution................................................. Dilution 7. Selling Security Holders ................................ Not Applicable, but see Interim Financing -- Delayed Offering By Warrant Holders 8. Plan of Distribution..................................... Outside Front Cover Page; Underwriting 9. Legal Proceedings........................................ Legal Matters 10. Directors, Executive Officers, Promoters and Control Persons.................................................. Management; Principal Shareholders 11. Security Ownership of Certain Beneficial Owners and Management............................................... Principal Shareholders; Certain Transactions 12. Description of the Securities............................ Description of Securities 13. Interests of Named Experts and Counsel................... Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities............................... Management 15. Organization Within Last Five Years...................... Management; Principal Shareholders; Certain Transactions 16. Description of Business.................................. Prospectus Summary; Business 17. Management's Discussion and Analysis or Plan of Operations............................................... Management's Discussion and Analysis of Financial Conditions and Results of Operations 18. Description of Property.................................. Business 19. Certain Relationships and Related Transactions........... Certain Transactions 20. Market for Common Equity and Related Stockholder Matters.................................................. Outside Front Cover Page; Risk Factors 21. Executive Compensation................................... Management 22. Financial Statements..................................... Financial Statements 23. Engagement of Independent Accountants.................... Engagement of Independent Accountants
iv INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED JULY 28, 1997 Initial Public Offering Prospectus [PCI logo] 1,900,000 shares of Common Stock $5.25 per share We distribute moderately priced premium cigars and other cigars, which are sold from our humidors placed primarily in convenience stores in the United States and Canada. This is our initial public offering, and no public market currently exists for our shares. The offering price may not reflect the market price of shares after the offering. ----------------------------------------------------------------- Proposed Trading Symbols: NASDAQ SmallCap Market(sm) - PCIG Boston Stock Exchange - PCI ----------------------------------------------------------------- Terms of the Offering - -------------------------------------------------------------------------------- Price to Underwriting discounts Proceeds the Public and commissions to PCI ---------- --------------- ------ Per Share....................... $5.25 $.525 $4.725 Total (3)....................... $9,975,000 $997,500 $8,977,500 - -------------------------------------------------------------------------------- From the net proceeds, we expect to pay offering expenses of $674,250. The underwriters have a right to purchase up to 285,000 additional shares. For indemnification and other arrangements with the underwriters, see "Underwriting" at page ___. ------------------------------------------------------------ This Investment Involves a High Degree of Risk. You Should Purchase Shares Only If You Can Afford a Complete Loss. See "Risk Factors" Beginning on Page ___. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved these securities, or determined if this Prospectus is truthful or complete. Any representation to the contrary is a criminal offense. - -------------------------------------------------------------------------------- Underwriting: Firm Commitment W.B. MCKEE SECURITIES, INC. KASHNER DAVIDSON SECURITIES CORP. August ___, 1997 [INSIDE FRONT COVER] [picture of typical PCI plexiglass humidor with magazine rack and magazine typically sold from rack as used in convenience stores] [caption:] Typical plexiglass humidor with magazine rack used in convenience stores. [lit cigar in background (no caption)] ii [INSIDE FRONT COVER FOLD OUT] [pictures of five-SKU and three-SKU hand-crafted wood humidors with magazine racks and typical cigar-related magazines sold from racks] [caption:] Typical five-SKU and three-SKU wood humidors with magazine racks and magazines. [picture of clerk with on-counter humidor in convenience store] [caption:] Typical location of humidor and magazine rack in convenience store. [picture of 7-Eleven(TM) advertisement currently appearing in cigar aficionado(tm) magazine featuring PCI cigar] [caption:] Advertisement currently appearing in Cigar Aficionado(TM) magazine featuring PCI cigar. [PCI logo (no caption)] [picture of lit cigar in background (no caption)] [flat reproduction of six pci-designed cigar bands] [caption:] PCI-designed cigar bands. iii Special Note Regarding Forward-looking Statements Some of the statements contained in this Prospectus, including information incorporated by reference, 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 the success or failure of our efforts to implement our business strategy; 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. vi PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this Prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire Prospectus carefully, including the risk factors and financial statements. PCI Offices: Premium Cigars International, Ltd. ("PCI") , Suite 3, 15651 North 83rd Way, Scottsdale, Arizona 85260, telephone (602) 922-8887, or toll-free at (888) 724-1001. Our Business: We distribute cigars throughout the United States and Canada. We had placed our PCI Cigar Program, which includes supplying humidors, cigars, service and information, in over 1,550 stores as of June 30, 1997. We are currently expanding with national retail and distribution accounts in both the United States and Canada. Our mission is to place our PCI Cigar Program in every convenience, gas and high-traffic retail outlet. Our Concept: Premium cigars are a luxury item and are often purchased on impulse. We seek to capitalize on the recent growth of the premium cigar market by introducing our PCI Cigar Program to additional convenience stores. Based on reports by the Cigar Association of America, following several decades of decline, premium cigar sales in the United States increased by 10.7% in 1993, 14.5% in 1994, 30.5% in 1995 and an estimated 67.0% in 1996. The PCI Cigar Our complete PCI Cigar Program includes: Program: o imported, hand-rolled short, medium and long-leaf filler premium cigars from the Dominican Republic, Honduras, Mexico, Nicaragua and the Philippines; o domestic machine-made mass market cigars; o in-store, countertop, custom made, hand-crafted wood and plexiglass humidors; o training materials and telemerchandising support to individual stores; o point-of-purchase information cards and cigar magazine racks; o telemerchandising for order fulfillment; o large, "walk-in" humidors for distribution center cigar inventory storage; and o spokesman relationship with Arie Luyendyk, the recent winner of the Indianapolis 500. Our Customers: We sell virtually all of our cigars through convenience stores, including stores affiliated with: The Southland Corporation and Southland Canada, Inc. which do business as 7-Eleven(TM); AM/PM(TM); Circle K(TM); Associated Grocers; SuperValu(TM)(1); and stores supplied by the McLane Compan Our Cigars: We distribute name-brand and our own private-label cigars from our humidors. Premium cigars generally retail from $1 to more than $20. We distribute low to medium-priced premium cigars, primarily in the $1 to $8 price range. We also distribute mass market cigars at around $1. --------------------------------- (1) Believed to be trademarks of third parties. We have no ownership interest in any of the intellectual property indicated by trademark or service mark symbols in this Prospectus. Our History: Because premium cigars require special care (including humidified storage) and knowledgeable sales personnel, they were traditionally sold only in tobacco specialty shops. In June 1996, Colin Jones and Greg Lambrecht, our Vice Presidents of International and National Sales, developed their concept of selling premium cigars from in-store humidors through convenience stores, grocery stores, and other retail outlets. They introduced the concept through their wholly-owned companies J&M and Rose Hearts (see below) first in Canada and then in the northwest United States. CAN-AM; In December 1996, we acquired all of the outstanding Rose Hearts; stock of CAN-AM International Investments Corp., a And J&M: British Columbia (Canada) corporation. CAN-AM had previously acquired the cigar distribution operations, including cigar accounts, humidors and inventory, of Rose Hearts, Inc., a Washington corporation wholly-owned by Greg Lambrecht and J&M Wholesale, Ltd., a British Columbia (Canada) corporation wholly-owned by Colin Jones. J&M began distributing cigars in convenience stores in Vancouver, B.C., Canada in June 1996. Rose Hearts began its cigar distribution in Seattle, Washington in late summer 1996. Current Currently, we distribute cigars to over 1,550 Operations: convenience stores and other retailers in: Canada: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. United States: Washington, Oregon, California, Arizona, Kansas, Missouri, Utah, Idaho, Alaska, Nevada, Oklahoma, Texas, Maryland, Virginia, Colorado, Illinois, Michigan, Wisconsin, Nebraska, Georgia, Montana and Florida. We have established our PCI Cigar Program to supply cigars and in-store humidors for direct shipments and delivery and in-store merchandising in convenience stores affiliated with certain national chains. In most instances we have "master" agreements with, have negotiated and approved standard form retailer agreements with, or have other arrangements with, these national accounts. We have developed relationships with several cigar suppliers and are expanding our sources for cigars and accessories. 2 The Offering Securities offered........................ 1,900,000 shares Shares outstanding at July 28, 1997:....................... 1,480,500 shares Shares to be outstanding after the offering...................... 3,380,500 shares Warrants Outstanding at July 28, 1997:....................... 380,226 Common Stock Purchase Warrants Total public price........................ $9,975,000 Underwriters' discount.................... $ 997,500 Net proceeds.............................. $8,977,500 Estimated offering expenses............... $ 674,250 Over-allotment............................ Up to 285,000 shares; if the full over-allotment is purchased by the underwriters, the total public offering price, underwriting discount, and net proceeds will be $11,471,250; $1,147,125; and $10,324,125, respectively. Use of proceeds........................... We intend to use offering proceeds to expand the PCI Cigar Program by purchasing humidors, cigars and accessories; repaying indebtedness; funding sales and marketing and providing working capital. Risk factors.............................. Investing in our shares is very risky, and you should be able to bear a complete loss of your investment. See Risk Factors." Proposed market symbols: Nasdaq SmallCap Market(sm)................. PCIG. Boston Stock Exchange...................... PCI. 3 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following financial information reflects the operations of PCI (and its predecessor operations) for the period from June 1, 1996 to March 31, 1997. This summary financial information has been derived from the consolidated financial statements of PCI and subsidiary which appear later in this Prospectus. This data should be read in conjunction with those consolidated financial statements and related notes. Operations June 1, 1996 to March 31, 1997 -------------- Consolidated Statement of Operations Data: Historical Pro Forma ---------- --------- (unaudited) Sales ......................................... $ 845,571 $ 845,571 Net loss ...................................... ($ 153,517) ($ 361,217)(2) Net loss per share (1) ........................ ($ .10) ($ .10) Weighted average of shares outstanding (1) .... 1,480,500 3,741,715 March 31, 1997 -------------- Consolidated Balance Sheet Data: Historical Pro Forma(3) ---------- --------- Working capital ............................ ($ 82,169) $9,014,631 Total assets ............................... $ 523,461 $9,566,711 Total liabilities .......................... $ 459,928 $ 349,928 Accumulated deficit ........................ ($ 153,517) ($ 153,517) Shareholders' equity ....................... $ 63,533 $9,216,783 Net tangible book value per share .......... ($ .02) $ 2.45 (1) Shares of Common Stock issued to founders at the time of PCI's organization are treated as outstanding since inception; Pro Forma includes issuance of 1,900,000 shares in the offering and conversion of 361,215 bridge warrants and excludes conversion of 19,011 bridge warrants issued to William B. McKee. (2) As adjusted to give effect to additional executive compensation and management fees (see "Management -- Executive Compensation"), and assumes repayment of indebtedness. (3) As adjusted to give effect to the offering and exercise of 361,215 bridge warrants. 4 RISK FACTORS Investing in PCI's Shares is very risky. You should be able to bear a complete loss of your investment. You should carefully consider the following factors, among others. Recently Organized PCI was organized in December, 1996 and acquired a Business; Losses During cigar distribution business which began in June, Start-up Operations. 1996. PCI, its subsidiary CAN-AM, and the predecessor cigar distribution operations of J&M and Rose Hearts, We have incurred incurred losses of $153,517, or $.10 per share, on losses since we revenues of $845,571, for the period from June 1, began doing 1996 (inception) to March 31, 1997. The rapid business. expansion in our accounts since March has substantially increased our expenses, and we have not yet realized increased revenues. Our ability to operate profitably depends on increasing our sales and distribution outlets, achieving sufficient gross profit margins, and a continuing demand for premium cigars. PCI is also subject to business risks associated with new business enterprises. We cannot assure you that PCI will operate profitably. See "Selected Historical and Pro Forma Consolidated Financial Information"; "Management's Discussion and Analysis of Results of Operations." We had a working At March 31, 1997, PCI had a net working capital capital deficit at deficit of approximately $82,169. Our operations were our fiscal year end, financed to that date through private placements of and we have met our shares in 1997, which generated net proceeds of capital needs with approximately $207,050. From April to June 1997, we private sales of obtained debt financing by issuing bridge notes which securities. generated net proceeds of $810,000, virtually all of which was used to expand operations. We have no plans to obtain additional outside capital after we complete this offering. However, we cannot assure you that we will not need additional funds or that any needed funds will be available, if at all, on acceptable terms. If we need additional funds, our inability to raise them will have a very adverse effect on our operations. If we raise funds by selling equity securities, sales may dilute your share ownership. See "Management's Discussion and Analysis of Results of Operations." 40-State Tobacco On June 20, 1997 the Attorneys General of 40 States Litigation - Proposed and the major United States cigarette manufacturers Settlement. announced a proposed settlement of a lawsuit filed by the States. The proposed settlement, which will The effect, if any, require that the United States Congress take certain of this settlement on action, is complex and may change significantly or be the cigar industry is rejected. However, the proposal would require uncertain. significant changes in the way United States cigarette and tobacco companies do business. Among other things: the tobacco companies will pay hundreds of billions of dollars; the FDA could regulate nicotine as a drug; class action lawsuits and punitive damages would be banned; cigarettes and smokeless tobacco could only be sold behind store counters, with no self-service; and tobacco billboards and sporting event sponsorships would be prohibited. The potential impact, if any, of the settlement and related legislation on the cigar industry is uncertain. See "Business -- Government Regulation; Tobacco Industry Litigation." Extensive and The tobacco industry in general has been subject to Increasing Regulation extensive federal, state and local regulation and and Taxation of taxation. Recent trends have increased regulation and Tobacco Products. taxation of the tobacco industry. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole, and may focus more directly on cigars in the future. Cigars are subject to federal excise taxes which vary according to the type and weight of the cigar. The recent increase in popularity of cigars could lead to an increase in regulation and taxation of cigars. 5 Federal legislation A variety of bills relating to tobacco issues have has been introduced been introduced in the U.S. Congress, including bills to regulate many that would: aspects of the o prohibit the advertising and promotion of all tobacco industry. tobacco products or restricted or eliminated the deductibility of such advertising expense, o increase labeling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins, o shift regulatory control of tobacco products and advertisements from the U.S. Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration (the "FDA"), o increase tobacco excise taxes, and o 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, none of these proposals has been passed by Congress. If enacted, these or similar proposals may adversely affect our results of operations or financial condition. See "Business -- Government Regulations." State and local A majority of states restrict or prohibit smoking in regulation and certain public places and restrict the sale of taxation of tobacco products to minors. Local legislative and smoking is regulatory bodies have increasingly moved to curtail pervasive and smoking by prohibiting smoking in certain buildings increasing, and or areas or by requiring designated "smoking" areas. public pressure for Several states currently prohibit self-service sales more regulation or restrict point-of-sale placement of tobacco exists. products. Further restrictions of a similar nature could have a substantial adverse effect on our sales or operations, such as banning self-service sales, counter access to or display of cigars. Numerous proposals also have been considered at the state and local level restricting smoking in certain public areas, regulating point of sale placement and promotions and requiring warning labels. 46 states currently tax cigars at rates ranging from 2% to 75% and cigars are subject to local taxes as well. The number of states taxing cigars and the rates of taxation are likely to increase. In addition to governmental restrictions, certain retailers may voluntarily stop selling all tobacco products, including cigars, because of public pressure. Warning labels; Although federal law has required health warnings on Second-hand cigarettes since 1965 and on smokeless tobacco since smoke. 1986, there is no federal law requiring that cigars carry those warnings. California requires "clear and reasonable" warning to consumers who are exposed to chemicals determined by the state to cause cancer or reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Similar legislation has been introduced in other states, but did not pass. We cannot assure you that other states will not enact similar legislation. Federal and state legislatures have also considered the consequences of tobacco smoke on others who do not smoke (so called "second-hand" smoke). If regulations relating to second-hand smoke are adopted, these regulations may have a substantial adverse effect on our results of operations or financial condition. Canadian federal and The Canadian government recently enacted substantial provincial laws and restrictions or the promotion and retail display of regulations. tobacco products. The Canadian government may supplement the new legislation with implementing regulations and provincial governments may add other regulations and restrictions on tobacco products. Each Canadian Province taxes cigars at rates which vary from 45% to 95% of retail selling prices. New laws and potential additional regulations could adversely affect our Canadian business. See "Business -- Government Regulations -- Canadian Regulations -- Canadian Taxes." 6 Possible additional Increased cigar consumption and its publicity may regulation. increase the risk of additional regulation. We cannot predict the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body. Future legislation, regulation or tax policies may have a significant adverse effect on the ability of cigar manufacturers or distributors, including PCI, to generate revenues and profits. See "Business -- Government Regulation; Tobacco Industry Litigation." Historical Dependence Corporate and franchise stores affiliated with The on One Customer Store Southland Corporation ("Southland USA") and Southland Group. Canada, Inc. ("Southland Canada") (collectively "7-Eleven") accounted for over 82% of our sales in the fiscal year ended March 31, 1997. Since then, we 7-Eleven stores have expanded our customer base, but sales to comprise 79% of 7-Eleven stores still accounted for over 79% of our our stores sales for the quarter ended June 30, 1997. We expect that sales to 7-Eleven stores will continue to account for a substantial percentage of our sales. Our plans for the coming year include rapidly expanding the number of 7-Eleven stores participating in our PCI Cigar Program. PCI, Southland USA, or any U.S. franchisee have the right to terminate our agreement for any reason upon 60 days notice. Southland Canada can terminate its arrangement with us at any time without notice. Problems with 7-Eleven stores, our major customer in Canada and the United States, could have a substantial adverse impact on our business. A substantial reduction in our 7-Eleven business could result in diminished revenues for several quarters or more as we attempt to replace that business. See "Business -- Our Largest Customer -- Canadian Sales; CAN-AM -- U.S. Sales." Nature of Convenience We have "master" agreements and other arrangements Store Distribution with corporate offices of several major convenience Relationships. store chains to place the PCI Cigar Program in corporate and participating franchise stores. Our agreements However, the nature of the convenience store with convenience distribution business is that all supplier stores may be relationships are terminable on short notice (usually terminated easily. on between 30 and 120 days notice). In addition, while "master" or approved form agreements may be automatically acceptable for use, participation in the PCI Cigar Program is usually at the discretion of each local franchise store or each region of the country. As long as demand for premium cigars remains strong, we believe that individual stores and regions will participate in our PCI Cigar Program. However, if demand and sales decline, stores may terminate participation on short notice, which could have a significant adverse effect on our business. See "Business - Master Agreements and Arrangements with National Chains." Product placement We do not pay "slotting" fees or other inducements to competition. retailers in order to secure counter space, which could affect our ability to place our humidors on store counters. In addition, other major manufacturers or distributors may have master agreements with convenience stores which require the stores to locate that manufacturers' or distributors' tobacco or other products in a counter position that is preferential to, or at least as favorable as, the location of our products. This may inhibit our ability to obtain favorable counter presentation of our humidors. See "Business -- Products -- Humidors." Declining Market for According to industry sources, the cigar industry was Cigars Through 1991. in substantial decline from approximately 1973 to 1991. Cigar sales, as well as smoking in general, The effect of steadily decreased after a 1964 report of the United medical studies on States Surgeon General and numerous other subsequent smoking. studies which stress the link between smoking, including secondary smoke, and medical problems such as cancer, heart, respiratory and other diseases. "No smoking" laws, ordinances and 7 prohibitions on cigar smoking in certain cases may have adversely affected the sale of cigar products. These factors may continue to have an adverse effect upon the cigar industry in general and our business in particular. See "Business -- Medical Studies on Smoking." Demand for Cigars; Premium cigar sales have increased dramatically in Inventory. recent years, but we cannot assure you that the trend will continue. If cigar sales trends do not continue as we anticipate or if we experience a reduction in our demand, we may temporarily accumulate excess inventory which could have an adverse effect on our business or results of operations. See "Business -- The Expanding Cigar Market." Current positive Premium cigar sales have increased since 1991, and sales trends may the cigar industry has experienced very positive not continue. trends in sales since 1993. We believe 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. We cannot assure you 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. See "Business -- The Expanding Cigar Market." Other Tobacco Industry In addition to the 40-State litigation referred to Litigation. above, the tobacco industry has experienced and is experiencing significant health-related litigation involving tobacco and health issues. Plaintiffs in such litigation have sought and are seeking Current litigation compensatory, and in some cases punitive, damages for focuses on various injuries claimed to result from the use of cigarettes and tobacco products or exposure to tobacco smoke. The smokeless tobacco. proposed settlement of the 40-State litigation may substantially limit litigation, but we cannot assure that there would not be an increase in health- related litigation against the cigarette and smokeless tobacco industries or similar litigation in the future against the cigar industry. Neither PCI, nor to our knowledge any other cigar distributor, is a party to tobacco industry litigation. However, should litigation involving cigars be initiated the costs of defending prolonged litigation and any settlement or successful prosecution of any significant health-related litigation could have a substantial adverse effect on our results of operations or financial condition. See "Business -- Tobacco Industry Litigation." The potential for The recent increase in the sales of cigars and the litigation targeting publicity such increase has received may have the cigars is growing. effect of increasing the probability of legal claims. Also, a recent study published in the journal Science reported that a chemical found in tobacco smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and, thereby, directly links lung cancer to smoking. The National Cancer Institute has announced that it will issue a report in 1997 describing research into cigars and health. This study and this report could affect pending and future tobacco regulation or litigation relating to cigar smoking. See "Business -- Government Regulation, Tobacco Industry -- Litigation." Dependence on a Few We do not directly manufacture or import any cigars, Suppliers. and depend entirely on third party manufacturers, suppliers and importers for our cigars. Typically, we do not have supply agreements, but submit purchase orders for cigars. We currently purchase cigars from over 19 suppliers. We have relied on For the quarter ended June 30, 1997 our largest two suppliers for supplier, TSG Import, Export and Manufacturing over 75% of our Corporation, located in the Dominican Republic, cigars. accounted for approximately 40% of our cigar purchases for Canadian distributors and 38% of our total cigar purchases. Our written agreement with TSG expired on July 7, 1997, but we continue to purchase from TSG on the same terms as in our agreement. We are negotiating with TSG to reach a new agreement. Our second 8 largest supplier, House of Horvath, Inc., accounted for 37% of our total purchases. Currently, we have We have executed supply contracts with a few minor no contracts with suppliers but with none of our major suppliers. major suppliers. We are currently negotiating with manufacturers in the Dominican Republic and elsewhere to secure multiple sources of cigars. Although we believe that we could quickly replace our main suppliers with alternative sources at comparable prices and terms, a disruption in the supply of cigars from either TSG or House of Horvath would have a significant adverse impact on our operations. See "Business -- Cigar Purchasing; Private Label and Custom Brands." Risks Relating to We primarily sell moderately-priced cigars which are Supply of Cigars. hand-rolled or machine-made from tobacco aged six months to two years. At the present time, we believe there is an adequate supply of tobacco available in a number of countries for these types of cigars. However, we also sell a limited number of higher priced premium cigars which require longer-aged tobacco. Our ability to acquire these 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, increases in demand may adversely affect our ability to acquire higher priced premium cigars. See "Business -- Cigar Production -- Cigar Purchasing; Private Label and Custom Brands." Competition. As a distributor of premium cigars, we generally compete with a smaller number of less well-known, Currently, we have primarily regional, distributors including Southern several smaller, Wine and Spirits, Specialty Cigars, Inc., Cohabico, primarily regional Old Scottsdale Cigar Company, Inc. and many other competitors. small tobacco distributors. Large potential The cigar industry in general is dominated by a small competitors are number of companies which are well known to the cigar manufacturers public. These larger cigar manufacturing and and distribution wholesale companies such as 800 JR Cigar Company, companies. Inc., Consolidated Cigar Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar Company and US Tobacco have not yet entered the retail distribution market but may do so in the future. Also, a number of large distribution companies, such as McLane and CoreoMark, who are currently in the convenience outlet distribution business, have not yet entered the premium cigar distribution business, but may do so in the future. These cigar manufacturing and distribution companies, along with major cigarette manufacturers, have more resources than PCI. If they chose to enter the cigar distribution market, they would constitute formidable competition for our business. We cannot assure you that we can compete successfully in any market. See "Business -- Competition." 9 Dependence on Our business is largely dependent on our ability to Management. hire and retain quality managers. Our president, Steven A. Lambrecht, has no prior experience in the We have a few business of distributing cigars or other tobacco key officers and products. We have agreements with certain officers directors. and directors, including written employment agreements with Steven A. Lambrecht, Colin A. Jones and Greg P. Lambrecht and a business consulting agreement with David S. Hodges. We also have a verbal consulting agreement with William L. Anthony. The loss of Messrs. Steven or Greg Lambrecht, Jones, Hodges or Anthony could have an adverse effect upon our business and prospects. See "Management -- Executive Compensation." Key officers and The employment agreements for each of Steven A. directors may terminate Lambrecht, Colin A. Jones and Greg P. Lambrecht allow their employment them to terminate their employment at any time on two agreements on short weeks' notice. After the completion of this offering, notice. either PCI or David S. Hodges may terminate his business consulting agreement at any time. Mr. Hodges may continue to serve as a consultant for up to six months or until he accepts other employment. Either Mr. Anthony or PCI may terminate his consulting agreement at any time, with or without cause. Because of the short notice requirements, we may not be able to replace these individuals before we suffer an adverse impact on our business. See "Management --Executive Compensation." Key-man We do not currently maintain key-man life insurance insurance. on any of our employees, but will be required to maintain $1,000,000 in key-man life insurance on Steven A. Lambrecht at least until March 31, 2002, according to the terms of our Agreement with the underwriters. See "Underwriting." Control by As of June 24, 1997, our officers and directors owned Management. approximately 76% of our outstanding shares. Upon completion of this offering, and assuming full exercise of the bridge warrants, our officers and directors will own approximately 33% of the then issued and outstanding shares, and they may be able to elect a majority of the directors and continue to control PCI. However, Arizona law allows shareholders to cumulate their votes for the election of directors and may allow minority shareholders a greater opportunity to elect a director. See "Principal Shareholders." Conflicts of Interest. Certain relationships between PCI and certain of our officers, directors and affiliates involve inherent conflicts of interest. In particular, Greg P. Lambrecht and Colin A. Jones own Rose Hearts and J&M, two companies that do business with PCI. Greg P. Lambrecht and Mr. Jones are officers, and together own more than 49% of our issued and outstanding shares. After this offering, they will own approximately 22%. See "Certain Transactions." Policy for resolving We will not enter into any transaction with a related conflicts of interest. party unless the transaction or loan is on terms that are no less favorable to us than we could obtain from an unrelated third party and a majority of the disinterested, "independent" members of our board of directors must review and approve any transaction involving related parties or conflicts of interest. We entered a number of transactions before we adopted this policy and before we had any disinterested, independent directors to ratify the transactions. See "Certain Transactions -- Resolving Conflicts of Interest." 10 Risks Relating to A portion of our proposed business involves supplying Trademarks. exclusive "private label" cigars to certain customers. The brand names used for such private Currently we own labels will be important, and we intend to apply for no trademarks. federal trademark and tradename protection when appropriate, relying primarily on trademark law to protect brand names. We do not currently own any federally registered trademarks or tradenames, but we have filed federal trademark applications for three private label names. Trademark protection We cannot assure you that any pending trademark is uncertain. application will result in a registered trademark, or that any trademark granted will be effective in thwarting competition or be held valid if subsequently challenged. Our failure to obtain trademark protection, or illegal use of any trademarks we may obtain, may have an adverse effect on our business, financial condition and operating results. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as the laws of the United States or Canada. Costs of prosecuting We cannot assure you that claims for infringement or and defending claims for damages resulting from any such trademark infringement will not be asserted or prosecuted infringement claims against us. Even if we obtain trademark protection are significant. for our private label names, the validity of any trademarks may be challenged. Any such claims, with or without merit, could be time consuming and costly to defend, diverting management's attention and our resources. See "Business- Intellectual Property Rights." Effects of Fluctuations We purchase cigars which are manufactured by in Cigar Costs and suppliers outside the United States. The price and Availability. availability of these cigars are subject to numerous factors out of our control, including weather conditions, foreign government policies, potential trade restrictions and the overall demand for cigars. While we have expanded our base of suppliers, and our unit costs have been improving, we have no significant written agreements with suppliers, only ongoing relationships. Loss of these relationships may make it difficult for us to replace sources of cigars of the same quality, price and quantities. We cannot assure that our current suppliers of cigars will be able to supply us with sufficient quantities or at reasonable prices. See "Business -- Products -- Our Cigars." Social, Political and We purchase virtually all of our premium cigars from Economic Risks manufacturers located in countries outside of the Associated with Foreign U.S., including the Dominican Republic, Mexico, Operations and Honduras, Nicaragua and the Philippines. Social, International Trade. 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. or Canadian 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 the Dominican Republic, Mexico or Honduras could interrupt the production of premium cigars, which would inhibit us from buying inventory. Accordingly, we cannot assure you that changes in social, political or economic conditions will not have a substantial adverse effect on our 11 business. See "Business -- Cigar Purchasing; Private Label and Custom Brands." Possible Failure to We intend to list our Common Stock on The Nasdaq Obtain or Maintain SmallCap Market(sm) and the Boston Stock Exchange and Exchange Listings on the believe that we will be able to satisfy and maintain Nasdaq SmallCap the current and proposed entry standards for those Market(sm) or Boston exchanges when we complete this offering. If we are Stock Exchange. unable to satisfy and maintain the requirements for continued listing on Nasdaq or the Boston Stock Exchange, our shares will not be listed on those exchanges. See "Description of Securities." Potential liquidity If our shares are not listed on an exchange, trading, problems. if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board, which was established for securities that do not meet The Nasdaq SmallCap Market(sm) listing requirements. Consequently, selling PCI shares would be more difficult because smaller quantities of shares could be bought and sold, could be delayed, and security analysts' and news media's coverage of PCI may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for our securities. See "Description of Securities." Risks of If our securities are not listed on The Nasdaq Low-priced Stocks. SmallCap Market and/or the Boston Stock Exchange, they may become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our shares and may affect the ability of holders to sell PCI shares in the secondary market. See "Description of Securities." Penny stock The Commission's regulations define a "penny stock" regulations. to be any equity security that has a market price less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock restrictions will not apply to our shares if they are listed on The Nasdaq SmallCap Market or the Boston Stock Exchange and we provide certain price and volume information on a current and continuing basis, or meet required minimum net tangible assets or average revenue criteria. We cannot assure you that our shares will qualify for exemption from these restrictions. If PCI shares were subject to the penny stock rules, the market liquidity for the shares could be adversely affected. See "Description of Securities." No Dividends We intend to retain any future earnings to fund the Anticipated. operation and expansion of our business. We do not anticipate paying cash dividends on our shares in the foreseeable future. See "Description of Securities -- Common Stock"; "Dividend Policy." Shares which may be Currently, other than 361,215 of the bridge warrants Acquired at or Below and options held by directors William L. Anthony and the Offering Price. Robert H. Manschot to purchase 25,000 shares, there are no outstanding warrants or options to acquire PCI shares. Mr. Anthony and Mr. Manschot may exercise their options to purchase shares at the offering price. The bridge warrants are exercisable at 50% of the price per share in this offering or $2.63 except for the bridge warrants held by William B. McKee, which are exercisable at the offering price of $5.25 per share, and holders are 12 likely to exercise them, if at all, at a time when we would otherwise be able to obtain capital on terms more favorable than those provided in the bridge warrants. See "Security Ownership of Certain Beneficial Owners and Management"; "Interim Financing -- Bridge Financing and Bridge Warrants." Shares Eligible for All 1,480,500 of the currently issued and outstanding Future Sale. PCI shares are "restricted securities," as that term is defined under Rule 144. None of these shares will become eligible for sale under Rule 144 prior to December 31, 1997. Thereafter, at various times through June 20, 1998, these 1,480,500 shares will become eligible for sale under Rule 144. See "Description of Securities -- Shares Eligible for Future Sale." Contractual sale The holders of all 1,480,500 shares have agreed that restrictions. they will not sell their shares for 18 months from the date of this Prospectus without the prior approval of the underwriter. See "Description of Securities -- Shares Eligible for Future Sale." Warrant shares; Bridge warrant holders may purchase 380,226 shares restrictions on during the five-year period commencing on completion resale. of this offering. However, the bridge warrant holders have agreed that if they exercise the bridge warrants they will not sell the underlying shares for 12 months from the date of this Prospectus, without the prior approval of the underwriter. This potential delayed offering may result in the resale of bridge warrant shares at some date between one and five years from the completion of this offering. See "Interim Financing -- Delayed Offering By Warrant Holders." We cannot predict We are unable to predict the effect that sales made the depressive effect under Rule 144, the delayed resale of warrant shares of resales. or other sales may have on the then prevailing market price of our shares. It is likely that market sales of large amounts of these or other PCI shares after this offering (or the potential for those sales even if they do not actually occur), will have the effect of depressing the market price of PCI shares. See "Description of Securities -- Shares Eligible for Future Sale"; "Interim Financing -- Delayed Offering By Warrant Holders." Limited Insurance We carry general liability insurance with an Coverage. aggregate limit of $10,000,000, and product liability and health hazard insurance. These policies also cover our suppliers, manufacturers and retail outlets, however we cannot assure you that we will not be subject to liability which is beyond the limits of our general liability, product liability and health hazard insurance coverage, and which may have an adverse effect on our business. See "Business -- Tobacco Industry Litigations." Dilution. Purchasers of shares will experience immediate and substantial dilution of $2.80 in net tangible book value per share , or approximately 53% of the assumed offering price of $5.25 per share. See "Dilution." No Prior Market for Prior to this offering, there has been no public Shares; Determination market for PCI shares. We cannot assure you that any of Public Offering trading market for our shares will exist following Price. the offering or that investors in the shares will be able to resell their shares at or above the offering price. The offering price for the shares will be determined through negotiations between us and W.B. McKee Securities, Inc., and may not be indicative of the market price of the shares after the offering. See "Description of Securities -- No Prior Market for Shares." 13 Use Of Offering We will use $1,000,000 (approximately 12%) of net Proceeds to Repay offering proceeds to repay the principal amount of Debt. notes relating to the bridge financing, rather than purchase inventory or humidors to expand the PCI Cigar Program. See "Use of Proceeds" and "Interim Financing." 14 USE OF PROCEEDS The net proceeds we receive from the sale of 1,900,000 Shares, assuming an offering price of $5.25 per share, and after deducting underwriting discounts and commissions of $997,500 and offering expenses of approximately $674,250, are estimated to be $8,303,250 ($9,604,988 if the Underwriter's over-allotment option is exercised in full). We expect to use the net proceeds (assuming no exercise of the Underwriter's over-allotment option) as follows: [Pie chart graphic of use of proceeds] Application of Approximate Approximate Net Proceeds Dollar Percentage ------------ Amount of Net ------ Proceeds -------- Repayment of Indebtedness(1)............. $1,000,000 12.1% Purchase of Cigars and Accessories(2).... 1,900,000 22.9 Purchase of Humidors(3).................. 4,287,400 51.6 Sales and Marketing(4)................... 700,000 8.4 Working Capital and general corporate purposes(5).............................. 415,850 5.0 ---------- ----- Total.............................. $8,303,250 100.0% ========== ===== (1) Represents the repayment of the bridge notes issued in 1997 with a total principal amount of $1,000,000. The bridge notes accrue interest at a rate of 8% per year until completion of this offering and at 16% per year thereafter. The bridge notes are due on the earlier of the consummation of this offering or two years from their issuance. Proceeds from the bridge notes were used to purchase cigars, humidors and related items, capital equipment and to pay salaries, business expenses, office costs and professional and consulting fees. 15 (2) Represents the amount needed to maintain adequate inventory levels to support retail sales turnover retail. Stores will keep only enough stock to fill their countertop humidors due to the care required to maintain cigar freshness. In addition, deposits are required on some overseas cigar purchase orders. (3) Represents the amount needed to purchase humidors to supply stores with custom-designed countertop display humidors. (4) Represents sales and marketing expenditures spending for trade relations events and support to further develop our relationships with major chain accounts and national distributors. (5) Represents a minimum level of working capital for general corporate purposes such as advertising, customer education, deposits and other prepaid assets. We intend to use these net proceeds to continue, and further accelerate, the rollout of the PCI Cigar Program with national chain accounts and others throughout the United States and Canada. Our plan is to reach 10,000 retail outlets by the end of this fiscal year, March 31, 1998, and add 10,000 stores each year. Our aggressive growth plans require extensive working capital to supply each store with a custom designed humidor, premium cigars and accessories. In addition, we plan to use $1,000,000 to retire the bridge financing indebtedness and accrued interest. See " Interim Financing -- Bridge Financing and Bridge Warrants." The use of proceeds disclosed above is subject to change. If our use of proceeds does change, we believe it would be to reallocate more proceeds to purchase cigars and humidors and less proceeds to sales and marketing. Pending use, the net proceeds will be invested in bank certificates of deposit and other fully-insured investment grade securities. Any funds we receive from exercise of the over-allotment option or the representatives' warrant will be added to working capital. 16 CAPITALIZATION The following table sets forth the capitalization of PCI as of March 31, 1997, and as adjusted to reflect the sale in April to June 1997 of bridge warrants to purchase 361,215 Shares at $2.63 per share, and giving effect to the sale of 1,900,000 shares at $5.25 per share, and exercise of the bridge warrants, but does not include the exercise of 19,011 bridge warrants issued to William B. McKee. [Bar chart comparing actual and pro forma information] MARCH 31, 1997 ACTUAL AS ADJUSTED ------ ----------- (Unaudited) Long-term liabilities due to Shareholder: $ 110,000 $ 0 --------- ---------- Shareholders' equity: Common Stock, no par value per share, 10,000,000 shares authorized, 1,480,500 shares issued and outstanding and 3,741,715 shares issued and outstanding as adjusted.................................... 217,050 9,370,300 Accumulated deficit......................... (153,517) (153,517) --------- ---------- Total Shareholders' equity.................... 63,533 9,216,783 --------- ---------- Total Capitalization..................... $ 173,533 $9,216,783 ========= ========== DILUTION The difference between the public offering price per share of Common Stock and the as adjusted pro forma net tangible book value per share of Common Stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing the net tangible book 17 value (total assets less intangible assets and total liabilities) by the number of outstanding shares of Common Stock. At March 31, 1997, the net tangible book value of PCI was ($22,403) or ($.02) per share of Common Stock. At March 31, 1997, after giving effect to the sale of the Common Stock offered hereby at an assumed initial offering price of $5.25 per share (less, underwriting discounts and commissions and estimated expenses of this Offering) and the exercise of 361,215 bridge warrants, the as adjusted pro forma net tangible book value at that date would be $9,184,397 or $2.45 per share. This represents an immediate increase in the adjusted pro forma net tangible book value of $2.47 per share to existing shareholders and an immediate dilution of $2.80 per share to new investors, or approximately 53% of the assumed offering price of $5.25 per share. 18 The following table illustrates the per share dilution to new investors without giving effect to the results of operations of PCI subsequent to March 31, 1997: [Bar chart of dilution and net tangible book value per share] Assumed public offering price ................................... $5.25 Pro forma net tangible book value at March 31, 1997 .......... ($.02) Increase attributable to new investors ....................... $2.47 Net tangible book value after offering .......................... $2.45 ----- Dilution to new investors ....................................... $2.80 ===== The following table summarizes the number and percentage of shares of Common Stock purchased from PCI, the amount and percentage of consideration paid, and the average price per share paid by existing shareholders and by new investors in this offering. 19 [3 groupings of 3 comparison bars: shares, consideration, average price per share] Total Consideration Shares ------------------- Average Number Percent Amount Percent Price ------ ------- ------ ------- Per Share ----- Existing Shareholders 1,480,500 39.57% $ 217,050 1.95% $ .15 Bridge Warrant Holders 361,215 9.65% $ 950,000 8.53% $2.63 Public Investors 1,900,000 50.78% $ 9,975,000 89.52% $5.25 --------- ----- ----------- ----- Total 3,741,715 100.00% $11,142,050 100.00% ========= ====== =========== ====== The above table assumes no exercise of (i) the Underwriters' over-allotment option, (ii) the Representative's Warrants, (iii) 25,000 options held by directors, or (iv) the 19,011 bridge warrants held by William B. McKee that are exercisable at $5.25 per share. See "Risk Factors - Immediate and Substantial Dilution," "Underwriting," and "Description of Securities." 20 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Set forth below is selected consolidated financial information with respect to PCI from June 1, 1996 (inception of cigar distribution activities) to March 31, 1997. The selected consolidated financial information has been derived from the consolidated financial statements which appear elsewhere in this Prospectus. This data should be read in conjunction with the consolidated financial statements of PCI and their related notes. JUNE 1, 1996 TO MARCH 31, 1997 HISTORICAL PRO FORMA(1) ---------- ------------ Consolidated Statements of Operations: (Unaudited) ----------- Sales $ 845,571 $ 845,571 Cost of sales 643,790 643,790 ----------- ----------- Gross Profit 201,781 201,781 Selling, General and Administrative 333,776 561,276(3) ----------- ----------- Loss from operations (131,995) (359,495) Interest expense and Miscellaneous 21,522 1,722(4) ----------- ----------- Net loss $ (153,517) $ (361,217) =========== =========== Weighted average shares outstanding 1,480,500 3,741,715(2) =========== =========== Loss per share $ (.10) $ (.10) =========== =========== Consolidated Balance Sheet Data: Working capital (deficiency) $ (82,169) $ 9,014,631 Total assets $ 523,461 $ 9,566,711 Total liabilities $ 459,928 $ 349,928 Shareholders' equity $ 63,533 $ 9,216,783 (1) Assumes issuance of shares in this offering, receipt of the bridge financing and conversion of 361,215 bridge warrants and excludes conversion of 19,011 bridge warrants issued to William B. McKee. (2) Assumes issuance of 1,9000,000 shares in the offering and conversion of the bridge warrants into 361,215 shares of Common Stock. (3) Includes $127,500 of additional executive compensation and $100,000 of management fees pursuant to executive compensation agreements. (See Executive Compensation.) (4) Assumes repayment of indebtedness as specified in Use of Proceeds. 21 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS General PCI was incorporated in Arizona on December 16, 1996, to be a national and international distributor of premium cigars from humidors in high traffic retail outlets. As of June 30, 1997, we had placed the PCI Cigar Program, which includes supplying humidors, cigars, service, and information in over 1,550 stores in the United States and Canada. We are currently expanding with national retail and distribution accounts in both countries. Our objective is to place the PCI Cigar Program in 10,000 high volume convenience, gas, grocery and drug stores and outlets by March 31, 1998 and in 50,000 outlets within three to five years. [bar graph of store increase by month]
Jun-96 Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 49 91 120 227 389 559 596 629 647 671 707 745 1550
PCI's primary focus is selling premium cigars priced at retail from $1 to $8. We market a broad range of brands as well as in-house, private label brands. PCI'S founders Colin Jones and Greg Lambrecht, have been supplying and distributing premium cigars through convenience stores and other high volume outlets since June, 1996, and each has more than 12 years of experience supplying various consumer products to retail outlets. PCI has arrangements and agreements with national chain accounts to supply cigars and in-store humidors for direct delivery distribution and in-store merchandising in the United States and Canada. Customers include stores affiliated with Southland USA and Southland Canada (7-Eleven), AM/PM, Circle K, Associated Grocers, SuperValu, McLane Company, and numerous independent accounts. In addition, PCI has developed several relationships with cigar manufacturers and suppliers of cigars from the Dominican Republic, Mexico and the Philippines. The Company is expanding its sources for cigars and accessories. PCI has experienced rapid growth in a competitive industry, and we are working to become an industry leader in distributing cigars to convenience stores and other high traffic retail outlets. Over the next five years, we believe that we have the opportunity to place the PCI Cigar Program in over 50,000 retail stores. As of June 30, 1997, the PCI Cigar Program was in over 1550 outlets, with PCI adding approximately 250 outlets per week. Since the end of June, we have increased the number of stores we are servicing to over 2000. We believe we have the facilities and staffing to roll out the PCI Cigar Program to up to 500 outlets each week. PCI's objective is to reach 10,000 retail outlets by the end of its fiscal year ending March 31, 1998, and add 10,000 stores per year over the next three to five years. PCI's largest customer, Southland, has over 5,000 retail stores in North America. PCI believes that it can reach its first year goal by further penetrating stores affiliated with national chains represented by its current customer list. In addition, the convenience and gas station segment of PCI's target market represents a significant number of retail outlets. The National Association of Convenience Stores recently reported in its "'97 State of The Industry" report that there are over 94,000 convenience stores in the United States. This excludes Canada and other key outlets for our program; grocery, drug and mass merchandising outlets. Based on the Company's growth and size of the market for its program, products and services, PCI believes that its business objectives are reasonable. 22 You must read the following discussion of the results of the operations and financial condition of PCI in conjunction with PCI's consolidated financial statements, including their notes included elsewhere in this Prospectus. Historical results and percentage relationships among accounts are not necessarily an indication of trends in operating results for any future period. The consolidated financial statements present the accounts of PCI and its wholly-owned subsidiary, CAN-AM, as well as the predecessor cigar sales activity of J&M and Rose Hearts. All significant intercompany balances and transactions were eliminated in consolidation. Results of Operations The following table sets forth the percentage of revenue represented by certain items reflected in PCI's consolidated statements of operations for the period from the date of inception, June 1, 1996 through March 31, 1997: Sales 100.0% Cost of sales 76.1 ----- Gross margin 23.9 Selling, general, and administrative expenses 39.5 ----- Loss from operations (15.6) Other income/expense 2.5 ----- Net Loss (18.1)% ===== Sales Sales of cigars and cigar accessories for the ten month period ended March 31, 1997 were $845,571. Cost of Sales Cost of sales for the period from the date of inception, June 1, 1996 through March 31, 1997 was $643,790, with a gross profit of approximately 24%. Our goal is to establish a consistent gross profit percentage in the range of 30% to 35%. Gross profit for the 10-month period ended March 31, 1997 was lower due to the lack of volume purchase bargaining power during the initial start-up phase. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the period from the date of inception (June 1, 1996) through March 31, 1997, were $333,776, or 39.5% of sales. These costs were disproportionately high during the initial 10 months of operations due to the addition of personnel to establish market positions with various national chains. In addition, administrative costs increased significantly as we prepared for our increased volume and this offering. Other Income/Expense Other income and expense for the period from the date of inception, June 1, 1996 through March 31, 1997, was an expense of $21,522. This expense is made up of $21,292 in interest, $1,193 foreign currency transaction loss and an offset of $963 in miscellaneous income. Seasonality We have experienced consistent growth in monthly sales volume throughout our first year of operations, hampered only by inadequate capital to fund expansion. However, as we increase our market penetration, we may experience some seasonality in revenues that is not currently discernable. Our operational history and the new nature of distributing cigars to convenience outlets does not yet permit us to 23 identify clear seasonal trends, but we believe that some variation in convenience store impulse cigar purchases may be tied to outdoor weather conditions. In the northern U.S. and Canada, sales appear to improve in the warmer months and in the southern U.S. sales appear to improve in the cooler months. Because we distribute across the U.S. and Canada, we anticipate that any seasonal variances in the northern and southern regions will be offsetting and not have a material impact on our financial condition or operations. Liquidity and Capital Resources We require capital to market our PCI Cigar Program, obtain additional inventory and humidors to supply our increasing distribution network, and develop the personnel, facilities, assets and organization infrastructure necessary to support our expanding business. During the period from the date of inception, June 1, 1996, through March 31, 1997, we financed our operating and business development activities by issuing notes payable of approximately $180,000, and shares of Common Stock for approximately $207,000. These funds were used to acquire equipment in the approximate amount of $23,000, humidors in the approximate amount of $71,000, pay organizational and deferred offering costs in the approximate amount of $86,000, and advance funds to affiliates to pay their prior commitments, in the approximate amount of $86,000. After March 31, 1997, we obtained additional bridge financing in the amount of $1,000,000 (including conversion of existing debt of $100,000) which has been used primarily to fund additional expansion of operations. We currently have no other credit facilities available. We believe that the net proceeds of this offering, together with cash flows from operations will be sufficient to meet our anticipated expansion and working capital needs for the foreseeable future, including our commitments under three employment agreements, two management fee agreements and two consulting agreements. See "Management -- Executive Compensation." We have no plans to perform any significant product research and development, to purchase or sell any significant plant or equipment, to significantly change our number of employees or to obtain additional outside capital in the next 12 months. However, additional funding is required, we may raise capital through the issuance of long-term or short-term debt or the issuance of securities in private or public transactions to fund future expansion of our business. We cannot assure you that we can obtain acceptable financing for future expansion. 24 BUSINESS Introduction Historically, premium cigars and cigar-related accessories have been sold through traditional specialty tobacco retail stores. Our PCI Cigar Program distributes moderately-priced premium and other cigars through convenience stores, grocery and drug stores, gas stations and other high-traffic retail locations that traditionally have not sold premium cigars, which require special care. We have designed, and have manufactured for us, humidors which we deliver to each store. Our humidors maintain premium cigars in an appropriately humidified environment, and we periodically re-stock the humidors. We buy cigars both from importers and directly from manufacturers. We have certain of our own brands manufactured for us, but we do not directly manufacture any of our own cigars. PCI currently distributes premium cigars in 22 of the United States, and in five Canadian provinces through CAN-AM, a wholly-owned subsidiary. We are expanding our business with existing and new accounts throughout the United States and Canada. We are capitalizing on the increase in demand for premium cigars in the United States and Canada. Using direct delivery, as well as large and small distributors, we supply and distribute name brands, as well as our own private label brands of premium and other cigars, at various moderate price levels, primarily from $1 to $8. Traditionally, convenience stores, grocery and drug stores, gas stations and other locations sold cigarettes, little cigars, and non-humified mass market (dry) cigars such as White Owls(TM), Tipparillos(TM), and Swisher Sweets(TM). Those stores lacked both access to a supply of fresh (humidified) premium and other cigars and the expertise to effectively maintain and service premium cigars. As a result, cigar smokers could buy premium cigars only at specialty tobacco shops. Our two sales Vice Presidents, Colin Jones and Greg Lambrecht, have each been in the business of supplying and distributing premium cigars through convenience stores since June 1996, and each has 12 or more years experience supplying various other products to convenience store chains and other retail outlets in Canada or the Northwest U.S., respectively. We have developed and will continue to develop relationships with tobacco suppliers, and are expanding our commercial and technical support systems to secure a variety of sources for products, ensure product quality, and maximize cost savings. We currently depend heavily on two suppliers, TSG Import, Export and Manufacturing Corporation and House of Horvath, but we are broadening our sources of supply. We believe we will be able to contract with a number of additional suppliers to obtain cigars on terms comparable or more favorable to our existing sources of supply, primarily because of the high quantity of cigars we purchase. We have negotiated and have entered into agreements to supply premium and other cigars and in-store humidors for direct delivery distribution and in-store merchandising and as of June 30, 1997 we were servicing 1,550 convenience stores in the States of: Washington, Oregon, California, Arizona, Texas, Kansas, Missouri, Utah, Idaho, Alaska, Nevada, Oklahoma, Maryland, Virginia, Colorado, Illinois, Michigan, Wisconsin, Nebraska, Georgia, Montana and Florida; and in the Canadian Provinces of: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. We have identified more than 10,000 retail outlets as potential PCI accounts in these states. Our current customers include stores affiliated with Southland Canada (7-Eleven), Southland USA (7-Eleven), AM/PM, Circle K, SuperValu and Associated Grocers. Our goal is to place a high quality humidor selling premium cigars and accessories in every convenience store and high traffic retail outlet. The Expanding Cigar Market 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. After declining from its peak in 1964, sales of cigars in the U.S. increased to 4.4 billion units in 1996 from 3.4 billion units in 1993. Sales of premium cigars, which had remained essentially flat since 1981 despite continued declines in mass 25 market cigar sales, increased at a compound annual unit growth rate ("CAGR") of: 2.4% from 1976 to 1991; 13.9% from 1991 to 1995; and 67.0% from 1995 to 1996. We cannot assure you that this growth rate will continue. Led by growth in premium cigars, the U.S. cigar market grew at an annual rate of 8.7% from 1993 to 1996. [bar chart of U.S. premium cigar consumption 1991 to 1996] The following table illustrates the trends in unit consumption and retail sales for the premium and mass market segments of the U.S. cigar industry from 1991 to 1996(a): 1991 1992 1993 1994 1995 1996 ---- ---- ---- ---- ---- ---- (in millions) UNIT SALES: PREMIUM 97.2 98.9 109.5 125.5 163.9 274.3 MASS MARKET 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4 4,122.3 ------- ------- ------- ------- ------- ------- TOTAL 3,530.5 3,518.1 3,423.3 3,718.1 3,970.3 4,396.3 ======= ======= ======= ======= ======= ======= RETAIL SALES $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0 -- (a) Source - Cigar Associates of America, Inc. ("CAA"). CAA's premium cigar data includes cigars imported from seven leading supplier countries, including the United States. U.S. premium cigar production was approximately 5.0 million units in 1995. The growth rate in premium cigar imports continued to accelerate in 1996 and thus far in 1997. Premium cigar imports in January 1997 more than doubled compared to January 1996, with almost 24 million cigars imported in January 1997 compared to 11 million cigars in January 1996. (Source: The Cigar Insider). Sales of premium cigars have more than doubled in the span of three years. Sale of mass market cigars grew at a CAGR of 7.2% from 3.3 billion units in 1993 to 4.1 billion units in 1996. Overall growth in retail sales of cigars was primarily a combination of a shift in the sales mix to more expensive cigars as well as the increased number of cigars being sold. We believe that the increase in cigar consumption and retail sales is the result of a number of factors, including: 26 (i) the improving image of cigar smoking resulting from increased publicity, including the success of Cigar Aficionado(TM), Cigar Lover(TM), Smoke(TM) and The Cigar Insider(TM) magazines and the increased visibility of cigar smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore, Michael Jordan, Wayne Gretzsky and Jack Nicholson); (ii) the emergence of an expanding base of younger, highly educated, affluent adults age 25 to 40 with an interest in luxury goods, including premium cigars; (iii) the increase in the number of "baby boomer" adults over the age of 40 (a demographic group believed to smoke more cigars than any other demographic group); (iv) an increased number of women smoking cigars; and (v) the proliferation of establishments, such as restaurants and clubs, where cigar smoking is encouraged, as well as "cigar smokers" dinners and other special events for cigar smokers. "Cigars have recaptured their traditional image as a symbol of success, celebration and achievement it is now seen as an item of quality in keeping with such other quality items as gourmet coffees, fine wines, beer from micro-breweries, single malt scotches and single barrel bourbons." (Norman F. Sharp President, Cigar Association of America). Categories of Cigars Cigars are divided into three principal categories: premium cigars, mass market cigars and little cigars. Premium Cigars. Most premium cigars are imported, hand-rolled cigars made with long filler and all natural tobacco leaf wrappers. Other moderately-priced premium cigars use a combination of short and medium filler, are hand-rolled with all natural wrappers and are kept humidified. The Dominican Republic, Honduras and Jamaica collectively accounted for approximately 84.0% of premium cigars imported into the U.S. in 1995. Many of the finest premium cigars sold in the U.S. trace their roots to pre-Castro Cuba and the Cuban emigres who continued making premium cigars in Jamaica, Honduras, the Dominican Republic and Florida. PCI distributes primarily moderately-priced premium cigars, but also distributes a limited number of higher-priced premium cigars. Mass Market Cigars. Mass market cigars generally are domestic, machine-made cigars that use less-expensive short filler tobacco and are made with tobacco binders and either homogenized sheet wrappers or natural leaf wrappers. Share sales of more expensive mass market cigars, using natural leaf wrappers, grew by 12.9% in 1995, as consumers appear to have shifted to more expensive, higher quality mass market cigars. We distribute a significant number of high quality, natural leaf wrapper, mass market cigars, including smaller-sized, humidified, natural leaf cigars. Little Cigars. Little cigars are the lowest priced cigars. Little cigars weigh less than three pounds per 1,000, and may have filters. Little cigars are not made with binders, are dry (not humidified) and are manufactured and packaged similarly to cigarettes. PCI does not distribute any little cigars. Currently, all segments of the premium cigar industry are growing rapidly, from the low and moderately-priced premium cigars which we market to the large "high priced" cigar brands sold by established cigar/tobacco retail specialty shops. We believe that large importers and manufacturers of premium cigars will continue to distribute their nationally advertised, leading brands primarily through local cigar/tobacco stores because sales through other locations require supplying humidors and care instructions. As and if our market demands, we intend to sell a larger number of higher quality premium cigars. 