UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
--------------------- ----------------------
September 30, 1997 0-29414
PREMIUM CIGARS INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
Arizona 86-0846405
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
15651 North 83rd Way, Suite 3
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Registrant's telephone number, including area code: (602) 922-8887
Securities registered pursuant to Section 12(b) of the Act:
No par value common stock
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes No X
--- ---
As of September 30, 1997, there were 3,469,092 shares of Premium Cigars
International, Ltd. common stock, no par value outstanding.
<PAGE>
INDEX
-----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited) as of September 30, 1997
Consolidated Statements of Operations (Unaudited) for the three and six
months ended September 30, 1997 and 1996
Consolidated Statements of Changes in Stockholders' Equity (Unaudited)
for the period from the date of inception, June 1, 1996 through March
31, 1997 and for the six month period ended September 30, 1997.
Consolidated Statements of Cash Flows (Unaudited) for the six months
ended September 30, 1997 and 1996
Notes to Consolidated Financial Statements
Item 2 - Management's Discussion and Analysis or Plan of Operation
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
Item 2 - Changes in Securities and Use of Proceeds
Item 3 - Defaults Upon Senior Securities
Item 4 - Submission of Matters to a Vote of Security Holders
Item 5 - Other Information
Item 6 - Exhibits and Reports on Form 8-K
SIGNATURES
2
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET (UNAUDITED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Current Assets
Cash and cash equivalents $3,514,417
Receivables
trade 314,061
related parties 16,946
miscellaneous 6,212
----------
Total Receivables 337,219
Inventory 354,265
Held to maturity securities 3,411,897
Other current assets 152,511
----------
Total Current Assets 7,770,309
Property and Equipment, Net 197,484
Other Assets
Humidors, net 517,586
Notes receivable - related parties 86,225
Organizational costs, net 36,742
Miscellaneous 10,456
----------
Total Other Assets 651,009
----------
TOTAL ASSETS $8,618,802
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current Liabilities
Notes payable - current portion $ 4,430
Accounts payable 683,068
Accrued expenses 250,678
----------
Total Current Liabilities 938,176
Total Long Term Liabilities 0
----------
TOTAL LIABILITIES 938,176
Equity
Common stock - no par value, 10,000,000 shares authorized,
3,469,092 shares issued and outstanding as of 9/30/97 8,807,049
Accumulated deficit (1,126,423)
----------
TOTAL EQUITY 7,680,626
----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $8,618,802
==========
</TABLE>
3
<PAGE>
PREMIUM CIGARS INTERNATIONAL,LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended September 30 Six Months Ended September 30
------------------------------- -----------------------------
1997 1996 1997 1996
------------------------------- -----------------------------
<S> <C> <C> <C> <C>
NET SALES $1,372,316 $ 132,511 $2,000,496 $ 132,511
COST OF SALES 1,013,951 105,345 1,521,969 105,345
------------------------------- -----------------------------
GROSS PROFIT 358,365 27,166 478,527 27,166
SALES AND MARKETING 482,354 737 600,048 737
GENERAL AND ADMINISTRATIVE 237,492 29,153 538,997 29,153
------------------------------- -----------------------------
LOSS FROM OPERATIONS (361,481) (2,724) (660,518) (2,724)
OTHER INCOME (EXPENSE)
Interest and miscellaneous income 24,667 -- 25,797 --
Interest and miscellaneous expense (22,296) (1,354) (46,754) (1,354)
Loan Fees (95,000) -- (95,000) --
------------------------------- -----------------------------
TOTAL OTHER INCOME (EXPENSE) (92,629) (1,354) (115,957) (1,354)
------------------------------- -----------------------------
NET LOSS $ (454,110) $ (4,078) $ (776,475) $ (4,078)
=============================== =============================
LOSS PER SHARE $ (0.20) $ (0.01) $ (0.42) $ (0.01)
=============================== =============================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 2,251,371 1,480,500 1,868,042 1,480,500
=============================== =============================
</TABLE>
4
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED)
for the period from the date of inception, June 1, 1996 through March 31, 1997
and for the six month period ended September 30, 1997.
<TABLE>
<CAPTION>
Common Stock Total
------------------------------- Accumulated Treasury Stockholders'
Shares Amount Deficit Stock Equity (Deficit)
---------- -----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, June 1, 1996 -- $ -- $ -- $ -- $ --
Shares issued for cash 1,433,400 212,050 -- -- 212,050
Shares issued for services 47,100 207,625 -- -- 207,625
Net loss -- -- (349,948) -- (349,948)
---------- -----------------------------------------------------------------
Balance, March 31, 1997 1,480,500 419,675 (349,948) -- 69,727
---------- -----------------------------------------------------------------
Purchase of treasury stock (15,000) -- -- (5,000) (5,000)
Shares issued for services 15,000 32,500 -- 5,000 37,500
Additional compensation recorded
on private transactions -- 72,500 -- -- 72,500
Net loss for the three month period
ended June 30, 1997 (unaudited) -- -- (322,365) -- (322,365)
---------- -----------------------------------------------------------------
Balance, June 30, 1997 1,480,500 524,675 (672,313) -- (147,638)
========== =================================================================
Additional required paid in capital -- 150,000 -- -- 150,000
Shares issued at Initial Public Offering 1,900,000 7,726,020 -- -- 7,726,020
Representative's Warrants -- 1,710 -- -- 1,710
Shares issued with Overallotment 88,592 404,644 -- -- 404,644
Net loss for the three month period
ended September 30, 1997 (unaudited) -- -- (454,110) -- (454,110)
---------- -----------------------------------------------------------------
Balance, September 30, 1997 3,469,092 $8,807,049 $(1,126,423) $ -- $ 7,680,626
========== =================================================================
</TABLE>
5
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
Six Months Ended September 30
-----------------------------
1997 1996
---------- ----------
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $1,742,286 $ 132,511
Cash paid to suppliers and employees (2,307,865) (108,034)
Interest and loan fees paid (141,754) (1,354)
Interest earned 25,797 --
---------- ----------
Net cash provided (used) by operating activities (681,536) 23,123
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment (183,137) --
Purchase of humidors (545,427) (23,124)
Short term investments made (3,411,897) --
Organizational costs (8,151) --
Deferred offering costs (879,279) --
---------- ----------
Net cash used by investing activities (5,027,891) (23,124)
---------- ----------
Cash flows from financing activities:
Proceeds from common stock issue 9,321,396 1
Proceeds from debt 1,185,000 --
Repayment of debt (1,345,000) --
Proceeds from lease financing 4,430 --
---------- ----------
Net cash provided by financing activities 9,165,826 1
---------- ----------
Net increase in cash and cash equivalents 3,456,399 --
Cash and cash equivalents - beginning of period 58,018 --
---------- ----------
Cash and cash equivalents - end of period $3,514,417 $ --
========== ==========
Reconciliation of Net Loss to Net Cash used
for Operating Activities:
Net loss $ (776,475) $ (4,078)
---------- ----------
Adjustments to reconcile net loss to net
cash used for operating activities:
Depreciation and amortization 100,831 737
Changes in assets and liabilities:
Receivables - trade (249,761) --
- related parties (8,449) --
- miscellaneous (6,212) --
Inventory (227,928) (44,781)
Other current assets (136,904) --
Other assets (10,456) --
Notes payable - related parties (19,641) --
Accounts payable - trade 573,814 45,464
Accrued expenses 79,645 25,781
---------- ----------
94,939 27,201
---------- ----------
Net cash used for operating activities $ (681,536) $ 23,123
========== ==========
</TABLE>
6
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation:
The accompanying consolidated financial statements of Premium Cigars
International, Ltd. and Subsidiary (the "Company") have been prepared
in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Item
310 of Regulation S-B. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation of the
Company's financial condition and operating results for the interim
periods presented, have been included. Operating results for the six
months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for the year ending March 31, 1998. These
interim financial statements should be read in conjunction with the
prospectus dated August 21, 1997, including the financial statements
and notes contained therein, filed with the Securities and Exchange
Commission.
