PREMIUM CIGARS INTERNATIONAL LTD, DEF 14A, 1998-04-08

PREMIUM CIGARS INTERNATIONAL LTD
DEF 14A, 1998-04-08
TOBACCO PRODUCTS

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SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a) of the
Securities Exchange Act of 1934
(Amendment No. )

Filed by the Registrant [X]
Filed by a Party other than the Registrant
[ ] Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule 14a-
6(2)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.
14a- 12

PREMIUM CIGARS INTERNATIONAL, LTD.
(Name of Registrant as Specified In Its Charter)

-----------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

[X] No fee required.

[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.

1) Title of each class of securities to which transaction applies:

2) Aggregate number of securities to which transaction applies:

3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):

4) Proposed maximum aggregate value of transaction:

5) Total fee paid:

[ ] Fee paid previously with preliminary materials.

[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of filing.

1) Amount Previously Paid:

2) Form, Schedule or Registration Statement No.:

3) Filing Party:

4) Date Filed:
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.

NOTICE OF 1998

ANNUAL MEETING OF STOCKHOLDERS

AND PROXY STATEMENT

YOUR VOTE IS IMPORTANT!

PLEASE PROMPTLY MARK, DATE, SIGN AND RETURN YOUR PROXY IN THE
ENCLOSED ENVELOPE
<PAGE>
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS

April 8, 1998

The Annual Meeting of Stockholders of PREMIUM CIGARS INTERNATIONAL,
LTD. (the "Company") will be held at the Scottsdale Plaza Resort, Grand Ballroom
"A," 7200 North Scottsdale Road, Scottsdale, Arizona on Friday, May 8, 1998 at
9:00 A.M. local time for the following purposes:

1. To elect the directors of the Company to serve for the ensuing
year;

2. To ratify the selection of SEMPLE & COOPER, LLP as independent
auditors for the Company;

3. To ratify certain stock option grants made by the Board of
Directors to certain officers, directors and consultants;

4. To approve the Management and Key Employee Incentive Plan;

5. To approve the Employee Stock Option Plan; and

6. To transact any other business as may properly come before the
meeting.

The Board of Directors has fixed the close of business on March 13,
1998 as the record date for the determination of stockholders entitled to notice
of and to vote at the meeting. A list of such stockholders will be available
during regular business hours at the Company's office at 15849 North 77th
Street, Scottsdale, Arizona on and after April 8, 1998, for inspection by any
stockholder for any purpose germane to the meeting.

By Order of The Board of Directors,

PREMIUM CIGARS INTERNATIONAL, LTD.

/s/ Scott I. Lambrecht 4-2-98
- --------------------------------------
Scott I. Lambrecht, Secretary
<PAGE>
PROXY STATEMENT

This Proxy Statement is furnished in connection with the solicitation
of proxies by the Board of Directors of PREMIUM CIGARS INTERNATIONAL, LTD. (the
"Company") for use at the Annual Meeting of Stockholders of the Company to be
held at the time and place and for the purposes set forth in the foregoing
Notice of Annual Meeting of Stockholders. The address of the Company's principal
executive offices is 15849 North 77th Street, Scottsdale, Arizona, 85260. This
Proxy Statement and the form of proxy are being mailed to stockholders on or
about April 8, 1998.

REVOCABILITY OF PROXY AND VOTING OF PROXY

A proxy given by a stockholder may be revoked at any time before it is
exercised by giving another proxy bearing a later date, by notifying the
Secretary of the Company in writing of such revocation at any time before the
proxy is exercised, or by attending the meeting in person and casting a ballot.

Any proxy returned to the Company will be voted in accordance with the
instructions indicated thereon. If no instructions are indicated on the proxy,
the proxy will be voted for the election of the nominees for directors named
herein and in favor of all other proposals described herein. Because abstentions
with respect to any matter are treated as shares present or represented and
entitled to vote for the purposes of determining whether that matter has been
approved by the stockholders, abstentions have the same effect as negative
votes. Broker non-votes and shares as to which proxy authority has been withheld
with respect to any matter are not deemed to be present or represented for
purposes of determining whether stockholder approval of that matter has been
obtained.

The Company knows of no reason why any of the nominees named herein
would be unable to serve. In the event, however, that any nominee named should,
prior to the election, become unable to serve as a director, the proxy will be
voted in accordance with best judgment of the persons named therein. The Board
of Directors knows of no matters, other than as described herein, that are to be
presented at the meeting, but if matters other than those herein mentioned
properly come before the meeting, the proxy will be voted by the persons named
in a manner that such persons (in their judgment) consider to be in the best
interests of the Company.
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<PAGE>
RECORD DATE AND VOTING RIGHTS

Only stockholders of record at the close of business on March 13, 1998
are entitled to vote at the meeting. On such record date the Company had
outstanding and entitled to vote 3,469,092 shares of Common Stock. Each
stockholder entitled to vote shall have one vote for each share of Common Stock
registered in such stockholder's name on the books of the Company as of the
record date.

Arizona law and the Company's Bylaws allow stockholders to cumulate
their votes for the election of directors. Stockholders are entitled to multiply
the total number of shares they are entitled to vote by the total number of
directors for whom they are entitled to vote, and may apply that product to the
election of a single director or distribute that product among two or more
candidates.

Neither Arizona law nor the Company's governing documents provide for
any dissenter's right of appraisal with respect to any matter to be acted upon
at the 1998 Annual Meeting of Stockholders. As no statutory or other dissenter's
rights are applicable under Arizona law, a stockholder's failure to register
written disapproval of any of the proposals at the Annual Meeting is not a
waiver of any such rights.

ANNUAL REPORT ON FORM 10-KSB AND OTHER MATTERS

The Company's Annual Report on Form 10-KSB for the fiscal year ended
December 31, 1997 (the "Annual Report"), which was mailed to stockholders with
or preceding this Proxy Statement, contains financial and other information
about the Company but is not incorporated into this Proxy Statement and is not
to be considered a part of these proxy soliciting materials or subject to
Regulations 14A or 14C or to the liabilities of Section 18 of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). The Company will provide
upon written request, to each stockholder of record as of the Record Date, a
copy of any exhibits listed in the Annual Report, upon receipt of the request
and a check for $20 to cover the Company's expense in furnishing such exhibits.
Any such requests should be directed to the Company's Secretary at the Company's
executive offices set forth in this Proxy Statement.
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<PAGE>
ELECTION OF DIRECTORS
(ITEM 1 ON PROXY CARD)

On September 17, 1997, the Board of Directors established a standing
Nominating Committee of three directors. The directors appointed to serve on the
committee until their successors have been elected or appointed and shall
qualify are: Steven A. Lambrecht (Chairman), Greg P. Lambrecht and William L.
Anthony. The Board of Directors, on April 2, 1998, after having considered the
recommendations of the individual members of the Nominating Committee who were
present at the Board's meeting, unanimously nominated the following persons as
the recommendation of the Board of Directors for directors of the Company:

Director
Nominee Name Age Since
------------ --- -----

William L. Anthony 54 1997
John E. Greenwell 50 1998
Colin A. Jones 31 1997
Greg P. Lambrecht 35 1997
Steven A. Lambrecht 46 1996
Robert H. Manchot 54 1997
Atul Vashistha 32 1997

Vote Required and Recommendation for Item 1

Information Related to Election of Directors

All directors hold office until the Annual Meeting of Stockholders of
the Company and until their successors have been elected and qualified. The
Board of Directors currently consists of seven members. Upon completion of the
Offering, and for five years thereafter, the underwriters' representative from
our initial public offering, W.B. McKee Securities, Inc., has the right to
select one member of the Board of Directors to serve the standard term of a
director. The Underwriter's Representative has not yet chosen the person that it
may select for director. The Bylaws permit the Board of Directors to determine
the size of the Board within a range that the shareholders have set which is
currently one to nine members. The Bylaws also require that we maintain at least
two "independent directors" who are not employees or officers and who do not
have a material business or professional relationship with PCI. Information
about each nominee for director is given below.
3
<PAGE>
William L. Anthony has been Chairman of the Board since June 20, 1997
and a consultant to PCI from April 1, 1997 to August 31, 1997. He has agreed to
serve as PCI's Chairman for a period of up to five years. He is currently the
Chief Operating Officer and Chief Financial Officer for BioMedic, which has
developed Philosophy, one of the world's leading medically-endorsed skin care
lines. He has 30 years of business and management experience and a "Big Six"
accounting background with the New York office of KPMG Peat Marwick, LLP. Mr.
Anthony worked for The Dial Corp. from 1984 until August, 1996 culminating his
position as Executive Vice President for the Consumer Products Division with
annual revenue in excess of $1 billion. He has held key management positions
with Bechtel, the U.S. Chamber of Commerce, MAPCO and The Dial Corp. He is the
owner, President and sole shareholder of Quality Computer Services, Inc. He
received both a B.B.A. and an M.A. in Accounting from the University of
Mississippi in 1965 and 1966 respectively. Mr. Anthony was certified as a public
accountant in Louisiana in 1969.

John E. Greenwell has been a director and PCI's Chief Executive Officer
since March 1, 1998 and PCI's President and Chief Operating Officer since
December 15, 1997. Mr. Greenwell previously was employed by The Dial Corporation
from 1984 to 1996, culminating with his position as Executive Vice President and
the General Manager of Dial's Detergent Division. He has 28 years of marketing
and executive management experience in the consumer package goods industry.
Prior to his Executive Vice President role with The Dial Corporation, Mr.
Greenwell was Senior Vice President and General Manager of Dial's Food Division.
He has served in consumer marketing responsibilities for The Dial Corporation,
Texize (a former division of Morton Thiokol), Drackett (a former division of
Bristol Myers), the advertising agency of Leo Burnett Company and a sales
position with The Chicago Tribune. Mr. Greenwell has also served as a member of
the Board of Directors for the Soap & Detergent Association and the National
Food Processors Association. Mr. Greenwell received a B.S. degree in Business
from Indiana University in 1969.

Colin A. Jones has been a director since May 3, 1997. He previously
served as Vice President of International Sales from May 31, 1997 to January 16,
1998. He has 12 years of experience managing, marketing and selling to the
convenience store and grocery store market. In 1985, he founded J&M Wholesale,
Ltd., a British Columbia corporation which delivers various wholesale products
primarily to convenience store accounts in Canada. He continues to be the
President and Chief Executive Officer of J&M. Mr. Jones attended Douglas College
of New Westminster, British Columbia, Canada.

Greg P. Lambrecht has been a director since August 7, 1997. He
previously served as PCI's Vice President of National Sales from May 31, 1997 to
March 2, 1998 and as PCI's Secretary and Treasurer from May 31, 1997 to March 4,
1998. He has 14 years of experience managing, marketing and selling to the
convenience store and grocery store market. In 1984, he founded Rose Hearts,
Inc., a Washington company which delivers various impulse purchase products in
Washington, Oregon and California. He graduated with a B.A. in Communications
from Western Washington University in 1984. Greg P. Lambrecht is the brother of
Steven A. Lambrecht and the uncle of Scott I. Lambrecht.
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<PAGE>
Steven A. Lambrecht has been a director since December 31, 1996. He
previously served as PCI's Chief Executive Officer from December 31, 1996 to
March 1, 1998, as President from May 3, 1997 to December 15, 1997 and as
Chairman of the Board from December 31, 1996 to June 20, 1997. He has 23 years
of marketing and sales experience and 17 years of management experience; most of
his business experience has been in real estate development and construction. He
is the owner of Forum Import/Export Company, a sole proprietorship, and was
co-owner of Forum Development and Construction Company, Inc., a Washington
corporation. He also owns SDCC, Inc., an Arizona development and construction
corporation that he founded in 1992. He has developed and sold over 20 million
dollars worth of real estate since 1974. Steven A. Lambrecht is the brother of
Greg P. Lambrecht and the father of Scott I. Lambrecht.

Robert H. Manschot has been a director and an independent director
since July 25, 1997. He has been the President and Chief Executive Officer of
the NVD and Seceurop Security Services Group, an emergency services corporation
in the Netherlands and the United Kingdom, since 1995. He is also the Chairman
of RHEM International Enterprises, Inc., an investment, consulting and venture
capital company. He was the President and Chief Executive Officer of Rural/Metro
Corporation, a Nasdaq-listed emergency services corporation, from 1987 to 1995.
He has served in senior management positions with KLM's hotel management
company, Sheraton, and Inter Continental Hotels in the U.S., Europe, Middle East
and Africa. He has served and continues to serve on numerous public and private
company and institution boards, including Nasdaq-listed Action Performance
Industries, Inc., and Toronto Stock Exchange-listed Samouth Capital Corporation.
He holds a bachelors degree in hotel management from the School for Hospitality
Management in the Hague, Netherlands, an MBA from Boston University and is a
graduate of Stanford Business School's Financial Management Program.

Atul Vashistha has been a director and an independent director since
November 19, 1997. Since 1996, Mr. Vashistha has been the Vice President,
Marketing and Business Development, of Rural/Metro Corporation, a
publicly-traded, $425 million company which provides medical transportation,
personal health management and safety solutions in 25 states to a population
exceeding 20 million. Mr. Vashistha served Rural/Metro in a variety of marketing
and executive management capacities from 1991 to 1996, culminating in his
position as Regional President of the company's Southern Arizona operations. He
holds an M.B.A. from Arizona State University, where he graduated first in his
class, and a B.S. in Engineering from the Institute of Technology, Benaras Hindu
University.

Board Activity - Standing Audit and Compensation Committees

Although the Board has established standing Audit and Compensation
Committes, because PCI is in its first year following its initial public
offering, the Board has elected to fulfil the functions of those committees
through meetings of the entire Board. The Board of Directors held 11 meetings in
the first year ended December 31, 1997 and all directors attended at
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<PAGE>
least 75% of the total number of meetings. Neither the Compensation Committee
nor the Audit Committee held meetings independent of the entire board in 1997.

