UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED COMMISSION FILE NUMBER
--------------------- ----------------------
September 30, 1998 0-29414
PREMIUM CIGARS INTERNATIONAL, LTD.
(Exact name of small business issuer as specified in its charter)
Arizona 86-0846405
(state or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
15849 North 77th Street
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Registrant's telephone number, including area code: (602) 922-8887
Securities registered pursuant to Section 12(b) of the Act:
No par value common stock
Securities registered pursuant to Section 12(g) of the Act:
No par value common stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months (or for such shorter periods that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of September 30, 1998, there were 3,469,092 shares of Premium Cigars
International, Ltd. common stock, no par value, outstanding.
<PAGE>
INDEX
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements........................................... 3
Condensed Consolidated Balance Sheet (Unaudited)
as of September 30, 1998............................................. 3
Condensed Consolidated Statements of Operations (Unaudited)
for the nine months ended September 30, 1998 and the three
months ended September 30, 1997...................................... 4
Condensed Consolidated Statements of Cash Flows (Unaudited)
for the nine months ended September 30, 1998 and 1997................ 5
Notes to Condensed Consolidated Financial Statements................. 6
Special Note Regarding Forward-Looking Statements.................... 8
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operation................... 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings..............................................13
Item 2 - Changes in Securities and Use of Proceeds......................13
Item 3 - Defaults Upon Senior Securities................................14
Item 4 - Submission of Matters to a Vote of Security Holders............14
Item 5 - Other Information..............................................14
Item 6 - Exhibits and Reports on Form 8-K...............................15
SIGNATURES....................................................................16
2
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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEET
September 30,
1998
-------------
(Unaudited)
ASSETS
Current Assets:
Cash and cash equivalents $ 197,212
Available for sale securities 130,736
Accounts receivable - trade, net 935,228
Inventory, net (Note 3) 1,829,627
Other current assets (Note 5) 189,184
-----------
Total Current Assets 3,281,987
-----------
Property and Equipment, net 587,834
-----------
Other Assets:
Humidors, net 1,006,455
Other assets 56,513
-----------
1,062,968
-----------
$ 4,932,789
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued expenses (Note 4) 1,069,009
-----------
Total current liabilities 1,069,009
-----------
Commitments and Contingencies --
-----------
Stockholders' Equity:
Common stock - no par value, 10,000,000 shares
authorized, 3,469,092 shares issued and outstanding 8,807,049
Foreign currency translation adjustment (66,056)
Accumulated deficit (4,877,213)
-----------
Total Stockholders' Equity 3,863,780
-----------
$ 4,932,789
===========
The accompanying notes are an integral part of the
condensed consolidated financial statements
3
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PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------------ ------------------------
1998 1997 * 1998 1997 *
---- ---- ---- ----
Unaudited) (Unaudited) (Unaudited) (Unaudited)
Net Sales $2,000,622 $1,372,316 $ 5,264,226 $ 2,333,422
Cost of Sales 1,452,290 1,041,153 3,997,059 1,799,297
---------- ---------- ----------- -----------
Gross Profit 548,332 331,163 1,267,167 534,125
Selling, General and
Administrative 1,256,315 787,644 3,766,479 1,300,809
Severance Packages (Note 4) 395,173
Stock Based Compensation 317,625
---------- ---------- ----------- -----------
Loss from Operations (707,983) (456,481) (2,894,485) (1,084,309)
Other Income (Expense) 33,883 2,371 128,796 (32,697)
---------- ---------- ----------- -----------
Net Loss $ (674,100) $ (454,110) $(2,765,689) $(1,117,006)
========== ========== =========== ===========
Basic Loss per Share $ (0.19) $ (0.20) $ (0.80) $ (0.65)
========== ========== =========== ===========
Weighted Average Number
of Shares Outstanding 3,469,092 2,251,371 3,469,092 1,719,402
========== ========== =========== ===========
* As restated for comparative purposes only.
The accompanying notes are an integral part of the
condensed consolidated financial statements
4
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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
-------------------------
1998 1997
---- ----
(Unaudited) (Unaudited)
Cash flows from operating activities:
Net loss $(2,765,689) $(1,117,006)
Adjustments to reconcile net loss to net cash
provided by (used for) operating activities:
Depreciation and amortization 548,911 101,798
(Increase) decrease in accounts receivable (323,384) (251,252)
(Increase) decrease in inventories (528,018) (257,965)
Increase (decrease) in accounts payable and
accrued expenses (64,852) 877,066
Stock issued for services and compensation 317,625
Net change in other assets and liabilities (47,038) (152,355)
----------- -----------
Net cash provided by (used for)
operating activities (3,180,070) (482,089)
----------- -----------
Cash flows from investing activities:
Purchase of humidors (718,158) (561,077)
Purchase of equipment (486,691) (206,439)
Purchase of short term investments (3,411,897)
Other uses (net) (97,082)
Proceeds from sale of available for
sale securities 3,339,734
----------- -----------
Net cash provided by (used for)
investing activities 2,134,885 (4,276,495)
----------- -----------
Cash flows from financing activities:
Net proceeds (repayment) from (on) notes payable (99,650)
Net proceeds from issuance of common stock 8,320,982
----------- -----------
Net cash provided by financing activities -- 8,221,332
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents (21,968) --
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,067,153) 3,462,748
Cash and cash equivalents, beginning
of period 1,264,365 51,669
----------- -----------
Cash and cash equivalents, end of period $ 197,212 $ 3,514,417
=========== ===========
The accompanying notes are an integral part of the
condensed consolidated financial statements
5
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PREMIUM CIGARS INTERNATIONAL, LTD. & SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. PRESENTATION OF INTERIM INFORMATION
In the opinion of the management of Premium Cigars International, LTD. and
Subsidiary (the "Company"), the accompanying condensed consolidated financial
statements include all normal adjustments considered necessary to present fairly
the financial position as of September 30, 1998, and the results of operations
for the three months and nine months ended September 30, 1998 and 1997, and cash
flows for the nine months ended September 30, 1998 and 1997. Interim results are
not necessarily indicative of results for a full year.
The condensed consolidated financial statements and notes are presented as
permitted by the instructions to Form 10-QSB, and therefore do not contain
certain information included in the Company's audited consolidated financial
statements and notes for the nine month period ended December 31, 1997.
2. FINANCIAL STATEMENTS
The condensed consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany accounts
and transactions have been eliminated.
