UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C., 20549
FORM 10-KSB
ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
Commission file No. 0-29414
PREMIUM CIGARS INTERNATIONAL, LTD.
(Name of small business issuer in its charter)
Arizona 86-0846405
(state or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
15651 North 83rd Way, Suite 3
Scottsdale, Arizona 85260
(Address of principal office) (Zip code)
Issuer's telephone number, including area code: (602) 922-8887
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Name of each exchange on which registered:
No par value Common Stock Boston Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
No par value Common Stock
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter periods that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10- KSB or any
amendment to this Form 10-KSB. [ ]
Issuer's revenues for its most recent fiscal year were $3,362,275.
The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $2,824,425 as of March 24, 1998.
The number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date of March 31, 1998 was 3,469,092.
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Premium Cigars International, Ltd.
FORM 10-KSB
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
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TABLE OF CONTENTS
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PART I.....................................................................................4
Item 1 - Description of Business..................................................4
Item 2 - Description of Property.................................................19
Item 3 - Legal Proceedings.......................................................20
Item 4 - Submission of Matters to a Vote of Security Holders.....................20
PART II...................................................................................21
Item 5 - Market for Common Equity and Related Stockholder Matters................21
Item 6 - Management's Discussion and Analysis or Plan of Operation...............23
Item 7 - Financial Statements and Supplementary Data.............................29
Item 8 - Changes in and Disagreements with Accountants on Accounting
Financial Disclosure...........................................29
PART III..................................................................................30
Item 9 - Directors and Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a)
of the Exchange Act............................................30
Item 10 - Executive Compensation.................................................35
Item 11 - Security Ownership of Certain Beneficial Owners and Management.........42
Item 12 - Certain Relationships and Related Transactions.........................45
Item 13 - Exhibits and Reports on Form 8-K.......................................52
SIGNATURES................................................................................55
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS................................................56
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Special Note Regarding Forward-looking Statements
Some of the statements contained in this report discuss future
expectations, contain projections of results of operations or financial
condition or state other "forward-looking" information. Those statements are
subject to known and unknown risks, uncertainties and other factors that could
cause the actual results to differ materially from those contemplated by the
statements. The forward-looking information is based on various factors and was
derived using numerous assumptions. Important factors that may cause actual
results to differ from forward-looking statements and projections include, for
example:
o our ability to maintain an adequate capital position and a sufficient
cash flow as we add retail stores required by commitments with our
customers and distributors;
o our ability to raise additional capital, if current financing is
depleted, to enable us to maintain sufficient working capital for
operating activities;
o any decision by major retail chains to discontinue selling all tobacco
products or to place our humidors in a disadvantageous location within
their stores;
o changes in government regulations, tax rates and similar matters,
including any restriction on the self-service nature of merchandising
displays and marketing promotions;
o the ability of our in-house Customer Service Department to
significantly improve over the support and sales order processing
results previously managed by an out-sourced telemarketing contractor;
o our ability to establish a stable management team and attract and
retain quality employees;
o the risk of any significant uninsured loss from potential passenger
claims as a result of a September 1997 automobile accident in which one
of our employees was the driver;
o the possible negative impact of a settlement announced June 20, 1997 of
litigation among 40 States and major U.S. cigarette manufacturers;
o our ability to buy quality premium cigars at favorable prices and the
effect on cigar prices and availability, of weather and other
conditions in the countries that import cigars to the U.S. and Canada;
o our ability to negotiate and maintain favorable distribution
arrangements with our customers;
o the effect of changing economic conditions;
o a decline in the popularity of cigar smoking and/or possible adverse
public opinion against cigars and cigar smoking; and
o other risks which may be described in our future filings with the SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could
affect those statements.
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PART I
Item 1 - Description of Business
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History. PCI was incorporated in Arizona on December 16, 1996 to be a
national and international distributor of premium cigars from humidors in high
traffic retail outlets. Shortly after incorporation, PCI acquired CAN-AM
International Investments Inc. ("CAN-AM"), a Canadian corporation which owned
all cigar accounts, inventory and humidors formerly owned by Rose Hearts Inc.
("Rose Hearts") of Seattle, Washington, and J&M Wholesale, Inc. ("J&M") located
near Vancouver, British Columbia. On September 29, 1997, the Company completed
an initial public offering which raised approximately $10.4 million in capital.
We are continuing to use this capital to expand the PCI Cigar Program in high
volume retail outlets in the United States and Canada.
Operations - What We Have Learned. Our operations expanded dramatically in
1997. However, results of operations were disappointing in several aspects. See
Item 6 "Management's Discussion and Analysis of Financial Condition or Plan of
Operation" below. In our relatively short history, we have gained significant
insights on PCI operations, and we have initiated major changes to improve our
business. We believe these changes are critical to help achieve the revenue and
profit growth necessary for success. The following summarizes our key insights
into PCI, based on our experience to date, and the changes we have made (or are
making) as a result of our experience. Much of the information set forth below,
particularly all of the statements made under "Our Focus - Vision, Mission,
Strategic Goals," each "Strategic Goal," and "Key 1998 Strategies" constitutes
"forward looking" information, and should be considered in light of the "Special
Notes Regarding Forward-looking Statements" on page 3.
To be a distributor is not enough; PCI must be a marketer.
The premise on which PCI was founded - distributing premium cigars via humidors
in convenience, gas and high-volume retail outlets - is fundamentally sound, but
it needs focus.
We must focus more on the needs of the consumer and the unique needs of each
distribution channel.
We believe that PCI must differentiate itself from "distributors of premium
cigars" and become a "marketer of premium cigars." We have learned that a
complete program is critical to our long-term success; simply placing a humidor
at retail has proven not to be sufficient. We are gaining a greater
understanding of the consumer who buys cigars in our customers' retail outlets,
and are acting to improve our cigar selection and price points, differing by
geographic location. We are acting to improve our merchandising by helping our
customers present our humidor program to their consumers more effectively. We
believe that a consistent, quality message to customers and consumers, combined
with a fact-based understanding of individual store order patterns, will help
build equity behind our name, and credibility with our customers. We have
learned that a humidor in every outlet may not be justified. Some retail stores
are not appropriate for our program - the store's consumer base may not be large
enough or demographically consistent with our product offerings. We have also
identified
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opportunities to place humidified, premium cigars in high volume retail outlets
by making adjustments in the size of our humidors, and structuring sell-through
programs to meet the unique requirements of each distribution channel (e.g.,
grocery stores, drug stores, mass merchandisers, warehouse clubs).