On September 17, 1997, the Board of Directors established standing
Audit and Compensation Committees which would each be continually comprised of
at least one director, but a majority of the members of the Audit Committee must
be directors. Pursuant to the Company's Bylaws, Section 5, the committees must
include at least one board member, but may also include officers who are not
directors, if the committee will not be delegated Board decision-making
authority and will make recommendations to the Board for decision. The Audit
Committee is comprised of the Company's three Independent Directors. The
directors appointed to serve on the committees until thier successors have been
elected or appointed and shall qualify are:

Audit Committee Compensation Committee
--------------- ----------------------

William L. Anthony Robert H. Manschot (Chairman)
Robert H. Manschot William L. Anthony
Atul Vashistha Steven A. Lambrecht
Colin A. Jones

When the Audit and Compenesation Committees begin to meetin
independently of the entire Board, the Compensation Committee's duties will
include reviewing and approving salaries and other matters relating to
compensation of the executive officers of the Company. The Audit Committee's
duty will be to recommend for approval by the Board of Directors a firm of
certified public accountants whose duty it is to audit the financial statements
of the Company for the Fiscal year in which they are appointed, and monitors the
effectiveness of the audit effort, the Company's internal financial and
accounting organization and controls and financial reporting.

Security Ownership of Certain Beneficial Owners, Management and Changes
in Control

The following tables set forth certain information regarding shares of
common stock beneficially owned as of April 8, 1998 by (i) each person or group
known to PCI, which beneficially owns more than 5% of the common stock; (ii)
each of PCI's officers and directors; and (iii) all officers and directors as a
group. The percentage of beneficial ownership is based on 3,469,092 shares
outstanding on March 31, 1998 plus, for each person or group, any securities
that person or group has the right to acquire within 60 days pursuant to
options, warrants, conversion privileges or other rights. Unless otherwise
indicated, the following persons have sole voting and investment power with
respect to the number of shares set forth opposite their names:

[see next page]
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<PAGE>
Security Ownership of Certain Beneficial Owners
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
<S> <C> <C> <C>
Common Colin Jones 371,357 10.70%
Suite 606, 888 Pacific Street
Vancouver, B.C. CANADA
V6Z-2S6

Common Greg P. Lambrecht(1) 363,708 10.48%
6980 East Sahuaro Drive
Apt. 1129
Scottsdale, AZ 85254

Common Steven A. Lambrecht(1) 256,584 7.40%
12072 North 118th Street
Scottsdale, AZ 85259

Common Lincoln Heritage Life 210,476(2) 5.75%
Insurance Company
4343 E. Camelback Rd. #400
Phoenix, AZ 85018

Common Londen Insurance Group 210,476(2) 5.75%
4343 E. Camelback Rd. #400
Phoenix, AZ 85018
</TABLE>

(1) Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father
of Scott I. Lambrecht. Each of the Lambrechts disclaims any beneficial
interest in the shares held by the others.

(2) Represents beneficial ownership of 20,000 shares held of record by Life
of Boston Insurance Company and of 95,057 shares each which may be
acquired directly by the exercise of stock warrants within 60 days by
Lincoln Heritage Life Insurance Company and Life of Boston Insurance
Company. The Londen Insurance Group is the sole shareholder of the
Lincoln Heritage Life Insurance Company. Lincoln Heritage Life
Insurance Company owns 79% of the shares of Life of Boston Insurance
Company.
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<PAGE>
Security Ownership of Management
<TABLE>
<CAPTION>
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
<S> <C> <C> <C>
Common Colin Jones 371,357 10.70%
Suite 606, 888 Pacific Street
Vancouver, B.C. CANADA
V6Z-2S6

Common Greg P. Lambrecht(1) 363,708 10.48%
6980 East Sahuaro Drive
Apt. 1129
Scottsdale, AZ 85254

Common Steven A. Lambrecht(1) 256,584 7.40%
12072 North 118th Street
Scottsdale, AZ 85259

Common Scott I. Lambrecht(1) 86,250 2.49%
15651 N. 83rd Way #3
Scottsdale, AZ 85260

Common James B. Stanley 26,250 (2)
15651 N. 83rd Way #3
Scottsdale, AZ 85260

Common David S. Hodges(3) 21,048(4) (2)
5043 E. Desert Jewel
Paradise Valley, AZ 85253

Common William L. Anthony 20,048(4) (2)
7254 East Whitethorn
Scottsdale, AZ 85262
- -------------------------------------------------------------------------------------------

Common All Officers and Directors 1,145,245(1)(2)(4) 32.65%
as a group (10 persons)
</TABLE>

(1) Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father
of Scott I. Lambrecht. Each of the Lambrechts disclaims any beneficial
interest in the shares held by the others.

(2) Less than 1%.
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<PAGE>
(3) Director and Chief Financial Officer until he left PCI to pursue other
interests on March 24, 1998.

(4) Includes shares which may be acquired by the exercise of options or
warrants within 60 days as follows: William L. Anthony, 19,048 shares,
David S. Hodges, 19,048 shares. Excludes shares underlying options
which are not currently exercisable as follows: William L. Anthony,
158,125 shares, John E. Greenwell, 70,000 shares Steven A. Lambrecht,
21,250, Robert H. Manschot and David S. Hodges, 6,250 shares each, Atul
Vashistha, 2,250 shares, Colin A. Jones and Greg P. Lambrecht, 1,250
shares each.

Changes in Control

None.

Certain Relationships and Related Transactions

Resolving Conflicts of Interest. A number of the transactions described
in this section involve inherent conflicts of interest because an officer,
director, significant shareholder, promoter or other person with a material
business or professional relationship with PCI is a party to the transaction.
Our current policy adopted by our board of directors regarding transactions
involving conflicts of interest, is:

(i) we will not enter into any material transaction or loan
with a related or affiliated party unless the transaction or loan is on
terms that are no less favorable to us than we could obtain from an
unrelated or unaffiliated third party; and

(ii) a majority of the independent directors (those who do not
have a material business or professional relationship with PCI other
than being a director) who have no interest in the transactions must
review and approve transactions involving related parties or conflicts
of interest after having been given access, at our expense, to our
counsel or to their own independent legal counsel; and

(iii) when there are only two independent directors, both
directors must approve the transaction; and

(iv) the independent director approval applies to all
related-party transactions and loans, whether or not to a
related-party.

We currently have three independent directors, William L. Anthony,
Robert H. Manschot and Atul Vashistha. Our independent directors have had
access, at our expense, to our counsel or to independent counsel, and a majority
of the independent directors have ratified all related-party transactions that
are ongoing. However, we entered into a number of transactions described below
before we adopted our current conflicts of interest policy and before we had
sufficient disinterested, independent directors to ratify the transactions. We
have subsequently terminated the Rose Hearts Distributorship Agreement because
we determined that the ongoing net effect was not as favorable to PCI as
distributorship relationships generally available with unaffiliated third
parties.
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<PAGE>
CAN-AM Acquisition of J&M and Rose Hearts. On December 31, 1996, CAN-
AM issued shares of its stock in exchange for the assets and liabilities of the
cigar operations of J&M and Rose Hearts, including the cigar distribution
accounts of each entity. PCI director Colin A. Jones is the President and sole
shareholder of J&M. PCI director Greg P. Lambrecht is the President and sole
shareholder of Rose Hearts. Messrs. Jones and Greg Lambrecht owned 100% of the
voting stock of CAN-AM, and three others held non-voting shares. As set forth in
PCI's consolidated financial statements for the fiscal year ended March 31,
1997, the cost of the net assets to J&M and Rose Hearts and the amount at which
CAN-AM acquired the net assets was the same as its historical net cost in J&M
and Rose Hearts. The combined cost, net of liabilities assumed, was
approximately $1,000. The asset purchases are closed transactions and we entered
the asset purchase agreements before we had sufficient disinterested,
independent directors to ratify the transactions.

PCI Acquisition of CAN-AM. Subsequent to the asset purchase
transactions, but also on December 31, 1996, PCI acquired all of the issued and
outstanding shares of CAN- AM in exchange of PCI shares. No written agreement
was entered between PCI and CAN- AM's shareholders to formalize the acquisition
or share exchange. As adjusted by the May 31, 1997 3:1 stock split ("3:1 Stock
Split"), and including shares issued on December 31, 1996 and January 9, 1997,
CAN-AM's five shareholders received 817,500 shares of PCI Common Stock,
representing all of the then-issued and outstanding shares of Common Stock of
PCI. Mr. Jones received 371,250 or 45.4% and Greg Lambrecht received 363,750 or
44.5%. At the time PCI acquired CAN-AM's shares, neither Greg P. Lambrecht nor
Colin A. Jones had any formal relationship as an incorporator, officer, director
or shareholder of PCI. PCI was formed with a view to purchasing the cigar
operations of the entities they owned and controlled, however, and both Greg P.
Lambrecht and Colin A. Jones were affiliated with PCI as promoters at the time
PCI acquired CAN-AM's shares. Colin A. Jones was elected a director of PCI on
January 9, 1997, shortly after PCI acquired CAN-AM's shares. The CAN-AM
acquisition is a closed transaction and we acquired CAN-AM before we had
sufficient disinterested, independent directors to ratify the transaction.

Jones/Lambrecht Notes Receivable. Colin A. Jones and Greg P. Lambrecht
each delivered to PCI long term promissory notes for $43,112.50. The notes are
dated December 31, 1996, accrue interest at six percent, and all interest and
principal are due on March 31, 1999. The notes relate to CAN-AM receivables
which accrued prior to PCI's acquisition of all of CAN-AM's outstanding stock on
December 31, 1996. We negotiated these notes receivable before we had sufficient
disinterested, independent directors to ratify the transaction, but Messrs.
Jones' and Lambrecht's obligation for repayment of the notes is ongoing, and our
independent directors have ratified the transaction.

J&M Management Agreement. On January 1, 1997, CAN-AM entered a
Management Agreement with J&M to enable CAN-AM to reimburse J&M for any services
provided to CAN-AM or on CAN-AM's behalf during the transition of J&M's Canadian
operations to CAN-AM. J&M received no additional sum, fee or commission other
than reimbursement for J&M's expenses which were directly incurred in providing
services to or
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<PAGE>
on behalf of CAN-AM. At CAN-AM's sole discretion, CAN-AM could offset the
reimbursement due under the Management Agreement against any related-party
receivables that J&M owed to CAN-AM. We entered this Management Agreement before
we had sufficient disinterested, independent directors to ratify the agreement.
Our independent directors subsequent ratified the agreement, but our
relationship with J&M terminated during the quarter ended September 30, 1997.

J&M, as a Canadian corporation wholly-owned by PCI director Colin A.
Jones, continues to distribute certain wholesale and impulse purchase items to
convenience stores and other accounts entirely located in Canada. J&M has, in
the past, distributed certain cigars of Cuban origin to its convenience store
accounts. Neither PCI nor its wholly-owned Canadian subsidiary CAN-AM currently
distributes any cigars or other products of Cuban origin either in the United
States or Canada. PCI's standard form supplier agreement strictly prohibits its
suppliers from providing any product containing any component of Cuban origin.

Luyendyk Endorsement Agreement. On May 1, 1997, PCI entered an
Endorsement Agreement with Arie Luyendyk under which PCI would issue 15,000
shares of Common Stock (as adjusted for the 3:1 Stock Split) to Mr. Luyendyk
subject to a six-month vesting schedule. In order to meet its obligations under
the Endorsement Agreement without diluting the relative security positions of
other shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by
the 3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer
and Chairman, Steven A. Lambrecht, at $0.33 per share. We entered the
Endorsement Agreement before we had sufficient disinterested, independent
directors to ratify the agreement, but our relationship with Mr. Luyendyk under
the agreement is ongoing, and our independent directors have ratified the
agreement.

Rose Hearts Distributorship Agreement. On June 13, 1997, PCI entered a
Distributorship Agreement with Rose Hearts for the non-exclusive distribution to
Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho,
Oregon, Washington and Northern California. The agreement provides that any
master agreement with a national PCI account or national distributor shall
supersede the Rose Hearts agreement. We pay Rose Hearts a commission equal to
10% of the wholesale cost to the store of products PCI ships to third-party
stores where Rose Hearts provides only in-store merchandising support services.
We pay Rose Hearts a commission equal to 22% of the wholesale cost to the store
of PCI products that Rose Hearts delivers to the stores directly. Greg P.
Lambrecht is the President and sole shareholder of Rose Hearts and a director
and substantial shareholder of PCI. We entered this Distributorship Agreement
before we had sufficient disinterested, independent directors to ratify the
agreement, but our independent directors subsequently ratified the agreement. On
February 27, 1998, PCI notified Rose Hearts, Inc. that its Distributorship
Agreement with PCI would terminate on March 28, 1998. See "Termination of Rose
Hearts Distributorship Agreement."
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<PAGE>
Employment Agreements with Founders. On June 13, 1997, PCI entered
Employment Agreements with Colin A. Jones, Greg P. Lambrecht and Steven A.
Lambrecht. See "Executive Compensation - Employment Agreements." We entered the
Employment Agreements before we had sufficient disinterested, independent
directors to ratify the agreements.

Barton Financing Settlement. On June 13, 1997, PCI entered a Full
Settlement and Full Release of Equity Interest agreement among CAN-AM, Rose
Hearts, J&M, Greg P. Lambrecht, Colin A. Jones, Greg S. Barton and two of Mr.
Barton's lenders. The agreement settled potential equity claims by Mr. Barton
and his lenders regarding a September 5, 1996 loan for $110,000 at an annual
interest rate of 36% to Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones and
CAN-AM. CAN-AM had expressly accepted liability for the loan under the terms of
each of the Asset Purchase Agreements with J&M and Rose Hearts on December 31,
1996. After PCI purchased all of CAN-AM's shares, PCI desired to extinguish the
loan obligation primarily to eliminate the burden on CAN-AM's cash requirements,
but also to avoid any potential, but unasserted equity claims against PCI from
Mr. Barton's lenders related to the loan obligation. As a result of the
settlement, PCI paid $10,000 to one of Mr. Barton's lenders, the loan was
reduced to $100,000 and Mr. Barton converted the loan to bridge financing. Mr.
Barton's forgiveness of the reduced $100,000 loan is the consideration he gave
in exchange for an 8% bridge note for $100,000 and bridge warrants to purchase
approximately 38,023 shares of PCI Common Stock at 50% of the initial public
offering price. Greg P. Barton is a 7.56% beneficial owner of PCI's Common
Stock. Greg P. Lambrecht and Colin A. Jones own and control Rose Hearts and J&M,
respectively, and are substantial shareholders and directors of PCI. The
settlement transaction is a closed transaction and we entered the settlement
before we had sufficient disinterested, independent directors to ratify the
transaction.