3. INVENTORIES
As of September 30, 1998, inventory consists of the following:
Cigars and cigar accessories $1,839,990
Reserve for inventory spoilage (10,363)
----------
$1,829,627
==========
4. SEVERANCE PACKAGES
Subsequent to January 1, 1998 , the company terminated employment agreements
with certain former officers and employees of the Company. Under the terms of
the various employment agreements, severance pay ranges from six to nine months
of salary, payable over the same six or nine month period. Additionally, three
of the former officers received lump-sum payments of $40,000 each as settlement
for potential claims against the company. As part of the settlement, each of the
individuals agreed to extend their non-compete clauses for an additional six
months for a total of a full year and one-half following termination of
employment and released the Company from all claims or causes of action relating
to their respective employment agreement and their employment with the company.
6
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The severance packages are broken out as follows:
Severance pay $251,500
Payroll taxes 18,553
Other benefits 5,120
Lump sum payments 120,000
--------
$395,173
========
As of September 30, 1998 the balance of accrued severance benefits was $53,504.
5. RELATED PARTY TRANSACTIONS
In March of 1998, the Company terminated its distributorship agreement with Rose
Hearts, Inc., which was wholly-owned by a director of the Company, after it
determined that in practice, the agreement was not as favorable to the Company
as those generally available with unaffiliated third parties.
The Company has notes receivable from two director/shareholders of the Company
in the aggregate amount of $86,225. The notes, which bear interest at 6%, are
due on March 31,1999. Accrued interest as of September 30, 1998 is $12,072. The
total of the notes receivable plus accrued interest is included in other current
assets in the Company's condensed consolidated balance sheet.
6. SUBSEQUENT EVENT
Subsequent to September 30,1998 the Company reached an agreement in principle
for a $1,000,000 secured revolving line of credit agreement with a commercial
lender. The line will be subject to the terms and conditions of final loan
documents to be executed, and will be tied to accounts receivable and inventory
balances and will be secured by accounts receivable and inventory, as well as
other unencumbered assets of the Company.
7
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this report discuss future expectations,
contain projections of results of operations or financial condition or state
other "forward-looking" information. Those statements are subject to known and
unknown risks, uncertainties and other factors that could cause the actual
results to differ materially from those contemplated by the statements. The
forward-looking information is based on various factors and was derived using
numerous assumptions. Important factors that may cause actual results to differ
from forward-looking statements and projections include, for example:
+ our ability to maintain an adequate capital position and a sufficient
cash flow as we add retail stores required by commitments with our
customers and distributors;
+ our ability to raise additional capital, if current financing is
depleted, to enable us to maintain sufficient working capital for
operating activities;
+ any decision by major retail chains to discontinue selling all tobacco
products or to place our humidors in a disadvantageous location within
their stores;
+ changes in government regulations, tax rates and similar matters,
including any restriction on the single sales of both cigars or
self-service nature of merchandising displays and marketing
promotions;
+ the risk of any significant uninsured loss from potential passenger
claims as a result of a September 1997 automobile accident in which
one of our employees was the driver;
+ the possible negative impact of any final settlement of litigation
among up to 46 States and major U.S. cigarette manufacturers;
+ our ability to buy quality premium cigars at favorable prices and the
effect on cigar prices and availability, of weather and other
conditions in the countries that import cigars to the U.S. and Canada;
+ our ability to negotiate and maintain favorable distribution
arrangements with customers;
+ the effect of changing economic conditions;
+ a decline in the popularity of cigar smoking and/or possible adverse
public opinion against cigars and cigar smoking; and
+ other risks which were described in our Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1997 or which may be described
in our future filings with the SEC. We do not promise to update
forward-looking information to reflect actual results or changes in
assumptions or other factors that could affect those statements.
8
<PAGE>
ITEM 2. - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You must read the following discussion on the financial condition and results of
operations of Premium Cigars International, LTD. ("PCI") in conjunction with
PCI's condensed consolidated financial statements, including the notes elsewhere
in this Form 10-QSB filing. Historical results are not necessarily an indicator
of trends in operating results for any future period.
PCI is an international marketer of premium cigars from its humidors and
promotional programs located in high traffic retail outlets. PCI operates in one
business segment and has a December 31 fiscal year.
RESULTS OF OPERATIONS
The following table sets forth, for the three months and nine months ended
September 30, 1998 and 1997, certain items from PCI's Condensed Consolidated
Statements of Income expressed as a percentage of net sales.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
1998 1997 1998 1997
---- ---- ---- ----
Net Sales 100.0% 100.0% 100.0% 100.0%
Cost of Sales 72.6% 75.9% 75.9% 77.1%
----- ----- ----- -----
Gross Profit 27.4% 24.1% 24.1% 22.9%
SG&A and Other Operating
Expenses 62.8% 57.4% 79.0% 69.3%
----- ----- ----- -----
Loss from Operations (35.4%) (33.3%) (54.9%) (46.4%)
Other Income (Expense) 1.7% .2% 2.4% (1.4%)
----- ----- ----- -----
Net Loss (33.7%) (33.1%) (52.5%) (47.8%)
===== ===== ===== =====
9
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COMPARISON OF THE THIRD QUARTER OF 1998 WITH THE THIRD QUARTER OF 1997
Net sales for the quarter ended September 30, 1998 increased by $628,000, a 46%
increase over the same period last year. The increase in net sales is a result
of increased store count versus prior year, as well as improved re-order rates
which we believe, result from bringing the U.S. customer service function
in-house beginning in April of 1998.
Gross profit margin improved to 27% for the quarter ended September 30, 1998, up
from 24% in the quarter ended September 30, 1997. The improvement is mainly
attributable to more favorable purchasing arrangements with key suppliers versus
those available to PCI one year ago, as well as the contribution from higher
margin, higher priced cigars that were introduced during the second quarter of
1998. Additionally, higher sales volume during the 1998 period allowed for
greater absorption of fixed warehousing costs.
Selling, general and administrative expenses for the quarter ended September 30,
1998 increased $469,000, or 60% from the same period one year ago. SG&A as a
percentage of sales was 63% for the quarter ended September 30, 1998 compared to
57% for the same period one year ago. The increase is attributable to the
development of the infrastructure that has been put into place as we continue to
invest in the systems and people necessary to generate future revenue and manage
operations. The year ago SG&A represents the costs for a start-up organization
just prior to PCI's initial public offering.
Other income for the quarter ended September 30, 1998 consists mainly of
interest income from short-term investments which were purchased with a portion
of the net proceeds from our initial public offering, as well as an adjustment
for foreign currency conversion. Other income for the quarter ended September
30, 1997 consists of interest income from short-term investments, offset by
interest expense on notes payable.