2. Nature of Operations:
Premium Cigars International, Ltd. (the "Company") is a Corporation
organized under the laws of the State of Arizona on December 16, 1996.
CAN-AM International Investments Corp. (CAN-AM), a British Columbia
Canadian corporation, was incorporated on June 20, 1996. The Company
acquired all of the outstanding stock of CAN-AM on December 31, 1996.
The principal business purpose of the Company is the distribution of
premium cigars using countertop humidors in convenience stores, grocery
stores and other retail outlet markets. The Company conducts business
throughout the United States. The Company's wholly-owned subsidiary,
CAN-AM, operates in five Canadian Provinces.
3. Earnings Per Common Share:
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods. Fully diluted earnings
per share are not presented as they are anti-dilutive. The Company
completed an initial public offering of its Common Stock on August 21,
1997. Pursuant to Securities and Exchange Commission rules, shares of
Common Stock issued for consideration below the anticipated offering
price per share during the 12-month period prior to filing of the
registration statement have been included in the calculation of common
share equivalent shares as if they had been outstanding for all periods
presented.
4. New Accounting Pronouncements:
On March 3, 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS 128). This pronouncement provides a different method of
calculating earnings per share than is currently used in accordance
with APB 15, "Earnings per Share." SFAS 128 provides for the
calculation of basic and diluted earnings per share. Basic earnings per
share includes no dilution and is computed by dividing income
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity, similar to fully diluted earnings per share. This pronouncement
is effective for fiscal years and interim periods ending after December
15, 1997; early adoption is not permitted. The Company has not
determined the effect, if any, of adoption on its earnings per share
computations.
Statements of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB
is effective for financial statements ending after December 15, 1997.
The new standard reinstates various securities disclosure requirements
previously in effect under Accounting Principles Board Opinion No. 15,
which has been superseded by SFAS No. 129. The Company does not expect
adoption of SFAS No. 129 to have a material effect, if any, on its
financial position or results of operations.
7
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. New Accounting Pronouncements: (Continued)
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective
for financial statements with fiscal years beginning after December 15,
1997. Earlier application is permitted. SFAS No. 130 establishes
standards for reporting and display of comprehensive income and its
components in a full set of general purpose financial statements. The
Company has not determined the effect on its financial position or
results of operations, if any, from the adoption of this statement.
Statements of Financial Accounting Standards No. 131, "Disclosure about
Segments of an Enterprise and Related Information" (SFAS No. 131)
issued by the FASB is effective for financial statements beginning
after December 15, 1997. The new standard requires that public business
enterprises report certain information about operating segments in
complete sets of financial statements of the enterprise and in
condensed financial statements of interim periods issued to
shareholders. It also requires that public business enterprises report
certain information about their products and services, the geographic
areas in which they operate and their major customers. The Company does
not expect adoption of SFAS No. 131 to have a material effect, if any,
on its Results of Operations.
5. Held to Maturity Securities:
Held to maturity securities consist of proceeds from the initial public
offering temporarily invested in United States treasury bills. As of
September 30, 1997, these were comprised of treasury bills with a yield
of 5.234%, maturing on February 26, 1998.
6. Subsequent Event:
The Company's Board of Directors elected to change its fiscal year end
from March 31, to Dec 31, effective with the year ending Dec 31, 1997.
The accompanying financial statements have been presented on a March
31, year end basis.
8
<PAGE>
Item 2 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
GENERAL
Premium Cigars International, Ltd. ("PCI" or the "Company"), an Arizona
corporation, is a national and international marketer and distributor of premium
cigars in convenience stores and other high volume retail stores in the United
States and Canada.
In recent years, cigar smoking has regained popularity in the United States.
Consumption and sales of cigars, particularly premium cigars, have increased
significantly since 1993. Sales in the U.S. of all types of cigars increased
from 3.4 billion units in 1993 to 4.4 billion units in 1996, an annual increase
of 8.7%. However, premium cigars, the type marketed and distributed by PCI,
increased at an annual rate of 67.0% from 1995 to 1996.
We have established the objective of placing our PCI Cigar Program, which
includes supplying humidors, cigars, service and information in 10,000 high
volume convenience, gas, grocery and drug stores and outlets by March 31, 1998,
and in 30,000 to 50,000 outlets within three to five years. In these selected
markets, we offer a broad range of brands as well as in-house private label
brands, priced at retail from $1.00 to $8.00.
We operate in one industry segment, which is the marketing and distribution of
premium cigars and accessory products.
Results of Operations
In December 1996, PCI acquired all of the outstanding stock of CAN-AM, which
prior to that had acquired the cigar distribution operations, including cigar
accounts, humidors and inventory of Rose Hearts, Inc, a Washington corporation,
and J&M Wholesale, Ltd., a British Columbia (Canada) corporation. J&M did not
begin its cigar distribution until June 1996 and had no material sales until the
three month period ended September 30, 1996, and then, principally to Southland
Canada (7-Eleven) outlets. Rose Hearts did not begin cigar distribution until
late summer of that year and distributed primarily in the State of Washington.
Therefore, any comparisons made to the results of operations in 1996 are limited
to the three month period ended September 30, 1996 (the "September 1996
Quarter").
Also, certain expenses and costs in the income statement for the three months
ended June 30, 1997 (the "June 1997 Quarter") that were included in our Initial
Public Offering Prospectus dated August 21, 1997 (the "Prospectus"), have been
reclassified to make them consistent with the presentation of these expenses and
costs in the income statements for the three months ended September 30, 1977
(the "September 1997 Quarter") and the six months year-to-date period ended
September 30, 1997 (the "September 1997 YTD Period"). We believe that the
reclassified income statements better present the performance of the Company on
a forward-looking basis.
9
<PAGE>
Our revenues for the September 1997 Quarter and the September 1997 YTD Period
were $1,372,316 and $2,000,496, respectively, compared to revenues of $132,511
for the September 1996 Quarter. The increase in revenues for the September 1997
Quarter compared to the September 1996 Quarter was 935.6%.
We derived revenues principally from the initial "rollout" of new orders to
stores, which included a humidor and cigars among other items, and from
re-orders of cigars and accessories to restock the humidors. The rollouts for
our Program for each quarter were:
-------------------- ---------------- --------------- --------------------
September 30, 1996 March 31, 1997 June 30, 1997 September 30, 1997
-------------------- ---------------- --------------- --------------------
110 480 2,610 4,212
-------------------- ---------------- --------------- --------------------
We announced in our press release dated November 3, 1997, that re-orders for the
month of August 1997 averaged approximately $120 per month for our combined
United States and Canadian operations. Reorders for our substantially more
mature PCI Cigar Program in Canada averaged more than double that, up from
approximately $100 per month one year earlier. The increases in both the number
of rollouts and the average dollar amount of monthly reorders account for the
substantial change in revenues for the September 1997 Quarter and the
September 1997 YTD Period compared to the September 1996 Quarter.
As shown below, our revenues for the September 1997 quarter increased $744,136
or 118.5% over the revenues for the June 1997 Quarter.
--------------- ----------------------- ----------------------------
June 1997 Quarter September 1997 Quarter
--------------- ----------------------- ----------------------------
Revenues $ 628,180 $ 1,372,316
--------------- ----------------------- ----------------------------
$ Increase - $ 744,136
--------------- ----------------------- ----------------------------
% Increase - 118.5%
--------------- ----------------------- ----------------------------
Our gross margins for the September 1997 Quarter and the September 1997 YTD
Period were 26.1 % and 23.9 %, respectively, compared to 20.5% for the September
1996 Quarter. In the September 1997 Quarter, we were able to reduce the cost of
product relative to sales price by 7.0% compared to the September 1996 Quarter.