Barton and Mullavey Loans. On or about June 18, 1996, Greg S. Barton
loaned Greg P. Lambrecht and Rose Hearts $50,000 in a transaction which included
an option for Mr. Barton to convert the debt to equity of Rose Hearts. Between
approximately May and September 1996, Ben P. Mullavey, a prior Rose Hearts
consultant, loaned $50,000 to Rose Hearts in an undocumented transaction and
provided consulting services to Rose Hearts. PCI, Rose Hearts and Greg P.
Lambrecht agree that the Barton and Mullavey loans are solely Rose Hearts' debt
obligations which CAN-AM did not assume as a part of the December 31, 1996 Asset
Purchase Agreement for Rose Hearts' cigar operations. Ben P. Mullavey
communicated to PCI on April 23, 1997, that he believes he has rights to convert
his debt to shares of PCI Common Stock. Mr. Mullavey did not specify any number
of shares that he believes he is entitled to, but instead demanded payment of
$55,000, representing the principal from his undocumented loan and $5,000 for
consulting services he provided to Rose Hearts. PCI will not be a party to any
settlement between Greg P. Lambrecht, Rose Hearts and either of Messrs. Barton
or Mullavey regarding a settlement of these claims, and will not directly issue
any Common Stock to Barton or Mullavey. Because PCI is not a party to these
Barton and Mullavey loans, our independent directors did not, and were not
required to, review or approve the transactions.
12
<PAGE>
Lambrecht-LBIC Stock Sale. On June 17, 1997, Steven A. Lambrecht sold
20,000 shares of PCI Common Stock to Life of Boston Insurance Company, an
Oklahoma corporation ("LBIC"). The Lambrecht-LBIC transaction was to provide
additional incentive to LBIC to invest the final $250,000 to complete the Bridge
Financing. Steven A. Lambrecht was PCI's President and Chief Executive Officer
and a substantial PCI shareholder at the time of the transaction. Lincoln
Heritage Life Insurance Company, an Illinois corporation ("Lincoln"), owns 79%
of the stock of LBIC. The Londen Insurance Group, an Arizona holding
corporation, is the sole shareholder of Lincoln and the beneficial owner of the
Shares of Common Stock held by LBIC and the bridge warrants held by Boston and
Lincoln.

Anthony Stock Purchase and Option Agreement. On June 20, 1997, PCI
Chairman William L. Anthony entered an Agreement to purchase 66,000 shares of
PCI Common Stock for $22,000 from Steven A. Lambrecht (60,000), Colin A. Jones
(3,000) and Greg P. Lambrecht (3,000). PCI, also a party to the Agreement,
granted Anthony a non-qualified stock option to purchase 20,000 shares at the
offering price from the effective date of the offering and for one year
thereafter. PCI also agreed to obtain, and did obtain, within 30 days after
completion of the initial public offering, director and officer insurance at
coverage levels which are standard for distribution companies comparable to PCI.
Anthony agreed to serve as Chairman of the Board for up to five years, subject
to appropriate approvals and the provisions of PCI's Bylaws.

The agreement is a closed transaction that occurred before we had
sufficient disinterested, independent directors to ratify the transaction. Mr.
Anthony's ongoing relationship to the Board as its Chairman is subject to
ongoing Board approval, and Mr. Anthony's continued service as a director
generally is subject to annual shareholder reelection.

On August 7, 1997, to remove certain potentially compensatory aspects
of the June 20, 1997 Agreement and to maintain Mr. Anthony's status as an
independent director, the parties entered a Modification Agreement which
rescinded and modified certain aspects of the June 20, 1997 Agreement. The
August 7, 1997 Modification Agreement rescinded the private stock purchase for
all but 1,000 of the 66,000 shares and restructured the transaction so that Mr.
Anthony purchased the 1,000 shares at a settlement price of $2.50 per share,
received options to acquire an additional 136,250 shares at $5.25 per share, and
modified the exercise period for all of the options one to five years after
completion of the offering.

Lambrecht-Stanley Stock Sale. On June 20, 1997, Steven A. Lambrecht
sold 15,000 shares of PCI Common Stock to James B. Stanley for $5,000. James B.
Stanley is PCI's Vice President of Purchasing. PCI was not a party to the
transaction.

Credit Line Guarantees. On July 25, 1997 PCI obtained a $200,000 credit
line from Biltmore Investor Bank, N.A., an independent third-party lender. The
credit line was at 1% above the prime rate and terminated upon completion of
PCI's initial public offering. Greg P. Lambrecht and Colin A. Jones, PCI
directors and officers at the time, personally
13
<PAGE>
guaranteed the credit line. The Board of Directors ratified the entry into the
credit line and ratified Messrs. Lambrecht and Jones' entry into personal
guarantees on PCI's behalf.

Manschot Stock Option Grant. By resolutions dated July 30, 1997 and
August 7, 1997, PCI's Board of Directors granted Robert H. Manschot a
non-qualified stock option to purchase 5,000 shares at the initial public
offering price of $5.25 from one to five years after completion of the initial
public offering. The option was issued in the name of RHEM Enterprises, Inc., a
company that Mr. Manschot beneficially owns and controls. The stock grant was
approved by the other disinterested directors and independent director.

Capital Contribution Agreement. On August 8, 1997, certain holders of
PCI's shares who are classified as "Promoters" under applicable state securities
laws and regulations, contributed a total of $150,000 as additional capital to
PCI. Contributors included Steven A. Lambrecht, Greg P. Lambrecht, Colin A.
Jones and a number of other founders. This contribution was made to comply with
promoters' equity requirements set forth in the North American Securities
Administrators Association, Inc. ("NASAA") Statement of Policy Regarding
Promoters' Equity Investment. No shares were issued as a result of this equity
contribution and the number of outstanding shares did not change. All monies
contributed came from contributors' personal funds. In order to make their
contributions, Greg P. Lambrecht and Colin A. Jones obtained loans for $39,371
and $37,871 respectively from an independent third-party bank, but William B.
Anthony personally guaranteed the private loans. All of PCI's directors,
including the other independent director Robert H. Manschot, ratified the
Capital Contribution Agreement.

Raises to Certain Founders and Other Key Employees. On September 17,
1997, the respective Boards of Directors of PCI and CAN-AM and each of the
Independent Directors of PCI, where applicable, ratified management's grant of
salary increases, effective October 1, 1997, for certain PCI and CAN-AM officers
and employees in the following amounts:

[see next page]
14
<PAGE>
Annualized
Officer / Employee Salary Increase
------------------ ---------------

Steve Lambrecht $ 24,000
Greg Lambrecht $ 24,000
Colin Jones $ 24,000
Karissa Nisted $ 20,000
Scott Lambrecht $ 9,000
James Stanley $ 9,000
Pete Charleston $ 9,000
Corey Lambrecht $ 9,000
Murphy Pierson $ 9,000
Mark Jensen $ 6,500
Amrik Gill $ 6,500
--------
TOTAL: $150,000

Based on Management's recommendation, the Board expressly approved such
salary increases subject to: (i) the availability of operating proceeds and that
salary increases could not be paid from initial public offering proceeds; (ii)
presentation and approval of a budget showing profitability; (iii) possible
adjustment after receipt of actual results for October 1997. Management
implemented the raises using offering proceeds prior to the availability of
operating proceeds. Subsequently, an independent study performed for PCI in
conjunction with its analysis of incentive compensation alternatives supports
that the majority of the resulting salary levels were within the market value
base compensation ranges for qualified individuals in these positions. PCI
continues to pay compensation which includes the raises.

Payout of Management Fees. When PCI received proceeds from its initial
public offering, its asset increase triggered an obligation of PCI to pay the
management fees of $80,000 each to Greg P. Lambrecht and Colin A. Jones in a
lump sum after offset of amounts due PCI from Messrs. Lambrecht or Jones,
respectively or Rose Hearts, Inc. and J&M Wholesale, Ltd., the companies they
respectively own and control. On October 15, 1997, PCI reached an agreement with
Mr. Lambrecht, which was approved by the Independent Directors on November 3,
1997, to release the remaining portion of his management fee, without offset, in
consideration for the right to deduct offsetting amounts from commissions and
other payments due to Rose Hearts, Inc. or to become due in the future. At the
time, PCI considered the balance not to be significant, and not necessary of
deduction in the context of the ongoing relationship. Under the agreement, PCI
also reimbursed Mr. Lambrecht $3,338 for interest on personal loans which he
incurred during the period that PCI delayed payment of his management fee. The
agreement with Mr. Lambrecht did not affect Mr. Jones' management fee, which was
paid after deducting amounts then known to be due from him.

Amendment to Steve Lambrecht's Employment Agreement. On November 19,
1997, PCI entered an Amendment to Employment Agreement with Steven A. Lambrecht
in
15
<PAGE>
which, among other terms, PCI granted Mr. Lambrecht (i) options to purchase
10,000 shares of Common Stock at $5.25 per share, which vested immediately upon
his termination as President that same day, for his services in conjunction with
PCI's public offering and (ii) options to purchase an additional 10,000 shares
at $5.25 per share, which vested on March 1, 1998, when he was terminated as
Chief Executive Officer upon the Board's determination that he had cooperated in
a smooth transition to the next Chief Executive Officer. The Amendment was
ratified by all disinterested directors, including the independent directors.

Settlement of Compensation Disputes with Founders. On March 3, 1998,
PCI entered into settlement agreements with each of Messrs. Jones, Greg
Lambrecht and Steve Lambrecht relating to their compensation disputes with PCI.
The terms of the settlements are set forth under "Executive Compensation -
Employment Agreements - Settlement of Compensation Disputes with Founders." The
settlements were approved by all disinterested directors, including the
independent directors.

Termination of Rose Hearts Distributorship Agreement. On February 27,
1998, PCI notified Rose Hearts, Inc. that its Distributorship Agreement with PCI
would terminate on March 28, 1998. Rose Hearts is wholly-owned and controlled by
director and former officer Greg P. Lambrecht. We originally entered a
distributorship relationship with this related-party company when PCI acquired
Rose Hearts' cigar accounts and needed Rose Hearts' initial assistance in
servicing these direct delivery accounts which are primarily located in the
northwest U.S.

The Rose Hearts distribution relationship differed from our other
third-party distribution relationships in that we sell our cigars directly to
our other third-party distributors who, in turn, ship or deliver directly to
their own affiliated stores, perform their own collections and pay PCI directly.
Currently Rose Hearts distributes PCI-owned cigars to stores operating under PCI
retail distribution agreements and does not collect account payments, except for
C.O.D. deliveries.

Prior to September 30, 1997, and before we fully implemented our
accounting and reporting systems, Rose Hearts provided invoicing and collection
services for PCI. We had a related-party receivable from Rose Hearts of $11,772
at September 30, 1997, which was reduced to $886 as of December 31, 1997. Since
September 30, 1997, Rose Hearts has continued to collect C.O.D. sales on account
for PCI. We estimate that as of December 31, 1997 approximately $8,500 was due
from Rose Hearts to PCI for C.O.D. sales. This amount and subsequent amounts for
C.O.D. sales have not been received by PCI to date, although they may be offset
by commissions owed to Rose Hearts. In addition, PCI incurred expenses for
accounting services and warehouse support of approximately $14,000 relating to
Rose Hearts sales.

The December 31, 1997 balance of trade receivables relating to PCI
accounts serviced by Rose Hearts, but for which PCI has ultimate collection
responsibility, was approximately $80,000, of which $67,000 remains uncollected.
A reserve of $18,000 for potential
16
<PAGE>
uncollectibility of this balance is recorded in our financial statements for the
nine-month period ended December 31, 1997. PCI paid commissions on these sales
by Rose Hearts based on our wholesale list price that includes applicable state
tobacco taxes.

Management terminated the Rose Hearts Distributorship Agreement after
it determined that in practice, the Rose Hearts Distributorship Agreement was
not as favorable to PCI as distributorship relationships generally available
with unaffiliated third parties.

Compliance with Section 16(a) of the Exchange Act

The following persons were, during the last fiscal year, either
directors, officers, or beneficial owners of more than ten percent (10%) of a
class of equity securities registered pursuant to Section 12 of the Exchange Act
of 1934 and failed to file the following reports on a timely basis reports
required by Section 16(a) during the most recent fiscal year or prior years
which have not previously been disclosed:

Steven A. Lambrecht and David S. Hodges each filed one late Form 5 in
March 1998 reporting one transaction that was not reported on a timely basis and
that should have been reported previously in a Form 4 or Form 5. Colin A. Jones
filed one late Form 5 in March 1998 reporting two transactions that were not
reported on a timely basis and that should have been reported previously in a
Form 4 or Form 5.

Executive Compensation

Summary Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities
Name and Annual Restricted Underlying
Principal Compen- Stock Options/ LTIP All Other
Position Year Salary ($) Bonus ($) sation ($) Awards ($) SARs (#) Payouts ($) Compensation
- -------- ---- ---------- --------- ---------- ---------- -------- ----------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Steve 1997 48,832 -- $7,500(1) -- 20,000(2) -- --
Lambrecht ($18,600)
/CEO
Greg 1997 48,832 -- $7,500(1) -- -- -- 83,000(3)(4)
Lambrecht/
VP Sales
Colin Jones/ 1997 48,832 -- -- -- -- -- 83,000(3)(4)
VP Int. Sales
</TABLE>
(1) Represents payments for consulting services at $2,500 per month during
the first quarter of 1997.

(2) Represents shares of Common Stock underlying options granted on
November 19, 1997 in conjunction with Mr. Lambrecht's transition from
President and Chief Executive Officer. The fair market value at the
time of the award was $0.93 per share or $18,600. See "Option
SAR/Grants in Last Fiscal Year" and "Employment Agreements."
17
<PAGE>
(3) Includes the payment of a one-time "Management Fee" under Greg
Lambrecht's and Colin Jones' Employment Agreements. See "Employment
Agreements."

(4) Includes reimbursement of $3,000 each to Colin A. Jones and Greg P.
Lambrecht for attorneys' fees related to the negotiation of various
personal agreements or agreements of J&M or Rose Hearts with PCI.