COMPARISON OF THE FIRST NINE MONTHS OF 1998 WITH THE FIRST NINE MONTHS OF 1997
Net sales for the nine months ended September 30, 1998 increased $2.9 million,
an increase of 126% over the nine months ended September 30, 1997. As discussed
above, the increase is due to the increase in the number of stores participating
in the humidor program, as well as improving second and third quarter 1998
re-order rates.
Gross profit margin for the nine months ended September 30, 1998 improved
slightly to 24%, up from 23% for the same period one year ago. The improvement
from more favorable purchasing arrangements with key suppliers versus those
available to PCI one year ago, as well as the contribution from higher margin,
higher priced cigars that were introduced during the second quarter of 1998 is
offset somewhat by lower margins during the first quarter of 1998. The lower
margins during the first quarter of 1998 were due mainly to a higher percentage
of lower margin cigars that were sold in Canada, as well as increased labor
costs incurred in consolidating warehouse space and inspecting inventory for
possible damage.
10
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Selling, general and administrative expense for year to date 1998 increased
$2.47 million, or 190% over the comparable figures for 1997. SG&A as a
percentage of sales was 72% for the nine months ended September 30, 1998
compared to 56% for the same period one year ago. As previously discussed, the
increase is attributable to the development of the infrastructure that has been
put into place to generate future revenue and manage operations.
Severance Packages - As discussed in the 1997 Form 10-KSB, we took a one-time
charge in the first quarter of 1998 to reflect the cost of severance packages
for previous Management. The amount charged against earnings was $395,173.
Stock based compensation - During the first half of 1997 certain employees
purchased Common Stock at a per share price that was determined to have a market
value in excess of the amount paid by the employees. Additional compensation was
recorded for the amount of the excess market value, or $317,265.
Other income for the nine months ended September 30, 1998 consists primarily of
interest income from short-term investments which were purchased with a portion
of the net proceeds from our initial public offering . Other expense for the
nine months ended September 30, 1997 consists primarily of interest expense on
notes payable.
LIQUIDITY AND CAPITAL RESOURCES
We require capital to market our PCI Cigar program, obtain additional inventory
and humidors to supply our increasing distribution network, and develop the
personnel, facilities, assets, and organization infrastructure necessary to
support our expanding business. Prior to our initial public offering, we raised
capital through the issuance of stock and notes payable, as well as obtaining a
line of credit from a bank. On September 29, 1997 we completed an initial public
offering that resulted in net proceeds to PCI of $8,131,664. See Item 2(c), "Use
of Proceeds" for application of the proceeds.
PCI used $3.2 million for operating activities for the first nine months of
1998, which was largely attributable to the net loss incurred during the period.
Non-cash expenses (depreciation and amortization) of $549 thousand were offset
by increases, as discussed below, in accounts receivable and inventory. Cash
used for operations includes $342 thousand in severance benefits paid to former
management of PCI.
As of September 30, 1998 the combined balance of cash and available for sale
securities totaled $328,000, a decrease of $4,407,000 or 93% from December 31,
1997. The decline is due to the net loss incurred for the nine months ended
September 30, 1998 as well as PCI's continued additional investments in humidors
and property and equipment.
Accounts receivable at September 30, 1998 increased $298,000 or 47% from
December 31, 1997. The increase is due to the increased level of sales during
1998, as the annualized accounts receivable turnover rates were virtually the
same for each period.
11
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Net inventories at September 30, 1998 increased $507,000, or 38% from December
31, 1997. The increase is attributable to: 1) inventory returned by customers as
part of the cigar trade-out program that was implemented during the first half
of 1998; 2) a gradual shift in inventory mix to higher priced, and therefore,
higher cost cigars; and 3) an overall increase in the number of cigars on hand
to support a higher volume of sales. We are developing programs to eliminate our
investment in obsolete and discontinued cigars and expect to reduce this figure
over the next several months.
As part of PCI's humidor program, a humidor is sent with each initial order of
cigars as new stores are added. While PCI retains ownership of the humidor, the
store is not charged for the humidor unless it is lost or damaged by the store.
Therefore, as new stores continue to be added, PCI requires capital to purchase
the humidors it sends out as part of the initial order.
Capital expenditures (excluding humidors) totaled $487,000 for the nine months
ended September 30, 1998. This included the cost of new office furniture and
leasehold improvements for our new facility, continued investment in computer
equipment and software applications, and warehouse machinery and equipment.
Accounts payable and accrued expenses at September 30, 1998 decreased $83,000,
or 7% from December 31, 1997. Decreases in the amount of tobacco taxes payable
were largely offset by increases in budgeted accrued incentive plan pay-outs and
accrued severance benefits.
We have no current plans that represent a material change from the use of
proceeds described in the Prospectus dated August 21, 1997. We have reached an
agreement in principle to obtain a $1,000,000 revolving line of credit tied to
our accounts receivable and inventory balances, which we believe will provide
the necessary working capital for our immediate needs. However, we cannot assure
you that we can generate sufficient revenues to provide the cash flow necessary
to meet our anticipated future expansion or our working capital needs. Based on
anticipated terms of final loan documents, we will draw an initial $100,000. Our
lender will review our books and records, and if approved, our accounts
receivable balances on or near the date of filing of this Form 10-QSB would
permit us to draw on approximately $525,000 of the total available line. Because
the loan documents are not yet final, we cannot determine the amount of funds we
may ultimately obtain under this line of credit. If additional funding is
required, we cannot assure you that we can raise this or other additional
capital which may be required through the issuance of long-term or short-term
debt or the issuance of securities in private or public transactions.
YEAR 2000 READINESS
We purchased most of our computers within the past year and do not anticipate
any significant problems relative to their Year 2000 ("Y2K") capabilities.
Testing of each machine's capability is expected to be completed by the end of
the first quarter of 1999. We have not yet implemented a plan to identify the
non-IT (Information Technology) systems (i.e., those systems with an imbedded
technology such as microcontrollers) which may require repair or replacement;
however, given the nature of our operations and the age of our business, we do
not believe that we face any material risk from these types of systems.
12
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Our business relies to a large extent on our integrated accounting, order entry,
and inventory control system (SBT Pro Series 5.0), which is represented by the
vendor as being Y2K compliant. We also rely on standard office productivity
software (Microsoft Office 97) which is also represented as being Y2K compliant.
Our EDI software, which we use to transmit invoices and receive payment
information from our largest U.S. customer is non-compliant. The cost to replace
this software is not expected to be material and we intend to identify suitable
alternatives by the end of the first quarter of 1999. We are in the process of
determining the compliance of our other software and expect to have this
completed by the end of the first quarter of 1999.