Managing PCI's expanded operations requires different management skills and
experience.
PCI assembled a new Management team, particularly in marketing, sales, finance
and executive management.
We retained purchasing and operations management.
Founding Management realized that in order to maximize our potential, PCI needed
Management with extensive consumer products operations experience. John
Greenwell was recruited as the Chief Executive Officer, President and Chief
Operating Officer to build a Management team with the necessary skills. He
obtained the services of Brendan McGuinness as Acting Vice-President of Sales,
David Hodges as interim Chief Financial Officer, and Stan Hall as Controller. We
believe that these experienced individuals (detailed biographies are included in
Item 9 of this Report) can provide the critical leadership and skills
appropriate to these functions. Mr. Greenwell's consumer package goods marketing
background enhances his ability to provide the leadership for this critical
function. We confirmed that purchasing and operations functions were effectively
managed, and no changes were necessary.
Computer systems are critical to control and management decision-making.
Our existing systems were totally inadequate to manage our business. We have
nearly completed implementing our new computer systems.
The number of transactions associated with our dramatically increased customer
base quickly overwhelmed PCI's existing systems in the Third Quarter of 1997.
Although we made some progress in getting new systems on line, we did not
progress fast enough to handle the growing number of transactions, or provide
adequate information required to make management decisions. After January 1998,
Mr. Hodges and Mr. Hall provided the necessary leadership and skills to
accelerate system installation. Although we expect PCI's fully integrated system
to be completely installed and operating during the Second Quarter, 1998, we
have already made significant progress. Our system has helped to improve
accounts receivable management, sales forecasting, budget and expense control.
We believe that inventory management and sales tracking functions will come
on-line in the next two months. We anticipate that a fully integrated system
will aid us in better cash management, along with significant improvements in
customer service capabilities.
Improved sensitivity to our customer service function is critical.
Outsourcing customer service failed. We are bringing that function in-house.
PCI elected to outsource customer service in the United States, but retained the
customer service function in-house in Canada. Outsourcing this critical function
and failing to provide appropriate Management attention proved to be a mistake.
Order rates,
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percent of accounts reordering, and credibility with our customers were all at
very disappointing levels versus our in-house Canadian experience. Our new
Management team has addressed this problem and we intend that all customer
service functions will be in-house as of April 1, 1998. We are currently hiring
or reassigning personnel and training them to manage all customer service
matters.
Brand names must be included in our product line.
The availability of premium cigars is different now than when PCI began its
expansion.
We have made arrangements to distribute major brand names.
Only limited quantities of brand name premium cigars were available in 1997, and
PCI's size and status did not afford us access to brand name premium cigars when
we first expanded our PCI Cigar Program. As our Program grew, so did our
credibility with suppliers and the availability of brand names to us increased.
We expect that as of mid-April, 1998, PCI will be able to offer our customers
and consumers the number one selling premium cigar in the United States, and
five of the top ten selling premium cigar brands in the United States -
Macanudo(TM), H. Upmann(TM), Partagas(TM), Te-Amo(TM), Don Tomas(TM)(1) (source:
Cigar Insider, 1997 Unit Sales). We believe there is a demand for brand names,
and intend to provide our customers and consumers with the best premium cigars
at key price points. We are planning a cigar trade-out program replacing slower
moving SKU's with more appropriate cigars and price points for each store's
consumer base.
Our Transition. PCI is in a "transition" period where we are implementing the
changes described above. Management believes that by making these changes, PCI
will significantly improve its ability to generate increased revenue, and to
attain and grow profitability.
Our Focus - Vision, Mission, Strategic Goals. To provide long-term focus, our
new Management team has developed the following Vision, Mission, and Strategic
Goals for PCI. We intend to implement business plans designed to achieve each of
our seven strategic goals.
VISION.
We intend to be the international leader in marketing premium cigars to
the mass markets.
- --------------------
(1) Believed to be trademarks of third parties. We have no ownership interest in
any of the intellectual property indicated by trademark or service mark symbols
in this document.
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MISSION.
We intend to continuously improve our position in the marketing of
premium cigars by:
o Delivering superior customer satisfaction
o Understanding and meeting our consumer's needs
o Creating an environment that inspires our employees to reach
their full potential
This will allow us to prosper as a business and provide a reasonable
return to our owners...the shareholders.
STRATEGIC GOALS.
1. During the next three years, PCI intends to increase sales, increase
gross margins and improve net margins.
2. Improve/build PCI brand equity.
3. Identify and improve three key processes per year for the next three
years.
4. Establish preferred relationships with accounts representing the
large majority of our sales within three years.
5. Establish preferred relationships with suppliers representing the
large majority of our cost of goods within three years.
6. Increase organizational capacity, flexibility and responsiveness by
increasing the effectiveness of individuals and teams.
7. Establish a contingency plan that addresses three key threats each
year for the next three years.
Key 1998 Strategies. To achieve PCI's seven strategic goals, we intend to
implement the following key strategies during 1998:
During the next three years, PCI intends to increase sales each year, increase
the gross margins, and improve net margins.
Increase PCI's direct humidor placements in convenience stores.
Increase the percent of accounts reordering.
Increase average order rate.
Implement sell-through programs to alternative channels (grocery, mass
merchandisers, drug, warehouse clubs).
Reduce the overall freight percentage of net sales.
Reduce the overall packaging materials expense.
Use detailed and accurate sales forecasting to reduce overall operations payroll
expense.
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Price sell-through gift packs to improve gross margin.
Ensure Canadian subsidiary infrastructure is capable of handling growth.
Increase inventory turnover.
Establish aggressive receivables management program.
Improve/build PCI brand equity
Understand and deliver products that meet consumers' needs and wants.
Develop and implement a new PCI logo that projects a memorable, consistent image
of quality to the consumer and the customer.
Communicate the PCI Program in consumer and trade advertisements, consumer and
trade promotions, special event sponsorship, trade show participation,
editorials and web page.
Identify and improve three key processes per year for the next three years.
Establish a system platform to ensure ease of use, timeliness and accuracy of
information.
Develop appropriate interaction with our customers that establishes our category
leadership.
Process map critical operations activity to identify opportunities.
Establish preferred relationships with accounts representing the large majority
of our sales within three years.
Increase the contact frequency with key account's decision makers.
Implement single cigar UPC stickers.
Establish a PCI identity with our customers by emphasizing communication and
teamwork between the Sales and Customer Service departments.
Increase PCI response level to customer needs.
Increase the quality of category information available for our customers.