27 Cigar Production According to statistics compiled by The Cigar Insider, the Dominican Republic produces and exports more premium cigars into the United States than any other country in the world. It has a strong lead over all other cigar exporting nations, with nearly 50% of the market. Industry experts rate cigars manufactured in the Dominican Republic third in the world in quality, trailing only those from Cuba and Jamaica. Cuban cigars cannot be exported into the United States as a result of the 1962 trade embargo. Neither PCI nor its wholly-owned subsidiary CAN-AM currently distributes or engages in any transactions involving Cuban cigars or any products of Cuban origin in any of their operations, whether in the United States, Canada or elsewhere. PCI's standard form supplier agreement strictly prohibits its suppliers from providing any product containing any component of Cuban origin. Cigar Purchasing; Private Label and Custom Brands We do not directly manufacture or import any cigars and rely entirely upon third party manufacturers and importers to supply us with cigars. Some of our suppliers and importers also directly manufacture some or all of the cigars they sell to us. All of our suppliers deliver the cigars to us in the U.S. after cigars have passed through customs and after all of the shipping and other import costs have been paid. We currently do not have written contracts with our two largest suppliers, but are relying upon the strength of our relationships and ongoing negotiations with them and a number of alternative suppliers, to meet our current and future supply requirements. Although our current relationships with our two largest suppliers are good, if problems develop, without written contracts, the relationships could end abruptly. We have developed a standard form supplier agreement that is similar to all common buyer/seller agreements for consumer products. In general terms, the agreement sets our negotiated minimum purchase requirements, and establishes delivery to us at Phoenix Sky Harbor International Airport after passing through customs and shipping is paid. The agreement allows for termination upon 120 days notice, obtains warranty that no illegal substances accompany the products, prohibits disclosure or contact with each party's business relationships, and contains a covenant by the seller not to compete for a negotiated period. We have entered variations of our form supply agreement with two newer suppliers who currently supply only a small portion of our total needs. House of Horvath, Inc., accounted for approximately 71% of our cigar purchases from inception to March 31, 1997 (and a higher percentage in Canada). However, our purchases decreased to approximately 37% of our total sales for the quarter ended June 30, 1997. We have no written contract with House of Horvath and purchase by purchase order only. We currently purchase cigars and accessories from over 19 different sources. As we have increased the volume of our cigar purchases, vendors have offered more favorable terms. TSG Import, Export and Manufacturing Corporation, a Dominican Republic Company, is currently our largest supplier and importer and accounted for 38% for the quarter ended June 30, 1997. We are operating under a verbal exclusive supply arrangement with TSG. TSG currently can manufacture 60,000 cigars a month and potentially source up to an additional 240,000 premium cigars per month. We had a written contract with TSG, which expired in July 1997. We are currently negotiating with TSG to renew our contract, but continue to purchase cigars from TSG on the same terms as our previous agreement. However, our purchases decreased to approximately 37% of our total sales for the quarter ended June 30, 1997. We have no written contract with House of Horvath and purchase by purchase order only. We currently purchase cigars manufactured in the Dominican Republic, Mexico, 28 Honduras, Nicaragua and the Philippines, and are working to establish relationships with additional cigar manufacturers in the Dominican Republic. In addition to brands distributed by our suppliers, we also sell cigars manufactured to our specifications by TSG and other suppliers which we distribute and sell under our own "private" label. We are negotiating with additional suppliers and customers to expand our private label operations, although we cannot assure that we will be successful. We will continue to purchase cigars manufactured by others as they become available on the open market, from time to time. Our cigars are generally purchased from various suppliers to meet demands at our sales price points. The recently publicized shortage of premium cigars has focused on the large importers and manufacturers that distribute well known "high priced" premium cigars to the local cigar/tobacco stores. We believe that the shelves of local cigar/tobacco stores have been, and will continue to be, low on stock due to brand name manufacturers not being able to meet the demand for their high priced, premium cigars. Supplies of the moderately-priced premium cigars we sell have remained more than adequate. 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 the Dominican Republic, Mexico or Honduras could interrupt the production of premium cigars, which would inhibit us from buying inventory. Company History PCI was incorporated in Arizona in December, 1996, and shortly thereafter acquired CAN-AM International Investments Inc., a Canadian corporation ("CAN-AM") which owned all cigar accounts, inventory and humidors formerly owned by Rose Hearts Inc. ("Rose Hearts") of Seattle, Washington, and J&M Wholesale, Inc. ("J&M") located near Vancouver, B.C. PCI's National and International Sales Managers, Colin Jones and Greg Lambrecht, through J&M and Rose Hearts, respectively, developed their concept of selling premium cigars using in-store countertop humidors in convenience stores, grocery stores and other retail outlet markets in June of 1996. Colin Jones owns and operates J&M, a 12-year old regional supplier and distributor of impulse purchase products to the convenience store market in British Columbia, Canada. Greg Lambrecht owns and operates Rose Hearts, a 14-year old supplier and distributor of impulse purchase products to convenience stores and grocery stores in the northwestern United States including Washington, Oregon, Northern California, and Montana. Our Largest Customer. Corporate and franchise stores affiliated with Southland USA and Southland Canada (7-Eleven) accounted for over 82% of our sales in the fiscal year ended March 31, 1997. We have expanded our customer base, but sales to 7-Eleven stores still accounted for over 79% of our sales for the quarter ended June 30, 1997. We expect that sales to 7-Eleven stores will continue to account for a substantial percentage of our sales. Canadian Sales; CAN-AM. With an average of over 12 years of distribution experience in the convenience store industry, Colin Jones and Greg Lambrecht created a new company, CAN-AM, to establish a premium cigar program with 7-Eleven in five Canadian Provinces. They believe that CAN-AM was the first company to market premium cigars sold out of in-store humidors to a Canadian national convenience store chain. 29 The first major presentation of what is now the PCI Cigar Program was to Southland Canada (7-Eleven). An initial test was conducted in 45 stores in Vancouver, B.C. and 15 stores in Edmonton, Alberta, with a possibility of expansion in 60 days if the test market was successful. After three weeks, the premium cigar program was so successful that 7-Eleven began a national program, and the PCI Cigar Program is currently in all 464 7-Eleven stores across Canada. With a warehouse near Vancouver B.C., a national distribution system, and a telemarketing service, current CAN-AM sales to 625 stores in the quarter ended June 30, 1997 were approximately $400,000 (unaudited). CAN-AM secured a strong foothold in the convenience industry with 7-Eleven stores, and is pursuing expansion through chains such as Mac's and Petro-Canada, as well as other independent retail outlets. Numerous retail outlets have approached CAN-AM to supply them with the PCI Cigar Program. Over the past several months, CAN-AM has secured over 625 retail outlets in Canada and is rapidly expanding to large chain stores and through distributors. U.S. Sales. As of June 30, 1997 our United States operations distribute to 926 stores in 22 states. PCI U.S. sales in the quarter ending June 30, 1997 were approximately $190,000 (unaudited). 7-Eleven. Largely because of the success of the PCI Cigar Program with Southland Canada, PCI and Southland USA have negotiated and signed a master agreement to establish the PCI Cigar Program in 7-Eleven corporate stores and in all franchise stores that request the PCI Cigar Program. There are over 5,300 7-Eleven stores across the United States. Under this agreement, we added approximately 500 stores a month through June, at which time we increased to 1,000 new stores a month and hope to continue at that rate until our 7-Eleven rollout is complete. Rose Hearts. The PCI Cigar Program was established in the northwest United States by Rose Hearts and Greg Lambrecht. Rose Hearts sold these accounts to CAN-AM, PCI's wholly owned subsidiary, but temporarily continues, as PCI's transitional distributor, to service the PCI Cigar Program accounts in stores affiliated with 7-Eleven, Circle K, AM/PM and other chains in Washington, Oregon, Idaho, northern California and Alaska. Rose Hearts' operations are declining and its owner, Greg P. Lambrecht, intends to sell or liquidate Rose Hearts in the near future as we assume the direct service of all of the stores that Rose Hearts currently serves. Greg Lambrecht has turned over operational control of Rose Hearts to other management so that he can honor his full-time obligations to us. McLane. McLane distributes products to over 35,000 retail outlets nationwide. We believe that currently PCI is the largest supplier of premium cigars to McLane, but we are not its sole supplier of humidors or premium cigars. We now distribute to two of McLane's 16 divisions, and are negotiating with other divisions. In addition to placing the PCI Cigar Program in Circle K stores serviced by McLane in Las Vegas and one McLane account in Arizona, we have placed a large distributor humidor in a McLane facility in Goodyear, Arizona, through which McLane services its Sun West Division (Arizona and Nevada). AM/PM. We have executed an agreement with AM/PM to place the PCI Cigar Program in AM/PM convenience stores in Washington and Oregon. We have placed humidors in 21 stores, and will roll out to over 100 stores, with the potential of nearly 200 stores. If initial results are successful, we intend to present the PCI Cigar Program to AM/PM nationwide. Associated Grocers. We have executed an agency contract with Associated Grocers to distribute the PCI Cigar Program to Associated Grocers' retail outlets (421 stores) in the Northwest. We have placed humidors in over 20 Associated Grocers stores. Texaco Star Mart. We service 22 Texaco Star Mart convenience stores in the Northwest, and are negotiating to expand the PCI Cigar Program with Texaco. 30 Growth Plus; Additional Capital Needs. We intend to grow rapidly by expanding the PCI Cigar Program distributing moderately-priced name brand and private label premium cigars and other cigars, in-store humidors, direct marketing, in-store merchandising, telemarketing, and education and training to retail outlets in the US and Canada. We have grown quickly with investor capital and bridge financing, but we have reached a point where substantial outside capital is needed to further expand the PCI Cigar Program. Overall Marketing. Colin Jones and Greg Lambrecht each have been in the impulse item distribution business for over 12 years and have established relationships with many accounts across the United States that represent additional retail outlets not yet selling premium cigars. PCI officers attended the National Association of Convenience Stores ("NACS") convention in Las Vegas and displayed our premium cigars and in-store humidors. Our humidors advertise the PCI logo, name, and toll free number. We recently hired a celebrity spokesman, Arie Luyendyk, to help promote the PCI Cigar Program. Products The PCI Cigar Program. We offer a "full service" program to convenience stores and gas station outlets, grocery stores, and other high volume retail stores. To effectively place premium cigars and in-store humidors, we primarily distribute directly to outlets, but to a smaller degree distribute through independent local/regional and national distributors. Direct sales accounted for approximately 88% of our total sales and third-party distribution accounted for less than 12% of our total sales for the quarter ended June 30, 1997. We offer and recommend that a PCI sales representative visit each local area to educate store managers and regional supervisors about the PCI Cigar Program. This presentation is accompanied by the PCI "Guide to Premium Cigars" that reviews the types of premium cigars by taste, smell, country of origin, and, most importantly, how to effectively sell premium cigars. The on-going success of our "full service" PCI Cigar Program depends, in part, on tele-merchandising. Our employees call store managers at retail outlet locations periodically to ask specific questions relating to sales volume, humidity levels, and placement of humidors. We analyze customer feedback and make recommendations on cigar brands and price points based upon the customer profile and experience of a retail location. This system has been working effectively in Canada for several months, and is being implemented in the U.S. Humidors. We provide, and retain ownership of, all countertop humidors shipped to retail outlets. Our humidors provide an attractive product display and increase counter space available for PCI's products. In addition, we have designed and attached a magazine rack, which can be used to display and sell trade magazines such as Cigar Aficionado and Smoke. The celebrity covers used by such magazines, when displayed in the magazine rack, provide high impact, point of purchase signage. Each PCI in-store humidor is a sealed case or box that displays premium cigars in an optimal environment of humidity. Our in-store humidors come in varying sizes that can store and display 50 to 400 cigars. The most popular humidor is a stained, hand-made wood case with a clear plexiglass lid, which holds 75 to 125 cigars. PCI's in-store humidors are designed to be placed on store countertops next to the cash register for maximum exposure. Each in-store humidor is equipped with a humidifier unit and a humidity gauge to indicate when to soak the humidifier in purified water. We designed a long-lasting Spanish cedar humidifier to maintain constant humidity. Point of purchase signs which describe the characteristics of the cigars, such as the name of the cigar, country origin of the tobacco, size, flavor, and price are placed on the front of each stock keeping unit ("SKU") in the in-store humidors. PCI does not pay "slotting" fees or other inducements to retailers in order to secure counter space, which could affect our ability to place our humidors in prime locations. In addition, other major manufacturers or distributors may have agreements with convenience stores which require the stores to 31 locate the manufacturers' or distributors' tobacco products in a counter position that is preferential to, or at least as favorable as, the location of other suppliers' products, including our humidors. This may inhibit our ability to obtain favorable counter presentation of our humidors. We currently have four suppliers of humidors which are based in Arizona, Oregon, California and Canada, our largest supplier being The Wildwood Collection of Scottsdale, Arizona. Although we have specially designed our humidors to meet our business needs, we believe any reputable cabinet making company could meet our production specifications. For this reason, we do not believe we are dependent upon any humidor supplier and we have not entered any written contracts with our humidor suppliers. Our Cigars. We distribute moderately-priced imported premium cigars, a limited number of higher-priced finest quality premium cigars, a significant number of mass-market cigars and certain accessories. We currently distribute over 60 brands of cigars. Premium Cigars. Our premium cigars are generally hand-rolled and sell at retail price points above $1.00/cigar. Through the PCI Cigar Program we distribute primarily large premium cigars with long-filler, long/medium, and medium/short filler tobacco and high quality, natural leaf wrappers and binders. In order to make hand-made cigars, binder tobacco is hand-wrapped around filler to create the "bunch" which is placed into a mold. Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a premium cigar. The manufacturing process for premium cigars includes the selection, purchase and aging of the tobacco and hand rolling of the cigars. Tobacco is selected based upon its flavor and quality. The availability and quality of tobacco varies from season to season as a result of such factors as weather conditions and the demand for the tobacco. The taste of the cigar is based on the quality and/or blend of the tobacco. We do our best to select premium cigars with a blend of imported fine aged tobaccos. After tobacco is grown, it is typically aged for periods of between three months to three years. The time period for aging cigar tobacco has been substantially reduced in recent months due to the high demand for leaf tobacco used for cigar manufacturing worldwide. The cigar industry in general has recently experienced shortages in high-priced premium cigars because of shortages of certain types of the longest aged and highest priced natural wrapper and long filler. Currently, there is an abundant supply from a number of countries of the moderately-priced premium cigars of the types distributed by PCI. Although the shortages have not materially impacted cigar production to date, we cannot assure that future shortages will not have an adverse effect on the PCI Cigar Program. Mass Market Cigars. Mass market cigars are machine-made and generally have a retail price point of $1.00/cigar or less. Mass market cigars use less expensive tobacco than premium cigars. Manufacturers use a variety of techniques and grades of tobacco to produce mass market cigars that sell at PCI's low price points. Mass market cigars include large cigars (weighing three pounds/1,000 cigars) and smaller, natural leaf cigars (weighing less than three pounds/1,000 cigars). We purchase significant quantities of mass market cigars from several sources for sale at our lowest price point. Mass market large cigars combine natural leaf wrapper and man-made binder made from tobacco ingredients instead of natural binder, with filler threshed into short, tobacco ingredients replacing natural tobacco leaf. Flavoring and/or plastic tips are often added to popularly priced mass market large cigars. Price Point Supplies. Our PCI Cigar Program currently provides each customer with a number of cigars at each price point established between PCI and the specific store or distributor. This strategy allows us to substitute various premium cigar brands in each price group, depending upon supplies 32 available from time to time. Our typical humidor displays premium cigars in three or five different price point SKUs. In addition, we maintain large custom-designed display case humidors with eight or more price point SKUs for selected high-volume locations. No Returns of Unsold Product to Date. We are generally obligated to accept returns of unsold products, but because of the nature of our PCI Cigar Program we have had no returns to date. Our program tends to eliminate returns because properly humidified premium cigars improve with age, and our program properly maintains cigars in humidifiers. In addition, we do not supply more inventory than is required, but focus on filling price points as inventory depletes. Our telemarketers currently maintain frequently contact with the stores we service. We cannot assure that this record will continue. Our Expansion Plans Our strategy for continuing growth and achieving profits involves filling a market niche by providing affordable, premium cigars that are conveniently accessible to the cigar smoking public. The PCI Cigar Program includes several components, including: Cigar Purchasing and Supply. Most of the cigars we sell are high quality, low to medium priced, premium cigars that are currently available in large quantities and are affordable. We do business with, and are negotiating relationships and agreements with, cigar importers and manufacturers which have relationships with tobacco plantations in the Dominican Republic and Mexico. The Dominican plantations with which we deal are located in the same valley that produces tobacco used in high priced premium cigars, and we believe that our suppliers produce cigars of similar high quality. However, we believe we can purchase and distribute these cigars at significantly lower prices than those made by the brand name manufacturers. We intend to maintain the manufacturers' labels which they use in their country's local markets, and have begun to create our own private labels which may be banded on these premium cigars. We believe that we have built satisfactory supply relationships and are currently working with various cigar importers to assure that PCI will have an adequate supply of cigars at each key retail price point. We anticipate rapid expansion during the next few years, and we expect to add new suppliers to broaden our access to quality cigar and cigar accessories. We are also securing rights to distribute and place several different in-store humidors. Master Agreements and Arrangements with National Chains. A "master agreement" is a form retailer or regional distribution agreement that PCI negotiated with a major convenience store chain, which is approved for use by retail stores or regional distribution centers within the chain, but which must be accepted by each individual store or distribution region which wishes to participate in the PCI Cigar Program. We have "master" agreements and other arrangements with several major convenience store chains to place the PCI Cigar Program in corporate and franchise stores, the largest of which is Southland USA (7-Eleven). However, the nature of the convenience store distribution business is that all supplier relationships are terminable on short notice (usually on between 30 and 120 days notice). Participation in the PCI Cigar Program is usually at the discretion of each local franchise 33 store or each region of the country. As long as demand for premium cigars remains strong, we believe that individual stores and regions will participate in our PCI Cigar Program. Regional Direct Distribution and Sales Companies. We have entered into arrangements or agreements with two regional direct distribution and sales companies to supply them with premium cigars and in-store humidors in mass quantities. These regional direct distribution and sales companies, Rose Hearts and McLane Company, will, in turn, sell, deliver direct to the stores, service, and merchandise the PCI Cigar Program. Third-party distribution accounted for less than 12% of our total sales for the quarter ended June 30, 1997. We have provided distributors with large humidors for quantity storage of cigars at distribution warehouses. We believe that these relationships will allow us to expand the PCI Cigar Program rapidly throughout the western United States. We intend to continue to utilize and expand this sales, distribution and merchandising strategy with similar regional direct distribution and sales companies throughout the rest of the U.S. and possibly Canada. PCI entered a Distributorship Agreement on June 13, 1997 with Rose Hearts for the non-exclusive distribution to Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho, Oregon, Washington and Northern California. The agreement provides that any master agreement with a national PCI account or national distributor will supersede the Rose Hearts agreement. PCI must pay Rose Hearts a ten percent (10%) commission on the retail value of products PCI ships to third-party stores where Rose Hearts provides only in-store merchandising support services, but must pay Rose Hearts a twenty-two percent (22%) commission on the retail value of PCI products that Rose Hearts delivers to the stores directly. PCI must provide Rose Hearts, at PCI's expense, with a warehouse humidor to store PCI products shipped to Rose Hearts. The agreement is for an initial one year term and automatically renews upon each anniversary unless terminated by certain conditions, including either party's breach, Rose Hearts' insolvency, bankruptcy or an arbiter's determination requiring termination. Greg P. Lambrecht is the President and sole shareholder of Rose Hearts and the Secretary, Treasurer, Vice President of National Sales and a substantial shareholder of PCI. Price Point Supply Systems. We have developed a price-point-based ordering system to eliminate complications of brand-specific product ordering, minimize stock shortages, and more effectively meet demand. We group our cigars by retail price point. Store personnel simply select the amount of cigars needed at each price point and phone or fax in the order. We then fill the order with cigars in stock which fall within the price point grouping. It is possible to order cigars by name, but the PCI Cigar Program provides that if a particular brand is not in stock when the order is taken, then a comparable cigar within the price point will be substituted. Extensive Education and Training Program. We believe that proper education, training, and support of store personnel can enhance the PCI Cigar Program by providing knowledge and awareness of brand popularity, cigar characteristics, care of humidors, and proven selling techniques. We have developed the "Premium Cigars International Comprehensive Guide to Premium Cigars" for distribution to store managers and employees, and a separate comprehensive package for distributors that introduces and explains the PCI Cigar Program in detail. State of the Art Management/Accounting Information Systems. Customer service and support are key factors in the success of the PCI Cigar Program. We have acquired and are implementing a modern, mid-sized integrated information system throughout PCI to support a business strategy which includes call management, order entry, credit and collection, inventory management, accounting and reporting, and decision management tools. Utilizing Distribution Companies And Telemarketing. We directly distribute the majority of our products to our customers. McLane Company and Rose Hearts are our only third party distributors and their combined distributions represent less than 12% of our total sales. We are expanding the PCI Cigar Program through these and other third party distributors that currently deliver items to 34 convenience stores, grocery stores, gas stations and restaurants throughout the United States and Canada. We believe we can use established national distributors to enable us to expand rapidly to thousands of stores that they already service. By using large distributors, we can consolidate the invoicing of thousands of stores and drop ship large quantities of cigars and humidors to the distributors' regional warehouses or distribution centers for delivery directly to retail stores. We plan to increase the number of telemarketers we use so that stores being serviced by distributors will be called regularly to check on supply, chart sales, give tips on selling and placement of the humidors, and ensure that the store managers know how to care for the humidors. Most distributors purchase the products directly from us and then resell the products to the outlet accounts they serve. The compensation for these distributors is built into their pricing from us. Because we own the accounts that Rose Hearts previously served, we retain ownership of the products Rose Hearts distributes and pay Rose Hearts a percentage of the retail sale amount, but Rose Hearts' compensation is no more favorable than any non-related-party distributor who is compensated in the pricing structure. Advertising and Promotions; Spokesperson. We intend to support the distribution of our cigars through advertising in numerous publications, including Cigar Aficionado, Smoke, Cigar Lovers, The Cigar Insider and other publications oriented to the type of person whom, we believe, smokes premium cigars. We also intend to expand our advertising and marketing through promotions distributed at our points of sale and through direct mail, and participation in trade shows. Recently we signed an agreement with Arie Luyendyk, winner of this year's Indianapolis 500, to be a spokesperson for PCI. Our logo is displayed on his helmet, and he will support us through personal appearances. Competition We believe that, as a distributor of premium cigars to convenience outlets, PCI competes with a smaller number of primarily regional distributors including Southern Wine and Spirits, Specialty Cigars, Inc., Cohabico, Old Scottsdale Cigar Company, Inc. and many other small tobacco distributors and jobbers. The broader cigar distribution industry is dominated by a small number of companies which are well known to the public. These well-known cigar manufacturing and wholesale companies, along with major cigarette manufacturers, have not yet entered the retail distribution market. These companies include 800 JR Cigar Company, Inc., Consolidated Cigar Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar Company, US Tobacco and others. These companies may do so in the future. Also a number of large distribution companies, such as McLane Company and CoreoMark, who are currently in the convenience outlet distribution business, but who have not entered the cigar distribution business, may do so in the future. These cigar manufacturing and wholesale companies have larger resources than PCI and would, if they enter the cigar distribution market, constitute formidable competition for our business. We compete by offering our PCI Cigar Program as a total package of service, convenience and quality. Our cigars are not the cheapest in the market nor the highest end quality cigars, but we believe they represent excellent value as high quality products at fair prices and in convenient purchasing locations. Government Regulation General. The tobacco industry in general has been subject to regulation by Federal, state and local governments, and recent trends have been toward increased regulation. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the tobacco industry as a whole. Regulation may focus more directly on cigars in the future because of the recent increase in popularity of cigars. Regulations include labeling requirements, limitations on advertising and prohibition of sales to minors, laws restricting smoking from public places including offices, office buildings, restaurants and other eating establishments. In addition, cigars have been subject to substantial excise taxation at the Federal, state and local level, and those taxes may increase in the future. Future regulations and tax policies may have a material adverse affect upon the ability of cigar companies, including PCI, to generate revenue and profits. Excise Taxes. U.S. Federal Taxes. Effective January 1, 1991, the federal excise tax rate on large cigars (weighing more than three pounds per thousand cigars) was increased to 10.625%, capped at $25.00 per thousand cigars, and again increased to 12.75%, capped at $30.00 per thousand cigars, effective January 1, 1993. However, the base on which the federal excise tax is calculated was lowered effective January 35 1, 1991 to the manufacturer's selling price, net of the federal excise tax and certain other exclusions. The federal excise tax on little cigars (weighing less than three pounds per thousand cigars) increased from $0.75 per thousand cigars to $0.9375 per thousand cigars effective January 1, 1991. The excise tax on little cigars increased to $1.125 per thousand cigars effective January 1, 1993. We do not believe that the current level of excise taxes will have a material adverse effect on our business, but we cannot assure that additional increases will not have a material adverse effect on our business. U.S. State and Local Taxes. Cigars and pipe tobacco are also subject to certain state and local taxes. Deficit concerns at the state level continue to exert pressure to increase tobacco taxes. Since 1964, the number of states that tax cigars has risen from six to 42. State excise taxes generally range from 2% to 75% of the wholesale purchase price, and are not subject to caps similar to the federal cigar excise tax. In addition, seven states have increased existing taxes on large cigars since 1988. Five states tax little cigars at the same rates as cigarettes, and four of these states have increased their cigarette taxes since 1988. State cigar excise taxes are not subject to caps similar to the federal cigar excise tax. Increases in such state excise taxes or new state excise taxes may in the future have a material adverse effect on our business. Canadian Taxes. Each Canadian province has approved CAN-AM to collect provincial taxes under the applicable province's tobacco tax act. The tax rates vary from province to province, but range from 45% of the retail selling price in Manitoba and Alberta to 95% of the retail selling price in Saskatchewan. Health Regulations. General. Cigars, like other tobacco products, are subject to regulation in the U.S. at the federal, state and local levels. Together with changing public attitudes toward smoking, a constant expansion of smoking regulations since the early 1970s has been a major cause for a substantial decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry. Federal Regulation. In recent years, a variety of bills relating to tobacco issues have been introduced in the Congress of the United States, including bills that would have: prohibited the advertising and promotion of all tobacco products and/or restricted or eliminated the deductibility of such advertising expenses; set a federal minimum age of 18 years for use of tobacco products; increased labelling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins; modified federal preemption of state laws to allow state courts to hold tobacco manufacturers liable under common law or state statutes; required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases; and shifted regulatory control of tobacco products and advertisements from the Federal Trade Commission to the U.S. Food and Drug Administration (the "FDA"). In addition, in recent years, there have been proposals to increase excise taxes on cigarettes. In some cases, hearings were held, but only one of these proposals was enacted. That law requires states, in order to receive full funding for federal substance abuse block grants, to establish a maximum age of 18 years for the sale of tobacco products along with an appropriate enforcement program. The law requires that states report on their enforcement efforts. Future enactment of the other bills may have an adverse effect on the sales or operations of PCI. Currently, the federal Consumer Product Safety Commission is working to establish such standards for cigarettes. The enabling legislation, as originally proposed, included little cigars. However, little cigars were deleted due to the lack of information on fires caused by these products. EPA Regulation. The U.S. Environmental Protection Agency (the "EPA") has recently published a report with respect to the respiratory health effects of passive smoking, which report concluded that widespread exposure to environmental tobacco smoke presents a serious and substantial 36 public health impact. In June 1993, Philip Morris and five other representatives of the tobacco manufacturing and distribution industries filed suit against the EPA seeking a declaration that the EPA does not have the statutory authority to regulate environmental tobacco smoke, and that, in view of the available scientific evidence and the EPA's failure to follow its own guidelines in making the determination, the EPA's final risk assessment was arbitrary and capricious. The litigation is still pending. FDA Regulation. The FDA has proposed rules to regulate cigarettes and smokeless tobacco in order to protect minors. Although the FDA has defined cigarettes in such a way as to include little cigars, the ruling does not directly impact large cigars. However, once the FDA has successfully exerted authority over any one tobacco product, the practical impact may be felt by distributors and manufacturers of any tobacco product. If the FDA is successful, this may have long-term repercussions on the larger cigar industry. The major tobacco companies and advertising companies recently brought an action in federal court in North Carolina challenging FDA regulation of tobacco products. The trial court ruled, on April 25, 1997, that the FDA may regulate tobacco products under the Federal Food, Drug and Cosmetic Act. The court certified its order for immediate appeal and the ultimate resolution of the litigation is still pending. State Regulation. In addition, the majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. Places where the majority of states have prohibited smoking include: any public building designated as non-smoking; elevators; public transportation; educational facilities; health care facilities; restaurants and workplaces. 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. In a few states, legislation has been introduced, but has not passed, which would require all little cigars sold in those states to be "fire-safe" little cigars, i.e., cigars which extinguish themselves if not continuously smoked. Passage of similar restrictions or regulation restricting smoking in certain places, regulating point of sale placement and promotions, requiring warning labels or relating to so-called "second-hand" smoke could have an adverse effect on our sales or operations. Certain retailers may decide to stop selling all tobacco products because of public pressure. Massachusetts lawmakers have introduced several bills to require warning labels on cigars, but none has yet passed. On June 16, 1997, Texas passed a law which prohibits offering cigarettes or tobacco products (including cigars) in a manner that permits a customer direct access to the products, but the law specifically does not apply to "that part of a business that is a humidor or other enclosure designed to store cigars in a climate-controlled environment." California Regulation - Proposition 65. Although federal law has required health warnings on cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars carry such warnings. However, California requires "clear and reasonable" warnings 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, Proposition 65, can result in a civil penalty not to exceed $2,500 per day for each violation. Although similar legislation has been introduced in other states, no action has been taken. We cannot assure you that other states will not enact similar requirements. During 1988, 26 manufacturers of tobacco products, including the largest mass-marketers of cigars, entered into a settlement of legal proceedings filed against them pursuant to Proposition 65. Under the terms of the settlement, the defendants agreed to label retail packages or containers of cigars, pipe tobaccos and other smoking tobaccos other than cigarettes manufactured or imported for sale in California with the following specified warning label: "This Product Contains/Produces Chemicals Known To The State of California To Cause Cancer, And Birth Defects or Other Reproductive Harm." Although the settlement of the Proposition 65 litigation by its terms only impacts California, it is not practical for 37 national cigar manufacturers to confine their warning labels to cigars earmarked for sale in California. Consequently, since 1988, most boxes of mass market cigars manufactured in the United States carry cancer warning labels. Canadian Regulations. Bill C-71, The Tobacco Act, became effective in Canada on April 25, 1997. The purpose of the Act is to protect the health of Canadians, especially young people. The new tobacco legislation affects all persons who promote or sell tobacco products. The Act builds on many of the measures formerly set out in the Tobacco Sales to Young Persons Act, under which the tobacco industry in Canada was previously operating. Health Canada, an agency of the Government of Canada advises that the Canadian government may issue additional regulations to complement the new Act and that provinces may issue their own supplemental regulations. We provide you the following summary of what we believe is the current status of Canadian tobacco regulations after the effectiveness of the Act and Health Canada's stated enforcement policy, but cautions you that the Act and such regulations are subject to change or supplement and Health Canada's enforcement policies may change: The Act requires promoters or retailers of tobacco products to: o refuse to sell their products to persons younger than 18 years (under 19 years in the Atlantic provinces, British Columbia and Ontario). Health Canada strongly advises retailers to require valid proof of age identification; o ensure the visibility of signs that inform the public that furnishing tobacco products to minors is prohibited by law; o refuse to sell cigarettes in a number less than 20; and o not display tobacco products in a way that lets customers handle them before purchase. The Act prohibits: o the sale of tobacco products through vending machines without a security device; o mailing tobacco products directly to consumers; o delivering tobacco products across a provincial boundary except between manufacturers and retailers; and o giving promotional incentives and free gifts displaying a tobacco brand name or logo; giving rewards or incentives for buying tobacco products or for buying another product or service. Retailers may display: o signs indicating the price and availability of tobacco products, but no tobacco brand name or logo may appear on these signs; o tobacco products and smoking accessories that display a tobacco brand name or logo. After October 1, 1998, retailers may not display: o tobacco sponsorship promotions of activities, events or facilities in conjunction with the display of a tobacco product or packaging, except in places where children are prohibited by law. 38 Advertisements must: o contain factual and brand information only (e.g.: size, number, tar content, sales data, technical specifications, etc.); o may not contain images that suggest a way of life or that appeal to youth; o may not be misleading or likely to create a false impression about a tobacco product or its emissions; and o only appear in publications mailed to a named adult, publications with an adult readership of not less than 85% or in signs in a place where young persons are not permitted by law. Health Canada has informed retailers that it will enforce the Act using a staged approach. It will first notify affected parties of their obligations and give them an opportunity to comply. It will then monitor compliance and warn non-complying persons. It will pursue further enforcement only against persons who consistently fail to comply after warning. Tobacco Industry Litigation. General. Historically, the cigar industry has not experienced material health-related litigation. However, litigation against leading United States cigarette manufacturers seeking compensatory and, in some cases, punitive damages for cancer and other health effects alleged to have resulted from cigarette smoking is pending. We carry general liability insurance with an aggregate limit of $10,000,000, and product liability and health hazard insurance. These policies also cover our suppliers, manufacturers and retail outlets, however, we cannot assure you that we will not be subject to liability which is not covered beyond the limits of our general liability, product liability and health hazard insurance coverage, and which may have a material adverse effect upon our business. Proposed Settlement with States. Several states have sued tobacco companies seeking to recover the monetary benefits paid under Medicaid to treat residents allegedly suffering from tobacco-related illnesses. On June 20, 1997 the Attorneys General of 40 States and the major United States tobacco companies announced a proposed settlement of the litigation, which, if approved by the United States Congress, would require significant changes in the way United States cigarette and tobacco companies do business. The potential impact, if any, on the cigar industry is uncertain. As announced, the proposed settlement would include, among other things: o U.S. tobacco companies will pay $360 billion in the first 25 years, and then $15 billion a year. o The Food and Drug Administration could regulate nicotine as a drug but could not ban it until 2009. o Sick smokers can still sue the industry. Any money they won would come out of an annual $5 billion tobacco company fund. Smokers also could receive punitive damages for any future wrongdoing by tobacco companies out of that fund. o All class-action lawsuits against the industry are banned. o No tobacco billboards or other outdoor ads. o No humans or cartoons in ads or on cigarette packs. 39 o No brand-name sponsorship of sporting events. o Text-only ads in magazines with significant youth readership. o No Internet advertising. o No "product placement" in movies and on TV. o Black labels covering the top fourth of cigarette packs, including "Cigarettes are addictive" and "Smoking can kill you." o A cigarette vending machine ban; no self-service displays; cigarettes and smokeless tobacco sold only behind store counters. o Industry will pay fines if smoking by youths fails to drop by 30 percent in five years, 50 percent in seven years and 60 percent in 10 years. The penalty is $80 million per percentage point by which the target is missed. o No smoking in public places and most workplaces unless there are separately ventilated smoking areas. Other State Actions. Florida and Massachusetts have enacted statutes permitting suit against the tobacco companies to recoup such Medicaid costs, and recently, one defendant has entered into a settlement with such plaintiff states, which provides that the settling defendant will, among other things, pay a portion of its profits in the future to the plaintiff. Under the Florida statute, many of the tobacco companies' traditional defenses, such as assumption of risk, are vitiated. The statute also permits the state to establish causation (that smoking causes cancer, heart disease and other ailments) through the use of purely statistical evidence. The tobacco companies have filed suit challenging the Florida law as unconstitutional. Class Actions. A class action suit, Castano v. American Tobacco, et al. has been filed in federal district court in New Orleans against the entire cigarette industry. On February 17, 1995, the district court granted plaintiffs' motion for class certification with regard to the liability issues of fraud, breach of warranty (express or implied), intentional tort, negligence and strict liability as well as the issues of consumer protection and punitive damages. The court defined the class as "all nicotine-dependent persons in the United States," "the estates, representatives, and administrators of these nicotine-dependent cigarette smokers," and "the spouses, children, relatives and 'significant others' of these nicotine-dependent cigarette smokers as their heirs or survivors." The court defined "nicotine-dependent" to mean "all cigarette smokers who have been diagnosed by a medical practitioner as nicotine-dependent; and/or all regular cigarette smokers who were or have been advised by a medical practitioner that smoking has had or will have adverse health consequences who thereafter do not or have not quit smoking." In May 1996, the Fifth Circuit Court of Appeals 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 certain states. To date, two pending class actions against major cigarette manufacturers have been certified. The first case is limited to Florida citizens allegedly injured by their addiction to cigarettes; the other is limited to flight attendants allegedly injured through exposure to secondhand smoke. In another decision, Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608 (1992), the United States Supreme Court held that certain federal legislation applicable specifically to cigarette manufacturers preempts claims based on failure to warn consumers about the health hazards of smoking, but does not preempt claims based on express warranty, misrepresentation and fraud, or conspiracy. Although we 40 believe that the effect of the Cipollone decision, which involved cigarette smoking, will not have a material adverse effect on PCI operations, there can be no assurance of what the ultimate effect, if any, of the Cipollone decision or the pending cigarette industry litigation, or cigarette and tobacco regulation, will be on the cigar industry. Although there are numerous differences between the cigar industry and the cigarette industry, the outcome of pending and future cigarette litigation may encourage various parties to bring suits on various grounds against cigar industry participants. While it is impossible to quantify what effect, if any, any such litigation may have on our operations, we cannot assure you that such litigation would not have a material adverse effect on our operations. OSHA Regulations. The federal Occupational Safety and Health Administration (OSHA) has proposed an indoor air quality regulation covering the workplace that seeks to eliminate nonsmoker exposure to environmental tobacco smoke. Under the proposed regulation, smoking must be banned entirely from the workplace or restricted to designated areas of the workplace that meet certain criteria. The proposed regulation covers all indoor workplaces under OSHA jurisdiction, including, for example, private residences used as workplaces, hotels and motels, private offices, restaurants, bars and vehicles used as workplaces. The tobacco industry is challenging the proposed OSHA regulation on legal, scientific and practical grounds. It also contends that the proposed regulation ignores reasonable alternatives. There is no guaranty, however, that this challenge will be successful. Although we do not believe that the proposed OSHA regulation would have a material adverse effect on the cigar industry or PCI, there are no assurances that such regulation would not materially adversely impact PCI. Medical Studies on Smoking Cigar sales, as well as the general decline in smoking decreased after a 1964 report of the United States Surgeon General. That and numerous other subsequent studies have stressed the link between smoking, including secondary smoke and medical problems, including cancer, heart, 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. We believe that these factors may continue to have a material adverse effect upon the cigar industry in general and our business in particular. Intellectual Property Rights We intend to assert our rights under trademark, trade dress, trade secret, unfair competition and copyright laws to protect its intellectual property, including trademarks and product designs. These rights are protected through the acquisition of trademark registrations, the development of trade dress, and where appropriate, litigation against those who are, in our opinion, infringing rights which we may have. We have obtained Arizona state trademark registrations from the Arizona Secretary of State's office for the trademarks PREMIUM CIGARS INTERNATIONAL and PCI. We cannot assure that these registrations cannot be successfully challenged or invalidated. These registrations do not provide us with any trademark rights outside the borders of the State of Arizona. We do not own any United States federal trademark registrations. We have has filed three trademark applications in the United States Patent and Trademark Office for the trademarks BIG STAR, THOROUGHBRED and PURITOS BELLEZA. We intend to use these marks in interstate commerce. In addition, we intend to file federal trademark applications with the United States Patent and Trademark Office for registration of the trademarks PREMIUM CIGARS INTERNATIONAL and PCI. We have researched and are developing other trademarks and tradenames, and intend to file additional applications when appropriate. We can give no assurance that any of these applications will mature to registration or that we will be granted the right to use any trademarks or tradenames by the United States Patent and Trademark Office. Further, we cannot assure that others will not assert rights to and ownership of, the trademarks. Use of these marks may infringe the rights of others. Currently, we do not own any patents. See "Risk Factors -- Risks Relating to Trademarks." 41 We intend to assert our intellectual property rights against infringers. In addition, although asserting our rights can result in a substantial cost to and diversion of our efforts, we believe that protecting PCI's intellectual property rights is a key component of our operating strategy. Facilities We sublease, from an independent third party, approximately 8,500 square feet for our corporate offices, warehouse, humidor storage and distribution facilities located in the Scottsdale Airpark area of Scottsdale, Arizona. Our sublease agreement expires on May 31, 1999. The annual rent for the first year is approximately $83,571 and the annual rent for the second year is approximately $85,609. PCI also leases approximately 3,000 square feet of an office/warehouse facility in Burnaby, British Columbia (a suburb of Vancouver). The written lease expires July 14, 2000. The annual rent for the first year is approximately $1,660 per month and $1,915 per month for the second and third years. Distribution of products in the northwest United States is handled through the Rose Hearts facility near Seattle, Washington. We neither own nor lease a facility in that area. We believe that our distribution facilities are adequate for our present needs. However, we intend to lease additional space for distribution facilities within and outside the United States and believe that additional space will be available at commercially reasonable rents. Employees As of July 25, 1997, we had 17 full time employees, of which five were executive and administrative, five were sales and marketing, and seven were warehouse and distribution personnel. None of our employees are represented by a labor union and we believe that employee relations are good. Legal Proceedings PCI is not a party to any pending lawsuits, nor do we know of any potential claims which, in the aggregate, could have a material adverse effect on PCI's financial position. 42 MANAGEMENT Executive Officers and Directors The executive officers and directors of PCI are as follows: NAME AGE POSITION William L. Anthony 54 Chairman of the Board of Directors and Consultant Steven A. Lambrecht 46 Director, President and Chief Executive Officer David S. Hodges 41 Director and Consultant Colin A. Jones 31 Director, Vice President of International Sales Greg P. Lambrecht 35 Secretary, Treasurer, Vice President of National Sales Karissa B. Nisted 41 Chief Financial Officer and Controller Robert H. Manschot 54 Director James B. Stanley 34 Vice President of Purchasing Scott I. Lambrecht 26 Assistant Secretary William L. Anthony has been Chairman of the Board since June 20, 1997 and a consultant to PCI since April 1, 1997. He has agreed to serve as PCI's Chairman for a period of up to five years. He has 30 years of business and management experience and a "Big Six" accounting background with the New York office of KPMG Peat Marwick, LLP. Mr. Anthony worked for The Dial Corp from 1984 until August, 1996 culminating his position as Executive Vice President for the Consumer Product Division with annual revenue in excess of $1,000,000,000. He has held key management positions with Bechtel, the U.S. Chamber of Commerce, MAPCO and The Dial Corp. He is the owner, President and sole shareholder of Quality Computer Services, Inc. He received both a B.B.A. and an M.A. in Accounting from the University of Mississippi in 1965 and 1966 respectively. Mr. Anthony was certified as a public accountant in Louisiana in 1969. Steven A. Lambrecht has been a director and PCI's Chief Executive Officer since December 31, 1996. He has also served as PCI's President since May 3, 1997 and as Chairman of the Board from December 31, 1996 to June 20, 1997. He has 23 years of marketing and sales experience and 17 years of management experience; most of his business experience has been in real estate development and construction. He is the owner of Forum Import/Export Company, a sole proprietorship, and was co-owner of Forum Development and Construction Company, Inc., a Washington corporation. He also founded Scottsdale Development and Construction Company, Inc., an Arizona corporation, in 1992. He has developed and sold over 20 million dollars worth of real estate since 1974. Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father of Scott I. Lambrecht. 43 David S. Hodges has been a director since June 20, 1997 and has been a consultant to PCI since June 2, 1997. From April 1, 1997 to May 31, 1997, Mr. Hodges served PCI in a financial management capacity. From February, 1997 to April, 1997, Mr. Hodges served as Chief Financial Officer of Pro- Innovative Concepts, Inc., a Phoenix, Arizona premium promotion company. From January 1994 to September 1996 he was the Controller of The Dial Corp's Household Consumer Products Division. From 1984 to 1992 he served the R.J. Reynolds Tobacco Company in various financial and management positions. From 1980 to 1984, he served as a Senior Auditor and Consultant for public and private clients of Price Waterhouse LLP, a "Big Six" independent public accounting firm. Mr. Hodges received a B.S.B.A. in accounting from John Carroll University of Cleveland, Ohio in 1978 and an M.B.A. in Finance from the University of North Carolina at Greensboro, North Carolina in 1980. He is a Certified Public Accountant in the State of North Carolina and a member of both the American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants. Colin A. Jones has been a director and Vice President of International Sales for PCI since May 3, 1997. He is a founder, the Co-Chairman and the President of PCI's wholly-owned subsidiary CAN-AM. He has 12 years of experience managing, marketing and selling in the convenience store and grocery store market sectors. In 1985, he founded J&M Wholesale, Ltd., a British Columbia corporation which delivers various wholesale products primarily to convenience store accounts in Canada. He continues to be the President and Chief Executive Officer of J&M. Under his employment agreement, Mr. Jones is obligated to devote his full time to PCI. Mr. Jones attended Douglas College of New Westminster, British Columbia, Canada. Greg P. Lambrecht has been the Secretary, Treasurer and Vice President of National Sales of PCI since May 31, 1997. He is the Co-Chairman and the President, National Sales, of PCI's wholly-owned subsidiary CAN-AM. He has 14 years of experience managing, marketing and selling to the convenience store and grocery store market. In 1984, he founded Rose Hearts, Inc., a Washington company which delivers various impulse purchase products to over 1,200 individual accounts in Washington, Oregon and California. He graduated with a B.A. in Communications from Western Washington University in 1984. Under his employment agreement, Mr. Lambrecht is obligated to devote his full working time to PCI. Greg P. Lambrecht is the brother of Steven A. Lambrecht and the uncle of Scott I. Lambrecht. Robert H. Manschot has been a director since July 25, 1997. He has been the President and Chief Executive Officer of the NVD and Seceurop Security Services Group, an emergency services corporation in the Netherlands and the United Kingdom, since 1995. He is also the Chairman of RHEM International Enterprises, Inc., an investment, consulting and venture capital company. He was the President and Chief Executive Officer of Rural/Metro Corporation, a Nasdaq-listed emergency services corporation, from 1987 to 1995. He has served in senior management positions with KLM's hotel management company, Sheraton, and Inter Continental Hotels in the U.S., Europe, Middle East and Africa. He has served and continues to serve on numerous public and private company and institution boards, including Nasdaq-listed Action Performance Industries, Inc., and Toronto Stock Exchange-listed Samouth Capital Corporation. He holds a bachelors degree in hotel management from the School for Hospitality Management in the Hague, Netherlands, an MBA from Boston University and is a graduate of Stanford Business School's Financial Management Program. Karissa B. Nisted has been the Chief Financial Officer since June 20, 1997 and has been the Controller of PCI since May 1, 1997. She served as Controller of Parkway Manufacturing, Inc. of Phoenix, Arizona from May 1995 to April 1997. From January 1994 to March 1995 she was the Controller of Guzman, a Tempe, Arizona construction firm. From July 1991 to October 1993 she was the Controller of Coxreels, a Tempe, Arizona manufacturing company. In 1990 and 1991 she performed accounting management for Arizona Precision Sheet Metal, a Phoenix, Arizona manufacturing company. Ms. Nisted has over 19 years' experience in accounting and financial management, including audit and tax experience with Arthur Andersen & Company of Phoenix, Arizona. Ms. Nisted received a B.B.A. in Accounting from Texas A&M University in 1978. 44 James B. Stanley has been Vice President of Purchasing since June 20, 1997. He served as Purchasing Director for PCI since November of 1996. From May 1996 to October 1996 he served as an Account Executive for Computer Credit Insurance Corp. of Brea, California in the real estate loan and mortgage insurance market. From November 1995 to May 1996 he was an Account Executive for Senior Estate Services, a Bellevue, Washington estate planning and investment firm. From June 1994 to November 1995 he was Operations Manager for Promark Armrest, Inc. of Everett, Washington, a product development firm. He has owned and developed two successful restaurants in the Seattle area over the previous six years. Mr. Stanley received a B.A. in Business Administration from Washington State University in 1985. Scott I. Lambrecht has been the Assistant Secretary of PCI since May 31, 1997. He served as a director from December 31, 1996 to February 17, 1997 and as PCI's interim President from December 31, 1996 to May 3, 1997. From July 1993 through December 1996 he served as President of SDCC, Inc., a Scottsdale, Arizona general contracting firm owned by Steve Lambrecht. He received a Bachelors degree in Construction Management in 1993 from Arizona State University in Tempe, Arizona. Scott Lambrecht is the son of Steven A. Lambrecht and the nephew of Greg P. Lambrecht. All directors hold office until the next election of directors at the annual shareholders meeting or until their successors have been elected and qualified. The Board of Directors currently consists of five members. Upon completion of the Offering, and for five years thereafter, the underwriter's representative, W.B. McKee Securities, Inc., has the right to select one member of the Board of Directors to serve the standard term of a director. The Underwriter's Representative has not yet chosen the person that it may select for director. The Bylaws permit the Board of Directors to determine the size of the Board within a range that the shareholders have set which is currently one to nine members. The Bylaws also require that we maintain at least two "independent directors" who are not employees or officers and who do not have a material business or professional relationship with PCI. See "Certain Transactions -- Resolving Conflicts of Interest." Indemnification of Directors and Officers Under our Articles of Incorporation, directors and former directors are generally not liable to PCI or its shareholders for the directors' actions or failures to take action. Our Articles limit director liability to the full extent that the law allows. Generally, Arizona law permits companies to indemnify their officers and directors if the individual officer or director acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation. A corporation may never indemnify any director that a court finds liable to the corporation or that the director received an improper personal benefit. Corporations generally must indemnify a director or officer who win a lawsuit related to being a director or officer of the corporation. PCI has not entered any indemnification agreements with its current directors and executive officers to indemnify them against liability as directors or officers. PCI is not aware of any pending or threatened litigation or proceeding involving our directors, officers, employees or agents which would require or permit indemnification. We also refer you to Section 8 of the Underwriting Agreement included at Exhibit 1.1 to our Registration Statement on file with the SEC, which contains indemnification provisions relating to us, our officers and directors and the Underwriter's Representative and certain of its affiliates. That Section grants extensive indemnification rights from us to the Underwriter's Representative and certain of its affiliates and requires the Underwriter's Representative to indemnify us and our directors, officers and affiliates under certain circumstances. The indemnification relates to claims under the Securities Act and certain other claims based on breaches of the agreements with the Underwriter's Representative, or untrue or alleged untrue statements or omissions in the Registration Statement or prospectus. We encourage you to obtain a copy of the Underwriting Agreement and read it in its entirety. See also a fuller discussion of 45 indemnification provisions under Item 24, "Indemnification of Officers and Directors," of our Registration Statement on file with the SEC. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, offices or controlling persons of PCI, pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by PCI of expenses incurred or paid by a director, officer or controlling person of PCI in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, PCI will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. Executive Compensation PCI was incorporated in December 1996 and commenced operations after December 31, 1996. Neither PCI nor its wholly-owned subsidiary, CAN-AM, paid any compensation to any of its executive officers prior to January 1, 1997. The following table sets forth the annual and long-term compensation for PCI's Chief Executive Officer from January 1, 1997 through the completion of the fiscal year ended March 31, 1997. No other officers received reportable remuneration. SUMMARY COMPENSATION TABLE
Long Term Compensation Annual Compensation Awards Payouts (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities All Annual Restricted Under- Other Compen- Stock lying LTIP Compen- Name and sation Award(s) Options/ Payouts sation Principal Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($) Steven A. Lambrecht, 1997 $7,500 -- -- -- -- -- -- Chairman of the Board, Chief Executive Officer