This was achieved by entering into certain strategic purchasing arrangements
designed to improve and protect our margins and by making large-volume purchases
with selected vendors. The improvements realized in product costing were offset
in part by the expense of building a core warehousing and shipping team to meet
the objectives set for both new store rollouts and re-orders. Even here, we used
temporary employees during peak demand periods to lessen the brunt of these
expenses.
Our ongoing efforts to reduce product, warehousing and shipping costs are
reflected in the 36.6% improvement in the gross margin we achieved during the
September 1997 Quarter compared to the June 1997 Quarter.
10
<PAGE>
--------------- ----------------------- ----------------------------
June 1997 Quarter September 1997 Quarter
--------------- ----------------------- ----------------------------
Gross Margin 19.1% 26.1%
--------------- ----------------------- ----------------------------
% Change - 36.6%
--------------- ----------------------- ----------------------------
Selling, general and administrative expenses ("SG&A Expenses") for the September
1997 Quarter and the September 1997 YTD period included non-recurring charges of
$160,000 and $270,000, respectively. The $160,000 charge represents management
fees paid to two key executives, and the $110,000 charge represents compensation
expense related to common stock sold by the chief executive officer of the
Company at a price below fair market value.
June 1997 September 1997 September 1997
Quarter Quarter YTD Period
- ---------------------------------- ------------ ---------------- --------------
SG&A Expenses With
Non-recurring Expenses $ 419,199 $ 719,846 $1,139,045
- ---------------------------------- ------------ ---------------- --------------
% of Revenues 66.7% 52.5% 56.9%
- ---------------------------------- ------------ ---------------- --------------
Non-recurring Expenses
included in SG&A Expenses $ 110,000 $ 160,000 $ 270,000
- ---------------------------------- ------------ ---------------- --------------
SG&A Expenses Without
Non-recurring Expenses $ 309,199 $ 559,846 $ 869,045
- ---------------------------------- ------------ ---------------- --------------
% of Revenues 49.2% 40.8% 43.4%
- ---------------------------------- ------------ ---------------- --------------
We established an infrastructure to obtain the sales objectives outlined in the
Prospectus. Many selling and marketing expenses are typically incurred in
advance of the revenues that might be realized from the selling and marketing
efforts represented by these expenses. Accordingly, SG&A Expenses were high
relative to revenues during the June 1997 Quarter (49.2%) and the September 1997
Quarter (40.8%). With significantly increased revenues in the September 1997
Quarter, SG&A Expenses, relative to revenues, did decline from the June 1997
Quarter.
Substantially all of the interest income of $24,251 and $25,331 received during
the September 1997 Quarter and the September 1997 YTD Period was earned on the
net proceeds from our initial public offering, which was placed into short-term,
highly liquid, low-risk investments. Interest income is expected to decrease in
future periods as the proceeds from the initial public offering are used in the
operations of the Company.
We incurred interest expense of $19,307 and $43,622 during the September 1997
Quarter and the September 1997 YTD Period, respectively, on bridge financing
entered into with accredited investors, notes entered into with a related party
and an operating line of credit
11
<PAGE>
entered into with Biltmore Investors Bank. Related to the bridge financing, we
incurred a non-recurring fee of $95,000, which was expensed during the September
1997 Quarter.
Although changes in the exchange rate between the U.S. and Canadian currencies
may have an impact on the profitability of the Company, we do not expect the
impact of these changes to be material to the consolidated financial statements
of the Company due to the significantly smaller size of our Canadian operations
and to the stable relationship historically of the United States and Canadian
currencies.
We incurred a loss of $776,475, or $.42 per share during the September 1997 YTD
Period inclusive of the non-recurring expenses. Excluding the non-recurring
expenses, the net loss was $411,475, or $.22 per share.
For the September 1997 Quarter, the net loss inclusive of the non-recurring
expenses was $454,110, or $.20 per share and $199,110, or $.09 excluding the
non-recurring expenses. This compares to a net loss of $4,078, or $.01 per share
for the September 1996 Quarter. For the September 1997 Quarter, both the amount
of the loss ($199,110 compared to $212,169) and the loss per share ($.09
compared to $.14), improved from the June 1997 Quarter.
<TABLE>
<CAPTION>
- ------------------------- ---------------- ---------------- ------------------ ----------------
September
September 1996 June 1997 September 1997 YTD
Quarter Quarter 1997 Quarter Period
- ------------------------- ---------------- ---------------- ------------------ ----------------
<S> <C> <C> <C> <C>
Net Lost Including
Non-recurring Expenses $ (4,078) $ (322,365) $ (454,110) $ (776,475)
- ------------------------- ---------------- ---------------- ------------------ ----------------
% of Revenues 3.1% 51.3% 33.1% 38.8%
- ------------------------- ---------------- ---------------- ------------------ ----------------
Loss Per Share $ (.01) $ (.22) $ (.20) $ (.42)
- ------------------------- ---------------- ---------------- ------------------ ----------------
Non-recurring Expenses $ -0- $ 110,000 $ 255,000 $ 365,000
- ------------------------- ---------------- ---------------- ------------------ ----------------
Net Loss Not Including
Non-recurring Expenses $ (4,078) $ (212,365) $ (199,110) $ (411,475)
- ------------------------- ---------------- ---------------- ------------------ ----------------
% of Revenues 3.1% 31.8% 14.5% 20.6%
- ------------------------- ---------------- ---------------- ------------------ ----------------
Loss Per Share $ (.01) $ (.14) $ (.09) $ (.22)
- ------------------------- ---------------- ---------------- ------------------ ----------------
</TABLE>
Other Information
On September 18, 1997, we announced in a press release that we had increased the
number of rollouts of our PCI Cigar Program to over 4000 participating stores.
On September 24, 1997, we announced in a press release that we had signed an
agreement with Lockwood Publications, Inc, publisher of Smoke Magazine, granting
us
12
<PAGE>
the exclusive right in North America to market the magazine in the stores that
display or sell our PCI Cigar Program.
On September 29, 1997, we announced in a press release that we had begun a
statewide Arizona rollout, that also included select stores in New Mexico, of
our PCI Cigar Program into approximately 700 Circle-K (Tosco Corporation),
7-Eleven (The Southland Corporation) and Giant Industries stores.
Capital Resources
During the September 1997 Quarter and the September 1997 YTD Period, we made
capital purchases, including the purchase of humidors, of $450,956 and $696,025,
respectively. As part of our PCI Cigar Program, one humidor is shipped with each
new store rollout. The humidor, which remains the property of PCI, is
capitalized as an Other Asset and written off over a twenty-four month period.
Liquidity
Our cash, cash equivalents and short-term investments and our current ratio
were:
<TABLE>
<CAPTION>
- ---------------------------- --------------------- ---------------- --------------- ---------------------
At September 30, At March 31, At June 30, At September 30,
1996 1997 1997 1997
- ---------------------------- --------------------- ---------------- --------------- ---------------------
<S> <C> <C> <C> <C>
Cash, cash
equivalents and
short-term investments $ -0- $ 58,018 $ 26,424 $ 6,926,314
- ---------------------------- --------------------- ---------------- --------------- ---------------------
Current ratio .63 .78 1.23 8.32
- ---------------------------- --------------------- ---------------- --------------- ---------------------
Situation Start-up company Prior to the With the Following the
bridge loans bridge initial public
financing offering
- ---------------------------- --------------------- ---------------- --------------- ---------------------
</TABLE>
We believe that the net proceeds received from our $9,975,000 Initial Public
Offering completed August 29, 1997, together with cash flows generated from
operations, will be sufficient to meet anticipated expansion and working capital
needs for the foreseeable future. If additional funding is required, the Company
expects that it will be able to raise capital through the issuance of long-term
or short-term debt or the issuance of securities in private or public
transactions. However, there can be no assurances that we can generate
sufficient revenues or obtain acceptable future financing.
