-----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, E0G/DSzLI8RkvkGPB3AcRwB8IF6NKS1lST+kIWr1PErKx+DT8/QSq0gxdnCxOBmI IV346zx4PNcMsoJPitmJiA== 0000950147-98-000943.txt : 19981123 0000950147-98-000943.hdr.sgml : 19981123 ACCESSION NUMBER: 0000950147-98-000943 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 DATE AS OF CHANGE: 19981120 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUM CIGARS INTERNATIONAL LTD CENTRAL INDEX KEY: 0001041479 STANDARD INDUSTRIAL CLASSIFICATION: 2100 IRS NUMBER: 860846405 STATE OF INCORPORATION: AZ FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10QSB SEC ACT: SEC FILE NUMBER: 001-13273 FILM NUMBER: 98752744 BUSINESS ADDRESS: STREET 1: 15651 N 83RD WAY STREET 2: STE 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 10QSB 1 QUARTERLY REPORT FOR THE QTR ENDED 9/30/98 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-QSB QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED COMMISSION FILE NUMBER --------------------- ---------------------- September 30, 1998 0-29414 PREMIUM CIGARS INTERNATIONAL, LTD. (Exact name of small business issuer as specified in its charter) Arizona 86-0846405 (state or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 15849 North 77th Street Scottsdale, Arizona 85260 (Address of principal office) (Zip code) Registrant's telephone number, including area code: (602) 922-8887 Securities registered pursuant to Section 12(b) of the Act: No par value common stock Securities registered pursuant to Section 12(g) of the Act: No par value common stock Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934 during the preceding 12 months (or for such shorter periods that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] As of September 30, 1998, there were 3,469,092 shares of Premium Cigars International, Ltd. common stock, no par value, outstanding. INDEX PART I - FINANCIAL INFORMATION Item 1 - Financial Statements........................................... 3 Condensed Consolidated Balance Sheet (Unaudited) as of September 30, 1998............................................. 3 Condensed Consolidated Statements of Operations (Unaudited) for the nine months ended September 30, 1998 and the three months ended September 30, 1997...................................... 4 Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 1998 and 1997................ 5 Notes to Condensed Consolidated Financial Statements................. 6 Special Note Regarding Forward-Looking Statements.................... 8 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation................... 9 PART II - OTHER INFORMATION Item 1 - Legal Proceedings..............................................13 Item 2 - Changes in Securities and Use of Proceeds......................13 Item 3 - Defaults Upon Senior Securities................................14 Item 4 - Submission of Matters to a Vote of Security Holders............14 Item 5 - Other Information..............................................14 Item 6 - Exhibits and Reports on Form 8-K...............................15 SIGNATURES....................................................................16 2 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONDENSED CONSOLIDATED BALANCE SHEET September 30, 1998 ------------- (Unaudited) ASSETS Current Assets: Cash and cash equivalents $ 197,212 Available for sale securities 130,736 Accounts receivable - trade, net 935,228 Inventory, net (Note 3) 1,829,627 Other current assets (Note 5) 189,184 ----------- Total Current Assets 3,281,987 ----------- Property and Equipment, net 587,834 ----------- Other Assets: Humidors, net 1,006,455 Other assets 56,513 ----------- 1,062,968 ----------- $ 4,932,789 =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable and accrued expenses (Note 4) 1,069,009 ----------- Total current liabilities 1,069,009 ----------- Commitments and Contingencies -- ----------- Stockholders' Equity: Common stock - no par value, 10,000,000 shares authorized, 3,469,092 shares issued and outstanding 8,807,049 Foreign currency translation adjustment (66,056) Accumulated deficit (4,877,213) ----------- Total Stockholders' Equity 3,863,780 ----------- $ 4,932,789 =========== The accompanying notes are an integral part of the condensed consolidated financial statements 3 PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS Three Months Ended Nine Months Ended September 30, September 30, ------------------------ ------------------------ 1998 1997 * 1998 1997 * ---- ---- ---- ---- Unaudited) (Unaudited) (Unaudited) (Unaudited) Net Sales $2,000,622 $1,372,316 $ 5,264,226 $ 2,333,422 Cost of Sales 1,452,290 1,041,153 3,997,059 1,799,297 ---------- ---------- ----------- ----------- Gross Profit 548,332 331,163 1,267,167 534,125 Selling, General and Administrative 1,256,315 787,644 3,766,479 1,300,809 Severance Packages (Note 4) 395,173 Stock Based Compensation 317,625 ---------- ---------- ----------- ----------- Loss from Operations (707,983) (456,481) (2,894,485) (1,084,309) Other Income (Expense) 33,883 2,371 128,796 (32,697) ---------- ---------- ----------- ----------- Net Loss $ (674,100) $ (454,110) $(2,765,689) $(1,117,006) ========== ========== =========== =========== Basic Loss per Share $ (0.19) $ (0.20) $ (0.80) $ (0.65) ========== ========== =========== =========== Weighted Average Number of Shares Outstanding 3,469,092 2,251,371 3,469,092 1,719,402 ========== ========== =========== =========== * As restated for comparative purposes only. The accompanying notes are an integral part of the condensed consolidated financial statements 4 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS Nine Months Ended September 30, ------------------------- 1998 1997 ---- ---- (Unaudited) (Unaudited) Cash flows from operating activities: Net loss $(2,765,689) $(1,117,006) Adjustments to reconcile net loss to net cash provided by (used for) operating activities: Depreciation and amortization 548,911 101,798 (Increase) decrease in accounts receivable (323,384) (251,252) (Increase) decrease in inventories (528,018) (257,965) Increase (decrease) in accounts payable and accrued expenses (64,852) 877,066 Stock issued for services and compensation 317,625 Net change in other assets and liabilities (47,038) (152,355) ----------- ----------- Net cash provided by (used for) operating activities (3,180,070) (482,089) ----------- ----------- Cash flows from investing activities: Purchase of humidors (718,158) (561,077) Purchase of equipment (486,691) (206,439) Purchase of short term investments (3,411,897) Other uses (net) (97,082) Proceeds from sale of available for sale securities 3,339,734 ----------- ----------- Net cash provided by (used for) investing activities 2,134,885 (4,276,495) ----------- ----------- Cash flows from financing activities: Net proceeds (repayment) from (on) notes payable (99,650) Net proceeds from issuance of common stock 8,320,982 ----------- ----------- Net cash provided by financing activities -- 8,221,332 ----------- ----------- Effect of exchange rate changes on cash and cash equivalents (21,968) -- ----------- ----------- Net