Option/SAR Grants in Last Fiscal Year (Individual Grants)
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options / SARs Exercise
Underlying Granted to or Base
Options / SARs Employees in Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
---- ----------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Steve Lambrecht 20,000(1) 100% $5.25 11/19/2002 (10,000)
/ CEO 03/01/2003 (10,000)
Greg Lambrecht -- -- -- --
/ VP Sales
Colin Jones / VP -- -- -- --
Int. Sales
</TABLE>
(1) Options grant pursuant to an "Amendment to Employment Agreement" dated
November 19, 1997. Options to purchase 10,000 shares vested immediately
upon the date that Lambrecht ceased to be President, or November 19,
1997. Options to purchase an additional 10,000 shares vested on March
1, 1998 after the Board of Directors made a determination that Mr.
Lambrecht had cooperated in a management transition to the next Chief
Executive Officer.

Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values

(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
Acquired Value
on Realized Exercisable / Exercisable /
Name Exercise ($) Unexercisable Unexercisable
---- -------- -------- ------------- -------------

Steve Lambrecht -- -- 20,000 Not In-the-
/ CEO Unexercisable Money and
(1) Unexercisable
(1)
Greg Lambrecht -- -- -- --
/ VP Sales
Colin Jones / VP -- -- -- --
Int. Sales

(1) Options to purchase 20,000 shares at $5.25 per share, unexercisable
until November 19, 1998 (10,000) and March 1, 1999 (10,000). Closing
price of the Company's Common Stock on December 31, 1997 was $2.5625
per share.
18
<PAGE>
Director Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Number of
Securities
Annual Consulting Underlying
Name Retainer Meeting Fees/Other Number of Options/SAR
Fees ($) Fees ($) Fees ($) Shares (#) s (#)
-------- -------- -------- ---------- -----
<S> <C> <C> <C> <C> <C>
William L. -- 3,150 10,000(1) -- 156,250(2)
Anthony ($340,625)
Robert H. -- 3,500 -- -- 5,000(2)
Manschot ($10,900)
David S. -- 3,150 93,445(3) -- 5,000(2)
Hodges ($4,650)
Atul -- 350 -- -- 1,250(2)
Vashistha ($1,163)
</TABLE>

(1) Consulting fees paid pursuant to a verbal consulting agreement
effective from April 1, 1997 to August 31, 1997 for assistance in the
initial public offering and certain aspects of ongoing strategic
planning, business analysis and operations. See "Employment
Agreements."

(2) Represents shares of Common Stock underlying options granted for
service as a director. The date of grant and fair market value at the
time of the awards was as follows: Anthony, June 20 and August 7, 1997,
$2.18 per share or $340,625; Manschot, August 7, 1997, $2.18 per share
or $10,900; Hodges, November 19, 1997, $0.93 per share or $4,650;
Vashistha, November 19, 1997, $0.93 per share or $1,163.

(3) Consulting fees paid pursuant to, and as termination payments under, a
Business Consulting Agreement dated June 2, 1997 and which terminated
August 25, 1997 for assistance in the initial public offering and
certain additional projects related to strategic planning, budgeting,
accounting and reporting, business analysis, information systems and
operations. See "Employment Agreements." Also includes reimbursement of
$1,200 in legal fees.

Employment Agreements

Steven A. Lambrecht had an at-will Employment Agreement with PCI as
Chief Executive Officer dated June 13, 1997 which was amended on November 19,
1997 and terminated on March 1, 1998. Under the original agreement, effective
May 1, 1997, he received an annual salary of $60,000. He agreed to devote his
full time to PCI activities. PCI had the right to terminate his employment at
any time, with or without cause. Upon termination for any reason other than for
cause, as defined in the agreement, PCI was obligated to pay him his
then-current compensation on a regular basis and premiums for continued health
insurance coverage for nine (9) months, unless he is disqualified from
19
<PAGE>
receiving continued compensation and benefits based on certain conduct or
breaches of the Employment Agreement.

On September 17, 1997, Mr. Lambrecht's salary was raised to $84,000
annually. See "Certain Relationships and Related Transactions - Raises to
Certain Founders and Other Key Employees."

On November 19, 1997, PCI entered an Amendment to Employment Agreement
with Steven A. Lambrecht in which, among other terms, PCI granted Mr. Lambrecht
(i) options to purchase 10,000 shares of Common Stock at $5.25 per share, which
vested immediately upon his termination as President that same day, for his
services in conjunction with PCI's public offering and (ii) options to purchase
an additional 10,000 shares at $5.25 per share, which vested on March 1, 1998
when he was terminated as Chief Executive Officer, upon the Board's
determination that he had cooperated in a smooth transition to the next Chief
Executive Officer. The Amendment also provided that Lambrecht would complete his
unexpired term as a director, affirmed that he would receive the severance
compensation set forth in his original Employment Agreement and that, upon PCI's
request, he would provide consulting services without additional charge during
the severance payout period.

Steve Lambrecht subsequently disputed the compensation and severance
compensation due to him under his Employment Agreement. PCI settled the dispute
in an Agreement with Mr. Lambrecht dated March 3, 1998, which recognized the
termination of his employment effective March 1, 1998. See "Settlement of
Compensation Disputes with Founders" below.

Colin A. Jones had an at-will Employment Agreement with PCI as Vice
President of International Sales dated June 13, 1997 which was terminated on
January 16, 1998. Under the Employment Agreement effective May 1, 1997, he
received an annual salary of $60,000. He was also entitled to a one-time
management fee of $80,000, payable over a 16-month period commencing July 1,
1997 at $5,000 per month or in a lump sum upon PCI's obtaining of certain
financing, to compensate him for his expertise in sales, marketing, operations,
management and existing contacts with major retail distributors. Mr. Jones
agreed to devote his full time to PCI activities. The Employment Agreement
allowed PCI to terminate his employment at any time, with or without cause. Upon
a termination for any reason other than for cause, as defined in the agreement,
PCI was required to continue paying him his then-current compensation on a
regular basis and premiums for continued health insurance coverage for nine
months, unless he is disqualified from receiving continued compensation and
benefits based on certain conduct or breaches of the Employment Agreement.

On September 17, 1997, Mr. Jones' salary was raised to $84,000
annually. See "Certain Relationships and Related Transactions - Raises to
Certain Founders and Other Key Employees."

Mr. Jones's employment was terminated on January 16, 1998, and he
subsequently disputed the compensation and severance compensation due to him
under his Employment
20
<PAGE>
Agreement. PCI settled the dispute in an Agreement with Mr. Jones dated March 3,
1998. See "Settlement of Compensation Disputes with Founders" below.

Greg P. Lambrecht had an at-will Employment Agreement with PCI as Vice
President of International Sales dated June 13, 1997 and which was terminated on
March 2, 1998. Under the Employment Agreement and effective May 1, 1997, he
received an annual salary of $60,000. He was also entitled to a one-time
management fee of $80,000, payable over a 16-month period commencing July 1,
1997 at $5,000 per month or in a lump sum upon PCI's obtaining of certain
financing, to compensate him for his expertise in sales, marketing, operations,
management and existing contacts with major retail distributors. He agreed to
devote his full time to PCI activities. The Employment Agreement allowed PCI to
terminate his employment at any time, with or without cause. Upon a termination
for any reason other than for cause, as defined in the agreement, PCI must
continue paying him his then-current compensation on a regular basis and
premiums for continued health insurance coverage for nine months, unless he is
disqualified from receiving continued compensation and benefits based on certain
conduct or breaches of the Employment Agreement.

On September 17, 1997, Mr. Lambrecht's salary was raised to $84,000
annually. See "Certain Relationships and Related Transactions - Raises to
Certain Founders and Other Key Employees."

Greg Lambrecht subsequently disputed the compensation and severance
compensation due to him under his Employment Agreement. PCI settled the dispute
in an Agreement with Mr. Lambrecht dated March 3, 1998, which recognized the
termination of his employment effective March 2, 1998. See "Settlement of
Compensation Disputes with Founders" below.

John E. Greenwell has an at-will Employment Agreement with PCI as
President, Chief Executive Officer and Chief Operating Officer. The initial
salary was $120,000, but
21
<PAGE>
increased, pursuant to the agreement's terms, to $150,000 a year upon his
becoming Chief Executive Officer on March 1, 1998. Mr. Greenwell is eligible for
any bonus plan or stock option plan offered to other comparable executives and
was granted a conditionally guaranteed bonus of $50,000 for the fiscal year
ending December 31, 1998, unless PCI terminates for cause and itself did not
materially breach the agreement. The agreement may be terminated upon four
weeks' written notice. The agreement provides severance compensation of 3 months
compensation in the first 6 months or 9 months compensation for a termination
after 6 months. The agreement contains a covenant not to compete which extends
12 months after termination of employment. The Board of Directors, on November
19, 1997, also granted Mr. Greenwell stock options to purchase 70,000 shares
according to a vesting schedule from the date of the agreement until June 30,
1999 and which are exercisable from 1 to 5 years after the options vest and are
subject to other conditions and restrictions.

Settlement of Compensation Disputes with Founders. PCI's employment of
Colin A. Jones terminated on January 16, 1998. On about January 19, 1998, Mr.
Jones raised claims that his Employment Agreement with PCI entitled him to
receive automatic percentage increases in compensation so that his compensation
(including stock options and other benefits) would equal that of the most highly
compensated officer of PCI. He asserted that his compensation should have
retroactively increased to reflect higher compensation granted to Mr. Greenwell,
who was hired in December, 1997. Mr. Jones retained counsel to pursue his
claims, and his counsel subsequently brought similarly-based claims on behalf of
Greg P. Lambrecht. On February 23, 1998, Steven A. Lambrecht asserted his
position that the identical automatic raise clause contained in the Employment
Agreements of each of the three individuals required that he receive equal
compensation to Mr. Jones and Greg Lambrecht.

PCI Management (other than those who asserted the claims) disagreed
with the claimants' interpretation of their Employment Agreements, but
determined that a quick resolution of the issues was preferable to a protracted
legal dispute, and that settlement was in PCI's best interests.

On March 3, 1998, PCI entered into settlement agreements with each of
Messrs. Jones, Greg Lambrecht and Steve Lambrecht acknowledging the termination
of their employment relationships with PCI. PCI paid each individual a lump sum
payment of $40,000 in addition to severance compensation of nine months' salary
and other benefits payable over nine months under their individual Employment
Agreements. Each of the individuals agreed to extend their non-compete clauses
for an additional six months for a total of a full year and a half following
termination of employment and released PCI from all claims or causes of action
relating to their respective Employment Agreement and their employment with PCI.
22
<PAGE>
Consulting Agreements. During 1997, we also had arrangements with the
following consultants:

David S. Hodges was a director and had a Business Consulting
Agreement with PCI dated June 2, 1997, which was terminated on August
25, 1997. In accordance with the agreement, Mr. Hodges assisted PCI
with its initial public offering and additional projects. Mr. Hodges
received $60 per hour and reimbursement for business expenses and
health care coverage during the term of the agreement. Upon termination
PCI was required to pay Mr. Hodges biweekly payments of $4,800 each for
a six month period.

William L. Anthony, the Chairman of PCI's Board, entered a
verbal agreement with PCI, on April 1, 1997, to act as a consultant to
PCI's management to assist PCI with its initial public offering and
advise them regarding certain aspects of strategic planning, business
analysis and operations, including merchandising, marketing and supply
chain issues as requested by PCI's management. PCI agreed to pay Mr.
Anthony $2,000 per month and to reimburse certain related expenses. The
consulting agreement was terminated on August 31, 1997, shortly after
completion of PCI's initial public offering.

L.G. Zangani, Inc. and Leonardo G. Zangani Agreements. PCI
entered a Consulting Agreement, effective September 16, 1997, with L.G.
Zangani, Inc. as PCI's financial public relations consultant for $3,000
per month and a Stock Option Agreement, for the purchase by Leonardo G.
Zangani, as further consideration for the entry into the Consulting
Agreement of 50,000 shares at $8.40 per share, which vest in increments
of 10,000 shares from September 16, 1999 to 2003.

Reimbursement of Attorneys' Fees. PCI reimbursed Greg P. Lambrecht and
Colin A. Jones for approximately $6,000 in attorneys fees related to the
negotiation of various personal agreements or agreements of J&M or Rose Hearts
with PCI. PCI also directly paid John E. Greenwell's attorney approximately
$4,000 in fees in January 1998 for legal services provided in November and
December 1997 related to the negotiation of his Employment Agreement. PCI
reimbursed David S. Hodges for $1,200 in attorney's fees related to the
negotiation of his consulting relationship. None of the law firms involved have
any affiliation with PCI.

Standing Arrangements for Outside Director Compensation. PCI has
standing arrangements to grant each outside director options to purchase 5,000
shares of Common Stock and the Chairman additional options to purchase 2,500
shares of Common Stock on February 1 of each year at the market price on the
date of the grant, but not less than $5.25 per share, to vest in quarterly
increments of 1,250 (1,875 for the Chairman) and which shall be exercisable 1 to
5 years from the date each quarterly increment vests. The options are
non-qualified. PCI also pays all outside directors for all meetings attended
(whether regular or additional meetings) at the rate of $350 per meeting for
meetings of up to four (4) hours
23
<PAGE>
and $750 per meeting for meetings over four (4) hours. The Board of Directors
held 11 meetings in the year ended December 31, 1997 and all directors attended
at least 75% of the total number of meetings.

RATIFICATION OF APPOINTMENT OF
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
(ITEM 2 ON PROXY CARD)

In conjunction with the Company's initial public offering, the Company,
engaged Semple & Cooper, LLP of Phoenix, Arizona as its principal accountant to
audit the Company's financial statements beginning with the Company's fiscal
year ended March 31, 1997. The Company subsequently changed its fiscal year end
to December 31 and appointed Semple & Cooper, LLP as the Company's independent
certified public accountants for the Company for the fiscal year ending December
31, 1997. It is not anticipated that a representative of Semple & Cooper, LLP
will be present at the Annual Meeting of Stockholders to respond to questions or
make a statement.

Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure

None.