13
<PAGE>
Special Note Regarding Forward-looking Statements
Some of the statements contained in this report discuss future
expectations, contain projections of results of operation or financial condition
or state other "forward-looking" information. Those statements are subject to
known and unknown risks, uncertainties and other factors that could cause the
actual results to differ materially from those contemplated by the statements.
The forward-looking information is based on various factors and was derived
using numerous assumptions.
Important factors that may cause actual results to differ from
projections include, for example:
o our ability to raise sufficient capital to purchase cigars and
humidors to meet any unanticipated increase in the aggressive
"roll-out" schedules required by our contracts and commitments
with stores and distributors;
o the effect of a settlement announced June 20, 1997 of
litigation among 40 States and major U.S. tobacco companies;
o our ability to buy quality premium cigars at favorable prices;
o our ability to negotiate and maintain favorable distribution
arrangements with stores affiliated with major national
convenience store chains;
o the effect of changing economic conditions;
o any decision by major retail chains to remove all tobacco
products from their shelves or place our humidors in a
disadvantageous location within their stores;
o changes in government regulations, tax rates and similar
matters;
o our ability to attract and retain quality employees;
o the decline in popularity of cigar smoking; and
o other risks which may be described in our future filings with
the SEC. We do not promise to update forward-looking
information to reflect actual results or changes in
assumptions or other factors that could affect those
statements.
14
<PAGE>
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
-----------------
None
Item 2 - Changes in Securities and Use of Proceeds
-----------------------------------------
(a) None.
(b) None.
(c) Use of Proceeds.
The Company provides the following information in accordance with Item
701(f) of Regulation S-B:
1. The Company's Registration Statement on Form SB-2 (File No.
333-29985) was declared effective on August 21, 1997;
2. The offering commenced on August 21, 1997;
3. The offering did not terminate before any securities were
sold;
4(i). On August 29, 1997, the Company closed the sale of 1,900,000
shares of its common stock to W.B. McKee Securities, Inc., the
Underwriters' Representative (the "main offering"). On
September 24, 1997, W.B. McKee Securities, Inc. purchased
88,592 of the 285,000 shares available for the over-allotment
option provided for in the Company's Underwriting Agreement
(the "over-allotment offering"). See "Underwriting" section of
the Company's Registration Statement on Form SB-2 and Item 5
herein. The over-allotment option on the remaining 196,408
shares of common stock expired on September 29, 1997.
Therefore, the main offering terminated on August 29, 1997,
after the sale of all of the securities registered; the
over-allotment offering terminated on September 29, 1997, with
196,408 registered shares unsold.
4(ii). W.B. McKee Securities, Inc. served as the managing underwriter
for the offering.
4(iii). The Company registered common stock, no par value, in its
Registration Statement on Form SB-2.
4(iv). The Company registered 2,185,000 shares of common stock, no
par value, in its Registration Statement on Form SB-2, for an
aggregate offering price of $11,471,250. These figures include
the full over-allotment of 285,000 shares;
15
<PAGE>
however, as stated above, only 88,592 over-allotment shares
were purchased by the Underwriters' Representative.
Accordingly, the Company has sold 1,988,592 shares at an
aggregate offering price of $10,440,108.
4(v). The amount of expenses incurred through September 30, 1997 in
connection with the issuance and distribution of the
securities registered was $2,309,444. This amount is made up
of $1,044,011 in underwriter's discounts and commissions,
$313,203 in underwriter's non-accountable expenses, and
$952,230 in other expenses, including $118,662 in consulting
fees to directors.
4(vi). The net offering proceeds after deducting the above expenses
were $8,130,664.
4(vii). From the effective date of the Company's Registration
Statement, August 21, 1997 to September 30, 1997, the net
offering proceeds were applied as follows: $1,212,835 to
repayment of debt, $156,025 to purchase humidors, $544,186 to
purchase inventory, $345,503 for sales and marketing, $137,239
for working capital, $3,411,895 as a temporary investment in
six month treasury bills and $2,322,981 as a temporary
investment in a money market account.
4(viii). The use of proceeds described above represents no material
change from the use of proceeds described in the prospectus.
Item 3 - Defaults upon Senior Securities
-------------------------------
None
Item 4 - Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5 - Other Information
-----------------
W.B. McKee Securities, Inc. ("McKee") served as the Representative of
the Underwriters in the Company's initial public offering which became effective
on August 21, 1997. Under the terms of the Underwriting Agreement, McKee was
given an over-allotment option to purchase up to 285,000 shares of the Company's
common stock at the public offering price, less certain underwriting discounts
and commissions. On September 24, 1997, McKee exercised a portion of the
over-allotment and purchased 88,592 of the 285,000 total over-allotment shares.
The Company realized total proceeds from the over-allotment exercise of
$465,108, minus discounts and commissions of $46,510.80 and non-accountable
expenses of $13,953.24, for net proceeds totaling $404,643.96. The
over-allotment option on the remaining 196,408 shares of common stock expired on
September 29, 1997.
For additional information regarding the specific terms and conditions
of the Underwriting Agreement, please refer to the "Underwriting" section of the
Company's Registration Statement on Form SB-2 (file number 33-29985) declared
effective on August 21, 1997, which is incorporated herein by reference as an
exhibit to this Form 10-QSB and in response to this item.
16
<PAGE>
Item 6 - Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit Exhibit Name Method of Filing
- ------- ------------ ----------------
Number
- ------
<S> <C> <C>
3.1 Articles of Incorporation **
3.2 By-Laws, as amended ***
4.1 Specimen Common Stock Certificate ****
4.2 Description of Rights of Security Holders *****
10.1 Form of Indemnity Agreements between the Exhibit filed herewith
Company and its Officers and Directors
10.2 Marketing and Sales Agreement dated Exhibit filed herewith*
September 17, 1997, between the Company and
Lockwood Publications, Inc.
10.3 Retailer Agreement dated August 25, 1997, Exhibit filed herewith*
between the Company and Tosco Marketing
Co.
10.4 Distributorship Agreement dated October 24, Exhibit filed herewith*
1997 between the Company and Irvine Breath
Products, Inc.
11.1 Statement Re: Computation of Exhibit filed herewith
Per Share Earnings
27.1 Financial Data Schedule Exhibit filed herewith
99.1 "Underwriting" section of Registration ******
Statement on Form SB-2
</TABLE>
* Portions of the exhibit omitted and filed separately with the
Commission pursuant to the Confidential Treatment provisions of Regulation ss.
230.406.
** Incorporated by reference to Exhibit 3.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
*** Incorporated by reference to Exhibit 3.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
**** Incorporated by reference to Exhibit 4.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
17
<PAGE>
***** Incorporated by reference to Exhibit 4.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
****** Incorporated by reference to pages 56-57 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
(b) Reports on Form 8-K
None
18
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PREMIUM CIGARS INTERNATIONAL, LTD.
(Registrant)
/s/ Steven A. Lambrecht Date: November 14, 1997
- ---------------------------------------
Steven A. Lambrecht
President & C.E.O.
/s/ Karissa B. Nisted Date: November 14, 1997
- ---------------------------------------
Karissa B. Nisted
Chief Financial Officer
19
OFFICER AND DIRECTOR INDEMNITY AGREEMENT
This Agreement is made as of the ___ day of September, 1997, by and
between Premium Cigars International, an Arizona corporation (the
"Corporation"), and ___________________ ("Indemnitee").
RECITALS
A. The Corporation believes it is important to the Corporation to
retain and attract the most capable persons available to serve as executive
officers and directors.
B. Indemnitee, in the capacity as an executive officer and/or a
director of the Corporation, will be performing a valuable service to the
Corporation.