Enhance PCI's position as an industry leader.
Increase face to face contact with broker representatives.
Improve the flow of critical information.
Ship orders on-time and complete.
Establish preferred relationships with suppliers representing the large majority
of our cost of goods within three years.
Ensure shipping configurations meet supplier requirements.
Utilize computer system to improve inventory management.
Provide suppliers with appropriate lead times and timely payment.
Increase organizational capacity, flexibility and responsiveness by increasing
the effectiveness of individuals and teams.
Use cross-functional teams with empowered members.
Improve individual and team skills via training and/or seminars
Establish clearly understood policies, procedures and job descriptions.
Implement competitive compensation strategy.
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Establish a contingency plan that addresses three key threats each year for the
next three years.
Increase informational resources and build relationships in the industry.
Use proactive approach to managing investor expectations.
Use the mutual resources of the industry to address issues.
Management Changes. As a response to perceived needs for different management
skills, virtually all of PCI's Management team, except purchasing and operations
managers, has changed since completion of our initial public offering in
September, 1997. Changes include:
o John E. Greenwell was hired as PCI's President and Chief Operating Officer
on December 15, 1997; he became PCI's Chief Executive Officer on March 1,
1998.
o Colin A. Jones, Director, was terminated as Vice President of
International Sales on January 16, 1998.
o R. Allen Vaughan, hired as Vice President of Corporate Planning and
Investor Relations on October 1, 1997, left PCI on January 23, 1998.
o David E. Hodges, Director, replaced Karissa B. Nisted as Chief Financial
Officer on January 31, 1998, and became Treasurer on March 4, 1998.
o Brendan McGuinness was hired as a sales consultant on February 1, 1998 and
on March 13, 1998 began serving as Acting Vice President of Sales.
o Ms. Nisted left PCI on February 3, 1998.
o Stanley R. Hall was employed as Controller on February 7, 1998.
o Steven A. Lambrecht, Director, stepped down as President on December 15,
1997 and was terminated as Chief Executive Officer on March 1, 1998.
o Greg P. Lambrecht, Director, was terminated as Vice President of National
Sales on March 2, 1998, and as Secretary and Treasurer on March 4, 1998.
o Mr. Hodges resigned from each of his capacities as a Director and officer
on March 24, 1998. Mr. Hall assumed PCI's financial reporting
responsibilities on that date.
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Components of the PCI Cigar Program. We compete by marketing our PCI Cigar
Program as a total package of service, convenience and quality. Our cigars
represent an excellent value as high quality products at competitive prices and
in convenient locations. Our complete PCI Cigar Program includes:
o quality premium and mass-market cigars at key price points;
o imported, hand-rolled short, medium and long-leaf filler premium cigars
from the Dominican Republic, Honduras, Nicaragua, Mexico and the
Philippines;
o domestic machine-made mass market cigars;
o in-store, countertop and free-standing, custom made wood humidors;
o training materials and sales support to individual stores;
o point-of-purchase information cards and cigar magazine racks;
o customer service telephone contact for sales and store support;
o large, "walk-in" humidors for distribution center cigar inventory storage;
o spokesman relationship with Arie Luyendyk, the recent winner of the
Indianapolis 500; and
o merchandising arrangements with leading cigar publications such as
Smoke(TM) and Cigar Aficionado(TM).
Our Customers. We sell virtually all of our cigars through convenience
stores, including stores affiliated with The Southland Corporation and Southland
Canada, Inc. which do business as 7-Eleven(TM). We also sell through convenience
stores affiliated with Circle K(TM), Mobil(TM), AM/PM(TM), Petro Canada(TM),
Mac's(TM) and stores supplied by the McLane Company. We had placed our PCI Cigar
Program in over 6,000 directly-serviced stores in the U.S. and Canada as of
December 31, 1997.
Our Largest Customer. Corporate and franchise stores affiliated with
Southland USA and Southland Canada (7-Eleven) accounted for over 82% of our
sales in the period ended March 31, 1997. We have expanded our customer base,
but sales to 7-Eleven stores still
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accounted for approximately 73% of our sales for the nine-month period ended
December 31, 1997. We expect that sales to 7-Eleven stores will continue to
account for a substantial percentage of our sales.
PCI, Southland USA, or any U.S. franchisee have the right to terminate our
agreement for any reason upon 60 days notice. Southland Canada can terminate its
arrangement with us at any time without notice. Problems with 7-Eleven stores,
our major customer in Canada and the United States, would have a material,
adverse impact on our business. A substantial reduction in our 7-Eleven business
could result in diminished revenues for several quarters or more as we attempt
to replace that business.
Canadian Sales. CAN-AM, our wholly-owned subsidiary, is believed to be the
first company to market premium cigars sold via in-store humidors to a major
Canadian national convenience store chain. The first major presentation of what
is now the PCI Cigar Program was to Southland Canada (7-Eleven). An initial test
that began in June, 1996 was conducted in 45 stores in Vancouver, B.C. and 15
stores in Edmonton, Alberta, with a possibility of expansion in 60 days if the
test market was successful. After three weeks, the premium cigar program was so
successful that 7-Eleven began a national program, and the PCI Cigar Program is
currently in virtually all of 7-Eleven's Canadian stores.
CAN-AM secured a strong foothold in the convenience industry with 7-Eleven
stores, and is pursuing expansion through chains such as Petro-Canada, Mac's,
TRA, PRIDA, as well as other independent retail outlets. Through December 31,
1997, CAN-AM had secured retail outlets in the Canadian provinces of British
Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Nova Scotia, Prince Edward
Island and New Brunswick. With a warehouse near Vancouver B.C., a national
distribution system and an in-house Customer Service Department, current CAN-AM
revenue in the nine-month period ended December 31, 1997 was approximately US
$1,317,688.
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U.S. Sales. As of December 31, 1997 our United States operations distribute
to stores in 42 states and the District of Columbia as follows:
Alabama Illinois Missouri Pennsylvania
Alaska Indiana Nebraska Rhode Island
Arizona Iowa Nevada Texas
Arkansas Kansas New Hampshire Utah
California Louisiana New Jersey Virginia
Colorado Maine New Mexico Washington
Connecticut Maryland New York West Virginia
Delaware Massachusetts North Carolina Wisconsin
Florida Michigan Ohio Virginia
Georgia Minnesota Oklahoma
Idaho Mississippi Oregon
PCI U.S. revenue for the nine-month period ended December 31, 1997 was
$2,044,587. Our U.S. accounts include nationally-recognized accounts such as
7-Eleven(TM); Circle K(TM); Mobil(TM); AM/PM(TM) and stores supplied by the
McLane Company. Other than 7-Eleven, which represents approximately 62% of our
total U.S. sales, no other individual customer represents more than 17% of our
U.S. sales.