increase (decrease) in cash and cash equivalents (1,067,153) 3,462,748 Cash and cash equivalents, beginning of period 1,264,365 51,669 ----------- ----------- Cash and cash equivalents, end of period $ 197,212 $ 3,514,417 =========== =========== The accompanying notes are an integral part of the condensed consolidated financial statements 5 PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. PRESENTATION OF INTERIM INFORMATION In the opinion of the management of Premium Cigars International, LTD. and Subsidiary (the "Company"), the accompanying condensed consolidated financial statements include all normal adjustments considered necessary to present fairly the financial position as of September 30, 1998, and the results of operations for the three months and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. Interim results are not necessarily indicative of results for a full year. The condensed consolidated financial statements and notes are presented as permitted by the instructions to Form 10-QSB, and therefore do not contain certain information included in the Company's audited consolidated financial statements and notes for the nine month period ended December 31, 1997. 2. FINANCIAL STATEMENTS The condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. All significant intercompany accounts and transactions have been eliminated. 3. INVENTORIES As of September 30, 1998, inventory consists of the following: Cigars and cigar accessories $1,839,990 Reserve for inventory spoilage (10,363) ---------- $1,829,627 ========== 4. SEVERANCE PACKAGES Subsequent to January 1, 1998 , the company terminated employment agreements with certain former officers and employees of the Company. Under the terms of the various employment agreements, severance pay ranges from six to nine months of salary, payable over the same six or nine month period. Additionally, three of the former officers received lump-sum payments of $40,000 each as settlement for potential claims against the company. As part of the settlement, each of the individuals agreed to extend their non-compete clauses for an additional six months for a total of a full year and one-half following termination of employment and released the Company from all claims or causes of action relating to their respective employment agreement and their employment with the company. 6 The severance packages are broken out as follows: Severance pay $251,500 Payroll taxes 18,553 Other benefits 5,120 Lump sum payments 120,000 -------- $395,173 ======== As of September 30, 1998 the balance of accrued severance benefits was $53,504. 5. RELATED PARTY TRANSACTIONS In March of 1998, the Company terminated its distributorship agreement with Rose Hearts, Inc., which was wholly-owned by a director of the Company, after it determined that in practice, the agreement was not as favorable to the Company as those generally available with unaffiliated third parties. The Company has notes receivable from two director/shareholders of the Company in the aggregate amount of $86,225. The notes, which bear interest at 6%, are due on March 31,1999. Accrued interest as of September 30, 1998 is $12,072. The total of the notes receivable plus accrued interest is included in other current assets in the Company's condensed consolidated balance sheet. 6. SUBSEQUENT EVENT Subsequent to September 30,1998 the Company reached an agreement in principle for a $1,000,000 secured revolving line of credit agreement with a commercial lender. The line will be subject to the terms and conditions of final loan documents to be executed, and will be tied to accounts receivable and inventory balances and will be secured by accounts receivable and inventory, as well as other unencumbered assets of the Company. 7 SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS Some of the statements contained in this report discuss future expectations, contain projections of results of operations or financial condition or state other "forward-looking" information. Those statements are subject to known and unknown risks, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by the statements. The forward-looking information is based on various factors and was derived using numerous assumptions. Important factors that may cause actual results to differ from forward-looking statements and projections include, for example: + our ability to maintain an adequate capital position and a sufficient cash flow as we add retail stores required by commitments with our customers and distributors; + our ability to raise additional capital, if current financing is depleted, to enable us to maintain sufficient working capital for operating activities; + any decision by major retail chains to discontinue selling all tobacco products or to place our humidors in a disadvantageous location within their stores; + changes in government regulations, tax rates and similar matters, including any restriction on the single sales of both cigars or self-service nature of merchandising displays and marketing promotions; + the risk of any significant uninsured loss from potential passenger claims as a result of a September 1997 automobile accident in which one of our employees was the driver; + the possible negative impact of any final settlement of litigation among up to 46 States and major U.S. cigarette manufacturers; + our ability to buy quality premium cigars at favorable prices and the effect on cigar prices and availability, of weather and other conditions in the countries that import cigars to the U.S. and Canada; + our ability to negotiate and maintain favorable distribution arrangements with customers; + the effect of changing economic conditions; + a decline in the popularity of cigar smoking and/or possible adverse public opinion against cigars and cigar smoking; and + other risks which were described in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997 or 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. 8 ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You must read the following discussion on the financial condition and results of operations of Premium Cigars International, LTD. ("PCI") in conjunction with PCI's condensed consolidated financial statements, including the notes elsewhere in this Form 10-QSB filing. Historical results are not necessarily an indicator of trends in operating results for any future period. PCI is an international marketer of premium cigars from its humidors and promotional programs located in high traffic retail outlets. PCI operates in one business segment and has a December 31 fiscal year. RESULTS OF OPERATIONS The following table sets forth, for the three months and nine months ended September 30, 1998 and 1997, certain items from PCI's Condensed Consolidated Statements of Income expressed as a percentage of net sales. Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 1998 1997 1998 1997 ---- ---- ---- ---- Net Sales 100.0% 100.0% 100.0% 100.0% Cost of Sales 72.6% 75.9% 75.9% 77.1% ----- ----- ----- ----- Gross Profit 27.4% 24.1% 24.1% 22.9% SG&A and Other Operating Expenses 62.8% 57.4% 79.0% 69.3% ----- ----- ----- ----- Loss from Operations (35.4%) (33.3%) (54.9%) (46.4%) Other Income (Expense) 1.7% .2% 2.4% (1.4%) ----- ----- ----- ----- Net Loss (33.7%) (33.1%) (52.5%) (47.8%) ===== ===== ===== ===== 9 COMPARISON OF THE THIRD QUARTER OF 1998 WITH THE THIRD QUARTER OF 1997 Net sales for the quarter ended September 30, 1998 increased by $628,000, a 46% increase over the same period last year. The increase in net sales is a result of increased store count versus prior year, as well as improved re-order rates which we believe, result from bringing the U.S. customer service function in-house beginning in April of 1998. Gross profit margin improved to 27% for the quarter ended September 30, 1998, up from 24% in the quarter ended September 30, 1997. The improvement is mainly attributable to more favorable purchasing arrangements with key suppliers versus those available to PCI one year ago, as well as the contribution from higher margin, higher priced cigars that were introduced during the second quarter of 1998. Additionally, higher sales volume during the 1998 period allowed for greater absorption of fixed warehousing costs. Selling, general and administrative expenses for the quarter ended September 30, 1998 increased $469,000, or 60% from the same period one year ago. SG&A as a percentage of sales was 63% for the quarter ended September 30, 1998 compared to 57% for the same period one year ago. The increase is attributable to the development of the infrastructure that has been put into place as we continue to invest in the systems and people necessary to generate future revenue and manage operations. The year ago SG&A represents the costs for a start-up organization just prior to PCI's initial public offering. Other income for the quarter ended September 30, 1998 consists mainly of interest income from short-term investments which were purchased with a portion of the net proceeds from our initial public offering, as well as an adjustment for foreign currency conversion. Other income for the quarter ended September 30, 1997 consists of interest income from short-term investments, offset by interest expense on notes payable. COMPARISON OF THE FIRST NINE MONTHS OF 1998 WITH THE FIRST NINE MONTHS OF 1997 Net sales for the nine months ended September 30, 1998 increased $2.9 million, an increase of 126% over the nine months ended September 30, 1997. As discussed above, the increase is due to the increase in the number of stores participating in the humidor program, as well as improving second and third quarter 1998 re-order rates. Gross profit margin for the nine months ended September 30, 1998 improved slightly to 24%, up from 23% for the same period one year ago. The improvement from more favorable purchasing arrangements with key suppliers versus those available to PCI one year ago, as well as the contribution from higher margin, higher priced cigars that were introduced during the second quarter of 1998 is offset somewhat by lower margins during the first quarter of 1998. The lower margins during the first quarter of 1998 were due mainly to a higher percentage of lower margin cigars that were sold in Canada, as well as increased labor costs incurred in consolidating warehouse space and inspecting inventory for possible damage. 10 Selling, general and administrative expense for year to date 1998 increased $2.47 million, or 190% over the comparable figures for 1997. SG&A as a percentage of sales was 72% for the nine months ended September 30, 1998 compared to 56% for the same period one year ago. As previously discussed, the increase is attributable to the development of the infrastructure that has been put into place to generate future revenue and manage operations. Severance Packages - As discussed in the 1997 Form 10-KSB, we took a one-time charge in the first quarter of 1998 to reflect the cost of severance packages for previous Management. The amount charged against earnings was $395,173. Stock based compensation - During the first half of 1997 certain employees purchased Common Stock at a per share price that was determined to have a market value in excess of the amount paid by the employees. Additional compensation was recorded for the amount of the excess market value, or $317,265. Other income for the nine months ended September 30, 1998 consists primarily of interest income from short-term investments which were purchased with a portion of the net proceeds from our initial public offering . Other expense for the nine months ended September 30, 1997 consists primarily of interest expense on notes payable. 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. Prior to our initial public offering, we raised capital through the issuance of stock and notes payable, as well as obtaining a line of credit from a bank. On September 29, 1997 we completed an initial public offering that resulted in net proceeds to PCI of $8,131,664. See Item 2(c), "Use of Proceeds" for application of the proceeds. PCI used $3.2 million for operating activities for the first nine months of 1998, which was largely attributable to the net loss incurred during the period. Non-cash expenses (depreciation and amortization) of $549 thousand were offset by increases, as discussed below, in accounts receivable and inventory. Cash used for operations includes $342 thousand in severance benefits paid to former management of PCI. As of September 30, 1998 the combined balance of cash and available for sale securities totaled $328,000, a decrease of $4,407,000 or 93% from December 31, 1997. The decline is due to the net loss incurred for the nine months ended September 30, 1998 as well as PCI's continued additional investments in humidors and property and equipment. Accounts receivable at September 30, 1998 increased $298,000 or 47% from December 31, 1997. The increase is due to the increased level of sales during 1998, as the annualized accounts receivable turnover rates were virtually the same for each period. 11 Net inventories at September 30, 1998 increased $507,000, or 38% from December 31, 1997. The increase is attributable to: 1) inventory returned by customers as part of the cigar trade-out program that was implemented during the first half of 1998; 2) a gradual shift in inventory mix to higher priced, and therefore, higher cost cigars; and 3) an overall increase in the number of cigars on hand to support a higher volume of sales. We are developing programs to eliminate our investment in obsolete and discontinued cigars and expect to reduce this figure over the next several months. As part of PCI's humidor program, a humidor is sent with each initial order of cigars as new stores are added. While PCI retains ownership of the humidor, the store is not charged for the humidor unless it is lost or damaged by the store. Therefore, as new stores continue to be added, PCI requires capital to purchase the humidors it sends out as part of the initial order. Capital expenditures (excluding humidors) totaled $487,000 for the nine months ended September 30, 1998. This included the cost