C. In recognition of Indemnitee's need for substantial protection
against personal liability and in order to retain Indemnitee's services as an
executive officer and/or a director of the Corporation, the Corporation desires
to provide Indemnitee with specific contractual assurances that such protection
will be available to Indemnitee as set forth in this Agreement, to the fullest
extent (whether partial or complete) permitted by law, and, to the extent
officers' and directors' liability insurance is maintained by the Corporation,
to provide for the coverage of Indemnitee under the Corporations officers' and
directors' liability insurance policies.
AGREEMENT
NOW, THEREFORE, in consideration of Indemnitee agreeing to serve as an
executive officer and/or a director of the Corporation and other good and
valuable consideration, the parties hereto hereby agree as follows:
1. Indemnity. The Corporation will indemnify Indemnitee, to the fullest
extent allowed by law, against all damages, judgments, fines, assessments,
charges, penalties, expenses (including attorneys' fees), and amounts paid in
settlement (all hereinafter referred to as "Damages") suffered or incurred by or
on behalf of Indemnitee in connection with or arising out of any threatened,
pending or completed actions, suit or proceeding, whether civil, criminal,
administrative or investigative ("Proceeding") with respect to any event, act,
omission, occurrence or circumstance related to the fact that Indemnitee is or
was an executive officer and/or a director of the Corporation or an agent of
another corporation, partnership, joint venture, trust or other enterprise at
the request of the Corporation ("Indemnifiable Event"), including, without
limitations, acts or omissions of Indemnitee that constitute negligence. The
Corporation shall pay all amounts required to be paid to or on behalf of
Indemnitee pursuant to this Agreement as soon as possible, but in any event no
later than fifteen (15) days after written demand therefor is presented to the
Corporation.
2. Advance Payment of Expenses. Notwithstanding anything to the
contrary, promptly upon written request by Indemnitee, expenses (including
attorneys' fees) incurred by
<PAGE>
Indemnitee in connection with defending a civil or criminal action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding, upon receipt of an undertaking by or on
behalf of Indemnitee to repay such amount unless it ultimately shall be
determined that he is entitled to be indemnified by the Corporation as required
in the Corporation's Articles of Incorporation or authorized by law and may be
paid by the Corporation in advance on behalf of any other authorized
representative when authorized by the Board of Directors upon receipt of a
similar undertaking.
3. Presumptions. The termination (in whole or in part) of any action,
suit or proceeding, whether by judgment, order, settlement, conviction, or upon
a plea of nolo contendere, or its equivalent, shall not, of itself, create a
presumption that Indemnitee did not act in good faith and in a manner which he
reasonably believed to be in, or not opposed to, the best interests of the
Corporation, and, with respect to any criminal action or proceeding, had
reasonable cause to believe that his conduct was unlawful.
4. Partial Indemnification. If Indemnitee is entitled to
indemnification, whether pursuant to this Agreement or otherwise, for a portion,
but not all, of the Damages, the Corporation shall, nevertheless, indemnify
Indemnitee for the portion of the Damages to which Indemnitee is entitled. In
addition, the extent that Indemnitee has been successful in defense of any or
all Proceedings relating in whole or in part to an Indemnifiable Event, or in
defense of any issue or matter (including, without limitation, any dismissal
without prejudice), Indemnitee shall be entitled to indemnification against all
expenses incurred in connection with those defenses.
5. Indemnification Hereunder Not Exclusive; Change in Law. Nothing in
this Agreement shall be deemed to diminish or otherwise restrict Indemnitee's
right to indemnification under any provision of the Certificate of Incorporation
or Bylaws of the Corporation or under Arizona law. If and to the extent that any
change in the law of Arizona (whether by statute or judicial action) permits
greater indemnification than would be afforded under the Corporation's
then-current Certificate of Incorporation or Bylaws or by this Agreement, it is
the intent of the parties that Indemnitee shall enjoy by this Agreement the
greater benefits so afforded by such change immediately upon the occurrence of
such change, without further action on the part of the parties hereto.
6. Applicable Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
AND ENFORCED IN ACCORDANCE WITH, ARIZONA LAW, REGARDLESS OF ANY CONFLICT-OF-LAW
PRINCIPALS TO THE CONTRARY.
7. Attorneys' Fees. In the event of any claim, controversy or dispute
arising out of or relating to this Agreement, or the breach thereof, the
prevailing party shall be entitled to recover reasonable attorneys' fees and
costs incurred in connection with any such proceeding.
8. Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs, personal
representatives, successors and
2
<PAGE>
assigns; provided, however, that Indemnitee may not assign Indemnitee's rights
hereunder and that any assignment by the Corporation shall not relieve the
Corporation of its obligations hereunder. Any transfer by operation of law,
pursuant to a merger or otherwise, shall constitute an assignment.
9. Continuation of Indemnification. The indemnification under this
Agreement applied to Indemnitee with respect to Indemnifiable events occurring
during Indemnitee's service as an executive officer and/or a director of the
Corporation and shall continue beyond any termination of that service as an
executive officer and/or a director to the Corporation.
10. Amendment, Modification or Waiver. No amendment, modification or
waiver of any condition, provision or term of this Agreement shall be valid or
of any effect unless made in writing, signed by the party or parties to be bound
and specifying with particularity the nature and extent of such amendment,
modification or waiver. Failure on the part of any party to complain of any act
or failure to act of another party or to declare another party in default,
irrespective of how long such failure continues, shall not constitute a waiver
by such party of its rights hereunder. Any waiver by any party of any default of
another party shall not affect or impair any right arising from any other or
subsequent default. Nothing herein shall limit the remedies and rights of the
parties hereto under and pursuant to this Agreement.
11. Counterparts. This Agreement may be executed in any number of
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and signed as of the day and year first above written.
INDEMNITEE CORPORATION
Premium Cigars International,
an Arizona corporation
By:
- ----------------------------- --------------------------------
Steven A. Lambrecht
President and Chief Executive
Officer
3
MARKETING AND SALES AGREEMENT
-----------------------------
This Marketing and Sales Agreement ("Agreement") is entered into this
17th day of September, 1997 between Lockwood Publications, Inc., a New York
corporation ("Lockwood") and Premium Cigars International, Ltd., an Arizona
corporation ("PCI").
RECITALS
--------
WHEREAS, Lockwood is the publisher of a magazine named "Smoke
Magazine," hereinafter referred to as the "Magazine";
WHEREAS, Lockwood desires to have the Magazine displayed in retail
outlets with PCI's humidors, cigars and cigar-related products (the "PCI
Products"); and
WHEREAS, PCI desires to receive and Lockwood desires to grant to PCI
the right to market the Magazine for display with the PCI Products.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Lockwood and PCI agree as follows:
1. Marketing Rights.
a. Right to Market. Lockwood grants to PCI the exclusive right
to market the Magazine to all retailers which display or sell the PCI
Products in North America (the "Retailers"). During the term of this
Agreement, neither Lockwood nor any representatives of Lockwood shall
be entitled to market the Magazine to any such Retailers. PCI shall
have no duty, right or other obligation to market the Magazine to, or
to maintain any relationship with, any Retailer which has discontinued
and no longer carries the PCI Products. The parties hereto acknowledge
that "Smoke Magazine" is the featured magazine of PCI. However, nothing
contained within this Agreement shall limit PCI's right to market, sell
or distribute any products, including other magazines, with the PCI
Products.
b. Right of First Refusal. PCI shall notify Lockwood in
writing of its desire to sell the Magazine outside of North America
through any entity other than Lockwood. Lockwood shall have thirty (30)
days after the receipt of such notice within which to notify PCI if it
desires to enter a contract with PCI to sell the Magazine outside of
North America.
2. Commission. PCI shall be entitled to receive commissions based on
the number of Magazines sold to Retailers as set forth below:
* Confidential portions omitted and filed
separately with the Commission.