Vote Required and Recommendation for Item 2

The affirmative vote of a majority of the shares of common stock
present or represented by proxy and voting at the Annual Meeting of Stockholders
is required for approval of this proposal. The Board of Directors unanimously
recommends that the stockholders vote FOR the Item 2 ratification of the
appointment of Semple & Cooper, LLP. as the Company's independent certified
public accountants for the fiscal year ending December 31, 1996.

RATIFICATION OF CERTAIN STOCK OPTION GRANTS TO
CERTAIN DIRECTORS, OFFICERS AND CONSULTANTS
(ITEM 3 ON PROXY CARD)

From June 20, 1997 through February 23, 1997, the Board of Directors
made certain grants of non-qualified stock options to certain directors,
officers and consultants which were subject to ratification by the Shareholders.
Following is a summary of the terms of the options in tabular format (Please
note that where certain option grants have multiple vesting periods, the first
exercise date and the last expiration date are set forth):

[see next page]
24
<PAGE>
<TABLE>
<CAPTION>
NEW PLAN BENEFITS

================================ =============== ================== ============== ============== ================ ===============
Grant Exercisable Exercise Number Value of
Name of Holder Date Beginning Expires Price of Shares Grant(1)
================================ =============== ================== ============== ============== ================ ===============
<S> <C> <C> <C> <C> <C> <C>
William L. Anthony 6/20/97 08/29/98 08/29/02 $5.25 156,250 $340,625
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Leonardo G. Zangani 9/16/97 09/16/99 09/16/03 $8.40 10,000 $12,700
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Leonardo G. Zangani 9/16/97 09/16/00 09/16/04 $8.40 10,000 $12,700
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Leonardo G. Zangani 9/16/97 09/16/01 09/16/05 $8.40 10,000 $12,700
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Leonardo G. Zangani 9/16/97 09/16/02 09/16/06 $8.40 10,000 $12,700
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Leonardo G. Zangani 9/16/97 09/16/03 09/16/07 $8.40 10,000 $12,700
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
RHEM Enterprises, 8/7/97 08/29/98 08/29/02 $5.25 5,000 $10,900
Inc./Manschot
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Steven A. Lambrecht 11/19/97 11/19/98 11/19/02 $5.25 10,000 $9,300
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Steven A. Lambrecht 11/19/97 03/01/99 03/01/03 $5.25 10,000 $9,300
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Atul Vashistha 11/19/97 11/19/98 11/19/02 $5.25 1,250 $1,163
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
David S. Hodges 11/19/97 11/19/98 11/19/02 $5.25 5,000 $4,650
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 12/15/98 12/15/02 $2.6875 10,000 $6,600
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 03/01/99 03/01/03 $5.25 10,000 $6,600
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 06/30/99 06/30/03 $5.25 10,000 $6,600
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 12/31/99 12/31/03 $5.25 10,000 $6,600
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 06/30/00 06/30/04 $5.25 10,000 $6,600
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
John E. Greenwell 12/13/97 01/01/00 01/01/04 $5.25 20,000 $13,200
- -------------------------------- --------------- ------------------ -------------- -------------- ---------------- ---------------
Eight Directors - 1998 2/1/98 02/01/99(2) Various $5.25 42,500 $12,325
================================ =============== ================== ============== ============== ================ ===============
</TABLE>

(1) No value was recorded for any of the director or employee options in
the Company's financial statements because the market price on the date
of grant for each option equaled or exceeded the grant price. No value
was assigned to the Zangani options in the Company's financial
statements due to immateriality standards applicable to options granted
to non-employees. The values provided are for pro forma disclosure
purposes only, and were calculated using the Black Schols valuation
method.

(3) Directors receive options which vest in four increments in 1998 and
following years on February 1, April 1, July 1 and October 1. The
options will have exercise dates of 1 year to 5 years after the grant
date. Thus, the first options will be exercisable on February 1, 1999.
The options set forth in the table above constitute
25
<PAGE>
the options granted to directors for 1998, but shareholder approval
under this Item constitutes approval for continuing annual grants in
the same amount.

The options described above were granted in conjunction with, and in
consideration for consulting services (Zangani), employment services (Lambrecht
and Greenwell) services as a director in 1997 (Anthony, RHEM/Manschot,
Vashistha, Hodges) or services as a director in 1998 (Eight directors). The
terms of agreements or standing arrangements for these services are described in
greater detail in this Proxy Statement under "Employment Agreements" and
"Certain Relationships and Related Transactions."

Vote Required and Recommendation for Item 3

APPROVAL OF MANAGEMENT AND KEY EMPLOYEE INCENTIVE PLAN
APPROVAL OF EMPLOYEE STOCK OPTION PLAN
(ITEMS 4 AND 5 ON PROXY CARD)

Purpose

The Board desires to attract and retain high-quality employees upon
whom the Company's productivity, profitability and growth depends. The purpose
of the Company's Management and Key Employee Incentive Plan (the "Incentive
Plan") is to motivate the Company's management and sales staff to achieve
certain predetermined performance goals, and to reward them upon achieving those
goals.

The Company's Employee Stock Option Plan (the "Option Plan") motivates
Company employees by giving them a proprietary interest in the growth and
performance of the Company. This, in turn, increases stockholder value through
improved Company performance. Moreover, stock options allow the Company to
reward employees without increasing the Company's compensation expense.

Administration

The Incentive Plan and the Option Plan (collectively, the "Plans") will
be administered by the Compensation Committee of the Company's Board of
Directors (the "Committee"). The Committee will consist of two or more directors
who qualify as: 1) "outside directors" within the meaning of Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code"); and 2) "non-employee
directors" within the meaning of Rule 16b-3 under the Exchange Act of 1934, as
amended (the "Exchange Act").
26
<PAGE>
Eligibility

All salaried full-time employees of the Company are eligible to
participate in both Plans.

Shares Subject to the Option Plan

A stock option, which may be either qualified or non-qualified for
income tax purposes, is the right to purchase a specified number of shares of
the Company's Common Stock at a price fixed by the Committee. A maximum of
400,000 shares of the Company's Common Stock (the "Shares") may be issued under
the Option Plan. Pursuant to the criteria of the Option Plan, these shares will
be divided among the Option Plan participants in such manner as the Committee
shall determine or authorize.

Each time an option grant is made, the number of Shares available for
future option grants will be reduced. Conversely, when an outstanding option
expires, is canceled or is otherwise terminated or forfeited without being
exercised, either in whole or in part, the unexercised Shares may again be the
subject of a future option grant.

Performance Criteria

Generally, performance criteria for executive officers and managers
under the Incentive Plan will be based on a combination of: 1) the Company's
achievement of targeted net income and net sales objectives; and 2) the
employee's achievement of individual performance objectives. Before any payment
will be made under the Incentive Plan, the Company must achieve at least 80% of
its performance target level. To address potential situations for recognizing
extraordinary individual performance in any year in which the Company fails to
achieve either minimum net sales or net income objectives, the Incentive Plan
will allow for discretionary payments as solely approved by the Committee.

Performance criteria for sales people under the Incentive Plan will be
based on a combination of: 1) individual gross sales objectives; 2) sales
department gross sales objectives; and 3) total Company net income objectives.
Gross sales objectives will be established for the first and second half of the
fiscal year. Payments based on gross sales objectives will be made
semi-annually, within two months of Company's half-year end. Payments based on
net income objectives will be made annually.

Under Section 162(m) of the Code, the federal income tax deductibility
of compensation paid to the Company's Chief Executive Officer and to each of its
next four most highly compensated executive officers may be limited to the
extent that such compensation exceeds $1,000,000 in any one year. The Company
can deduct compensation in excess of that amount if it qualifies as
"performance-based compensation" under Section 162(m) of the Code. For bonus
compensation paid under the Incentive Plan and for non-qualified options issued
and exercised under the Option Plan to qualify as "incentive-based
27
<PAGE>
compensation," the Company must disclose to stockholders the performance
criteria upon which the Committee bases awards under the Plans, and the Plans
must be approved by the Company's stockholders.

The Company will not pay any employee in excess of $1,000,000 for
fiscal year 1998, nor does the Company anticipate paying any employee in excess
of $1,000,000 in any fiscal year in the foreseeable future. Accordingly, Section
162(m) is not implicated at this time. If, in the future, the Committee
contemplates a compensation package for any employee which may exceed $1,000,000
in a given fiscal year, the Company will take all steps necessary to comply with
Section 162(m) to preserve the full deductibility of compensation expense.

Federal Income Tax Consequences

The following is a brief summary of the principal federal income tax
consequences related to awards under the Option Plan. This summary is provided
for general information only and does not purport to address all aspects of the
possible federal income tax consequences of the Option Plan and IS NOT INTENDED
AS TAX ADVICE TO ANY PERSON. No ruling from the Internal Revenue Service or
opinion of counsel will be obtained regarding the federal income tax
consequences to any holder of an option granted pursuant to the Option Plan.

Incentive Stock Options Versus Non-Qualified Options

Under the Option Plan, the Committee may grant options which either
qualify as incentive stock options (an "ISO") under Section 422 of the Code or
do not qualify under Section 422 (a "NQO"). At the time an option grant is made,
regardless of whether the option is an ISO or NQO, generally no taxable income
will be recognized by the holder of the option and no tax deduction will be
available to the Company. However, upon exercise of the option and subsequent
disposition of the underlying Shares, the tax consequences will vary depending
on whether the option is an ISO or NQO.

Incentive Stock Options

No regular taxable income will be recognized by an option holder upon
the exercise of an ISO if the holding period and employment requirements
contained in the Code are met. Under the holding period requirements, the option
holder must not dispose of the Shares within two years of the date the option
was granted, nor within one year from the date of exercise. Under the employment
requirements, the option holder must exercise the option either while employed
by the Company or within three months of termination.

Although no regular taxable income is recognized upon exercise of an
ISO, the amount by which the fair market value of the Shares on the date of
exercise exceeds the exercise price may give rise to alternative minimum tax
liability.
28
<PAGE>
Provided that the holding period and employment requirements are met,
any gain or loss realized upon the subsequent disposition of the Shares will be
treated as capital gain or loss. The option holder's tax basis in the Shares
will be the option price.

Non-qualified Stock Options

Any option grant that does not satisfy the requirements of an ISO is,
by definition, a NQO. Upon exercise of a NQO, the option holder must recognize
ordinary taxable income, and the Company is entitled to a tax deduction equal to
the difference between the fair market value of the Shares and the option price.
The option exercise may also be subject to tax reporting and withholding
requirements.

Upon the subsequent disposition of the Shares, the option holder will
recognize a capital gain or loss equal to the difference between the fair market
value of the Shares at the date of exercise and the fair market value of the
Shares on the date of disposition. The capital gain or loss will be either
short-term or long-term, depending upon the length of time that the Shares were
held after exercise.

Effective Date, Amendment, Termination and Expiration

The Option Plan shall be effective upon stockholder approval at the
Company's annual meeting on May 8, 1998. The Incentive Plan shall be
retroactively effective to January 1, 1998, in order to base Incentive Plan
goals and payouts on a full fiscal year.

The Board of Directors may amend, modify, suspend or terminate either
or both of the Plans at any time; provided, however, that:

o No amendment, modification, suspension or termination shall in
any manner adversely affect any Plan participant without the
participant's written consent;

o No amendment shall be made to the Incentive Plan without
stockholder approval if: 1) stockholder approval is required
under any provision of the Code or Exchange Act or any other
law; and 2) the Board determines that stockholder approval is
appropriate;

o The Option Plan shall terminate no later than the day
preceding the tenth anniversary of the date the Plan is
adopted by the Board.

THE FOREGOING SUMMARY OF THE PLANS IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO THE FULL TEXT OF THE INCENTIVE PLAN AND OPTION PLAN, ATTACHED
HERETO AS EXHIBITS AND INCORPORATED HEREIN BY THIS REFERENCE.
29
<PAGE>
Vote Required and Recommendation for Items 4 and 5

The affirmative vote of a majority of the shares of common stock
present or represented by proxy and voting at the Annual Meeting of Stockholders
is required for approval of proposal 4. The Board of Directors unanimously
recommends that the stockholders vote FOR the Item 4 Management and Key Employee
Incentive Plan.

The affirmative vote of a majority of the shares of common stock
present or represented by proxy and voting at the Annual Meeting of Stockholders
is required for approval of proposal 5. The Board of Directors unanimously
recommends that the stockholders vote FOR the Item 5 Employee Stock Option Plan.

STOCKHOLDER PROPOSALS FOR 1998

Proposals of security holders intended to be presented at the Company's
1999 Annual Meeting of Stockholders must be received by the Company by not later
than December 2, 1998.

OTHER MATTERS

The cost of soliciting proxies will be borne by the Company and will
consist primarily of printing, postage and handling, including the expenses of
brokerage houses, custodians, nominees, and fiduciaries in forwarding documents
to beneficial owners. Solicitations also may be made by the Company's officers,
directors, or employees, personally or by telephone.

Scottsdale, Arizona
April 8, 1998
30
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
1998 MANAGEMENT AND KEY EMPLOYEE INCENTIVE PLAN

1. PURPOSE. The purpose of the Premium Cigar International, Ltd. (the
"Company") 1998 Management and Key Employee Incentive Plan (the "Plan") is to
advance the interests of the Company by encouraging and rewarding teamwork, and
providing management with a strong incentive to increase value to shareholders.

2. DEFINITIONS. As used in this Plan, terms defined parenthetically
immediately after their use shall have the respective meanings provided by such
definitions, and the terms set forth below shall have the following meanings:

(a) "Award" shall mean, individually or collectively, a cash
payment under the Plan.

(b) "Board" shall mean the Board of Directors of the Company.

(c) "Change in Control" shall have the same meaning as that
term has in the Premium Cigars International, Ltd. Stock Option Plan for
Employees.

(d) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time, and any referenced section thereof shall include any
successor provision thereto.

(e) "Committee" shall mean the Compensation Committee of the
Board. to "Company" shall mean Premium Cigars International, Ltd.

(f) "Company shall mean Premium Cigars International, Ltd.

(g) "Disabled" shall have the same meaning as the term
"Disability" has in the Stock Option Plan.

(h) "Effective Date" shall mean January 1, 1998.

(i) "Employee" shall mean an individual who is a full-time
employee of the Company or a Subsidiary.