We will soon begin contacting key customers, vendors, service providers and
other third parties with whom business is conducted to determine what impact, if
any, their Y2K readiness will have on us; this process is expected to be
completed by the end of the first quarter of 1999. Although we do not anticipate
any material adverse effect on our business as a result of such parties failure
to achieve Y2K readiness, we cannot assure you that these parties will have
accurately assessed their Y2K readiness status.
At this time, we do not believe that we will incur any material expenditures to
identify and replace, as necessary, any Y2K non-compliant systems. We do not
anticipate any material effect to our business from any non-compliant PCI-owned
systems; however, we are unable at this time to determine what, if any, effect
on our business will occur from any third parties non-compliant systems. We
expect to be better able to assess this uncertainty as we obtain more Y2K
information from these parties.
We do not currently have a contingency plan in place to handle a "worst case
scenario", as we believe that any non-compliant systems on our part do not pose
a material risk to PCI. If, and to the extent that we identify material risks to
PCI from third parties non-compliance, we will formulate a plan at that time.
PART II - OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
None
ITEM 2 - CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) Use of Proceeds.
PCI provides the following information in accordance with Item 701(f)
of Regulation S-B:
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1. PCI's Registration Statement on Form SB-2 (File No. 333-29985)
was declared effective on August 21, 1997;
2. The offering commenced on August 21, 1997.
3. The offering did not terminate before any securities were sold.
4(i) to 4(vi). In response to subparagraphs 4(i) to 4(vi), the
Registrant incorporates by reference its response to
subparagraphs 4(i) to 4(vi) of Item 5 of its Annual
Report on Form 10-KSB for the fiscal year ended
December 31, 1997.
4(vii). From the effective date of PCI's Registration
Statement, August 21, 1997 to September 30, 1998, the
net offering proceeds were applied as follows:
$1,200,000 to repayment of debt, $1,196,911 to
purchase humidors, $2,030,445 to purchase inventory,
$2,103,676 for sales and marketing and $1,599,632 in
temporary investments and other net working capital.
4(viii). In addition, net offering proceeds were applied to
the following items, which represent a material
change from the use of proceeds described in the
Prospectus dated August 21, 1997:
In response to this subparagraph 4(viii),
the Registrant incorporates by reference its
response to subparagraph 4(viii) of Item 5
of its Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1997.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
(a) RELATED PARTY TRANSACTION. The Registrant entered into a Supplier
Agreement with Single Cigars, Inc. a wholly owned subsidiary of Single Stick,
Inc. dated October 5, 1998, under which Single Cigars, Inc. will supply little
cigars known as Prime Time(TM) exclusively to the Registrant (the "Single Stick
Transaction") for distribution by the Registrant. Greg Lambrecht, a director of
the Registrant, has entered into a consulting arrangement with Single Stick,
Inc. Pursuant to his relationship with Single Stick, Inc., Greg Lambrecht will
receive consideration including two percent (2%) of the net collected sales
price received by Single Stick, Inc. from sales of Prime Time(TM) to the
Registrant, as well as shares of Single Stick, Inc. if certain sales criteria
are met for the Prime Time(TM) product. Additionally, Greg Lambrecht received a
retainer and shares of Single Stick, Inc. under his
14
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consulting agreement with Single Stick, Inc. The Registrant's Board of Directors
including all of the Registrant's independent directors, have approved the
transaction with Single Cigars, Inc. and have found the terms to be fair to the
Registrant.
(b) ADDITIONAL RISK DISCLOSURE. A part of the Registrant's distribution
business now includes the distribution of little cigars known as Prime Time(TM).
Federal or state regulation of little cigars in the future may impair the
success of this line of business. Specifically, little cigars may be treated as
cigarettes under government regulations. Canada has implemented regulations
which would largely restrict single cigarette sales, and the United States Food
and Drug Administration ("FDA") previously approved regulations for cigarettes,
which, if applied to little cigars, would significantly impair the Registrant's
ability to distribute little cigars acquired under the Single Stick Transaction.
While the FDA regulations are not currently in effect because a United States
Circuit Court of Appeals has held that the FDA did not have the authority to
enact such regulations, the United States Supreme Court could reverse that
ruling or the United States government could enact similar provisions in the
future.
(c) LINE OF CREDIT. The Registrant has reached an agreement in
principle for a $1.0 million secured line of credit with Altres Financial. The
line of credit will be subject to the terms and conditions of final documents to
be executed, and will be tied to and secured by the Registrant's outstanding
accounts receivable and inventory balances. See "Management's Discussion and
Analysis of Financial Conditions and Results of Operation - Liquidity and
Capital Resources."
(d) JOHN GREENWELL PURCHASE OF STOCK. In October, 1998, John Greenwell,
President and CEO of the Registrant, entered into agreements with Greg
Lambrecht, Colin Jones and Dan Goldman to purchase a total of 350,000 shares of
the Registrant, pending regulatory approval from the coordinated equity review
states. Regulatory approval was received on November 12, 1998, and the
transaction is scheduled to close promptly.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit
Number Exhibit Name Method of Filing
- - ------ ------------ ----------------
3.1 Articles of Incorporation (1), Exhibit 3.1
3.2 Amended and Restated Bylaws, Adopted May 8, 1998 (2), Exhibit 3.2
4.1 Specimen Common Stock Certificate (1), Exhibit 4.2
4.2 Description of Rights of Security Holders (1), Exhibit 4.1
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10.1 Supplier Agreement between the Registrant and Exhibit filed
Single Cigars, Inc. dated October 5, 1998 herewith (3)
27.1 Financial Data Schedule Exhibit filed
herewith
99.1 "Underwriting" section of Registration Statement
on Form SB-2 (4)
- - ----------
(1) Incorporated by reference to Registration Statement on Form SB-2 (file no.
333-29985) declared effective on August 21, 1997.
(2) Incorporated by reference to Exhibit 3.2 of the Form 10-QSB filed by the
Registrant for the quarter ending June 30, 1998.
(3) Portions of the exhibit omitted and filed separately with the Commission
pursuant to the Confidential Treatment provisions of Regulation ss.
240.24b-2.
(4) Incorporated by reference to pages 56-57 of Registration Statement on Form
SB-2 (file no. 333-29985) declared effective on August 21, 1997.
(b) Reports on Form 8-K
None.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PREMIUM CIGARS INTERNATIONAL, LTD.