1
<PAGE>
a. Wholesaler Commission. * (the "Wholesaler Commission").
b. Standard Commission. * (the "Standard Commission"). *
The Standard Commission and the Wholesaler Commission shall
collectively be referred to as the "Commissions." The parties acknowledge that
the current cover price of the Magazine is $4.99 U.S. / $5.99 Canada.
3. Payment of Commissions. Commissions shall accrue immediately upon
the receipt of a Retailer's order by Lockwood or Lockwood's distributor of the
Magazine. All Commissions accrued shall be paid on or before the 30th day after
the "on sale date" of each subsequent issue of the Magazine, and such payments
shall be accompanied by a statement setting forth the number of units sold and
the number of units refunded or credited for that prior issue of the Magazine.
The "on sale date" shall mean the first business day an issue of the Magazine is
offered for sale to the general public through Retailers. If Lockwood refunds or
grants a credit for the sale of any of the Magazines, no Commission shall be
paid by Lockwood to PCI for such sale. If the Commission for such sale has
already been paid by Lockwood to PCI, the amount of the Commission payment shall
be deducted from future Commission payments thereafter payable to PCI. If no
further Commissions are thereafter payable to PCI, such payment shall be
returned to Lockwood.
4. Additional Compensation. In addition to the Commissions and in order
to entice PCI to enter into this Agreement, Lockwood agrees to provide the
following:
a. *
b. *
5. Delivery. Lockwood shall use its best efforts to fill all orders and
deliver the Magazine through Curtis Circulation or another reliable common
carrier, at Lockwood's sole expense, in a timely fashion. Prior to the print
order due date, PCI shall provide to Lockwood an estimate of the number of
Magazines to be sold by or through PCI for such issue of the Magazine. The
parties hereto acknowledge that no assurance can be given as to the accuracy of
such estimate.
6. Term. Subject to the terms set forth in paragraph 7 herein, the term
of this Agreement shall be for two (2) years from the date hereof and shall
automatically be renewed annually for three (3) additional one year periods,
unless one hundred twenty days (120) days prior to the expiration of the
applicable term one party notifies the other party in writing that it intends to
terminate this Agreement. The parties acknowledge that, in the event a Retailer
should cancel its contract with PCI for maintaining a humidor in its store, upon
such cancellation any obligation or duties owed by PCI to Lockwood would
terminate as to such store.
* Confidential portions omitted and filed
separately with the Commission.
2
<PAGE>
7. Early Termination of This Agreement.
a. Termination by PCI. PCI shall have the absolute right to
terminate this Agreement upon delivery of written notice to Lockwood
one hundred twenty (120) days prior to termination in the event that
PCI determines, in its sole and exclusive discretion, that the
Magazine's volume of sales is insufficient to provide PCI with
reasonable profitability.
b. Termination by Either Party. Lockwood or PCI shall have the
right to terminate this Agreement in the event one or more of the
following events shall occur, provided the non-defaulting party sends
notice of such default to the defaulting party and the defaulting party
fails to remedy such breach within thirty (30) days after receipt of
such written notice of default:
(i) 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 such
party's property or business;
(ii) either party is adjudicated bankrupt; or
(iii) either party fails to timely perform or observe
any of its covenants, duties or obligations hereunder.
c. Remedies of the Parties. In the event either party is in
default hereunder and such default has not been cured during the
applicable cure period, the non-defaulting party may pursue all of its
real and equitable rights and remedies against the defaulting party.
8. Acts Upon Termination. Upon termination of this Agreement, Lockwood
agrees that it shall continue to supply all orders from any Retailers for a
period of two (2) months (the "Continuation Period"). PCI shall be entitled to a
Commission for all sales to Retailers during such Continuation Period.
9. Indemnification. PCI and Lockwood shall indemnify and hold each
other and their respective officers, directors, shareholders, employees,
representatives and agents harmless from any loss, damages, expenses (including,
without limitation, reasonable attorneys' fees and expenses) resulting from a
breach of terms, conditions and covenants hereunder.
10. Independent Contractor. This Agreement shall in no way be construed
to constitute PCI as an agent or employee of Lockwood for any purpose
whatsoever, PCI being an independent contractor engaged by Lockwood to perform
the services set forth herein.
11. Confidential Information. The parties recognize that as a result of
the relationship with each other, the parties have in the past and may in the
future develop, obtain or learn about Confidential Information which is the
property of PCI or Lockwood or which PCI or Lockwood
* Confidential portions omitted and filed
separately with the Commission.
3
<PAGE>
is under an obligation to treat as confidential. Each party agrees to use its
best efforts and the utmost diligence to guard, protect and keep confidential
said Confidential Information, and each party agrees that it will not, during or
after the period of this Agreement, use for its own purposes or others any of
said Confidential Information which either party may develop, obtain or learn
about during or as a result of its relationship with the other party, unless
authorized to do so by the other party in writing.
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 PCI an opportunity to obtain an
advantage over their competitors who do not know or use it. The parties
acknowledge that the sales numbers set forth in the ABC Auditing Report are
reported to Lockwood's members and its affiliates. PCI agrees to cooperate in
providing the appropriate sales numbers for an audit. Both parties acknowledge
that PCI, as a public company, shall provide notice of this contract in press
releases and reports filed with the Securities and Exchange Commission.
Lockwood 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.
Notwithstanding the foregoing, PCI gives Curtis Circulation and its wholesalers
consent to contact PCI customers in connection with the normal course of
business conducted pursuant to the terms of this Agreement.
12. Notices Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be delivered in person, sent by
telefacsimile or sent by
* Confidential portions omitted and filed
separately with the Commission.
4
<PAGE>
registered mail, charges prepaid, to the parties at the address or facsimile
telephone as set forth on the signature page of the Agreement and a copy sent
to:
If Notice sent to PCI
send a copy to: Kurt M. Brueckner
Titus, Brueckner & Berry, P.C.
7373 North Scottsdale Road, Suite B-252
Scottsdale, Arizona 85253
(602) 483-9600
Fax: (602) 483-3215
If Notice sent to Lockwood
send a copy to: Peter M. Messer, P.C.
Attorney at Law
21 East 40th Street
New York, New York 10016
(212) 481-5600
Fax (212) 213-9673
13. 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.
14. 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.
15. 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.
16. 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.
17. 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 reasonable attorneys' fees and costs.
* Confidential portions omitted and filed
separately with the Commission.
5
<PAGE>
18. 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" "LOCKWOOD"
PREMIUM CIGARS INTERNATIONAL, LTD. LOCKWOOD PUBLICATIONS, INC.
By: /s/ Steven A. Lambrecht By: /s/ Illegible
-------------------------- -----------------
Its: CEO / President Its: President/Publisher
-------------------- -----------------------
Address: Address:
15651 North 83rd Way 130 West 42nd Street
Suite 3 New York, NY 10036
Scottsdale, Arizona 85260 Fax: 212-827-0945
Fax: 602-922-8656
* Confidential portions omitted and filed
separately with the Commission.
6
PCI RETAILER AGREEMENT
================================================================================
VENDOR: RETAILER: Tosco Marketing Co.
PREMIUM CIGARS INTERNATIONAL, LTD. Circle K
11259 East Via Linda, Suite #100-102 *
602-657-0200 (Office) 602-661-6026 (Facsimile) *
800-PCI-1001 (Toll Free)
================================================================================
Effective Date: August 25, 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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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.
<PAGE>
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 By: /s/ *
-------------------------- ------------------
Its: C.E.O. Its: [authorized officer]
------------------------ ---------------------------
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
EXHIBIT "A"
* Confidential portions omitted and filed
separately with the Commission.