of new office furniture and leasehold improvements for our new facility, continued investment in computer equipment and software applications, and warehouse machinery and equipment. Accounts payable and accrued expenses at September 30, 1998 decreased $83,000, or 7% from December 31, 1997. Decreases in the amount of tobacco taxes payable were largely offset by increases in budgeted accrued incentive plan pay-outs and accrued severance benefits. We have no current plans that represent a material change from the use of proceeds described in the Prospectus dated August 21, 1997. We have reached an agreement in principle to obtain a $1,000,000 revolving line of credit tied to our accounts receivable and inventory balances, which we believe will provide the necessary working capital for our immediate needs. However, we cannot assure you that we can generate sufficient revenues to provide the cash flow necessary to meet our anticipated future expansion or our working capital needs. Based on anticipated terms of final loan documents, we will draw an initial $100,000. Our lender will review our books and records, and if approved, our accounts receivable balances on or near the date of filing of this Form 10-QSB would permit us to draw on approximately $525,000 of the total available line. Because the loan documents are not yet final, we cannot determine the amount of funds we may ultimately obtain under this line of credit. If additional funding is required, we cannot assure you that we can raise this or other additional capital which may be required through the issuance of long-term or short-term debt or the issuance of securities in private or public transactions. YEAR 2000 READINESS We purchased most of our computers within the past year and do not anticipate any significant problems relative to their Year 2000 ("Y2K") capabilities. Testing of each machine's capability is expected to be completed by the end of the first quarter of 1999. We have not yet implemented a plan to identify the non-IT (Information Technology) systems (i.e., those systems with an imbedded technology such as microcontrollers) which may require repair or replacement; however, given the nature of our operations and the age of our business, we do not believe that we face any material risk from these types of systems. 12 Our business relies to a large extent on our integrated accounting, order entry, and inventory control system (SBT Pro Series 5.0), which is represented by the vendor as being Y2K compliant. We also rely on standard office productivity software (Microsoft Office 97) which is also represented as being Y2K compliant. Our EDI software, which we use to transmit invoices and receive payment information from our largest U.S. customer is non-compliant. The cost to replace this software is not expected to be material and we intend to identify suitable alternatives by the end of the first quarter of 1999. We are in the process of determining the compliance of our other software and expect to have this completed by the end of the first quarter of 1999. We will soon begin contacting key customers, vendors, service providers and other third parties with whom business is conducted to determine what impact, if any, their Y2K readiness will have on us; this process is expected to be completed by the end of the first quarter of 1999. Although we do not anticipate any material adverse effect on our business as a result of such parties failure to achieve Y2K readiness, we cannot assure you that these parties will have accurately assessed their Y2K readiness status. At this time, we do not believe that we will incur any material expenditures to identify and replace, as necessary, any Y2K non-compliant systems. We do not anticipate any material effect to our business from any non-compliant PCI-owned systems; however, we are unable at this time to determine what, if any, effect on our business will occur from any third parties non-compliant systems. We expect to be better able to assess this uncertainty as we obtain more Y2K information from these parties. We do not currently have a contingency plan in place to handle a "worst case scenario", as we believe that any non-compliant systems on our part do not pose a material risk to PCI. If, and to the extent that we identify material risks to PCI from third parties non-compliance, we will formulate a plan at that time. PART II - OTHER INFORMATION ITEM 1 - LEGAL PROCEEDINGS None ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS (a) None. (b) None. (c) Use of Proceeds. PCI provides the following information in accordance with Item 701(f) of Regulation S-B: 13 1. PCI's Registration Statement on Form SB-2 (File No. 333-29985) was declared effective on August 21, 1997; 2. The offering commenced on August 21, 1997. 3. The offering did not terminate before any securities were sold. 4(i) to 4(vi). In response to subparagraphs 4(i) to 4(vi), the Registrant incorporates by reference its response to subparagraphs 4(i) to 4(vi) of Item 5 of its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. 4(vii). From the effective date of PCI's Registration Statement, August 21, 1997 to September 30, 1998, the net offering proceeds were applied as follows: $1,200,000 to repayment of debt, $1,196,911 to purchase humidors, $2,030,445 to purchase inventory, $2,103,676 for sales and marketing and $1,599,632 in temporary investments and other net working capital. 4(viii). In addition, net offering proceeds were applied to the following items, which represent a material change from the use of proceeds described in the Prospectus dated August 21, 1997: In response to this subparagraph 4(viii), the Registrant incorporates by reference its response to subparagraph 4(viii) of Item 5 of its Annual Report on Form 10-KSB for the fiscal year ended December 31, 1997. ITEM 3 - DEFAULTS UPON SENIOR SECURITIES None ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None ITEM 5 - OTHER INFORMATION (a) RELATED PARTY TRANSACTION. The Registrant entered into a Supplier Agreement with Single Cigars, Inc. a wholly owned subsidiary of Single Stick, Inc. dated October 5, 1998, under which Single Cigars, Inc. will supply little cigars known as Prime Time(TM) exclusively to the Registrant (the "Single Stick Transaction") for distribution by the Registrant. Greg Lambrecht, a director of the Registrant, has entered into a consulting arrangement with Single Stick, Inc. Pursuant to his relationship with Single Stick, Inc., Greg Lambrecht will receive consideration including two percent (2%) of the net collected sales price received by Single Stick, Inc. from sales of Prime Time(TM) to the Registrant, as well as shares of Single Stick, Inc. if certain sales criteria are met for the Prime Time(TM) product. Additionally, Greg Lambrecht received a retainer and shares of Single Stick, Inc. under his 14 consulting agreement with Single Stick, Inc. The Registrant's Board of Directors including all of the Registrant's independent directors, have approved the transaction with Single Cigars, Inc. and have found the terms to be fair