(j) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time, and any referenced section thereof, or rule
or regulation promulgated thereunder shall include any successor provision
thereto.
<PAGE>
(k) "Executive Officer" shall mean an Employee who is an
executive officer of the Company or a Subsidiary.

(l) "Maximum Award" shall mean the maximum Award for which a
Participant is eligible in accordance with Section 6.

(m) "Participant" shall mean any Employee selected by the
Committee as eligible to receive an Award under the Plan.

(n) "Performance Period" shall mean the 12 month period
beginning January 1 and ending December 31, and/or the 6 month periods beginning
January 1 and ending June 30, and beginning July 1 and ending December 31.

(o) "Plan" shall mean this Premium Cigars International, Ltd.,
1998 Management and Key Employee Incentive Plan, as may be amended from time to
time.

(p) "Profit Objectives" shall mean the objectives established
by the Committee in accordance with Section 5.2.

(q) "Revenue Objectives" shall mean the objectives established
by the Committee in accordance with Section 5.1.

(r) "Subsidiary" shall mean any corporation or other person of
which a majority of its voting power, equity securities or equity interest is
owned, directly or indirectly, by the Company.

(s) "Target Award" is the percentage of a Participant's salary
as of December 31, ranging from 10% to 60%.

(t) "Target Profit Benchmark" shall mean the target Profit
Objective established by the Committee in accordance with Section 5.2.

(u) "Target Revenue Benchmark" shall mean the target Revenue
Objective established by the Committee in accordance with Section 5. l .

3. ADMINISTRATION.

3.1 The Committee. The Plan shall be administered by the
Committee, the members of which shall be appointed from time to time by, and
shall serve at the discretion of, the Board. The Committee shall be composed
solely of two or more directors who are outside directors within the meaning of
Section 162(m) of the Code and regulations promulgated thereunder, and who are
non-employee directors within the meaning of Rule
2
<PAGE>
16b-3 promulgated under the Exchange Act, and who are independent directors
within the meaning of Article III, Section 14(a) of the Company's Bylaws.

3.2 Authority of the Committee. Subject to the provisions of
the Plan, the Committee shall have full authority to:

(a) determine the size, types and frequency of Awards
granted under the Plan;

(b) determine the terms and conditions of Awards,
including any restrictions or conditions to the Awards, which need not be
identical;

(d) establish, amend and rescind rules and
regulations for the Plan's administration; and

(e) amend the terms and conditions of any outstanding
Award to the extent such terms and conditions are within the discretion of the
Committee as provided in the Plan.

The Committee shall have sole discretion to make all other determinations that
may be necessary or advisable for the administration of the Plan. To the extent
permitted by law, Rule 16b-3 promulgated under the Exchange Act and Section
162(m) of the Code and the regulations thereunder, the Committee may delegate
its authority as identified hereunder.

3.3 Decisions Binding. All determinations and decisions made
by the Committee pursuant to the provisions of the Plan, and all related orders
or resolutions of the Board, shall be final, conclusive and binding upon all
persons, including the Company, its stockholders, Employees, Participants and
their successors, assigns, estates and beneficiaries.

3.4 Compliance; Bifurcation of Plan. It is the intention of
the Company that the Plan and the administration of the Plan satisfy the
requirements of Rule 16b-3 promulgated under the Exchange Act and Section 162(m)
of the Code. Accordingly, if any aspect of the administration of the Plan, or
the operation of any provision of the Plan, would conflict with this intent,
such administration or provision shall be deemed null and void, and in all
events the Plan shall be construed in favor of its operation and administration
in accordance with such intent.

Notwithstanding anything in the Plan to the contrary, the Board or the
Committee, in its discretion, may bifurcate the Plan so as to restrict, limit or
condition the use of any provision of the Plan to Participants who are subject
to Section 16 of the Exchange Act without so restricting, limiting or
conditioning the Plan with respect to other Participants.
3
<PAGE>
4. ELIGIBILITY. All salaried Employees shall be eligible Participants
in the Plan for each Performance Period during which the Plan is in effect.

5. PERFORMANCE OBJECTIVES. Annually, within the applicable period
provided under Treas. Reg. ss. 1.162-27(e)(2), the Committee shall establish in
writing the Revenue Objectives and Profit Objectives and the relative weighing
of each for the Performance Period.

5.1 Revenue Objectives. The Committee shall establish various
Revenue Benchmarks for any relevant Performance Period based on revenues and
other quantitative or qualitative strategic growth measures as determined by the
Committee.

5.2 Profit Objectives. The Committee shall establish various
Profit Benchmarks for any relevant Performance Period based on consolidated net
income or earnings per share and other quantitative or qualitative strategic
profit measures as determined by the Committee.

6. AWARDS. Awards will be determined as soon as reasonably practicable
after the close of each Performance Period and will be certified by the
Committee before distribution. The Maximum Award available for any Participant
shall be equal to 190% of the Participant's Target Award amount.

7. PAYMENT OF AWARDS.

7.1 Payment of Award. The Award shall be paid to each
Participant as soon as reasonably practicable following the end of the
Performance Period, but no later than 60 days following the end of the
Performance Period to which the Award relates.

7.2 Withholding for Taxes. The Company shall have the right to
deduct from all cash Awards any taxes required to be withheld as a result
thereof, whether federal, state or local.

8. TERMINATION OF EMPLOYMENT DURING ANY PERFORMANCE PERIOD.

8.1 Termination for Reasons Other Than Death or Disability. If
the Participant's employment by the Company or a Subsidiary terminates for any
reason (other than death or disability) during any Performance Period, such
Participant shall not be entitled to any Award for that Performance Period.

8.2 Death or Disability During Performance Period. If a
Participant dies or becomes Disabled during any Performance Period, the amount
of the Award shall be calculated in the same manner as described in Section 9.2.
Such Award shall be non-forfeitable and shall be distributed in the same manner
as described in Section 9.3.
4
<PAGE>
9. CHANGE IN CONTROL. If there is a Change in Control while the Plan
remains in effect, then the following shall apply:

9.1 Nonforfeitability. Each Participant's accrued Award,
calculated in accordance with Section 9.2 below, shall automatically become
nonforfeitable on the date of such Change in Control.

9.2 Calculation of Awards. The Committee, as soon as
reasonably practicable after the date of such Change in Control, shall determine
each Participant's Award accrued through the end of the calendar month which
immediately precedes the date of such Change in Control. The Award shall be in
an amount which is equal to the greater of (a) the Target Award available
multiplied by a percentage equal to the percentage of the Target Award that
would have been earned assuming that the rate at which the Revenue Objectives
and Profit Objectives have been achieved as of the date of such Change in
Control would have continued until the end of the Performance Period or (b) the
Target Award available multiplied by the percentage of the Performance Period
completed at the time of the Change in Control.

9.3 Payment of Awards. Each Participant's accrued Award
(determined as provided in Section 9.2) shall be paid in a single sum in cash as
soon as reasonably practicable after the date of the Committee's determination
of the Award.

10. AMENDMENTS, MODIFICATION AND TERMINATION OF THE PLAN. The Board may
terminate the Plan, in whole or in part and may amend the Plan from time to
time, including the adoption of amendments deemed necessary or desirable to
correct any defect, supply an omission or reconcile any inconsistency in the
Plan. Notwithstanding the foregoing, no amendment shall be made without
stockholder approval if: (a) such approval is necessary to satisfy any
applicable (i) provision of the Code or the Exchange Act or any regulation
promulgated thereunder, or (ii) any other regulatory law or regulation, and (b)
the Board determines that it is appropriate to seek stockholder approval.

No amendment, modification or termination of the Plan shall in any manner
adversely affect any Participant with respect to a current Performance Period
without the written consent of such Participant.

11. GOVERNING LAW. The Plan and all determinations made and actions
taken pursuant thereto shall, to the extent not preempted by federal law, be
governed by and construed in accordance with the laws of the State of Arizona,
without regard to the conflict of law provisions thereof.

12. GENDER AND NUMBER. Unless otherwise indicated by the context,
reference to the masculine gender shall include the feminine gender and
vice-versa, the plural shall include the singular and the singular shall include
the plural.
5
<PAGE>
13. SEVERABILITY. In the event any provision of the Plan shall be held
illegal or invalid for any reason, the illegality or invalidity shall not affect
the remaining parts of the Plan, and the Plan shall be construed and enforced as
if the illegal or invalid provision had not been included.

14. NON-TRANSFERABILITY. A Participant's rights under this Plan may not
be assigned, pledged or otherwise transferred other than by will or the laws of
descent and distribution, except that upon a Participant's death, the
Participant's rights to payment may be transferred pursuant to the laws of
descent and distribution.

15. NO GRANTING OF EMPLOYMENT RIGHTS. Neither the Plan nor any action
taken under the Plan shall be construed as giving any Employee the right to
become a Participant, nor shall the fact that an Employee is a Participant be
construed as giving such Employee any right with respect to continuance of
employment by the Company. The Company expressly reserves the right to
terminate, whether by dismissal, discharge or otherwise, a Participant's
employment at any time, with or without cause, except as may otherwise be
provided by any written agreement between the Company and the Participant.

16. INDEMNIFICATION. No member of the Board or the Committee, nor any
officer or Employee acting on behalf of the Board or the Committee, shall be
personally liable for any action, determination or interpretation taken or made
with respect to the Plan, and all members of the Board, the Committee and each
and any officer or Employee of the Company acting on their behalf shall, to the
extent permitted by law, be fully indemnified and protected by the Company with
respect to any such action, determination or interpretation.

17. SUCCESSORS. All obligations of the Company under the Plan shall be
binding on any successor to the Company, whether the existence of such successor
is a result of a direct or indirect purchase, merger, consolidation or
otherwise, of all or substantially all of the business and/or assets of the
Company.
6
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
1998 STOCK OPTION PLAN
FOR EMPLOYEES

1. Purpose.

The purpose of The Premium Cigars International, Ltd. 1998
Stock Option Plan for Employees (the "Plan") is to strengthen Premium Cigars
International, Ltd., an Arizona corporation (the "Company"), by providing an
incentive to its employees and thereby encouraging them to devote their
abilities to the success of the Company. It is intended that this purpose be
achieved by extending to employees of the Company and its Subsidiaries a
long-term incentive for high levels of performance and unusual efforts through
the grant of Incentive Stock Options and Nonqualified Stock Options (as each
term is herein defined).

2. Definitions.

For purposes of the Plan:

2.1 "Adjusted Fair Market Value" means, in the event of a
Change in Control, the greater of (i) the highest price per share paid to
holders of the Company's Common Stock in any transaction (or series of
transactions) constituting or resulting in a Change in Control or (ii) the
highest Fair Market Value of a share of the Company's Common Stock during the
ninety (90) day period ending on the date of a Change in Control.

2.2 "Agreement" means the written agreement between the
Company and an Optionee evidencing the grant of an Option and setting forth the
terms and conditions thereof.

2.4 "Board" means the Board of Directors of the Company.

2.5 "Cause" means unless otherwise defined in the Agreement
evidencing a particular Option, a felony conviction of a Participant or the
failure of a Participant to contest prosecution for a felony, or a Participant's
willful misconduct or dishonesty, any of which is determined by the Committee to
be directly and materially harmful to the business or reputation of the Company
or its Subsidiaries.

2.6 "Change in Capitalization" means any increase or reduction
in the number of Shares, or any change (including, but not limited to, a change
in value) in the Shares or exchange of Shares for a different number or kind of
shares or other securities of the Company or another corporation, by reason of a
reclassification, recapitalization, merger, consolidation, reorganization,
spin-off, split-up, issuance of warrants or rights or debentures, stock
dividend, stock split or reverse stock split, cash dividend, property dividend,
combination or exchange of shares, repurchase of shares, change in corporate
structure or otherwise.
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2.7 A "Change in Control" shall mean the occurrence during the
term of the Plan, of:

(a) An acquisition (other than directly from the
Company) of any voting securities of the Company (the "Voting Securities") by
any Person (as the term person is used for purposes of Section 13(d) or 14(d) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act")),
immediately after which such Person has "Beneficial Ownership" (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of twenty percent
(20%) or more of the combined voting power of the Company's then outstanding
Voting Securities; provided, however, in determining whether a Change in Control
has occurred, Voting Securities which are acquired in a "Non-Control
Acquisition" (as hereinafter defined) shall not constitute an acquisition which
would cause a Change in Control. A Non-Control Acquisition shall mean an
acquisition by (i) an employee benefit plan (or a trust forming a part thereof)
maintained by (A) the Company or (B) any corporation or other Person of which a
majority of its voting power or its equity securities or equity interest is
owned, directly or indirectly, by the Company (for purposes of this definition,
a "Subsidiary") (ii) the Company or its Subsidiaries, or (iii) any Person in
connection with a Non-Control Transaction (as hereinafter defined):

(b) The individuals who, as of the effective date of
this Plan are members of the Board (the "Incumbent Board"), cease for any reason
to constitute at least two-thirds of the members of the Board; provided,
however, that if the election, or nomination for election by the Company's
common stockholders, of any new director was approved by a vote of at least
two-thirds of the Incumbent Board, such new director shall, for purposes of this
Plan, be considered a member of the Incumbent Board; provided further, however,
that no individual shall be considered a member of the Incumbent Board if such
individual initially assumed office as a result of either an actual or
threatened Election Contest (as described in Rule 14a-11 promulgated under the
Exchange Act) or other actual or threatened solicitation of proxies or consents
by or on behalf of a Person other than the Board (a "Proxy Contest") including
by reason of any agreement intended to avoid or settle any Election Contest or
Proxy Contest: or

(i) A merger, consolidation or
reorganization involving the Company, unless such merger, consolidation or
reorganization is a Non-Control Transaction. A "Non-Control Transaction" shall
mean a merger, consolidation or reorganization of the Company where:

(A) the stockholders of the Company
immediately before such merger, consolidation or reorganization own directly or
indirectly immediately following such merger, consolidation or reorganization,
at least seventy-five percent (75%) of the combined voting power of the
outstanding Voting Securities of the corporation resulting from such merger or
consolidation or reorganization (the "Surviving Corporation") in substantially
the
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same proportion as their ownership of the Voting Securities immediately before
such merger, consolidation or reorganization,

(B) the individuals who were members
of the Incumbent Board immediately prior to the execution of the agreement
providing for such merger, consolidation or reorganization constitute at least
two-thirds of the members of the board of directors of the Surviving
Corporation, or a corporation beneficially directly or indirectly owning a
majority of the Voting Securities of the Surviving Corporation, and no
agreement, plan or arrangement is in place to change the composition of the
board of directors following the merger, consolidation or reorganization; and

(C) no Person other than (i) the
Company, (ii) any Subsidiary, (iii) any employee benefit plan (or any trust
forming a part thereof) maintained by the Company, the Surviving Corporation, or
any Subsidiary, or (iv) any Person who, immediately prior to such merger,
consolidation or reorganization had Beneficial Ownership of twenty percent (20%)
or more of the then outstanding Voting Securities), has Beneficial Ownership of
twenty percent (20%) or more of the combined voting power of the Surviving
Corporation's then outstanding voting securities.