Direct and Third-Party Distribution. To effectively market and distribute
premium cigars and in-store humidors, we primarily distribute directly to
national convenience store chains, and to a smaller degree through independent
national, regional and local distributors. Direct sales accounted for
approximately 90% of our total sales and third-party distribution accounted for
10% of our total sales for the nine-month period ended December 31, 1997.
Customer Service. The ongoing success of our "full-service" PCI Cigar Program
depends, in part, upon a strong customer service department. Our goal is to be a
working partner with each of our customers, both at an individual store level,
and at the headquarters level. Our customer service representatives will use
databases to analyze store volume, price points, cigar selection, provide
counsel relative to proper humidification, maintenance, merchandising, humidor
placement and reorders.
We have been very successful in Canada with an in-house customer service
department; however, our U.S. test of out-sourcing this function was below
Management's expectations. Although it is an investment in staff, equipment,
training, systems, office space and supervision, Management believes the
investment is justified, and we will be bringing all customer service in-house
as of April 1, 1998.
Humidors. We provide, and retain ownership of, all countertop and
free-standing cigar humidors shipped to retail outlets. Our humidors provide an
attractive product display and increased counter space available for PCI's
products. A magazine rack can be attached that can be used to display and sell
cigar-related magazines such as Smoke(TM) and Cigar Aficionado(TM). The
celebrity covers used by such magazines, when displayed in the magazine rack,
provide high
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impact, point of purchase signage. Each PCI in-store humidor is a sealed case or
box that displays premium cigars in an optimal environment of humidity. Our
standard in-store humidors come in three sizes that can store and display 75,
125 or 200 cigars.
We currently have two suppliers of humidors which are based in Arizona and
Canada, and our largest supplier has been The Wildwood Collection of Tempe,
Arizona. Although we have specially designed our humidors to meet our business
needs, we believe any reputable cabinet making company could meet our production
specifications and requirements. For this reason, we do not believe we are
dependent upon a single humidor supplier.
Our Cigars. We sell name-brand and our own private-label cigars from our
humidors, typically retailing from $1 to $8. We also distribute a line of
cigar-related accessories as a service to our customers, although revenue is
very minor in relation to cigar sales. During our initial start-up phase, we
were distributing as many as 60 different cigar products from more than a dozen
different brands. We have subsequently reduced our product offerings to
approximately 35-40 cigar products to optimize our product quality and mix, to
more efficiently manage our inventory and to focus our efforts on our
best-selling and most profitable products. A smaller product line also makes it
easier for individual store personnel to become familiar with, and knowledgeably
recommend, our cigars and accessories.
Premium Cigars. Our premium cigars are generally hand-rolled and sell at
retail price points above $1.00/cigar. Through the PCI Cigar Program we
distribute primarily large premium cigars with long-filler, long/medium, and
medium/short filler tobacco and high quality, natural leaf wrappers and binders.
In order to make hand-made cigars, binder tobacco is hand-wrapped around filler
to create the "bunch" which is placed into a mold. Then, "wrapper" tobacco is
hand-wrapped around the bunch, creating a premium cigar.
Mass Market Cigars. Mass market cigars are machine-made and generally have a
retail price point of approximately $1.00/cigar or less. Mass market cigars use
less expensive tobacco than premium cigars. Manufacturers use a variety of
techniques and grades of tobacco to produce mass market cigars that sell at
PCI's low price points. Mass market cigars include large cigars (weighing more
than three pounds/1,000 cigars) and smaller, natural leaf cigars (weighing less
than three pounds/1,000 cigars).
Other Products Sold from Humidors. From time to time, we may take advantage
of opportunities to sell other products from our humidors which are compatible
with, or conducive to, cigar sales. For example, we currently have joint
merchandising agreements with leading cigar publications such as Smoke(TM) and
Cigar Aficionado(TM). These programs encourage the display of the magazines from
integrated magazine racks on some of our humidors. PCI receives advertising and
editorial support as well as the category-building power of the magazines while
the magazines enjoy the exposure and visibility of the association with our
humidors. We also have distribution arrangements with other cigar-related
accessories such as cutters, lighters and breath fresheners, such as Cigar
Gone(TM). We may elect to continue or discontinue offering these
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products in the future and revenue from non-cigar product sales is not
significant in comparison to revenue from cigar sales.
Price Point Supplies. Our PCI Cigar Program currently provides each customer
with a number of cigars at each price point established between PCI and the
specific store or distributor. This strategy allows us to substitute various
premium cigar brands in each price group, depending upon supplies available from
time to time. Our typical humidor displays premium cigars in three or five
different price point SKUs. In addition, we maintain large custom-designed
display case humidors with eight SKUs for selected customers and high-volume
retail locations.
Cigar Trade-Out Program. The relationship we have with our customers is very
important to us and we have a policy to contact each store to provide an optimum
selection of fresh, humidified premium cigars at appropriate price points for
that store's consumer base. We endeavor to work with personnel from each store
to maintain proper humidity and placement of our humidor and cigars.
Historically, we have had few returns. Nevertheless, a recent analysis of retail
outlets with substandard sales performance indicated opportunities to improve
product mix. These opportunities were primarily in the stores serviced by
out-sourced customer service, which were not receiving the attention necessary
to insure an optimal program. As a reflection of our commitment to our customers
to provide them with the optimum program, we are offering to trade out slower
moving store inventory and replace it with an improved product mix. The
estimated cost of this trade-out program is included in the cost of sales for
the nine months ended December 31, 1997. The trade-out program will be available
for each of the outlets we service.
Competition. PCI competes with a smaller number of primarily regional
distributors, including Southern Wine and Spirits, Specialty Cigars, Inc.,
Cohabico, Old Scottsdale Cigar Company, Inc. and other small tobacco
distributors and jobbers that service convenience stores.
The cigar industry is dominated by a small number of companies which are well
known to the public. To our knowledge, these cigar manufacturing and wholesale
companies, have not yet entered the retail convenience store distribution
market. These companies include 800 JR Cigar Company, Inc., Consolidated Cigar
Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar
Company, US Tobacco and others. These companies may enter the retail convenience
store distribution market in the future and may currently indirectly compete
with us, for example, through operating retail warehouse outlets or mail-order
retail distribution centers. Also, a number of large distribution companies,
such as McLane Company and Core~Mark, who are currently in the convenience
outlet distribution business, but who have not entered the cigar distribution
business, may do so in the future. These cigar manufacturing and wholesale
companies have larger resources than PCI and would, if they enter the cigar
distribution market, constitute formidable competition for our business.