to the Registrant. (b) ADDITIONAL RISK DISCLOSURE. A part of the Registrant's distribution business now includes the distribution of little cigars known as Prime Time(TM). Federal or state regulation of little cigars in the future may impair the success of this line of business. Specifically, little cigars may be treated as cigarettes under government regulations. Canada has implemented regulations which would largely restrict single cigarette sales, and the United States Food and Drug Administration ("FDA") previously approved regulations for cigarettes, which, if applied to little cigars, would significantly impair the Registrant's ability to distribute little cigars acquired under the Single Stick Transaction. While the FDA regulations are not currently in effect because a United States Circuit Court of Appeals has held that the FDA did not have the authority to enact such regulations, the United States Supreme Court could reverse that ruling or the United States government could enact similar provisions in the future. (c) LINE OF CREDIT. The Registrant has reached an agreement in principle for a $1.0 million secured line of credit with Altres Financial. The line of credit will be subject to the terms and conditions of final documents to be executed, and will be tied to and secured by the Registrant's outstanding accounts receivable and inventory balances. See "Management's Discussion and Analysis of Financial Conditions and Results of Operation - Liquidity and Capital Resources." (d) JOHN GREENWELL PURCHASE OF STOCK. In October, 1998, John Greenwell, President and CEO of the Registrant, entered into agreements with Greg Lambrecht, Colin Jones and Dan Goldman to purchase a total of 350,000 shares of the Registrant, pending regulatory approval from the coordinated equity review states. Regulatory approval was received on November 12, 1998, and the transaction is scheduled to close promptly. ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits Exhibit Number Exhibit Name Method of Filing - - ------ ------------ ---------------- 3.1 Articles of Incorporation (1), Exhibit 3.1 3.2 Amended and Restated Bylaws, Adopted May 8, 1998 (2), Exhibit 3.2 4.1 Specimen Common Stock Certificate (1), Exhibit 4.2 4.2 Description of Rights of Security Holders (1), Exhibit 4.1 15 10.1 Supplier Agreement between the Registrant and Exhibit filed Single Cigars, Inc. dated October 5, 1998 herewith (3) 27.1 Financial Data Schedule Exhibit filed herewith 99.1 "Underwriting" section of Registration Statement on Form SB-2 (4) - - ---------- (1) Incorporated by reference to Registration Statement on Form SB-2 (file no. 333-29985) declared effective on August 21, 1997. (2) Incorporated by reference to Exhibit 3.2 of the Form 10-QSB filed by the Registrant for the quarter ending June 30, 1998. (3) Portions of the exhibit omitted and filed separately with the Commission pursuant to the Confidential Treatment provisions of Regulation ss. 240.24b-2. (4) Incorporated by reference to pages 56-57 of Registration Statement on Form SB-2 (file no. 333-29985) declared effective on August 21, 1997. (b) Reports on Form 8-K None. SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. PREMIUM CIGARS INTERNATIONAL, LTD. (Registrant) /s/ John E. Greenwell Date: November 16, 1998 - - ------------------------------------------- John E. Greenwell President & Chief Executive Officer /s/ Stanley R. Hall Date: November 16, 1998 - - ------------------------------------------- Stanley R. Hall Controller and principal accounting officer 16 EX-10.1 2 SUPPLIER AGREEMENT WITH SINGLE CIGARS, INC. SUPPLIER AGREEMENT - CIGARS This Supplier Agreement ("Agreement") is entered into this 5th day of October, 1998 between Premium Cigars International, Ltd., an Arizona corporation ("PCI") and Single Cigars, Inc., an Arizona corporation ("Supplier"), which is a wholly owned subsidiary of Single Stick, Inc., an Arizona corporation. RECITALS -------- WHEREAS, Supplier is engaged in the production of little cigars to be marketed under the trademark of "PrimeTime" (the "Cigar Products") and desires to sell the Cigar Products to PCI; and WHEREAS, PCI is engaged as a wholesale distributor of premium cigars, humidors and other products to retail accounts worldwide and desires to secure a quality supply of Cigar Products. NOW, THEREFORE, for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, PCI and Supplier agree as follows: 1. APPOINTMENT AND ACCEPTANCE OF EXCLUSIVITY. Subject to the terms herein, Supplier agrees to exclusively supply the Cigar Products to PCI for the term set forth in paragraph 2 herein, provided PCI satisfies the Purchase Requirements described in paragraph 3 herein and provided PCI is not in default under the terms of this Agreement. Unless PCI fails to satisfy the Purchase Requirements set forth in paragraph 3 herein or PCI is in default under the terms of this Agreement, Supplier acknowledges and agrees that, during the term of this Agreement, it shall not supply the Cigar Products or little cigars to any manufacturer, supplier, distributor, retailer or other person or entity, other than PCI, worldwide and shall not be a distributor of the Cigar Products or little cigars. During the term of this Agreement and provided Supplier is not in default under the terms of this Agreement, PCI shall not be a distributor of products in direct competition with the Cigar Products or little cigars manufactured by Supplier. Subject to the foregoing, PCI may sell and distribute cigars and related products (but not little cigars in single tubes) without violating the terms of this Agreement. Subject to the foregoing, PCI acknowledges that Supplier sells and distributes other tobacco products including cigarettes. 2. TERM. Subject to the terms set forth in Sections 15 and 18 herein, the term of this Agreement shall be for five (5) years from the date hereof and shall automatically be renewed for an additional five (5) year period, subject to the conditions set forth below. No later than 45 days prior to the expiration of the initial five (5) year period, PCI and Supplier shall use their best efforts to mutually agree on Purchase Requirements, as defined below, for years 6 through and including 10 as evidenced by a written addendum to this Agreement. If the parties are unable to agree on such Purchase Requirements, the parties shall retain an independent third party with substantial experience in the cigar 1 * Confidential portions omitted and filed separately with the Commission. business ("Third Party") to establish the Purchase Requirements for years 6 through and including 10, taking into account the following: past per store sales, purchase history, regulatory climate, competitive products, market and industry factors and other relevant issues. The parties hereto agree that the Purchase Requirements as determined by such Third Party shall be binding on the parties hereto and PCI and Supplier agree to split 50/50 any fees and costs charged by such Third Party in connection with its evaluation and determination of the Purchase Requirements. If the parties hereto cannot agree on a Third Party, PCI and Supplier shall each select a qualified party with substantial experience in the cigar business and such two qualified parties selected shall select another qualified party with experience in the cigar business and such party shall establish the Purchase Requirements for years 6 through and including 10, which shall be binding on the parties hereto. 