(ii) A complete liquidation or dissolution
of the Company; or

(iii) The sale or other disposition of all
or substantially all of the assets of the Company to any Person (other than a
transfer to a Subsidiary).

Notwithstanding the foregoing, a Change in
Control shall not be deemed to occur solely because any Person (the "Subject
Person") acquired Beneficial Ownership of more than the permitted amount of the
then outstanding Voting Securities as a result of the acquisition of Voting
Securities by the Company which, by reducing the number of Voting Securities
then outstanding, increases the proportional number of shares Beneficially Owned
by the Subject Persons, provided that if a Change in Control would occur (but
for the operation of this sentence) as a result of the acquisition of Voting
Securities by the Company, and after such share acquisition by the Company, the
Subject Person becomes the Beneficial Owner of any additional Voting Securities
which increases the percentage of the then outstanding Voting Securities
Beneficially Owned by the Subject Person, then a Change in Control shall occur.

2.8 "Code" means the Internal Revenue Code of 1986, as amended
from time to time, or any successor thereto, together with any regulations
promulgated thereunder.

2.9 "Committee" means the Compensation Committee of the Board.

2.10 "Company" means Premium Cigars International, Ltd.
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2.11 "Disability" means total disability as determined by the
Committee in accordance with standards and procedures similar to those under the
Company's long-term disability Plan.

2.12 "Disinterested Director" means a director of the Company
who is a "non-employee director" within the meaning of Rule 16b-3 under the
Exchange Act.

2.13 "Division" means any of the operating units or divisions
of the Company designated as a Division by the Committee.

2.14 "Eligible Individual" means any full-time salaried
employee of the Company or a Subsidiary.

2.15 "Exchange Act" means the Securities Exchange Act of 1934,
as amended from time to time, and any referenced section thereof, or rule or
regulation promulgated thereunder, shall include any successor provision
thereto.

2.16 "Fair Market Value" on any date means the average of the
high and low sales prices of the Company's Common Stock on such date on the
NASDAQ SmallCap Market or if no such reported sale of the Company's Common Stock
shall have occurred on such date, on the next preceding date on which there was
such a reported sale. If there shall be any material alteration in the present
system of reporting sale prices of the Company's Common Stock, or if the
Company's Common Stock shall no longer be listed on the NASDAQ SmallCap Market,
the Fair Market Value shall be the value established by the Committee in good
faith and, in the case of an Incentive Stock Option, in accordance with Section
422 of the Code.

2.17 "Incentive Stock Option" means an Option satisfying the
requirements of Section 422 of the Code and designated by the Committee as an
Incentive Stock Option.

2.18 "Nonqualified Stock Option" means an Option which is not
an Incentive Stock Option.

2.19 "Option" means a Nonqualified Stock Option or an
Incentive Stock Option or each or both of them.

2.20 "Optionee" means a person to whom an Option has been
granted under the Plan.

2.21 "Outside Director" means a director of the Company who is
an "outside director" within the meaning of Section 162(m) of the Code and the
regulations promulgated thereunder.

2.22 "Parent" means any corporation which is a parent
corporation (within the meaning of Section 424(e) of the Code) with respect to
the Company.
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2.23 "Plan" means the Premium Cigars International, Ltd. 1998
Stock Incentive Plan for Employees.

2.24 "Pooling Transaction" means an acquisition of the Company
in a transaction which is intended to be treated as a "pooling of interests"
under generally accepted accounting principles.

2.25 "Retirement" means retirement from active employment with
the Company and its Subsidiaries as defined by the Committee for purposes of
this Plan.

2.26 "Share" means a share of the Company's Common Stock
issued to an Optionee as a result of the exercise of an Option.

2.27 "Subsidiary" means any corporation which is a subsidiary
corporation (within the meaning of Section 424(f) of the Code) with respect to
the Company.

2.28 "Successor Corporation" means a corporation, or a parent
or subsidiary thereof within the meaning of Section 424(a) of the Code, which
issues or assumes a stock option in a transaction to which Section 424(a) of the
Code applies.

2.29 "Ten-Percent Stockholder" means an Eligible Individual,
who, at the time an Incentive Stock Option is to be granted to him or her, owns
(within the meaning of Section 422(b)(6) of the Code) stock possessing more than
ten percent (10%) of the total combined voting power of all classes of stock of
the Company, or of a Parent or a Subsidiary.

3. Administration.

3.1 The Plan shall be administered by the Committee. The
Committee shall consist solely of two (2) or more directors of the Company, each
of whom shall be a Disinterested Director and an Outside Director, as well as an
"Independent Director" as defined in Article II, Section 14(a) of the Company's
Bylaws. The members of the Committee shall be appointed from time to time by and
shall serve at the discretion of the Board. No member of the Committee shall be
liable for any action, failure to act, determination or interpretation made in
good faith with respect to this Plan or any transaction hereunder, except for
liability arising from his or her own willful misfeasance, gross negligence or
reckless disregard of his or her duties. The Company hereby agrees to indemnify
each member of the Committee for all costs and expenses and, to the extent
permitted by applicable law, any liability incurred in connection with defending
against, responding to, negotiating for the settlement of or otherwise dealing
with any claim, cause of action or dispute of any kind arising in connection
with any actions in administering this Plan or in authorizing or denying
authorization of any transaction hereunder.

3.2 Subject to the express terms and conditions set forth
herein, the Committee shall also have the power from time to time to:
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(a) select those Eligible Individuals to whom Options
shall be granted under the Plan and the number of such Options to be granted and
to prescribe the terms and conditions (which need not be identical) of each such
Option, and make any amendment or modification to any Option Agreement
consistent with the terms of the Plan;

(b) accelerate the exercisability of, and accelerate
or waive any or all of the restrictions and conditions applicable to, any
Option, for any reason.

(d) construe and interpret the Plan and the Options
granted hereunder and to establish, amend and revoke rules and regulations for
the administration of the Plan, including, but not limited to, correcting any
defect or supplying any omission, or reconciling any inconsistency in the Plan
or in any Agreement, in the manner and to the extent it shall deem necessary or
advisable so that the Plan complies with applicable law including Rule 16b-3
under the Exchange Act and the Code to the extent applicable, and otherwise to
make the Plan fully effective.

(e) determine the duration and purposes for leaves of
absence, other than those provided for in the Company's personnel policies and
procedures, which may be granted to an Optionee on an individual basis without
constituting a termination of employment or service for purposes of the Plan;

(f) include forfeiture provisions for violations of
restrictive or other similar covenants;

(g) exercise its discretion with respect to the
powers and rights granted to it as set forth in the Plan; and

(h) generally exercise such powers and perform such
acts as are deemed necessary or advisable to promote the best interests of the
Company with respect to the Plan.

4. Stock Subject to the Plan.

4.1 Subject to adjustment, the maximum number of Shares that
may be made the subject of Options granted under the Plan is 400,000. Upon a
Change in Capitalization, the maximum number of Shares referred to in the
preceding sentence shall be adjusted in number and kind pursuant to Section 7.
The Company shall reserve for the purposes of the Plan, out of its authorized
but unissued Shares or out of Shares held in the Company's treasury, or partly
out of each, such number of Shares as shall be determined by the Board.

4.2 Upon the granting of an Option, the number of Shares
available under Section 4.1 for the granting of further Options will be reduced
by any such options granted.
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4.3 Whenever any outstanding Option or portion thereof
expires, is canceled or is otherwise terminated or forfeited for any reason
without having been exercised or payment having been made in respect of the
entire Option, the Shares allocable to the expired, canceled or otherwise
terminated portion of the Option may again be the subject of Options granted
hereunder.

5. Option Grants for Eligible Individuals.

5.1 Authority of Committee. Subject to the provisions of the
Plan, the Committee shall have full and final authority to select those Eligible
Individuals who will receive Options, and the terms and conditions thereof. The
grant of an Option and the terms and conditions thereof shall be set forth in an
Agreement.

5.2 Purchase Price. The purchase price or the manner in which
the purchase price is to be determined for Shares under each Option shall be
determined by the Committee and set forth in the Agreement; provided, however,
that the purchase price per Share under each Option shall not be less than 100%
of the Fair Market Value of a Share on the date the Option is granted (110% in
the case of an Incentive Stock Option granted to a Ten-Percent Stockholder).

5.3 Maximum Duration. Options granted hereunder shall be for
such term as the Committee shall determine, provided that an Incentive Stock
Option shall not be exercisable after the expiration of ten (10) years from the
date it is granted and except as set out in Section 5.5(d), a Nonqualified Stock
Option shall not be exercisable after the expiration of ten (10) years from the
date it is granted. The Committee may, subsequent to the granting of any Option,
extend the term thereof but in no event shall the term as so extended exceed the
maximum term provided for in the preceding sentence.

5.4 Vesting. Subject to Section 5.10, each Option shall become
exercisable in such installments (which need not be equal) and at such times as
may be designated by the Committee and set forth in the Agreement. To the extent
not exercised, installments shall accumulate and be exercisable, in whole or in
part, at any time after becoming exercisable, but not later than the date the
Option expires. The Committee may accelerate the exercisability of any Option or
portion thereof at any time.

5.5 Termination of Employment, Death or Disability. Unless
otherwise determined by the Committee:

(a) If the employment of an Eligible Individual by
the Company is terminated for Cause, all the rights of such Eligible Individual,
whether or not exercisable, under any then outstanding Option shall terminate
immediately.

(b) If the employment of the Eligible Individual is
terminated for any reason other than for Cause, Retirement, death or Disability,
an Option shall be exercisable by such Eligible Individual or a personal
representative at any time prior to the expiration date of
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the Option or within ninety (90) days after the date of such termination,
whichever is the shorter period, but only to the extent the Option was
exercisable at the date of termination.

(c) In the event of Retirement, an Option shall be
exercisable by such Eligible Individual at any time prior to the expiration date
of the Option or within two (2) years after the date of such Retirement,
whichever is the shorter period, but only to the extent the Option was
exercisable at the date of Retirement.

(d) In the event of death or Disability of an
Eligible Individual while in the employ of the Company, all Options of such
Eligible Individual then outstanding shall become immediately exercisable in
full. In the event of death of an Eligible Individual, all Options of such
Eligible Individual shall be exercisable by the person or the persons to whom
those rights pass by will or by the laws of descent and distribution or, if
appropriate, by the legal representative of the estate of the deceased Eligible
Individual at any time within two (2) years after the date of death, regardless
of the expiration date of the Option, except for Incentive Stock Options which
may not be exercised later than the expiration date of the Options. In the event
of Disability of an Eligible Individual all Options of such Eligible Individual
shall be exercisable by the Eligible Individual or, if incapacitated, by a legal
representative at any time within two (2) years of the date of determination of
Disability regardless of the expiration date of the Options, except for
Incentive Stock Options which may not be exercised later than the expiration
date of the Options.

5.6 Modification. Subject to the terms of the Plan, the
Committee may modify outstanding Options or accept the surrender of outstanding
Options (to the extent not yet exercised) and grant new Options in substitution
for them. No modification of an Option shall adversely alter or impair any
rights or obligations under the Option without the Optionee's consent.

5.7 Non-Transferability.

(a) No Option granted hereunder shall be transferable
by the Optionee to whom granted except by will or the laws of descent and
distribution, and an Option may be exercised during the lifetime of such
Optionee only by the Optionee or his or her guardian or legal representative.
The terms of such Option shall be final, binding and conclusive upon the
beneficiaries, executors, administrators, heirs and successors of the Optionee.

(b) No Share(s) issued to an Optionee pursuant to the
exercise of an Incentive Stock Option shall be transferable by reason of a
disposition (as that term is defined in Section 424(c) of the Code) within the
two-year period commencing on the day after the date of the grant or within the
one-year period commencing on the day after the date of transfer of such Share
or Shares to the Optionee pursuant to such exercise.

5.8 Method of Exercise. The exercise of an Option shall be
made only by a written notice delivered in person or by mail to the Secretary of
the Company at the Company's
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principal executive office, specifying the number of Shares to be purchased and
accompanied by payment therefor and otherwise in accordance with the Agreement
pursuant to which the Option was granted. The purchase price for any Shares
purchased pursuant to the exercise of an Option shall be paid, as determined by
the Committee in its discretion, in either of the following forms (or any
combination thereof): (i) cash or (ii) the transfer of Shares previously owned
by Optionee, for a time period determined by the Committee, to the Company upon
such terms and conditions as determined by the Committee. Any Shares transferred
to the Company as payment of the purchase price under an Option shall be valued
at their Fair Market Value on the day preceding the date of exercise of such
Option. In addition, Options may be exercised through a registered broker-dealer
pursuant to such cashless exercise procedures (other than Share withholding)
which are, from time to time, deemed acceptable by the Committee. No fractional
Shares (or cash in lieu thereof) shall be issued upon exercise of an Option and
the number of Shares that may be purchased upon exercise shall be rounded to the
nearest number of whole Shares.

5.9 Rights of Optionees. No Optionee shall be deemed for any
purpose to be the owner of any Shares subject to any Option unless and until (i)
the Option shall have been exercised pursuant to the terms thereof, (ii) the
Company shall have issued and delivered Shares to the Optionee and (iii) the
Optionee's name shall have been entered as a stockholder of record on the books
of the Company. Thereupon, the Optionee shall have full voting, dividend, and
other ownership rights with respect to such Shares, subject to such terms and
conditions set forth herein and in the applicable Agreement.