However, the McLane Company is a current third-party distributor utilizing the
PCI Cigar Program.
Decreasing Dependence on Principal Suppliers. We do not directly manufacture
or import any cigars, and depend entirely on third party manufacturers,
suppliers and importers for our
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cigars. Typically, we do not have supply agreements, but submit purchase orders
for cigars. We currently purchase cigars from over 20 suppliers.
We have decreased our dependence on any one supplier since the quarter ended
June 30, 1997, for which we previously reported that two suppliers accounted for
approximately 75% of our total cigar purchases. For the nine-month period ended
December 31, 1997 our largest supplier, Latin Partners, accounted for
approximately 22% of our total U.S. cigar purchases. Our second largest
supplier, Caribbean Cigar Company, accounted for approximately 20% of our total
U.S. purchases and our purchases from Caribbean have currently decreased to less
than 15% of our U.S. supply. House of Horvath accounted for approximately 77% of
total Canadian cigar purchases for the nine months December 31, 1997, but our
dependence on House of Horvath is expected to decrease significantly in the next
few months as we shift a portion of our purchases to other suppliers to enhance
our competitive pricing position. Apart from the named suppliers, no other
supplier accounts for more than 12% of our overall U.S. cigar purchases.
We have executed supply contracts with a few minor suppliers, but with none
of our major suppliers. We are currently negotiating with manufacturers in the
Dominican Republic and elsewhere to secure multiple sources of cigars. We
believe that we could quickly replace our main suppliers with alternative
sources at comparable prices and terms and a disruption in the supply of cigars
from our principal suppliers would not have a significant adverse impact on our
operations.
Cigar Supply Generally. We primarily sell moderately-priced cigars which are
hand-rolled or machine-made from tobacco aged six months to two years. At the
present time, we believe there is an adequate supply of tobacco available in a
number of countries for these types of cigars. However, we also sell a limited
number of higher priced premium cigars which require higher quality, longer-aged
cigar tobacco. Our ability to acquire these cigars in the future may be
constrained by a shortage of premium cigars made with longer-aged cigar tobacco.
At times, producers have suspended shipping certain brands of cigars when
excessive demand results in a shortage of properly aged and blended tobacco.
Accordingly, increases in demand may adversely affect our ability to acquire
higher priced premium cigars.
We purchase cigars which are manufactured by suppliers outside the United
States. The price and availability of these cigars are subject to numerous
factors out of our control, including weather conditions, foreign government
policies, potential trade restrictions, social, political and economic
conditions and the overall demand for cigars. While we have expanded our base of
suppliers, we have no significant written agreements with suppliers, only
ongoing relationships. Loss of these relationships may make it difficult for us
to replace sources of cigars of the same quality, price and quantities. We
cannot assure that our current suppliers of cigars will be able to supply us
with sufficient quantities or at reasonable prices.
Intellectual Property Rights. PCI has obtained Arizona state trademark
registrations from the Arizona Secretary of State's office for the trademarks
PREMIUM CIGARS INTERNATIONAL
15
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and PCI. These registrations provide trademark protection only within the
borders of the State of Arizona.
PCI does not currently own any United States federal trademark registrations.
We have filed trademark applications in the United States Patent and Trademark
Office for the trademarks on some of our in-house, private label brands. We are
already using these marks in interstate commerce. In addition, we recently filed
a federal trademark application with the United States Patent and Trademark
Office to register the trademark PREMIUM CIGARS INTERNATIONAL. We have
researched and are developing other trademarks and tradenames, and intend to
file additional applications when appropriate. The Company currently owns no
patents.
Government Regulation
General. The tobacco industry in general has been subject to regulation by
federal, state and local governments, and recent trends have been toward
increased regulation. Although regulation initially focused on cigarette
manufacturers, it has begun to have a broader impact on the tobacco industry as
a whole. Regulation may focus more directly on cigars in the future because of
the recent increase in popularity of cigars. Current regulations include
labeling requirements, limitations on advertising and prohibition of sales to
minors, and laws restricting smoking from public places including offices,
office buildings, restaurants and other eating establishments. In addition,
cigars have been subject to substantial excise taxation at the federal and state
levels, as well as substantial taxation in foreign jurisdictions, such as
Canada, and those taxes may increase in the future. Recently, several states
have enacted increases in cigar tobacco taxes. Future regulations and tax
policies may have a material adverse effect upon the ability of cigar companies,
including PCI, to generate revenue and profits.
Taxes. In recent years, federal and state governments have proposed and
implemented increases in cigarette excise taxes. The "balanced budget"
legislation signed into law by President Clinton on August 5, 1997 increases
federal excise taxes on each pack of cigarettes by 10(cent) in 2000 and an
additional 5(cent) in 2002. These particular increases do not, but other future
increases may, apply to cigars. Each Canadian province in which CAN-AM is
operating has approved CAN-AM to collect provincial taxes. The tax rates vary
from province to province, but range from 45% to 95%.
Tax Filing Compliance Issues. During 1997, PCI registered with appropriate
taxing authorities and paid taxes due in Arizona, Washington and in the Canadian
provinces where PCI began doing business. However, PCI failed to register with
taxing authorities and pay taxes due on a timely basis in a number of states
where PCI began doing business as a result of its aggressive roll-out schedule.
In March 1998, the State of New York asked PCI to suspend shipments of cigars
to that state until the proper tax applications had been processed and taxes,
penalties and interest had been paid. PCI has complied with New York's request
and has now paid all taxes,
16
<PAGE>
penalties and interest due. PCI was subsequently approved to resume shipments to
New York retail accounts. Management does not consider this brief shipment
interruption to be material to its operations. Other states have not yet, but
may, in the future, request temporary suspension of shipments to their states
until PCI is in full compliance with tobacco tax and other tax requirements. The
impact of possible suspensions is not currently known, but we are currently
taking steps to comply with all tax jurisdictions in which it does business.
Severe action by one or more states could adversely impact our operations.
Health Regulations. Together with changing public attitudes toward smoking,
the trend is toward increasing health regulation of the tobacco industry.
Although a variety of bills relating to tobacco issues have been introduced in
the United States Congress, only one bill relating to a minimum age of 18 years
for the sale of tobacco products has passed to date. Future enactment of the
other bills may have an adverse effect on the sales or operations of PCI.