3. PURCHASE REQUIREMENTS. PCI shall order from Supplier minimum orders of Cigar Products as set forth on the attached Exhibit "A" (the "Purchase Requirements"). The Cigar Products must satisfy the specifications of PCI as to blend, color, flavor, tip, concentration, quality and packaging as more specifically set forth on Exhibit B attached hereto. The final specifications shall be deemed Confidential Information and evidenced by both parties signing Exhibit B. PCI must give Supplier at least three months prior notice of any proposed change in the specifications for the Cigar Products. The parties agree to work together to effectuate a smooth transition to Cigar Products with new specifications and to mitigate the costs to both parties. The Purchase Requirements shall be calculated on a cumulative basis. The parties agree that such purchases shall generally be made on a monthly basis taking into account the existing production capacity of Supplier and requirements of PCI. If in any given period, the purchase orders by PCI exceed the Purchase Requirements set forth on the attached Exhibit "A," such excess amount shall be applied to the Purchase Requirements for the next succeeding fiscal quarter. Within thirty (30) business days of PCI's receipt of any Cigar Products delivered by Supplier pursuant to a PCI purchase order, PCI may return any or all of such Cigar Products because of damage or quality problems. PCI must notify Supplier as to nature of defect. Pursuant to the written instruction of PCI, Supplier shall as soon as possible. replace such returned Cigar Products. If damaged Cigar Products are not replaced within 60 days, Supplier shall immediately refund all monies paid for said product. Notwithstanding anything mentioned herein to the contrary, in the event that the FDA or any federal or state, governmental agency or legislative body at any time enacts any legislation, rule, regulation, ordinance or law which would prevent PCI from selling the Cigar Products in the same manner as it is selling its cigars as of the date of this Agreement or have a material adverse impact on the sales of Cigar Products, the Purchase Requirements shall be adjusted based on the following formula: 10 Cigar Products per day x 90 days x number of stores affected. Such adjusted Purchase Requirements shall be applicable to the fiscal quarter as of the date of the foregoing event and all subsequent fiscal quarters thereafter unless otherwise modified as provided for herein. In the event PCI fails to meet the Purchase Requirements for any given fiscal quarter as set forth on Exhibit A, as modified and PCI fails to cure such default within 60 days of the end of such fiscal quarter, PCI shall be deemed to be in default under the terms of this Agreement. To the extent the Purchase Requirements are reduced below 60% of the then current or future Purchase Requirements as set forth on Exhibit A due to the events described above, either PCI or Supplier may give the other party 30 days prior written notice of its election to terminate this Agreement. 2 * Confidential portions omitted and filed separately with the Commission. 4. PURCHASE PRICE; Adjustment of Price. During the term of this Agreement, PCI shall pay Supplier the price ("Purchase Price") for the Cigar Products of no higher than * per unit including the federal tobacco tax paid by Supplier. Such prices are subject to factory increases or decreases, provided Supplier delivers to PCI invoices and other information in a form acceptable to PCI which verify such increases or decreases and provided such cost increases or decreases are greater than ten percent (10%) of the actual costs of plastic and tobacco paid by Supplier for the manufacture of Cigar Products as of the date of this Agreement or the date of the latest adjustment to the Purchase Price, whichever is later. If any increases or decreases for the actual costs of plastic and tobacco paid by Supplier for the Cigar Products is ten percent (10%) or less there shall be no adjustment to the Purchase Price. Increases or decreases are subject to verification by PCI. For example, if the actual cost of plastic and tobacco paid by Supplier for the manufacture of Cigar Products has increased by fifteen percent (15%) from the date of this Agreement and PCI is able to verify such cost increases the Purchase Price shall be increased by fifteen percent (15%) increasing the Purchase Price from * per unit to * per unit. The price of * per unit shall then be the benchmark Purchase Price and any further increases or decreases in the Purchase Price shall be based on an increase or decrease of greater than ten percent (10%) from the benchmark Purchase Price of * per unit. Any increase in the federal cigar tobacco tax, which is in effect as of the date of this Agreement, shall increase the Purchase Price by the amount of such increase. As set forth in Section 18 below, Supplier shall at all times use best efforts to 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. Supplier will invoice PCI by components, separating the price of the tobacco products from the price of all other components, like packaging. The price that Supplier sells the Cigar Products to PCI is net of any state taxes, PCI is responsible to pay Arizona taxes on the price of the tobacco portion of the invoice. 5. PAYMENT TERMS. All payments shall be made within fifteen (15) days of both delivery of the Cigar Products and receipt of the invoice. Failure by PCI to make timely payments shall allow Supplier to require PCI to pay on a COD basis for future deliveries. A late charge of five (5%) of the payment amount shall be added to all payments not made within fifteen (15) days of delivery and receipt of the invoice for the Cigar Products. 