(Registrant)
/s/ John E. Greenwell Date: November 16, 1998
- - -------------------------------------------
John E. Greenwell
President & Chief Executive Officer
/s/ Stanley R. Hall Date: November 16, 1998
- - -------------------------------------------
Stanley R. Hall
Controller and principal accounting officer
16
SUPPLIER AGREEMENT - CIGARS
This Supplier Agreement ("Agreement") is entered into this 5th day of
October, 1998 between Premium Cigars International, Ltd., an Arizona corporation
("PCI") and Single Cigars, Inc., an Arizona corporation ("Supplier"), which is a
wholly owned subsidiary of Single Stick, Inc., an Arizona corporation.
RECITALS
--------
WHEREAS, Supplier is engaged in the production of little cigars to be
marketed under the trademark of "PrimeTime" (the "Cigar Products") and desires
to sell the Cigar Products to PCI; and
WHEREAS, PCI is engaged as a wholesale distributor of premium cigars,
humidors and other products to retail accounts worldwide and desires to secure a
quality supply of Cigar Products.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, PCI and Supplier agree as follows:
1. APPOINTMENT AND ACCEPTANCE OF EXCLUSIVITY. Subject to the terms
herein, Supplier agrees to exclusively supply the Cigar Products to PCI for the
term set forth in paragraph 2 herein, provided PCI satisfies the Purchase
Requirements described in paragraph 3 herein and provided PCI is not in default
under the terms of this Agreement. Unless PCI fails to satisfy the Purchase
Requirements set forth in paragraph 3 herein or PCI is in default under the
terms of this Agreement, Supplier acknowledges and agrees that, during the term
of this Agreement, it shall not supply the Cigar Products or little cigars to
any manufacturer, supplier, distributor, retailer or other person or entity,
other than PCI, worldwide and shall not be a distributor of the Cigar Products
or little cigars. During the term of this Agreement and provided Supplier is not
in default under the terms of this Agreement, PCI shall not be a distributor of
products in direct competition with the Cigar Products or little cigars
manufactured by Supplier. Subject to the foregoing, PCI may sell and distribute
cigars and related products (but not little cigars in single tubes) without
violating the terms of this Agreement. Subject to the foregoing, PCI
acknowledges that Supplier sells and distributes other tobacco products
including cigarettes.
2. TERM. Subject to the terms set forth in Sections 15 and 18 herein,
the term of this Agreement shall be for five (5) years from the date hereof and
shall automatically be renewed for an additional five (5) year period, subject
to the conditions set forth below. No later than 45 days prior to the expiration
of the initial five (5) year period, PCI and Supplier shall use their best
efforts to mutually agree on Purchase Requirements, as defined below, for years
6 through and including 10 as evidenced by a written addendum to this Agreement.
If the parties are unable to agree on such Purchase Requirements, the parties
shall retain an independent third party with substantial experience in the cigar
1
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
business ("Third Party") to establish the Purchase Requirements for years 6
through and including 10, taking into account the following: past per store
sales, purchase history, regulatory climate, competitive products, market and
industry factors and other relevant issues. The parties hereto agree that the
Purchase Requirements as determined by such Third Party shall be binding on the
parties hereto and PCI and Supplier agree to split 50/50 any fees and costs
charged by such Third Party in connection with its evaluation and determination
of the Purchase Requirements. If the parties hereto cannot agree on a Third
Party, PCI and Supplier shall each select a qualified party with substantial
experience in the cigar business and such two qualified parties selected shall
select another qualified party with experience in the cigar business and such
party shall establish the Purchase Requirements for years 6 through and
including 10, which shall be binding on the parties hereto.
3. PURCHASE REQUIREMENTS. PCI shall order from Supplier minimum orders
of Cigar Products as set forth on the attached Exhibit "A" (the "Purchase
Requirements"). The Cigar Products must satisfy the specifications of PCI as to
blend, color, flavor, tip, concentration, quality and packaging as more
specifically set forth on Exhibit B attached hereto. The final specifications
shall be deemed Confidential Information and evidenced by both parties signing
Exhibit B. PCI must give Supplier at least three months prior notice of any
proposed change in the specifications for the Cigar Products. The parties agree
to work together to effectuate a smooth transition to Cigar Products with new
specifications and to mitigate the costs to both parties. The Purchase
Requirements shall be calculated on a cumulative basis. The parties agree that
such purchases shall generally be made on a monthly basis taking into account
the existing production capacity of Supplier and requirements of PCI. If in any
given period, the purchase orders by PCI exceed the Purchase Requirements set
forth on the attached Exhibit "A," such excess amount shall be applied to the
Purchase Requirements for the next succeeding fiscal quarter. Within thirty (30)
business days of PCI's receipt of any Cigar Products delivered by Supplier
pursuant to a PCI purchase order, PCI may return any or all of such Cigar
Products because of damage or quality problems. PCI must notify Supplier as to
nature of defect. Pursuant to the written instruction of PCI, Supplier shall as
soon as possible. replace such returned Cigar Products. If damaged Cigar
Products are not replaced within 60 days, Supplier shall immediately refund all
monies paid for said product. Notwithstanding anything mentioned herein to the
contrary, in the event that the FDA or any federal or state, governmental agency
or legislative body at any time enacts any legislation, rule, regulation,
ordinance or law which would prevent PCI from selling the Cigar Products in the
same manner as it is selling its cigars as of the date of this Agreement or have
a material adverse impact on the sales of Cigar Products, the Purchase
Requirements shall be adjusted based on the following formula: 10 Cigar Products
per day x 90 days x number of stores affected. Such adjusted Purchase
Requirements shall be applicable to the fiscal quarter as of the date of the
foregoing event and all subsequent fiscal quarters thereafter unless otherwise
modified as provided for herein. In the event PCI fails to meet the Purchase
Requirements for any given fiscal quarter as set forth on Exhibit A, as modified
and PCI fails to cure such default within 60 days of the end of such fiscal
quarter, PCI shall be deemed to be in default under the terms of this Agreement.
To the extent the Purchase Requirements are reduced below 60% of the then
current or future Purchase Requirements as set forth on Exhibit A due to the
events described above, either PCI or Supplier may give the other party 30 days
prior written notice of its election to terminate this Agreement.