Steven A. Lambrecht has an at-will Employment Agreement with PCI as Chief Executive Officer dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He has agreed to devote his full time to PCI activities. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable executives. The Employment Agreement allows Mr. Lambrecht to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine (9) months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. 46 Mr. Lambrecht's Employment Agreement also provides that he will devote his full time to PCI activities. Forum Import/Export Company and Forum Development Company, Inc. have conducted no operations since Mr. Lambrecht began working with PCI. Members of Mr. Lambrecht's family manage Scottsdale Development Construction Company, Inc.'s only remaining project and the company is not currently contemplating any other major projects. Mr. Lambrecht is available Scottsdale Development for questions, but otherwise devotes no material time to that company. Colin A. Jones has an at-will Employment Agreement with PCI as Vice President of International Sales dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a one-time management fee of $80,000, payable over a 16-month period commencing July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales, marketing, operations, management and existing contacts with major retail distributors. He has agreed to devote his full time to PCI activities and has turned over operational control of J&M to other members of J&M's management and plans to sell or liquidate J&M in the near future. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable PCI executives. The Employment Agreement allows Mr. Jones to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. Greg P. Lambrecht has an at-will Employment Agreement with PCI as Vice President of International Sales dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a one-time management fee of $80,000, payable over a 16-month period commencing July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales, marketing, operations, management and existing contacts with major retail distributors. He has agreed to devote his full time to PCI activities and has turned over operational control of Rose Hearts to other members of Rose Heart's management, namely, Mike Rocha and plans to sell or liquidate Rose Hearts in the near future. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable PCI executives. The Employment Agreement allows Mr. Lambrecht to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. We also have arrangements with the following consultants, each of whom is also a director. David S. Hodges is a director and has a Business Consulting Agreement with PCI dated June 2, 1997 under which Mr. Hodges is to assist PCI with this Offering and additional projects related to strategic planning, budgeting, accounting and reporting, business analysis, information systems and operations as requested by PCI's management. Mr. Hodges receives $60 per hour and reimbursement for business expenses and health care coverage during the term of the agreement. Upon completion of this Offering, PCI or Mr. Hodges can elect to terminate the hourly payment agreement and PCI will instead pay Mr. Hodges biweekly payments of $4,800 each for a maximum six month period or until Mr. Hodges finds other employment, at which time the payments will cease. William L. Anthony, the Chairman of PCI's Board, entered a verbal agreement with PCI, on April 1, 1997, to act as a consultant to PCI's management to assist PCI with this Offering and advise them regarding certain aspects of strategic planning, business analysis and operations, including 47 merchandising, marketing and supply chain issues as requested by PCI's management. Mr. Anthony's services have included representing PCI in certain meetings arranged by the Underwriter's Representative with prospective underwriters and institutional investors in preparation for this Offering. He has not yet been compensated for his consulting services, but PCI has agreed to pay him $2,000 per month and to reimburse certain related expenses. Either Mr. Anthony or PCI may terminate his consulting agreement at any time, with or without cause. PCI has reimbursed David S. Hodges for $1,200 in attorney's fees related to the negotiation of his consulting relationship and has agreed to reimburse Greg P. Lambrecht and Colin A. Jones for approximately $6,000 in attorneys fees related to the negotiation of various personal agreements or agreements of J&M or Rose Hearts with PCI. Neither of the law firms involved have any affiliation with PCI. PCI has no standing arrangements to compensate directors. After PCI completes this offering, PCI will determine appropriate director compensation, which may include an annual retainer fee and/or a fee for each meeting attended, plus reasonable out-of-pocket expenses. CERTAIN TRANSACTIONS Resolving Conflicts of Interest. A number of the transactions described in this section involve inherent conflicts of interest because an officer, director, significant shareholder, promoter or other person with a material business or professional relationship with PCI is a party to the transaction. Our current policy adopted by our board of directors regarding transactions involving conflicts of interest, is: (i) we will not enter any material, transaction or loan with a related or affiliated party unless the transaction or loan is on terms that are no less favorable to us than we could obtain from an unrelated or unaffiliated third party; and (ii) a majority of the independent directors (those who do not have a material business or professional relationship with PCI other than being a director) who have no interest in the transactions must review and approve transactions involving related parties or conflicts of interest after having been given access, at our expense, to our counsel or to their own independent legal counsel; and (iii) when there are only two independent directors, both directors must approve the transaction; and (iv) the independent director approval applies to all related-party transactions and loans, whether or not to a related-party. We currently have two independent directors, William L. Anthony and Robert H. Manschot. Our independent directors have had access, at our expense, to our counsel or to independent counsel, and have ratified all related-party transactions that are ongoing. However, we entered into a number of transactions described below before we adopted our current conflicts of interest policy and before we had sufficient disinterested, independent directors to ratify the transactions. We believe that each of those transactions was on terms that were no less favorable to us than are generally available from unaffiliated third parties. Other than the transactions described below, we do not now anticipate entering into other related-party transactions or loans. CAN-AM Acquisition of J&M and Rose Hearts. On December 31, 1996, CAN-AM issued shares of its stock in exchange for the assets and liabilities of the cigar operations of J&M and Rose Hearts, including the cigar distribution accounts of each entity. PCI director and Vice President of International Sales Colin A. Jones is the President and sole shareholder of J&M. PCI Secretary, 48 Treasurer and Vice President of National Sales Greg P. Lambrecht is the President and sole shareholder of Rose Hearts. Messrs. Jones and Greg Lambrecht owned 100% of its voting stock of CAN-AM, and three others held non-voting shares. As set forth in PCI's consolidated financial statements for the fiscal year ended March 31, 1997, the cost of the net assets to J&M and Rose Hearts and the amount at which CAN-AM acquired the net assets was the same as its historical net cost in J&M and Rose Hearts. The combined cost, net of liabilities assumed, was approximately $1,000. The asset purchases are closed transactions and we entered the asset purchase agreements before we had sufficient disinterested, independent directors to ratify the transactions. PCI Acquisition of CAN-AM. Subsequent to the asset purchase transactions, but also on December 31, 1996, PCI acquired all of the issued and outstanding shares of CAN-AM in exchange of PCI shares. No written agreement was entered between PCI and CAN-AM's shareholders to formalize the acquisition or share exchange. As adjusted by the May 31, 1997 3:1 stock split (as defined below "3:1 Stock Split"), and including shares issued on December 31, 1996 and January 9, 1997, CAN-AM's five shareholders received 817,500 shares of PCI Common Stock, representing all of the then-issued and outstanding shares of Common Stock of PCI. Mr. Jones received 371,250 or 45.4% and Greg Lambrecht received 363,750 or 44.5%. At the time PCI acquired CAN-AM's shares, neither Greg P. Lambrecht nor Colin A. Jones had any formal relationship as an incorporator, officer, director or shareholder of PCI. PCI was formed with a view to purchasing the cigar operations of the entities they owned and controlled, however, and both Greg P. Lambrecht and Colin A. Jones were affiliated with PCI as promoters at the time PCI acquired CAN-AM's shares. PCI incorporator and initial director Scott I. Lambrecht, is the nephew of Greg P. Lambrecht. Colin A. Jones was elected a director of PCI on January 9, 1997, shortly after PCI acquired CAN-AM's shares. The CAN-AM acquisition is a closed transaction and we acquired CAN-AM before we had sufficient disinterested, independent directors to ratify the transaction. Jones/Lambrecht Notes Receivable. Colin A. Jones and Greg P. Lambrecht each delivered to PCI long term promissory notes to PCI for $43,112.50. The notes are dated December 31, 1996, accrue interest at eight percent, and all interest and principal are due on March 31, 1999. The notes relate to CAN-AM receivables which accrued prior to PCI's acquisition of all of CAN-AM's outstanding stock on December 31, 1996. We negotiated these notes receivable before we had sufficient disinterested, independent directors to ratify the transaction, but Messrs. Jones' and Lambrecht's repayment of the notes is ongoing, and our independent directors have ratified the transaction. J&M Management Agreement. On January 1, 1997, CAN-AM entered a Management Agreement with J&M to enable CAN-AM to reimburse J&M for any services provided to CAN-AM or on CAN-AM's behalf during the transition of J&M's Canadian operations to CAN-AM. J&M is to receive no additional sum, fee or commission other than reimbursement for J&M's expenses which are directly incurred in providing services to or on behalf of CAN-AM. At CAN-AM's sole discretion, CAN-AM may offset the reimbursement due under the Management Agreement against any related-party receivable that CAN-AM may owe to J&M. We entered this Management Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with J&M under the agreement is ongoing, and our independent directors have ratified the agreement. J&M, as a Canadian corporation wholly-owned by Colin A. Jones, continues to distribute certain wholesale and impulse purchase items to convenience stores and other accounts entirely located in Canada. J&M has, in the past, distributed certain cigars of Cuban origin to its convenience store accounts. Neither PCI nor its wholly-owned Canadian subsidiary CAN-AM currently distributes any cigars or other products of Cuban origin either in the United States or Canada. PCI's standard form supplier agreement strictly prohibits its suppliers from providing any product containing any component of Cuban origin. 49 Luyendyk Endorsement Agreement. On May 1, 1997, PCI entered an Endorsement Agreement with Arie Luyendyk under which PCI would issue 15,000 shares of Common Stock (as adjusted for the 3:1 Stock Split) to Mr. Luyendyk subject to a six-month vesting schedule. In order to meet its obligations under the Endorsement Agreement without diluting the relative security positions of other shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by the 3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer and Chairman, Steven A. Lambrecht, at $0.33 per share. We entered the Endorsement Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with Mr. Luyendyk under the agreement is ongoing, and our independent directors have ratified the agreement. Rose Hearts Distributorship Agreement. On June 13, 1997, PCI entered a Distributorship Agreement with Rose Hearts for the non-exclusive distribution to Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho, Oregon, Washington and Northern California. The agreement provides that any master agreement with a national PCI account or national distributor shall supersede the Rose Hearts agreement. PCI must pay Rose Hearts a 10% commission on the retail value of products PCI ships to third-party stores where Rose Hearts provides only in-store merchandising support services, but must pay Rose Hearts a 22% commission on the retail value of PCI products that Rose Hearts delivers to the stores directly. Greg P. Lambrecht is the President and sole shareholder of Rose Hearts and the Secretary, Treasurer, Vice President of National Sales and a substantial shareholder of PCI. We entered this Distributorship Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with Rose Hearts under the agreement is ongoing, and our independent directors have ratified the agreement. Barton Financing Settlement. On June 13, 1997, PCI entered a Full Settlement and Full Release of Equity Interest agreement among CAN-AM, Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones, Greg S. Barton and two of Mr. Barton's lenders. The agreement settled potential equity claims by Mr. Barton and his lenders regarding a September 5, 1996 loan for $110,000 at an annual interest rate of 36% to Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones and CAN-AM. CAN-AM had expressly accepted liability for the loan under the terms of each of the Asset Purchase Agreements with J&M and Rose Hearts on December 31, 1996. After PCI purchased all of CAN-AM's shares, PCI desired to extinguish the loan obligation primarily to eliminate the burden on CAN-AM's cash requirements, but also to avoid any potential, but unasserted equity claims against PCI from Mr. Barton's lenders related to the loan obligation. As a result of the settlement, PCI will repay $10,000 to one of Mr. Barton's lenders, the loan was reduced to $100,000 and Mr. Barton converted the loan to bridge financing (See Interim Financing - Bridge Financing"). Mr. Barton's forgiveness of the reduced $100,000 loan is the consideration he gave in exchange for an 8% bridge note for $100,000 and bridge warrants to purchase approximately 38,023 shares of PCI Common Stock at 50% of the Offering Price. Greg P. Barton is a 7.56% beneficial owner of PCI's Common Stock. Greg P. Lambrecht and Colin A. Jones own and control Rose Hearts and J&M, respectively, are officers and directors of CAN-AM and are controlling shareholders, officers and/or a director of PCI. The settlement transaction is a closed transaction and we entered the settlement before we had sufficient disinterested, independent directors to ratify the transaction. Barton and Mullavey Loans. On or about June 18, 1996, Greg S. Barton loaned Greg P. Lambrecht and Rose Hearts $50,000 in a transaction which included an option for Mr. Barton to convert the debt to equity of Rose Hearts. Between approximately May and September 1996, Ben P. Mullavey, a prior Rose Hearts consultant, loaned $50,000 to Rose Hearts in an undocumented transaction and provided consulting services to Rose Hearts. PCI, Rose Hearts and Greg P. Lambrecht agree that the Barton and Mullavey loans are solely Rose Hearts' debt obligations which CAN-AM did not assume as a part of the December 31, 1996 Asset Purchase Agreement for Rose Hearts' cigar operations. Ben P. Mullavey communicated to PCI on April 23, 1997, that he believes he has rights to convert his debt to shares of PCI Common Stock. Mr. Mullavey did not specify any number of shares that he believes he is entitled to, but instead demanded payment of $55,000, representing the principal from his undocumented 50 loan and $5,000 for consulting services he provided to Rose Hearts. Greg P. Lambrecht and Rose Hearts are negotiating with Messrs. Barton and Mullavey regarding a settlement of their claims, but PCI will not be a party to any settlement and will not directly issue any Common Stock to Barton or Mullavey. Because PCI is not a party to these Barton and Mullavey loans, our independent directors did not, and is not required to, review or approve the transactions. Lambrecht-LBIC Stock Sale. On June 17, 1997, Steven A. Lambrecht sold 20,000 shares of PCI Common Stock to Life of Boston Insurance Company, an Oklahoma corporation ("LBIC"). The Lambrecht-LBIC transaction was to provide additional incentive to LBIC to invest the final $250,000 to complete the Bridge Financing (See " Interim Financing - Bridge Financing"). Steven A. Lambrecht is PCI's President and Chief Executive Officer and the beneficial owner of 13.34% of PCI's Common Stock. Lincoln Heritage Life Insurance Company, an Illinois corporation ("Lincoln"), owns 79% of the stock of LBIC. The Londen Insurance Group, an Arizona holding corporation, is the sole shareholder of Lincoln and the beneficial owner of the Shares of Common Stock held by LBIC and the bridge warrants held by Boston and Lincoln. Anthony Stock Purchase and Option Agreement. On June 20, 1997, William L. Anthony entered an Agreement to purchase 66,000 shares of PCI Common Stock for $22,000 from Steven A. Lambrecht (60,000), Colin A. Jones (3,000) and Greg P. Lambrecht (3,000). PCI, also a party to the Agreement, granted Anthony a non-qualified stock option to purchase 20,000 shares at the offering price from the effective date of the offering and for one year thereafter. PCI also agreed to obtain, within 30 days after completion of this Offering to purchase officer and director insurance at coverage levels which are standard for distribution companies comparable to PCI. Anthony agreed to serve as Chairman of the Board for up to five years, subject to appropriate approvals and the provisions of PCI's Bylaws. The agreement is a closed transaction that occurred before we had sufficient disinterested, independent directors to ratify the transaction. Mr. Anthony's ongoing relationship to the Board as its Chairman is subject to ongoing Board approval, and Mr. Anthony's continued service as a director generally is subject to annual shareholder reelection. Lambrecht-Stanley Stock Sale. On June 20, 1997, Steven A. Lambrecht sold 15,000 shares of PCI Common Stock to James B. Stanley for $5,000. James B. Stanley is PCI's Vice President of Purchasing. PCI was not a party to the transaction. Manschot Stock Option Grant. On July __, 1997 PCI's Board of Directors granted Robert H. Manschot a non-qualified stock option to purchase 5,000 shares at the offering price from the effective date of the offering and for one year thereafter. The stock grant was approved by the other disinterested directors and independent directors contingent upon management's entry into an option agreement with Mr. Manschot. PRINCIPAL SHAREHOLDERS Security Ownership of Certain Beneficial Owners, Management The following tables set forth certain information regarding shares of common stock beneficially owned as of June 24, 1997 by (i) each person or group known to PCI, which beneficially owns more than 5% of the common stock; (ii) each of PCI's officers and directors; and (iii) all officers and directors as a group. The percentage of beneficial ownership is based on 1,480,500 shares outstanding on June 24, 1997 as adjusted for the 3:1 Stock Split plus, for each person or group, any securities that person or group has the right to acquire within 60 days pursuant to options, warrants, conversion privileges or other rights. Unless otherwise indicated, the following persons have sole voting and investment power with respect to the number of shares set forth opposite their names: 51 Security Ownership of Certain Beneficial Owners
Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership of Class - ----- ---------------- -------------------- -------- Common Colin Jones 368,250 24.87% 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Greg P. Lambrecht 360,750(2) 24.37 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Steven A. Lambrecht 197,500(2) 13.34 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Lincoln Heritage Life 210,114(1)(3) 12.58 Insurance Company 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Londen Insurance Group 210,114(1)(3) 12.58 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Life of Boston 115,057(1)(3) 7.30 Insurance Company 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Greg S. Barton 113,023(1) 7.44 17403 NE 45th Street Redmond, WA 98036 Common William L. Anthony 105,011(1) 6.91 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Peter G. Charleston 90,000(2) 6.08 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Scott I. Lambrecht 86,250(2) 5.83 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Corey A. Lambrecht 75,000(2) 5.07% 15651 N. 83rd Way #3 Scottsdale, AZ 85260
52 (1) Includes shares which may be beneficially acquired by the exercise of stock warrants or options within 60 days as follows: Greg S. Barton, 38,023 shares, William L. Anthony 39,011 shares, Lincoln Heritage Life Insurance Company, 190,114 shares, Life of Boston Insurance Company 95,057 shares. (2) Steven A. Lambrecht is the brother of Greg P. Lambrecht, the father of Corey A. Lambrecht and Scott I. Lambrecht and the uncle of Peter G. Charleston. Each of the Lambrechts and Mr. Charleston disclaims any beneficial interest in the shares held by the others. (3) The Londen Insurance Group is the sole shareholder of the Lincoln Heritage Life Insurance Company. Lincoln Heritage Life Insurance Company owns 79% of the shares of Life of Boston Insurance Company. 53 Security Ownership of Management
Title of Name and Address of Amount and Nature of Percent Class Beneficial Owner Beneficial Ownership of Class - ----- ---------------- -------------------- -------- Common Colin Jones 368,250 24.87% 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Greg P. Lambrecht 360,750(2) 24.37 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Steven A. Lambrecht 197,500(2) 13.34 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common William L. Anthony 105,011(1) 6.91 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Scott I. Lambrecht 86,250(2) 5.83 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common David S. Hodges 19,011(1) 1.27 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common James B. Stanley 26,250 1.77 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Robert H. Manschot 5,000 0.34 15651 N. 83rd Way #3 Scottsdale, AZ 85260 - ------------------------------------------------------------------------------------------------------- Common All Officers and Directors 1,168,022(1)(2) 75.67% as a group (8 persons)
(1) Includes shares which may be acquired by the exercise of options or warrants within 60 days as follows: William L. Anthony, 30,011 shares, David S. Hodges, 19,011 shares, Robert H. Manschot, 5,000 shares. (2) Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father of Corey A. Lambrecht and Scott I. Lambrecht. Each of the Lambrechts disclaims any beneficial interest in the shares held by the others. Shareholders and Voting Agreement. On January 1, 1997, PCI and the following shareholders entered a Shareholders and Voting Agreement: Greg P. Lambrecht, Colin A. Jones, Greg S. Barton, Dan C. Goldman and Pat Quadrelli. Between January 9 and 11, 1997, the following persons also agreed to be bound by the agreement: Scott I. Lambrecht, Peter G. Charleston, Mike Rocha, Murphy Pierson, Lorraine Shelley, Steven A. Lambrecht, Corey A. Lambrecht and James B. Stanley. On May 31, 1997, 54 the agreement was terminated by a majority vote of the board of directors and a majority vote of the total outstanding shares of PCI according to a provision of the agreement which allowed for voluntary termination by that means. Among other terms, the agreement (i) required the offer of the parties' shares to the other parties to the agreement or PCI prior to offering such shares to a third party, (ii) required parties to maintain confidentiality of PCI confidential information, (iii) restricted any party from competing with PCI at any time the party held PCI shares, and (iv) contained a voting agreement to break a deadlock between an even number of directors by electing (an) additional director(s). Although the agreement stated that it would not apply to publicly registered shares, the agreement was terminated to avoid any potential restriction on PCI, as a party to the agreement, in this offering and to simplify legal and transfer agent procedures regarding future transfers of restricted shares. INTERIM FINANCING Bridge Financing and Bridge Warrants. Between March and June 1997, 10 accredited investors loaned PCI a total amount of $1,000,000 bridge financing in cash or conversion of prior debt of CAN-AM. The Underwriter's Representative, W.B. McKee Securities, Inc., was PCI's consultant for the bridge financing. In return for their loans, the bridge investors received promissory notes from PCI and bridge warrants to purchase 361,215 shares of PCI Common Stock at 50% of the offering price or $2.63. The bridge warrants held by William B. McKee entitle him to purchase 19,011 shares at the offering price. 55 The following sets forth the names of the bridge investors, the amount of their cash investment or the value of other consideration given, the number of shares of Common Stock that they are entitled to purchase under the bridge warrants, and the percentage of their beneficial ownership before and after the offering:
Number of Percent Percent Common Shares Owned Owned Loan Entitled to Prior to After Name Amount Purchase Offering Offering - ---- ------ -------- -------- -------- Walter Adrushenko $ 50,000 19,011 1.27 (6) William L. Anthony(1) $ 50,000 19,011 6.91(5) 3.07(5) Greg S. Barton $ 100,000(4) 38,023 7.44(5) 3.31(5) Mary A. Davis $ 100,000 38,023 2.50 1.11 David S. Hodges(1) $ 50,000 19,011 1.27 (6) Anthony Holden $ 50,000 19,011 1.27 (6) William B. McKee(2) $ 50,000 19,011 1.27 (6) Life of Boston Insurance $ 250,000 95,057 7.30(5) 3.31(5) Company(3) Lincoln Heritage Life $ 250,000 95,057 12.58(5) 5.88(5) Insurance Company(3) Martin B. Perlman $ 50,000 19,011 1.27 (6) ---------- ------ Totals: $1,000,000 380,226
(1) Messrs. Anthony and Hodges are directors and consultants to PCI. See "Management." (2) Principal of W.B. McKee Securities, Inc., the Underwriter's Representative. (3) Beneficially owned and controlled by the Londen Insurance Group. (4) Conversion of $100,000 debt of CAN-AM, valued by PCI as a $100,000 investment. See "Certain Transactions." (5) Includes other beneficial holdings of such persons as follows: William L. Anthony, 86,000, Greg S. Barton, 75,000, Life of Boston Insurance Company, 20,000, Lincoln Heritage Life Insurance Company, 115,057. (6) Less than 1%. The bridge notes accrue eight percent (8%) annual interest until the closing of the offering under this prospectus. After the offering closes, the bridge notes bear interest at sixteen percent (16%). PCI intends to repay the bridge notes using proceeds from the offering. 56 Proceeds from the bridge financing were used to purchase cigars, humidors and related items and capital equipment and pay salaries, business expenses and office costs, and professional and consulting fees. Delayed Offering By Warrant Holders. The holders of the bridge warrants, have the right to exercise those warrants on or after the first day that our shares are traded. However, the holders of the warrants to purchase all 380,226 shares have agreed that if they exercise the warrants they will not sell the underlying shares for twelve (12) months from the date of this prospectus, subject to regulatory or exchange modification or approval, without the prior approval of the Underwriter's Representative. From the end of the agreed-upon no-resale period and for the remainder of the exercise period of the warrants, we must include the shares underlying the warrants in any subsequent registration statement we file for any sale of our Common Stock or the warrant holders may demand that we register the shares underlying the warrants. This potential delayed offering would result in the resale of the shares underlying the warrants at some date between one and five years from the completion of this offering. PCI will not receive any proceeds from the delayed offering of the shares underlying the Bridge warrants. Shares being sold in the delayed offering may be sold from time to time in transactions (which may include block transactions by or for the account of the Bridge Warrant holders) in the over-the-counter market, on any market in which PCI shares are traded, including the Nasdaq SmallCap Market, the Boston Stock Exchange or in negotiated transactions, a combination of such methods or otherwise. Sales may be made at fixed prices which may be changed, at market prices or in negotiated transactions, a combination of such methods or otherwise, and securities may be transferred by gift. In the delayed offering, the sellers may sell their shares directly to purchasers, through broker-dealers acting as agents for the sellers, or to broker-dealers who may purchase shares as principals and thereafter sell the securities from time to time in the over-the-counter market, in negotiated transactions or otherwise. The broker-dealers, if any, may receive compensation in the form of discounts, concessions or commissions from the sellers and/or the purchasers from whom such broker-dealer may act as agents or to whom they may sell as principals or otherwise (which compensation as to a particular broker-dealer may exceed customary commissions). Under applicable SEC rules and regulations , namely Rule 102 of Regulation M, any person engaged in the distribution of our securities in the delayed offering may not simultaneously engage in market-making activities in our securities during the applicable "cooling-off" period (which runs from at least one and possibly five business days before the beginning of the distribution and continues until the distribution is over). This means that if we offer more shares of our Common Stock to the public at some future date, and the underwriters of the subsequent offering are also distributing the shares underlying the Bridge warrants, the underwriters will not be able to make a market in our shares during the applicable restrictive period. Note that for two years following the completion of this offering, the Underwriter's Representative in this offering has a right of first refusal to participate as underwriter, co- underwriter or placement agent for any public or private offering of our securities. However, the underwriters in this offering have not agreed to and are not obligated to act as broker-dealer in delayed offering of the shares underlying the selling shareholders' securities and the selling shareholders may be required, and in the event the underwriter in the delayed offering is a market-maker, will likely be required, to sell such securities through another broker-dealer. In addition, each selling shareholder that may sell in any delayed offering will be subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder, including Rule 102 of Regulation M, which may limit the timing of the purchases and sales of shares of PCI's securities by such selling shareholders. The selling shareholders and broker-dealers, if any, acting in connection with any delayed offering might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act and any commission received by them and any profit on the resale of the securities might be deemed to be underwriting discount and commissions under the Securities Act. 57 We have informed the holders of the bridge warrants that the anti-manipulative rules under the Securities Exchange Act of 1934, including Regulation M, may apply to their sales in the market in any delayed offering. PCI has also informed the holders of the Bridge warrants of the need for delivery of copies of a current prospectus prior to any sale of their underlying shares in any delayed offering. PCI is unable to predict what effect the delayed offering by warrant holders may have on the then prevailing market price of PCI Common Stock. DESCRIPTION OF SECURITIES General. PCI is authorized to issue 10,000,000 shares of Common Stock, no par value. Stock Split. On May 31, 1997, PCI's shareholders unanimously approved a three-for-one forward stock split ("3:1 Stock Split"). Each issued and outstanding share of PCI's Common Stock was reclassified as three shares of Common Stock, no par value. The 3:1 Stock Split did not affect the number of shares of Common Stock which may be acquired by the holders of the bridge warrants, because the anti-dilution provisions of the Bridge warrants are only affected by reclassifications which occur after the date of this prospectus. Common Stock. Holders of Common Stock are entitled to one vote for each share on all matters submitted to a shareholder vote. Holders of Common Stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In any liquidation, each outstanding share entitles its holder to participate pro rata in the assets that remain after PCI pays liabilities. 1,480,500 shares of Common Stock are currently issued and outstanding, and upon completion of this offering, assuming the underwriters do not exercise their over-allotment option, 3,380,500 shares of Common Stock will be outstanding. Shareholders have no preemptive or other rights to subscribe for or purchase additional shares of any class of stock or of any other securities of PCI, nor are there any redemption or sinking fund provisions that relate to the Common Stock. All outstanding shares of Common Stock are, and the shares underlying all warrants and options will be validly issued, fully paid, and nonassessable have at the time PCI issues them. Arizona law allows shareholders to cumulate their votes for the election of directors. This means that shareholders may multiply the total number of shares they are entitled to vote by the total number of directors for whom they are entitled to vote, and may apply that product to elect a single director or distribute that product among two or more candidates. For example, at a meeting to elect three directors, a stockholder holding 100 voting shares could cast 300 votes for a single candidate, or could cast any combination totalling 300 votes for two or more candidates. Arizona's cumulative voting rights may allow shareholders holding a minority of PCI's shares a greater opportunity to elect a director even though management or larger shareholders control a substantial percentage of PCI's shares. Shares Eligible for Future Sale. Other than the outstanding shares of Common Stock issued in this offering, all of the presently issued and outstanding shares of Common Stock are "restricted securities" as that term is defined in SEC Rule 144. Rule 144 governs resales of restricted securities for the account of any person (other than an issuer), and restricted and unrestricted securities for the account of an "affiliate" of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates which were not issued or sold in a public offering registered under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. PCI's affiliates may include our directors, executive officers and persons directly or indirectly owning 10% or more of our outstanding Common Stock. Under Rule 144, unregistered resales of restricted Common Stock cannot be made until the restricted Shares have been held for one year from the later of when the stock was acquired from PCI or an affiliate of PCI. Thereafter, shares of Common Stock may be resold without registration subject to 58 Rule 144's volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about PCI (the "Applicable Requirements"). Resales by PCI's affiliates of restricted and unrestricted Common Stock are subject to the Applicable Requirements. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of (i) one percent of the then outstanding shares, or (ii) the average weekly reported trading volume during the four calendar weeks preceding each sale. A person who is not deemed an "affiliate" of PCI and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the Applicable Requirements. If a public market develops for PCI's Common Stock, PCI is unable to predict the effect that sales made under Rule 144 or other sales may have on the then prevailing market price of the Common Stock. None of the 1,480,500 presently outstanding shares of Common Stock will become eligible for sale under Rule 144 prior to December 31, 1997. Thereafter, at various times through March 10, 1998, all 1,480,500 shares of Common Stock will become eligible for sale pursuant to Rule 144. In addition, the holders of all 1,480,500 presently outstanding shares of Common Stock have agreed that they will not sell their shares for 18 months from the date of this Prospectus, without the prior approval of the underwriter. No Prior Market for Shares. Prior to the offering, there has been no public market for PCI shares. The offering price for the shares was determined through negotiations between us and the W.B. McKee Securities, Inc., and may not be indicative of the market price of the shares after the offering. We intend to list our Common Stock in The Nasdaq SmallCap Market(sm) and the Boston Stock Exchange and believe that we will be able to satisfy the current and proposed entry standards for those exchanges when we complete this Offering. If we are unable to satisfy the requirements for continued listing on Nasdaq or the Boston Stock Exchange, our shares will not be listed on those exchanges. In the event our shares are not listed on an exchange, trading, if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board, established for securities that do not meet The Nasdaq SmallCap Market(sm) listing requirements. Consequently, the liquidity of our securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts' and the news media's coverage of PCI, and lower prices and larger differences in bid and ask prices for our securities. If our securities are not listed on The Nasdaq SmallCap Market(sm) and/or the Boston Stock Exchange, they may become subject to Rule 15g-9 under the 1934 Act, which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our shares and may affect the ability of holders to sell our shares in the secondary market. The SEC's regulations define a "penny stock" to be any equity security that has a market price less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock restrictions will not apply to our shares if they are listed on The Nasdaq SmallCap Market(sm) or the Boston Stock Exchange and we provide certain price and volume information on a current and continuing basis or meet required minimum net tangible assets or average revenue criteria. We cannot assure you that our shares will qualify for exemption from these restrictions. If PCI shares were subject to the penny stock rules, the market liquidity for the shares could be severely adversely affected. 59 Transfer Agent The transfer agent ("Transfer Agent") for the Common Stock and warrant agent for the underwriter warrants is American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444, Denver, Colorado 80202-1817, (303) 298-5370. DIVIDEND POLICY PCI has never declared or paid a cash dividend on its shares. We currently intend to retain any earnings to fund the development and growth of our business and we do not anticipate paying any cash dividends in the foreseeable future. PCI's Board of Directors will determine whether to pay cash dividends based upon our results of operations, cash flows, financial condition and liquidity. UNDERWRITING CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE, PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES AND THE IMPOSITION OF PENALTY BIDS. See "Plan of Distribution." Subject to the terms and conditions of the Underwriting Agreement, the Underwriters named below have severally agreed to purchase from PCI the following number of shares set forth opposite their names at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus: Underwriter Number of Shares ----------- ---------------- W.B. McKee Securities, Inc. 950,000 Kashner Davidson Securities Corp. 950,000 --------- Total 1,900,000 ========= The Underwriting Agreement provides that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters will purchase all shares offered in this offering if any of the shares are purchased. W.B. McKee Securities, Inc. as underwriter's representative advised PCI that the underwriters will offer the shares they purchase directly to the public at the offering price on the cover page of this prospectus and to certain dealers at a price that represents a concession of $.2625 per Share, or 5.0% per Share. The underwriter's representative also advised PCI that it will not sell any of the shares to accounts over which it exercises discretionary authority, but that certain dealers may do so. After the initial public offering of the shares, the underwriters may change the offering price and the selling terms. We granted the underwriter's representative, an over-allotment option exercisable not later than 45 days after the date of this prospectus to purchase up to 285,000 shares (equal to 15% of the number of shares sold in the offering), at the public offering price, less the underwriting discounts and commissions listed on the cover page of this prospectus, solely for the purpose of covering any over-allotments. We agreed to pay the underwriter's representative a non-accountable expense allowance of 3% of the offering proceeds from the sale of the shares. We estimated the expense allowance at $299,250, $25,000 of which has already been paid, or $344,138 if the underwriter's representative exercises the over-allotment option. 60 At the closing of this offering, PCI will sell to the underwriter's representative, at a price of $.01 each, representative's warrants to purchase up to 190,000 shares (one share for every ten shares sold in this offering) which includes 19,011 bridge warrants issued to William B. McKee. Each representative's warrant will be exercisable for a four-year period, commencing one year from the date of this prospectus, at an exercise price equal to $8.40 per share (160% of the public offering price of the shares). We will issue one share of Common Stock upon exercise of each representative's warrant. The representative's warrants will contain anti-dilution provisions providing for appropriate adjustments in any recapitalization, reclassification, stock dividend, stock split or similar transaction by PCI. The representative's warrants do not entitle the Representative to any rights as a shareholder of PCI until the underwriter's representative exercises them. The representative's warrants may only be transferred to officers and employees of the underwriter's representative who are also shareholders of the underwriter's representative. For the exercise period of the representative's warrant, the holder(s) will have the opportunity to profit from a rise in the market value of the Common Stock, which will dilute the interest of the other PCI shareholders. We expect that the holder(s) of the representative's warrants will exercise them at a time when PCI would, in all likelihood, be able to obtain any capital it needs from an offering of its unissued Common Stock on terms more favorable to PCI than the terms in the representative's warrant, which may adversely affect the terms on which PCI can obtain additional financing. We have granted certain demand and piggyback registration rights for the Common Stock underlying the representative's warrants. On one occasion, at the underwriter's representative's request, at any time during the five-year period commencing one year after the date of this prospectus, PCI will prepare and file a post-effective amendment or new registration statement permitting the sale of the representative's warrants and/or underlying securities and use its best efforts to keep the registration statement effective under the Securities Act for a nine-month period following the effective date. We will bear the cost of that amendment or registration statement. Also, if PCI files an equity offering registration statement under the Securities Act at any time during the five-year period following the date of this prospectus, the holders of the representative's warrants or underlying securities will include in such registration statement all or part of the underlying securities at the request of the holders. PCI, any selling security holders and the underwriter's representative have agreed to indemnify each other against certain liabilities in connection with the Registration Statement, including liabilities under the Securities Act. The indemnification is limited or unavailable in certain circumstances, including where legally unavailable. All of the present shareholders of PCI have agreed not to offer, sell or otherwise dispose of all of their outstanding Common Stock or Common Stock issuable upon exercise of options for a period of 18 months after completion of this offering without prior consent of the underwriter's representative. See "Principal Shareholders." Upon closing of the Offering, the Representative will have the right to select one member of the Board of Directors to serve for a five (5) year term. PCI does not currently maintain key-man life insurance on any of its employees, but the terms of our agreement with the underwriters require us to maintain $1,000,000 in key-man life insurance on Steven A. Lambrecht at least until March 31, 2002. The previous paragraphs are a brief summary of the terms of the Underwriting Agreement and is not complete. A copy of the Underwriting Agreement is on file with the SEC as an exhibit to the INFORMATION."registration statement. See "Available Information." 61 PLAN OF DISTRIBUTION In connection with this offering, the underwriters' selling group members (if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of our shares. These transactions may include stabilization transactions permitted by Rule 104 of Regulation M, under which persons may bid for or purchase shares to stabilize its market price. The underwriters may also create a "short position" for their own account by selling more shares in the offering than they are committed to purchase, and in that case they may purchase shares in the open market after this offering is completed to cover all or a part of their short position. The underwriters' representative may also cover all or a portion of their short position, up to 285,000 shares, by exercising their over-allotment option described above and on the cover of this prospectus. Also, W.B. McKee Securities, Inc., on behalf of the underwriters, may impose "penalty bids," under contractual arrangements with the underwriters, that allow it to reclaim from an underwriter (or dealer participating in this offering) for the account of the other underwriters, the selling concession on the shares that the underwriters distribute in the offering but later purchase for their account in the open market. Any of these transactions may maintain the price of the shares at a higher level than the level which the shares might otherwise bear in the open market. None of these transactions is required, and if the underwriters, selling agents or others engage in the transactions, they may also stop at any time. LEGAL MATTERS Titus, Brueckner & Berry, P.C., 7373 North Scottsdale Road, Scottsdale Centre, Suite B-252, Scottsdale, Arizona 85253, counsel for PCI, will give their opinion that the shares of Common Stock offered in this Prospectus are validly authorized and issued. Streich Lang, P.A., Renaissance One, Two North Central Avenue, Phoenix, Arizona 85004, has represented the underwriter's representative in connection with this Offering. EXPERTS The financial statements of PCI included in this prospectus have been audited by Semple & Cooper, LLP, independent certified public accountants, as stated in their report which immediately precedes the financial statements. We include the financial statements in reliance on Semple & Cooper, LLP's report, which was given on that firm's authority as experts in accounting and auditing. 62 GLOSSARY Applicable Requirements Resale restrictions required by SEC Regulation ss. 230.144 ("Rule 144"), including holding period, volume limitation, aggregation, broker transaction, notice filing and availability of public information requirements. Bridge warrants Warrants to purchase shares of PCI's Common Stock at 50% of the offering price, except that the exercise price for William B. McKee's warrants is $5.25. Bridge financing Interim financing of $1,000,000 from nine investors between March and June 1997; Investors received a promissory note for the amount of their investment and a warrant to purchase shares of PCI's Common Stock. CAN-AM CAN-AM International Investments Corp., a British Columbia (Canada) corporation and wholly-owned subsidiary of PCI. All of PCI's Canadian cigar operations are conducted through CAN-AM. EPA The U.S. Environmental Protection Agency. Exchange Act The Securities Exchange Act of 1934, as amended. FDA The U.S. Food and Drug Administration. FTC The Federal Trade Commission. J&M J&M Wholesale, Ltd., a British Columbia (Canada) corporation wholly-owned and controlled by Colin A. Jones, who is an officer and director of CAN-AM and an officer, director and controlling shareholder of PCI. Master agreement A form retailer or regional distribution agreement that PCI negotiated with a major convenience store chain, which is approved for use by retail stores or regional distribution centers within the chain, but which must be accepted by each individual store or distribution region which wishes to participate in the PCI Cigar Program. Merchandising Full-service, in-store support of a retail location including cleaning, supplying and maintaining the humidor, rotating stock and providing training to store management and personnel. NACS National Association of Convenience Stores. Nasdaq SmallCap Market(sm) An interdealer quotation system for smaller companies operated by Nasdaq. Nasdaq The National Automated Dealer Quotation System operated by The Nasdaq Stock Market, Inc. Offering price The price per share printed on the cover of this prospectus. 63 Offering PCI's initial public offering of its shares under this prospectus and registered under its registration statement on Form SB-2. Over-allotment option Options that PCI has granted to the underwriter, exercisable for 45 days from the date of this Prospectus, to purchase up to an additional 285,000 Shares to cover excess allotments . PCI Premium Cigars International, Ltd. PCI Cigar Program PCI's cigar distribution program, including premium and mass market cigars, humidors, service, training and sales. Prospectus This document. Registration statement PCI's registration statement on Form SB-2 filed with the SEC as of the date of this prospectus, which includes exhibits and other information that is not included in this prospectus. Representative's warrants Warrants to purchase 170,989 Shares exercisable at 160% of the Offering Price; issued to the Underwriter as additional compensation. Rose Hearts Rose Hearts, Inc, a Washington corporation that is wholly-owned and controlled by Greg P. Lambrecht, who is an officer and director of CAN-AM and an officer and controlling shareholder of PCI. SEC The Securities and Exchange Commission. Securities Act The Securities Act of 1933, as amended. Shares Shares of PCI's Common Stock, no par value. 3:1 stock split A 3:1 forward split of PCI's Shares approved by PCI's shareholders on May 31, 1997. Transfer agent and American Securities Transfer & Trust, Inc. warrant agent Underwriters W.B. McKee Securities, Inc., Kashner Davidson Securities Corp and others who may be named in a syndicate of co-underwriters. Underwriter's W.B. McKee Securities, Inc. representative Underwriting discount Compensation to the underwriter's representative in the form of a 10% discount of underwriter's representative's purchase price from the Offering Price. "We" Premium Cigars International, Ltd. ADDITIONAL INFORMATION PCI filed a registration statement on Form SB-2 with the SEC relating to the securities offered in this prospectus. This prospectus does not contain all of the information included in the registration 64 statement. For further information about PCI and the securities we are offering in this prospectus, refer to the registration statement and its exhibits. The statements we make in this prospectus regarding the content of any contract or other document are necessarily not complete, and you may examine the copy of the contract or other document that we filed as an exhibit to the registration statement. All our statements about all such contracts or other documents are qualified in their entirety by referring you to the exhibits to the registration statement. FINANCIAL STATEMENTS Index to Financial Statements Independent Auditor's Report ............................................. F-2 Consolidated Balance Sheet ............................................... F-3 Consolidated Statement of Operations ..................................... F-4 Consolidated Statement of Changes in Stockholders' Equity ................ F-5 Consolidated Statement of Cash Flows ..................................... F-6 Notes to Consolidated Financial Statements ............................... F-7 65 INDEPENDENT AUDITORS' REPORT ---------------------------- To The Board of Directors of Premium Cigars International, Ltd. We have audited the accompanying consolidated balance sheet of Premium Cigars International, Ltd. and Subsidiary as of March 31, 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the period from the date of inception, June 1, 1996 through March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated 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 consolidated financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Premium Cigars International, Ltd. and Subsidiary as of March 31, 1997, and the results of its operations, changes in stockholders' equity, and its cash flows for the period from the date of inception, June 1, 1996 through March 31, 1997, in conformity with generally accepted accounting principles. Semple & Cooper, L.L.P. Phoenix, Arizona June 18, 1997 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEET March 31, 1997 ASSETS Current Assets: Cash and cash equivalents (Note 1) $ 53,018 Accounts receivable (Notes 1 and 2) - trade 64,300 - related parties 8,497 Inventory (Notes 1 and 3) 126,337 Prepaid expenses 15,607 --------- Total Current Assets 267,759 --------- Property and Equipment, Net (Notes 1 and 4) 23,055 --------- Other Assets: Humidors, net (Note 1) 60,486 Notes receivable - related parties (Note 2) 86,225 Organizational costs, net (Note 1) 32,386 Deferred costs (Note 1) 53,550 --------- 232,647 --------- $ 523,461 ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Note payable (Note 5) $ 50,000 Notes payable - related parties, current portion (Note 2) 19,641 Accounts payable - trade 109,254 Accrued expenses - tobacco taxes 100,333 - other 70,700 --------- Total Current Liabilities 349,928 --------- Long-Term Liabilities: Notes payable - related parties, long-term portion (Note 2) 110,000 --------- Commitments: (Note 7) -- --------- Stockholders' Equity:(Note 8) Common stock - no par value, 10,000,000 shares authorized, 1,480,500 shares issued and outstanding 217,050 Accumulated deficit (153,517) --------- Total Stockholders' Equity 63,533 --------- Total Liabilities and Stockholders' Equity $ 523,461 ========= The Accompanying Notes are an Integral Part of the Consolidated Financial Statements F-2 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENT OF OPERATIONS For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 Net Sales $ 845,571 Cost of Sales 643,790 ----------- Gross Profit 201,781 ----------- Selling, General and Administrative 333,776 ----------- Loss from Operations (131,995) ----------- Other Income (Expense): Interest Expense (21,292) Other 963 Foreign currency transaction loss (1,193) ----------- (21,522) ----------- Net Loss $ (153,517) =========== Loss per Share (Note 1) $ (.10) =========== Weighted Average Number of Shares Outstanding 1,480,500 =========== The Accompanying Notes are an Integral Part of the Consolidated Financial Statements F-3 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 Common Stock Total ------------------ Accumulated Stockholders' Shares Amount Deficit Equity ------ ------ ------- ------ Balance, June 1, 1996 -- $ -- $ -- $ -- Shares issued for cash 1,450,500 207,050 -- 207,050 Shares issued for services 30,000 10,000 -- 10,000 Net loss -- -- (153,517) (153,517) --------- --------- --------- --------- Balance, March 31, 1997 1,480,500 $ 217,050 $(153,517) $ 63,533 ========= ========= ========= ========= The Accompanying Notes are an Integral Part of the Consolidated Financial Statements F-4 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENT OF CASH FLOWS For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Cash received from customers $ 782,234 Cash paid to suppliers and employees (827,701) Interest paid (21,292) --------- Net cash used for operating activities (66,759) --------- Cash flows from investing activities: Purchase of property and equipment (23,302) Purchase of humidors (71,451) Disbursements for notes receivable - related parties (86,225) Organizational costs (32,386) Deferred offering costs (53,550) --------- Net cash used by investing activities (266,914) --------- Cash flows from financing activities: Proceeds from notes payable 50,000 Proceeds from note payable - related party 129,641 Proceeds from issuance of common stock 207,050 --------- Net cash provided by financing activities 386,691 --------- Net increase in cash and cash equivalents 53,018 Cash and cash equivalents at beginning of period -- --------- Cash and cash equivalents at end of period $ 53,018 ========= Reconciliation of Net Loss to Net Cash used for Operating Activities: Net Loss $(153,517) --------- Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization 11,212 Stock issued for services 10,000 Changes in Assets and Liabilities: Accounts receivable - trade (64,300) - related parties (8,497) Inventory (126,337) Prepaid expenses (15,607) Accounts payable - trade 109,254 Accrued expenses - tobacco taxes 100,333 - other 70,700 --------- 86,758 --------- Net cash used for operating activities $ (66,759) ========= The Accompanying Notes are an Integral Part of the Consolidated Financial Statements F-5 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: Nature of Operations: Premium Cigars International, Ltd. (the "Company") is a Corporation organized under the laws of the State of Arizona on December 16, 1996. CAN-AM International Investments Corp. (CAN-AM), a British Columbia Canadian corporation, was incorporated on June 20, 1996. The Company acquired all of the outstanding stock of CAN-AM on December 31, 1996. The 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 throughout greater Canada. The Company has elected a March 31 fiscal year end. Significant Transactions: Prior to January 1, 1997, CAN-AM acquired all existing cigar accounts, cigar related inventory, humidors, other assets and the related trade accounts payable and tobaco tax liabilities from J&M Wholesale, Ltd. and Rose Hearts, Inc. These corporations were owned by the principal stockholders of Premium Cigars International, Ltd. As all acquisitions and account purchases were consummated within a controlled group, the cigar operations of J&M Wholesale, Ltd. and Rose Hearts, Inc. are included in the accompanying financial statements from the date of commencement of cigar sales, June 1, 1996. Principles of Consolidation: The consolidated financial statements include the activity of Premium Cigars International, Ltd., together with its wholly-owned subsidiary, CAN-AM, and its predecessors cigar related activity of J&M Wholesale, Ltd. and Rose Hearts, Inc. The activity of CAN-AM and its predecessors is included in the consolidated financial statements from the date of commencement of cigar operations, June 1, 1996. All significant intercompany accounts and transactions have been eliminated. Pervasiveness of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Cash and Cash Equivalents: Cash equivalents are considered to be all highly liquid investments purchased with a maturity of three (3) months or less. Accounts Receivable - Trade: Accounts receivable - trade represents amounts earned but not collected in connection with the sale of cigars and cigar accessories. The Company follows the allowance method of recognizing uncollectible accounts receivable. The allowance method recognizes bad debt expense as a percentage of accounts receivable based on a review of individual accounts outstanding. In the opinion of the management, all accounts receivable outstanding at March 31, 1997, are considered fully collectible and therefore, no allowance has been provided for potentially uncollectible accounts receivable. F-6 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: (Continued) Inventory: Inventory quantities and valuation were determined based upon a physical count, and pricing of same at March 31, 1997. Inventory is stated at the lower of cost, first-in, first-out method, or market. Inventory quantities are reviewed for obsolescence periodically. Property and Equipment: Property and equipment are recorded at cost. Depreciation is provided for on the straight-line method, over the following estimated useful lives. Equipment 5-7 years Furniture and fixtures 5-7 years Maintenance and repairs that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Betterments or renewals are capitalized when incurred. Depreciation expense was $247 for the period from the date of inception, June 1, 1996 through March 31, 1997. Humidors: Humidors are used primarily to display cigars available for sale at retail outlets. The humidors are being amortized ratably over a two (2) year period. For the period from the date of inception, June 1, 1996 through March 31, 1997, amortization expense was $10,965. Organization Costs: Organization costs consist of costs incurred in relation to the formation of the Corporation and its wholly-owned subsidiary. These costs are being amortized ratably over five (5) years. Deferred Costs: Deferred costs primarily represent costs incurred in connection with the Company's proposed Initial Public Offering of its common stock and will be offset against the proceeds of the offering, or expensed if not successful. Income Taxes: Deferred income taxes are provided on an asset and liability method, whereby deferred tax assets are recognized for deductible temporary differences and operating loss carryforwards. Deferred tax liabilities are recognized for taxable temporary differences. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment. F-7 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 1. Summary of Significant Accounting Policies, Nature of Operations and Use of Estimates: (Continued) Translation of Foreign Currencies: Account balances and transactions denominated in foreign currencies and the accounts of the Corporation's foreign operations have been translated into United States funds, as follows: Assets and liabilities at the rates of exchange prevailing at the balance sheet date; Revenue and expenses at average exchange rates for the period in which the transaction occurred; Exchange gains and losses arising from foreign currency transactions are included in the determination of net earnings for the period; Exchange gains and losses arising from the translation of the Corporation's foreign operations are deferred and included as a separate component of stockholders' equity. Loss Per Share: During the period ended March 31, 1997, the Company's Board of Directors approved an Initial Public Offering of its common stock. The Initial Public Offering price to the public is expected to be $5.01 per share. Pursuant to the Securities and Exchange Commission rules, common stock issued for consideration below the $5.01 per share Initial Public Offering price during the twelve (12) months prior to filing the Registration Statement, have been included in the weighted average number of shares outstanding from the beginning of the period. 2. Related Party Transactions: Accounts Receivable - Related Parties: Accounts receivable - related parties as of March 31, 1997 are, in the opinion of management, short-term in nature and are non-interest bearing. Notes Receivable - Related Parties: As of March 31, 1997, notes receivable - related parties are comprised of 6% interest bearing notes from the principal stockholders in the amount of $86,225. The notes receivable are due on March 31, 1999. Notes Payable - Related Parties: At March 31, 1997, notes payable related parties consist of the following: Non-interest bearing note to a stockholder, due on demand; unsecured $ 19,641 36% interest bearing note to a stockholder, with monthly interest-only payments, due May, 1998; unsecured 110,000 --------- 129,641 Less: current portion (19,641) --------- $ 110,000 ========= F-8 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 2. Related Party Transactions: (Continued) Notes Payable - Related Parties: (Continued) For the period from the date of inception, June 1, 1996 through March 31, 1997, the Company incurred interest expense in relation to the above notes payable from related parties in the approximate amount of $19,800. Subsequent Related Party Transactions: Subsequent to the balance sheet date, the following related party transactions occurred: The Company paid $10,000 of principal on the $110,000 note payable to a stockholder, and converted the remaining balance into additional bridge financing, with terms in accordance therewith (See Note 12). The Company entered into a distributorship agreement with a related entity allowing for payments of ten percent (10%) to twenty-two percent (22%) of the sales price as an account servicing fee. Although the Company has no other similar distributor agreements at this time, it is managements belief that the distribution fee represents a reasonable cost if the services were to be performed by an independent party. 3. Inventory: As of March 31, 1997, inventory consists of the following: Cigars $124,684 Cigar accessories 1,653 -------- $126,337 ======== 4. Property and Equipment: At March 31, 1997, property and equipment consists of the following: Equipment $ 3,090 Furniture and fixtures 10,212 -------- 13,302 Less: accumulated depreciation (247) -------- 13,055 Equipment held for sale 10,000 -------- $ 23,055 ======== 5. Note Payable: As of March 31, 1997, the note payable consists of a $50,000 operating line of credit with Biltmore Investors Bank, with interest at two percent (2%) above the lenders index rate. The note is due December 18, 1997, and is secured by various assets. F-9 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 6. Income Taxes: At March 31, 1997, the Company has available approximately $150,000 of U.S operating loss carryforwards that may be applied against future taxable income and will expire in 2012. In addition, the Company has a Canadian net operating loss carryforward in the approximate amount of $25,000, expiring through 2004. The Company has established a valuation allowance equal to the full amount of the deferred tax asset of approximately $70,000, resulting from the loss carryforwards. The Company established an allowance because the utilization of the loss carryforwards is uncertain. 7. Commitments: Employment Agreements: The Company has entered into employment agreements with three (3) officers of the Corporation. The agreements are cancellable at any time by either party. The Company has agreed to pay two (2) of the officers a management fee in the amount of $80,000. The fee is to be paid over a sixteen (16) month period. In addition, the Company has retained a consultant to assist with the Initial Public Offering, for a minimum fee of $62,400. Operating Leases: The Company leased office and warehouse space in Scottsdale, Arizona in May, 1997, under a non-cancellable operating lease agreement, expiring May 31, 1999. The terms of the lease provide for monthly payments ranging from $5,878 to $7,134. The lease terms also require the Company to pay common area maintenance, taxes, and certain other incidental costs. A schedule of future minimum lease payments due under the non-cancellable operating lease agreements for each of the next three (3) years, is as follows: Year Ending March 31, Amount --------- ------ 1998 $ 75,521 1999 85,270 2000 14,268 -------- $175,059 ======== As this lease was executed subsequent to the year end, there was no rent expense under the aforementioned operating lease agreement for the period from the date of inception, June 1, 1996 through March 31, 1997. 8. Stockholders' Equity: Common Stock Split: In May, 1997, the Company declared a three for one split of its common stock. The accompanying consolidated financial statements give retroactive effect to the stock split. Proposed Offering: The Company is currently in the process of filing a Form SB-2 Registration Statement with the Securities and Exchange Commission to register its common stock for sale to the public. The offering is intended to issue 1,900,000 common shares at $5.25 per share. F-10 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Foreign Currency: Foreign currency transactions resulted in an aggregate exchange loss of $1,193 for the period from the date of inception, June 1, 1996 through March 31, 1997. Foreign currency translation gains or losses were immaterial for the period. 10. Statements of Cash Flows: Non-Cash Financing and Investing Activities: During the period ended March 31, 1997, the Company recognized a financing activity that affected its assets, liabilities and equity, but did not result in cash receipts or payments. This non-cash activity is as follows: Issuance of 30,000 shares of common stock valued at $10,000 for services rendered. 11. Economic Dependency: For the period from the date of inception, June 1, 1996 through March 31, 1997, the Company's largest supplier accounted for approximately seventy-one percent (71%) of the Company's cigar purchases. As of March 31, 1997, this supplier had an account payable balance of approximately $15,000. For the period from the date of inception, June 1, 1996 through March 31, 1997, the Company's largest customer accounted for approximately eighty-two percent (82%) of the Company's sales. As of March 31, 1997, there are accounts receivable of approximately $50,000 due from this customer. 12. Subsequent Events: In April 1997, the Company obtained a $650,000 bridge financing loan, with interest at 8% per annum, and net proceeds of $585,000 due the earlier of the date of the closing of an Initial Public Offering, or six (6) months after the offering date, with interest at 16% per annum after this period if not paid in full. In addition, $100,000 of related party debt was converted to the same terms as the bridge financing. In June, 1997, an additional $250,000 of bridge financing loans were made, with net proceeds of $225,000, under the same terms. The bridge financing also allows the debt holder to exercise a warrant to buy common stock at fifty percent (50%) of the proposed Initial Public Offering price, with the number of shares equal to the financing amount divided by the exercise price. In April, 1997, the Company paid its line of credit in full and terminated the agreement. F-11 [INSIDE BACK COVER] [picture of race car driver Arie Luyendyk in Indy 500 winner's circle with helmet bearing PCI logo] [caption] Arie Luyendyk, winner of 1997 Indy 500, in winner's circle with PCI logo on helmet. [picture of Luyendyk's helmet with PCI logo (no caption)] [picture of Luyendyk driving Indy 500 race car (no caption)] [PCI logo (no caption)] [background picture of lit cigar (no caption)] II-14 NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING BEEN AUTHORIZED BY PCI OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WAS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF PCI OF THE FACTS HEREIN SET FORTH SINCE THE DATE OF THIS PROSPECTUS. ------------------- TABLE OF CONTENTS PAGE ---- Prospectus Summary ........................................................ 1 Summary Consolidated Financial Information ................................ 4 Risk Factors .............................................................. 5 Use of Proceeds ........................................................... 15 Capitalization ............................................................ 17 Dilution .................................................................. 17 Selected Historical and Pro Forma Consolidated Financial Information ...... 21 Management's Discussion and Analysis of Results of Operations ............. 22 Business .................................................................. 25 Management ................................................................ 43 Certain Transactions ...................................................... 48 Principal Shareholders .................................................... 51 Interim Financing ......................................................... 55 Description of Securities ................................................. 58 Dividend Policy ........................................................... 60 Underwriting .............................................................. 60 Legal Matters ............................................................. 62 Experts ................................................................... 62 Glossary .................................................................. 63 Additional Information .................................................... 64 Financial Statements ...................................................... 65 ------------------- UNTIL ______________, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. We intend to furnish our shareholders annual reports containing audited financial statements and other appropriate reports. Our fiscal year ends on March 31. We will file annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference room in Washington, D.C. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC Internet site at http\\www.sec.gov. 66 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS See also "Management," "Indemnification of Directors and Officers." PCI's Articles of Incorporation provide that no director or former director shall be liable to PCI or its shareholders for monetary damages or for breach of fiduciary duty or for any action taken or any failure to take any action as a director or officer. The Articles continue that the liability of directors is limited or eliminated to the fullest extent permitted by law and provide that no repeal or modification of such limitation of liability may adversely affect any right or protection of a director or officer existing at the time of such repeal or modification. Generally, Arizona statutory law permits indemnification of an officer or director if such individual acted in good faith and with respect to conduct of an official capacity, in a manner he or she reasonably believed to be in the best interests of the corporation and in all other cases, at least not opposed to the corporation's best interests, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. A corporation may never indemnify any director who is adjudged liable to the corporation or who is adjudged, regardless of the nature of the proceeding, liable on the basis that the director received an improper personal benefit. Unless a corporation's articles of incorporation provide otherwise, a corporation must indemnify a director or officer who is the prevailing party on merits or otherwise for the director's or officer's reasonable expenses in the defense of a proceeding to which the director or officer was a party because he or she is or was a director or officer of the corporation. PCI has not entered any agreement with its current directors and executive officers pursuant to which it is obligated to indemnify those persons. At present, PCI is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of PCI in which indemnification would be required or permitted. We also refer you to Section 8 of the Underwriting Agreement included at Exhibit 1.1, which we incorporate to this disclosure by this reference. The indemnification provisions relate to our officers and directors and the underwriter's representative which has potential control over PCI because it can nominate a director for a five year period from the completion of this Offering. That Section grants extensive indemnification rights from us to the underwriter's representative and certain of its affiliates and requires the underwriter's representative to indemnify us and our directors, officers and affiliates under certain circumstances. We qualify this entire summary of the Underwriting Agreement indemnification provisions by referring you to that document directly, but in general: We must indemnify the underwriter's representative and affiliates if they become subject to claims under the Securities Act issue, or otherwise, and the claims are: (i) based on our failure to perform our obligations under agreements with the underwriter's representative, or (ii) based on untrue or alleged untrue statements in the registration statement or any preliminary or final prospectus, or material omissions or alleged material omissions in those documents, unless we were relying on certain written information that the underwriter's representative or certain affiliates provided us; and The underwriter's representative must indemnify us, our officers, directors and affiliates if we become subject to claims under the Securities Act or otherwise, and the claims are: II-1 (i) based on the underwriter's representative's or certain affiliates' failure to perform our obligations under agreements with us, or (ii) based on untrue or alleged untrue statements in the registration statement or any preliminary or final prospectus, or material omissions or alleged material omissions in those documents, if we were relying on certain written information that the underwriter's representative or certain affiliates provided us. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC registration fee ................. $ 4,158 Blue sky filing fees ................. $ 42,000* Transfer agent and engraving fees .... $ 750 Accounting fees ...................... $ 80,000* NASD corporate finance filing fee .... $ 1,875 Boston Stock Exchange listing fee .... $ 7,500 Nasdaq SmallCap Market(sm) listing fee $ 8,481 Legal fees ........................... $175,000* Printing and engraving costs ......... $ 50,000 Miscellaneous ........................ $ 5,236* ======== Total ........................... $375,000* - ----------------------- * Estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is information concerning the issuance by PCI of its securities since its organization in December 1996 (other than securities issued in this Offering). All such securities are restricted securities and the certificates bear restrictive legends. All share issuances are adjusted to reflect the effect of the 3:1 Stock Split. In each of the transactions for which we assert exemption from registration under Section 4(2) of the Act, with the exception of the shares issued to Mike Rocha, the purchaser executed some form of written subscription offer or agreement which contained representations about the unregistered nature of the shares, their access to full information regarding the corporation and the shares, their understanding regarding the restrictions on transfer of the shares and their intent to acquire the shares for investment purposes only and not with a view to resale. (a) In connection with PCI's acquisition of all of the issued and outstanding shares of CAN-AM on December 31, 1996, aggregated with additional shares issued for the same consideration on January 9, 1997, PCI issued 817,500 shares of Common Stock to the following founders, employees or consultants in a stock-for-stock transaction for certain class "A" (non-voting) and Class "B" (voting) shares of CAN-AM: II-2 Name Shares Consideration ---- ------ ------------- Greg P. Lambrecht 363,750 95 CAN-AM "A" Shares 1 CAN-AM "B" Share Colin A. Jones 371,250 95 CAN-AM "A" Shares 1 CAN-AM "B" Share Greg S. Barton 22,500 6 CAN-AM "A" Shares Daniel C. Goldman 52,500 4 CAN-AM "A" Shares Pat Quadrelli 7,500 2 CAN-AM "A" Shares ------- -------------------- Totals: 817,500 Shares $1,000 Value to PCI The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition at the time of the issuance, Greg P. Lambrecht and Colin A. Jones were PCI promoters and the owners of entities which sold cigar operations to PCI. Greg S. Barton was a $100,000 creditor of CAN-AM and a creditor of Rose Hearts, which also on December 31, 1996 sold its cigar operations to PCI. Daniel C. Goldman was a financial consultant to Rose Hearts, J&M and CAN-AM and PCI and a PCI director from January 9, 1997 to February 17, 1997. Pat Quadrelli was a lender to CAN-AM prior to the time that it was acquired by PCI. As set forth in PCI's consolidated financial statements for the fiscal year ended March 31, 1997, the cost of the net assets to J&M and Rose Hearts and the amount at which CAN-AM acquired the net assets was the same as its historical net cost in J&M and Rose Hearts. The combined cost, net of liabilities assumed, was approximately $1,000. (b) On January 9, 1997, PCI issued 15,000 shares of Common Stock to Mike Rocha as compensation for past services provided to PCI and which PCI valued at $5,000. The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of the issuance, Mr. Rocha was an employee of Rose Hearts and a consultant to PCI. (c) From January 9 to 12, 1997, PCI issued shares of Common Stock to certain directors, officers, employees, consultants and accredited investors for cash as follows: Name Shares Consideration ---- ------ ------------- Lorraine Shelley 82,500 $ 27,200 Kathy Keil 82,500 $ 27,200 Scott I. Lambrecht 86,250 $ 25,500 Steven A. Lambrecht 82,500 $ 27,200 Corey A. Lambrecht 75,000 $ 27,200 James B. Stanley 11,250 $ 10,000 Greg S. Barton 52,500 $ 50,000 -------- -------- Total: 472,500 $194,300 The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Scott I. Lambrecht and Steven A. Lambrecht were PCI directors, Lorraine Shelley was a director, II-3 Secretary and Treasurer who, along with Kathy Keil, were PCI consultants who owned a convenience store distributorship that previously worked with Rose Hearts in handling its accounts, Corey A. Lambrecht was a Senior Account Executive for PCI and the brother and son of directors Scott I. Lambrecht and Steven A. Lambrecht, James B. Stanley was PCI's Purchasing Director (now Vice President of Purchasing) and Greg S. Barton was a founding shareholder and, as described under (a), a substantial lender to CAN-AM and Rose Hearts. (d) On March 5, 1997, PCI's Board of Directors authorized a private placement of a maximum of 195,000 Shares of PCI Common Stock to its existing shareholders and on March 10, 1997 PCI issued the following additional shares of Common Stock to its existing shareholders in exchange for cash: Name Shares Consideration ---- ------ ------------- Peter G. Charleston 90,000 $ 3,750 Steven A. Lambrecht 60,000 $10,000 Murphy Pierson 15,000 $ 1,250 Daniel C. Goldman 10,500 $ 1,750 ------- ------- Total: 175,500 $16,750 The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Peter G. Charleston was the National Sales and Training Director and responsible for PCI's largest U.S. account, Steven A. Lambrecht was a director, Murphy Pierson was a PCI Account Executive, and Dan C. Goldman, as described under (a), was a financial consultant to PCI, a founding shareholder and a former director. (e) As described above under " Interim Financing - Bridge Financing," between March and June 1997, ten (10) accredited bridge investors loaned PCI a total amount of $1,000,000 in increments of $50,000, consisting of $900,000 in cash and $100,000 in forgiveness of prior debt of CAN-AM. In return for their loan, the bridge investors received a Bridge Note from PCI in the amount of their loan and Bridge warrants to purchase shares of PCI Common Stock at fifty percent (50%) of the Offering Price printed in this prospectus except that the exercise price is $5.25 for the warrants held by William B. McKee. The names of the bridge investors, the cash amount or value of consideration they provided to PCI and the number of shares of Common Stock that they are entitled to purchase under the bridge warrants are set forth in the prospectus under " Interim Financing -Bridge Financing." The issuance of the bridge notes and bridge warrants was exempt from the registration requirements of the Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of the SEC. Each bridge investor was an accredited investor within the meaning of Rule 501 and a "sophisticated" or otherwise suitable investor within the meaning of the Section 4(2) exemption. Each bridge investor was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, of the ten (10) bridge investors, David S. Hodges was a PCI consultant and promoter and is currently a director, William L. Anthony was a PCI consultant and is currently a director, William B. McKee is the Chairman of the Board of the underwriter's representative in this offering and Greg S. Barton, as set forth in (a) and (c), was a founding shareholder and a substantial lender to CAN-AM and Rose Hearts. The remaining four (4) bridge investors, along with the other bridge investors, made substantial and specific representations to PCI regarding their net worth and income, their ability to accept the risk of the investment, their access, examination and satisfaction with information about PCI and the investment, that they had adequate II-4 means to provide for their current financial needs, that they believed the investment was suitable to their personal financial circumstances and that they were either relying on their own financial advisor or that their education, business experience and financial sophistication enabled them to evaluate the economic merits of their investment. PCI conducted no advertisement or public solicitation in connection with the transaction and filed a Notice of Sales of Securities on Form D on July 3, 1997 and amended the Form D on July 16, 1997. (f) As described above under "Certain Transactions," on May 1, 1997, PCI entered an Endorsement Agreement with Arie Luyendyk, an accredited investor, under which PCI would issue 15,000 shares of Common Stock to Mr. Luyendyk subject to a six-month vesting schedule. In order to meet its obligations under the Endorsement Agreement without diluting the relative security positions of other shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by the 3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer and Chairman, Steven A. Lambrecht at $0.33 per share. PCI valued Mr. Luyendyk's entry into the Endorsement Agreement and the placement of PCI's logo on his helmet at the Indy 500 at $5,000. The issuance of the shares of Common Stock to Mr. Luyendyk were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Mr. Luyendyk became PCI's spokesperson, and made substantial and specific representations to PCI regarding his net worth and income, his ability to bear the economic risk of losing the entire investment, his capability to evaluate the risks and merits of the investment, and his examination to his satisfaction of corporate and financial information regarding PCI and the investment. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES (A) EXHIBITS 1.1(2) Form of Underwriting Agreement. 1.2(2) Form of Lock-Up Agreement for Promoter's Shares. 1.3(2) Form of Master Agreement Among Underwriters 1.4 Form of Selected Dealer's Agreement 1.5(2) Form of Lock-Up Agreement for Shares Underlying Bridge Warrants. 1.6(2) Registration Rights Agreement. 3.1 Articles of Incorporation of PCI. 3.2 Amended and Restated By-Laws, dated May 3, 1997. 3.3(3) Amendment to Bylaws, dated July ___, 1997. 3.4 Certificate of Incorporation and Company Act Memorandum of CAN-AM. 4.1 Pages from Articles of Incorporation and Bylaws defining the rights of security holders. 4.2(2) Specimen Common Stock Certificate. II-5 4.3(2) Form of Underwriter's Share Purchase Warrant. 4.4 Investment Banking Agreement dated December 14, 1996 between Registrant and Underwriter. 4.5 Letter of Intent dated March 31, 1997 between Registrant and Underwriter. 4.6 Form of Subscription to Acquire Warrant between Registrant and Bridge Investors to which the Form of Bridge Note and Form of Bridge Warrant are exhibits. 5.1(2) Opinion of Titus, Brueckner & Berry, P.C. 9.1 Shareholders and Voting Agreement, dated January 1, 1997 (terminated May 31, 1997). 10.1 Business Loan Agreement, dated September 5, 1996, among Greg S. Barton, Rose Hearts, Inc., Greg P. Lambrecht, J&M Wholesale, Ltd., Colin A. Jones, and CAN-AM. 10.2 Asset Purchase Agreement, dated December 31, 1996, between CAN-AM International Investments Corp. and Rose Hearts, Inc. 10.3 Asset Purchase Agreement, dated December 31, 1996, between CAN- AM International Investments Corp. and J&M Wholesale, Ltd. 10.4(2) Promissory Note, dated December 31, 1996, between Colin A. Jones and PCI. 10.5(2) Promissory Note, dated December 31, 1996, between Greg P. Lambrecht and PCI. 10.6 Management Agreement, dated January 1, 1997, between CAN-AM International Investment Corp. and J&M Wholesale, Ltd. 10.7(1)(2) Letter Agreement for Supply of Brand Name and Private Label Cigars, dated January 7, 1997, between Registrant and TSG Import, Export and Manufacturing Corporation. 10.8(1)(2) Cigar Display and Merchandising Agreement, dated April 1, 1997, between the Registrant and The Southland Corporation (7-Eleven Stores/U.S.A.). 10.9(1)(2) Agency Relationship Agreement, dated April 8, 1997, between the Registrant and Associated Grocers, Inc. 10.10(1)(2) Retailer Agreement, dated April 15, 1997, between the Registrant and Arizona Region, Region 3100, Circle K Stores, Inc. 10.11(1)(2) Retailer Agreement, dated April 29, 1997, between the Registrant and Express Stop, Inc. II-6 10.12 Endorsement Agreement, dated May 1, 1997, between the Registrant and Arie Luyendyk. 10.13 Standard Sublease, dated May 5, 1997, between the Registrant and Michael R. Ellison, Inc. 10.14(1)(2) Agency Relationship Agreement, dated May 8, 1997, between the Registrant and SuperValu, Inc. 10.15(1)(2) Retailer Agreement, dated May 22, 1997, between the Registrant and Prestige Stations, Inc. (AM/PM Stores). 10.16 Business Consulting Agreement, dated June 2, 1997, between the Registrant and David S. Hodges. 10.17 Employment Agreement, dated June 13, 1997, between the Registrant and Steven A. Lambrecht. 10.18 Employment Agreement, dated June 13, 1997, between the Registrant and Greg P. Lambrecht. 10.19 Employment Agreement, dated June 13, 1997, between the Registrant and Colin A. Jones. 10.20(2) Distributorship Agreement, dated June 13, 1997, between the Registrant and Rose Hearts, Inc. 10.21 Settlement and Full Release of Equity Interest, dated June 13, 1997, among the Registrant and Greg P. Lambrecht, Colin A. Jones, Rose Hearts, Inc., CAN-AM International Investment Corp., J&M Wholesale Ltd., Greg S. Barton, Lucille B. Barnes and Kelli D. Martin. 10.22 Agreement, dated June 20, 1997 by and between Steven A. Lambrecht, Greg P. Lambrecht, Colin A. Jones, William B. Anthony and PCI. 10.23(2) Stock Purchase Agreement, dated June 20, 1997 between Steven A. Lambrecht and James B. Stanley. 10.24(2) Retailer Agreement, dated June 3, 1997, between CAN-AM International Investment Corp. and Silcorp Limited. 10.25(2) Retailer Agreement, dated July 1, 1997, between the Registrant and Central Region, Circle K Stores, Inc. and Stax Stores. 10.26(2) Supplier Agreement, dated June 23, 1997, between the Registrant and Primadonna Cigar Company. 10.27(2) Supplier Agreement, dated June 23, 1997, between the Registrant and Universal Premium Cigars, Inc. II-7 10.28(2) Offer to Lease, dated July 1, 1997, between the Registrant and Marine Way Estates Ltd. 11.1 Statement Regarding Computation of Per Share Earnings. 21.1 Subsidiary List. 23.1 Consent of Semple & Cooper, LLP. See "Consent of Independent Certified Accountants." 23.2(2) Consent of Titus, Brueckner & Berry, P.C. (included in Exhibit 5.1). 27.1 Financial Data Schedule. (1) Portions of the exhibit omitted and filed separately with the Commission pursuant to the Confidential Treatment provisions of Regulation ss. 230.406. (2) Filed with this Amendment. (3) To be filed by amendment. ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For determining liability under the Securities Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To remove from the registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officer or controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event II-8 that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (6) For determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the issuer under Rule 424(b)(I), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (7) For determining any liability under the Securities Act, to treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-9 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale, State of Arizona on this the 25th day of July, 1997. PREMIUM CIGARS INTERNATIONAL, LTD. By: /s/ Steven A. Lambrecht ------------------------------------ Steven A. Lambrecht President and Chief Executive Officer By: /s/ Greg P. Lambrecht ------------------------------------ Greg P. Lambrecht Secretary and Vice President of National Sales Pursuant to the requirements of the Securities Act of 1933, as amended, this amended registration statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes Steven A. Lambrecht, Greg P. Lambrecht, David A. Hodges or any of them acting in the absence of the others, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission. Date Signature Capacity in Which Signed - ---- --------- ------------------------ July 25, 1997 /s/ William L. Anthony Chairman of the Board ---------------------------- William L. Anthony July 25, 1997 /s/ Steven A. Lambrecht Director and Principal Executive ---------------------------- Officer Steven A. Lambrecht July 25, 1997 /s/ Colin A. Jones Director and Vice President of ---------------------------- International Sales Colin A. Jones II-10 July 25, 1997 /s/ David S. Hodges Director ---------------------------- David S. Hodges July 25, 1997 /s/ Karissa B. Nisted Principal Financial Officer and ---------------------------- Controller Karissa B. Nisted II-11 EX-1.1 2 UNDERWRITING AGREEMENT PREMIUM CIGARS INTERNATIONAL, LTD. 1,900,000 Shares of Common Stock UNDERWRITING AGREEMENT (the "Agreement") ____________, 1997 W. B. McKee Securities, Inc. 3003 North Central Avenue Suite 100 Phoenix, Arizona 85012 Ladies and Gentlemen: Premium Cigars International, Ltd., an Arizona corporation ("Company"), proposes to sell an aggregate of 1,900,000 shares of common stock, no par value per share ("Firm Stock"), to W. B. McKee Securities, Inc. ("Representative") on the terms and conditions set forth herein. The Company also proposes to sell, at the Representative's option, an aggregate of up to 285,000 additional shares of Comon Stock (the "Option Stock") as discussed more thoroughly in Section 2 below. The Company further agrees to issue, upon the Closing Date as hereafter defined in Section 2, the Representative's warrants more fully discussed in Section 4(o) below ("Representative's Warrants"). The Firm Stock and the Option Stock are herein collectively called the "Stock." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Company. The Company represents, warrants and agrees as follows: (a) A registration statement on Form SB-2 (File No. 333-29985 with respect to the Firm Stock and Option Stock has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended ("Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission ("Commission") thereunder and has been filed with the Commission under the Act. Copies of such registration statement, including any pre-effective and post-effective amendments thereto, the preliminary prospectus (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to the Representative. Such registration statement is herein referred to as the "Registration Statement," upon filing of the prospectus referred to below with the Commission, shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the prospectus referred to below, has been declared effective by the Commission under the Act. The form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as the "Prospectus." Such preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Arizona, with full corporate power and corporate authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse effect upon the business or property of the Company. (c) The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws; all of the Units to be issued and sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated herein, the components thereof will be validly issued, fully paid and nonassessable; and no preemptive rights of stockholders exist with respect to any of the Units or the issue and sale thereof; no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such stockholder under the Act in the public offering contemplated herein except as disclosed in the Registration Statement; all necessary and proper corporate proceedings have been taken to validly authorize such Units and no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Units to be sold by the Company as contemplated herein. (d) The Common Stock of the Company conforms in all material respects to the description thereof in the Registration Statement. Except as specifically disclosed in the Registration Statement and the financial statements of the Company and the related notes thereto, the Company does not have outstanding any options to purchase, or any preemptive rights or other -2- rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans, and of the options or other rights granted and exercised thereunder, set forth in the Prospectus, are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. The Company and its affiliates are not currently offering any securities other than the Firm Stock and Option Stock, nor have they offered or sold any of the Company's securities, except as described in the Registration Statement. (e) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Firm Stock nor instituted or threatened instituting proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by and in all respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, contains or will contain as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any underwriter through the Representative, specifically for use in the preparation thereof. (f) The financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly in all material respects the financial position and the results of operations of the Company, at the indicated dates and for the indicated periods. Such financial statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary and selected financial and statistical data and schedules included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (g) There is no action, suit or proceeding pending or, to the best knowledge of the Company, after due inquiry, threatened against the Company before any court or regulatory, governmental or administrative agency or body, which might result in a material adverse change in the business or financial condition of the Company, except as set forth in the Registration Statement. The Company is not subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or arbitral -3- forum, which might result in a material adverse change in the business, assets or condition of the Company. (h) The Company has good and marketable title to all of the properties and assets reflected in either the financial statements or as described in the Registration Statement and such properties and assets are not subject to liens, mortgages, security interests, pledges or encumbrances of any kind, except for such encumbrances that, individually or in the aggregate, would not have a material adverse effect on the business or financial condition of the Company. The Company occupies its leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (i) The Company has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes indicated by said returns and has paid all tax assessments received by it. There is no income, sales, use, transfer or other tax deficiency or assessment which has been or might reasonably be expected to be asserted or threatened against the Company which might result in a material adverse change in the business or financial condition of the Company. The Company has paid all sales, use, transfer and other taxes applicable to it and its business and operations. (j) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, (i) there has not been any material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business affairs, management, or business prospects of the Company, whether or not occurring in the ordinary course of business, (ii) there has not been any transaction entered into by the Company, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement as it may be amended or supplemented, (iii) the Company has not sustained any material loss or interference with its businesses or properties from fire, flood, windstorm, accident or other calamity, (iv) the Company has not paid or declared any dividends or other distribution with respect to its capital stock and the Company is not in default in the payment of principal of or interest on any outstanding debt obligations, and (v) there has not been any change in the capital stock (other than the sale of the Units or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company. The Company does not have any material contingent obligation which is not disclosed in the Registration Statement (or contained in the financial statements or related notes thereto), as such may be amended or supplemented. (k) The Company is not in violation or default under any provision of its articles of incorporation or bylaws or any of its agreements, leases, license, contracts, franchises, mortgages, permits, deeds of trust, indentures or other instruments or obligations to which the Company is a party or by which it or any of its properties is bound or may be materially affected (collectively, "Contracts"), where such violation or default would have a material adverse effect on the business or financial condition of the Company. -4- (l) The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company is a party or by which the Company or any of its property may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company, or violate any of the provisions of the articles of incorporation or bylaws of the Company or violate any order, judgment, statute, rule or regulation applicable to the Company of any court or of any regulatory, administrative or governmental body or agency or arbitral forum having jurisdiction over the Company or any of its property. (m) The Company has the legal right, corporate power and corporate authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is legally binding upon and enforceable against the Company in accordance with its terms (except as the enforceability may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally and subject to the effect of general principles of equity). (n) Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional actions as may be required by the National Association of Securities Dealers, Inc. ("NASD") or may be necessary to qualify the Stock for public offering under state securities or Blue Sky laws has been obtained or made and each is in full force and effect. (o) The Company is not an owner or assignee of any patents or patent rights; the Company is not aware of any pending or threatened action, suit, proceeding or claim by others, either domestically or internationally, that the Company is violating any patents, patent rights, copyrights, trademarks or trademark rights, service marks, trade names, licenses or royalty arrangements, or rights thereto of others, or governmental, regulatory or administrative authorizations, orders, permits, certificates and consents. (p) There are no Contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. (q) The Company is conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where the failure to so comply would not have a material adverse effect on the business or financial condition of the Company. The Company possesses adequate certificates or permits issued by the appropriate federal, state and local regulatory authorities necessary to conduct its business and to -5- retain possession of its properties. The Company has not received any notice of any proceeding relating to the revocation or modification of any of these certificates or permits. (r) All transactions among the Company and the officers, directors, and affiliates of the Company have been accurately disclosed in the Prospectus, to the extent required to be disclosed in the Prospectus in accordance with the Act and the Rules and Regulations. As used in this Agreement, the term "affiliate" shall mean a person or entity controlling, controlled by or under common control with any specified person or entity, or the ability to direct, directly or indirectly, the management or policies of the controlled person or entity, whether through the ownership of voting securities, by contract, positions of employment, family relationships, service as an officer, director or partner of the person or entity, or otherwise. (s) The Company has not, directly or indirectly, (i) made any unlawful contribution to any candidate for public office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal, state, local or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any other such jurisdiction. (t) The Company maintains insurance of the types and in the amounts which it deems adequate for its business and which is customary for companies in its industry, including, but not limited to, general liability insurance and insurance covering all real and person property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (u) Semple & Cooper LLP, who have certified the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (v) The Company has taken all appropriate steps reasonably necessary to assure that no offering, sale or other disposition of any Common Stock of the Company will be made for a period of eighteen months after the date of the Prospectus. The Company will also take steps to assure that no director, executive officer or 5% or greater stockholder will sell or otherwise dispose of any shares of Common Stock held by them for a period of eighteen (18) months after the date of the Prospectus. (w) As of the effective date hereof, the Company is classified as a "C" corporation with the Internal Revenue Service. (x) The Company's board of directors consists of those persons listed in the Prospectus. Except as disclosed in the Prospectus, none of such persons is employed by the Company nor is any of them affiliated with the Company, except for service on its board of directors. -6- (y) Except as provided for herein, no broker's or finder's fees or commissions are due and payable by the Company, and none will be paid by it. (z) The Company is eligible to use Form SB-2 for the registration of the Stock. (aa) Neither the Company, nor to its knowledge, any person other than any underwriter, has made any representation, promise or warranty, whether verbal or in writing, to anyone, whether an existing stockholder or not, that any of the Stock will be reserved for or directed to them during the proposed public offering. 2. Purchase, Sale and Delivery of the Firm Stock. On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Representative and the Representative agrees to purchase, at the gross price per share of Common Stock indicated in the Prospectus ("Initial Price") less the Representative's discount of ten percent (10%) of the Initial Price of the Firm Stock. Payment for the Firm Stock to be sold hereunder is to be made by bank wire or certified or bank cashier's check(s) drawn to the order of the Company for the Firm Stock, against delivery of certificates therefor to the Representative. Such payment and delivery are to be made at the offices of Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004, at 10:00 a.m., M.S.T., on ____________, 1997 (the third business day after the date of this Agreement), such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the Nasdaq is open for trading and on which banks in Arizona are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Stock shall be in definitive form with engraved borders and will be delivered two full business days prior to the Closing Date to W. B. McKee Securities, Inc., Attention: William B. McKee, 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least two business days prior to the Closing Date at the offices of Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company grants an option to the Representative to purchase the Option Stock at the Initial Price, less the Representative's discount. The maximum number of shares of Option Stock to be sold by the Company is equal to fifteen percent (15%) of the number of shares of Firm Stock. The option granted hereby may be exercised in whole or in part, but only once, and at any time upon written notice given within 30 days after the Closing Date, by the Representative, to the Company, as the case may be, setting forth the number of shares of Option Stock as to which the Representative is exercising the option, the names and denominations in which the Option Stock is to be registered and the time and date at which such certificates are to be delivered. The certificates for the Option Stock are to be delivered to a location designated by the Representative no later than one full business day after -7- the exercise of such option (such time and date being herein referred to as the "Option Closing Date"). The option with respect to the Option Stock granted hereunder may be exercised solely to cover over-allotments in the sale of the Firm Stock by the Representative or to permit purchases by the Representative to the extent permitted by law. The Representative may cancel such option at any time, in whole or in part, prior to its expiration, by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Stock shall be made on the Option Closing Date by bank wire or certified or bank cashier's check(s) drawn to the order of the Company, for the Option Stock against delivery of certificates therefor at the offices of the Representatives noted above. 3. Offering by the Representative. It is understood that the Representative is to make a public offering of the Firm Stock as soon as the Representative deems it advisable to do so. The shares of Firm Stock are to be initially offered to the public at the Initial Price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering prices and other selling terms. To the extent, if at all, that any Option Stock is purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms. The Representative shall have the right to associate with other dealers as it may determine and shall have the right to grant to such persons such concessions out of the underwriting discount to be received by the Representative as it may determine, under and pursuant to a Master Selected Dealers' Agreement in the form filed as an exhibit to the Registration Statement. 4. Covenants of the Company. The Company covenants and agrees with the Representative that: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representative promptly and will confirm such advice in writing (i) when the Registration Statement has become effective, (ii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or (iii) of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. -8- (c) The Company will cooperate with the Representative in endeavoring to qualify the Stock for sale under the securities laws of such jurisdictions as the Representative may have reasonably requested in writing and will make such applications, file such documents, furnish such information and take such other actions as may be reasonably required by federal or state securities laws or regulations (including but not limited to appointing additional independent directors or advisors to the board of directors) whether before, during or after the offering. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Sock; provided, however, that the Company shall not be required to register or qualify as a foreign corporation or to take any action that would subject it to service of process in suits, other than relating to the sale of the Stock, in any jurisdiction where it is not now so subject. (d) The Company will qualify the Stock for trading on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market and use best efforts to maintain such listing (or a listing on another national securities exchange) thereafter for a period of no less than five (5) years. (e) The Company will make such applications, file such documents, and furnish such information as necessary to list the Company's securities in the securities listing manuals of Standard & Poor's Corporation or Moody's Industrial Services contemporaneous with the filing of the Prospectus with the Commission, and shall maintain listing in such manuals thereafter for a period of no less than five years. The Company will take such other similar steps as are reasonably necessary to obtain exemptions for secondary trading of the Company's securities in various U.S. jurisdictions specified by the Representative. (f) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may request. The Company will deliver to the Representative at or before the Closing Date, five signed copies of the Registration Statement and all amendments thereto, including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement, without exhibits, but including any information incorporated by reference, and of all amendments thereto, as the Representative may request. (g) If during the period in which a Prospectus is required by law to be delivered by an underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the opinion of counsel for the Representative, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the -9- Registration Statement or supplement to the Prospectus so that the Registration Statement, including the Prospectus as so amended or supplemented, will not be misleading, or so that the Registration Statement, including the Prospectus, will comply with law. (h) The Company will make generally available to its stockholders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11 (a) of the Act and Rule 158 of the Rules and Regulations and will advise the Representative in writing when such statement has been so made available and will furnish the Representative with a true and correct copy thereof. (i) The Company will apply the net proceeds of the sale of the Stock sold by it in accordance with the statements under the caption "USE OF PROCEEDS" in the Prospectus. Prior to the application of such net proceeds, the Company will invest or reinvest such proceeds only in Eligible Investments. For the purposes of this Agreement, "Eligible Investments" shall mean the following investments so long as they have maturities of one year or less: (i) obligations issued or guaranteed by the United States or by any person controlled or supervised by or acting as an instrumentality of the United States pursuant to authority granted by Congress; (ii) obligations issued or guaranteed by any state or political subdivision thereof rated either Aa or higher, or MIG 1 or higher, by Moody's Investors Service, Inc. or AA or higher, or an equivalent, by Standard & Poor's Corporation, both of New York, New York, or their successors; (iii) commercial or finance paper which is rated either Prime-1 or higher or an equivalent by Moody's Investors Services, Inc. or A-1 or higher or an equivalent by Standard & Poor's Corporation, both of New York, New York, or their successors; and (iv) certificates of deposit or time deposits of banks or trust companies, organized under the laws of the United States, having a minimum equity of $250,000,000. (j) The Company has required each of its directors, executive officers and 5% or greater shareholders to enter into agreements not to sell any shares of the Company's Common Stock for eighteen months after the date of the Prospectus. The Company has furnished the Representative with an executed copy of each such agreement. (k) The Company shall make original documents and other information relating to the Company's affairs available upon request to the Representative and to its counsel at the Company's office for inspection and copies of any such documents will be furnished upon request to the Representative and to its counsel. Included within the documents made available have been at least the articles of incorporation and all amendments thereto, the bylaws and all amendments thereto, minutes of all of the meetings of the incorporators, directors and stockholders, all financial statements and copies of all Contracts to which the Company is a party or in which the Company has an interest. -10- (l) The Company has appointed American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444, Denver, CO 80202-1817, as the Company's transfer agent and registrar, respectively. Unless the Representative otherwise consents in writing, the Company will continue to retain a transfer agent reasonably satisfactory to the Representative for a period of one year following the Closing. The Company will make arrangements to have available at the office of the transfer agent sufficient quantities of certificates representing as may be needed for the quick and efficient transfer of the Units as contemplated hereunder and for the one year period following the Closing. (m) Except with the Representative's approval, the Company agrees that the Company will not do any of the following for 180 days after the Closing Date or the Option Closing Date, whichever occurs later: (i) Undertake or authorize any change in its capital structure or authorize, issue or permit any public or private offering of additional securities; (ii) Authorize, create, issue or sell any funded obligations, notes or other evidences of indebtedness, except in the ordinary course of business; or (iii) Consolidate or merge with or into any other corporation or effect a material corporate reorganization of the Company. (n) The Company shall deliver to the Representative a warrant ("Representative's Warrant") to purchase, for a price of $.01 per Representative's Warrant, up to 170,989 shares of the Company's Common Stock, which entitles the Representative to purchase one share of common stock at an exercise price per Representative's Warrant equal to 160% of the aggregate of the Initial Purchase Price. The Representative's Warrants shall be in the form attached hereto as Appendix "A." The terms of the Common Stock issuable upon exercise of the Representative's Warrants shall be identical to those as offered to the public. The Representative's Warrants shall be exercisable at any time commencing one year from the effective date of the Registration Statement and continuing for four years thereafter. (i) The Company shall reserve and at all times have available a sufficient number of shares of its Common Stock to be issued upon the exercise of the Representative's Warrants. (ii) The Company and the Representative agree that the Representative may designate that the Representative's Warrants be issued in varying amounts directly to its officers, partners, other underwriters and selling group members. However, such designation will only be made by the Representative if it determines and substantiates to the Company that such issuance will not violate the applicable rules of the NASD. The Representative and the Company agree that any transfers -11- of the Representative's Warrants will only be made if they do not violate the registration provisions of the Act. (iii) Upon written request of the Representative or the then holder(s) of at least fifty percent (50%) of (i) the total unexercised Representative's Warrants (based on the shares of Common Stock purchasable directly or indirectly thereunder) and (b) the shares of Common Stock included in the Representative's Warrants issued upon the exercise of the Representative's Warrants, made at any time within the period commencing one (1) year from the Effective Date and ending four (4) years thereafter, the Company will file on no more than one (1) occasion a Registration Statement under the Act, registering or qualifying, as the case may be, the Representative's Warrants and/or all of the securities underlying them provided that the Company has available current financial statements. The Company agrees to use its best efforts to cause the above filings to be declared effective by the Commission. All expenses of such registrations or qualifications, including, but not limited to, legal, accounting, printing and mailing fees will be borne by the Company. (iv) In addition to the above, the Company understands and agrees that if, at any time during the term of the Representative's Warrants, it files a post-effective amendment or new registration statement with the Commission pursuant to the Act, or files a Notification on Form 1-A under the Act for a public offering of securities, either for the account of the Company or for the account of any other person, the Company, at its own expense, will offer to said holder(s) the opportunity to register or qualify the Representative's Warrants and/or all of the securities underlying them for offering to the public. This right shall be prior to any registration rights granted by the Company to holders of the Company's currently outstanding securities. (o) For a period of five years from the Effective Date, the Company shall provide the Representative with routine internal forecasts if any such reports are prepared by the Company for general dissemination. (p) During the period of the proposed public offering and for 12 months from the effective date of the Registration Statement, the Company will not, without the Representative's prior written consent, sell, contract to sell, issue for other purposes or otherwise dispose of any securities of the Company other than (a) shares of Common Stock issuable on the exercise of any options, warrants, or other rights which are disclosed in the Prospectus and (b) shares of Common Stock issuable upon the exercise of options granted to employees, officers or directors after the date of this Agreement if such options are reasonable and are granted in good faith and at prices which are not less than 85% of the fair market value of the Common Stock on the date of grant of such options. -12- (q) For a period commencing on the date hereof and ending 12 months after the date of the Prospectus, neither the Company nor any of its officers or directors will hold discussions with any member of the news media or issue news releases or other publicity about the Company regarding the financial condition of any significant event of the Company without the approval of the Company's legal counsel named in the Prospectus under the heading "Legal," or such other counsel as may be approved by the Representative. During such period, the Company will deliver to the Representative copies of such news releases or other publicity about the Company promptly after distribution thereof. (r) The Company will appoint, as a member of its Board of Directors for a period of not less than five (5) years from the date of the Prospectus, an individual designated by the Representative, such term to commence upon the Closing Date. Such designee shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transportation. (s) The Company will employ an investor relations firm reasonably acceptable to the Representative upon completion of the offering. (t) The Company will retain an analyst reasonably satisfactory to the Representative after the completion of the offering, to prepare and distribute a research report at the end of the quiet period and six months thereafter. 5. Costs and Expenses. The Company will pay or cause to be paid all costs, expenses and fees in connection with the offering or incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: (a) all expenses (including any transfer taxes) incurred in connection with the delivery to the Representative of the Stock sold hereunder; (b) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Representative) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), Preliminary Prospectuses and the Prospectus as amended or supplemented, and any Blue Sky Memoranda; (c) all filing fees and fees and disbursements incurred in connection with the qualification of the Stock under the applicable state securities laws; (d) filing and listing fees of the Commission, NASD, Nasdaq, and any other similar entity in connection with the offering; (e) the cost of printing certificates representing the Stock; (f) the costs and charges of any transfer agent or registrar; (g) the costs of preparing, printing and distributing bound volumes for the Representative and their counsel; and (h) the costs of placing "tombstone advertisements" in any publications which may be selected by the Representative, and all other costs and expenses incident to the performance of its obligations under this Agreement which are not otherwise provided for in this Section. The Company shall use a printer acceptable to the Representative. Any transfer taxes imposed on the sale of the Stock to the Representative will be paid by the Company. Additionally, the Company shall pay to the Representative a non-accountable expense allowance of 3% of the gross amount to be raised hereunder, payable at the -13- Closing(s), of which $25,000 has already been paid by the Company in connection with this offering. Any amounts advanced, on a non-accountable basis, to the Representative on or before the date hereof, which shall be credited to the allowance noted above. This expense allowance is in addition to the Representative's discount. The Representative shall be responsible for the fees of its counsel, except as noted otherwise in this Section 5. The Company shall not be required to pay for any of the Representative's other expenses, except that if this Agreement shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Representative pursuant to Section 6 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due solely to the default of the Representative, then the Company shall reimburse the Representative solely on an accountable basis for out-of-pocket expenses, including fees and disbursements of counsel, incurred in connection with investigating, marketing and proposing to market the Units or in contemplation of performing its obligations hereunder. 6. Conditions of Obligations of the Representative. The obligations of the Representative to purchase the Firm Stock on the Closing Date and the Option Stock, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than August ____, 1997, or such later date and time as may be consented to in writing by the Representative. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the best knowledge of the Company, after due inquiry, shall be contemplated by the Commission or any state securities commission. (b) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Titus, Brueckner & Berry, P.C., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Representative substantially in the form and to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and corporate authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse affect upon the business or financial condition of the Company. -14- (ii) To the best of such counsel's knowledge, the Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable. (iii) All of the Stock to be issued and sold by the Company pursuant to this Agreement have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable. Further, to the best of such counsel's knowledge, no preemptive rights of stockholders exist with respect to any of the Units or the issue and sale thereof; no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such stockholder under the Act in the public offering contemplated herein; and no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Stock to be sold by the Company as contemplated herein. (iv) The certificates evidencing the Stock to be delivered hereunder are in due and proper form under Delaware law and the Stock conforms in all material respects to the description thereof contained in the Prospectus. (v) Except as specifically disclosed in the Registration Statement and the financial statements of the Company, and the related notes thereto, to the best of such counsel's knowledge, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans, and any other options or warrants heretofore granted by the Company, set forth in the Prospectus are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. (vi) The Registration Statement has become effective under the Act and to the best of such counsel's knowledge no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act and nothing has come to such counsel's attention to lead them to believe that such proceedings are contemplated; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (vii) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all -15- material respects with the requirements of the Act and the Rules and Regulations (except that such counsel need express no opinion as to the financial statements, schedules and other financial and statistical information included therein). (viii) Such counsel does not know of any Contracts or other documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are required to be filed or described, which are not so filed or described as required, and such Contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (ix) There is no action or suit pending before any court of the United States of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; there is no action, suit or proceeding threatened against the Company before any U.S. court or regulatory, governmental or administrative agency or arbitral forum of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; to the best of such counsel's knowledge, the Company is not a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or agency or arbitral forum. Nothing has come to the attention of such counsel that would suggest that the Company is not conducting business in compliance with all applicable laws, statutes, rules and regulations of the State of Arizona and of the United States of America, except where the failure to so comply would not have a material adverse effect on the business or financial condition of the Company. (x) The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in the breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company is a party or by which the Company or any of its property may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company, or violate any of the provisions of the articles of incorporation or bylaws of the Company or violate any statute, judgment, decree, order, rule or regulation known to such counsel or any court or of any governmental, regulatory or administrative body or agency or arbitral forum having jurisdiction over the Company or any its property. (xi) The Company is not in violation or default under any provision of any of its certificate of incorporation or bylaws and the Company is not in violation or of default under any Contracts to which the Company is a party or by which it or any of its properties is bound or may be affected, except where such violation -16- or default would not have a material adverse effect on the business or financial condition of the Company. (xii) The Company has the corporate power and authority to enter into this Agreement on behalf of itself and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. This Agreement is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors generally and except that enforceability may be subject to the effect of general principles of equity, except to the extent that the enforceability of the indemnification provisions of this Agreement may be limited by consideration of public policy under federal and state securities laws. (xiii) All approvals, consents, orders, authorizations, designations, registrations, permits, qualifications, licenses, declarations or filings by or with any regulatory, administrative or governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD as to which such counsel need express no opinion) have been obtained or made and all are in full force and effect. In rendering such opinion such counsel may rely as to matters governed by the laws other than Federal laws of the United States of America on local counsel in applicable jurisdictions, provided that such counsel shall state that they believe that they and the Representative are justified in relying on such other counsel. As to factual matters, such counsel may rely on certificates (provided at Closing and available to the Representative and its counsel) obtained from directors and officers of the Company, its stockholders, and from public officials. Matters stated to counsel's knowledge need be based only on the actual knowledge of the attorneys involved in the representation of the Company. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, or any amendment thereto, at the time the Registration Statement or amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information and statistical data and information included therein). -17- Such counsel shall permit Streich Lang, P.A. to rely upon such opinion in rendering its opinion under Section 6(c). (c) The Representative shall have received from Streich Lang, P.A., counsel for the Representative, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect that: (i) the Company is a validly organized and existing corporation under the laws of the State of Arizona; (ii) the Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; to the best of such counsel's knowledge, the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and nonassessable; all of the Units conform to the description thereof contained in the Prospectus; the Stock to be sold by the Company pursuant to this Agreement has been duly authorized and will be validly issued, fully paid and nonassessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Stock or the issue and sale thereof; (iii) the Registration Statement has become effective under the Act and to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act; (iv) the Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules and other financial or statistical information included therein); and (v) this Agreement has been duly authorized, executed and delivered by the Company. In rendering such opinion, Streich Lang, P.A. may rely on the opinion of counsel referred to in paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, the Prospectus or any amendment thereto contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). With respect to such statement, Streich Lang, P.A. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representative shall have received at or prior to the effective date of the Registration Statement, and at the Closing Date, from Streich Lang, a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Representative of the Stock under the state securities or Blue Sky laws of such jurisdictions as the Representative may have designated to the Company. -18- (e) The Representative shall have received on the date hereof and on the Closing Date and the Option Closing Date, as the case may be, a signed letter from Semple & Cooper, LLP, auditors for the Company, dated the date hereof, the Closing Date and the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such firm and dated and delivered to the Representative on the date noted above the following matters: (i) They are independent public accountants with respect to the Company within the meaning of the Act. (ii) The financial statements and schedules included in the Registration Statement and Prospectus covered by their reports therein set forth comply as to form in all material respects with the applicable accounting requirements of the Act. (iii) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the minutes of meetings and consents of the shareholders and board of directors of the Company and the committees of such board subsequent to December 31, 1996, as set forth in the minute books of the Company, inquiries of officers and other employees of the Company who have responsibilities for financial and accounting matters with respect to transactions and events subsequent to December 31, 1996, and such other specified procedures and inquires to a date not more than five days prior to the date of such letter, nothing has come to their attention which in their judgment would indicate that (A) with respect to the period subsequent to December 31, 1996, there were, as of the date of the most recent available monthly consolidated financial statements of the Company and, as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or long-term indebtedness of the Company or payment or declaration of any dividend or other distribution, or decrease in net current assets, total assets or net stockholder's equity, in each case as compared with the amounts shown in the most recent audited consolidated financial statements included in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter or (B) during the period from December 31, 1996, to the date of the most recent available monthly unaudited consolidated financial statements of the Company and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues or total or per share net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter. -19- (iv) Stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings and other financial information pertaining to the Company set forth in the Registration Statement and the Prospectus, which have been specified by the Representative, to the extent that such amounts, numbers and percentages and information may be derived from the general accounting and financial records of the Company and its subsidiaries or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified reasonings, inquiries and other appropriate procedures specified by the Representative (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in such letter heretofore delivered, and found them to be in agreement. (v) Such other matters as may be reasonably requested by the Representative. All such letters shall be in form and substance satisfactory to the Representative and its counsel. (f) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them jointly and represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to the best of their knowledge, after due inquiry, contemplated or threatened by the Commission or any state securities commissions. (ii) They do not know of any investigation, litigation, or proceeding instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; they do not know of any Contract or other document required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in the Agreement are true and correct in all material respects as of the Closing Date or the Option Closing Date, as the case may be, as if such representations and warranties were made as of such date. (iii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were and are correct, in all material respects, and such Registration Statement and Prospectus do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which -20- they were made, not misleading and, in their opinion, since the effective date of the Registration Statement, no event has occurred which should be set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (g) The Company shall have furnished to the Representative such further certificates and documents confirming the representations, warranties and covenants contained herein and related matters as the Representative may reasonably have requested. Each such certificate shall be deemed a representation and warranty of the Company as to the statements made therein. The opinions and certificates described in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all respects satisfactory to the Representative to Streich Lang, P.A., counsel for the Representative. If any of the conditions herein above provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Representative hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Representative shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the Units required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Representative and its respective affiliates, directors, officers, partners, employees, agents, counsel, and representatives, (collectively, "Underwriter Parties") against any losses, claims, damages or liabilities to which such Underwriter Parties or any one or more of them may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Company or any of its affiliates, directors, officers, employees, agents, counsel, and representatives (collectively, the "Company Parties") to perform any obligation hereunder or any other agreement among any of the Company Parties and any of the Underwriter Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (iii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which -21- they were made, and will reimburse each Underwriter Party for any legal or other expenses incurred by such Underwriter Party in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that (X) the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement, or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information contained in the last paragraph on the cover page and the paragraph relating to stabilization on page 2 of the Prospectus or Preliminary Prospectus and in the section thereof entitled "Underwriting"), and (Y) such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter Parties from whom the person asserting any such loss, claim, damage or liability purchased the Stock which is the subject thereof if such person did not receive a copy of the Prospectus (or the Prospectus as amended or supplemented at or prior to the confirmation of the sale or such Stock to such person in any case where such delivery is required by the Act and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented.) This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) The Representative will indemnify and hold harmless the Company Parties against any losses, claims, damages or liabilities to which the Company Parties or any one or more of them may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Underwriter Parties to perform any obligations hereunder or any other agreement among any of the Underwriter Parties and any of the Company Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or (iii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expense reasonably incurred by the Company Parties in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that the Representative will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information contained in the last paragraph on the cover page and the paragraph relating to stabilization on page 2 of the Prospectus or Preliminary Prospectus and in the section thereof entitled "Underwriting"). This indemnity agreement will be in addition to any liability which the Representative may otherwise have. -22- (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity maybe sought pursuant to this Section 8, such person ("indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party or the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by the Representative in the case of parties indemnified pursuant to Sections 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Representative on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Representative on the -23- other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Representative on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting fees and commissions received by the Representative, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Representative on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Representative agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied, or telegraphed and confirmed as follows: if to the Representative, to W. B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012; Telephone (602) 954-7365; Fax (602) 266-5774, Attention: Gary J. Sherman, with a copy to Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004; Telephone (602) 229-5200; Fax (602) 229-5690; Attention: Christian J. Hoffmann, III, Esq.; if to the Company, to Premium Cigars International, Ltd., 10855 N. Frank Lloyd Wright Blvd., Suite 100-102, Scottsdale, Arizona 85259; telephone, (602) 922-8887; Fax (602) ___-____; Attention: Steven J. Lambrecht, President; with a copy to Titus, Brueckner & Berry, 7373 North Scottsdale Road, Suite B-252, Scottsdale, Arizona 85253-3527, Attention: Charles R. Berry, Esq.; telephone (602) 483-9600; fax (602) 483-3215. -24- 10. Termination. This Agreement may be terminated by the Representative by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Firm Stock is released by the Representative for sale by notice to the Representative, or (ii) 5:00 P.M., M.S.T., on the first business day following the date of this Agreement; (b) at any time prior to the Closing itself if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the business or financial condition of the Company, or the earnings, business affairs, management or business prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change on the financial markets or economic conditions would, in reasonable judgment of the Representative, have a material adverse effect on the securities markets in the United States, (iii) suspension of trading in securities on the Nasdaq or the New York Stock Exchange, Inc. or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the reasonable opinion of the Representative materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or Arizona authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the reasonable opinion of the Representative have a material adverse effect on the securities markets in the United States or the business prospects of the Company; or (c) as provided in Section 6 of this Agreement. This Agreement also may be terminated by the Representative, by notice to the Company, as to any obligation of the Representative to purchase the Option Stock, upon the occurrence at any time at or prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Section 6 of this Agreement. 11. Successors. This Agreement has been and is made solely for the benefit of the Representative and the Company and their respective successors, executors, administrators, heirs and assigns, and the Underwriter Parties and Company Parties referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Units merely because of such purchase. 12. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations and warranties in this Agreement shall remain -25- in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter Party, or by or on behalf of any Company Party and (c) delivery of and payment for the Units under this Agreement. This Agreement and any notices delivered hereunder may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and any and all notices may be delivered by telecopy and shall be effective upon receipt, with the original of such document to be deposited promptly in the U.S. Mail. This Agreement and all disputes and controversies relating hereto or in connection with the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the State of Arizona. [THIS SPACE INTENTIONALLY LEFT BLANK] -26- If the foregoing agreement is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the Representative in accordance with its terms as of the date first above written. Sincerely yours, PREMIUM CIGARS INTERNATIONAL, LTD. By ---------------------------- Steven J. Lambrecht President The foregoing Underwriting Agreement is hereby confirmed and accepted as of ___________, 1997. W. B. MCKEE SECURITIES, INC. By -------------------------------- Gary J. Sherman President -27- EX-1.2 3 LOCK-UP AGREEMENT PREMIUM CIGARS INTERNATIONAL, LTD. LOCK-UP AGREEMENT This Lock-Up Agreement ("Agreement") is entered into as of July ___, 1997, by and between PREMIUM CIGARS INTERNATIONAL, INC., an Arizona corporation (the "Company"), and_________________________, a(n) ________________ ("Holder"). WHEREAS, the Holder understands that W.B. McKee Securities, Inc., as the representative ("Representative") proposes to enter into an Underwriting Agreement on behalf of the several Underwriters (collectively, the "Underwriters") with the Company providing for an initial public offering of the Common Stock of the Company (the "Shares") pursuant to a Registration Statement on Form SB-2 filed with the Securities and Exchange Commission (the "SEC"); and WHEREAS, the Company has also filed an application with the securities administrators in the states listed in Exhibit A hereto ("Administrators") for the registration of such Shares; and WHEREAS, the Holder is the owner of Shares which are currently outstanding; and WHEREAS, as a condition to filing of the Registration Statement, the underwriter has requested that the Holders agree to be bound to the terms of this Agreement. NOW, THEREFORE, the parties hereby agree as follows: I. LOCK-UP TERMS ------------- A. Period of Lock-Up; No Sale. In consideration of the agreement by the Underwriters to offer and sell the Shares, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned agrees, for a period of eighteen (18) months from the effective date of the public offering of the Shares, that the undersigned will not offer to sell, sell, contract to sell, grant any option to purchase, make any short sale or otherwise dispose of any Shares or any other securities of the Company that are substantially similar to the Shares, including but not limited to any securities of the Company that are convertible into or exchangeable for, or that represent the right to receive, Common Stock of the Company or any such similar securities, whether now owned or hereafter acquired, owned directly by the Holder or with respect to which the Holder has beneficial ownership, within the rules and regulations of the SEC (collectively, the "Holder's Shares"). B. No Other Dispositions. The foregoing restriction is expressly agreed to preclude the Holder from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a sale or disposition of the Holder's Shares even if such Shares would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Holder's Shares or with respect to any security that includes, relates to or derives any significant part of its value from such Shares. - 1 - C. Stop Transfer Instructions. The Holder agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of the Holder's Shares except in compliance with the foregoing and following restrictions. II. REORGANIZATION PROVISIONS ------------------------- A. Distributions Upon Reorganization. The Holder agrees that in the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the Company's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is not a Promoter (as that term is defined by the North American Securities Administrators Association), which results in the distribution of the Company's assets or securities ("Distribution"), while this Agreement remains in effect that: 1. All holder's of the Company's Common Stock will initially share on a pro rata, per share basis in the Distribution, in proportion to the amount of cash or other consideration that they paid per share for their Shares (provided that the state securities administrator's of the states listed in Exhibit A ("Administrator") have accepted the value of the other consideration), until the shareholders who purchased the Company's Shares pursuant to the public offering ("Public Shareholders") have received, or have had irrevocably set aside for them, an amount that is equal to one hundred percent (100%) of the public offering's price per share times the number of Shares that they purchased pursuant to the public offering and which they still hold at the time of the Distribution, adjusted for stock splits, stock dividends, recapitalizations and the like; and 2. All holder's of the Company's Shares shall thereafter participate on an equal, per share basis adjusted for stock splits, stock dividends, recapitalizations and the like. 3. The Distribution may proceed on lesser terms and conditions than the terms and conditions stated in subsections A.1 and A.2 above if a majority of the Shares that are not held by Holder's, officers, directors, or Promoters of the Company, or their associates or affiliates vote, or consent by consent procedure, to approve the lesser terms and conditions. B. Survival of Terms. In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the Company's assets or securities (incuding by way of tender offer), or any other transaction or proceeding with a person who is not a Promoter, which results in a Distribution while this Agreement remains in effect, the Holder's Shares shall remain subject to the terms of this Agreement. III. PERMISSIBLE TRANSFERS; VOTING RIGHTS; LEGENDS --------------------------------------------- A. Transfer of Shares by Operation of Law. Holder's Shares may be transferred by will, the laws of descent and distribution, the operation of law, or by order of any court of competent jurisdiction and proper venue. - 2 - B. Hypothecation of Deceased Holder's Shares. Shares of a deceased Holder may be hypothecated to pay the expenses of the deceased Holder's estate. The Hypothecated Shares shall remain subject to the terms of this Agreement. Holder's Shares may not be pledged to secure any other debt. C. Transfer to Family Members. Holder's Shares may be transferred by gift to the Holder's family members, provided that the Shares shall remain subject to the terms of this Agreement. For purposes of this Lock-Up Agreement, "family members" shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. D. Voting Rights. With the exception of susection A.3 above, the Holder's Shares shall have the same voting rights as similar Shares not subject to this Agreement. E. Legends. A notice shall be placed on the face of each stock certificate of the Holder's Shares covered by the terms of this Agreement stating that the transfer of the stock evidenced by the certificate is restricted in accordance with the conditions set forth on the reverse side of the certificate. A typed legend shall be placed on the reverse side of each stock certificate of the Holder's Shares representing stock covered by this Agreement which states that the sale or transfer of the shares evidenced by the certificate is subject to certain restrictions until eighteen (18) months following the effective date of the Registration Statement pursuant to an agreement between the Holder and the Company, which agreement is on file with the Company and the stock transfer agent from which a copy is available upon request and without charge. IV. TERMINATION ----------- The term of this Agreement shall begin on the date that the Registration Statement is declared effective by the SEC ("Effective Date") and shall terminate: A. At the expiration of the lock-up period provided in Section I.A; or B. On the date the Registration has been terminated if no securities were sold pursuant thereto; or C. If the Registration has been terminated, the date that checks representing all of the gross proceeds that were derived therefrom and addressed to the Public Investors have been placed in the U.S. Postal Service with first class postage affixed; or D. At the discretion of the representative: 1. With respect to one quarter of the Holder's Shares if between six (6) months and one (1) year have passed since the Effective Date and the Shares have traded at one hundred fifty percent (150%) of the public offering's price per share for twenty (20) consecutive trading days; or - 3 - 2. With respect to all of the Holder's Shares if between one (1) year and Eighteen (18) months have passed since the Effective Date and the Shares have traded at two hundred percent (200%) of the public offering's price per share for twenty (20) consecutive trading days. 3. None of the Holder's Shares may be released from this Agreement by the Representative unless at least six (6) months have passed since the Effective Date. E. On the date the securities subject to this Agreement become "Covered Securities," as defined under ss.18 of the Securities Act of 1933, as amended. V. MECHANICAL REQUIREMENTS ----------------------- A. Filing. A manually signed copy of the Agreement signed by all parties to be filed with the Administrators prior to the Effective Date. B. Copies. Copies of the Agreement and a statement of the per share initial public offering price to be provided to the Company's stock transfer agent. C. Stock Transfer Orders. Appropriate stock transfer orders to be placed with the Company's stock transfer agent against the sale of the Holder's Shares prior to the expiration of this Agreement, except as may otherwise be provided in this Agreement. VI. MISCELLANEOUS ------------- A. Modification. This Agreement may be modified only with the written approval of the Administrators. B. Reliance. The Holder understands that the Company and the Underwriters are relying upon this Lock-Up Agreement in proceeding toward consummation of the offering. The Holder further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the Holder's heirs, legal representatives, successors and assigns. C. Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. D. Counterparts. This Agreement may be executed in any number of counterparts each of which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one instrument. Any telecopied signature of a party on this Agreement shall be deemed an original signature of such party for all purposes. - 4 - IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. PREMIUM CIGARS INTERANATIONAL, INC., ------------------------------------ ------------------------------------ ------------------------------------ HOLDER ------------------------------------ ------------------------------------ ------------------------------------ - 5 - EX-1.3 4 MASTER AGREEMENT AMONG UNDERWRITERS MASTER AGREEMENT AMONG UNDERWRITERS __________________, 1997 W. B. McKee Securities, Inc. 3003 North Central Avenue, Suite 100 Phoenix, Arizona 85012 Ladies and Gentlemen: We understand that you may act from time to time as Representative of the several underwriters of offerings of securities to be conducted by you. We further understand that this Agreement shall apply to and govern our participation in any such offerings of securities in which we elect to act as underwriters after receipt from you of an invitation by telecopy, telegram or other written form of communication or telephone call (confirmed immediately in writing) ("Invitation Telecopy") which will identify the issuer, describe the securities to be offered and state the amount of securities to be underwritten by us (subject to increase as provided in the applicable Underwriting Agreement). Prior to the commencement of the offering, you will notify us by telecopy, telegram or other written form of communication or telephone call (confirmed immediately in writing) of the terms of any particular offering of securities ("Terms Telecopy"), it being understood that the terms and conditions set forth herein and therein shall be applicable only in public offerings with respect to which you have expressly informed us that such terms and conditions shall be applicable. The Terms Telecopy shall specify the price at which the securities are to be purchased by the underwriters (or the formula for establishing the maximum purchase price) and certain other terms of the offering, including without limitation and as applicable, the initial public offering price (or the formula for determining such price), the interest or dividend rate (or the method by which such rate is to be determined), whether the Underwriting Agreement provides the underwriters with an option to purchase option securities, the Selected Dealer's concession, the amount of any reallowance, the management fee and information with respect to the trustee, if any. This Agreement, as amended or supplemented by the Invitation Telecopy, shall become effective with respect to our participation in an offering of securities if you have received our acceptance of the Invitation Telecopy, which acceptance will be by telecopy, telegram or in such other form as may be specified in the Invitation Telecopy and if you have not received a communication from us revoking our acceptance in the manner and within the time period specified in the Invitation Telecopy or the Terms Telecopy. Our acceptance will constitute an affirmation that, except as otherwise stated in such acceptance, each statement included in the Underwriters' Questionnaire set forth as Exhibit A hereto (or that you may have otherwise furnished to us) is correct. As used herein, "this Agreement" refers to this Agreement together with any Invitation Telecopy and Terms Telecopy (which may be combined in a single communication), "Company" refers to the issuer of the securities in an offering to which this Agreement relates, "Securities" refers to those securities offered in an offering to which this Agreement relates, "Option Securities" refers to those securities covered by any option provided the underwriters to purchase additional securities to cover over-allotments, "you" or "Representative" refers to W. B. McKee Securities, Inc., "Underwriter" refers to those underwriters (including the -1- Representative), our "underwriting obligation" refers to the amount of Securities that we agree in the Underwriting Agreement to purchase, subject to increase as provided in the Underwriting Agreement, but without giving effect to any reduction for our portion of any Securities sold pursuant to Delayed Delivery Contracts (as defined in Section 4(b) hereof) and "our Securities" refers to the Securities comprising our underwriting obligation. 1. Registration Statement and Prospectus. You will furnish to us, to the extent made available by the Company, copies of the registration statement, the related prospectus and the amendment(s) thereto (excluding exhibits but including any documents incorporated by reference therein) filed with the Securities and Exchange Commission ("Commission") in respect of the Securities, and our acceptance of the Invitation Telecopy with respect to an offering of Securities will serve to confirm that we are willing to accept the responsibility of an Underwriter thereunder and to proceed as therein contemplated. Such acceptance will further confirm that the statements made under the heading "Underwriting" in the proposed final form of prospectus, insofar as they relate to us, do not contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make the statements therein not misleading. As hereinafter mentioned, the "Registration Statement" and the "Prospectus" refer to the Registration Statement and the Prospectus included as a part thereof, in the form in which the Registration Statement becomes effective and the form in which the Prospectus is filed pursuant to Rule 424(b) under the Securities Act of 1933, as amended ("Act") with respect to the Securities. Each preliminary prospectus with respect to the Securities is herein referred to as a "Preliminary Prospectus." You have our consent to the use of our name in the Prospectus and any Preliminary Prospectus, as one of the Underwriters. You are authorized, with the approval of counsel for the Representative, to approve on our behalf any further amendments or supplements to the Registration Statement or the Prospectus which may be necessary or appropriate. 2. Authority. We authorize you on our behalf to negotiate the terms of, and to execute and deliver, an underwriting agreement or purchase agreement among the Company, the selling security holders, if any ("Selling Securityholders") and the Underwriters relating to the Securities ("Underwriting Agreement"). As used herein the term "Underwriting Agreement" includes any pricing agreement relating to the Securities. We further authorize you to consent to such changes in or waivers of compliance with the Underwriting Agreement as in your judgment do not materially and adversely affect our rights and obligations and to execute on our behalf any supplementary agreement with the Company or the Selling Securityholders, if any. We authorize you to act as Representative under this Agreement and, as Representative, to exercise all authority and discretion vested in the Underwriters or in the Representative by the provisions of the Underwriting Agreement and to take such action as you deem advisable in connection with the performance of the Underwriting Agreement and this Agreement, and the purchase, carrying, sale and distribution of the Securities. Without limiting the foregoing, we authorize you to (a) make changes in those who are to be Underwriters and in the amount of Securities to be purchased by them, provided that the original underwriting obligation of any Underwriter shall not be changed without the consent of such Underwriter, (b) determine all matters relating to advertising and communications with dealers or others, (c) extend the time within which the Registration Statement may become effective by not more than 24 hours, (d) postpone the closing date and (e) exercise any right of cancellation or termination. 3. Compensation. As compensation for your services as Representative in connection with the purchase of the Securities and the management of the public offering thereof, we agree to pay you and we authorize you to charge our account with an amount equal to the management fee specified in the Terms Telecopy. -2- 4. Terms of the Public Offering. (a) We authorize you, as Representative of the several Underwriters, to manage the underwriting and the public offering of the Securities and to take such action in connection therewith and in connection with the purchase, carrying and resale of the Securities as you in your sole discretion deem appropriate or desirable. Without limiting the foregoing, we authorize you to determine (i) with respect to offerings using formula pricing, the initial public offering price and the price at which the Securities are to be purchased in accordance with the Underwriting Agreement and (ii) whether to purchase any Option Securities and the amount, if any, of the Option Securities to be so purchased. You are also authorized to make any changes in the public offering price or other terms of the offering, the concession to Selected Dealers (hereinafter defined) and the reallowance to dealers, after the initial public offering of the Securities. We further authorize you for our account to reserve, offer for sale, and deliver against payment therefor, such amount of Securities as you may determine to (a) various members of the National Association of Securities Dealers, Inc. ("NASD"), including you and any of the other Underwriters, or foreign dealers who are not eligible for membership in the NASD and who agree not to reoffer, resell or deliver the Securities in the United States or to persons who they have reason to believe are residents of the United States ("Selected Dealers"), at the public offering price, less a concession not in excess of the Selected Dealers concession set forth in the Terms Telecopy; and (b) institutions, trustees and individuals ("Special Purchasers"), at the public offering price. Except for sales which are designated by a purchaser to be for the account of a particular Underwriter, sales made by you to Special Purchasers for our account shall be as nearly as practicable in the same proportion to all such sales as the amount which our underwriting obligation bears to the total underwriting. Sales made by you to Selected Dealers for our account shall be approximately in the proportion that the amount of our Securities reserved for such sales bears to the total Securities so reserved for sale to such dealers. In making direct sales of the Securities, the several Underwriters may allow and the Selected Dealers, if any, may reallow, such concession or concessions not in excess of the amount set forth in the Terms Telecopy (a) to dealers who are members of the NASD and who agree to comply with Section 24 of Article III of the Rules of Fair Practice of the NASD or (b) to foreign dealers who are not eligible for membership in the NASD and who agree not to reoffer, resell or deliver the Securities in the United States or to persons whom they have reason to believe are residents of the United States and who agree to comply with the NASD's Interpretation with Respect to Free-Riding and Withholding, and to comply, as though they were a member of the NASD, with the provisions of Sections 8, 24 and 36 of such Rules of Fair Practice and to comply with Section 25 thereof as that Section applies to a non-member foreign dealer. At any time prior to the termination of this Agreement with respect to the Securities, any of the Securities purchased by us, which are reserved by you for sale for our account as set forth above but not sold, may, on our request, and at your discretion, be released to us for direct sale, and the Securities so released to us shall no longer be deemed reserved for sale by you. From time to time prior to the termination of this Agreement with respect to the Securities, on your request, we shall advise you of the amount of the Securities remaining unsold which were retained by or released to us for direct sale, or if any other securities are delivered to us pursuant to Section 8 hereof, and, on your request, we shall release to you any such securities remaining unsold for sale by you for our account. The Underwriters and the Selected Dealers may with your consent purchase Securities from and sell Securities to each other at the public offering price less a concession not in excess of the concession to Selected Dealers. -3- If immediately prior to the filing of the Registration Statement relating to the Securities the Company was not subject to the requirements of Section 13 (a) or 15 (d) of the Securities Exchange Act of 1934, as amended ("Exchange Act"), we will not sell to any account over which we exercise discretionary authority. (b) If contemplated by the terms of offering of the Securities, arrangements may be made for the sale of Securities pursuant to delayed delivery contracts between the Company and purchasers ("Delayed Delivery Contracts"). We authorize you to act on our behalf in arranging any Delayed Delivery Contracts, and we agree that all such arrangements will be made only through you, directly or through Selected Dealers (including Underwriters acting as Selected Dealers), to whom you may pay a commission. Reservations of our Securities as contemplated by the preceding paragraphs of this Section may include reservations of Securities for sale pursuant to Delayed Delivery Contracts. Except for sales of Securities pursuant to Delayed Delivery Contracts which you determine in your sole discretion were directed by a purchaser to a particular Underwriter or were made pursuant to arrangements made by a particular Underwriter through you, sales of reserved Securities pursuant to Delayed Delivery Contracts not arranged through Selected Dealers shall be as nearly as practicable in proportion to the respective underwriting obligations of the Underwriters. Sales of reserved Securities pursuant to Delayed Delivery Contracts arranged through Selected Dealers shall be as nearly as practicable in proportion to the respective reservations of Securities as you may determine. The total amount of Securities to be purchased by the Underwriters pursuant to the Underwriting Agreement will be reduced by any Securities sold pursuant to Delayed Delivery Contracts ("Contract Securities"), and the amount of Securities to be purchased by us will be reduced by the amount of Contract Securities which you determine were sold pursuant to arrangements made for our account as contemplated by the preceding paragraph of this Section. The fee payable by the Company to Underwriters with respect to Contract Securities shall be credited to our account based upon the amount of Contract Securities attributed to us as specified in the preceding paragraph. If the amount of Contract Securities attributed to us plus the amount of other Securities sold by us or for our account exceeds our underwriting obligation, there shall be credited to us with respect to such excess amount of Securities only the amount of the commission payable to Selected Dealers in respect of Contract Securities. The commissions payable to Selected Dealers in respect of sales of Contract Securities arranged through them shall be charged to each Underwriter in the proportion which the amount of Securities of such Underwriter reserved and sold pursuant to Delayed Delivery Contracts arranged through Selected Dealers bears to the total Securities so reserved and sold. After, and only after, advice from you that the Securities are released for public offering, will we offer to the public in conformity with the terms of the offering as set forth in the Prospectus or any amendment or supplement thereto such of the Securities to be purchased by us as you advise us are not reserved. We will comply with any and all restrictions which may be set forth in the invitation. The initial public advertisement with respect to the Securities shall appear on such date, and shall include the names of such of the Underwriters, as you may determine. 5. Additional Provisions Regarding Sales. Any Securities sold by us (otherwise than through you) which you purchase in the open market or otherwise prior to the termination of this Agreement as provided -4- in Section 9, shall be repurchased by us on demand at the cost to you of such purchase plus commissions, taxes on redelivery, accrued interest and dividends. Securities delivered on such repurchase need not be the identical Securities so purchased. In lieu of such repurchase, you may, in your discretion, sell for our account the Securities so purchased and debit or credit our account for the loss of profit resulting from such sale, or charge our account with an amount not in excess of the Selected Dealers' concession with respect to such Securities. Sales of Securities among the Underwriters may be made with your prior consent or as you may deem advisable for state securities law purposes. In connection with offers to sell and sales of Securities, we will comply with all applicable laws and all applicable rules, regulations and interpretations of all governmental agencies and self-regulatory organizations. 6. Payment and Delivery. At or before such time, on such dates and at such places as you may specify in the Invitation Telecopy, we will deliver to you or your agent, wire funds, or a certified or bank cashier's check payable to the order of W. B. McKee Securities, Inc., in an amount equal to the gross initial public offering price. You agree to pay us the Selected Dealers' concession in accordance with this Agreement and the Invitation Telecopy, along with all accrued simple interest thereon at the Prime Rate then in effect as referenced by Bank One, Arizona, NA, within 45 days of the termination of this Agreement. We authorize you to make payment for our account of the purchase price for the Securities to be purchased by us against delivery to you of such Securities (which may be in temporary form), and the difference between such purchase price of the Securities and the amount of our funds delivered to you therefor shall be credited to our account. You shall deliver to us the Securities retained by us for direct sale as soon as practicable after your receipt of the Securities. We agree that delivery of any Securities purchased by us shall be made through the facilities of the Depository Trust Company if we are a member thereof, unless we are otherwise notified by you in your discretion. If we are not a member of the Depository Trust Company, such delivery shall be made through a correspondent who is such a member, if we shall have furnished instructions to you naming such correspondent, unless we are otherwise notified by you in your discretion. We authorize you to hold and deliver to Selected Dealers and Special Purchasers against payment the portion of our Securities reserved by you for offering to them. Upon receiving payment for the Securities so sold for our account, you will remit to us promptly an amount equal to either the purchase price stated in the Underwriting Agreement or the net sales proceeds, as you may elect. In connection with the purchase or carrying for our account of any Securities under this Agreement or the Underwriting Agreement, we authorize you, in your discretion, to advance your own funds for our account, or, as Representative, to arrange and make loans on our behalf and for our account and to execute and deliver any notes or other instruments and hold or pledge as security any of our Securities, or any securities acquired pursuant to Section 8 hereof, as may be necessary or advisable in your discretion. Our obligation in respect to any such loans shall be several and not joint. Any lending bank is hereby authorized to rely upon your instructions in all matters relating to any such loans. You may deliver to us from time to time, for carrying purposes only, any Securities reserved but which have not been sold or paid for. We will redeliver to you on demand any Securities so delivered to us for carrying purposes. 7. Allocation of Expenses. We agree to pay and authorize you to charge our account with all transfer taxes on sales made by you for our account and our proportionate share, based upon our underwriting -5- obligation, of all other expenses incurred by you under the terms of this Agreement and the Underwriting Agreement. With respect to the offering of Securities pursuant to this Agreement, the respective accounts of the Underwriters shall be settled as promptly as practicable after the termination of this Agreement designated in Section 10(b). Your determination of the amount and the allocation of any such charges or expenses shall be final and conclusive. We authorize you to charge our account for any and all expenses incurred by you in connection with the purchase and sale of the Securities or preparations therefor. We agree that all expenses of a general nature incurred by you shall be borne by us based upon our respective underwriting obligations. You may at any time make partial distributions of credit balances or call for payment of debit balances. Any of our funds in your hands may be held with your general funds without accountability for interest. Notwithstanding any settlement, we will remain liable for any taxes on transfers for our account. In the event we fail to fulfill our obligation hereunder, the expenses chargeable to us pursuant to this agreement and not paid, as well as any additional expenses arising from such default, may be charged against the other underwriters not so defaulting in the same proportions as their respective underwriting obligations, without, however, relieving us from our liability therefor. Your ascertainment of all expenses and apportionment thereof shall be conclusive. 8. Stabilization and Other Matters. We authorize you, in your discretion, to make purchases and sales of Securities, any other securities of the Company of the same class and series, any securities of the Company into which the Securities are convertible and any securities of the Company that you may specify in writing, in the open market or otherwise, for long or short account, on such terms and at such prices as you may determine, and to over-allot in arranging sales of Securities. It is understood that you may have made purchases of outstanding securities of the Company for stabilizing purposes prior to the time when this Agreement became binding upon us with respect to the offering of the Securities, and we agree that any securities so purchased shall be treated as having been purchased for the respective accounts of the Underwriters pursuant to the foregoing authorization. We authorize you to cover any short position incurred pursuant to this Section by purchasing securities on such terms and in such manner as you deem advisable. At no time shall our net commitment either for long or short accounts (except for over-allotments which may be covered by the purchase of Option Securities) under the foregoing provisions of this Section exceed an amount equal to fifteen percent (15%) of our underwriting obligation as it relates to the aggregate underwriting obligations of all Underwriters. On demand, we will take up and pay for at cost any securities so purchased and deliver any of said securities so sold or overallotted for our account, and if any other Underwriter shall fail to comply with such a demand, we will assume our proportionate share of such obligations, based upon our underwriting obligation as related to the aggregate underwriting obligations of all non-defaulting Underwriters, without, however, relieving such defaulting Underwriter from its liability therefor. The existence of this provision is no assurance that the price of the Securities or other securities of the Company will be stabilized or that stabilizing, if commenced, may not be discontinued at any time. We agree to advise you from time to time upon your request of the amount of our Securities retained by us remaining unsold and will upon your request sell to you for the accounts of one or more of the several Underwriters such amount of such Securities as you may designate at such price, not less than the public offering price less the Underwriter's Discount concession nor more than the initial public offering price, as you may determine. If prior to the termination of this Agreement, you shall purchase or contract to purchase any of the Securities which were sold by us (otherwise than through you) pursuant to this Agreement, in your discretion you may (a) sell for our account the Securities so purchased and debit or credit our account for the loss or profit resulting from such sale, (b) charge our account with an amount equal to the Underwriter's Discount with respect thereto and credit such amount against the cost thereof or (c) require us to repurchase such Securities at a price equal to the total cost of such purchase made by you as Representative, including discount and -6- commissions, if any, and transfer tax on the redelivery. Certificates for the Securities delivered on such repurchase need not be identical to the certificates so purchased by you. We understand that, in the event that you effect stabilization pursuant to this Section, you will notify us promptly of the date and time when the first stabilizing purchase is effected and the date and time when stabilizing is terminated. We agree that stabilizing by us may be effected only with the consent of W. B. McKee Securities, Inc., and we will furnish W. B. McKee Securities, Inc. with such information and reports relating to such stabilization as are required by the rules and regulations of the Commission under the Exchange Act. We authorize you, in your sole discretion, to exercise any over-allotment option in whole or in part or to cancel the same at such time as you may determine. To the extent, if at all, that you exercise such option, we agree to take down and pay for our portion of such Option Securities in the proportion that our underwriting obligation bears to the underwriting obligations of all Underwriters. You will advise us of the amount of our Option Securities, and we will offer such Option Securities to the public in conformity with the terms of the offering set forth in the Prospectus. 9. Open Market Transactions. We and you agree that, until the termination of the provisions of this Section of this Agreement with respect to the Securities, neither we nor you will make purchases or sales of the Securities or securities exchangeable for, convertible into, or exercisable against the Securities, any security of the same class and series as the Securities and any right to purchase the Securities or any such security, including trading in any put or call option on any such security other than (a) as provided for in this Agreement or in the Underwriting Agreement or (b) as a broker in executing unsolicited orders. We represent that we have not participated in any transaction prohibited by the preceding paragraph and that we have at all times complied with the provisions of Rule 10b-6 of the Commission applicable to the offering of the Securities. 10. Termination and Settlement. (a) This Agreement may be terminated by any party hereto upon five (5) business days' written notice to the other parties; provided, however, that as to any notice received after this Agreement shall have become effective, as provided in the third paragraph of this Agreement, with respect to any offering of Securities, this Agreement shall remain in full force and effect as to such offering of Securities and shall terminate with respect to such offering and all previous offerings in accordance with the provisions of paragraph (b) of this Section. (b) With respect to each offering of Securities pursuant to this Agreement, this Agreement shall terminate forty-five (45) days after the initial public offering date of the Securities, or at such earlier date as you may determine in your discretion, or may be extended by you, in your discretion, for an additional period or periods not exceeding fifteen (15) days in the aggregate, in each case, except as otherwise provided herein. You may, in your discretion, on notice to us prior to such time terminate the effectiveness of Section 9 of this Agreement. Upon termination of this Agreement with respect to the offering of the Securities, or prior thereto at your discretion, you shall deliver to us any of the Securities purchased by us from the Company and the Selling Securityholders, if any, and held by you for sale for our account but not sold and paid for and any other securities of the Company which are held by you for our account pursuant to the provisions of Section 9 hereof. -7- As promptly as possible after the termination of this Agreement with respect to the offering of the Securities, the accounts arising pursuant thereto shall be settled and paid. The determination by you of the amounts to be paid to or by us hereunder shall be final and conclusive. (c) Notwithstanding anything in this Agreement to the contrary, our obligations under Section 7, 13 and 14 shall survive the termination of this Agreement pursuant to paragraph (a) or (b) of this Section. 11. Default by Underwriter. Default by one or more Underwriters under counterparts to this Agreement executed by such Underwriters or under the Underwriting Agreement will not release the other Underwriters from their obligations or affect the liability of any defaulting Underwriter to the other Underwriters for damages resulting from such default. If one or more Underwriters default under the Underwriting Agreement, you may arrange for the purchase by one or more non-defaulting Underwriters of Securities not taken up by the defaulting Underwriter or Underwriters and we will, at your request, increase pro rata with the other non-defaulting Underwriters the amount of our underwriting obligation by an amount not exceeding ten percent (10%) of our underwriting obligation with respect to the Securities. 12. Legal Qualifications. You shall inform us, upon request, of the states and other jurisdictions of the United States in which it is believed that the Securities are qualified for sale under, or are exempt from the requirements of, their respective securities laws, but you assume no responsibility with respect to our right or the right of any Underwriter or other person to sell Securities in any jurisdiction. You are authorized to file with the Department of State of the State of New York a Further State Notice with respect to the Securities, if you determine to sell any of the Securities in New York and if a Further State Notice shall be necessary. If we propose to offer Securities outside of the United States, its territories or its possessions, we shall so notify you and designate the nations in which such offering is proposed, and we will take, at our own expense, such action, if any, as may be necessary to comply with the laws of each foreign jurisdiction in which we propose to offer Securities. 13. Liability of Representative. You shall be under no liability (except for your own want of good faith and for obligations expressly assumed by you hereunder) for or in respect of: the validity or value of, or title to, any of the Securities; the form of, or the statements contained in, or the validity of, the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or any other letters or instruments executed by or on behalf of the Company, any Selling Securityholder or other persons; the form or validity of the Underwriting Agreement or this Agreement; the delivery of the Securities; the performance by the Company, the Selling Securityholders or others of any agreement on its or their part; or any matter in connection with any of the foregoing. Nothing in this Section 13, however, shall be deemed to relieve you from any liability imposed by the Act. 14. Indemnification and Claims. We agree to indemnify, hold harmless and reimburse each other Underwriter, their respective affiliates, directors, officers, employees, agents, counsel, representatives, and participants (collectively, "Underwriter Parties") to the extent, and upon the terms that we will agree, as one of the Underwriters, to indemnify, hold harmless and reimburse the Company, the Selling Securityholders, if any, and certain other persons pursuant to the Underwriting Agreement. This indemnity agreement shall remain in full force and effect regardless of any investigation made by or on behalf of such other Underwriter Parties or any statement made to the Commission as to the results thereof. In the event that at any time any person other than an Underwriter Party asserts a claim against one or more of the Underwriters or against you as Representative of the Underwriters arising out of an alleged untrue -8- statement or omission in the Registration Statement, any Preliminary Prospectus or the Prospectus or any amendment or supplement thereto or documents incorporated by reference therein or relating to any transaction contemplated by this Agreement, we authorize you to make such investigation, to retain such counsel for the Underwriters and to take such action in the defense of such claim as you may deem necessary or advisable. You may settle such claim with the approval of a majority in interest of the Underwriters. We will pay our proportionate share (based upon our underwriting obligation) of all expenses incurred by you, including the fees and expenses of counsel for the Underwriters, in investigating and defending against such claim and our proportionate share of the aggregate liability incurred by all Underwriters in respect of such claim after deducting any contribution or indemnification obtained pursuant to the Underwriting Agreement, or otherwise, from persons other than Underwriters, whether such liability is the result of a judgment against one or more of the Underwriters or the result of any such settlement. We and any other Underwriter may retain separate counsel at our own expense. A claim against or liability incurred by a person who controls an Underwriter shall be deemed to have been made against or incurred by such Underwriter. In the event of default by us in respect of our obligations under this Section, each non-defaulting Underwriter shall assume its proportionate share of our obligations without relieving us of our liability hereunder. 15. Distribution of Prospectuses and Other Matters. We are familiar with Release No. 4968 under the Act and Rule 15c2-8 under the Exchange Act, relating to the distribution of preliminary and final prospectuses, and we confirm that we will comply therewith, to the extent applicable, in connection with any sale of Securities. You shall cause to be made available to us, to the extent made available to you by the Company, such number of copies of the Prospectus and any Preliminary Prospectuses as we may reasonably request for purposes contemplated by the Exchange Act and the rules and regulations thereunder. We agree to keep an accurate record of the distribution (including dates, number of copies and persons to whom sent) by us of the Registration Statement, any amendment thereto and any related Preliminary Prospectus and supplement thereto and also agree, upon request by W. B. McKee Securities, Inc. to furnish promptly to the persons who received copies of the above, copies of any subsequent amendment to the Registration Statement or any revised Preliminary Prospectus or any revised Preliminary Prospectus supplement or of any memorandum furnished to us outlining changes in any such document. 16. Miscellaneous. Nothing in this Agreement shall constitute you or us partners or joint venturers with you, or with the other Underwriters and the obligations of each of you, ourselves and of each of the other Underwriters are several and not joint. We elect to be excluded from the application of Subchapter K, Chapter 1, Subtitle A, of the Internal Revenue Code of 1986, as amended. Your authority under this Agreement and under the Underwriting Agreement as Representative may be exercised solely by W. B. McKee Securities, Inc. Any notice from you to us shall be deemed duly given if hand-delivered, telecopied, telegraphed or telephoned (and confirmed immediately in writing) to us at the address set forth in the Terms Telecopy to us. Any notice from us to you shall be deemed duly given if hand-delivered, telecopied, telegraphed or telephoned (and confirmed immediately in writing) to W. B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, Attention: Mark Jazwin. We confirm that we are actually engaged in the investment banking or securities business and are either (a) a member of the NASD and our commitment to purchase shares pursuant to the Underwriting Agreement will not result in a violation of the financial responsibility requirements of Rule 15c-3-1 of the Commission, or of any similar provisions of any applicable rules of any securities exchange to which we are subject or of any restriction imposed upon us by any such exchange or any governmental authority or (b) a foreign dealer not eligible for membership in the NASD who hereby agrees to make no sales within the United States, its -9- territories or its possessions (except that we may participate in sales to Special Purchasers under Section 4 hereof) or to persons who are citizens thereof or resident therein. In making sales of Securities, if we are such a member, we agree to comply with all applicable rules of the NASD, including, without limitation, the NASD's Interpretation with Respect to Free-Riding and Withholding and Section 24 of Article III of the NASD's Rules of Fair Practice, or, if we are such a foreign dealer, we agree to comply with such Interpretation and Sections 8, 24 and 36 of such Article as though we were such a member and Section 25 of such Article as that Section applies to a non-member foreign dealer. This Agreement in all respects shall be governed by the laws of Arizona and shall inure to the benefit of and be binding upon the successors, assigns, executors and administrators of the parties hereto. It is being executed by us and delivered to you, in duplicate, and we request that you confirm by signature, in the space provided below, and return one copy to us. Very truly yours, ----------------------------------------------- (Name of Firm exactly as it should appear in any Registration Statement or advertisement) By --------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- Address: --------------------------------------- ----------------------------------------------- Telephone: (____) ------------------------------ Telecopier: (____) ------------------------------ Confirmed as of the date first above written: W. B. McKEE SECURITIES, INC. By: --------------------------------- Mark Jazwin -10- EX-1.4 5 SELECTED DEALERS AGREEMENT PREMIUM CIGARS INTERNATIONAL, LTD. SELECTED DEALERS AGREEMENT _____________________, 1997 Ladies and Gentlemen: 1. We, as representative ("Representative") named in the Prospectus dated ___________, 1997 ("Prospectus") are offering for sale an aggregate of 1,900,000 shares of common stock, no par value ("Common Stock") of Premium Cigars International, Ltd., an Arizona corporation ("Company"). The shares are herein referred to as the "Firm Shares." In addition, we are offering up to 285,000 additional shares of Common Stock ("Option Shares") to cover over-allotments. The Firm Shares and the Option Shares are hereinafter referred to as the "Securities." The Securities and the terms under which they are to be offered for sale by the Representative are more particularly described in the Prospectus. 2. The Securities are to be offered to the public by the Representative at the price per Unit indicated in our purchase wire (herein called the "Offering Price"), in accordance with the terms of the offering thereof set forth in the Prospectus. 3. The Representative is offering, subject to the terms and conditions hereof, a portion of the Securities for sale to certain dealers ("Dealers") as principals at the full Offering Price, with later payment to you for the concession and any accrued interest thereon. The offering of Securities to Dealers may be made on the basis of reservations or allotments against subscriptions. We will advise you by telecopies of the method and terms of the offering. Acceptance of any reserved Securities received at the offices of W. B. McKee Securities, Inc. in Phoenix, Arizona, after the time specified therefor in the telecopy, and any subscriptions for Securities, will be subject to rejection in whole or in part. Subscription books may be closed by us at any time without notice and the right is reserved to reject any subscription in whole or in part. Upon receipt of the aforementioned telecopy, the Securities purchased by you may be re-offered to the public in conformity with the terms of offering set forth in the Prospectus. You may, in accordance with the rules of the National Association of Securities Dealers, Inc. ("NASD") allow a discount from the Offering Price of not more than the amount indicated in our purchase wire with respect to Securities sold by you to any other dealer or broker. Dealers must be either (i) members in good standing of the NASD or (ii) dealers with their principal places of business located outside the United States, its territories and its possessions and not registered as brokers or dealers under the Securities Exchange Act of 1934, as amended ("Exchange Act"), who have agreed not to make any sales within the United States, its territories and its possessions or to persons who are nationals thereof or residents therein. Dealers must also agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and, if any such dealer is a foreign dealer and not a member of the NASD, such foreign dealer must also comply with the NASD's Interpretation with Respect to Free-Riding and Withholding, and with the provisions of Rules 2730 and -1- 2750 of such Conduct Rules, as though it were a member of the NASD and to comply with Rule 2420 thereof as that Rule applies to non-member foreign dealers. Each of the underwriters has agreed that, during the term of this Agreement, it will be governed by the terms and conditions hereof. 4. On behalf of the several underwriters we shall act as Representative under this Agreement and shall have full authority to take such action as we may deem advisable in respect of all matters pertaining to the public offering of the Securities. 5. If you desire to purchase any of the Securities, your application should reach us promptly by telephone or telecopy at the office of W.B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, telephone number (602) 954-7365, fax number (602) 266-5774, Attention: Gary J. Sherman. We reserve the right to reject subscriptions in whole or in part, to make allotments and to close the subscription books at any time without notice. The number of Securities allotted to you will be confirmed, subject to the terms and conditions of this Agreement. 6. The privilege of subscribing for the Securities is extended to you on behalf of the Representative as it may lawfully sell the Securities to dealers in your state or other jurisdictions. 7. With respect to purchase and sale: a. Offering. Any Securities purchased by you under the terms of this Agreement may be immediately re-offered to the public in accordance with the terms of the offering thereof set forth herein and in the Prospectus, subject to the securities or blue sky laws of the various states or other jurisdictions. Neither you nor any other person is or has been authorized to give any information or to make any representations in connection with the sales of Securities other than as contained in the Prospectus. b. Penalty Bid. If you have received Securities purchased by you pursuant to this Agreement, which prior to the later of (i) the termination of the effectiveness of this Agreement with respect to the offering of such Securities; or (ii) the covering by the Representative of any short position created by the Representative in connection with the offering of such Securities, the Representative may have purchased or contracted to purchase for the account of any Dealer (whether such Securities have been sold or loaned by you), then you agree to pay the Representative on demand for the accounts of the several underwriters an amount equal to the Selected Dealers' concession and, in addition, the Representative may charge you with any broker's commission and transfer tax paid in connection with such purchase or contract to purchase. Securities delivered on such repurchases need not be the identical Securities originally purchased. With respect to any such repurchased Securities as to which you have not yet received, you shall be responsible for any such broker's commission and transfer tax and the Representative shall not be obligated to pay any Selected Dealers' concession as to such Securities. c. Accounting for Allotment. You agree to advise us from time to time, upon request, of the number of Securities purchased by you hereunder and remaining unsold at the time of such request, and if in our opinion any such Securities shall be needed to make delivery of the Securities sold for the account of the Representative, you will, forthwith upon our request, grant to us for the account or accounts of any Dealer the right, exercisable promptly after receipt of notice from you that such right has been granted, to purchase, at the Public Offering Price less the selling concession or such part thereof as we shall determine, such number of Securities owned by you as shall have been specified in our request. -2- d. Expenses. No expenses shall be charged to Selected Dealers. A single transfer tax, if payable, upon the sale of the Securities by the Representative to you will be paid when such Securities are delivered to you. However, you shall pay any transfer tax on sales of Securities by you and you shall pay your proportionate share of any transfer tax (other than the single transfer tax described above) in the event that any such tax shall from time to time be assessed against you and other Selected Dealers as a group or otherwise. 8. The provisions of Section 7 hereof will terminate when we shall have determined that the public offering of the Securities has been completed and upon telecopied notice to you of such termination, but, if not theretofore terminated, they will terminate at the close of business on the forty-fifth (45th) full business day after the date of the final Prospectus; provided, however, that we shall have the right to extend such provisions for a further period or periods, not exceeding fifteen (15) full business days in the aggregate upon notice to you. 9. On becoming a Selected Dealer, and in offering and selling the Securities, you agree to comply with all the applicable requirements of the Securities Act of 1933, as amended ("1933 Act"), and the Exchange Act. You confirm to you are familiar with Rule 15c2-8 under the Exchange Act relating to the distribution of preliminary and final prospectuses for securities of an issuer (whether or not the issuer is subject to the reporting requirements of Sections 13 or 15(d) of the Exchange Act) and confirm that you have complied and will comply therewith. We hereby confirm that we will make available to you such number of copies of the Prospectus (as amended or supplemented) as you may reasonably request for the purposes contemplated by the 1933 Act or the Exchange Act, or the rules and regulations thereunder. 10. For the purpose of stabilizing the market in the Securities, we have been authorized to over-allot, and to make purchases and sales of the Securities of the Company. 11. You agree not to bid for, purchase, attempt to induce others to purchase, or sell, directly or indirectly, any Securities, or any other securities of the Issuer of the same class and series as the Securities or any other securities of the Issuer or the right or option to purchase any securities of the Issuer or any guarantor of the Securities, except as brokers pursuant to unsolicited orders and as otherwise provided in this Agreement. You also agree not to effect or attempt to induce others to effect, directly or indirectly, any transactions in or relating to put or call options on any securities of the Issuer, except to the extent permitted by Rule 10b-6 under the Exchange Act as interpreted by the Securities and Exchange Commission. 12. Upon application, you will be informed as to the states and other jurisdictions in which we have been advised that he Securities have been qualified for sale (or are exempt from such qualification) under the respective securities or blue sky laws of such states and other jurisdictions, but the Representative does not assume any obligation or responsibility as to the right of any Selected Dealer to sell the Securities in any state or other jurisdiction or as to the eligibility of the Securities for sale therein. 13. No Selected Dealer is authorized to act as our agent or as agent for the Representative, or otherwise to act on behalf of the Representative, in offering or selling the Securities to the public or otherwise to furnish any information or make any representation except as contained in the Prospectus. 14. Nothing will constitute the Selected Dealers an association or other separate entity or partners with the Representative or with each other, but you will be responsible for your share of any -3- liability or expense based on any claim to the contrary. We shall not be under any liability for or in respect of the value or validity of form of the Securities, the delivery of the certificates for the Securities, the performance by anyone of any agreement on its part, the qualification of the Securities for sale under the laws of any jurisdiction, or for or in respect of any other matter relating to this Agreement, except for lack of good faith and for obligations expressly assumed by us in this Agreement and no obligation on our part shall be implied herefrom. The foregoing provisions shall not be deemed a waiver of any liability imposed under the 1933 Act or the Exchange Act. 15. Securities sold to you hereunder shall be paid for in an amount equal to the initial public offering price therefor, with the Selected Dealers' concession and simple interest thereon at the Prime Rate then in effect as referenced by Bank One, Arizona, NA, paid to you by the Representative within 45 days of the termination of this Agreement, at 9:00 a.m., M.S.T., Phoenix time on the date on which the Dealers are required to purchase the Securities by delivery to the Representative at the offices of W. B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, telephone number (602) 954-7365, fax number (602) 266-5774, in current clearing house funds, payable to the order of W. B. McKee Securities, Inc. for the benefit of Premium Cigars International, Ltd.. Delivery of certificates for the Securities will be made after closing of the offering. If you are a member of, or clear through a member of, the Depository Trust Company ("DTC"), we may, in our discretion, delivery your Securities through the facilities of DTC. Payment for Securities purchased by you is to be made at the initial public Offering Price, with the Selected Dealers' concession and any interest thereon to which you may be entitled will be paid to you upon the later to occur of i) the termination of the effectiveness of this Agreement with respect to the offering of such Securities; or ii) the covering by the Representative of any short position created by the Representative in connection with the offering of such Securities. 16. Notices to the Representative should be addressed in care of W. B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, telephone number (602) 954-7365, fax number (602) 266-5774, Attention: Gary J. Sherman. Notices to you shall be deemed to have been duly given if telegraphed or mailed to you at the address to which this letter is addressed. 17. If you desire to purchase any of the Securities on the terms and conditions set forth herein, please confirm your application by signing and returning to us your confirmation on the duplicate copy of this letter enclosed herewith, even though you may have previously advised us thereof by telephone or telecopy. Our signature hereon may be by facsimile. -4- Sincerely yours, W. B. MCKEE SECURITIES, INC. By -------------------------------------- Gary J. Sherman President -5- W. B. McKee Securities, Inc. 3003 North Central Avenue Suite 100 Phoenix, Arizona 85012 Dear Sirs: We hereby subscribe for ________________________________ shares of Common Stock, no par value, of Premium Cigars International, Ltd. ("Securities") in accordance with the terms and conditions stated in the foregoing letter. We hereby acknowledge receipt of the Prospectus referred to in the first paragraph thereof relating to said Securities. We further state that in purchasing said Securities we have relied upon the Prospectus and upon no other statement whatsoever, whether written or oral. We confirm that we are a dealer actually engaged in the investment banking or securities business and that we are either (i) a member in good standing of the NASD or (ii) a dealer with its principal place of business located outside the United States, its territories and its possessions and not registered as a broker or dealer under the Securities Exchange Act of 1934, who hereby agrees not to make any sales within the United States, its territories or its possessions or to persons who are nationals there or residents therein. We hereby agree to comply with the provisions of Rule 2740 of the NASD Conduct Rules, and if we are a foreign dealer and not a member of the NASD, we also agree to comply with the NASD's Interpretation with Respect to Free-Riding and Withholding, and with the provisions of Rules 2730 and 2750 of such Conduct Rules, as though we were a member of the NASD, and to comply with Rule 2420 thereof as that Rule applies to non-member foreign dealers. -------------------------------------------- (Please type or print name of firm) -------------------------------------------- -------------------------------------------- (Please type or print address of firm) By ------------------------------------------ Its ----------------------------------------- -6- Please complete and return with one executed copy of the Selected Dealers Agreement. Firm Name: ------------------------------------------ Address: Street: --------------------------- City: ----------------------------- State: ---------------------------- Zip Code: ------------------------- Phone Number: ----------------------------- Fax Number: ------------------------------- Contact Person: --------------------------- Tax I.D. #: ------------------------------- DTC#: ------------------------------------- ABA #: ------------------------------------ Corporate Delivery Instructions: ----------------- ----------------- Government Delivery Instructions: ----------------- ----------------- -7- EX-1.5 6 LOCK-UP AGREEMENT DRAFT July 25, 1997 PREMIUM CIGARS INTERNATIONAL, LTD. LOCK-UP AGREEMENT This Lock-Up Agreement ("Agreement") is entered into as of July ___, 1997, by and between PREMIUM CIGARS INTERNATIONAL, INC., an Arizona corporation (the "Company"), and _________________________, a(n)________________("Holder"). WHEREAS, the Holder understands that W.B. McKee Securities, Inc., as the representative ("Representative") proposes to enter into an Underwriting Agreement on behalf of the several Underwriters (collectively, the "Underwriters") with the Company providing for an initial public offering of the Common Stock of the Company (the "Shares") pursuant to a Registration Statement on Form SB-2 filed with the Securities and Exchange Commission (the "SEC"); and WHEREAS, the Company has also filed an application with the securities administrators in the states listed in Exhibit A hereto ("Administrators") for the registration of such Shares; and WHEREAS, the Holder is the owner of Bridge Warrants which are exerciseable for Shares; and WHEREAS, as a condition to filing of the Registration Statement, the underwriter has requested that the Holders agree to be bound to the terms of this Agreement. NOW, THEREFORE, the parties hereby agree as follows: I. LOCK-UP TERMS ------------- A. Period of Lock-Up; No Sale. In consideration of the agreement by the Underwriters to offer and sell the Shares, and of other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the undersigned agrees, for a period of twelve (12) months from the effective date of the public offering of the Shares, that the undersigned will not offer to sell, sell, contract to sell, grant any option to purchase, make any short sale or otherwise dispose of any Shares or any other securities of the Company that are substantially similar to the Shares, including but not limited to any securities of the Company that are convertible into or exchangeable for, or that represent the right to receive, Common Stock of the Company or any such similar securities, whether now owned or hereafter acquired, owned directly by the Holder or with respect to which the Holder has beneficial ownership, within the rules and regulations of the SEC (collectively, the "Holder's Shares"). B. No Other Dispositions. The foregoing restriction is expressly agreed to preclude the Holder from engaging in any hedging or other transaction which is designed to or reasonably expected to lead to or result in a sale or disposition of the Holder's Shares even if such Shares would be disposed of by someone other than the undersigned. Such prohibited hedging or other transactions would include without limitation any short sale or any purchase, sale or grant of any right (including without limitation any put or call option) with respect to any of the Holder's Shares or with respect to any security that includes, relates to or derives any significant part of its value from such Shares. C. Stop Transfer Instructions. The Holder agrees and consents to the entry of stop transfer instructions with the Company's transfer agent and registrar against the transfer of the Holder's Shares except in compliance with the foregoing and following restrictions. II. REORGANIZATION PROVISIONS ------------------------- A. Distributions Upon Reorganization. The Holder agrees that in the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the Company's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is not a Promoter (as that term is defined by the North American Securities Administrators Association), which results in the distribution of the Company's assets or securities ("Distribution"), while this Agreement remains in effect that: 1. All holder's of the Company's Common Stock will initially share on a pro rata, per share basis in the Distribution, in proportion to the amount of cash or other consideration that they paid per share for their Shares (provided that the state securities administrator's of the states listed in Exhibit A ("Administrator") have accepted the value of the other consideration), until the shareholders who purchased the Company's Shares pursuant to the public offering ("Public Shareholders") have received, or have had irrevocably set aside for them, an amount that is equal to one hundred percent (100%) of the public offering's price per share times the number of Shares that they purchased pursuant to the public offering and which they still hold at the time of the Distribution, adjusted for stock splits, stock dividends, recapitalizations and the like; and 2. All holder's of the Company's Shares shall thereafter participate on an equal, per share basis adjusted for stock splits, stock dividends, recapitalizations and the like. 3. The Distribution may proceed on lesser terms and conditions than the terms and conditions stated in subsections A.1 and A.2 above if a majority of the Shares that are not held by Holder's, officers, directors, or Promoters of the Company, or their associates or affiliates vote, or consent by consent procedure, to approve the lesser terms and conditions. B. Survival of Terms. In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the Company's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is not a Promoter, which results in a Distribution while this Agreement remains in effect, the Holder's Shares shall remain subject to the terms of this Agreement. III. PERMISSIBLE TRANSFERS; VOTING RIGHTS; LEGENDS --------------------------------------------- A. Transfer of Shares by Operation of Law. Holder's Shares may be transferred by will, the laws of descent and distribution, the operation of law, or by order of any court of competent jurisdiction and proper venue. -2- B. Hypothecation of Deceased Holder's Shares. Shares of a deceased Holder may be hypothecated to pay the expenses of the deceased Holder's estate. The Hypothecated Shares shall remain subject to the terms of this Agreement. Holder's Shares may not be pledged to secure any other debt. C. Transfer to Family Members. Holder's Shares may be transferred by gift to the Holder's family members, provided that the Shares shall remain subject to the terms of this Agreement. For purposes of this Lock-Up Agreement, "family members" shall mean any relationship by blood, marriage or adoption, not more remote than first cousin. D. Voting Rights. With the exception of susection A.3 above, the Holder's Shares shall have the same voting rights as similar Shares not subject to this Agreement. E. Legends. A notice shall be placed on the face of each stock certificate of the Holder's Shares covered by the terms of this Agreement stating that the transfer of the stock evidenced by the certificate is restricted in accordance with the conditions set forth on the reverse side of the certificate. A typed legend shall be placed on the reverse side of each stock certificate of the Holder's Shares representing stock covered by this Agreement which states that the sale or transfer of the shares evidenced by the certificate is subject to certain restrictions until twelve (12) months following the effective date of the Registration Statement pursuant to an agreement between the Holder and the Company, which agreement is on file with the Company and the stock transfer agent from which a copy is available upon request and without charge. IV. TERMINATION ----------- The term of this Agreement shall begin on the date that the Registration Statement is declared effective by the SEC ("Effective Date") and shall terminate: A. At the expiration of the lock-up period provided in Section I.A; or B. On the date the Registration has been terminated if no securities were sold pursuant thereto; or C. If the Registration has been terminated, the date that checks representing all of the gross proceeds that were derived therefrom and addressed to the Public Investors have been placed in the U.S. Postal Service with first class postage affixed; or D. At the discretion of the representative: 1. With respect to one quarter of the Holder's Shares if between six (6) months and one (1) year have passed since the Effective Date and the Shares have traded at one hundred fifty percent (150%) of the public offering's price per share for twenty (20) consecutive trading days. -3- 2. None of the Holder's Shares may be released from this Agreement by the Representative unless at least six (6) months have passed since the Effective Date. E. On the date the securities subject to this Agreement become "Covered Securities," as defined under ss.18 of the Securities Act of 1933, as amended. V. MECHANICAL REQUIREMENTS ----------------------- A. Filing. A manually signed copy of the Agreement signed by all parties to be filed with the Administrators prior to the Effective Date. B. Copies. Copies of the Agreement and a statement of the per share initial public offering price to be provided to the Company's stock transfer agent. C. Stock Transfer Orders. Appropriate stock transfer orders to be placed with the Company's stock transfer agent against the sale of the Holder's Shares prior to the expiration of this Agreement, except as may otherwise be provided in this Agreement. VI. MISCELLANEOUS ------------- A. Modification. This Agreement may be modified only with the written approval of the Administrators. B. Reliance. The Holder understands that the Company and the Underwriters are relying upon this Lock-Up Agreement in proceeding toward consummation of the offering. The Holder further understands that this Lock-Up Agreement is irrevocable and shall be binding upon the Holder's heirs, legal representatives, successors and assigns. C. Entire Agreement. This Agreement constitutes the full and entire understanding and agreement between the parties with regard to the subjects hereof. D. Counterparts. This Agreement may be executed in any number of counterparts each of which shall be enforceable against the parties actually executing such counterparts and all of which together shall constitute one instrument. Any telecopied signature of a party on this Agreement shall be deemed an original signature of such party for all purposes. - 4 - IN WITNESS WHEREOF, the parties have executed this Agreement on the day and year first above written. PREMIUM CIGARS INTERANATIONAL, INC., ------------------------------------ ------------------------------------ ------------------------------------ HOLDER ------------------------------------ ------------------------------------ ------------------------------------ EX-4.2 7 STOCK CERTIFICATE P C I PREMIUM CIGARS INTERNATIONAL NUMBER SHARES PREMIUM CIGARS INTERNATIONAL. LTD. INCORPORATED UNDER THE LAWS OF THE STATE OF ARIZONA 10,000,000 AUTHORIZED SHARES NO PAR VALUE CUSIP 740588 10 8 SEE REVERSE FOR CERTAIN DEFINITIONS THIS CERTIFIES THAT Is The Owner of FULLY PAID AND NON-ASSESSABLE SHARES OF NO PAR VALUE COMMON STOCK OF PREMIUM CIGARS INTERNATIONAL, LTD. transferable only on the books of the Company in person or by duly authorized attorney upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and Registrar. IN WITNESS WHEREOF, the said Company has caused this Certificate to be executed by the facsimile signatures of its duly authorized officers and to be sealed with the facsimile seal of the Company. Dated: PREMIUM CIGARS INTERNATIONAL, LTD. CORPORATE SEAL ARIZONA SECRETARY PRESIDENT COUNTERSIGNED AND REGISTERED: American Securities Transfer & Trust, Inc. P. O. Box 1596 Denver, Colorado 80201 By___________________________ Transfer Agent & Registrar Authorized Signature PREMIUM CIGARS INTERNATIONAL, LTD. The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations: TEN COM --as tenants in common UNIF GIFT MIN ACT -- ......Custodian....... TEN ENT -- as tenants by the entireties (Cust) (Minor) JT TEN -- as joint tenants with right of under the Uniform Gifts to Minors survivorship and not as tenants Act ............. in common (State)