6. PACKAGING. At PCI's request, Supplier shall provide appropriate retail packaging including the box in which the Cigar Products are shipped utilizing packaging materials provided by Supplier, at its sole cost, and mutually approved by PCI and Supplier and using logos and designs provided by PCI to Supplier. If prior to the production of the retail packaging, such packaging as set forth in Exhibit B does not reasonably satisfy PCI, Supplier shall provide the Cigar Products, at Supplier's sole expense, in packaging which does satisfy PCI, determined by mutual agreement, as signified by a signed memorandum by officers of each party. Any change to specifications set forth in Exhibit B for packaging must have three months lead-time from PCI to Supplier and the cost difference shall be paid by PCI provided the parties agree to work together to mitigate the costs of such transition. PCI has the right to produce, at its discretion and expense, any and all sales/marketing materials under the 3 * Confidential portions omitted and filed separately with the Commission. PrimeTime name. Supplier shall not produce any sales/marketing materials under the PrimeTime name without the express written approval of PCI. Subject to the provisions herein, PCI retains all ownership and other rights to the packaging materials and any designs, logos or other intellectual property contained in such materials, including without limitation, all trademark rights to the "PrimeTime" brand name. Supplier shall not, by utilizing such materials or intellectual property gain any ownership or other rights to such materials or intellectual property. PCI, at its expense, shall apply for trademark registration of the intellectual property rights described herein. During the term of the Agreement, Supplier will not assign distribution rights to the Cigar Products to anyone except PCI, and the Supplier will not distribute the Cigar Products under the PrimeTime name. In the event that PCI elects to terminate this Agreement because it no longer desires to distribute the Cigar Products, or PCI is in default under the terms of this Agreement, PCI agrees to transfer to Supplier all of its rights, title, and interest in the trademarks associated with the brand name "PrimeTime" and all other intellectual property rights (including related marketing materials) relating to the Cigar Products and to sign all documents requested by Supplier to accomplish such transfer. Except as expressly set forth in the immediate preceding sentence, Supplier shall have no right, title or interest to any intellectual property rights associated with the Cigar Products or Prime Time, which shall remain owned by PCI. To the extent PCI sends written notice to Supplier that it elects to terminate this Agreement due to PCI's desire to no longer distribute the Cigar Products, Supplier may distribute the Cigar Products to the PCI accounts upon sixty (60) days notice to PCI or such earlier date as agreed to by the parties provided Supplier pays PCI for the existing inventory at PCI's cost. 7. DELIVERY. Delivery will be made to PCI FOB Premium Cigars International, Ltd. Warehouse, Scottsdale, Arizona. Supplier shall fill all orders and deliver the Cigar Products by a reliable common carrier, at Supplier's sole expense, within twenty (20) calendar days from the receipt of PCI's orders as long as purchase orders are not in excess of ten percent (10%) of the Purchase Requirements as outlined in Section 3. Any purchase order in excess of ten percent (10%) of the quantities outlined in Exhibit A shall be delivered within 28 days of the date of the purchase order on a best efforts basis subject to the existing production capacity of Supplier. 8. CONFIRMATION OF PURCHASE ORDERS WITH MANUFACTURER(S); VERIFICATION OF PAYMENT. Supplier shall provide to PCI, within three (3) business days of Supplier's receipt of a purchase order from PCI, confirmation of the receipt by Supplier of such purchase order. 9. 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. 10. RISK OF LOSS; INSURANCE. The risk of loss during transit, and up to the time that PCI accepts delivery of the Cigar Products shall be borne by Supplier. Supplier, at its expense, shall secure and maintain comprehensive 4 * Confidential portions omitted and filed separately with the Commission. 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. Each party shall be named as an additional insured on all policies of insurance purchased by either party which applies to the Cigar Products and shall provide copies of such policies to each other. The parties agree to maintain product liability coverage in amounts mutually acceptable to the parties during the term of this Agreement. 11. DEFAULT. Subject to the applicable cure period set forth in paragraph 12 herein, each party shall have the right to terminate this Agreement, effective immediately thereafter upon delivery to the other of written notice of termination, in the event that one or more of the following events shall occur: a. Either party 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 its property or business; b. Either party is adjudicated bankrupt; or c. Supplier or PCI neglects or fails to perform any of their respective material covenants or obligations hereunder. 12. OPPORTUNITY TO CURE DEFAULT. Each party shall have sixty (60) days from the date of receipt of notice of default to cure any condition creating a non-monetary default. If the default pursuant to this section shall be a monetary default, then the defaulting party shall have 10 days from the date of receipt of such notice of default to cure the default and thereafter all sums due and payable as of the expiration of the cure period shall bear interest at the rate of twelve percent (12%) per annum until paid. 13. REMEDIES. Upon an Event of Default as defined in paragraph 11 herein, the non-defaulting party can pursue all of its legal and equitable remedies. 14. DISPENSERS. Supplier hereby grants to PCI the right to use dispensing units to sell Cigar Products supplied by Supplier, at no cost to PCI, during the term of this Agreement. Such dispenser units may not be used by PCI for the sale of any other products except Cigar Products manufactured by Supplier. If this Agreement is terminated due to a default by Supplier, Supplier hereby transfers to PCI all of its right, title and interest in the dispensers located at all retail locations and PCI would have the right to contract for a similar dispenser from another party. If PCI is in default under the terms of this Agreement, PCI shall deliver to Supplier a list of locations where such dispensers are located and Supplier may, at its own cost, collect the dispensers from such locations and PCI shall return to Supplier all other dispensers in its inventory. 15. 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 5 * Confidential portions omitted and filed separately with the Commission. performance of the Cigar Products or related in any way to its manufacturing, shipment, transport or delivery, including, but not limited to, any violation of Section 16, 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 Cigar Products created or prepared 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 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. PCI shall indemnify and hold Supplier and its officers, directors, shareholders, employees agents harmless from and against all claims, cost or expense including attorneys fees incurred by Supplier as a result of PCI's breach of this Agreement or arising from PCI's distribution of the Cigar Products. 