Litigation is still pending by Philip Morris and five other representatives of
the tobacco manufacturing and distribution industries against the U.S.
Environmental Protection Agency (the "EPA") is still pending to determine
whether the EPA has statutory authority to regulate environmental tobacco smoke.
A federal trial court recently ruled that the U.S. Food and Drug Administration
(the "FDA") has authority to regulate tobacco products under the Federal Food,
Drug and Cosmetic Act, but ultimate resolution of the litigation is still
pending. The tobacco industry is challenging proposed regulations by the federal
Occupational Safety and Health Administration (OHSA) that seeks to eliminate
nonsmoker exposure to environmental tobacco smoke in the workplace. The ultimate
effect that these regulation efforts may have on PCI's operations is uncertain.
State Regulation. In addition, the majority of states restrict or prohibit
smoking in certain public places and restrict the sale of tobacco products to
minors. Local legislative and regulatory bodies have also increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. In a few states, legislation has been
introduced, but has not passed, which would require all little cigars sold in
those states to be "fire-safe" little cigars, i.e., cigars which extinguish
themselves if not continuously smoked. Passage of similar restrictions or
regulations could adversely affect our sales or operations. Massachusetts
lawmakers have introduced several bills to require warning labels on cigars, but
none has yet passed. On June 16, 1997, Texas passed a law which prohibits
offering cigarettes or tobacco products (including cigars) in a manner that
permits a customer direct access to the products, but the law specifically does
not apply to "that part of a business that is a humidor or other enclosure
designed to store cigars in a climate-controlled environment."
Warning Labels. Although federal law has required health warnings on
cigarettes since 1965 and on smokeless tobacco since 1986, there is no federal
law requiring that cigars carry such warnings. During 1988, 26 manufacturers of
tobacco products, including the largest mass-marketers of cigars, entered into a
settlement of legal proceedings filed against them pursuant to California's
Proposition 65. Under the terms of the settlement, the defendants agreed to
label retail packages or containers of cigars, pipe tobaccos and other smoking
tobaccos other than cigarettes manufactured or imported for sale in California
with the following specified
17
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warning label: "This Product Contains/Produces Chemicals Known To The State of
California To Cause Cancer, And Birth Defects or Other Reproductive Harm."
Because it is not practical for national cigar manufacturers to confine their
warning labels to cigars earmarked for sale in California, most packaged mass
market cigars manufactured in the United States carry cancer warning labels.
Canadian Regulations. The Canadian Tobacco Act of 1997 was enacted to protect
the health of Canadians, especially young people. The new tobacco legislation
affects all persons who promote or sell tobacco products. The Act prohibits the
sale to persons under 18 years of age, restricts access to tobacco products
through self-service displays and vending machines, direct mail and regulates
advertising and promotions.
Tobacco Industry Litigation. Litigation, including class actions, is pending
against leading United States cigarette manufacturers seeking compensatory and,
in some cases, punitive damages for cancer and other health effects alleged to
have resulted from cigarette smoking. We carry general commercial liability
insurance with an aggregate limit of $10,000,000. However, we cannot assure you
that we will not be subject to liability which is not covered beyond the limits
of our general liability insurance coverage, and which may have a material
adverse effect upon our business.
Proposed Settlement with States. Several states have sued tobacco companies
seeking to recover the monetary benefits paid under Medicaid to treat residents
allegedly suffering from tobacco-related illnesses. On June 20, 1997 the
Attorneys General of 40 States and the major U.S. cigarette tobacco companies
announced a proposed settlement of the litigation, which, if approved by the
United States Congress, would require significant changes in the way U.S.
cigarette and tobacco companies do business. The final form of the settlement
and the potential impact, if any, on the cigar industry is uncertain, as the
settlement continues to be the subject of ongoing political debate. Until the
multi-state settlement is reached, the individual state actions against the
tobacco companies will continue.
FTC Regulations. The Federal Trade Commission ("FTC") recently issued an
order requiring the five largest cigar manufacturers (Swisher International
Group, Inc., Consolidated Cigar Co., General Cigar Co., Havatampa, Inc. and John
Middleton, Inc.) to report annual sales figures and advertising and marketing
expenses. Such reporting would include promotional expenses, such as
expenditures related to product placement in motion pictures. Cigarette and
smokeless tobacco manufacturers are already required to report similar
information. The FTC is also contemplating requiring cigar ads to include the
same health warning as cigarette adds. Approximately 90% of all U.S. cigars, and
primarily mass-market cigars, already carry such a warning label.
National Cancer Institute Report. The National Cancer Institute is expected
to release a report sometime this spring which focuses on the health dangers
related to cigar smoking. The American Lung Association has reported that cigar
smokers are 34% more likely to get lung cancer than nonsmokers, and have a four
to ten times higher incidence of cancer of the mouth,
18
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larynx and esophagus. In addition, secondhand cigar smoke is thought to be even
more toxic than secondhand cigarette smoke. It remains to be seen what effect,
if any, the FTC order and the National Cancer Institute report will have on the
cigar industry or on the Company's operations.
Research and Development; Environmental Compliance. We have not consistently
incurred substantial research and development costs associated with our
products. Historically, PCI has acquired cigars and accessory product lines from
its suppliers and contract manufacturers and has typically allowed the suppliers
and manufacturers to incur the costs of product research and development. PCI's
research and development expense was insignificant in 1997. Our policy is to not
warehouse or handle in our facilities any products that require Material Safety
Data Sheet ("MSDS") reporting and compliance. Currently, the costs and effects
of environmental compliance do not have a material effect on our financial
condition or operations.
Employees. As of December 31, 1997, we had 39 employees in the U.S. and
Canada, of which 37 were employed full-time. None of our employees are
represented by a labor union and we believe that employee relations are good.
Item 2 - Description of Property
- --------------------------------
We sublease, from an independent third party, approximately 8,500 square feet
for our corporate offices, warehouse, humidor storage and distribution
facilities located in the Scottsdale Airpark area of Scottsdale, Arizona. Our
sublease agreement expires on May 31, 1999. The annual rent for the first year
(June 1997 through May 1998) is approximately $83,571 and the annual rent for
the second year (June 1998 through May 1999) is approximately $85,609. We will
be moving out of this facility in late April of 1998 to a larger facility
described below. We are in the process of formalizing a verbal understanding
with our current sublessor to release us from the remainder of the sublease when
we move to our new facility.