2
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
4. PURCHASE PRICE; Adjustment of Price. During the term of this
Agreement, PCI shall pay Supplier the price ("Purchase Price") for the Cigar
Products of no higher than * per unit including the federal tobacco tax paid by
Supplier. Such prices are subject to factory increases or decreases, provided
Supplier delivers to PCI invoices and other information in a form acceptable to
PCI which verify such increases or decreases and provided such cost increases or
decreases are greater than ten percent (10%) of the actual costs of plastic and
tobacco paid by Supplier for the manufacture of Cigar Products as of the date of
this Agreement or the date of the latest adjustment to the Purchase Price,
whichever is later. If any increases or decreases for the actual costs of
plastic and tobacco paid by Supplier for the Cigar Products is ten percent (10%)
or less there shall be no adjustment to the Purchase Price. Increases or
decreases are subject to verification by PCI. For example, if the actual cost of
plastic and tobacco paid by Supplier for the manufacture of Cigar Products has
increased by fifteen percent (15%) from the date of this Agreement and PCI is
able to verify such cost increases the Purchase Price shall be increased by
fifteen percent (15%) increasing the Purchase Price from * per unit to * per
unit. The price of * per unit shall then be the benchmark Purchase Price and any
further increases or decreases in the Purchase Price shall be based on an
increase or decrease of greater than ten percent (10%) from the benchmark
Purchase Price of * per unit. Any increase in the federal cigar tobacco tax,
which is in effect as of the date of this Agreement, shall increase the Purchase
Price by the amount of such increase. As set forth in Section 18 below, Supplier
shall at all times use best efforts to maintain the confidentiality of the
Purchase Price paid by PCI and shall not disclose such prices to PCI's
distributors or other third parties with which PCI does business. Supplier will
invoice PCI by components, separating the price of the tobacco products from the
price of all other components, like packaging. The price that Supplier sells the
Cigar Products to PCI is net of any state taxes, PCI is responsible to pay
Arizona taxes on the price of the tobacco portion of the invoice.
5. PAYMENT TERMS. All payments shall be made within fifteen (15) days
of both delivery of the Cigar Products and receipt of the invoice. Failure by
PCI to make timely payments shall allow Supplier to require PCI to pay on a COD
basis for future deliveries. A late charge of five (5%) of the payment amount
shall be added to all payments not made within fifteen (15) days of delivery and
receipt of the invoice for the Cigar Products.
6. PACKAGING. At PCI's request, Supplier shall provide appropriate
retail packaging including the box in which the Cigar Products are shipped
utilizing packaging materials provided by Supplier, at its sole cost, and
mutually approved by PCI and Supplier and using logos and designs provided by
PCI to Supplier. If prior to the production of the retail packaging, such
packaging as set forth in Exhibit B does not reasonably satisfy PCI, Supplier
shall provide the Cigar Products, at Supplier's sole expense, in packaging which
does satisfy PCI, determined by mutual agreement, as signified by a signed
memorandum by officers of each party. Any change to specifications set forth in
Exhibit B for packaging must have three months lead-time from PCI to Supplier
and the cost difference shall be paid by PCI provided the parties agree to work
together to mitigate the costs of such transition. PCI has the right to produce,
at its discretion and expense, any and all sales/marketing materials under the
3
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
PrimeTime name. Supplier shall not produce any sales/marketing materials under
the PrimeTime name without the express written approval of PCI. Subject to the
provisions herein, PCI retains all ownership and other rights to the packaging
materials and any designs, logos or other intellectual property contained in
such materials, including without limitation, all trademark rights to the
"PrimeTime" brand name. Supplier shall not, by utilizing such materials or
intellectual property gain any ownership or other rights to such materials or
intellectual property. PCI, at its expense, shall apply for trademark
registration of the intellectual property rights described herein. During the
term of the Agreement, Supplier will not assign distribution rights to the Cigar
Products to anyone except PCI, and the Supplier will not distribute the Cigar
Products under the PrimeTime name. In the event that PCI elects to terminate
this Agreement because it no longer desires to distribute the Cigar Products, or
PCI is in default under the terms of this Agreement, PCI agrees to transfer to
Supplier all of its rights, title, and interest in the trademarks associated
with the brand name "PrimeTime" and all other intellectual property rights
(including related marketing materials) relating to the Cigar Products and to
sign all documents requested by Supplier to accomplish such transfer. Except as
expressly set forth in the immediate preceding sentence, Supplier shall have no
right, title or interest to any intellectual property rights associated with the
Cigar Products or Prime Time, which shall remain owned by PCI. To the extent PCI
sends written notice to Supplier that it elects to terminate this Agreement due
to PCI's desire to no longer distribute the Cigar Products, Supplier may
distribute the Cigar Products to the PCI accounts upon sixty (60) days notice to
PCI or such earlier date as agreed to by the parties provided Supplier pays PCI
for the existing inventory at PCI's cost.
7. DELIVERY. Delivery will be made to PCI FOB Premium Cigars
International, Ltd. Warehouse, Scottsdale, Arizona. Supplier shall fill all
orders and deliver the Cigar Products by a reliable common carrier, at
Supplier's sole expense, within twenty (20) calendar days from the receipt of
PCI's orders as long as purchase orders are not in excess of ten percent (10%)
of the Purchase Requirements as outlined in Section 3. Any purchase order in
excess of ten percent (10%) of the quantities outlined in Exhibit A shall be
delivered within 28 days of the date of the purchase order on a best efforts
basis subject to the existing production capacity of Supplier.
8. CONFIRMATION OF PURCHASE ORDERS WITH MANUFACTURER(S); VERIFICATION
OF PAYMENT. Supplier shall provide to PCI, within three (3) business days of
Supplier's receipt of a purchase order from PCI, confirmation of the receipt by
Supplier of such purchase order.
9. INDEPENDENT CONTRACTOR. This Agreement shall in no way be construed
to constitute Supplier as an employee, agent, partner or joint venturer of PCI
for any purpose whatsoever, Supplier being an independent contractor engaged by
PCI to perform the services set forth herein. Except as specifically provided
herein or in a power of attorney or similar written instrument specifically
authorizing Supplier to act for or on behalf of PCI, Supplier shall have no
authority to so act. Supplier shall take no action on behalf of PCI beyond the
scope of the authority specifically conferred upon it by this Agreement.
10. RISK OF LOSS; INSURANCE. The risk of loss during transit, and up to
the time that PCI accepts delivery of the Cigar Products shall be borne by
Supplier. Supplier, at its expense, shall secure and maintain comprehensive
4
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
general liability insurance equal to or in excess of PCI's Purchase Price for
the Cigar Products shipped to PCI by Supplier during the period of shipment.
Each party shall be named as an additional insured on all policies of insurance
purchased by either party which applies to the Cigar Products and shall provide
copies of such policies to each other. The parties agree to maintain product
liability coverage in amounts mutually acceptable to the parties during the term
of this Agreement.
11. DEFAULT. Subject to the applicable cure period set forth in
paragraph 12 herein, each party shall have the right to terminate this
Agreement, effective immediately thereafter upon delivery to the other of
written notice of termination, in the event that one or more of the following
events shall occur:
a. Either party makes an assignment for the benefit of
creditors, or a receiver, trustee in bankruptcy, or similar officer is
appointed to take charge of all or any part of its property or
business;
b. Either party is adjudicated bankrupt; or
c. Supplier or PCI neglects or fails to perform any of their
respective material covenants or obligations hereunder.