Additional abbreviations may also be used though not in the above list. - -------------------------------------------------------------------------------- For Value Received, _______________________hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE - ------------------------------------- - ------------------------------------- - -------------------------------------------------------------------------------- (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- __________________________________________________________________________Shares of the Common Stock represented by the within Certificate, and do hereby irrevocably constitute and appoint - -------------------------------------------------------------------------------- attorney-in-fact to transfer the said stock on the books of the within-named Corporation, with full power of substitution in the premises. Dated ___________________________ -------------------------------------------------------------------- -------------------------------------------------------------------- NOTICE: THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OR ANY CHANGE WHATSOEVER. Signature(s) Guaranteed: - -------------------------------------------- The signature(s) must be guaranteed by an eligible guarantor institution (Banks, Stockbrokers, Savings and Loan Associations and Credit Unions with membership in an approved signature guarantee Medallion Program), pursuant to S.E.C. Rule 17Ad-15 EX-4.3 8 WARRANT THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE CORPORATION, SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT. WARRANT For the Purchase of 170,989 Shares of Common Stock, No Par Value Per Share, of PREMIUM CIGARS INTERNATIONAL, LTD. (Incorporated Under the Laws of the State of Arizona) Void After 5 P.M., July _____, 2002 No. ___ Warrant to Purchase One Hundred Seventy Thousand Nine Hundred Eighty-Nine (170,989) Shares of Common Stock. THIS IS TO CERTIFY, that, for value received, W. B. McKEE SECURITIES, INC. ("Representative") or registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, on or after July ____, 1998 and at any time prior to 5 p.m., M.S.T., on July _____, 2002 but not thereafter, to purchase such number of shares ("Shares") of Common Stock, no par value per share ("Common Stock"), of PREMIUM CIGARS INTERNATIONAL, LTD., an Arizona corporation ("Company"), from the Company as is set forth above and upon payment to the Company of $8.40 per Share ("Purchase Price") if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Article II hereof, and to receive a certificate or certificates or other evidence of ownership representing the Shares so purchased, upon presentation and surrender to the Company of this Warrant, with the form of subscription attached hereto duly executed, and accompanied by payment of the Purchase Price of each Unit purchased. 1. Terms of the Warrant 1.1 Time of Exercise. Subject to the provisions of Sections 1.5 and 3.1 hereof, this Warrant may be exercised at any time and from time to time after 9:00 a.m., M.S.T., on July_______, 1998 ("Exercise Commencement Date"), but no later than 5:00 p.m., M.S.T., July_______, 2002 ("Expiration Time") at which point it shall become void, and all rights hereunder shall thereupon cease. 1.2 Manner of Exercise. 1.2.1 The holder of this Warrant ("Holder") may exercise this Warrant, in whole or in part, upon surrender of this Warrant with the form of subscription attached hereto duly executed, to the Company at its corporate office in Phoenix, Arizona together with the full Purchase Price for the Shares to be purchased in lawful money of the United States, or by certified check, bank draft or postal or express money order payable in United States dollars to the order of the Company, and upon compliance with and subject to the conditions set forth herein. 1.2.2 Upon receipt of this Warrant with the form of subscription duly executed and accompanied by payment of the aggregate Purchase Price for the Shares for which this Warrant is then being exercised, the Company shall cause to be issued certificates or other evidence of ownership, for the total number of whole Shares for which this Warrant is being exercised in such denominations as are required for delivery to the Holder, and the Company shall thereupon deliver such documents to the Holder or its nominee. 1.2.3 In case the Holder shall exercise this Warrant with respect to less than all of the Shares that may be purchased under this Warrant, the Company shall execute a new Warrant for the balance of the Shares that may be purchased upon exercise of this Warrant and deliver such new Warrant to the Holder. 1.2.4 The Company covenants and agrees that it will pay when due and payable any and all taxes which may be payable in respect of the issue of this Warrant, or the issue of any Shares upon the exercise of this Warrant. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of this Warrant or of the Shares in a name other than that of the Holder at the time of surrender, and until the payment of such tax the Company shall not be required to issue such Shares. 1.3 Exchange of Warrant. This Warrant may be split-up, combined or exchanged for another Warrant or Warrants of like tenor to purchase a like aggregate number of Shares. If the Holder desires to split-up, combine or exchange this Warrant, he shall make such request in writing delivered to the Company at its corporate office and shall surrender this Warrant and any other Warrants to be so split-up, combined or exchange, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split-up, combination or exchange which will result in the issuance of a Warrant entitling the Holder to purchase upon exercise a fraction of a Share. The Company may require the Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. -2- 1.4 Holder as Owner. Prior to due presentment for registration of transfer of this Warrant, the Company may deem and treat the Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. 1.5 Transfer and Assignment. Prior to 9:00 a.m., M.S.T., on July ____, 1998, this Warrant may not be sold, hypothecated, exercised, assigned or transferred, except to individuals who are officers of the Representative or any successor to its business or pursuant to the laws of descent and distribution. After 9:00 a.m., M.S.T., on July ____, 1998, and until the expiration of the Warrant, the Warrant shall be assignable and transferable in accordance with and subject to the provisions of the Securities Act of 1933; provided, however, that if not exercised immediately upon such transfer or assignment, the Warrant shall immediately lapse. 1.6 Method for Assignment. Any assignment permitted hereunder shall be made by surrender of this Warrant to the Company at its principal office with the form of assignment attached hereto duly executed and funds sufficient to pay any transfer tax. In such event, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation thereof at the corporate office of the Company together with a written notice signed by the Holder, specifying the names and denominations in which such new Warrants are to be issued. 1.7 Rights of Holder. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of this Warrant and prior to its exercise, any of the following shall occur: 1.7.1 the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings; as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or 1.7.2 the Company shall offer to the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or 1.7.3 there shall be proposed any capital reorganization or reclassification of the Common Stock, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another entity; or -3- 1.7.4 there shall be proposed a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall cause to be mailed to the Holder, at the earliest practicable time (and, in any event, not less than thirty (30) days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken to determine the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the Common Stock and other securities and property deliverable upon exercise of this Warrant. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be (on which date, in the event of voluntary or involuntary dissolution, liquidation or winding up of the Company, the right to exercise this Warrant shall terminate). Without limiting the obligation of the Company to provide notice to the holder of actions hereunder, it is agreed that failure of the Company to give notice shall not invalidate such action of the Company. 1.8 Lost Certificates. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such reasonable terms as to indemnity or otherwise as it may impose (which shall, in the case of a mutilated Warrant, include the surrender thereof, issue a new Warrant of like denomination and tenor as, and in substitution for, this Warrant, which shall thereupon become void. Any such new Warrant shall constitute an additional contractual obligation of the Company, whether or not the Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. 1.9 Covenants of the Company. The Company covenants and agrees as follows: 1.9.1 at all times it shall reserve and keep available for the exercise of this Warrant such number of authorized Shares as are sufficient to permit the exercise in full of this Warrant; 1.9.2 prior to the issuance of any Shares upon exercise of this Warrant, the Company shall secure the listing of such Shares upon any securities exchange or automated quotation system upon which the shares of the Company's Common Stock are listed for trading; and 1.9.3 all Shares here when issued upon the exercise of this Warrant will be validly issued, fully paid, non-assessable and free of preemptive rights. -4- 2. Adjustment of Purchase Price and Number of Shares Purchasable Upon Exercise 2.1 Recapitalization. In case the Company shall, while this Warrant remains unexercised, in whole or in part, and in force effect a recapitalization of such character that the Shares purchasable hereunder shall be changed into or become exchangeable for a larger or smaller number of shares, then, after the date of record for effecting such recapitalization, the number of Shares Common Stock which the Holder hereof shall be entitled to purchase hereunder shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason such recapitalization, and of the Purchase Price, per share, whether or not in effect immediately prior to the time of such recapitalization, of such recapitalized Common Stock shall in the case of an increase in the number of such Shares be proportionately reduced, and in the case of a decrease in the number of such Shares shall be proportionately increased. For the purposes of this Section 2.1, a stock dividend, stock split-up or reverse split shall be considered as a recapitalization and as an exchange for a larger or smaller number of shares, as the case may be. 2.2 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then, as a condition of such consolidation, merger or sale or conveyance, adequate provision shall be made whereby the Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock or securities as may be issued in connection with such consolidation, merger or sale or conveyance, with respect to or in exchange for the number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such consolidation, merger or sale or conveyance, not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof shall be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. 2.3 Notice of Dissolution or Liquidation. Except as otherwise provided in Section 2.2 above, in the case of any sale or conveyance of all or substantially all of the assets of the Company in connection with a plan of complete liquidation of the Company, in the case of the dissolution, liquidation or winding-up of the Company, all rights under this Warrant shall terminate on a date fixed by the Company, such date so fixed to be not earlier than the date of the commencement of the proceedings for such dissolution, liquidation or winding-up and not later than thirty (30) days after such commencement date. Notice of such termination of purchase rights shall be given to the Holder at least thirty (30) days prior to such termination date. 2.4 Statement of Adjustment. Any adjustment pursuant to the provisions of this Section 2 shall be made on the basis of the number of Shares of Common Stock which the Holder would -5- have been entitled to acquire by exercise of this Warrant immediately prior to the event giving rise to such adjustment and, as to the Purchase Price per Share in effect immediately prior to the rise to such adjustment. Whenever any such adjustment is required to be made, the Company shall forthwith determine the new number of Shares of Common Stock which the Holder hereof shall be entitled to purchase hereunder and/or such new Purchase Price per Share and shall prepare, retain on file and transmit to the Holder within 10 days after such preparation a statement describing in reasonable detail the method used in calculating such adjustment. 2.5 No Fractional Shares. Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a Share in connection with the exercise of this Warrant, and in any case where the Holder would, except for the provisions of this Section 2.6, be entitled under the terms of this Warrant to receive a fraction of a Share upon such exercise, the Company shall upon the exercise and receipt of the Purchase Price issue the largest number of whole Shares purchasable upon exercise of this Warrant. The Company shall not be required to make any cash or other adjustment in respect of such fraction of a Share to which the Holder would otherwise be entitled. The Holder, by the acceptance of this Warrant, expressly waives his right to receive a certificate for any fraction of a Share upon exercise hereof. 2.6 No Change in Form Required. The form of Warrant need not be changed because of any change pursuant to this Section in the Purchase Price or in the number of Shares purchasable upon exercise of this Warrant. 3. Registration Under the Securities Act of 1933 3.1 Registration and Legends. This Warrant has been registered under the Securities Act of 1933, as amended ("Act"). The Shares issuable upon exercise of this Warrant have been registered under the Act on Form SB-2, SEC File No. 333-29985 ("Registration Statement"). Upon exercise, in part or in whole, of this Warrant, the Shares shall bear the following legend: The shares represented by the certificate have been registered under the Securities Act of 1933, as amended, solely for sale to the holder of a warrant to purchase, which holder may be deemed to be an underwriter of such shares within the provisions and for purposes only of the Securities Act of 1933, as amended. The issuer of these shares will agree to a transfer hereof only if: (1) an amended or supplemented prospectus setting forth the terms of the offer has been filed as part of a post-effective amendment to the Registration Statement under which these shares are registered or as part of a new registration statement under which these shares are registered, if then required, and such post-effective registration statement or new registration statement has become effective under the Securities Act of 1933, as amended, or (2) counsel to the issuer is reasonably satisfied that no such post-effective amendment or new registration statement is required. -6- 3.2 No-Action Letter. The Company agrees that it shall be satisfied that no post-effective amendment or new registration is required for the public sale of the Shares if it shall be presented with a letter from the Staff of the Securities and Exchange Commission ("Commission") stating in effect that, based upon stated facts which the Company shall have no reason to believe are not true in any material respect, the Staff will not recommend any action to the Commission if such Shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which such shares are to be registered or new registration statement is required to be filed. 3.3 Registration Rights. The Company has agreed, upon the Representative's demand, to register the Shares underlying the Warrants, to file all necessary post-effective amendments to the Registration Statement or a new Registration Statement, if then required, and to file all necessary undertakings with the Securities and Exchange Commission so as to permit the Representative, or any assignee of the Representative, the right to sell publicly the Shares issued on exercise of the Warrants, on one occasion at any time within five (5) years from the effective date of the Company's Registration Statement filed in 1997, as described in the Underwriting Agreement ("Underwriting Agreement") between the Company and the Representative, dated ___________, 1997. 3.4 Inclusion in Company Registration Statement. In the event that the Representative does not exercise its right to demand that the Shares underlying the Warrants be registered, the Company agrees to include any Shares issuable upon exercise of the Warrants in any Registration Statement filed by the Company at any time within five (5) years from the effective date of the Company's Registration Statement as filed in 1997, as described in the Underwriting Agreement. 3.5 Covenants Regarding Registration. In connection with any registration under Section 3.2 or 3.3 hereof, the Company covenants and agrees as follows: 3.5.1 The Company shall use its best efforts to have any post-effective amendment or new registration statement declared effective at the earliest possible time, and shall furnish such number of prospectuses as shall be reasonably requested. 3.5.2 The Company shall pay all costs, fees, and expenses in connection with all post-effective amendments or new registration statement sunder Section 3.2 and Section 3.3 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses, except that the Company shall not pay for any of the following costs and expenses: (a) underwriting discounts and commissions allocable to the Shares, (b) state transfer taxes, (c) brokerage commissions, (d) fees and expenses of counsel and accountants for the holder of the Warrants or Shares. 3.5.3 The Company will take all necessary action which may be required in qualifying or registering the Shares included in any Registration Statement or post-effective amendment or new registration statement for offering and sale under the securities or blue sky -7- laws of such states as are requested by the holders of such Shares, provided that the Company shall not be obligated to execute or file any general consent to service or process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 3.5.4 The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 3.6 Indemnity. 3.6.1 The Company shall indemnify and hold harmless each person registering securities pursuant to this Section ("Seller") and each underwriter, within the meaning of the Act, who may purchase from or sell for any Seller any of the Shares from and against any and all losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or new registration statement or any supplemented prospectus under the Act included therein required to be filed or furnished by reason of this Section, or caused by any omission or alleged omission to state therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Seller or underwriter within the meaning of such Act; provided, however, that the indemnity agreement set forth in the Section 3.6 with respect to any prospectus which shall be subsequently amended prior to the written confirmation of sale of any Shares shall not inure to the benefit of any Seller or underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased such Shares which are the subject thereof (or to the benefit of any person controlling such Seller or underwriter), if such Seller or underwriter failed to send or give a copy of the prospectus as amended to such person at or prior to the written confirmation of the sale of such Shares and if such amended prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, or liability. 3.6.2 Each Seller which avails itself of the procedures under Section 3 shall indemnify and secure the agreement of any underwriter which the Seller employs to indemnify the Company, its directors, each officer signing the related post-effective amendment or registration statement and each person, if any, who controls the Company, within the meaning of the Act from and against any losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or registration statement or any prospectus required to be filed or furnished by reason of this Section or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Company by any such Seller or underwriter expressly for use therein. -8- 3.7 Agreements. The agreements in this Section shall continue in effect regardless of the exercise and surrender of this Warrant. 3.8 Proceeds of Sale. The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 4. Other Matters 4.1 Payment of Taxes. The Company will from time to time promptly pay, subject to the provisions of Section 1.2.4 hereof, all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of this Warrant or the Shares purchasable upon the exercise of this Warrant. 4.2 Binding Effect. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns hereunder. 4.3 Notices. Notices or demands pursuant to this Warrant to be given or made by the Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, as follows: Premium Cigars International, Ltd. 10855 N. Frank Lloyd Wright Blvd. Suite 100-102 Scottsdale, Arizona 85259 Notices to the Holder provided for in this Warrant shall be deemed given or made by the Company if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed to the Holder at his last known address as it shall appear on the books of the Company. 4.4 Governing Law. The validity, interpretation and performance of this Warrant shall be governed by the laws of the State of Arizona. 4.5 Parties Bound and Benefitted. Nothing in this Warrant expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements contained in this Warrant shall be for the sole and exclusive benefit of the Company and its successors and of the Holder, its successors and, if permitted, its assignees. 4.6 Headings. The Article headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. -9- IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its corporate seal as of the _____ day of July, 1997. PREMIUM CIGARS INTERNATIONAL, LTD. By: ------------------------------------ Steven J. Lambrecht [Corporate Seal] Attest: - ----------------------------------- , Secretary - ------------------------ -10- PREMIUM CIGARS INTERNATIONAL, LTD. Assignment FOR VALUE RECEIVED, W. B. McKEE SECURITIES, INC. hereby sells, assigns and transfers unto ________________ the within Warrant and the rights represented thereby, and does hereby irrevocably constitute and appoint _______________________________ Attorney, to transfer said Warrant on the books of the Company, with full power of substitution. Dated: ----------------------- Signed: ----------------------------- Signature guaranteed: - ----------------------------- -11- Subscription Form PREMIUM CIGARS INTERNATIONAL, LTD. 10855 N. Frank Lloyd Wright Blvd. Suite 100-102 Scottsdale, Arizona 85259 The undersigned hereby irrevocably subscribes for the purchase of the shares ("Shares") of your Common Stock pursuant to and in accordance with the terms and conditions of this Warrant, and herewith makes payment, covering such Shares of Common Stock which should be delivered to the undersigned at the address stated below, and, if said number of Shares shall not be all of the Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the remaining Shares purchasable hereunder be delivered to the undersigned at the address stated below. The undersigned agrees that: (1) the undersigned will not offer, sell, transfer or otherwise dispose of any such Shares unless either (a) a registration statement, or post-effective amendment thereto, covering such Shares have been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended ("Act"), and such sale, transfer or other disposition is accompanied by a prospectus meeting the requirements of Section 10 of the Act forming a part of such registration statement, or post-effective amendment thereto, which is in effect under the Act covering the Shares to be so sold, transferred or otherwise disposed of, or (b) counsel to PREMIUM CIGARS INTERNATIONAL, LTD. ("Company") satisfactory to the undersigned has rendered an opinion in writing and addressed to the Company that such proposed offer, sale, transfer or other disposition of the Shares is exempt from the provisions of Section 5 of the Act in view of the circumstances of such proposed offer, sale, transfer or other disposition; (2) the Company may notify the transfer agent for its Common Stock that the certificates for the Shares acquired by the undersigned are not to be transferred unless the transfer agent receives advice from the Company that one or both of the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and (3) the Company may affix the legend set forth in Section 3.1 of this Warrant to the certificates for Shares hereby subscribed for, if such legend is applicable. Dated: Signed: -------------------------- --------------------------- Address: -------------------------- ---------------------------------- Signature Guaranteed: - --------------------------------- -12- EX-5.1 9 OPINION OF TITUS, BRUECKNER & BERRY, P.C. July 28, 1997 Premium Cigars International, Ltd. Suite 3 15651 North 83rd Way Scottsdale, Arizona 85260 Re: Form SB-2 Registration Statement -------------------------------- Gentlemen: We have acted as counsel for Premium Cigars International, Ltd., an Arizona corporation (the "Company"), in connection with the preparation of the Registration Statement relating to 2,000,000 shares of Common Stock, no par value, of the Company as well as up to 300,000 shares available pursuant to the underwriter's over-allotment option and up to 200,000 issuable pursuant to representative's warrants (the "Securities"). As your counsel in connection with preparation of the Registration Statement, we have undertaken such examination as we have deemed relevant to such preparation. On the basis of and subject to the foregoing, it is our opinion that the Securities to be issued and sold by the Company as described in the Registration Statement have been duly authorized and, when issued and sold, will be duly issued, fully paid and non-assessable shares of securities of the Company. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the Rules and Regulations of the Securities and Exchange Commission thereunder. This opinion is to be used only in connection with the offer of sale of the Securities as variously referred to herein while the Registration Statement is in effect. TITUS, BRUECKNER & BERRY, P.C. /s/ Titus, Brueckner & Berry, P.C. EX-5.2 10 OPINION OF TITUS, BRUECKNER & BERRY [TITUS, BRUECKNER & BERRY LETTERHEAD] July 28, 1997 Premium Cigars International, Ltd. Suite 3 15651 North 83rd Way Scottsdale, Arizona 85260 Re: Form SB-2 Registration Statement -------------------------------- Gentlemen: We have acted as counsel for Premium Cigars International, Ltd., an Arizona corporation (the "Company"), in connection with the preparation of the Registration Statement relating to 1,900,000 shares of Common Stock, no par value, of the Company as well as up to 285,000 shares available pursuant to the underwriter's over-allotment option and up to 170,989 issuable pursuant to representative's warrants. As your counsel in connection with preparation of the Registration Statement, we have undertaken such examination as we have deemed relevant to such preparation. On the basis of and subject to the foregoing, it is our opinion that the shares to be issued and sold by the Company as described in the Registration Statement (including the shares issuable after valid exercise of the representative's warrants) have been duly authorized and, when issued and sold, will be duly issued, fully paid and non-assessable shares of the Company. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Registration Statement. In giving such consent, we do not thereby admit that we come within the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended, or the Rules and Regulations of the Securities and Exchange Commission thereunder. This opinion is to be used only in connection with the offer of sale of the Securities as variously referred to herein while the Registration Statement is in effect. Very truly yours, EX-10.4 11 PROMISSORY NOTE BETWEEN C. JONES AND PCI $43,112.50 DATE: December 31, 1996 PHOENIX, ARIZONA PROMISSORY NOTE --------------- FOR VALUE RECEIVED, the undersigned Colin A. Jones ("Maker") promises and agrees to pay to the order of Premium Cigars International, Ltd., an Arizona corporation ("Payee"), at the mailing address of Payee, or at such other place as the holder hereof may from time to time designate, the principal sum of FORTY THREE THOUSAND ONE HUNDRED TWELVE AND 50/100 DOLLARS ($43,112.50), together with interest (defined herein) in lawful money of the United States, on the unpaid amount of said sum at the Interest Rate (as defined herein) or the Default Rate (as defined herein), whichever is applicable. 1. Payments and Interest Rate a. Commencing on the date hereof, the unpaid balance of this Promissory Note ("Note"), shall accrue interest ("Interest") at the rate ("Interest Rate") of eight percent (8.0%) per annum. All unpaid interest and principal shall be due and payable on or before March 31, 1999. b. During any event of default as defined herein, the Interest Rate shall be twelve percent (12.0%) per annum ("Default Rate"). Interest shall accrue at the Default Rate on the unpaid principal balance immediately upon any Event of Default without notice to Maker. The existence or occurrence of either one or both of the following events shall constitute an event of default ("Event of Default") shall be defined as the failure by Maker to make any payment of principal or interest or late charges due under this Note in accordance with the terms of this Note. Upon the occurrence of an Event of Default, the Payee shall have the right to declare the remaining balance of this Note immediately due and payable and the Payee shall have and may exercise any and all rights and remedies available at law or in equity and also any and all rights and remedies provided in any security for this Note. 2. Prepayment. The Maker may prepay any portion of the remaining balance of this Note at any time without penalty. Any partial prepayment shall not postpone the due date of any subsequent payments or change the amount of such payments unless the Payee agrees otherwise in writing. 3. Attorneys' Fees. Maker, endorsers, guarantors, sureties, accommodation parties hereof, and all other persons liable or to become liable on this Note, jointly and severally agree to pay all fees and costs incurred in connection with the collection of the amounts due and owing under this Note, including attorneys' fees and all costs. 4. Governing Law and Severability. This Note is made pursuant to, and shall be construed and governed by, the laws of the State of Arizona and Maker irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of Maricopa County, State of Arizona and all courts competent to hear appeals therefrom. If any provision of this Note is construed or interpreted by a court of competent jurisdiction to be void, invalid or unenforceable, such decision shall affect only those provisions so construed or interpreted and shall not affect the remaining provisions of the Note. 5. Time of Essence. Time is of the essence of this Note. 6. Notices. All notices under this Note shall be in writing and shall be deemed delivered upon personal delivery to the authorized representatives of either party or three days after being sent by certified mail (registered mail if to an address outside of the United States), return receipt requested, postage prepaid, addressed to the respective parties at the addresses set forth below. 7. Waiver. Maker for himself and for his successors, transferees and assigns, hereby waives presentment and demand for payment, protest, notice of protest and nonpayment, dishonor and notice of dishonor, bringing of suit, lack of diligence or delays in collection or enforcement of this Note and notice of the intention to accelerate, the release of any party liable, the release of any security for the debt, the taking of any additional security and any other indulgence or forbearance. Maker agrees that this Note and any or all payments coming due hereunder may be extended or renewed from time to time without in any way affecting or diminishing Maker's liability under this Note. IN WITNESS WHEREOF, Maker has executed this Note as of the date set forth above. "PAYEE" "MAKER" PREMIUM CIGARS INTERNATIONAL, LTD. an Arizona corporation /s/ Colin A. Jones --------------------------------- Colin A. Jones Address: Address: 4440 East Cortez - -------------------------- ---------------------------------- Scottsdale Arizona - -------------------------- ---------------------------------- - -------------------------- ---------------------------------- -2- EX-10.5 12 PROMISSORY NOTE BETWEEN G. LAMBRECHT AND PCI $43,112.50 DATE: December 31, 1996 PHOENIX, ARIZONA PROMISSORY NOTE --------------- FOR VALUE RECEIVED, the undersigned Greg P. Lambrecht ("Maker") promises and agrees to pay to the order of Premium Cigars International, Ltd., an Arizona corporation ("Payee"), at the mailing address of Payee, or at such other place as the holder hereof may from time to time designate, the principal sum of FORTY THREE THOUSAND ONE HUNDRED TWELVE AND 50/100 DOLLARS ($43,112.50), together with interest (defined herein) in lawful money of the United States, on the unpaid amount of said sum at the Interest Rate (as defined herein) or the Default Rate (as defined herein), whichever is applicable. 1. Payments and Interest Rate a. Commencing on the date hereof, the unpaid balance of this Promissory Note ("Note"), shall accrue interest ("Interest") at the rate ("Interest Rate") of eight percent (8.0%) per annum. All unpaid interest and principal shall be due and payable on or before March 31, 1999. b. During any event of default as defined herein, the Interest Rate shall be twelve percent (12.0%) per annum ("Default Rate"). Interest shall accrue at the Default Rate on the unpaid principal balance immediately upon any Event of Default without notice to Maker. The existence or occurrence of either one or both of the following events shall constitute an event of default ("Event of Default") shall be defined as the failure by Maker to make any payment of principal or interest or late charges due under this Note in accordance with the terms of this Note. Upon the occurrence of an Event of Default, the Payee shall have the right to declare the remaining balance of this Note immediately due and payable and the Payee shall have and may exercise any and all rights and remedies available at law or in equity and also any and all rights and remedies provided in any security for this Note. 2. Prepayment. The Maker may prepay any portion of the remaining balance of this Note at any time without penalty. Any partial prepayment shall not postpone the due date of any subsequent payments or change the amount of such payments unless the Payee agrees otherwise in writing. 3. Attorneys' Fees. Maker, endorsers, guarantors, sureties, accommodation parties hereof, and all other persons liable or to become liable on this Note, jointly and severally agree to pay all fees and costs incurred in connection with the collection of the amounts due and owing under this Note, including attorneys' fees and all costs. 4. Governing Law and Severability. This Note is made pursuant to, and shall be construed and governed by, the laws of the State of Arizona and Maker irrevocably and unconditionally submits to the non-exclusive jurisdiction of the courts of Maricopa County, State of Arizona and all courts competent to hear appeals therefrom. If any provision of this Note is construed or interpreted by a court of competent jurisdiction to be void, invalid or unenforceable, such decision shall affect only those provisions so construed or interpreted and shall not affect the remaining provisions of the Note. 5. Time of Essence. Time is of the essence of this Note. 6. Notices. All notices under this Note shall be in writing and shall be deemed delivered upon personal delivery to the authorized representatives of either party or three days after being sent by certified mail (registered mail if to an address outside of the United States), return receipt requested, postage prepaid, addressed to the respective parties at the addresses set forth below. 7. Waiver. Maker for himself and for his successors, transferees and assigns, hereby waives presentment and demand for payment, protest, notice of protest and nonpayment, dishonor and notice of dishonor, bringing of suit, lack of diligence or delays in collection or enforcement of this Note and notice of the intention to accelerate, the release of any party liable, the release of any security for the debt, the taking of any additional security and any other indulgence or forbearance. Maker agrees that this Note and any or all payments coming due hereunder may be extended or renewed from time to time without in any way affecting or diminishing Maker's liability under this Note. IN WITNESS WHEREOF, Maker has executed this Note as of the date set forth above. "PAYEE" "MAKER" PREMIUM CIGARS INTERNATIONAL, LTD. an Arizona corporation /s/ Greg P. Lambrecht --------------------------------- Greg P. Lambrecht Address: Address: 15651 N. 83rd Way Suite 3 - -------------------------- --------------------------------- Scottsdale, Arizona 85260 - -------------------------- --------------------------------- - -------------------------- --------------------------------- -2- EX-10.7 13 AGREEMENT BETWEEN PCI AND TSG PREMIUM CIGARS INTERNATIONAL, LTD. 10855 North Frank Lloyd Wright Boulevard, Suite 102 Scottsdale, Arizona 85259 January 7, 1997 Syed A. Shaikh, President TSG Import, Export and Manufacturing Corporation Re: Agreement between PCI and TSG for the supply of brand name and private label cigars to PCI by TSG. Dear Shaikh: This letter agreement (the "Letter Agreement") shall set forth our understanding of the initial agreement between Premium Cigars International, Ltd., an Arizona corporation ("PCI"), and TSG Import, Export and Manufacturing Corporation, a Maryland corporation ("TSG"), regarding the supply of brand name and private label cigars to PCI by TSG. It is our understanding that the agreement between TSG and PCI (the "Initial Agreement") is as follows: 1. Term of Agreement. The term of the Initial Agreement shall be for six (6) calendar months from the date of this Letter Agreement (the "Agreement Term"). 2. Minimum Purchase by PCI. PCI agrees to order, in the aggregate, from TSG a minimum of * cigars per calendar month (the "Minimum Orders") and take delivery of such cigars upon tender by TSG. The cigars shall be delivered to PCI by TSG according to the instructions specified by each purchase order provided to TSG by PCI. Notwithstanding the forgoing, any cigars ordered by and delivered to PCI that are returned to TSG due to quality problems shall be included in the total number of cigars applied to the Minimum Orders for a calendar month even if a refund of payment for such returned cigars is made by TSG to PCI. 3. Output Requirements. The initial output requirement for TSG shall be * cigars per calendar month (the "Output Requirement"). PCI may, in any calendar month, order quantities greater than the Output Requirement, however, TSG shall not be required to deliver to PCI, pursuant to such orders, quantities of cigars in a total aggregate amount in excess of the then existing Output Requirement. PCI may increase the Output Requirement at any time by increments of up to * cigars per month upon the provision of sixty (60) calendar days prior * Confidential portions omitted and filed separately with the Commission. Syed A. Shaikh, President TSG Import, Export and Manufacturing Corporation January 9, 1997 Page 2 written notice to TSG of such increase. TSG may reduce the Output Requirement by increments of up to * cigars per month upon sixty (60) calendar days prior written notice to PCI of such decrease if the total number of cigars ordered by PCI for each of the three (3) calendar months prior to the delivery of such notice was below the then existing Output Requirement. Notwithstanding the foregoing, upon any reduction of the Output Requirement by TSG, the resulting amount of the Output Requirement shall not be less than the highest total number of cigars ordered by PCI in any single calendar month prior to such reduction of the Output Requirement by TSG. 4. Taxes and Shipping. Except for the state taxes applicable to each cigar delivered to PCI by TSG in the United States of America, TSG agrees to pay all other federal, state and other governmental taxes, duties and tariffs associated with each cigar delivered to PCI pursuant to a PCI purchase order. TSG shall also pay all transportation, shipping and handling charges for all cigars delivered to PCI at such locations in the United States as specified by PCI purchase orders. 5. Exclusive Supplier; * Supplier. TSG shall serve as PCI's exclusive supplier of the name brand of cigars sold under the brand labels "Santiago", "Anillo-De-Oro", "E. Leon Jimenez" and "Carbonnel" (collectively the "Exclusive Cigars"). TSG agrees to supply the Exclusive Cigars to PCI at a price * . TSG agrees to maintain such * pricing during the Agreement Term. Failure of TSG to maintain such * pricing shall be considered a material breach of its obligations which may only be cured, within the time period specified by Paragraph 12 below, by an immediate refund of any and all monies overpaid by PCI to TSG because of such breach. 6. Private Label Cigars. TSG agrees to supply to PCI cigars labeled under PCI brand names (each a "Private Label Brand" and collectively the "Private Label Brands"). Unless otherwise specified in writing to TSG by PCI, the first Private Label Brand to be supplied by TSG shall be of the same or better quality (in tobacco leaf, wrapping, packaging and manufacturing) as * cigars. Subsequent Private Label Brands to be supplied by TSG to PCI and the price of each such brand shall be specified by mutual agreement of TSG and PCI. All Private Label Brands shall be manufactured by TSG exclusively for PCI. Notwithstanding the foregoing and except for custom blends developed specially for or by PCI, TSG shall have the right to produce cigars under different labels for TSG customers other than PCI. * Confidential portions omitted and filed separately with the Commission. Syed A. Shaikh, President TSG Import, Export and Manufacturing Corporation January 9, 1997 Page 3 7. Orders. TSG shall use its best efforts to fill all PCI purchase orders as written. TSG may, however, at the same price specified in a PCI purchase order and upon the written consent of PCI, make substitutions of the same or better quality of cigars for any or all cigars ordered by PCI in such purchase order other than Private Label Cigars. However, any quantity of substituted cigars meeting the specifications of this Paragraph 7 and offered to and refused by PCI shall be included in the determination of TSG's satisfaction of the Output Requirement. PCI shall not be required to accept delivery of or make payment for any cigars delivered by TSG to PCI not pursuant to a PCI purchase order. 8. Returns. Within ten (10) business days of PCI's receipt of any cigars delivered by TSG pursuant to a PCI purchase order, PCI may return any or all of such cigars because of damage or quality problems. Pursuant to the written instruction of PCI, TSG shall immediately either replace such returned cigars or refund all monies paid by PCI for such returned cigars. 9. Payment. Payment by PCI for a purchase order shall be made in full at the time of PCI's placing of such purchase order. 10. Pricing. At least once per each * period, TSG shall provide PCI with a dated pricing sheet (the "Price Sheet") listing (i) a description of the then current prices (in U.S. dollars) of all cigars able to be supplied to PCI by TSG and (ii) the availability of each such cigar which availability shall include minimum delivery time and maximum quantity available to be supplied during the following sixty (60) day period. TSG shall guarantee * pricing on all cigars listed on the Price Sheet except for cigars * for which TSG shall guarantee * pricing. The availability of cigars as listed on the price sheets issued by TSG shall not be guaranteed by TSG. 11. Compliance. TSG hereby warrants that all cigars delivered to PCI shall meet all federal and state rules, regulations and standards applicable to such tobacco products and that such cigars shall not contain any materials or substances (i) not normally found in such tobacco products or (ii) that are illegal or in violation of applicable federal and state rules, regulations and standards. TSG agrees to indemnify and hold PCI harmless from any loss, claim, damage, cost or expense resulting from TSG's breach of its warranties specified in this paragraph 11. 12. Termination for Breach. If a material breach of the Initial Agreement by either party is not cured within thirty (30) calendar days of the non-breaching party's delivery of * Confidential portions omitted and filed separately with the Commission. Syed A. Shaikh, President TSG Import, Export and Manufacturing Corporation January 9, 1997 Page 4 written notice to the breaching party of such breach, the non-breaching party may, at its option, immediately terminate the Initial Agreement. 13. Choice of Law. This Letter Agreement has been made and entered into in the State of Arizona and it and the Initial Agreement shall be construed in accordance with the laws of the State of Arizona, excluding its choice of law provisions. The parties agree that the Courts of Arizona, including Maricopa County, Arizona Superior Court shall be the proper and exclusive forum for any action relating to a dispute between the parties arising out of, or related to, this Letter Agreement and the Initial Agreement. Each party consents to the in personam jurisdiction of said court. 14. Formal Agreement. PCI and TSG agree to negotiate, at least thirty (30) days prior to the end of the Agreement Term, a more formal written agreement memorializing the terms and conditions of the agreement between the parties (the "Formal Agreement"). If the Formal Agreement is not executed by both PCI and TSG thirty days (30) prior to the end of the Agreement Term, the Initial Agreement shall automatically terminate at the end of the Agreement Term. Furthermore, until such time as the Formal Agreement is executed by both PCI and TSG, this Letter Agreement and any written modifications hereof signed by both PCI and TSG, shall be the sole and complete understanding between the parties as to the Initial Agreement and shall supersede any prior understandings or written or oral agreements between the parties respecting the subject matter hereof. No oral modifications of this Letter Agreement or the Initial Agreement shall be binding on either party. 15. Right of Cancellation. Either party, without cause and with a minimum of sixty (60) days written notice to the other party, may cancel this Agreement. All terms and conditions of this Agreement shall remain in full force and effect during the sixty (60) day period after notice of cancellation has been tendered. At the close of the sixty (60) day period, the parties agree to conduct a final accounting of all cigars shipped and payments made and reconcile any payments or refunds due. If the foregoing accurately reflects your understanding of our agreement, please execute this Letter Agreement where indicated below and return a copy of the executed letter to me. If you have any questions, or this letter misstates your understanding of our agreement, please call me. We look forward to continuing our relationship with you on this contract. * Confidential portions omitted and filed separately with the Commission. Syed A. Shaikh, President TSG Import, Export and Manufacturing Corporation January 9, 1997 Page 5 Very truly yours, Premium Cigars International, Ltd. By: /s/ Steve Lambrecht --------------------------- Steve Lambrecht Its: Chief Executive Officer AGREED TO AND ACCEPTED BY: TSG Import, Export and Manufacturing Corporation By: /s/ Syed A. Shaikh ------------------------- Syed A. Shaikh Its: President * Confidential portions omitted and filed separately with the Commission. EX-10.8 14 MERCHANDISING AGREEMENT CIGAR DISPLAY AND MERCHANDISING AGREEMENT ----------------------------------------- This Cigar Display and Merchandising Agreement (this "Agreement") is entered into as of the 1st day of April, 1997 (the "Effective Date"), between Premium Cigars International, Ltd. ("PCI") and The Southland Corporation ("Southland"). 1. General Program Description. As more fully set forth in this Agreement, PCI shall provide to participating 7-Eleven convenience stores cigar humidor counter displays in connection with the retail sale of PCI cigar products (the "Products") at the stores (the "Program"). 2. Stores. 2.01 For purposes of this Agreement, corporate-owned and operated 7-Eleven convenience stores shall be referred to as "Corporate Stores" or "Stores." "Stores" shall not include, except to the extent section 2.02 below applies, any 7-Eleven convenience stores which are or hereafter may be operated by Southland's franchisees or area licensees. 2.02 PCI acknowledges that Southland's 7-Eleven franchisees or area licensees are independent contractors who determine the manner and means of operating the 7-Eleven stores pursuant to the respective franchise or license agreement with Southland and arrangements relating thereto and, as such, generally determine the selection of products and services for the stores and the establishment of retail selling prices for such products and services and, therefore, solely determine whether to participate in the Program. The term "Participating Stores" or "Stores" shall include Southland's franchisees or area licensees to the extent each such franchisee or area licensee independently elects to participate in the Program. In such event, all rights, duties and obligations running from PCI to Southland will also run between PCI and each such franchisee or area licensee. Unless otherwise described herein, Corporate Stores and Stores operated by participating franchisees and licensees may collectively at times, be referred to as "Participating Stores." 2.03 Southland shall not be responsible for any Program obligation or the breach of any such obligation as it may relate to a Participating Store operated by a franchisee or area licensee. Southland will reasonably cooperate with PCI to communicate the terms and conditions of the Program to franchisees and area licensees. Southland will use its reasonable efforts, to the extent it is permitted, to solicit franchisee and area licensee participation under the Program and will reasonably cooperate with PCI as to issues regarding Program eligibility and participation. 3. Participation Agreement. PCI requires that each franchisee that independently elects to participate in the Program execute the Participation Form attached to this Agreement as Exhibit A (the "Participation Agreement"). PCI acknowledges that as to an area licensee, A * Confidential portions omitted and filed separately with the Commission. separate agreement of participation agreement may be necessary in connection with area licensee participation. Southland shall make available the Program materials and Participation Agreement to its franchisees and shall provide PCI with copies of the executed Participation Agreements as they become available to Southland. 4. Term of Agreement. 4.01 The term of this Agreement shall begin on the Effective Date and shall continue until March 30, 1999. unless otherwise extended or renewed only upon the mutual agreement of the parties (the "Term"). Except as otherwise specified by Section 4.03 below, either party may terminate this Agreement, at any time, without cause, upon sixty (60) days prior written notice to the other party. 4.02 Except as otherwise specified by Section 4.3 below, participating Stores operated by franchisees or area licensees may terminate their participation in the Program, at any time, without cause, upon sixty (60) days prior written notice to Southland. 4.03 Except as otherwise provided under Section 14 herein, during the first full year of the term of this Agreement: (i) Southland may terminate this Agreement as to all stores only upon thirty (30) days written notice to PCI that PCI has breached PCI's obligations under this Agreement and such breach is not cured by PCI within fifteen (15) calendar days of PCI's receipt of such notice from Southland and (ii) Participating Stores operated by franchisees or area licensees may terminate their participation in the Program only upon thirty (30) days written notice to Southland that PCI has breached PCI's obligations under this Agreement and such breach is not cured by PCI within fifteen (15) calendar days of PC"s receipt from Southland of a copy of such notice from a Participating Store. 5. Humidor Displays. 5.01 PCI shall provide each Participating Store with either a * humidor counter display or * humidor counter display in connection with the sale of the Products (the "Display"). The designations specified by this Section 5.01 are for descriptive purposes only and are not exact size specifications for the Displays. 5.02 The Display shall be provided to Participating Stores at the sole cost of PCI. Participating Stores shall be responsible for the care and maintenance of the Displays. Any damaged, lost or stolen Displays shall be replaced by PCI, with the cost of such replacement to be charged to the Participating Store. The cost for Display replacement shall be prorated to the Store based upon a * schedule of PCI's cost as set forth in Exhibit B. Replacement of Displays due to manufacturing defects or normal wear and tear shall be made by PCI at no charge or cost to the Participating Store. * Confidential portions omitted and filed separately with the Commission. 2 5.03 PCI represents that the Displays provided under this Agreement are available to other PCI's customers on a comparable basis and that such Displays are being provided under this Agreement based on PCI's belief that the Displays shall increase the visibility and sales of the Products. PCI further represents that the Displays are provided at PCI's sole cost and expense and without any additional charge or mark-up on PCI Products above PCI's standard wholesale price for such products. 5.04 Title and ownership to the Displays provided under this Agreement, including any replacements for lost or stolen Displays, shall remain with PCI. Upon the expiration or termination of this Agreement, Southland and Participating Stores shall cooperate in making available to PCI for return all Displays placed in the Stores. All costs relating to the removal of the Displays from the Stores and the return of Displays to PCI shall be the responsibility of PCI. 6. Program Display and Merchandising Requirements. 6.01 At least one Display shall be placed in a mutually agreed upon location at or near the front or main sales counter at the Store or such other location as may be required by any law or local ordinance. To the extent reasonably possible, such location shall provide customers of the Store with a complete view of the Display. 6.02 Products shall only be placed in and sold from the Displays. Only PCI Products may be merchandised in the Displays. PCI and Southland acknowledge that specially packaged Products or other accessory Products available for purchase through PCI may be merchandised outside the Display. 6.03 Stores may continue to market and sell tobacco and other cigar and related products not provided by PCI so long as such products are not sold in or from the Displays or other non-PCI humidors. 6.04 PCI and Southland shall develop mutually agreed upon sales and merchandising programs in connection with the sale of the Products that will be recommended and presented to the Participating Stores for implementation. 7. Program Disqualification. Notwithstanding the provisions of Section 4 above, PCI may disqualify a Participating Store if, in PCI's determination, the Store is not in compliance with the Display and merchandising requirements set forth in section 6 of this Agreement. PCI shall provide each such Store with written notice of non-compliance and if such non-compliance is not remedied by the Store within ten (10) days, PCI may permanently disqualify the Store from participation under the Program. In such an event, PCI, at its sole cost, may remove the Displays from the disqualified Store. * Confidential portions omitted and filed separately with the Commission. 3 8. Inspection Rights. Southland and the Participating Stores grant PCI representatives the right to inspect Participating Stores for Program compliance during normal business hours so long as such inspection does not interfere with the operation of the Store. 9. Ordering. 9.01 It is Southland's intent that most Corporate Stores will participate in the Program. Southland also believes that a number of franchisees and area licensees may also be interested in the Program. Notwithstanding, the execution of this Agreement does not in any way obligate Southland or Participating Stores to order or purchase any minimum amount of Products. PCI acknowledges and agrees that Southland is under no obligation of any kind whatsoever to order or purchase any minimum amount of Product for the Stores or to commit to PCI a minimum number of Stores that will participate under the Program. 9.02 Product orders received by PCI shall be billed and shipped no later than the end of the business day following the day the order was received by PCI. 9.03 Product orders will be shipped to the Stores at PCI's cost by a carrier of PCI's choosing. Product order will be delivered to the Store no later than five (5) business days from the day the order was received by PCI. 9.04 Product orders shall be filled at an average rate of not less than ninety percent (90%) of the quantity ordered. Product brands may be substituted by PCI as provided by Section 11, but such substituted brands must be of equal or greater quality and value and at a cost not to exceed the order cost. 9.05 If the terms and conditions of Product orders conflict with the terms and conditions of this Agreement, the terms and conditions of this Agreement will control. 10. EDI Agreement. Contemporaneously with this Agreement, the parties have agreed to enter into an Electronic Data Interchange ("EDI") Agreement covering electronic invoicing, electronic remittance advice and Electronic Funds Transfer ("EFT") payment procedures. 11. Products. From time to time, PCI shall provide Southland and Participating Stores with a list of available Products including the costs of the Products delivered to the Stores. The initial Product order shall be shipped to the Store along with the Display. Because all of the Products are categorized by PCI into price point groupings, PCI shall have the right to substitute, at no additional charge to Southland or the Participating Stores, a Product in the same or higher price point group for any ordered Products and such Products may not be returned on the basis of such substitution * Confidential portions omitted and filed separately with the Commission. 4 12. Product Payment Terms. Terms for the payment of Products ordered by the Corporate Stores and the Stores operated by participating franchisees shall be payable by Southland on terms of net * days from date of invoice via * EFT. Invoices from Monday through Sunday shall be paid by Southland through EFT to PCI's designated bank account no later than * following the invoice date. EDI invoices for payment will be dated with anticipated date of Product delivery to the stores and will be paid by Southland using this date in accordance with the provisions herein. 13. Product Price. The Product prices will remain firm during * of the Term. Thereafter, PCI will reduce its Product prices for the stores to the extent PCI reduces its prices to the general trade for the same type of products with such price decrease to be effective immediately upon notice to Southland. 14.__*__ . During the * of the Term, PCI agrees to use its best efforts to * . 15. Taxes. PCI shall be responsible for accruing and remitting all taxes relating to the Displays provided under this Agreement and all taxes relating to PCI's performance or the supplying of the Products, (except for the taxes that must legally be collected by the Stores from consumers at the time of Product purchase). 16. Warranty. 16.01 PCI hereby warrants, guarantees and certifies to Southland, and to any subsidiary, division, affiliate, franchisee or license of Southland that at the time of delivery of such Products to Stores and Participating Stores, any and all Products (i) have been, are and will be produced and furnished in compliance with the provisions of the Federal Fair Labor Standards Act; (ii) have been, are and will be produced in compliance with and have not been, are not and will not be, adulterated or misbranded within the meaning of the Federal Food Drug and Cosmetic Act of 1938, as amended, and the regulations promulgated thereunder (the "Act"), or the pure food or drug laws or ordinances of any state or city to which the Products are shipped by PCI, and have not been, are not and will not be articles which may not be introduced into interstate commerce under the Act; (iii) if the Products contain a color additive, said color additive has been, is and will be from a batch certified by the Secretary of Health, Education and Welfare as required by the Act; (iv) have not been, are not and will not be misbranded hazardous substances or banned hazardous substances, and have not been, are not and will not be in a misbranded package within the meaning of that term in the Federal Hazardous Substance Labeling Act or the consumer Product Safety Act; (v) have been, are and will be placed in packages that reflect true net weight, measure, contents and size pursuant to applicable federal and state requirements; (vi) have been, are and will be in compliance with all applicable federal, state and local laws, regulations and other legal requirements, including but not limited to those related to health, safety, labeling, flammability and price discrimination; and (vii) have been, are and will be good and merchantable and fit for the purposes for which they are sold. PCI will * Confidential portions omitted and filed separately with the Commission. 5 not, however, warrant in any way or be liable for any Products that have been damaged, modified or allowed to spoil after delivery by PCI to a Corporate Store, Store or Participating Store. 16.02 PCI agrees that it will promptly reimburse Southland for all costs involved in any Product recall or other market withdrawal of the Products attributable to the breach of any representations or warranties contained herein, such costs to include, but not be limited to, the cost of (i) handling and preparing the Products for reshipment to PCI or other designee, (ii) destroying the Products if necessary, and (iii) replenishing inventory as a result of the Products' removal, return or necessary destruction. 17. Indemnification. PCI agrees, in addition to any other rights or remedies of Southland and unless the applicable Products have been damaged, modified or allowed to spoil after delivery of such Products by PCI to a Store or Participating Store, to defend, indemnify and hold Southland harmless from any and all losses, damages, liabilities or expenses (including attorneys' fees and court costs) arising out of or resulting from, or in connection with: (i) any allegation or finding of a violation of any patent, trademark, copyright or contractual or other rights of any third parties arising from the purchase, use or sale of the Products; (ii) any allegation or finding of any breach of any warranty, guarantee or certification to Southland; (iii) any allegation or finding of a violation pertaining to, or arising in connection with, the manufacture, production or sale of the Products; or (iv) any complaint, claim or legal action whatsoever, whether foreseen or unforeseen, alleging damages, death, illness, injury or damage to property, resulting from the purchase or use of any of the Products. 18. Insurance. 18.01 PCI agrees to keep in force, at ail times while any of the Products are being offered for sale by PCI, adequate comprehensive general liability insurance endorsed to include both "products" and "contractual" coverage, with a combined single limit of at least * each occurrence for bodily injury or property damage. 18.02 PCI agrees to furnish Southland with a certificate from a financially responsible insurance company evidencing that the insurance required hereunder is in force, including a broad form seller's endorsement naming Southland as an additional insured and providing that such coverage may not be terminated, canceled or materially changed without thirty (30) days prior written notice to Southland at its office at 2711 North Haskell Avenue, Dallas, Texas 75204-2906, Attn: Legal Department. PCI shall furnish Southland a copy of such certificate of insurance prior to its first shipment of Products to Southland. 19. Goodwill. Southland agrees that it neither has, nor will acquire, any vested or proprietary right or interest with respect to the marketing and sale of the Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of PCI. * Confidential portions omitted and filed separately with the Commission. 6 20. Effect of Termination or Expiration. In the event or termination or expiration of this Agreement, PCI, at its sole cost, will remove any and all Displays from each Store within sixty (60) days of termination or expiration. 21. Remedies. All rights and remedies conferred by this Agreement or by law shall be cumulative and in addition to every other right and remedy available. No failure on the part of the injured party to exercise and no delay in exercising any right or remedy hereunder shall operate as a waiver thereof unless specifically waived in writing, nor shall any single or partial exercise of any right or remedy hereunder preclude any other or further exercise thereof or the exercise of any other right or remedy. 22. Confidential Information. PCI and Southland will and will use all reasonable efforts to cause their respective employees to hold in confidence all Confidential Information, hereinafter defined, and PCI and Southland will not, and will use all reasonable efforts to ensure that any employees having access to the Confidential information through them will not, disclose the same and will not use except in connection with this Agreement. For purposes hereof, "Confidential Information" means this Agreement, all information of any kind (including, without limitation, sales, pricing, financial and promotional information) obtained directly or indirectly from PCI or Southland, as the case may be, or from any of their respective employees, agent, accountants, counsel or other representatives, relating to either PCI or Southland's business, except information that: 1. constitutes readily ascertainable public information, including, without limitation, any information filed with the Securities and Exchange Commission; 2. subsequently becomes public information through no fault of the party to whom it was revealed. 3. either party obtains from a third party who they have no reason to believe is under any obligation of confidentiality; or 4. either party becomes legally obligated to disclose, provided that the other party is afforded an opportunity prior to such disclosure to apply to the court or other appropriate authority for a form of restrictive order preventing disclosure of any such information. 23. Miscellaneous. 