Because we have outgrown our current facilities, we entered into a new
building lease on February 25, 1998 for approximately 20,434 square feet of
office and warehouse space at 15849 North 77th Street, Scottsdale, Arizona
85260. The new leased facilities are less than one mile from our current
facilities. We plan to move our operations to the new facilities in late April
of 1998. The new lease expires on April 30, 2003. The monthly rent for the first
three years (May 1998 through April 2001) is $18,000 and the monthly rent for
years four and five (May 2001 through April 2003) is $19,000. PCI is also
responsible for common area maintenance, taxes and certain other incidental
costs.
PCI also leases, from an independent third party, approximately 3,064 square
feet of office and warehouse space in Burnaby, British Columbia (a suburb of
Vancouver) for CAN-AM's Canadian operations. The lease expires July 14, 2000 and
the rent is approximately U.S. $1,190, $1,373 and $1,556 per month for the
first, second and third years of the lease, respectively.
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Item 3 - Legal Proceedings
- --------------------------
PCI is not a party to any pending lawsuits. PCI may become a defendant,
however, in an automobile accident injury claim in which PCI's insurer has
disputed coverage. See "Management's Discussion and Analysis or Plan of
Operation."
Item 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
None
20
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PART II
Item 5 - Market for Common Equity and Related Stockholder Matters
- -----------------------------------------------------------------
(a) Market for Common Equity.
PCI's common stock under the registered name of Premium Cigars International,
Ltd. is traded on the NASDAQ SmallCap Market(sm) "PCIG" and on the Boston Stock
Exchange "PCI."
Set forth below are the high and low closing prices for PCI's common stock as
reported on either the NASDAQ SmallCap Market(sm) or The Boston Stock Exchange
for the quarters ended September 30, 1997 and December 31, 1997:
Quarter High Low
- ------- ---- ---
September 30, 1997 $ 5.8125 $ 4.3750
December 31, 1997 $ 5.5625 $ 2.0000
As of December 31, 1997, there were approximately 30 holders of record of
PCI's common shares, not including those shares held in brokerage accounts.
PCI has never declared or paid a cash dividend on its shares. Our Board of
Directors will determine whether to pay cash dividends based upon results of
operations, cash flows, financial condition and liquidity. However, at present,
PCI intends to retain any earnings to fund the development and growth of its
business and does not anticipate paying any cash dividends in the foreseeable
future.
(b) Use of Proceeds.
PCI provides the following information in accordance with Item 701(f) of
Regulation S-B:
1. Our Registration Statement on Form SB-2 (File No. 333-29985) was
declared effective on August 21, 1997.
2. The offering commenced on August 21, 1997.
3. The offering did not terminate before any securities were sold.
4(i). On August 29, 1997, PCI closed the sale of 1,900,000 shares of its
common stock to W.B. McKee Securities, Inc., the Underwriters'
Representative
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<PAGE>
(the "main offering"). On September 24, 1997, W.B. McKee Securities,
Inc. purchased 88,592 of the 285,000 shares available for the
over-allotment option provided for in the Company's Underwriting
Agreement (the "over-allotment offering"). See "Underwriting"
section of PCI's Registration Statement on Form SB-2 and Item 5
herein. The over-allotment option on the remaining 196,408 shares of
common stock expired on September 29, 1997. Therefore, the main
offering terminated on August 29, 1997, after the sale of all of the
securities registered; the over-allotment offering terminated on
September 29, 1997, with 196,408 registered shares unsold.
4(ii). W.B. McKee Securities, Inc. served as the managing underwriter for
the offering.
4(iii). PCI registered common stock, no par value, in this Registration
Statement on Form SB-2.
4(iv). PCI registered 2,185,000 shares of common stock, no par value, in
its Registration Statement on Form SB-2, for an aggregate offering
price of $11,471,250. These figures include the full over-allotment
of 285,000 shares; however, as stated above, only 88,592
over-allotment shares were purchased by the Underwriters'
Representative. Accordingly, PCI has sold 1,988,592 shares at an
aggregate offering price of $10,440,108.
4(v). The amount of expenses incurred through December 31, 1997 in
connection with the issuance and distribution of the securities
registered was $2,309,444. This amount is made up of $1,044,011 in
underwriter's discounts and commissions, $313,203 in underwriter's
non-accountable expenses, and $952,230 in other expenses, including
consulting fees of $108,662 to David S. Hodges ($92,245 of which was
paid in 1997 and $16,417 was accrued in 1997 for amounts paid in
1998) and consulting fees of $10,000 to director William L. Anthony.
4(vi). The net offering proceeds after deducting the above expenses were
$8,130,664.
4(vii). From the effective date of PCI's Registration Statement, August 21,
1997 to December 31, 1997, the net offering proceeds were applied as
follows: $1,200,000 to repayment of debt, $478,753 to purchase
humidors, $1,572,276 to purchase inventory, $731,977 for sales and
marketing and $4,147,658 in temporary investments and other net
working capital.
4(viii). In addition, net offering proceeds were applied to the following
items, which represent a material change from the use of proceeds
described in the Prospectus dated August 21, 1997:
Raises to Certain Founders and Other Key Employees. Effective
October 1, 1997, certain founders and other key employees received
raises in the range of 17% to
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<PAGE>
40% which, in the aggregate, totalled $150,000 on an annualized
basis. The independent directors approved these raises based upon
management's recommendation that the raises be funded from cash
generated from operations. 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. See "Certain Relationships and Related Transactions
- Raises to Certain Founders and Other Key Employees."
Payout of Management Fees. On or about November 3, 1997, PCI paid
each of Colin A. Jones and Greg P. Lambrecht $80,000, for a total of
$160,000, as lump sum payments of their management fees, which
became due under their Employment Agreements as a result of PCI's
receipt of financing from its initial public offering. See "Certain
Relationships and Related Transactions -Payout of Management Fees to
Greg Lambrecht and Colin Jones."
Severance Compensation and Settlement Payments. 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) a lump sum payment of $40,000; and (b) severance compensation of
$63,000 and other benefits payable over nine months under his
individual Employment Agreement. In exchange for the lump sum
payment, each individual: (x) agreed to extend his non-compete
clause for six months, for a total of 18 months; and (y) released
PCI from all claims relating to his Employment Agreement and
employment with PCI. See "Certain Relationships and Related
Transactions - Settlement of Compensation Disputes with Founders".
On February 18, 1998, PCI and Karissa B. Nisted executed a severance
agreement confirming that PCI will pay her $40,000 in severance
compensation over six months according to the terms of her
Employment Agreement and in exchange for a limited release. The
aggregate total of these settlement and severance payments is
$353,320.