12. OPPORTUNITY TO CURE DEFAULT. Each party shall have sixty (60) days
from the date of receipt of notice of default to cure any condition creating a
non-monetary default. If the default pursuant to this section shall be a
monetary default, then the defaulting party shall have 10 days from the date of
receipt of such notice of default to cure the default and thereafter all sums
due and payable as of the expiration of the cure period shall bear interest at
the rate of twelve percent (12%) per annum until paid.
13. REMEDIES. Upon an Event of Default as defined in paragraph 11
herein, the non-defaulting party can pursue all of its legal and equitable
remedies.
14. DISPENSERS. Supplier hereby grants to PCI the right to use
dispensing units to sell Cigar Products supplied by Supplier, at no cost to PCI,
during the term of this Agreement. Such dispenser units may not be used by PCI
for the sale of any other products except Cigar Products manufactured by
Supplier. If this Agreement is terminated due to a default by Supplier, Supplier
hereby transfers to PCI all of its right, title and interest in the dispensers
located at all retail locations and PCI would have the right to contract for a
similar dispenser from another party. If PCI is in default under the terms of
this Agreement, PCI shall deliver to Supplier a list of locations where such
dispensers are located and Supplier may, at its own cost, collect the dispensers
from such locations and PCI shall return to Supplier all other dispensers in its
inventory.
15. INDEMNIFICATION. PCI shall not be liable for, and Supplier shall
indemnify and hold PCI and its officers, directors, shareholders, employees,
agents harmless from, any loss, damage, expense (including without limitation
attorney fees and expenses) claimed to have resulted from the use, operation or
5
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
performance of the Cigar Products or related in any way to its manufacturing,
shipment, transport or delivery, including, but not limited to, any violation of
Section 16, regardless of the form of action. If any action is brought against
PCI or its affiliates, subsidiaries, officers, directors or agents, as a result
of the actions of Supplier or its affiliates, subsidiaries, officers, directors,
or agents, including without limitation, claims for product liability or for any
claim related to illness to any person, in connection with the Cigar Products
created or prepared by Supplier or its affiliates or agents, PCI shall be
entitled to select and retain its own counsel and defend against such claims or
settle such claims as it shall, in its sole discretion determine, and if PCI is
required to incur costs for legal fees or court costs or settlement as a result
thereof, Supplier shall reimburse and indemnify PCI for all damages suffered or
settlement paid by PCI, including the amount of any judgment, reasonable
attorney fees and court costs. PCI shall indemnify and hold Supplier and its
officers, directors, shareholders, employees agents harmless from and against
all claims, cost or expense including attorneys fees incurred by Supplier as a
result of PCI's breach of this Agreement or arising from PCI's distribution of
the Cigar Products.
16. NO CUBAN TOBACCO OR ILLEGAL SUBSTANCES; COMPLIANCE WITH LAWS.
Supplier specifically represents and warrants to PCI that no Cuban tobacco has
been included in the Cigar Products. Supplier also represents and warrants that
all U.S. customs and other laws have been complied with and that no illegal
substances are present in, transported or delivered with the Cigar Products.
Supplier certifies that the Cigar Product satisfies the criteria for a "cigar"
with respect to all applicable regulations, guidelines and statutes, including
without limitation, any regulations or guidelines promulgated by the Bureau of
Alcohol, Tobacco and Firearms or the FDA.
17. EFFECT OF TERMINATION. Upon termination of this Agreement, the
parties agree as follows:
a. Supplier shall immediately cancel all purchase orders that
PCI has placed with Supplier relating to the Cigar Products.
b. Notwithstanding anything contained herein to the contrary,
PCI shall be allowed to maintain and/or order a reasonable quantity of
the Cigar Products necessary to fulfill any outstanding orders it may
have to its distributors, retailers or other third parties for the
Cigar Products at the time of termination.
c. Each party shall continue to be bound by Section 18 herein
regarding Confidential Information.
d. Supplier and PCI agree to promptly return to the other
party all Confidential Information, as that term is defined in Section
18 herein, and all other documents and equipment pertaining to this
Agreement.
e. Each party shall take such actions as required by this
Agreement including the transfer of any rights from PCI to Supplier as
contemplated herein.
6
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
18. CONFIDENTIAL INFORMATION. Supplier and PCI recognize that as a
result of their relationship, Supplier and/or PCI may in the future develop,
obtain or learn about Confidential Information which is the property of the
other party or which is deemed as confidential.
a. AGREEMENT TO PROTECT CONFIDENTIAL INFORMATION. The parties
agree to use their best efforts and the utmost diligence to guard,
protect and keep confidential said Confidential Information, and agree
that they will not, during or after the period of this Agreement, use
for themselves or others, or divulge to others any of said Confidential
Information which either party may develop, obtain or learn about
during or as a result of their relationship with the other party,
unless authorized to do so by the other party in writing.
b. DEFINITION OF CONFIDENTIAL INFORMATION. For the purposes of
this Agreement, the term "Confidential Information" shall include but
not be limited to the following: customer lists; financial statements
or information in any form; marketing strategies; business contacts;
business plans; computer software, including all rights under licenses
and other contracts relating thereto; all intellectual property
including all patents, trademarks, trademark registration and
applications, service marks, copyrights, trade secrets, proprietary
marketing information and know-how; books and records including lists
of customers; credit reports; sales records; price lists; sales
literature; advertising material; manuals; processes; technology; or
any information of whatever nature which gives to a party an
opportunity to obtain an advantage over their competitors who do not
know or use it. Confidential Information shall not include information
which is required to be disclosed by either party by law or court
order, or as a public reporting company under the applicable securities
laws or which is or becomes generally known or available by publication
or otherwise, or is developed independently by the receiving party
without reference to the disclosing party's materials or information.
c. NONDISCLOSURE. Each party agrees that they shall not
contact directly any customers or companies with which the other party
does business as it relates to the Cigar Products, without the prior
consent of the other party. Each party agrees that the Purchase Price
constitutes "Confidential Information" as defined herein. PCI is solely
responsible for any retailer counter fees or slotting allowances paid
on behalf of the Cigar Products.
d. INJUNCTIVE RELIEF FOR BREACH. In the event of a breach or
threatened breach by either party of the provisions of this section,
the non-defaulting party shall be entitled to an injunction
restraining the defaulting party from disclosing, in whole or in part,
any Confidential Information, or from rendering any services to any
person, firm, partnership, joint venture, association, or other entity
to whom such Confidential Information, in whole or in part, has been
disclosed. Nothing herein shall be construed as prohibiting either
party from pursuing any other remedies available either party for such
breach or threatened breach, including the recovery of damages from
the Supplier.