DISTRIBUTORSHIP AGREEMENT
-------------------------
This Distributorship Agreement ("Agreement") is entered into this ____
day of October, 1997 between Cigar Gone Corporation, a Delaware corporation aka:
Irvine Breath Products, Inc., a Delaware corporation (collectively "Cigar
Gone"), and Premium Cigars International, Ltd., an Arizona corporation
("Distributor"). Cigar Gone and Distributor shall also be referred to as the
"Parties".
RECITALS
--------
WHEREAS, Cigar Gone is engaged in the production and sale of breath
cleansers, which are marketed under the tradenames "Cigar Gone Breath Cleanser"
and "Coffee Gone Breath Cleanser", hereinafter referred to as the "Breath
Cleansers";
WHEREAS, Cigar Gone has designed a mini pack to hold eight (8) capsules
of Breath Cleanser (the "Mini-Pack"), a display box to hold thirty-six (36)
Mini-Pack (the "Display Box") and bottles to hold fifty (50) capsules of Cigar
Gone Breath Cleanser ("CG Bottle");
WHEREAS, collectively, the Cigar Gone Breath Cleanser, the Coffee Gone
Breath Cleanser, the Mini-Pack; the Display Box; the CG Bottle; and any of the
breath products which may be developed by Cigar Gone are herein referred to as
the "Product" or "Products";
WHEREAS, Distributor desires to become the Master Distributor (as that
term is defined herein) of the Product in the United States and Canada (the
"Distribution Area");
WHEREAS, Distributor desires to receive and Cigar Gone desires to grant
to Distributor the right to serve as the Master Distributor of the Products in
the Distribution Area;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, Cigar Gone and Distributor agree
as follows:
1. Right to Sell. Cigar Gone grants to Distributor the right to serve
as "Master Distributor" for the Product. "Master Distributor", for the purpose
of this Agreement, shall be defined as the exclusive purchaser of the Product
for the resale of such Product in the Distribution Area, including without
limitation, those stores, chains, and retail outlets set forth on Exhibit "A"
attached hereto. The Master Distributor shall have the authority to
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
enter into sub-distributorships with other persons or entities in the
Distribution Area for the retail or wholesale of the Product (e.g., McLane and
Core-Mark). During the term of this Agreement, Cigar Gone agrees not to enter
into any distributorship agreements for the sale of the Product in the
Distribution Area (as defined above) other than through Distributor. During the
term of this Agreement, Cigar Gone or any entity in which Cigar Gone has an
ownership interest further agrees not to purchase, sell, distribute or deal in
cigar products or breath products which are similar to or compete, directly or
indirectly, with the Product within the Distribution Area. During the term of
this Agreement, Distributor agrees not to purchase, sell, distribute or deal in
breath products which are similar to or directly compete with the Cigar Gone
Product in the Distribution Area.
*
2. Marketing Efforts. The Distributor intends to attach the Product to
the humidors it distributes to various retail outlets and shall make such
efforts as it deems appropriate, in its sole discretion, to market the Product
to retailers. Distributor agrees not to sell or deliver any of the Products
outside of the Distribution Area or deliver any of the Products for resale or
use outside of the Distribution Area without first obtaining Cigar Gone's prior
written consent, which consent shall not be unreasonably withheld or delayed.
Should Cigar Gone desire to sell the Product to any foreign distributors, Cigar
Gone shall give ten (10) days written notice to Distributor prior to entering
into any agreement. Distributor shall have the option to distribute to any such
foreign destinations on terms to be agreed to by the Parties. Cigar Gone shall
forward to Distributor any retail or distributorship leads which Cigar Gone may
receive in order that Distributor may pursue such leads, and Cigar Gone will
forward to Distributor all contacts made in the Distribution Area which may
benefit Distributor.
It is understood that Cigar Gone will continue to market for sale its
Products to potential customers, provided that Cigar Gone shall not arrange
sales for less than the suggested retail or wholesale prices as set forth in
Paragraph 9, and that all sales are subject to the final approval of
Distributor. Cigar Gone shall immediately deliver invoices for any such sales to
Distributor for distribution. All sales commissions from the sales of the
Products created by Cigar Gone's personnel or agents shall be the sole
responsibility of Cigar Gone, and all sales commissions from the sales of the
Products created by Distributor's personnel or agents shall be the sole
responsibility of Distributor.
Distributor and Cigar Gone will cooperate with advertising done in
trade, consumer, in-house advertising programs and radio or TV ads. The
respective costs for each party and all other terms relating to advertising
shall be agreed to in writing by both parties prior to either party entering
into any commitments.
Upon the invitation of Distributor and approval of Cigar Gone, Cigar
Gone may work with and join Distributor in shows, conventions, events or parties
that include Cigar Gone's
* Confidential portions omitted and filed
separately with the Commission.
2
<PAGE>
Products. Cigar Gone will also name Distributor as its "Exclusive Distributor"
in any stories created by its publicist Larry Feldman and Associates.
3. Packaging. Cigar Gone will supply top quality soft gelcaps to
Distributor in either the Mini-Packs or the CG Bottles. Cigar Gone will supply
high quality foil packs for the Breath Cleansers. In conjunction with the
Mini-Packs, Cigar Gone shall supply Display Boxes for holding the Mini-Packs,
along with self-adhesive clip strips, of the same quality as those supplied to
Distributor's Phoenix office on October 22, 1997.
*
Cigar Gone shall give Distributor 30 days written notice prior to
implementing any change in the Products or the packaging of the Products. Any
changes in the count or quality of the Display Boxes or any change in the
contents or quality of the Products shall be subject to Distributor's prior
written approval.
4. Independent Contractor. This Agreement shall in no way be construed
to constitute the Distributor as an agent or employee of Cigar Gone for any
purpose whatsoever, the Distributor being an independent contractor engaged by
Cigar Gone to perform the services set forth herein.
5. Term. Subject to the terms set forth in paragraphs 11 and 12 herein,
the term of this Agreement shall be for two (2) years from the date hereof and
shall automatically be renewed annually for three (3) one year period 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.
6. Purchase Price. During the term of this Agreement, Distributor shall
pay to Cigar Gone a purchase price per Mini-Pack and per CG Bottle, as set forth
in Exhibit "B" hereto (the "Purchase Price"). Clipstrips shall be provided to
Distributor at no cost to Distributor as necessary to provide marketing racks
for Distributor's humidors.
7. *
8. Customer Billing. Distributor will handle all billing of
Distributor's and Cigar Gone's sales orders, except for the sale to those
exempted entities pursuant to paragraph 2. The terms and conditions of billing
will be COD to single stores that are not credit-approved and COD charges will
be billed to stores, net ten to multiple stores currently doing business with
Cigar Gone and 30 days to all other distributors or chains that have supplied
credit applications to Distributor and are approved by Distributor. Any term in
excess of 30 days must be approved by both Parties. All Products purchased by
Distributor or any customer of Distributor or Cigar Gone will be on a Cigar Gone
guaranteed sale basis unless otherwise stated on the purchase order.
* Confidential portions omitted and filed
separately with the Commission.
3
<PAGE>
9. Suggested Pricing. The minimum suggested retail and wholesale prices
are set forth below:
Retail Wholesale
------ ---------
Mini-Pack $0.99 per pack *
CG Bottle $4.98 per bottle *
*
10. Purchase Requirements. Distributor shall order from Cigar Gone as
much of the Product as it deems appropriate in its sole discretion, and Cigar
Gone shall provide sufficient amounts of the product to satisfy Distributor's
distribution requirements. Cigar Gone and Distributor specifically agree that
Distributor shall have no minimum purchase requirement.
11. Delivery. Delivery will be made to Distributor at 15651 North 83rd
Way, Suite 3, Scottsdale, Arizona 85260, or at such other destinations within
the Distribution Area which Distributor may designate from time to time.
Delivery designations will be limited to Seattle, Vancouver, Scottsdale and
CanAm. Cigar Gone shall fill all orders and deliver the Product by a reliable
common carrier, at Cigar Gone's sole expense, within ten (10) days from the
receipt of Distributors' orders.