16. NO CUBAN TOBACCO OR ILLEGAL SUBSTANCES; COMPLIANCE WITH LAWS. Supplier specifically represents and warrants to PCI that no Cuban tobacco 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. Supplier certifies that the Cigar Product satisfies the criteria for a "cigar" with respect to all applicable regulations, guidelines and statutes, including without limitation, any regulations or guidelines promulgated by the Bureau of Alcohol, Tobacco and Firearms or the FDA. 17. EFFECT OF TERMINATION. Upon termination of this Agreement, the parties agree as follows: a. Supplier shall immediately cancel all purchase orders that PCI has placed with Supplier relating to the Cigar Products. b. Notwithstanding anything contained herein to the contrary, PCI shall be allowed to maintain and/or order a reasonable 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. c. Each party shall continue to be bound by Section 18 herein regarding Confidential Information. d. Supplier and PCI agree to promptly return to the other party all Confidential Information, as that term is defined in Section 18 herein, and all other documents and equipment pertaining to this Agreement. e. Each party shall take such actions as required by this Agreement including the transfer of any rights from PCI to Supplier as contemplated herein. 6 * Confidential portions omitted and filed separately with the Commission. 18. CONFIDENTIAL INFORMATION. Supplier and PCI recognize that as a result of their relationship, Supplier and/or PCI may in the future develop, obtain or learn about Confidential Information which is the property of the other party or which is deemed as confidential. a. AGREEMENT TO PROTECT CONFIDENTIAL INFORMATION. The parties agree to use their best efforts and the utmost diligence to guard, protect and keep confidential said Confidential Information, and agree that they will not, during or after the period of this Agreement, use for themselves or others, or divulge to others any of said Confidential Information which either party may develop, obtain or learn about during or as a result of their relationship with the other party, unless authorized to do so by the other party in writing. b. DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes 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 a party an opportunity to obtain an advantage over their competitors who do not know or use it. Confidential Information shall not include information which is required to be disclosed by either party by law or court order, or as a public reporting company under the applicable securities laws or which is or becomes generally known or available by publication or otherwise, or is developed independently by the receiving party without reference to the disclosing party's materials or information. c. NONDISCLOSURE. Each party agrees that they shall not contact directly any customers or companies with which the other party does business as it relates to the Cigar Products, without the prior consent of the other party. Each party agrees that the Purchase Price constitutes "Confidential Information" as defined herein. PCI is solely responsible for any retailer counter fees or slotting allowances paid on behalf of the Cigar Products. d. INJUNCTIVE RELIEF FOR BREACH. In the event of a breach or threatened breach by either party of the provisions of this section, the non-defaulting party shall be entitled to an injunction restraining the defaulting party from disclosing, in whole or in part, 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 either party for such breach or threatened breach, including the recovery of damages from the Supplier. 7 * Confidential portions omitted and filed separately with the Commission. 19. 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: Premium Cigars International, Ltd. 15849 North 77th Street Scottsdale, Arizona 85260 Facsimile: (602) 992-6026 Attention: Brendan McGuinness 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: Single Cigars, Inc. 2432 W. Peoria Avenue Suite 1206 Phoenix, Arizona 85029 Attention: Charles R. Emery with a copy to: Quinn Williams Snell & Wilmer One Arizona Center 400 E. Van Buren Phoenix, Arizona 85004 Facsimile: (602) 382-6070 20. 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, and 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. 8 * Confidential portions omitted and filed separately with the Commission. 21. 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, neither party shall have the right to assign its rights hereunder, without the prior written consent of the other party. 22. 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. 23. 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. 24. 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. 25. 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. 26. ARBITRATION. Disputes arising out of this Agreement shall be settled by binding arbitration to be held in Phoenix, Arizona in accordance with the Commercial Rules of American Arbitration Association. The Arbitrator shall have the right to award the prevailing parties reasonable attorney fees and costs. 27. FORCE MAJUERE. The time limitations set forth in this Agreement, excluding any monetary obligations, shall be extended for a period of any delay due to causes beyond the delayed party's control or which cannot be reasonably foreseen or provided against, including, without limitation, strikes, governmental regulations or orders or events of force majeure. 28. NEW BUSINESS OPPORTUNITIES. PCI will pay for all advertising and sale material relating to the merchandising of the Cigar Products. To the extent Supplier is contacted by a potential customer wishing to carry the Cigar Products in their store, Supplier will notify PCI and PCI will have the exclusive right, at its discretion, to sell the Cigar Products to such potential customer. 9 * Confidential portions omitted and filed separately with the Commission. 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: ------------------------------------- Its: ------------------------------------ "Supplier" SINGLE CIGARS, INC. By: ------------------------------------- Its: ------------------------------------ 10 * Confidential portions omitted and filed separately with the Commission. EXHIBIT "A" PURCHASE REQUIREMENTS QUARTERLY TIME PERIODS # OF CIGAR PRODUCTS ---------------------- ------------------- November 1, 1998 through January 31, 1999 * February 1, 1999 through April 30, 1999 * May 1, 1999 through June 30, 1999 * July 1, 1999 through September 30, 1999 * October 1, 1999 through December 31, 1999 * YEAR 2000 --------- 1st Quarter * 2nd Quarter * 3rd Quarter * 4th Quarter * YEAR 2001 --------- 1st Quarter * 2nd Quarter * 3rd Quarter * 4th Quarter * YEAR 2002 --------- 1st Quarter * 2nd Quarter * 3rd Quarter * 4th Quarter * YEAR 2003 --------- 1st Quarter * 2nd Quarter * 3rd Quarter * 4th Quarter * 11 * Confidential portions omitted and filed separately with the Commission. EXHIBIT "B" SPECIFICATIONS OF CIGAR PRODUCTS AND PACKAGING * 12 * Confidential portions omitted and filed separately with the Commission. EX-27.1 3 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1 U.S. DOLLARS 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 1 197,212 130,736 935,228 36,788 1,829,627 3,281,987 587,834 119,927 4,932,789 1,069,009 0 0 0 8,807,049 (66,056) 4,932,789 5,264,226 0 3,997,059 4,161,652 (128,796) 25,000 0 (2,765,689) 0 0 0 0 0 (2,765,689) (.80) 0
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