23.01 Force Majeure. Except with respect to each party's outstanding payment obligations, neither party to this Agreement shall be required to perform any term, covenant or condition of this Agreement as long as such performance is delayed or prevented by force majeure, which shall mean any acts of God, strike, lockout, material or labor restriction by any governmental authority, civil riot and any other cause not reasonably within the control of such * Confidential portions omitted and filed separately with the Commission. 7 party and which by exercise of due diligence such party is unable, wholly or in part to prevent or overcome. 23.02 Titles. All headings, titles and subdivisions are for the convenience of the parties and are not to be used in interpreting this Agreement. 23.03 Successor and Assigns. All of the terms of this Agreement will be binding upon, and inure to the benefit of, and be enforceable by the parties and their respective successors, assigns; provided, however, neither party can assign their respective interests herein without the written consent of the other, except to a parent, subsidiary or affiliate holding in excess of fifty percent (50%) of the controlling interest of such party. 23.04 Texas Law. This Agreement will be construed and in all respects take effect in accordance with the laws of the State of Texas and venue with respect to any judicial proceeding will be Dallas County, Texas. 23.05 Notices. Any notice or other instruments required or permitted by the Agreement to be served on or given to a party shall be sufficiently served or given for all purposes (a) when personally delivered to any officer of the party to whom it is addressed, or (b) if sent by (i) certified or registered mail postage prepaid, or (ii) overnight express mail, addressed to the party at the appropriate address set forth below, or at such other address as the party has directed in writing. The effective date of any notice shall be the date of delivery if by personal delivery or date of mailing thereof to the party to whom such notice is addressed. 2. Addresses. All correspondence shall be addressed as follows: If to Southland: The Southland Corporation 2711 N. Haskell Avenue Dallas, Texas 75204 Attn: Vice President, Merchandising With a copy given in the manner described above to: The Southland Corporation 2711 N. Haskell Avenue Dallas, Texas 75204 Attn: General Counsel, Legal Department * Confidential portions omitted and filed separately with the Commission. 8 If to PCI: Premium Cigars International, Ltd. 1129 East Via Linda Suite NO. 100-102 Scottsdale, Arizona 85259 Attn: Steven A. Lambrecht 23.06 Waiver. Neither the failure nor any delay on the part of either party to exercise any right under this Agreement shall operate as a waiver thereof, nor shall any single or partial exercise of any right preclude any other or further exercise of the same or of any other right nor shall any waiver of any right with respect to any occurrence be construed as a waiver of such right with respect to any other occurrence. No waiver shall be effective unless it is in writing and is signed by the party asserted to have granted such waiver. 23.07 Independent Contractor. The parties to this Agreement will be independent contractors under this Agreement and in no event will their relationship be deemed that of employer/employee. It is not the intent of the parties to form any partnership or joint venture, and it is understood that each party will exercise full power and authority, except as specifically provided otherwise in this Agreement, to select the means, method and manner of performing all obligations under this Agreement. PCI and Southland specifically agree that for all purposes hereunder, Southland, its franchisees and area licensees are independent contractors. 23.08 Attorney's Fees. Except as otherwise provide in section 17 herein, in the event any legal proceeding is initiated by either party regarding the construction or enforcement of this Agreement, each party will be responsible for its own attorney's fees, costs and expenses incurred in such proceeding. 23.09 Costs and Expenses. Each party will be responsible for its own costs and expenses relating to the execution and performance of its respective obligations under this Agreement, except as otherwise stated herein. 23.10 Press Release. Neither Southland nor PCI will issue press releases regarding the Program or any terms or conditions of this Agreement without receiving prior written permission from the other party, which permission will not be unreasonably withheld. 23.11 Exhibits and Schedules. All Exhibits and Schedules attached hereto are hereby incorporated by reference into, and made a part of, this Agreement. 23.12 Execution in Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be deemed to be an original as against any party whose signature appears thereon; and all of which shall together constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, * Confidential portions omitted and filed separately with the Commission. 9 individually or taken together, shall bear the signatures of all of the parties reflected hereon as the signatories. 23.13 Entire Agreement. This Agreement contains the entire understanding between the parties hereto with respect to the subject matter hereof, and supersedes all prior and contemporaneous agreements and understandings, inducements or conditions, express or implied, oral or written, except as herein contained. The express terms hereof control and supersede any course of performance and/or usage of the trade inconsistent with any of the terms hereof. This Agreement may not be modified, amended, extended or renewed other than by an agreement in writing and in the case of Southland, executed by a Senior Vice President. IN WITNESS WHEREOF, the parties have executed, or caused to be executed, this Agreement as of the day and year written above. ATTEST: PREMIUM CIGARS INTERNATIONAL, LTD. By: /s/ Ron Rice By: /s/ Steven A. Lambrecht ------------------ ------------------------------- Attorney Name: Steven A. Lambrecht ------------------ ----------------------------- Its: C.E.O. ------------------------------ ATTEST: THE SOUTHLAND CORPORATION By /s/ Thomas P. Hennen By: /s/ Gary R. Rose ------------------ ------------------------------- Assistant Secretary Name: Gary R. Rose ------------------ ----------------------------- Vice President * Confidential portions omitted and filed separately with the Commission. 10 EXHIBIT A CIGAR DISPLAY AND MERCHANDISING AGREEMENT PARTICIPATION AGREEMENT ----------------------- 1. Premium Cigars International Limited ("PCI") and The Southland Corporation ("Southland") have entered into an agreement (the "Agreement") wherein PCI shall provide to designated 7-Eleven corporate stores humidor counter displays (the "Displays") in connection with the sale of PCI cigar Products (the "Products") at the store (the "Program"). 2. You may also wish to participate in the Program. The general Program requirements include: (i) placing the Display at a location that is near the front or main sales counter at the Store unless as otherwise required by law; (ii) merchandising only PCI Products in the Display and selling only such Products from the Display; (iii) implementing mutually agreed upon and reasonable Product sales and marketing programs as presented by PCI and (iv) not selling Products or non-PCI cigars or cigar related items from or in non-PCI humidor units. 3. The Displays are initially provided at PCI's cost and without an additional charge or mark-up on PCI Products above PCI's standard wholesale price for such products. Replacement of damaged, stolen or lost displays are available through PCI at a * prorated cost. There is no ongoing or minimum Product purchase requirement under the Program. The minimum term under the Program is one (1) year. After the first year of the Program, you may terminate your participation in the Program for any reason and at any time, upon sixty (60) days notice to Southland in which case the Display will be removed by PCI. In the event of Program termination, PCI has the right to remove the Display. The Program is more fully described in the Cigar Display and Merchandising Agreement (the "Agreement") a copy of which is available for review through your field consultant or market manager. 4. By executing this Participation Agreement, you hereby agree to the applicable Program terms and conditions contained in the Agreement. You understand that PCI shall solely determine compliance under the Program, and that PCI shall be solely responsible for disqualifying stores from Program participation including your Store In the event of disqualification, the Display may be removed by PCI from the Store. 5. PCI and Southland recognize that franchisees are independent contractors who determine the manner and means of operating their 7-Eleven franchises pursuant to the terms of the franchise agreement and, as such, solely determine whether to participate in the Program. * Confidential portions omitted and filed separately with the Commission. IF YOU WISH TO PARTICIPATE IN THE PROGRAM, YOU MUST SIGN IN THE SPACE PROVIDED BELOW AND RETURN THIS FORM TO YOUR FIELD CONSULTANT BY ________________________, 1997. Franchisee(s) _______________________________________ 7-Eleven Store No._________________ Signature Store _______________________________________ Address:___________________________ Full Name (Printed) Date:__________________________________ ___________________________ The Southland Corporation _______________________________________ Signature _______________________________________ Market Manager (Printed Name) * Confidential portions omitted and filed separately with the Commission. EXHIBIT B DISPLAY COST/REPLACEMENT SCHEDULE ORDER COST PER INITIAL ORDER REPLACEMENT NUMBER DESCRIPTION CIGAR COUNT DISPLAY PER STORE COST COST: - ------ ----------- ----------- ------- -------------- ----- * * * * * * * * * * * * * [FOOTNOTE OMITTED] EX-10.9 15 AGENCY RELATIONSHIP April 8, 1997 Premium Cigars International 11259 E. Via Linda Suite #100-102 Scottsdale, AZ 85259 Attn: Murphy Pierson RE: Establishment of Agency relationship for the purpose of collecting your accounts where sales were made to Stockholders of Associated Grocers, Inc. Your company has been or is requesting to sell merchandise to members of Associated Grocers, Inc. under the drop shipment plan; the merchandise being sold by your sales representative to the various members and delivered directly to the member from your plants, warehouse or other depots without being handled by Associated Grocers. As part of this program, you have advised us as to the details of such sales and Associated Grocers has collected the amount of the sales price for your accounts. It is the purpose of this letter to formally state the nature of our contract relationship for the purposes of our respective files. The normal procedure to be followed in respect to drop shipment accounting has been and will be as follows: (a) All invoices are mailed to us in duplicate, one of which must be an original or a legible carbon copy identifying the store to which the delivery was made, the quantities and prices involved. (b) You will accumulate the invoices evidencing the sales to the several members stores, which will be mailed to us with a statement showing the store name, store number, the amount of each invoice and the grand total at the bottom of the statement. (c) It is definitely understood that this billing arrangement will not change your selling prices to our member stores, except when there is a market price change. (d) Associated will undertake to collect the amounts of the invoices forwarded to it from the respective purchasing members and remitted * from receipt of invoice. (e) Terms: * * Confidential portions omitted and filed separately with the Commission. Page 2 It is expressly understood that you will not, under this program be making any sales to Associated Grocers, and that Associated Grocers does not guarantee any of the accounts of its members. The sole obligation of Associated Grocers is to make its best efforts to effect the collection of such accounts in conjunction with the sale of merchandise by Associated Grocers to its respective members. In the event we, under this program, at any time remit to you for any accounts billed to members which prove to be uncollectible, you will, upon being advised, reimburse us for the amount so advanced by Associated Grocers. You will thereafter be free to proceed in manner to collect your account from the defaulting member. So that our records will be complete, we respectfully request that you indicate your acceptance hereof where designated on the copy of this letter which is enclosed. A stamped, self-addressed envelope is provided for your convenience. This agreement supersedes all prior agreements, oral or written. All prior agreements shall be null and void. Sincerely, ASSOCIATED GROCERS, INCORPORATED - -------------------------------- BY: /s/ Dan Harkins --------------------- Dan Harkins Grocery Procurement Accepted this 4 day of 9 , 1997. ----- ------- COMPANY NAME: PREMIUM CIGARS INTERNATIONAL ---------------------------- BY: /s/ Murphy Pierson ---------------------------- Murphy Pierson * Confidential portions omitted and filed separately with the Commission. EX-10.10 16 PCI RETAILER AGREEMENT PCI RETAILER AGREEMENT VENDOR: RETAILER: PREMIUM CIGARS INTERNATIONAL, LTD. Arizona Region, Region 3100, Circle K Stores, 11259 East Via Linda, Suite #100-102 Inc. 602-657-0200 (Office) 602-661-6026 (Facsimile) 2430 W. Mission Lane 800-PCI-1001 (Toll Free) Phoenix, Arizona 85021 (602) 331-3131 (602) 331-7740 fax
Effective Date: April 15, 1997 1. TERM OF AGREEMENT. The initial term of this Agreement shall be for one ( l ) calendar year from the Effective Date (the "First Term"). This Agreement shall automatically renew at the expiration of the First Term for up to three (3) additional one (l) year terms (each an "Additional Term") unless either party, at least thirty (30) calendar days prior to the end of the then existing First Term or Additional Term, gives written notice to the other party that this Agreement shall not renew. Notwithstanding the forgoing, either party may terminate this Agreement at any time upon one hundred twenty (120) days prior written notice to the other party of such termination. 2. GENERAL RETAILER OBLIGATIONS. Retailer agrees to use its standard business practices to actively promote, in lawful ways, the marketing and sale of Vendor's products (the ';Vendor Products") to customers at each retail location of Retailer listed on exhibit "A' attached hereto (each a "Retail Location"). Retailer shall conduct its operations at each Retail Location in a manner which shall not reflect adversely upon the reputation, quality or credibility of Vendor or the Vendor Products and shall comply with all applicable federal, territorial, state and local laws and regulations in performing its duties hereunder. Furthermore, in the event that Retailer becomes aware of any material complaints, charges or claims concerning Vendor or the Vendor Products, Retailer shall notify Vendor of such complaints, charges or claims. If requested by Vendor, Retailer shall consult with Vendor regarding mutually agreeable actions to be taken by Retailer regarding any such complaints, charges or claims. 3. CONTACT PERSON. Retailer shall provide Vendor with the name and phone number of the person responsible for communications with Vendor regarding this Agreement. At the request of Vendor. Retailer shall provide Vendor with any changes to the name or phone number of such person after the occurrence of such changes. Effective Date: 4. HUMIDORS. All Vendor Products shall only be displayed in and sold from humidors or other display units (each a "Vendor Humidor" and collectively "Vendor Humidors") provided or sold to Retailer by Vendor or an authorized distributor of Vendor Products (a "Vendor Distributor ') pursuant to this Agreement. Either Vendor or a Vendor Distributor shall provide Retailer with the Vendor Humidors required for the sale of Vendor Products at each Retail Location. Neither Vendor nor the Vendor Distributor shall charge Retailer for the first Vendor Humidor required for each display position at a Retail Location (each a "First Vendor Humidor" and collectively "First Vendor Humidors"). Retailer shall be responsible for the care of all Vendor Humidors placed in or at a Retail Location. Any damaged (except by normal wear and tear), lost or stolen Vendor Humidors shall be repaired or replaced by Vendor or a Vendor Distributor. with the cost of any such repairs or replacements being charged to and paid by Retailer. Any repair or replacement of Vendor Humidors * Confidential portions omitted and filed separately with the Commission. for which Retailer is charged, shall be made at a cost equal to * of Vendor's wholesale price (as listed on Vendor's then current price list) for such Vendor Humidors prorated over an * period beginning with the later of the date of the delivery or last replacement of such Vendor Humidor. Any repair or replacement of a Vendor Humidor due to manufacturing defects or normal wear and tear shall be made by Vendor or a Vendor Distributor at no charge or cost to Retailer. 5. HUMIDOR PLACEMENT. Retailer agrees to have at least one (1) Vendor Humidor prominently displayed at each Retail Location in full view of a primary traffic location. 6. PRODUCTS AND DISPLAYS: OWNERSHIP. Only Vendor Products may be placed in or on Vendor Humidors or sold in, on, or from Vendor Humidors. Retailer and each Retail Location shall display only such labels, displays or signs in or on the Vendor Humidors as are mutually agreeable to Vendor and Retailer. All Vendor Humidors provided to Retailer pursuant to this Agreement, including replacements for damaged, lost or stolen Vendor Humidors, shall be and shall remain the property of Vendor. Upon the termination of this Agreement for any reason, Retailer shall return to Vendor, within thirty (30) calendar days of such termination all Vendor Humidors provided to Retailer pursuant to this Agreement. Any and all costs of the return of Vendor Humidors pursuant to this Section 6 shall be paid by Vendor 7. PAYMENT. Retailer shall pay for all Vendor Products placed in a Vendor Humidor at each Retail Location. Such payment shall be made on the following terms: * days otherwise. 8. WARRANTIES AND REPRESENTATIONS. AS of the date of this Agreement, each party represents and warrants that: (i) it holds all necessary federal, state and local licenses and permits required for the sale, distribution and marketing of Vendor Products to customers in accordance with applicable law (the "Required Permits); (ii) there are no actions or proceedings pending or contemplated within its knowledge that would in any way jeopardize any Required Permits; (iii) it is in good standing under the laws of the state in which it is located, has all requisite corporate or organizational authority required to perform its obligations under this Agreement and has taken all corporate or organizational actions required for the performance of its obligations under this Agreement and (iv) its performance of its obligations under this Agreement will not violate any agreement or contract to which it is a party. Each party agrees to use commercially reasonable efforts to ensure that the above representations and warranties shall remain true throughout the term of this Agreement and will notify the other party, in writing, of any material changes of the above conditions. 9. POLICIES AND PROCEDURES. Any and all marketing or sales materials related to the Vendor Products shall be mutually agreeable to Vendor and Retailer and, if Vendor notifies Retailer that any such materials are objectionable to Vendor, then Retailer shall work with Vendor to reasonably resolve such objections to the mutual satisfaction of both Vendor and Retailer. Retailer shall not make false or misleading representations or claims with respect to Vendor or the Vendor Products. Retailer shall also refrain from communicating, as being binding on Vendor, any representations, guarantees or warranties with respect to the Vendor Products, except as expressly authorized by Vendor in writing or are set forth in written materials provided by Vendor. 10. INDEPENDENT CONTRACTOR. Vendor and Retailer specifically agree that for all purposes hereunder, Retailer is, and shall be deemed to be, an independent contractor. Neither * Confidential portions omitted and filed separately with the Commission. Retailer nor Retailer's employees, agents or representatives shall be deemed to be employees, agents or representatives of Vendor, nor shall any of them have the power to enter into any contract, agreement or obligation on behalf of Vendor or to otherwise legally bind Vendor in any way, nor enlarge upon or extend any warranty or representation regarding Vendor Products beyond that made by Vendor or the manufacturer of such products. Retailer shall be responsible for obtaining and paying for any and all costs, bonds, insurance and licenses required for Retailer's distribution, sale and marketing of the Vendor Products. Retailer shall also be further responsible for the collection, payment and reporting of any and all taxes required to be paid and/or reported by Retailer by any federal, state, territorial or local government including, but not limited to, any and all sales, use, employee, withholding and valued added taxes. Notwithstanding the foregoing, Vendor shall be responsible for paying tobacco taxes required by any federal. state, territorial or local government to be paid on or for the Vendor Products 11. RELATED PRODUCTS. During the term of this Agreement and any other period that Retailer sells or markets the Vendor Products, Retailer hereby agrees not to sell or market, either directly or indirectly, any cigars or cigar products, other than the Vendor Products, in, on or from humidors. 12. INDEMNIFICATION. Each party agrees to and does hereby fully indemnify and hold harmless the other party and any of the other party's affiliates, successors, assigns, officers, directors, shareholders, employees, and agents (the "Indemnified Parties"), from and against any and all losses, damages, liabilities, obligations, judgments, settlements, costs and other expenses incurred or suffered by the Indemnified Parties by reason of the assertion of any claim or the institution of any litigation against them during the term of the Agreement or subsequent to its expiration or termination, which is directly or indirectly based upon or related to any acts or omissions of such party (the "Indemnifying Party") or the Indemnifying Party's employees or agents, or which are directly or indirectly based upon or related to any breach of the Agreement by the Indemnifying Party. The Indemnifying Party shall assume the defense, at its sole expense, of any claim or litigation as to which it has an indemnification obligation hereunder. If the Indemnifying Party fails to do so, the Indemnified Parties shall have the right to assume their own defense, and the Indemnifying Party shall be obligated to reimburse the Indemnified Parties for any and all reasonable expenses (including, but not limited to, attorneys' fees) incurred in the defense of such claim or litigation, in addition to the Indemnifying Party's other indemnity obligations hereunder. Notwithstanding the foregoing, Vendor shall neither be responsible nor indemnify Retailer for any liability resulting from or related to the Vendor Products that is caused by, based on or related to any spoilage, damage or other modification of the Vendor Products related to or resulting from the acts of or omissions of Retailer or Retailer's employees, agents, contractors or affiliates. 13. PRODUCT WARRANTIES. Vendor warrants that, prior to and at the time of delivery of Vendor Products to Retailer, all Vendor Products shall be merchantable for their intended use and shall be in compliance with all applicable state and federal laws and regulations. Any and all other warranties, whether implied, express or arising pursuant to applicable law and relating to the Vendor Products, are hereby disclaimed to the maximum extent possible under applicable law. Furthermore, Vendor shall not be liable to Retailer for any loss of profit or any indirect, special, incidental or consequential damages in connection with or arising from the Vendor Products unless advised in writing of the possibility of such damages prior to or at the time of the ordering by Retailer of such Vendor Products * Confidential portions omitted and filed separately with the Commission. 14. GOOD WILL. Retailer agrees that it neither has. nor will acquire, any vested or proprietary right or interest with respect to the marketing and sale of Vendor Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of Vendor. 15. AGREEMENT TO PERFORM NECESSARY ACTS. Each party to this Agreement agrees to perform any further acts reasonably required under the terms of this Agreement and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. This Agreement, together with any exhibits, schedules and other documents contemplated hereby, constitute the final written expression of all of the agreements between the parties, and is a complete and exclusive statement of those terms. It supersedes all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by any party that differ in any way from the terms of this written Agreement, and the exhibits, schedules and other documents contemplated hereby, shall be given no force or effect. 16. CONFIDENTIALITY. Other than to their accountants and lawyers or as otherwise required by applicable law or for their performance of their obligations under this Agreement, the parties agree not to (i) publicly announce or disclose the terms of this Agreement or (ii) directly or indirectly issue or permit the issuance of any publicity whatsoever regarding the existence or terms of this Agreement. 17. GOVERNING LAW: ATTORNEY'S FEES. This Agreement has been made and entered into in the State of Arizona and shall be construed in accordance with the laws of the State of Arizona, United States of America, excluding its choice of law provisions. The parties agree that the Courts of Arizona, including Maricopa County, Arizona Superior Court shall be the proper and exclusive forum for any action relating to a dispute between the parties arising out of, or related to, this Agreement. Each party consents to the in personam jurisdiction of said court. The prevailing party in any dispute arising under this Agreement shall be entitled to receive its costs, fees, and expenses, including attorneys' fees. Reasonable attorneys' fees shall be determined by the court and not a jury. 18. SURVIVAL. Any obligation or agreement herein which has not been or cannot be fully performed prior to the termination or expiration of this Agreement, including, but not limited to. the provisions of Sections 11 and 12 above, shall survive such termination or expiration. 19. NOTICES. The service of any notice provided for in this Agreement shall be complete and effective on the date such notice is placed in the United States Mail, certified or registered with return receipt requested, postage prepaid, and addressed to the respective parties as first written above. 20. SECTION HEADINGS. The section headings contained in this Agreement are for convenience only and shall in no manner be construed as a part of this Agreement. 21. SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. * Confidential portions omitted and filed separately with the Commission. 22. BINDING ON SUCCESSORS AND ASSIGNS. Subject to the provisions herein, all covenants and agreements in this Agreement shall extend to and be binding upon the heirs, legal representatives, successors and assigns of the respective parties hereto. IN WITNESS WHEREOF the parties hereby agree to the above and execute this Agreements as of the Effective Date. "Vendor" "Retailer" Premium Cigars International, Ltd. Arizona Region, Region 3100, Circle K. Stores, Inc. /s/ Dave Hodges /s/ Douglas Hecker - ------------------------------------ --------------------------------------- Dave Hodges, Chief Executive Officer Douglas Hecker, Regional Vice President * Confidential portions omitted and filed separately with the Commission. Division 3130 Revised 4/1/1997 26 TOTAL STORES - 24 TOTAL GAS * GPCLPMNAF AARIIO2TF SDDQKV4MS CORNER DIST ST# ADDRESS CITY ST ZIP PHONE LOCATION STORE MANAGER * * * * * * * * * * Confidential portions omitted and filed separately with the Commission. EX-10.11 17 PCI RETAILER AGREEMENT PCI RETAILER AGREEMENT VENDOR: RETAILER: PREMIUM CIGARS INTERNATIONAL, LTD. EXPRESS STOP, INC. 11259 East Via Linda, Suite #101-102 2541 E. University Scottsdale, Arizona 85259 Phoenix, Arizona 85034 602-657-0200 (OFFICE) 602-661-6026 (FACSIMILE) 602-267-1211 (office) 602-267-1973 (fax) 800-PCI-1001 (TOLL-FREE)
Effective Date: April 29, 1997. 1. Term of Agreement. The initial term of this Agreement shall be for one (1) calendar year from the Effective Date (the "First Term"). Notwithstanding the foregoing, Vendor may terminate this Agreement for any reason and at any time upon fifteen (15) days' written notice to Retailer. Furthermore, Retailer may terminate this Agreement upon thirty (30) days' written notice to Vendor that Vendor has breached Vendor's obligations udder this Agreement and such breach is not cured by Vendor within fifteen (15) calendar days of Vendor's receipt of such notice from Retailer. 2. General Retailer Obligations. Retailer agrees to use its best efforts during the term of this Agreement to actively promote, in all lawful ways and to the maximum extent possible, the marketing and sale of Vendor's products (the "Vendor Products") to Customers at each retail location of Retailer (each a "Retail Location"). Retailer shall conduct its operations at each Retail Location in a manner which shall not reflect adversely upon the reputation, quality or credibility of Vendor or the Vendor Products. Furthermore, in the event that Retailer becomes aware of any complaints, charges or claims concerning Vendor or the Vendor Products, Retailer shall immediately notify Vendor of such complaints, charges or claims. Retailer shall respond to such complaints only as directed by Vendor after consultation with Vendor. Retailer shall comply with all applicable federal, territorial, state and local laws and regulations in performing its duties hereunder. Retailer may market and sell tobacco and other products other than the Vendor Products so long as such other products are not sold in, on or from humidors or other containers or displays similar to or resembling humidors. 3. Contact Person. Retailer shall provide Vendor with the name and phone number of the person responsible for communications with Vendor regarding this Agreement. Upon any change in the name or phone number of such person, Retailer shall notify Vendor in writing within five (5) calendar days of such change. 4. Humidors. All Vendor Products shall only be displayed in and sold from humidors or other display units (each a "Vendor Humidor" and collectively "Vendor Humidors") provided or sold to Retailer by Vendor or an authorized distributor of Vendor Products (a "Vendor Distributor") pursuant to this Agreement. Either Vendor or a Vendor Distributor shall provide Retailer with the Vendor Humidors required for the sale of Vendor Products at each Retail Location. Neither Vendor nor the Vendor Distributor shall charge Retailer for the first Vendor Humidor required for each display position at a Retail Location (each a "First Vendor Humidor) and collectively "First Vendor Humidors"). Retailer shall be responsible for the case and maintenance of all Vendor Humidors placed in or at a Retail Location. Any and all damaged, lost or stolen Vendor Humidors shall be repaired or replaced by Vendor or a Vendor Distributor, with the cost of any such repairs or replacements being charged to and paid by Retailer. Any replacement of Vendor Humidors for which Retailer is charged shall be made at a cost equal to Vendor's * of such price. Notwithstanding the foregoing, any repair or replacement of a Vendor Humidor due to manufacturing defects or normal wear and tear shall be made by Vendor or a Vendor Distributor at no charge or cost to Retailer. 5. Humidor Placement. Retailer agrees to have at least one (1) Vendor Humidor prominently displayed in full view of a primary traffic location. 6. Products and Displays; Ownership. Only Vendor Products may be placed in, on or near Vendor Humidors or sold in, on, near or from Vendor Humidors. If any on-Vendor Products are sold in, on or from Vendor Humidors, Retailer shall pay to Vendor, in addition to any other damages available to Vendor under equity or law, the wholesale cost of any and all such non-Vendor Products so placed or sold. Retailer and each Retail Location shall display only Vendor provided or approved labels, displays or signs in, on or around the Vendor Humidors. All Vendor Humidors provided to Retailer pursuant to this Agreement, including replacements for damaged, lost or stolen Vendor Humidors, shall be and shall remain the property of Vendor. Upon the termination of this Agreement for any reason, Retailer shall return to Vendor, within thirty )30) calendar days of such termination, all Vendor Humidors provided to Retailer pursuant to this Agreement. Any and all costs of the return of Vendor Humidors pursuant to this Section 6 shall be paid by Retailer. 7. Payment. Retailer shall pay for all Vendor Products placed in a Vendor Humidor at each Retail Location. Such payment shall be made pursuant to the terms and conditions specified in the invoice for such Vendor Products provided to Retailer by either Vendor or a Vendor Distributor. Retailer shall be responsible for any late charges accruing on all payments due and owing pursuant to a Vendor Invoice. 8. Retailer Warranties and Representations. Retailer acknowledges that its strict performance of the obligations of this Agreement is essential to the success of its distribution, sales and marketing of Vendor Products. Retailer, therefore, represents and warrants the following to Vendor: (i) Retailer, at all times, shall hold all necessary federal, state, territorial and local licenses and permits (the "Retailer Permits") required for the sale, distribution and marketing of Vendor Products to customers in accordance with applicable law; (ii) each Retail Location shall, at all times, be properly licensed for the selling of Vendor Products and all such sales by each Retail Location shall comply with applicable law; (iii) there are no actions or proceedings pending or contemplated within the knowledge of Retailer that would in any way jeopardize any Retailer Permits; (iv) Retailer is in good standing under the laws of the state, territory and nation in which it is located, has all requisite corporate or organizational authority required to perform its obligations under this Agreement and has taken all corporate or organizational actions required for the performance of its obligations under this Agreement; and (v) Retailer's performance of its obligations under this Agreement will not violate any agreement or contract to which it is a party. 9. Policies and Procedures. Retailer shall at all times conform with and carry out the sales and marketing programs and policies established by Vendor form time to time. Vendor expressly reserves the right to change such programs and policies at any time. Furthermore, except for any materials provided to Retailer by Vendor, any and all marketing or sales materials related to the Vendor Products must be approved in writing by Vendor prior to the use or distribution of such materials by Retailer. Retailer shall at no time engage in any unfair trade practices with respect to Vendor or the Vendor Products and shall make no false or misleading representations or claims with respect to Vendor or the Vendor Products. Retailer shall refrain from communicating any representations, guarantees or warranties with respect to the Vendor Products, except those expressly authorized by Vendor in writing or as set forth in written materials provided by Vendor. * Confidential portions omitted and filed separately with the Commission. 10. Independent Contractor. Vendor and Retailer specifically agree that, for all purposes hereunder, Retailer is, and shall be deemed to be, an independent contractor. Neither Retailer nor Retailer's employees, agents or representatives shall be deemed to be employees, agents, or representatives of Vendor, nor shall any of them have the power to enter into any contract, agreement or obligation on behalf of Vendor or to otherwise legally bind Vendor in any way, nor enlarge upon or extend any warranty or representation regarding Vendor Products beyond that made by the Vendor or the manufacturer of such products. Retailer shall also be further responsible for the collection, payment and reporting of any and all taxes required to be paid and/or reported by Retailer by any federal, state, territorial or local government, including, but not limited to, any and all sales, use, tobacco, employee, withholding, use and value added taxes. 11. Related Products. During the term of this Agreement and any other period the Retailer sells or markets the Vendor Products, Retailer hereby agrees not to sell or market, either directly or indirectly, any cigars or cigar products, other than the Vendor Products, in, on or from humidors. 12. Indemnification. Retailer agrees to and does hereby fully indemnify and hold harmless Vendor and any of Vendor's affiliates, successors, assigns, officers, directors, shareholders, employees and agents (collectively the"Indemnified Parties'), from and against any and all losses, damages, liabilities, obligations, judgments, settlements, costs and other expenses incurred or suffered by the Indemnified Parties by reason of the assertion of any claim or the institution of any litigation against them during the term of this Agreement or subsequent to its expiration or termination, which is directly or indirectly based upon or related to any acts or omissions of Retailer, Retailer's employees or agents, or which are directly or indirectly based upon or related to any breach by Retailer of this Agreement. Retailer shall assume the defense, at its sole expense, of any claim or litigation s to which it has an indemnification obligation hereunder. If Retailer fails to do so, the Indemnified Parties shall have the right to assume their own defense, and Retailer shall be obligated to reimburse the Indemnified Parties for any and all reasonable expenses (including, but not limited to, attorneys' fees) incurred in the defense of such claim or litigation, in addition to Retailer's other indemnity obligations hereunder. 13. Disclaimer of Implied Warranties. Unless considered unenforceable or unlawful under applicable law, all implied warranties to any products sold by Vendor to Retailer, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES FOR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE, are hereby disclaimed. Vendor liability, if any, to Retailer for alleged defective products shall, under any legal or equitable theory, be linked to repair or replacement of a product, at the sole option of Vendor, and shall in no event include damages of any kind, whether incidental, consequential or otherwise. 14. Goodwill. Retailer agrees that it neither has, nor will acquire, any vested or proprietary right or interest with respect to the marketing and sale of Vendor Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of Vendor. 15. Agreement to Perform Necessary Acts. Each party to this Agreement agrees to perform any further acts reasonably required under the terms of this Agreement and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. This Agreement, together with any exhibits, schedules and other documents contemplated hereby, constitute the final written expression of all of the agreements between the parties and is a complete and exclusive statement of those terms. It supersedes all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by any party that differ in any way from the terms of this written Agreement, and the exhibits, schedules and other documents contemplated hereby, shall be given no force or effect. 16. Governing Law; Attorney's Fees. This Agreement has been made and entered into in the State of Arizona and, subject only to applicable international law, shall be construed in accordance with the laws of the State of Arizona, United States of America, excluding its choice of law provisions. The parties agree that, subject only to applicable international law, the Courts of Arizona, including Maricopa County, Arizona Superior Court, shall be the proper and exclusive forum for any action relating to a dispute between the parties arising out of, or related to, this Agreement. Each party consents to the in personam jurisdiction of said court. The prevailing party in any dispute arising under this Agreement shall be entitled to receive its costs, fees and expenses, including attorneys' fees. Reasonable attorneys' fees shall be determined by the court and not a jury. 17. Survival. Any obligation or agreement herein which has not been or cannot be fully performed prior to the termination or expiration of this Agreement shall survive such termination or expiration. 18. Notices. The service of any notice provided for in this Agreement shall be complete and effective on the date such notice is placed in the United States Mail, certified or registered with return receipt requested, postage prepaid, and addressed to the respective parties as first written above. 19. Section Headings. The section headings contained in this Agreement are for convenience only and shall in no manner be construed as part of this Agreement. 20. Severability. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. 21. Binding on Successors and Assigns. Subject to the provisions herein, all covenants and agreements in this Agreement shall extend to and be binding upon the heirs, legal representatives and assigns of the respective parties hereto. IN WITNESS WHEREOF the parties hereby agree to the above and execute this Agreement as of the Effective Date. "Vendor" "Retailer" "PCI Premium Cigars International" "Express Stop, Inc." /s/ Corey Lambrecht /s/ Sue Dines - ------------------------------------ -------------------------- Corey Lambrecht, V.P. National Sales Sue Dines, General Manager * Confidential portions omitted and filed separately with the Commission. EXPRESS STOP - CIGARS - -------------------------------------------------------------------------------- 2541 East University - Phoenix, Arizona 85034 - (602) 267-1211 - Fax (602) 267-1973 STORE LIST ---------- PHONE NUMBER STORE NAME STORE ADDRESS - ------------ ---------- ------------- * * * [INFORMATION REGARDING 27 STORES IN ARIZONA] SUBWAY AND HOT STUFF PIZZA -------------------------- PHONE NUMBER STORE NAME STORE ADDRESS - ------------ ---------- ------------- * * * [INFORMATION REGARDING 5 STORES IN ARIZONA] * Confidential portions omitted and filed separately with the Commission. EX-10.14 18 ESTABLISHMENT OF AGENCY RELATIONSHIP March 12, 1997 Re: Establishment of Agency Relationship for the purpose of collecting your accounts where sales were made to members of SuperValu, Inc. Your company, PCI has been or is requesting to sell merchandise to members of SuperValu, Inc. Under the drop shipment plan, the merchandise will be sold by a PCI sales representative to the various members and delivered directly to the member from your plants, warehouse or other depots without being handled by SuperValu, Inc. As part of this program, PCI has advised SuperValu as to the details of such sales and SuperValu has collected the amount of the sales price for your accounts. It is the purpose of this letter to formally state the nature of our contract relationship for the purpose of our respective files. The normal procedure to be followed in respect to drop shipment accounting has been and will be as follows: (a) All original invoices are to be mailed to SuperValu once a week, attn. dsd associate to: P.O. Box 2237, Tacoma, WA 98401 (b) You will accumulate the invoices evidencing the sales to the several member stores which will be mailed to SuperValu with a summary sheet listing the store name, store number, the amount of each invoice, invoice number and the grand total at the bottom of the summary sheet. (c) It is definitely understood that this billing arrangement will not change PCI selling prices to our member stores, except when there is a market price change. (d) SuperValu will undertake to collect the amounts of the invoices forwarded to it from the respective purchasing members and remitted * from receipt of invoice (e) Terms: Deduct * (f) A * rebate will be paid for all sales when Super Value sales reach * annually It is expressly understood that you will not, under this program be selling any product directly to SuperValu and that SuperValu does not guarantee any of the accounts of its members. The sole obligation of SuperValu is to make its best efforts to effect the collection of such accounts in conjunction with the sale of merchandise by SuperValu to its respective members. In the event we, under this program, at any time remit to you for any account billed to members which prove to be uncollectible, you will, upon being advised, reimburse SuperValu for the amount advanced by SuperValu. PCI will thereafter be free to proceed in a manner to collect your account from the defaulting member. So that our records will be complete, we respectfully request that you indicate your acceptance hereof where designated on the copy of this letter which is enclosed. * Confidential portions omitted and filed separately with the Commission. This agreement supersedes all prior agreements, oral or written. All prior agreements shall be null and void. SuperValu retains the right to withdraw from any agreement made with Premium Cigars International at any time upon giving a 30-day written notification. Sincerely, Super Value, Inc. By: /s/ [illegible] ------------------------------------ Its: Accepted this 8 day of 5 , 1997. ------- ------- COMPANY NAME: PREMIUM CIGARS INTERNATIONAL By: /s/ Murphy Pierson ---------------------------------------- Murphy Pierson * Confidential portions omitted and filed separately with the Commission. EX-10.15 19 PCI RETAILER AGREEMENT PCI RETAILER AGREEMENT VENDOR: RETAILER: PREMIUM CIGARS INTERNATIONAL, LTD. Prestige Stations, Inc., a Delaware Corp. ("PSI") 11259 East Via Linda, Suite #100-102 602-657-0200 (Office) 602-661-6026 (Facsimile) 800-PCI-1001 (Toll Free) ( ) ( ) fax ---------------------------------------------- CONTACT PERSON:
Effective Date: May 22 , 1997 ------------------------ 1. TERM OF AGREEMENT. The initial term of this Agreement shall be for two (2) calendar years from the Effective Date (the "First Term"). This Agreement shall automatically renew at the expiration of the First Term for up to three (3) additional one (1) year terms (each an "Additional Term") if Retailer and Vendor agree in writing, prior to the end of the then existing First Term or Additional Term, to such renewal. Notwithstanding the foregoing, either Retailer or Vendor may terminate this Agreement at any time upon (i) one hundred twenty (120) days written notice to the other party for any reason or (ii) thirty (30) days written notice to the other party that such other party has breached the other party's obligations under this Agreement and such breach is not cured by the other party within fifteen (15) calendar days of the other party's receipt of such notice. 2. GENERAL RETAILER OBLIGATIONS. Retailer agrees to use its best efforts during the term of this Agreement to promote, in all lawful ways, the marketing and sale of Vendor's products (the "Vendor Products") to Customers at each retail location of Retailer listed on Exhibit "A" attached hereto currently located in the States of Washington or Oregon (each a "Retail Location"). Additional retail locations of Retailer may, at any time, be added by Retailer to Exhibit "A" hereto and each such additional shall be considered a Retail Location under this Agreement upon Vendor's receipt of written notice from Retailer of such addition. Retailer shall conduct its operations at each Retail Location in a manner which shall not reflect adversely upon the reputation, quality or credibility of Vendor or the Vendor Products. Furthermore, in the event that Retailer becomes aware of any complaints, charges or claims concerning Vendor or the Vendor Products. Retailer shall, if commercially reasonable, notify Vendor of such complaints or claims. Retailer shall comply with all applicable federal, territorial, state and local laws and regulations in performing its duties hereunder. 3. HUMIDORS. All Vendor Products shall only be displayed in and sold from humidors or other display units (each a "Vendor Humidor" and collectively "Vendor Humidors") provided or sold to Retailer by Vendor or an authorized distributor of Vendor Products (a "Vendor Distributor") pursuant to this Agreement. Either Vendor or a Vendor Distributor shall provide Retailer with the Vendor Humidors required for the sale of Vendor Products at each Retail Location. Neither Vendor nor the Vendor Distributor shall charge Retailer for the first Vendor Humidor required for each display position at a Retail Location (each a "First Vendor Humidor" and collectively "First Vendor Humidors"). Retailer shall be responsible for the care and maintenance of all Vendor Humidors placed in or at a Retail Location. Any and all damaged, lost or stolen Vendor Humidors shall be repaid or replaced by Vendor or Vendor Distributor, with the cost of any such repairs or replacements being charged to and paid by Retailer. Any replacement of Vendor Humidors for which Retailer is charged, shall be made at a cost equal to Vendor's * for such Vendor Humidors as specified by the current PCI product list, which such cost being prorated over a * period beginning on the date such Vendor Humidor was first delivered to Retailer in its original condition. Notwithstanding the foregoing, any repair or replacement * Confidential portions omitted and filed separately with the Commission. 1 of a Vendor Humidor due to manufacturing defects or normal wear and tear shall be made by Vendor or a Vendor Distributor at no charge or cost to Retailer. 4. HUMIDOR PLACEMENT. Retailer agrees to have at least one (1) Vendor Humidor prominently displayed and easily accessible to customers at a location mutually agreed to by Vendor and Retailer. 5. PRODUCTS AND DISPLAYS OWNERSHIP. Only Vendor Products may be placed in, on or attached to Vendor Humidors or sole in, on, from or attached to the Vendor Humidors. Retailer and each Retail Location shall display only Vendor provided or approved labels, displays or signs in, on or attached to the Vendor Humidors. All Vendor Humidors provided to Retailer pursuant to this Agreement, including replacements for damaged, lost or stolen Vendor Humidors shall be and shall remain the property of Vendor. Upon the termination of this Agreement for any reason, Retailer shall make available for return to Vendor, within thirty (30) calendar days of such termination, all Vendor Humidors provided to Retailer pursuant to this Agreement. Any and all costs of the return of Vendor Humidors pursuant to this Section 5 shall be paid by Vendor. 6. PAYMENT. Retailer shall pay for all Vendor Products placed in a Vendor Humidor at each Retail Location. Such payment shall be made by Retailer net * . 7. RETAILER WARRANTIES AND REPRESENTATIONS. Retailer, represents and warrants the following to Vendor; (i) Retailer, at all times, shall hold all necessary federal, state, territorial and local licenses and permits (the "Retailer Permits") required for the sale, distribution and marketing of Vendor Products to customers in accordance with applicable law, (ii) each Retail Location shall, at all times, be properly licensed for the selling of Vendor Products sand all such sales by each Retail Location shall comply with applicable law; (iii) Retailer is in good standing under the laws of the state, territory and nation in which it is located, has all requisite corporate or organizational actions required for the performance of its obligations under this Agreement and (iv) Retailer's performance of its obligations under this Agreement will not violate any agreement or contract to which it is a party. 8. POLICIES AND PROCEDURES. Retailer shall use commercially reasonable efforts to conform with and carry out the sales and marketing programs and policies established and modified by Vendor from time to time and mutually agreed to by Retailer and Vendor. Furthermore, any and all marketing or sales materials related to the Vendor Products shall be mutually agreed to by Retailer and Vendor prior to the use or distribution of such materials by Retailer. Retailer shall at no time engage in any unfair trade practices with respect to Vendor or the Vendor Products. Retailer shall refrain from communicating any representations, guarantees or warranties with respect to the Vendor Products, except those expressly authorized by Vendor in writing or are set forth written materials provided by Vendor. 9. INDEPENDENT CONTRACTOR. Vendor and Retailer specifically agree that for all purposes hereunder, Retailer, is and shall be deemed to be, an independent contractor. Neither Retailer nor Retailer's employees, agents or representatives shall be deemed to be employees, agents or representatives of Vendor, nor shall any of them have the power to enter into any contract, agreement or obligation on behalf of Vendor or to otherwise legally bind Vendor in any way, or enlarge upon or extend an warranty or representation regarding Vendor Products beyond that made by Vendor or the manufacturer of such products. Retailer shall be responsible for obtaining and paying for any and all costs, bonds, insurance and licenses required for Retailer's distribution, sale and marketing of the Vendor Products. Retailer shall also be further responsible for the collection, payment and reporting of any and all taxes required to be paid and/or reported by Retailer by any federal, state, territorial of local government including but not limited to any and all sales, use tobacco, employee, withholding and valued added taxes. * Confidential portions omitted and filed separately with the Commission. 2 10. RELATED PRODUCTS. During the First Term of this Agreement, Retailer agrees not to sell or market either directly or indirectly, any premium cigars or sell or market any other cigars or cigar products in or from humidors. 11. INDEMNIFICATION. Each party (the "Indemnifying Party") agrees to and does hereby fully indemnify and hold harmless the other party and any of the other party's affiliates, successors, assigns, officers, directors, shareholders, employees, and agents (collectively the "Indemnified Parties"). From and against any and all losses, damages, liabilities, obligations, judgments, settlements, costs and other expenses incurred or suffered by the Indemnified Parties by reason of the assertion of any claim or the institution of any litigation against them during the term of this Agreement or subsequent to its expiration or termination, which is directly or indirectly based upon or related to any acts or omissions of the Indemnifying party, the Indemnifying Party's employees or agents, or which are directly or indirectly based upon or related to any beach by the Indemnifying Party of this Agreement. The Indemnifying Party shall assume the defenses, at its sole expense, of any claim or litigation as to which it has an indemnification obligation hereunder. If the Indemnifying Party shall be obligated to reimburse the Indemnified Parties for any and all reasonable expenses (including, but not limited to, attorneys' fees) incurred in the defense of such claim or litigation, in addition to the Indemnifying Party's other indemnity obligations hereunder. 12. PRODUCT REPLACEMENT. Vendor agrees to replace, at Vendor's cost and with the same or similar Vendor Products, any Vendor Products that are defective, damaged, spoiled or otherwise unfit for sale at the time of delivery to Retailer. Vendor further agrees to replace, at Vendor's cost and with other Vendor Products, any Vendor Products sold at a Retail Location that are (i) determined by mutual agreement of Vendor and Retailer to be inappropriate for the customer base of such Retail Location and (ii) not otherwise damages, spoiled or unfit for sale at the time of such replacement. 13. DISCLAIMER OF IMPLIED WARRANTIES. Unless considered unenforceable or unlawful under applicable law, all implied warranties relating to any products sold by Vendor to Retailer. INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES FOR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE are hereby disclaimed. Vendor liability, if any, to Retailer for alleged defective products shall, under any legal or equitable theory, be limited to repair or replacement of a product, at the sole option of Vendor, and shall in no event include incidental, consequential or special damages. 14. GOODWILL. Retailer agrees that it neither has, nor will acquire, any vested or proprietary right or interest with respect to the marketing and sale of Vendor Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of Vendor. Retailer shall not be liable to Vendor for any consequential, incidental or specific damages related to such goodwill of Vendor. 15. AGREEMENT TO PERFORM NECESSARY ACTS. Each party to this Agreement agrees to perform any further acts reasonably required under the terms of this Agreement and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. This Agreement, together with any exhibits, schedules and other documents contemplated hereby, constitute the final written expression of all of the Agreements between the parties and is a complete and exclusive statement of those terms. It supersedes all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by any party that differ in any way from the terms of this written Agreement, and the exhibits, schedules and other documents contemplated hereby, shall be given no force or effect. 16. GOVERNING LAW; ATTORNEYS' FEES. This Agreement has been made and entered into in the State of Washington and shall be construed in accordance with the laws of the State of Washington, * Confidential portions omitted and filed separately with the Commission. 3 United States of America excluding its choice of law provisions. The parties agree that the Superior Courts of Washington, King County shall be the proper and exclusive forum for any action relating to a dispute between the parties arising out of or related to, this Agreement. Each party consents to the in personam jurisdiction of said court. The prevailing party in any dispute arising under this Agreement shall be entitled to receive its costs, fees, and expenses, including attorneys' fees. Reasonable attorneys' fees shall be determined by the court and not a jury. 17. NOTICES. The service of any notice provided for in this Agreement shall be complete and effective on the date such notice is received by facsimile delivered by same day or overnight courier (e.g. Federal Express) or placed in the United States Mail, certified or registered with return receipt requested, postage prepaid, and addressed to the respective parties as first written above. 18. SECTION HEADING. The section headings contained in this Agreement are for convenience only and shall in no manner be construed as part of this Agreement. 19. SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. 20. BINDING ON SUCCESSORS AND ASSIGNS. Subject to the provisions herein, all covenants and agreements in this Agreement shall extend to and be binding upon the heirs, legal representatives, successors and assigns of the respective parties hereto. IN WITNESS WHEREOF the parties hereby agree to the above and execute this Agreements as of the Effective Date. "Vendor" "Retailer" Premium Cigar International, Ltd. Prestige Stations, Inc. By: /s/ Greg Lambrecht By: /s/ [illegible] ------------------------ -------------------------- Its: Secretary Its: Mgr. ampm Marketing ----------- ---------------------- 6-9-97 * Confidential portions omitted and filed separately with the Commission. 4 AM/PM STORE LIST ALSO D.B.A. Prestige's Store Number Telephone Address City St Zip Manager - ------------ --------- ------- ---- -- --- ------- * * * * * * * [Information regarding 103 stores in Washington and Oregon] * Confidential portions omitted and filed separately with the Commission. 5 EX-10.23 20 STOCK PURCHASE AGREEMENT STOCK PURCHASE AGREEMENT THIS STOCK PURCHASE AGREEMENT (this "Agreement") is made and entered into as of June 20, 1997 by and between Steven A. Lambrecht ("Lambrecht") and James B. Stanley ("Stanley"). WHEREAS, Stanley desires to purchase from Lambrecht, and Lambrecht desires to sell to Stanley, Fifteen Thousand (15,000) "post-split" shares of Common Stock, no par value (the "Shares"), of Premium Cigars International, Ltd. ("PCI") to be paid for in cash. "Post-split" refers to shares of PCI's Common Stock following PCI's 3:1 forward split on May 31, 1997. NOW THEREFORE, in consideration of the covenants, agreements, warranties and representations contained in this Agreement, the parties agree as follows: 1. Agreement to Purchase. Subject to the terms and conditions set forth below, Stanley agrees to purchase from Lambrecht, and Lambrecht agrees to sell to Stanley the Shares for a cash payment of $5,000. The purchase and sale of the Shares shall be consummated at a closing (the "Closing") to occur on such date as Lambrecht and Stanley shall agree, but which date shall be no later than June 20, 1997. At the Closing, Stanley shall pay the purchase price to Lambrecht in immediately available funds. Upon receipt, Lambrecht shall surrender the Shares to Stanley with a duly executed stock power to effect the transfer to Stanley. 2. Representations, Warranties and Covenants of Lambrecht. Lambrecht represents, warrants and covenants with Stanley as follows: 2.1. Lambrecht has full power and authority to enter into this Agreement and sell the Shares. 2.2. All statements made in this Agreement are true, correct and complete as of the date of this Agreement. 3. Representations, Warranties and Covenants of Stanley. Stanley, represents and warrants to Lambrecht as follows: 3.1 I have such knowledge and experience that I am capable of evaluating the relative risks and merits of the purchase of the Shares. 3.2 The address set forth below for Stanley is my true and correct address. 3.3 The Shares I am purchasing are being acquired solely for my own account, for investment and are not being purchased with a view to or for their resale or distribution. In order to induce Lambrecht to sell the Shares to me, Lambrecht will have no obligation to recognize the ownership, beneficial or otherwise, of the Shares by anyone but me. 3.4 All documents, records and books relating to PCI and the Shares requested by me, including all pertinent records of PCI, financial and otherwise, have made available or delivered to me. 3.5 I have had an opportunity to ask questions of and receive answers from Lambrecht and PCI's officers and representatives concerning PCI's affairs generally and the terms and conditions of my proposed purchase of the Shares. 3.6 My decisions regarding my purchase of the Shares is based primarily on what I understand of the concept of PCI's business (which understanding may be mistaken or flawed), and not on its assets, liabilities or results to date. 3.7 I am buying the Shares based solely upon my own investigation and evaluation of PCI. 3.8 The Shares have not been registered under the Securities Act, nor have they been registered pursuant to the provisions of the securities or other laws of applicable jurisdictions. 4. Exclusive Warranties. There are no agreements, warranties or representations, express or implied, except those that are expressly set forth herein. All agreements, representations and warranties contained in this Agreement speak as of the date of this Agreement and shall survive the consummation of the transactions contemplated hereby. 5. Miscellaneous. 5.01 Governing Law. This Agreement shall be governed by and construed in accordance with the substantive law of the State of Arizona. 5.02 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and may be amended only by a writing executed by all parties. 5.03. Severability. If any provision hereof is invalid or unenforceable in any jurisdiction, the other provisions hereof shall remain in full force and effect in such jurisdiction and the remaining provisions will be enforced to the maximum extent permitted by law and construed in a fashion to effectuate best the provisions hereof, and the invalidity or unenforceability of any provision hereof in any jurisdiction shall not effect the validity or enforceability of any such provision in any other jurisdiction to the extent that the remaining enforceable and valid provisions of this Agreement may be construed in a fashion and act independently of the invalid or unenforceable provisions to effectuate the intent of the parties as evidenced by this Agreement. -2- 5.04. Additional Documents. Stanley and Lambrecht hereby agree to execute such additional documents and to do such things as may be reasonably required by the other party to implement the purposes of this Agreement. The parties have executed this Agreement as of the date first set forth above. "LAMBRECHT" "STANLEY" /s/ Steven A. Lambrecht /s/ James B. Stanley - ----------------------- -------------------- Steven A. Lambrecht James B. Stanley Address: Address: 12072 North 118th Street 4440 East Cortez Street Scottsdale, Arizona 85259 Phoenix, Arizona 85032 -3- EX-10.24 21 CAN-AM RETAILER AGREEMENT CAN-AM RETAILER AGREEMENT VENDOR: RETAILER: CAN-AM INTERNATIONAL Silcorp Ltd. (Western Division) #102-4663 BYRNE ROAD #600-10655 Southpass Road, S.W. Phone: (604) 435-1705 Fax: (604) 431-7673 Toll Free: 1-800-212-5814 (413) 974-5400 ( ) ------------------------------ British Columbia and Sasketchewan only