5.10 Effect of Change in Control. Except as may be set forth
in an Agreement, in the event of a Change in Control, all Options outstanding on
the date of such Change in Control shall become immediately and fully
exercisable. In the event an Optionee's employment with the Company is
terminated other than for Cause within three (3) years following a Change in
Control, each Option held by the Optionee that was exercisable as of the date of
termination of the Optionee's employment or service shall remain exercisable for
a period ending the earlier of the second anniversary of the termination of the
Optionee's employment or service or the expiration of the stated term of the
Option.

In addition, to the extent set forth in an Agreement
evidencing the grant of an Option, an Optionee will be permitted to surrender
for cancellation within sixty (60) days after such Change in Control any Option
or portion of an Option to the extent not yet exercised and the Optionee will be
entitled to receive a payment in an amount equal to the excess, if any, of
(x)((A) in the case of a Nonqualified Stock Option, the greater of (1) the Fair
Market Value, on the date preceding the date of surrender, of the Shares subject
to the Option or portion thereof surrendered or (2) the Adjusted Fair Market
Value of the Shares subject to the Option or portion thereof surrendered or (B)
in the case of an Incentive Stock Option, the Fair Market Value, on the date
preceding the date of surrender, of the Shares subject to the Option or portion
thereof surrendered) over (y) (the aggregate purchase price for such Shares
under the Option or portion thereof surrendered) provided, however, that in the
case of an Option granted within six (6)
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months prior to the Change in Control to any Optionee who may be subject to
liability under Section 16(b) of the Exchange Act, such Optionee shall be
entitled to surrender for cancellation his or her Option during the sixty (60)
day period commencing upon the expiration of six (6) months from the date of
grant of any such Option. The form of payment shall be determined by the
Committee.

6. Adjustment Upon Changes in Capitalization.

(a) In the event of a Change in Capitalization, the Committee
shall conclusively determine the appropriate adjustments, if any, to (i) the
maximum number and class of Shares or other stock or securities with respect to
which Options may be granted under the Plan, (ii) the maximum number and class
of Shares or other stock or securities with respect to which Options may be
granted to any Eligible Individual during the term of the Plan, and (iii) the
number and class of Shares or other stock or securities which are subject to
outstanding Options granted under the Plan and the purchase price therefor, if
applicable.

(b) Any such adjustment in the Shares or other stock or
securities subject to outstanding Incentive Stock Options (including any
adjustments in the purchase price) shall be made in such manner as not to
constitute a modification as defined by Section 424(h)(3) of the Code and only
to the extent otherwise permitted by Sections 422 and 424 of the Code.

(c) If, by reason of a Change in Capitalization, an Optionee
shall be entitled to exercise an Option with respect to new, additional or
different Shares of stock or securities, such new, additional or different
shares shall thereupon be subject to all of the conditions, restrictions and
performance criteria which were applicable to the Shares subject to the Option,
as the case may be, prior to such Change in Capitalization.

7. Effect of Certain Transactions.

Subject to Sections 5.10 and 6(b) or as otherwise provided in
an Agreement, in the event of (i) the liquidation or dissolution of the Company
or (ii) a merger or consolidation of the Company (a "Transaction"), the Plan and
the Options issued hereunder shall continue in effect in accordance with their
respective terms, except that following a Transaction each Optionee shall be
entitled to receive in respect of each Share subject to any outstanding Options,
as the case may be, upon exercise of any Option, the same number and kind of
stock, securities, cash, property, or other consideration that each holder of a
Share was entitled to receive in the Transaction in respect of a Share;
provided, however, that such stock, securities, cash, property, or other
consideration shall remain subject to all of the conditions, restrictions and
performance criteria which were applicable to the Options prior to such
Transaction.

8. Interpretation.

Following the required registration of any equity security of
the Company pursuant to Section 12 of the Exchange Act:
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(a) The Plan is intended to comply with Rule 16b-3 promulgated
under the Exchange Act and the Committee shall interpret and administer the
provisions of the Plan or any Agreement in a manner consistent therewith. Any
provisions inconsistent with such Rule shall be inoperative and shall not affect
the validity of the Plan.

(b) Each Option granted under the Plan is intended to be
performance-based compensation within the meaning of Section 162(m)(4)(C) of the
Code. The Committee shall not be entitled to exercise any discretion otherwise
authorized hereunder with respect to such Options if the ability to exercise
such discretion or the exercise of such discretion itself would cause the
compensation attributable to such Options to fail to qualify as
performance-based compensation.

9. Pooling Transactions.

Notwithstanding anything contained in the Plan or any
Agreement to the contrary, in the event of a Change in Control, which has been
approved by the Board, which is also intended to constitute a Pooling
Transaction, the Committee shall take such actions, if any, which are
specifically recommended by an independent accounting firm retained by the
Company to the extent reasonably necessary in order to assure that the Pooling
Transaction will qualify as such, including but not limited to (i) deferring the
vesting, exercise, payment, settlement, or lapsing of restrictions with respect
to any Option (ii) providing that the payment or settlement in respect of any
Option be made in the form of cash, shares or securities of a successor or
acquirer of the Company, or a combination of the foregoing and (iii) providing
for the extension of the term of any Option to the extent necessary to
accommodate the foregoing, but not beyond the maximum term permitted for any
Option.

10. Termination and Amendment of the Plan.

The Plan shall terminate on the day preceding the tenth
anniversary of the date of its adoption by the Board and no Option may be
granted after MAY 8, 2008. The Board may sooner terminate the Plan and the Board
may at any time and from time to time amend, modify or suspend the Plan;
provided, however, that:

(a) no such amendment, modification, suspension or termination
shall impair or adversely alter any Options theretofore granted under the Plan,
except with the consent of the Optionee; nor shall any amendment, modification,
suspension or termination deprive any Optionee of any Shares which he or she may
have acquired through or as a result of the Plan; and

(b) to the extent necessary for the Plan to continue to
satisfy the applicable requirement of Rule 16b-3 promulgated under Section 16(b)
of the Exchange Act or other applicable law, no amendment shall be effective
unless approved by the stockholders of the Company in accordance with applicable
law and regulations.

11. Non-Exclusivity of the Plan.
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The adoption of the Plan by the Board shall not be construed
as amending, modifying or rescinding any previously approved incentive
arrangement or as creating any limitations on the power of the Board to adopt
such other incentive arrangements as it may deem desirable, including, without
limitation, the granting of stock options otherwise than under the Plan, and
such arrangements may be either applicable generally or only in specific cases.

12. Limitation of Liability.

As illustrative of the limitations of liability of the
Company, but not intended to be exhaustive thereof, nothing in the Plan shall be
construed to:

(a) give any person any right to be granted an Option other
than at the sole discretion of the Committee;

(b) give any person any rights whatsoever with respect to
Shares except as specifically provided in the Plan;

(d) be evidence of any agreement or understanding, express or
implied, that the Company will employ any person at any particular rate of
compensation or for any particular period of time.

13. Regulations and Other Approvals; Governing Law.

13.1 Except as to matters of federal law, the Plan and the
rights of all persons claiming hereunder shall be construed and determined in
accordance with the laws of the State of Arizona without giving effect to
conflicts of laws principles thereof.

13.2 The obligation of the Company to sell or deliver Shares
with respect to Options granted under the Plan shall be subject to all
applicable laws, rules and regulations, including all applicable federal and
state securities laws, and the obtaining of all such approvals by governmental
agencies as may be deemed necessary or appropriate by the Committee.

13.3 The Board may make such changes as may be necessary or
appropriate to comply with the rules and regulations of any government
authority, or to obtain for Eligible Individuals granted Incentive Stock Options
the tax benefits under the applicable provisions of the Code and regulations
promulgated thereunder.

13.4 Each Option is subject to the requirement that, if at any
time the Committee determines, in its discretion, that the listing, registration
or qualification of Shares issuable pursuant to the Plan is required by any
securities exchange or under any state or federal law, or the consent or
approval of any governmental regulatory body is necessary or desirable
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as a condition of, or in connection with, the grant of an Option or the issuance
of Shares, no Options shall be granted or payment made or Shares issued, in
whole or in part, unless listing, registration, qualification, consent or
approval has been effected or obtained free of any conditions as acceptable to
the Committee.

14. Miscellaneous.

14.1 Multiple Agreements. The terms of each Option may differ
from other Options granted under the Plan at the same time, or at some other
time. The Committee may also grant more than one Option to a given Eligible
Individual during the term of the Plan, either in addition to, or in
substitution for, one or more Options previously granted to that Eligible
Individual.

14.2 Withholding of Taxes.

(a) At such times as an Optionee recognizes taxable
income in connection with the receipt of Shares or cash hereunder (a "Taxable
Event"), the Optionee shall pay to the Company an amount equal to the federal,
state and local income taxes and other amounts as may be required by law to be
withheld by the Company in connection with the Taxable Event (the "Withholding
Taxes") prior to the issuance, or release from escrow, of such Shares or the
payment of such cash. In satisfaction of the obligation to pay Withholding Taxes
to the Company, the Optionee may make a written election (the "Tax Election"),
which may be accepted or rejected in the discretion of the Committee to have
withheld a portion of the Shares then issuable to him or her having an aggregate
Fair Market Value equal to the Withholding Taxes. Notwithstanding the foregoing,
the Committee may, by the adoption of rules or otherwise, impose such other
restrictions or limitations on Tax Elections as may be necessary to ensure that
the Tax Elections will be exempt transactions under Section 16(b) of the
Exchange Act.

(b) If an Optionee makes a disposition, within the
meaning of Section 424(c) of the Code and regulations promulgated thereunder, of
any Share or Shares issued to such Optionee pursuant to the exercise of an
Incentive Stock Option within the two-year period commencing on the day after
the date of the grant or within the one-year period commencing on the day after
the date of transfer of such Share or Shares to the Optionee pursuant to such
exercise the Optionee shall, within ten (10) days of such disposition, notify
the Company thereof, by delivery of written notice to the Company at its
principal executive office.

14.3 Effective Date. The effective date of the Plan shall be
MAY 8, 2008, subject only to the approval by the stockholders of the Company.
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PROXY SOLICITED ON BEHALF OF BOARD OF DIRECTORS
-----------------------------------------------

PREMIUM CIGARS INTERNATIONAL, LTD. ANNUAL MEETING TO BE HELD ON 05/08/98 FOR
HOLDERS AS OF 03/13/98 CUSIP: 740588 10 8

THE UNDERSIGNED HEREBY APPOINTS JOHN E. GREENWELL AND WILLIAM L. ANTHONY AS
PROXIES, EACH WITH THE POWER TO APPOINT HIS OR HER SUBSTITUTE, AND HEREBY
AUTHORIZES THEM TO REPRESENT AND TO VOTE, AS DESIGNATED, ALL OF THE SHARES OF
COMMON STOCK OF PREMIUM CIGARS INTERNATIONAL, LTD. HELD BY THE UNDERSIGNED ON
MARCH 13, 1998, AT THE ANNUAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY 8, 1998
AT 9:00 A.M. AT THE SCOTTSDALE PLAZA RESORT, GRAND BALLROOM "A," 7200 NORTH
SCOTTSDALE ROAD, SCOTTSDALE, ARIZONA OR ANY ADJOURNMENT THEREOF. IF NO
INSTRUCTIONS ARE INDICATED ON THE PROXY, THE PROXY WILL BE VOTED FOR THE
ELECTION OF THE NOMINEES FOR DIRECTORS NAMED HEREIN AND IN FAVOR OF ALL
PROPOSALS DESCRIBED HEREIN.

PLEASE MARK YOUR VOTES AS IN THIS EXAMPLE: [X]
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<S> <C> <C> <C> <C> <C> <C>
DIRECTORS DIRECTORS (MARK X FOR ONLY ONE BOX - IF NOT
- --------- SPECIFIED, WILL BE VOTED FOR ALL NOMINEES)

1. DIRECTORS RECOMMEND: A VOTE FOR [ ] FOR ALL NOMINEES
ELECTION OF THE FOLLOWING DIRECTORS:

01-WILLIAM L. ANTHONY, 02-JOHN E. GREENWELL [ ] WITHHOLD ALL NOMINEES
03-COLIN A. JONES, 04-GREG P. LAMBRECHT

05-STEVEN A. LAMBRECHT, 06-ROBERT H. [ ] WITHHOLD AUTHORITY TO VOTE FOR ANY
MANSCHOT, 07-ATUL VASHISTHA INDIVIDUAL NOMINEE. WRITE NUMBER(S) OF
NOMINEE(S) BELOW (USE NUMBER ONLY).

--------------------

DIRECTORS
PROPOSAL(S) RECOMMEND FOR AGAINST ABSTAIN
- ----------- --------- --- ------- -------

2. RATIFICATION OF SEMPLE & FOR [ ] [ ] [ ]
COOPER, LLP AS INDEPENDENT
AUDITORS AS DESCRIBED IN THE
PROXY STATEMENT.

3. RATIFICATION OF OPTION GRANTS FOR [ ] [ ] [ ]
TO CERTAIN OFFICERS, DIRECTORS
AND CONSULTANTS AS DESCRIBED IN
THE PROXY STATEMENT.

4. APPROVAL OF THE MANAGEMENT AND FOR [ ] [ ] [ ]
KEY EMPLOYEE INCENTIVE PLAN
AS DESCRIBED IN THE PROXY STATEMENT.

5. APPROVAL OF THE EMPLOYEE STOCK FOR [ ] [ ] [ ]
OPTION PLAN AS DESCRIBED IN THE PROXY
STATEMENT.

6. AUTHORITY TO VOTE ON ANY OTHER FOR [ ] [ ] [ ]
BUSINESS THAT MAY PROPERLY
COME BEFORE THE MEETING.

- ------------------------------------------------------------------------------ ---------------
SIGNATURE(S) DATE

NOTE: PLEASE SIGN EXACTLY AS NAME APPEARS ON YOUR STOCK CERTIFICATE. JOINT OWNERS SHOULD EACH
SIGN. WHEN SIGNING AS AN ATTORNEY, EXECUTOR, ADMINISTRATOR, TRUSTEE OR GUARDIAN, PLEASE GIVE FULL
TITLE AS SUCH.
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