Distributor will warehouse the Products in a climate controlled
building. Distributor will ship the Products to all of its clients and to any of
Cigar Gone's clients, via UPS, FEDEX, or any other shipping service of
Distributor's choice, within ten (10 days of any customer order. Shipping
charges will be billed to the customer unless other prior arrangements have been
negotiated. In any event when the customer does no pay shipping, Distributor
will reach an agreement in writing with Cigar Gone for the payment of shipping
costs prior to shipping.
12. Risk of Loss; Insurance. The risk of loss during transit, delivery
and storage of the Products shall be borne by Cigar Gone. Cigar Gone, at its
expense, shall secure and maintain comprehensive general liability insurance for
the full value of all Products shipped to Distributor by Cigar Gone during the
period of shipment. Distributor shall be named as an additional insured on all
policies of insurance purchased by Cigar Gone for such purposes.
13. Termination Upon Notice. Both parties 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.
14. Default by Cigar Gone - Early Termination of This Agreement. Cigar
Gone shall be in default, and Distributor shall have the right to terminate this
Agreement, in the event that one or more of the following events shall occur:
* Confidential portions omitted and filed
separately with the Commission.
4
<PAGE>
(a) Cigar Gone 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 Cigar Gone's property or
business;
(b) Cigar Gone is adjudicated bankrupt; or
(c) Cigar Gone neglects or fails to timely deliver any orders
which Distributor may make pursuant to the Agreement or to perform or
observe any of its other covenants or obligations hereunder.
15. Default by Distributor. Early Termination of This Agreement. The
Distributor shall be in default and Cigar Gone shall have the right to terminate
this Agreement if, after notice and expiration of the cure period as provided in
Section 14 below, Distributor has failed to pay Cigar Gone any amounts owing
pursuant to this Agreement.
16. Opportunity to Cure Default. Distributor 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 twelve percent (12%) per annum until paid.
17. Indemnification. Distributor shall not be liable for, and Cigar
Gone shall indemnify and hold Distributor 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, regardless of the form of action.
18. Acts Upon Termination. Upon termination of this Agreement the
parties agree as follows:
(a) Distributor shall immediately cease the advertising and
sale of the Product and its rights as Master Distributor shall cease.
(b) Cigar Gone shall repurchase all of the Product in the
possession of the Distributor or in transit to the Distributor at the
time of termination at the full Purchase Price. Cigar Gone shall
provide, at its expense, for the removal of the Products from the
Distributor's premises.
(c) Cigar Gone, at its option, may ship, deliver or consign
any of the Product to any other person, firm, distributor, or
corporation in the Distribution Area or elsewhere and may cancel all
orders from the Distributor for the Product which may have been placed
prior to the termination.
* Confidential portions omitted and filed
separately with the Commission.
5
<PAGE>
(d) Cigar Gone may stop in transit and take possession of the
Products shipped to the Distributor which are still in transit.
(e) Cigar Gone shall abide by its obligations pursuant to
Section 16 herein regarding Confidential Information.
Notwithstanding anything contained herein to the contrary, Distributor
shall be allowed to maintain and/or order a quantity of the Product necessary to
fulfill any outstanding orders it may have to retailers or sub-distributors of
the Product at the time of termination.
19. Confidential Information. Both parties recognize that as a result
of this Agreement, both parties have in the past and may in the future develop,
obtain or learn about Confidential Information which is the property of
Distributor or Cigar Gone, or which Distributor or Cigar Gone is under an
obligation to treat as confidential. Both parties agree to use their best
efforts and the utmost diligence to guard, protect and keep confidential said
Confidential Information, and both parties 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 this Agreement and the
distribution relationship, unless authorized to do so in writing by the other
party.
For the purposes of this Agreement, the term "Confidential Information"
shall include but not be limited to the following: customer lists; financial
statements or financial 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 Distributor an opportunity
to obtain an advantage over their competitors who do not know or use it. Both
parties acknowledge that Distributor, as a public company, shall provide notice
of this Agreement in press releases and reports filed with the Securities and
Exchange Commission.
Both parties and their officers, directors, shareholders, employees,
representatives and agents agree that they shall not contact directly or
indirectly any of the other party's customers or companies with which the other
party does business, or is affiliated with in any way, or any third parties
which have any direct or indirect business dealings with the other party,
without the prior consent of the other party.
* Confidential portions omitted and filed
separately with the Commission.
6
<PAGE>
20. Intellectual Property. Cigar Gone shall retain ownership of all
marks, trademarks and confidential ingredients of the Cigar Gone and Coffee Gone
Breath Cleansers or any other products sold or created by Cigar Gone. However,
Distributor shall have the exclusive right to use any trademarks, or other marks
and intellectual property for the Products in Distributor's advertisements.
21. Notices Any notice or other communication required or permitted to
be given hereunder shall be in writing and shall be delivered in person, sent by
telefacsimile or sent by registered mail, charges prepaid, to the parties at the
address or facsimile telephone as set forth on the signature page of the
Agreement and a copy sent to:
Kurt M. Brueckner
Titus, Brueckner & Berry, P.C.
7373 North Scottsdale Road, Suite B-252
Scottsdale, Arizona 85253
22. 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.
23. 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.
24. 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.
25. 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.
26. 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.
* Confidential portions omitted and filed
separately with the Commission.
7
<PAGE>
27. 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.
"DISTRIBUTOR"
PREMIUM CIGARS INTERNATIONAL, LTD.
By: /s/ Steven A. Lambrecht
----------------------------
Its: CEO / Pres.
-----------------------
Address:
15651 North 83rd Way
Suite 3
Scottsdale, Arizona 85260
Fax: 922-8656
"CIGAR GONE"
CIGAR GONE CORPORATION
By: /s/ [illegible]
----------------------------
Its: President
-----------------------
Address:
7700 Irvine Center Drive
Suite 510
Irvine, California 92718
Fax: (714) 727-7451
* Confidential portions omitted and filed
separately with the Commission.
8
<PAGE>
EXHIBIT A
*
* Confidential portions omitted and filed
separately with the Commission.
9
<PAGE>
EXHIBIT B
*
* Confidential portions omitted and filed
separately with the Commission.
10
<PAGE>
EXHIBIT C
ADDITIONAL DISTRIBUTORS
*
* Confidential portions omitted and filed
separately with the Commission.
11
<PAGE>
EXHIBIT D
Purchase Price
*
* Confidential portions omitted and filed
separately with the Commission.
12
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
STATEMENT OF COMPUTATION OF EARNINGS PER SHARE
Three Months Six Months
Ended Ended
September 30, September 30,
1997 1997
---- ----
Net Loss $ (454,110) $ (776,475)
============ ===========
Weighted average common
shares outstanding 2,251,371 1,868,042
============ ===========
Primary loss per share $ (.20) $ (.42)
============ ===========
Earnings per share are based upon the weighted average number of shares
outstanding for each of the respective periods. Fully diluted earnings per share
are not presented as they are anti-dilutive.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollar
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> SEP-30-1997
<EXCHANGE-RATE> 1
<CASH> 3,514,417
<SECURITIES> 3,411,897
<RECEIVABLES> 337,219
<ALLOWANCES> 0
<INVENTORY> 354,265
<CURRENT-ASSETS> 7,770,309
<PP&E> 206,193
<DEPRECIATION> (8,709)
<TOTAL-ASSETS> 8,618,802
<CURRENT-LIABILITIES> 938,176
<BONDS> 0
0
0
<COMMON> 8,807,049
<OTHER-SE> (1,126,423)
<TOTAL-LIABILITY-AND-EQUITY> 8,618,802
<SALES> 2,000,496
<TOTAL-REVENUES> 2,000,496
<CGS> 1,521,969
<TOTAL-COSTS> 2,661,014
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</TABLE>