Effective Date: April, 21, 1997 1. TERM OF AGREEMENT. The initial term of this Agreement shall be for one (1) calendar years from the date first written above (the "First Term"). This Agreement shall automatically renew at the expiration of the First Term for up to three (3) additional one (1) year terms (each an "Additional Term") unless either of the parties, at least thirty (30) calendar days prior to the end of the then existing First Term or Additional Term gives written notice to the other party that the Agreement shall not renew. 2. GENERAL RETAILER OBLIGATIONS. Retailer agrees to use its best efforts during the term of this Agreement to actively promote, in all lawful ways and to the maximum extent possible, the marketing and sale of Can-Am Products to Customers at the Retail Location. Retailer shall conduct its operations at the Retail Location in a manner which will not reflect adversely upon the reputation, quality or credibility of Can-Am or the Can-Am Products. Furthermore, in the event that Retailer becomes aware of any complaints, charges or claims concerning Can-Am or the Can-Am Products, Retailer shall immediately notify Can-Am of such complaints, charges or claims. Retailer shall respond to such complaints only as directed by Can-Am after consultation with Can-Am. Retailer shall comply with all applicable federal, territorial, province and local laws and regulations in performing its duties hereunder. Retailer may market and sell tobacco and other products other than the Can-Am Products so long a such other products are not sold in or from humidors or other containers or displays similar to or resembling humidors. 3. CONTACT PERSON. Retailer shall provide Can-Am with the name and phone number of the person responsible for communications with Can-Am regarding this Agreement. Upon any change in the name or phone number of such person. Retailer shall notify Can-Am in writing five (5) calendar days of such changes. 4. HUMIDORS. All Can-am Products shall only be displayed in and sold from humidors or other display units (each a "Can-An humidor" and collectively "Can-Am humidors") provided by or sold to Retailer by Can-am or an authorized distributor of Can-Am Products (a Can-Am Distributor") pursuant to this Agreement. Either Can-Am or a Can-am Distributor shall provide Retailer with the Can-Am Humidors required for the sale of Can-Am Products at the Retail Location. Neither Can-Am nor the Can-Am Distributor shall charge Retailer for the first Can-Am Humidor for each display position at the Retail Location (each a "First Can-Am Humidor" and collectively "First Can-Am Humidors"). Retailer shall be responsible for the care, maintenance of all Can-Am Humidors placed in or at the Retail Locations. Can-Am either directly or through a Can-Am distributor, shall be responsible for the stocking of the Can-Am humidors with Can-Am Products. Any and all damaged, lost or stolen Can-Am Humidors shall be repaired or replaced by Can-Am or a Can-Am Distributor, with the cost of any such repairs or replacements being charged to and paid by Retailer. Any replacement of Can-Am Humidors for which Retailer is charged, shall be made at a cost equal to the Can-Am's * of such Can-Am Humidors * of such price. Notwithstanding the foregoing, however, any repair or * Confidential portions omitted and filed separately with the Commission. 1 replacement of a Can-Am Humidor due to manufacturing defects or normal wear and tear shall be made by Can- Am at no charge or cost to Retailer. 5. HUMIDOR PLACEMENT. Retailer agrees to have at least one (1) Can-Am Humidor prominently displayed on the front or main counter of each Retail Location. Such Can-Am Humidor shall be located on the front or main counter of the Retail Location such that (i) no displays, signs, labels or other materials whatsoever, other than those provided or approved by Can-Am, block or impinge on a retail customer's complete view of the entire front, sides and top of the Can-Am Humidor and (ii) the Can-Am Humidor is easily and readily accessible to a retail customer. If a problem arises regarding such placement of a Can-Am Humidor at a Retail Location. Retailer shall notify Can-Am of such problem and shall consult with Can-Am for the resolution of such problem to the reasonable satisfaction of both the Retailer and Can-am. 6. PRODUCTS AND DISPLAY: OWNERSHIP. Only Can-Am Products may be placed in or on Can-Am Humidors or sold from Can-Am Humidors. If any non Can-Am Products are sold in, on or from Can-Am Humidors, Retailer shall pay to Can-Am, in addition to any other damages available to can-Am under equity or law, the wholesale cost of any and all such non-Can-am Products so placed or sole. Retailer and Retail Location shall display only Can-Am provided or approved labels, displays or signs in, on or around the Can-Am Humidors. All Can-Am Humidors provided to Retailer pursuant to this Agreement, including replacement for damaged, lost or stolen Can-Am Humidors, shall be and shall remain the property of Can-Am. Upon the termination of this Agreement for any reason. Retailer shall return to Can-Am, within thirty (30) business days of such termination, all Can-Am Humidors provided to Retailer pursuant to the Agreement. Any and all costs of the return of Can-Am Humidors pursuant to the Section 6 shall be paid by Retailer. 7. PAYMENT. Retailer shall pay for all Can-Am Products placed in a Can-Am Humidor at each Retail Location. Such payment shall be made pursuant to the terms and conditions specified in the invoice for such Can-Am Products provided to Retailer by either Can-Am or a Can-Am Distributor. Retailer shall be responsible for any late charges accruing on all payments due and owing pursuant to Can-Am invoice. 8. RETAILER, WARRANTIES AND REPRESENTATIONS. Retailer acknowledges that its strict performance of the obligations of this Agreement is essential to the success of its distributions, sales and marketing of Can-Am Products to the Retail Locations. Retailer, therefor, covenants, represents and warrants the following to Can-Am. Retailer holds all necessary federal, provincial, territorial and local licenses and permits (the "Retailer Permits") required for the sale, distribution and marketing of Can-Am Products to retail Locations in accordance with applicable law. Retailer shall also require all Retail Locations to be properly licensed for the selling of Can-Am Products and all such sales by the Retail Locations shall comply with applicable law. There are no actions or proceedings pending or contemplated within the knowledge of retailer that would in any way jeopardize any Retailer Permits. Retailer is in good standing under the laws of the province, territory and nation in which it is located, has all requisite corporate or organizational authority required to perform its obligations under this Agreement and has taken all corporate or organizational actions reacquired for the performance of its obligations under this Agreement. Retailer's performance of its obligations under this Agreement will not violate any agreement or contract to which it is a party. 9. POLICIES AND PROCEDURES. Retailer shall at all times conform with and carry out the distribution, sales and marketing programs and policies established by Can-Am from time to time. Can-Am expressly reserves the right to change such programs and policies at any time. Furthermore, except for any materials provided to Retailer by Can-Am, any and all marketing or sales materials related to the Can-Am Products must be approved in writing by Can-Am prior to the use or distribution of such materials by Retailer. Retailer shall at no time engage in any unfair trade practices with respect to Can-Am or the Can-Am Products and shall make no false or misleading representations, guarantees or warranties with respect to the Can-Am * Confidential portions omitted and filed separately with the Commission. 2 Products, except such as are expressly authorized by Can-Am in writing or are set forth in written materials provided by Can-Am. 10. INDEPENDENT CONTRACTOR. Can-Am Retailer specifically agrees that for all purposes hereunder, Retailer is, and shall be deemed to be, an independent contractor. Neither Retailer nor Retailer's employees, agents or representatives shall be deemed to be employees, agents or representatives of Can-Am, nor shall any of them have the power to enter into any contract, agreement or obligation on behalf of Can-Am or to otherwise legally bind Can-Am in any way, nor enlarge upon or extend any warranty or representation regarding Can-Am Products beyond that made by Can-Am in any way, nor enlarge upon or extend any warranty or representation regarding Can-Am Products beyond that made by Can-Am or the manufacturer of such products. Retailer shall be responsible for obtaining and paying for any and all costs, bonds, insurance and licenses required for Retailer's distribution, sale and marketing of the Can-Am Products. Retailer shall also be further responsible for the collection, payment and reporting of any and all taxes required to be paid and/or reported by Retailer by any federal provincial, state, territorial or local government including, but not limited to, any and all sales, use, tobacco, employee withholding, use and valued taxes. 11. RELATED PRODUCTS. During the period ending one (1) year from the date first written above or during any other period that Retailer distribute, sells or markets Can-Am Products pursuant to this Agreement, Retailer agrees not to sell or market, either directly or indirectly, any products similar to or competing with the Can-Am Products. Can-Am shall be entitled to recover from Retailer Can-Am's costs, expenses and attorneys' fees incurred in enforcing Can-Am's rights under this Section 16. The provisions of this Section 16 shall survive the termination, expiration or assignment of this Agreement. 12. INDEMNIFICATION. Retailer agrees to and does hereby fully identify and hold harmless Can-Am and any of Can-Am's affiliates, successors, assigns, officers, directors, shareholders, employees, and agents (the "Indemnified Parties"), from and against any and all losses, damages, liabilities, obligations, judgements, settlements, costs and other expenses incurred or suffered by the Indemnified Parties by reason of the ascertain of any claim or the institution of any litigation against them during the term of this agreement or subsequent to its expiration or termination, which is directly or indirectly based upon or related to any acts or omissions of Retailer, Retailer's employees or agents, or which are directly or indirectly based upon or related to any breach by Retailer of this Agreement. Retailer's shall assume the defense, at its sole expense, of any claim or litigation as to which it has an indemnification obligation hereunder. If Retailer fails to do so, the Indemnified Parties shall have the right to assume their own defense, and Retailer shall be obligated to reimburse the Indemnified Parties for any and all reasonable expenses (including, but not limited to, attorneys' fees) incurred in the defense of such claim or litigation, in addition to Retailer's other indemnity obligations hereunder. 13. DISCLAIMER OF IMPLIED WARRANTIES. Unless considered unenforceable or unlawful under applicable law, all impled warranties relating to any products sole by Can-Am to Retailer, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES FOR MERCHANTABILITY AND FITNESS FOR A PARTICULAR PURPOSE are hereby disclaimed. Can-Am liability, if any, to Retailer for alleged defective products shall, under any legal or equitable theory, be limited to repair or replacement of the product, at the sole option of Can-Am, and shall in no event include damages of any kind, whether incidental, consequential or otherwise. 14. GOODWILL. Retailer agrees that it neither has, nor will acquire, any vested or proprietary right or interest with respect to marketing and sale of Can-Am Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of Can-Am. * Confidential portions omitted and filed separately with the Commission. 3 15. AGREEMENT TO PERFORM NECESSARY ACTS. Each party to this Agreement agrees to perform any further acts reasonably required under the terms of this Agreement and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. 16. GOVERNING LAW. This Agreement has been made and entered into in the Province of British Columbia and subject only to applicable international law, shall be construed in accordance with the laws of the Province of British Columbia, Canada, excluding its choice of law provisions. The parties agree that, subject only to applicable international law, the Courts of British Columbia shall be the property and exclusive forum for any action relating to a dispute between the parties arising out of, or related to, this Agreement. Each party consent to the in personam jurisdiction of said court. The prevailing party in any dispute arising under this Agreement shall be entitled to receive its cost, fees, and expenses, including attorney's fees. Reasonable attorney's fees shall be determined by the court and not a jury. 17. SURVIVAL. Any obligation or agreement herein which has not been or cannot be fully performed prior to the termination or expiration of this Agreement shall survive such termination or expiration. 18. NOTICES. The service of any notice provided for in this Agreement shall be complete and effective on the date such notice is placed in the British Columbia mail, certified or registered with return receipt requested, postage prepaid, and addressed to the respective parties as first written above. 19. SECTION HEADINGS. The section headings contained in this Agreement are for convenience only and shall in no manner be construed as a part of this Agreement. 20. SEVERABILITY. In case any one or more of the provisions contained in this Agreement are for convenience only and shall in no manner be construed as a part of this Agreement. 21. BINDING ON SUCCESSORS AND ASSIGNS. Subject to the provisions herein, all covenants and agreements in this Agreement shall extend to and be binding upon the heirs, legal representatives, successors and assigns of the respective parties hereto. IN WITNESS WHEREOF the parties hereto have hereunto set their hands as of the date first above written. June 3/97 /s/ [illegible] - ------------------ --------------------------- Date Silcorp Limited June 3/97 /s/ Colin Jones - ------------------ --------------------------- Date Can-Am International * Confidential portions omitted and filed separately with the Commission. 4 EX-10.25 22 PCI RETAILER AGREEMENT PCI RETAILER AGREEMENT VENDOR: RETAILER: Central Region PREMIUM CIGARS INTERNATIONAL, LTD. Circle K and Stax Stores 11259 East Via Linda, Suite #100-102 a Division of Tosco Corporation 602-657-0200 (Office) 602-661-6026 (Facsimile) 906 E. Anderson Lane, Austin, Texas 78752 800-PCI-1001 (Toll Free) (512) 339-8836 (512) 339-8178 fax ------------------------------
Effective Date: July 1, 1997 1. TERM OF AGREEMENT. The initial term of this Agreement shall be for one (1) calendar year from the Effective Date (the "First Term"). This Agreement shall automatically renew at the expiration of the First Term for up to three (3) additional one (1) year terms (each an "Additional Term") unless either party, at least thirty (30) calendar days prior to the end of the then existing First Term or Additional Term, gives written notice to the other party that this Agreement shall not renew. Notwithstanding the forgoing, either party may terminate this Agreement at any time upon one hundred twenty (120) days prior written notice to the other party of such termination. 2. GENERAL RETAILER OBLIGATIONS. Retailer agrees to use its standard business practices to actively promote, in lawful ways, the marketing and sale of Vendor's products (the "Vendor Products") to customers at each retail location of Retailer listed on exhibit "A" attached hereto (each a "Retail Location"). Retailer shall conduct its operations at each Retail Location in a manner which shall not reflect adversely upon the reputation, quality or credibility of Vendor or the Vendor Products and shall comply with all applicable federal, territorial, state and local laws and regulations in performing its duties hereunder. Furthermore, in the event that Retailer becomes aware of any material complaints, charges or claims concerning Vendor or the Vendor Products, Retailer shall notify Vendor of such complaints, charges or claims. If requested by Vendor, Retailer shall consult with Vendor regarding mutually agreeable actions to be taken by Retailer regarding any such complaints, charges or claims. 3. CONTACT PERSON. Retailer shall provide Vendor with the name and phone number of the person responsible for communications with Vendor regarding this Agreement. At the request of Vendor, Retailer shall provide Vendor with any changes to the name or phone number of such person after the occurrence of such changes. 4. HUMIDORS. All Vendor Products shall only be displayed in and sold from humidors or other display units (each a "Vendor Humidor" and collectively "Vendor Humidors") provided or sold to Retailer by Vendor or an authorized distributor of Vendor Products (a "Vendor Distributor") pursuant to this Agreement. Either Vendor or a Vendor Distributor shall provide Retailer with the Vendor Humidors required for the sale of Vendor Products at each Retail Location. Neither Vendor nor the Vendor Distributor shall charge Retailer for the first Vendor Humidor required for each display position at a Retail Location (each a "First Vendor Humidor" and collectively "First Vendor Humidors"). Retailer shall be responsible for the care of all Vendor Humidors placed in or at a Retail Location. Any damaged (except by normal wear and tear), lost or stolen Vendor Humidors shall be repaired or replaced by Vendor or a Vendor Distributor, with the cost of any such repairs or replacements being charged to and paid by Retailer. The cost to Retailer for the replacement of a * Confidential portions omitted and filed separately with the Commission. Vendor Humidor shall be prorated to the Retailer based upon * schedule of PCI's cost as set forth in Exhibit "A" attached hereto and hereby incorporated by reference. Any repair or replacement of a Vendor Humidor due to manufacturing defects or normal wear and tear shall be made by Vendor or a Vendor Distributor at no charge or cost to Retailer. 5. HUMIDOR PLACEMENT. Retailer agrees to have at least one (1) Vendor Humidor prominently displayed at each Retail Location in full view of a primary traffic location. 6. PRODUCTS AND DISPLAYS: OWNERSHIP. Only Vendor Products may be placed in or on Vendor Humidors or sold in, on, or from Vendor Humidors. Retailer and each Retail Location shall display only such labels, displays or signs in or on the Vendor Humidors as are mutually agreeable to Vendor and Retailer. All Vendor Humidors provided to Retailer pursuant to this Agreement, including replacements for damaged, lost or stolen Vendor Humidors, shall be and shall remain the property of Vendor. Upon the termination of this Agreement for any reason, Retailer shall return to Vendor, within thirty (30) calendar days of such termination, all Vendor Humidors provided to Retailer pursuant to this Agreement. Any and all costs of the return of Vendor Humidors pursuant to this Section 6 shall be paid by Vendor. 7. PAYMENT. Retailer shall pay for all Vendor Products placed in a Vendor Humidor at each Retail Location. Such payment shall be made on the following terms: * otherwise. 8. WARRANTIES AND REPRESENTATIONS. As of the date of this Agreement, each party represents and warrants that: (i) it holds all necessary federal, state and local licenses and permits required for the sale, distribution and marketing of Vendor Products to customers in accordance with applicable law (the "Required Permits"); (ii) there are no actions or proceedings pending or contemplated within its knowledge that would in any way jeopardize any Required Permits; (iii) it is in good standing under the laws of the state in which it is located, has all requisite corporate or organizational authority required to perform its obligations under this Agreement and has taken all corporate or organizational actions required for the performance of its obligations under this Agreement and (iv) its performance of its obligations under this Agreement will not violate any agreement or contract to which it is a party. Each party agrees to use commercially reasonable efforts to ensure that the above representations and warranties shall remain true throughout the term of this Agreement and will notify the other party, in writing, of any material changes of the above conditions. 9. POLICIES AND PROCEDURES. Any and all marketing or sales materials related to the Vendor Products shall be mutually agreeable to Vendor and Retailer and, if Vendor notifies Retailer that any such materials are objectionable to Vendor, then Retailer shall work with Vendor to reasonably resolve such objections to the mutual satisfaction of both Vendor and Retailer. Retailer shall not make false or misleading representations or claims with respect to Vendor or the Vendor Products. Retailer shall also refrain from communicating, as being binding on Vendor, any representations, guarantees or warranties with respect to the Vendor Products, except as expressly authorized by Vendor in writing or are set forth in written materials provided by Vendor. 10. INDEPENDENT CONTRACTOR. Vendor and Retailer specifically agree that for all purposes hereunder, Retailer is, and shall be deemed to be, an independent contractor. Neither Retailer nor Retailer's employees, agents or representatives shall be deemed to be employees, agents * Confidential portions omitted and filed separately with the Commission. or representatives of Vendor, nor shall any of them have the power to enter into any contract, agreement or obligation on behalf of Vendor or to otherwise legally bind Vendor in any way, nor enlarge upon or extend any warranty or representation regarding Vendor Products beyond that made by Vendor or the manufacturer of such products. Retailer shall be responsible for obtaining and paying for any and all costs, bonds, insurance and licenses required for Retailer's distribution, sale and marketing of the Vendor Products. Retailer shall also be further responsible for the collection, payment and reporting of any and all taxes required to be paid and/or reported by Retailer by any federal, state, territorial or local government including, but not limited to, any and all sales, use, employee, withholding and valued added taxes. Notwithstanding the foregoing, Vendor shall be responsible for paying tobacco taxes required by any federal, state, territorial or local government to be paid on or for the Vendor Products. 11. RELATED PRODUCTS. During the term of this Agreement and any other period that Retailer sells or markets the Vendor Products, Retailer hereby agrees not to sell or market, either directly or indirectly, any cigars or cigar products, other than the Vendor Products, in, on or from humidors. 12. INDEMNIFICATION. Each party agrees to and does hereby fully indemnify and hold harmless the other party and any of the other party's affiliates, successors, assigns, officers, directors, shareholders, employees, and agents (the "Indemnified Parties"), from and against any and all losses, damages, liabilities, obligations, judgments, settlements, costs and other expenses incurred or suffered by the Indemnified Parties by reason of the assertion of any claim or the institution of any litigation against them during the term of the Agreement or subsequent to its expiration or termination, which is directly or indirectly based upon or related to any acts or omissions of such party (the "Indemnifying Party") or the Indemnifying Party's employees or agents, or which are directly or indirectly based upon or related to any breach of the Agreement by the Indemnifying Party. The Indemnifying Party shall assume the defense, at its sole expense, of any claim or litigation as to which it has an indemnification obligation hereunder. If the Indemnifying Party fails to do so, the Indemnified Parties shall have the right to assume their own defense, and the Indemnifying Party shall be obligated to reimburse the Indemnified Parties for any and all reasonable expenses (including, but not limited to, attorneys' fees) incurred in the defense of such claim or litigation, in addition to the Indemnifying Party's other indemnity obligations hereunder. Notwithstanding the foregoing, Vendor shall neither be responsible nor indemnify Retailer for any liability resulting from or related to the Vendor Products that is caused by, based on or related to any spoilage, damage or other modification of the Vendor Products related to or resulting from the acts of or omissions of Retailer or Retailer's employees, agents, contractors or affiliates. 13. PRODUCT WARRANTIES. Vendor warrants that, prior to and at the time of delivery of Vendor Products to Retailer, all Vendor Products shall be merchantable for their intended use and shall be in compliance with all applicable state and federal laws and regulations. Any and all other warranties, whether implied, express or arising pursuant to applicable law and relating to the Vendor Products, are hereby disclaimed to the maximum extent possible under applicable law. Furthermore, Vendor shall not be liable to Retailer for any loss of profit or any indirect, special, incidental or consequential damages in connection with or arising from the Vendor Products unless advised in writing of the possibility of such damages prior to or at the time of the ordering by Retailer of such Vendor Products. * Confidential portions omitted and filed separately with the Commission. 14. GOODWILL. Retailer agrees that it neither has, nor will acquire, any vested or proprietary right or interest with respect to the marketing and sale of Vendor Products, and that any such goodwill created or increased during the term of this Agreement shall be considered the property of Vendor. 15. AGREEMENT TO PERFORM NECESSARY ACTS. Each party to this Agreement agrees to perform any further acts reasonably required under the terms of this Agreement and to execute and deliver any documents which may be reasonably necessary to carry out the provisions of this Agreement. This Agreement, together with any exhibits, schedules and other documents contemplated hereby, constitute the final written expression of all of the agreements between the parties, and is a complete and exclusive statement of those terms. It supersedes all understandings and negotiations concerning the matters specified herein. Any representations, promises, warranties or statements made by any party that differ in any way from the terms of this written Agreement, and the exhibits, schedules and other documents contemplated hereby, shall be given no force or effect. 16. CONFIDENTIALITY. Other than to their accountants and lawyers or as otherwise required by applicable law or for their performance of their obligations under this Agreement, the parties agree, during the term of this Agreement and for a period not to exceed two (2) years thereafter, not to (i) publicly announce or disclose the terms of this Agreement or (ii) directly or indirectly issue or permit the issuance of any publicity whatsoever regarding the existence or terms of this Agreement. 17. GOVERNING LAW: ATTORNEY'S FEES. This Agreement has been made and entered into in the State of Arizona and shall be construed in accordance with the laws of the State of Arizona, United States of America, excluding its choice of law provisions. The parties agree that the Courts of Arizona, including Maricopa County, Arizona Superior Court shall be the proper and exclusive forum for any action relating to a dispute between the parties arising out of, or related to, this Agreement. Each party consents to the in personam jurisdiction of said court. The prevailing party in any dispute arising under this Agreement shall be entitled to receive its costs, fees, and expenses, including attorneys' fees. Reasonable attorneys' fees shall be determined by the court and not a jury. 18. SURVIVAL. Any obligation or agreement herein which has not been or cannot be fully performed prior to the termination or expiration of this Agreement, including, but not limited to, the provisions of Sections 1 1 and 12 above, shall survive such termination or expiration. 19. NOTICES. The service of any notice provided for in this Agreement shall be complete and effective on the date such notice is placed in the United States Mail, certified or registered with return receipt requested, postage prepaid, and addressed to the respective parties as first written above. 20. SECTION HEADINGS. The section headings contained in this Agreement are for convenience only and shall in no manner be construed as a part of this Agreement. 21. SEVERABILITY. In case any one or more of the provisions contained in this Agreement shall for any reason be held to be invalid, illegal, or unenforceable in any respect, such * Confidential portions omitted and filed separately with the Commission. invalidity, illegality, or unenforceability shall not affect any other provision, and this Agreement shall be construed as if such invalid, illegal, or unenforceable provision had never been included in the Agreement. 22. BINDING ON SUCCESSORS AND ASSIGNS. Subject to the provisions herein, all covenants and agreements in this Agreement shall extend to and be binding upon the heirs, legal representatives, successors and assigns of the respective parties hereto. IN WITNESS WHEREOF the parties hereby agree to the above and execute this Agreements as of the Effective Date. "Vendor" "Retailer" Premium Cigars International, Ltd. By: /s/ Steven Lambrecht 6-3-97 By: /s/ [illegible] --------------------------------- ------------------ Its: C.E.O. Its: Mktg Director --------------------------------- ------------------ * Confidential portions omitted and filed separately with the Commission. EXHIBIT "A" PCI HUMIDOR REPLACEMENT COST SCHEDULE Order Replacement Cost Number Description Cigar Count * * * * * * * * * * * * * Confidential portions omitted and filed separately with the Commission. EX-10.26 23 SUPPLIER AGREEMENT - CIGARS SUPPLIER AGREEMENT - CIGARS --------------------------- This Supplier Agreement ("Agreement") is entered into this 23 day of June, 1997 between Premium Cigars International, Ltd., an Arizona corporation ("PCI") and Primadonna Cigar Company, a(n) California Corporation, ("Supplier"). RECITALS -------- WHEREAS, Supplier is engaged as a supplier of premium cigars and related products ("Cigar Products") and desires to sell Cigar Products to PCI; WHEREAS, PCI is engaged as a wholesale distributor of premium cigars, humidors and other products to certain retail accounts worldwide and desires to secure a quality supply of Cigar Products; and NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, PCI and Supplier agree as follows: 1. Term. Subject to the terms set forth in Sections 10, 11, 12, 13 14, 17, and 18 herein, the term of this Agreement shall be for six (6) months from the date hereof and shall automatically be renewed annually for three (3) one year periods, unless thirty (30) days prior to the expiration of the applicable term one party notifies the other party in writing that it intends to terminate this Agreement. 2. Purchase Requirements. PCI shall order from Supplier minimum orders totalling * Cigars per month calculated on a cumulative basis. If in any month the purchase orders by PCI exceeds * Cigars, such excess amount shall be applied to the minimum purchase requirements for the following month. Within ten (10) business days of PCI's receipt of any cigars delivered by Primadonna pursuant to a PCI purchase order, PCI may return any or all of such cigars becuase of damage or quality problems. PCI must notify Supplier as to nature of defect. Pursuant to the written instruction of PCI, Primadonna shall immediately replace such returned cigars. If damaged cigars are not replaced within 30 days Primadonna shall immediately refund all monies paid for said product. Primadonna shall invoice PCI in a form that clearly separates the cost of cigars from the cost of packaging, shipping and handling. 3. Purchase Price; Adjustment of Price. During the term of this Agreement, PCI shall pay Supplier the price ("Purchase Price") for the Cigar Products as set forth on the schedule attached as Exhibit "A" hereto or according to such schedules which may be substituted from time to time by agreement of both parties in writing. Such prices are subject to factory increases in an amount not to exceed * per quarter, provided Supplier delivers to PCI invoices in a form acceptable to PCI which verifies such increases. As set forth in Section 17 below, Supplier shall at all times maintain the confidentiality of the Purchase Price paid by PCI and shall not disclose such prices to PCI's distributors or other third parties with which PCI does business. 4. Payment Terms. All payments made hereunder shall be paid as follows: * 5. Packaging. Supplier shall provide packaging for the Cigar Products, at Supplier's sole expense, which satisfies PCI requirements. Packaging to include application of bands provided by PCI, individual cellophane for each cigar and cellophane bundle wrap for all bundles. PCI retains all ownership and other rights to the packaging materials and any designs, logos or other intellectual property contained in such materials and Supplier shall not, by utilizing such materials or intellectual property gain any owneship or other rights to such materials or intellectual property. 6. Delivery. Delivery will be made to PCI FOB Phoenix Sky Harbor International Airport after passing through United States Customs, or at such other destination which PCI may designate from time to time. Supplier shall fill all orders and deliver the Product by a reliable common carrier, at Supplier's sole expense, within twenty-one (21) calendar days from the receipt of PCI's orders and any packaging materials such as bands. 7. Confirmation of Purchase Orders with Manufacturer(s); Verification of Payment. Supplier shall provide to PCI, within five (5) calendar days of Supplier's receipt of a purchase order from PCI, confirmation of the receipt by Supplier of order items and deposit amount by signing said purchase order "received by x on x date x amount. Supplier shall provide to PCI, within five days after PCI's payment of the full Purchase Price for any order, certification of payment of Supplier's manufacturer for all products and services provided or performed by such manufacturer in connection with PCI's purchase order. Supplier's sending PCI a statement detailing the items paid for and the date payment was made, will satisfy such certification. Statement will not disclose prices paid to manufacturer by Supplier. Information is confidential and proprietary to Supplier and PCI is not to use information directly or indirectly. 8. Independent Contractor. This Agreement shall in no way be construed to constitute Supplier as an employee, agent, partner or joint venturer of PCI for any purpose whatsoever, Supplier being an independent contractor engaged by PCI to perform the services set forth herein. Except as specifically provided herein or in a power of attorney or similar written instrument specifically authorizing Supplier to act for or on behalf of PCI, Supplier shall have no authority to so act. Supplier shall take no action on behalf of PCI beyond the scope of the authority specifically conferred upon it by this Agreement. 9. Risk of Loss; Insurance. The risk of loss during transit, delivery and storage of the Cigar Products shall be borne by Supplier. Supplier, at its expense, shall secure and maintain 2 comprehensive general liability insurance equal to or in excess of PCI's Purchase Price for the Cigar Products shipped to PCI by Supplier during the period of shipment. PCI shall be named as an additional insured on all policies of insurance purchased by Supplier for such purposes. 10. Termination Upon Notice. PCI shall have the absolute right to terminate this Agreement upon delivery of written notice to Supplier one hundred twenty (120) days prior to termination. 11. Default by Supplier - Early Termination of This Agreement. Supplier shall be in default, and PCI shall have the right to terminate this Agreement, effective immediately upon delivery to Supplier of written notice of termination, in the event that one or more of the following events shall occur: (a) Supplier makes an assignment for the benefit of creditors, or a receiver, trustee in bankruptcy, or similar officer is appointed to take charge of all or any part of Supplier's property or business; (b) Supplier is adjudicated bankrupt; or (c) Supplier neglects or fails to timely deliver any orders which PCI may make pursuant to the Agreement or to perform or observe any of its other covenants or obligations hereunder. 12. Default by PCI - Early Termination of This Agreement. PCI shall be in default and Supplier shall have the right to terminate this Agreement if, after notice and expiration of the cure period as provided in Section 13 below, PCI has failed to pay Supplier any amounts owing pursuant to this Agreement. 13. Opportunity to Cure Default. PCI shall have thirty (30) days from the date of notice of default to cure any condition creating a default. If the default pursuant to this section shall be a monetary default, then all sums due and payable as of the expiration of the cure period shall bear interest at the rate of eight percent (8.0%) per annum until paid. 14. Indemnification. PCI shall not be liable for, and Supplier shall indemnify and hold PCI and its officers, directors, shareholders, employees, agents harmless from, any loss, damage, expense (including without limitation attorney fees and expenses) claimed to have resulted from the use, operation or performance of the Product or related in any way to its acquisition, manufacturing, shipment, transport or delivery, including, but not limited to, any violation of Section 15, regardless of the form of action. If any action is brought against PCI or its affiliates, subsidiaries, officers, directors or agents, as a result of the actions of Supplier or its affiliates, subsidiaries, officers, directors, or agents, including without limitation, claims for product liability or for any claim related to illness to any person, in connection with the Products created or prepared by Supplier or its affiliates or agents, PCI shall be entitled to select 3 and retain its own counsel and defend against such claims or settle such claims as it shall, in its sole discretion determine, and if PCI is required to incur costs for legal fees or court costs or settlement as a result thereof, Supplier shall reimburse and indemnify PCI for all damages suffered or settlement paid by PCI, including the amount of any judgment, reasonable attorney fees and court costs. 15. No Cuban Tobacco or Illegal Substances; Compliance with Customs Laws. Supplier specifically represents and warrants to PCI that no Cuban tobacco or any other component or product has been included in the Cigar Products. Supplier also represents and warrants that all U.S. customs and other laws have been complied with and that no illegal substances are present in, transported or delivered with the Cigar Products. 16. Effect of Termination. Upon termination of this Agreement the parties agree as follows: 1. Supplier shall immediately cancel all manufacture of and purchase orders that Supplier has placed with manufacturers relating to the Cigar Products and all of Supplier's rights hereunder shall cease. 2. Notwithstanding anything contained herein to the contrary, PCI shall be allowed to maintain and/or order a quantity of the Cigar Products necessary to fulfill any outstanding orders it may have to its distributors, retailers or other third parties for the Cigar Products at the time of termination. 3. Supplier shall continue to be bound by Sections 14, 17 and 18 herein regarding Confidential Information. 4. Supplier agrees to promptly return to PCI all confidential information, as that term is defined in Section 17 herein, and all other documents and equipment pertaining to the business of PCI. Supplier also agrees that Supplier will not at any time use any information acquired by Supplier during the term of this Agreement in a manner contrary to the interest of PCI, nor will Supplier do any act or acts which may directly or indirectly induce any person to terminate or detrimentally modify his, her or its relationship with PCI. 4 18. Covenant Not To Compete. 1. Interests to be Protected. The parties acknowledge that during the term of this Agreement, Supplier will perform essential services for PCI and for clients of PCI. Supplier will learn the identity of PCI's clients and may gain valuable insight as to the clients' operations, personnel and need for services. In addition, Supplier may be exposed to, have access to, and be required to work with, a considerable amount of 5 PCI's confidential and proprietary information, including but not limited to: information concerning PCI's methods of operation, strategic planning, operational strategies, marketing plans and strategies, acquisition strategies, and customer lists. The parties also expressly acknowledge that Supplier provides a highly specialized service and replacing Supplier in this position would require PCI to incur substantial expense. The parties expressly recognize that should Supplier compete with PCI in any manner whatsoever, it could seriously impair the goodwill and diminish the value of PCI's business. The parties acknowledge that the covenant not to compete contained in this section has an extended duration; however, they agree that this covenant is reasonable and it is necessary for the protection of PCI, its shareholders and employees. For these and other reasons, and the fact that there are many other supplier opportunities available to the Supplier if this Agreement should terminate, the parties are in full and complete agreement that the following restrictive covenants are fair and reasonable and are freely, voluntarily and knowingly entered into. Further, each party was given the opportunity to consult with independent legal counsel before entering into this Agreement. 2. Restrictions on Competition. Supplier agrees that it shall not during the term of this Agreement and for a period of one (1) year from the date of termination of this Agreement, directly or indirectly, either as partner, shareholder, joint venturer, consultant, member or otherwise, own any interest in, manage, control, or in any manner competes, directly with the business of PCI in any state of the United States or foreign country in which PCI is conducting business on the date of Supplier's termination. At any time and from time to time, each party agrees, at its expense, to take action and to execute and deliver documents as may be reasonably necessary to effectuate the purposes of this Covenant. 3. Judicial Amendment. If the scope of any provision of this covenant not to compete is found by any Court to be too broad to permit enforcement to its full extent, then such provision shall be enforced to the maximum extent permitted by law. The parties agree that the scope of any provision of this Agreement may be modified by a judge in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. If any provision of this Agreement is found to be invalid or unenforceable for any reason, it shall not affect the validity of the remaining provisions of this Agreement. 4. Injunction; Remedies for Breach. Since a breach of the provisions of this section of this Agreement could not adequately be compensated by money damages, PCI shall be entitled, in addition to any other right or remedy available to it at law or equity, to an injunction restraining the breach or threatened breach and to specific performance of any provision of this section of this Agreement, and, in either case, no bond or other security shall be required in connection therewith, and the parties hereby consent to the issuance of such an injunction and to the ordering of specific performance. 6 19. Protection of Supplier's Manufacturing Sources. PCI agrees that it shall not contract with any manufacturer which Supplier has disclosed to PCI in writing as a manufacturer of the Cigar Products, without the prior consent of Supplier. 7 23. Amendment and Waivers. No amendment or waiver of any provision of this Agreement shall be binding on either party unless consented to in writing by such party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, nor shall any waiver constitute a continuing waiver unless otherwise provided. 24. Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such determination shall not affect or impair the validity, legality or enforceability of the remaining provisions hereof and each provision is hereby declared to be separate, severable and distinct. 25. Attorneys' Fees. In the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover from the other party all costs and expenses of the action or suit, including attorneys' fees and costs. 26. Execution and Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of the date first written above. "PCI" PREMIUM CIGARS INTERNATIONAL, LTD. By: Steven A. Lambrecht -------------------------------- Its: CEO -------------------------------- "Supplier" Primadonna Cigar Company a(n) /s/ Mark N. Marcus Calif Corp. ----------------------------------- By: [printed] Mark N. Marcus /s/ Mark N. Marcus -------------------------------- Its: President -------------------------------- 8 EXHIBIT "A" PRICE SCHEDULE FOR CIGAR PRODUCTS * Size Quantity Per Bundle PCI Cost - ---- ------------------- -------- * * * * * * * * * * * * * * * * * * 9 EXHIBIT "B" PCI CUSTOMER LIST 1. 7 ELEVEN U.S. & CANADA 2. ARCO AM/PM 3. TEXACO 4. MOBIL 5. CIRCLE K 6. CHEVRON 7. ASSOCIATED GROCERS 8. SUPER VALU 9. WAREMART 10. EXPRESS STOPS 11. JACK POT 12. PETRO CANADA 13. MACS 10 EX-10.27 24 SUPPLIER AGREEMENT DATED 6/23/97 SUPPLIER AGREEMENT - CIGARS --------------------------- This Supplier Agreement ("Agreement") is entered into this 23rd day of June 1997 Between Premium Cigars International, Ltd., an Arizona Corporation ("PCI") and Universal Premium Cigars, Inc., a Delaware corporation ("Supplier"). RECITALS -------- WHEREAS, Supplier is engaged as a supplier of premium cigars and related products ("Cigar Products") and desires to sell Cigar Products to PCI; WHEREAS, PCI is engaged as a wholesale distributor of premium cigars, humidors, and other products to certain retail accounts worldwide and desires to secure a quality supply of Cigar Products; and NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiencyof which are hereby acknowledged, PCI and Supplier agree as follows: 1. Term. Subject to the terms set forth in Sections 10, 11, 12, 13, 14, 17, and 18 herein, the term of this Agreement shall be for six (6) months from the date hereof and shall automatically be renewed annually for three (3) one year periods, unless forty five (45) days prior to the expiration of the applicable term one party notifies the other party in writing that it intends to terminate this Agreement. 2. Purchase Requirements. PCI shall order from Supplier minimum orders totalling * Cigars per month calculated on a cumulative basis. Within ten (10) business days of PCI's receipt of any cigars delivered by UPC pursuant to a PCI purchase order, PCI may return any or all of such cigars because of damage or quality problems. PCI must notify Supplier as to nature of defect. Pursuant to the written instruction of PCI, UPC shall immediately replace such returned cigars. If damaged cigars are not replaced within 30 days UPC shall immediately refund all monies paid for said product. UPC shall invoice PCI in a form that clearly separates the cost of cigars from the cost of packaging, shipping and handling. 3. Purchase Price; Adjustment of Price. During the term of this Agreement, PCI shall pay Supplier the price ("Purchase Price") for the Cigar Products as set forth on the schedule attached as Exhibit "A" hereto or according to such schedules which may be substituted from time to time by agreement of both parties in writing. Such prices are subject to factory increases in an amount not to exceed the accumulated value of * , in any term of the agreement. Provided Supplier delivers to PCI invoices in a form acceptable to PCI that verify such increases. As set forth in Section 17 below, Supplier shall at all times maintain the confidentiality of the Purchase Price paid by PCI and shall not disclose such prices to * Confidential portions omitted and filed separately with the Commission. PCI's distributors nor other third parties with which PCI does business. Supplier may increase the price of Products at any time, and from time to time, provided however that no such increase or increases shall in the aggregate exceed * of the term. 4. Payment Terms. All payments made hereunder shall be paid as follows: * 5. Packaging. Supplier shall provide packaging for the Cigar Products, at Supplier's sole expense, which satisfies PCI requirements. Unless otherwise agreed upon, packaging to include application of bands provided by PCI, individual cellophane for each cigar and cellophane bundle wrap for all bundles. PCI retains all ownership and other rights to the packaging materials and any designs, logos or other intellectual property contained in such materials and Suppler shall not, by utilizing 6. Delivery. Delivery will be made to PCI FOB Phoenix Sky Harbor International Airport after Passing through United States Customs, or at such other destination, which PCI may reasonably designate from time to time. Supplier shall fill all orders and deliver the Product by a reliable common carrier, at Supplier's sole expense, within thirty (30) calendar days from the receipt of PCI's orders and any packaging materials such as bands. Delivery beyond thirty (30) days of receipt of purchase order will have a (7) day grace period. Once the grace period has expired, orders may be rejected at the sole discretion of PCI. 7. Confirmation of Purchase Orders with Manufacturer(s); Verification of Payment. Supplier shall provide to PCI, within five (5) calendar days of Supplier's receipt of a purchase order from PCI, confirmation of the receipt by Supplier of order items and deposit amount by signing said purchase order "received by x on x date x amount. Supplier shall provide to PCI, within five days after PCI's payment of the full Purchase Price for any order, certification of payment of Supplier's manufacturer for all products and services provided or performed by such manufacturer in connection with PCI's purchase order. Supplier's sending PCI a statement detailing the items paid for and the date payment was made, will satisfy such certification. Statement will not disclose prices paid to manufacturer by Supplier. Information is confidential and proprietary to Supplier and PCI is not to use information directly or indirectly. 8. Independent Contractor. This Agreement shall in no way be construed to constitute Supplier as an employee, agent, partner or joint venturer of PCI for any purpose whatsoever, Supplier being an independent contractor engaged by PCI to perform the services set forth herein. Except as specifically provided herein or in a power of attorney or similar written instrument specifically authorizing Supplier to act for or on behalf of PCI, Supplier shall have not authority to so act. Supplier shall take no action on behalf of PCI beyond the scope of the authority specifically conferred upon it by this Agreement. * Confidential portions omitted and filed separately with the Commission. 2 9. Risk of Loss; Insurance. The risk of loss during transit, delivery, and storage of the Cigar Products shall be borne by Supplier up to the point of possession by PCI. Supplier, at its expense, shall secure and maintain comprehensive general liability insurance equal to or in excess of PCI's Purchase Price for the Cigar Products shipped to PCI by Supplier during the period of shipment. PCI shall be named as an additional insured on all policies of insurance purchased by Supplier for such purposes. 10. Termination upon Notice. PCI or Supplier shall have the absolute right to terminate this Agreement upon delivery of written notice to the other party one hundred twenty (120) days prior to termination. 11. Default by Supplier - Early Termination of This Agreement. Supplier shall be in default, and PCI shall have the right to terminate this Agreement, effective immediately upon delivery to Supplier of written notice of termination, in the event that one or more of the following events shall occur: a. Supplier makes an assignment for the benefit of creditors, or a receiver trustee in bankruptcy, or similar officer is appointed to take charge of all or any part of Supplier's property or business; b. Supplier is adjudicated bankrupt; c. Supplier subject to expiration of grace period, neglects or fails to timely deliver any orders which PCI may make pursuant to the Agreement or to perform or observe any of its other covenants or obligations hereunder, provided that PCI has not caused such delay, and written notice of default and offer to cure. PCI shall not be relieved of payment obligations for cigars delivered or ordered to date of termination. 12. Default by PCI - Early Termination of This Agreement. PCI shall be in default and Supplier shall have the right to terminate this Agreement if, after notice and expiration of the cure period as provided in Section 13 below, PCI has failed to pay Supplier any amounts owing pursuant to this Agreement. Or in the event that one or more of the following events shall occur: a. PCI makes an assignment for the benefit of creditors or a receiver trustee in bankruptcy or similar officer is appointed to take charge of all or any party of Supplier's property or business; b. PCI is adjudicated bankrupt; this shall not relieve PCI of their payment obligation. 13. Opportunity to Cure Default. PCI shall have thirty (30) days from the date of * Confidential portions omitted and filed separately with the Commission. 3 notice of default to cure any condition creating a default. If the default pursuant to this section shall be a monetary default, then all sums due and payable as of the expiration of the cure period shall bear interest at the rate of eighteen percent (18.0%) per annum until paid. 14. Indemnification. PCI shall not be liable for, and Supplier shall indemnify and hold PCI and its officers, directors, shareholders, employees, agents harmless from, any loss, damage, expense (including without limitation attorney fees and expenses) claimed to have resulted from the acquisition, manufacturing, shipment, transport or delivery, including, but not limited to, any violation of Section 15, regardless of the form of action, except for loss as a result of trademark infringement or transport or delivery beyond the delivery point of Phoenix, Arizona. If any action is brought against PCI or its affiliates, subsidiaries, officers, directors or agents, as a result of the actions of Supplier or its affiliates, subsidiaries, officers, directors, or agents, in connection with the Products delivered by Supplier or its affiliates or agents, PCI shall be entitled to select and retain its own counsel and defend against such claims or settle such claims as it shall, in its sole discretion. Supplier and PCI shall indemnify each other for all damages suffered or settlements paid, including the amount of any judgement, reasonable attorney fees and court costs PCI will indemnify for trademark infringement. Indemnification does not cover actions relating to illnesses such as cancer. 15. No Cuban Tobacco or Illegal Substances; Compliance with Customs Laws. Supplier specifically represents and warrants to the best of UPC's knowledge, that no Cuban tobacco or any other component or product has been included in the Cigar Products. Supplier also represents and warrants that all U.S. customs and other laws have been complied with and that to the best of UPC's knowledge, no illegal substances are present in, transported or delivered with the Cigar Products. 16. Effect of Termination. Upon termination of this Agreement, the parties agree as follows: a. Supplier shall immediately cancel all manufacture of and purchase orders that Supplier has placed with Manufacturers relating to the Cigar Products and all of Supplier's rights hereunder shall cease. This shall not relieve PCI from accepting delivery of and submitting payment for Cigar Products already committed to through end of term of agreement. b. Notwithstanding anything contained herein to the contrary, PCI shall be allowed to maintain and/or order a quantity of the Cigar Products necessary to fulfill any outstanding orders it may have to its distributors, retailers or other third parties for the Cigar Products at the time of termination. PCI may not purchase, directly or indirectly, from suppliers manufacturer during contract, or for a period of one year following the termination of agreement. c. Supplier shall continue to be bound by Sections 14, 17, and 18 herein * Confidential portions omitted and filed separately with the Commission. 4 regarding Confidential Information. d. Supplier agrees to promptly return to PCI all confidential information, as that term is defined in Section 17 herein, and all other documents and equipment pertaining to the business of PCI. Supplier and PCI agree that neither party will at any time use any information acquired by the other during the term of this Agreement in a manner contrary to the interest of the other, nor will they do any act or acts which may directly or indirectly induce any person to terminate or detrimentally modify his, her or its relationship with the other. 17. Confidential Information. Each party recognizes that as a result of this Supplier relationship, that such party has in the past and may in the future develop, obtain or learn Confidential Information which is the property of the other party, or which the other party is under an obligation to treat as confidential. a. Agreement to Protect Confidential Information. Supplier agrees to use its best efforts and the utmost diligence to guard, protect and keep confidential said Confidential Information, and Supplier agrees that Supplier will not, during or after the period of this Agreement, use for Supplier or others, or divulge to others any of said Confidential Information which Supplier may develop, obtain or learn about during or as a result of its supplier relationship with PCI, unless authorized to do so by PCI in writing. b. Definition of Confidential Information. For the purpose of this Agreement, the term "Confidential Information" shall include but not be limited to the following: customer lists; financial statements or information in any form, marketing strategies; business contacts; business plans; computer software, including all rights under licenses and other contracts relating thereto; all intellectual property including all patents, trademarks, trademark registration and applications, service marks, copyrights, trade secrets, proprietary marketing information and know-how; books and records, including lists of customers; credit reports; sales records; price lists; sales literature, advertising material; manuals; processes; technology; or any information of whatever nature which gives to PCI an opportunity to obtain an advantage over their competitors who do not know or use it. c. No contact with PCI's Customers and Others. Supplier and its officers, directors, shareholders, employees, representatives, and agents agree that they shall not contact directly or indirectly any of PCI's customers or companies with which PCI does business, or are affiliated with in any way, or any third parties which have any direct or indirect business dealings with PCI, without the prior consent of PCI. The list of PCI's customers is attached hereto as Exhibit "B" and may be updated by PCI by giving written notice of such * Confidential portions omitted and filed separately with the Commission. 5 updates to the Supplier. Supplier expressly agrees not to disclose any Purchase Price information to any third party with which PCI does business or whom PCI approached about doing business, without PCI's prior written consent. d. Injunctive Relief for Breach. In the event of a breach or threatened breach by either party of the provisions of this section. The plaintiff shall be entitled to an injunction restraining the other from disclosing, in whole or in party, any confidential information, or from rendering any services to any person, firm, partnership, joint venture, association, or other entity to whom such confidential information, in whole or in part, has been disclosed. Nothing herein shall be construed as prohibiting either party from pursuing any other remedies available to either party for such breach or threatened breach, including the recovery of damages from the other. 18. Covenant Not to Compete. a. Interests to be protected. The parties acknowledge that during the term of this Agreement, Supplier will perform essential services for PCI and for clients of PCI. Supplier will learn the identity of PCI's clients and may gain valuable insight as to the clients' operations, personnel and need for services. In addition, Supplier may be exposed to, have access to, and be required to work with, a considerable amount of PCI's confidential and proprietary information, including but not limited to: information concerning PCI's methods of operation, strategic planning, operational strategies, marketing plans and strategies, acquisition strategies, and customer lists. The parties also express acknowledge that Supplier does a highly specialized service and replacing Supplier in this position would require PCI to incur substantial expense. The parties expressly recognize that should Supplier compete with PCI in any manner whatsoever, it could seriously impair the goodwill and diminish the value of PCI's business. The parties acknowledge that the covenant not to compete contained in this section will extend one year beyond termination of this agreement; however, they agree that this covenant is reasonable and it is necessary for the protection of PCI, its shareholders and employees. For these and other reason, and the fact that there are many other supplier opportunities available to the Supplier if this Agreement should terminate, the parties are in full and complete agreement that the following restrictive covenants are fair and reasonable and are freely, voluntarily and knowingly entered into. Further, each party was given the opportunity to consult with independent legal counsel before entering into this Agreement. b. Restrictions on Competition. Supplier agrees that it shall not during the term of this Agreement and for a period of one (1) year from the date of termination of this Agreement, directly or indirectly, either as partner, * Confidential portions omitted and filed separately with the Commission. 6 shareholder, joint venturer, consultant, member or otherwise, own any interest in, manage, control, or in any manner, compete directly with the companies listed by PCI in exhibit B, in any state of the United States or foreign country in which PCI is conducting business on the date of Supplier's termination. AT any time and from time to time, each party agrees, at its expense, to take action and to execute and deliver documents as may be reasonably necessary to effectuate the purpose of this Covenant. Supplier agrees not to transact business with PCI customer on Exhibit B for the term stated in 18b. Howver, it is agreed by both parties that Supplier may transact business with any party that is not contained on Exhibit B. c. Judicial Amendment. If the scope of any provision of this covenant not to compete is found by any Court to be too broad to permit enforcement to its full extent, then such provisions shall be enforced to the maximum extent permitted by law. The parties agree that the scope of any provision of this Agreement may be modified by a judge in any proceeding to enforce this Agreement, so that such provision can be enforced to the maximum extent permitted by law. If any provision of this Agreement is found to be invalid or unenforceable for any reason, it shall not affect the validity of the remaining provisions of this Agreement. d. Injunction; Remedies for Breach. Since a breach of the provisions of this section of this Agreement could not adequately be compensated by money damages, PCI shall be entitled, in addition to any other right or remedy available to it at law or equity, to an injunction restraining the breach or threatened breach and to specific performance of any provision of this section of this Agreement, and, in either case, no bonds or other security shall be required in connection therewith, and the parties hereby consent to the issuance of such an injunction and to the ordering of specific performance. 19. Protection of Supplier's Manufacturing Sources. PCI agrees that it shall not directly or indirectly contract with any manufacturer during the term, or for a period of one year, which Supplier has disclosed to PCI in writing as a manufacture of the Cigar Products, without the prior consent of Supplier. 20. Notices. All notices provided for by this Agreement shall be made in writing either (i) by actual delivery of the notice into the hands of the parties thereunto entitled or (ii) the mailing of the notice in the United States mail to the address, as stated below (or at such other address as may have been designated by written notice) of the party entitled thereto, by certified mail, return receipt requested. The notice shall be deemed to be received on the date of its actual receipt of the party entitled thereto. All communications hereunder shall be in writing and, if sent to PCI, shall be delivered to: * Confidential portions omitted and filed separately with the Commission. 7 Premium Cigars International, Ltd. 15651 N. 83rd Way Suite 3, Building C Scottsdale, Arizona 85260 Facsimile: (602) 992-6026 Attention: David Hodges With a copy to: Kurt M. Brueckner Titus, Brueckner & Berry, P.C. 7373 North Scottsdale Road Scottsdale Centre, Suite B-252 Scottsdale, Arizona 85253 Facsimile: (602) 483-3215 and if to Supplier, to: Universal Premium Cigars, Inc. 1900 Rittenhouse Square Suite C-2 Philadelphia, Pennsylvania 19103 Attention: Chet Atkins Facsimile: (215) 790-9350 21. Applicable Law. This Agreement shall be construed, interpreted and enforced in accordance with, and the respective rights and obligations of the parties shall be governed by, the laws of the State of Arizona, each party irrevocably and unconditionally submits to the exclusive jurisdiction and venue of the courts of Maricopa County, State of Arizona and all courts competent to hear appeals therefrom. 22. Successors and Assigns. This Agreement shall inure to the benefit of and shall be binding on and enforceable by the parties and their respective successors and permitted assigns, as the case may be. Except as provided for herein, either party shall have the right to assign its rights hereunder, without the prior written consent of the other party. 23. Amendment and Waiver. No amendment or waiver of any provision of this Agreement shall be binding on either party unless consented to in writing by such party. No waiver of any provision of this Agreement shall constitute a waiver of any other provision, nor shall any waiver constitute a continuing waiver unless otherwise provided. 24. Severability. If any provision of this Agreement is determined by a court of competent jurisdiction to be invalid, illegal or unenforceable in any respect, such determination shall not affect or impair the validity, legality or unenforceability of the * Confidential portions omitted and filed separately with the Commission. 8 remaining provisions hereof and each provision is hereby declare to be separate, severable and distinct. 25. Attorneys' Fees. IN the event of the bringing of any action or suit by a party hereto against another party hereunder by reason of any breach of any of the covenants, agreements or provisions on the part of the other party arising out of this Agreement, then in that event the prevailing party shall be entitled to have and recover from the other party all costs and expenses of the action or suit, including attorneys' fees and costs. 26. Execution and Counterparts. This Agreement may be executed in counterparts, each of which shall constitute an original and all of which taken together shall constitute one and the same instrument. IN WITNESS WHEREOF this Agreement has been executed by the parties hereto as of the date first written above. "PCI" PREMIUM CIGARS INTERNATIONAL, LTD. By: /s/ Steven A. Lambrecht ----------------------------------- Its: CEO ----------------------------------- "SUPPLIER" UNIVERSAL PREMIUM CIGARS, INC. By: /s/ Chet Atkins ----------------------------------- Chet Atkins, President 6/23/97 * Confidential portions omitted and filed separately with the Commission. 9 EXHIBIT "A" PRICE SCHEDULE FOR CIGAR PRODUCTS * Price Cigar * U.S. Currency. Price Shipping, Handling and packaging * U.S. Currency * Confidential portions omitted and filed separately with the Commission. 11 EXHIBIT "B" PCI CUSTOMER LIST 1. 7 ELEVEN U.S. & CANADA 2. ARCO AM/PM 3. TEXACO 4. MOBIL 5. CIRCLE K 6. CHEVRON 7. ASSOCIATED GROCERS 8. SUPER VALU 9. WAREMART 10. EXPRESS STOPS 11. JACK POT 12. PETRO CANADA 13. MACS * Confidential portions omitted and filed separately with the Commission. 12 EX-10.28 25 OFFER TO LEASE 106-3738 NORTH FRASER WAY BURNABY, B.C. (THE "BUILDING") OFFER TO LEASE BETWEEN MARINE WAY ESTATES LTD. (LANDLORD) AND PREMIUM CIGARS INTERNATIONAL (TENANT) Colliers Macauley Nicolls Inc. Industrial Division (Agent) OFFER TO LEASE 106-3738 NORTH FRASER WAY BURNABY, B.C. ("Building") TO: MARINE WAY ESTATES LTD. ("Landlord") 500-1681 Chestnut Street Vancouver, B.C. WE: PREMIUM CIGARS INTERNATIONAL ("Tenant") c/o 102-4663 Byrne Road Burnaby, B.C. hereby offer to lease from the Landlord, upon the following terms and conditions, approximately 3,064 square feet of warehouse and office space in the Building located at 106-3738 North Fraser Way, Burnaby, B.C. Legal Description: Lot 1, District Lot 161, Land District 37, Group 1, Plan 79633 (hereinafter referred to as the "Leased Premises") The area of the Lease Premises is shown outlined in black on the plan forming Schedule "A" to the Offer to Lease. 1. TERM The Term of the lease shall be three (3) years and zero (0) months commencing the 14th day of July, 1997 subject to the terms of the lease. 2. BASIC RENT The Basic Rent shall be payable in advance on the 1st day of each and every month during the Term in accordance with the following schedule: LEASE YEAR PER SQUARE FOOT PER MONTH PER ANNUM 1 $7.50 $1915.00 2 $7.50 $1915.00 3 $8.50 $2170.33 3. RENTAL ABATEMENT The Landlord shall provide a monthly rental abatement of $255.33 per month, (calculated as $1.00 per square foot per annum), for the first year of the lease term. 4. NET LEASE The Lease is to be a fully net lease with the Tenant responsible for paying all property taxes and operating expenses, including but not limited to utilities, building insurance, common area maintenance, landscaping, general maintenance, structure maintenance (excluding inherent structure defects), property management and Goods and Services Tax on a monthly basis, in advance on the 1st day of each month in addition to the Basic Rent. The Tenant's proportionate share of the above-noted expenses is estimated at $2.77 per square foot, per annum for 1997. 5. DEPOSIT A cheque for $4371.30 (the "Deposit") payable to the Landlord's Agent, Colliers Macaulay Nicolls, Inc., in trust shall be tendered within 48 hours of mutual acceptance of this Offer to apply as a deposit and to be applied in payment on the first months rent and one month security deposit as per the Lease Document, with applicable Goods and Services Tax and only to be returned if the Landlord conditions contained in Clause 10 are not satisfied. In the event the Tenant defaults under the terms hereof, the Landlord may terminate this agreement and retain the Deposit on account of damages and not as a penalty without prejudice to any other remedy. 6. LEASE The Lease shall be in the form attached hereto incorporating only the terms of this Offer (the "Lease") and shall be delivered by the Landlord to the Tenant within five (5) days after acceptance of this Offer. The Lease shall be executed and delivered by the Tenant to the Landlord within five (5) days of receipt by the Tenant but in any event before the date of commencement of the Term and prior to the Tenant taking possession of, or making any improvements to the Leased Premises. 7. USE The Leased Premises shall be used only for the purpose of a distribution facility and sales office for cigars and related goods. 8. TENANT IMPROVEMENTS The Leased Premises are leased "as is" and any alterations shall be subject to the Tenant obtaining the approval of the local Municipal authority, the Landlord and the Landlord's mechanical electrical, structural consultants and architects, at the Tenant's cost. This shall include providing a copy of the proposed tenant improvements and specifications to the Landlord for approval within three (3) days of Acceptance; said approval shall not be unreasonably or arbitrarily withheld, prior to commencement of any tenant improvements. 9. LEASEHOLD IMPROVEMENTS ALLOWANCE The Landlord will pay to the Tenant, as a contribution towards the cost of the Tenant Improvements, installed by or on behalf of the Tenant, the lesser of the actual costs of such improvements or the sum of $16,756.00 plus GST. Such contribution shall be payable to the approved contractor in installments as agreed between Landlord and Tenant and the approved contractor, on submission of the contractor's invoices duly certified as correct by the Tenant that the specified work has been carried out. The final ten (10%) percent payment shall be made after the time limited for filing a lien has expired and following receipt by the Landlord of a statutory declaration as to the non-existence of any liens. 10. LANDLORD TO DETERMINE FINANCIAL STRENGTH OF TENANT Acceptance of this Offer by the Landlord is conditional upon the Tenant providing the Landlord with information regarding the financial status of the Tenant as the Landlord may reasonably require for the purposes of determining the financial strength of the Tenant. The Landlord shall have three (3) days from the date of receipt of the aforesaid information to determine whether or not the Tenant is of sufficient financial strength. The condition referred to in this paragraph shall have been satisfied when the Landlord has so notified the Tenant in writing within the time limited above. If no such notification in writing is given or the Landlord advises the Tenant that it is not satisfied with the Tenant's financial strength this Offer shall become null and void and the Deposit returned in full. 11. NO REPRESENTATION There are no covenants, representations, agreements, warranties or conditions in any way relating to the subject matter of this agreement expressed or implied, collateral or otherwise, except as expressly set forth herein. 12. TIME OF THE ESSENCE Time is of the essence of the Agreement with respect to the covenants of the Tenant. 13. TIME FOR ACCEPTANCE This Offer shall be irrevocable and open for acceptance by the Landlord until twelve o'clock noon on the 4th day of July, 1997 after which time if not accepted this Offer shall become null and void and the Deposit shall be returned in full. Acceptance of this Offer may be communicated by facsimile transmission of an accepted Offer or by delivery of such facsimile without limiting other methods of communicating acceptance available to the parties. 14. DEFINITIONS Words defined in the Lease and used herein shall have the same meaning ascribed to them by the Lease. 15. OFFER PROVISIONS All terms of this Offer shall survive the completion of this transaction and shall not merge. In the event of any conflict between the terms of this Offer and the terms of the Lease, the terms of this Offer shall prevail. 16. DISCLOSURE The Landlord and Tenant acknowledge and agree that: (i) in accordance with the Code of Ethics of the Canadian Real Estate Association, Colliers Macaulay Nicolls Inc. (the "Agent") has disclosed that it is representing the Landlord and the Tenant in the transaction described in this Agreement. (ii) the Agent, in order to accommodate the transaction described in this Agreement, was and is entitled to pass any relevant information it receives from either party or from any other source to either of the parties as the Agent sees fit, without being in conflict of its duties to either party; and (iii) the Landlord shall pay the commission and compensation due to the Agent pursuant to the transaction described in this Agreement. The Landlord acknowledges and agrees that the Agent is entitled to pass any relevant information it receives from the Landlord or from any other source to the Tenant as the Agent sees fit, without being in conflict of its duty to the Landlord. DATED this 1st of July, 1997 PREMIUM CIGARS INTERNATIONAL (Tenant) Per: /s/ Steven A. Lambrecht CEO ----------------------------------- Name Per: ----------------------------- Name Witness: ----------------------------- Name ACCEPTANCE Marine Way Estates Ltd, hereby accept the above offer this 24th day of June, 1997. MARINE WAY ESTATES LTD. (Landlord) Per: /s/ [illegible] ----------------------------- Name Per: ----------------------------- Name EX-23.1 26 INDEPENDENT AUDITOR'S CONSENT SEMPLE & COOPER, LLP |BDO CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS |SEIDMAN ========================================================================-------- 2700 NORTH CENTRAL AVENUE, ELEVENTH FLOOR, PHOENIX, ARIZONA 85004 ALLIANCE * TEL 602-241-1500 * FAX 602-234-1867 INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the use in this Amendment No. 2 to the Registration Statement of Premium Cigars International, Ltd. and Subsidiary of our report dated June 18, 1997 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in the Prospectus. /s/ Semple & Cooper, LLP Semple & Cooper, LLP Phoenix, Arizona July 25, 1997 -----END PRIVACY-ENHANCED MESSAGE-----