7
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
19. NOTICES. All notices provided for by this Agreement shall be made
in writing either (i) by actual delivery of the notice into the hands of the
parties thereunto entitled or (ii) the mailing of the notice in the United
States mail to the address, as stated below (or at such other address as may
have been designated by written notice) of the party entitled thereto, by
certified mail, return receipt requested. The notice shall be deemed to be
received on the date of its actual receipt of the party entitled thereto. All
communications hereunder shall be in writing and, if sent to PCI, shall be
delivered to:
Premium Cigars International, Ltd.
15849 North 77th Street
Scottsdale, Arizona 85260
Facsimile: (602) 992-6026
Attention: Brendan McGuinness
with a copy to: Kurt M. Brueckner
Titus, Brueckner & Berry, P.C.
7373 North Scottsdale Road
Scottsdale Centre, Suite B-252
Scottsdale, Arizona 85253
Facsimile: (602) 483-3215
and if to Supplier, to: Single Cigars, Inc.
2432 W. Peoria Avenue
Suite 1206
Phoenix, Arizona 85029
Attention: Charles R. Emery
with a copy to: Quinn Williams
Snell & Wilmer
One Arizona Center
400 E. Van Buren
Phoenix, Arizona 85004
Facsimile: (602) 382-6070
20. APPLICABLE LAW. This Agreement shall be construed, interpreted and
enforced in accordance with, and the respective rights and obligations of the
parties shall be governed by, the laws of the State of Arizona, and each party
irrevocably and unconditionally submits to the exclusive jurisdiction and venue
of the courts of Maricopa County, State of Arizona and all courts competent to
hear appeals therefrom.
8
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
21. SUCCESSORS AND ASSIGNS. This Agreement shall inure to the benefit
of and shall be binding on and enforceable by the parties and their respective
successors and permitted assigns, as the case may be. Except as provided for
herein, neither party shall have the right to assign its rights hereunder,
without the prior written consent of the other party.
22. AMENDMENT AND WAIVERS. No amendment or waiver of any provision of
this Agreement shall be binding on either party unless consented to in writing
by such party. No waiver of any provision of this Agreement shall constitute a
waiver of any other provision, nor shall any waiver constitute a continuing
waiver unless otherwise provided.
23. SEVERABILITY. If any provision of this Agreement is determined by a
court of competent jurisdiction to be invalid, illegal or unenforceable in any
respect, such determination shall not affect or impair the validity, legality or
enforceability of the remaining provisions hereof and each provision is hereby
declared to be separate, severable and distinct.
24. ATTORNEYS' FEES. In the event of the bringing of any action or suit
by a party hereto against another party hereunder by reason of any breach of any
of the covenants, agreements or provisions on the part of the other party
arising out of this Agreement, then in that event the prevailing party shall be
entitled to have and recover from the other party all costs and expenses of the
action or suit, including attorneys' fees and costs.
25. EXECUTION AND COUNTERPARTS. This Agreement may be executed in
counterparts, each of which shall constitute an original and all of which taken
together shall constitute one and the same instrument.
26. ARBITRATION. Disputes arising out of this Agreement shall be
settled by binding arbitration to be held in Phoenix, Arizona in accordance with
the Commercial Rules of American Arbitration Association. The Arbitrator shall
have the right to award the prevailing parties reasonable attorney fees and
costs.
27. FORCE MAJUERE. The time limitations set forth in this Agreement,
excluding any monetary obligations, shall be extended for a period of any delay
due to causes beyond the delayed party's control or which cannot be reasonably
foreseen or provided against, including, without limitation, strikes,
governmental regulations or orders or events of force majeure.
28. NEW BUSINESS OPPORTUNITIES. PCI will pay for all advertising and
sale material relating to the merchandising of the Cigar Products. To the extent
Supplier is contacted by a potential customer wishing to carry the Cigar
Products in their store, Supplier will notify PCI and PCI will have the
exclusive right, at its discretion, to sell the Cigar Products to such potential
customer.
9
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
IN WITNESS WHEREOF this Agreement has been executed by the parties
hereto as of the date first written above.
"PCI"
PREMIUM CIGARS INTERNATIONAL, LTD.
By:
-------------------------------------
Its:
------------------------------------
"Supplier"
SINGLE CIGARS, INC.
By:
-------------------------------------
Its:
------------------------------------
10
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
EXHIBIT "A"
PURCHASE REQUIREMENTS
QUARTERLY TIME PERIODS # OF CIGAR PRODUCTS
---------------------- -------------------
November 1, 1998 through January 31, 1999 *
February 1, 1999 through April 30, 1999 *
May 1, 1999 through June 30, 1999 *
July 1, 1999 through September 30, 1999 *
October 1, 1999 through December 31, 1999 *
YEAR 2000
---------
1st Quarter *
2nd Quarter *
3rd Quarter *
4th Quarter *
YEAR 2001
---------
1st Quarter *
2nd Quarter *
3rd Quarter *
4th Quarter *
YEAR 2002
---------
1st Quarter *
2nd Quarter *
3rd Quarter *
4th Quarter *
YEAR 2003
---------
1st Quarter *
2nd Quarter *
3rd Quarter *
4th Quarter *
11
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
EXHIBIT "B"
SPECIFICATIONS OF CIGAR PRODUCTS AND PACKAGING
*
12
* Confidential portions omitted and filed
separately with the Commission.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 197,212
<SECURITIES> 130,736
<RECEIVABLES> 935,228
<ALLOWANCES> 36,788
<INVENTORY> 1,829,627
<CURRENT-ASSETS> 3,281,987
<PP&E> 587,834
<DEPRECIATION> 119,927
<TOTAL-ASSETS> 4,932,789
<CURRENT-LIABILITIES> 1,069,009
<BONDS> 0
0
0
<COMMON> 8,807,049
<OTHER-SE> (66,056)
<TOTAL-LIABILITY-AND-EQUITY> 4,932,789
<SALES> 5,264,226
<TOTAL-REVENUES> 0
<CGS> 3,997,059
<TOTAL-COSTS> 4,161,652
<OTHER-EXPENSES> (128,796)
<LOSS-PROVISION> 25,000
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,765,689)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,765,689)
<EPS-PRIMARY> (.80)
<EPS-DILUTED> 0
</TABLE>