Item 6 - Management's Discussion and Analysis or Plan of Operation
- ------------------------------------------------------------------
You must read the following discussion of the results of the operations
and financial conditional of PCI in conjunction with PCI's consolidated
financial statements, including the notes included elsewhere in this 10-KSB
filing. Historical results are not necessarily an indication of trends in
operating results for any future period. The consolidated financial statements
present the accounts of PCI and its wholly-owned subsidiary, CAN-AM, as well as
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<PAGE>
the predecessor cigar sales activity of J&M and Rose Hearts. All significant
intercompany balances and transactions were eliminated in consolidation.
Results of Operation. The following table sets forth a summary of PCI's
consolidated statements of operations for the nine months ending December 31,
1997, and for the period from the date of inception, June 1, 1996 through March
31, 1997:
For the Ten Month
For the Nine Month Period From Inception
Period Ending June 1, 1996 Through
December 31, 1997 March 31, 1997
----------------- --------------
Net Sales $3,362,275 $845,571
Cost of Sales 2,798,672 643,790
--------- -------
Gross Profit $563,603 $201,781
S,G & A $2,273,725 $323,776
Stock Based
Compensation 110,000 207,625
------- ------
Loss From Operations ($1,820,122) ($329,620)
Other Income (Expense) $59,739 ($21,522)
------ -------
Net Loss ($1,760,383) ($351,142)
========== ========
Loss Per Share ($.82) ($.24)
==== ====
Weighted Average
Number of Shares
Outstanding 2,156,076 1,480,500
For The Nine Month Period Ending December 31, 1997
Sales. Sales of cigars and related items for the nine month period ending
December 31, 1997 were $3,362,275. The following table summarizes Quarterly
results. Fourth Quarter 1997 Net Sales were $1,361,779, flat versus the prior
period.
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Quarters (Unaudited Results) 9 Months
2nd Quarter 3rd Quarter 4th Quarter Ending Dec. 31, 1997
----------- ----------- ----------- --------------------
Net Sales $628,180 $1,372,316 $1,361,779 $3,362,275
Despite a 42% increase in the number of directly serviced humidor placements
at retail (Dec. 31 vs. Sept. 30), Fourth Quarter revenue results were
disappointing. Revenue per store declined because of internal problems in
insuring adequate call frequency to all of our accounts, along with Management's
lack of appropriate attention to the customer service function. Revenue per
store presented mixed results, with some stores indicating strong reorder rates
while others were very disappointing. This problem extended into the First
Quarter, 1998. The call frequency and Management attention issues have been
addressed via bringing the customer service function in-house as of April 1,
1998. Unfortunately, PCI missed many October to March sales opportunities.
Customer service training and staffing are in progress, and for April 1, 1998
changeover will be met.
In addition to bringing customer service in-house, we believe that
implementing the 1998 Strategies outlined earlier (See Item 1 under "Strategic
Goals") will enable us to return to revenue growth. Management believes that a
combination of increased humidor placements, the pursuit of sell-through
programs designed to meet the needs of grocery, mass merchandisers, drug, and
warehouse clubs, leveraged with an effective customer service department,
represent significant opportunities to increase revenues.
Gross Margins. Gross margin for the nine month period ending December 31,
1997 was 17%. The following table summarizes Quarterly results, and reflects a
Fourth Quarter gross margin of 5%. Several factors affected the margin: (1)
Fourth Quarter cost of sales was increased by a one-time charge of $110,000 for
the estimated cost of the Cigar Trade-out Program, discussed under Item I, to
ensure our customers the optimum product selection and once executed, this
investment should result in higher revenue as store SKU's better match consumer
wants; (2) a $60,000 inventory write down to provide for damaged, unsalable
product received from a vendor we no longer do business with; (3) PCI's Canadian
subsidiary, which has a lower gross margin than the U.S., represented a greater
percentage of sales in the Fourth Quarter than the prior quarter; (4) accrual of
tobacco taxes that were associated with prior quarters as discussed under Item 1
- - "Tax Filing Compliance Issues"; and (5) increased warehousing and shipping
overhead in anticipation of higher sales volume.
Quarters (Unaudited Results) 9 Months
2nd Quarter 3rd Quarter 4th Quarter Ending Dec. 31, 1997
----------- ----------- ----------- --------------------
Gross Margin 19% 26% 5% 17%
As discussed earlier in Item 1 under "Strategic Goals", PCI's new Management
has identified and is pursuing opportunities to improve gross margins. With
higher margin sell-through programs, more efficient shipping, and continuing
improvements in our Canadian subsidiary's gross margin, Management fully expects
to see margin improvement beginning in the Second Half of 1998.
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Selling, General & Administrative. The S, G & A expense for the nine month
period ending December 31, 1997 was $2,273,725. The following table summarizes
Quarterly results, and reflects an increase versus the prior period.
Quarters (Unaudited Results) 9 Months
2nd Quarter 3rd Quarter 4th Quarter Ending Dec. 31, 1997
----------- ----------- ----------- --------------------
S, G & A $309,199 $814,846 $1,149,680 $2,273,725
S, G & A costs were disproportionately high in relation to sales because an
infrastructure (people, offices, equipment, etc.) has been created that is
necessary to generate future revenue and manage operations; unfortunately,
issues discussed earlier have negatively impacted revenue growth. The Fourth
Quarter also reflects several one-time expenses necessary in order to build a
sound company. An accrual of $76,000 was established to offset anticipated
collection of doubtful accounts; $10,252 was expensed to adjust depreciation
write-off for computers in order to reflect a more reasonable useful life;
$18,640 in expenses incurred related to moving to a new facility; $41,640 in
estimated fees, penalties/interest on tobacco taxes that have not been filed
(See Item 1 under "Tax Filing Compliance Issues").
PCI anticipates taking a one-time restructuring charge during First Quarter
1998 in order to reflect additional one-time expenses (severance packages for
previous Management, relocation of our offices, and moving customer service
department functions in-house). These expenses will be reflected in S, G & A. S,
G & A should begin to decrease as a percent of sales in the Second Quarter, 1998
as revenues are anticipated to regain momentum.
Stock Based Compensation. During the Second Quarter, 1997, certain employees
purchased Common Stock at a price per share that has been determined to have
market value in excess of the amount paid by the employees. Additional
compensation was recorded in the amount of $110,000.
Other Income/(Expenses). Other Income/(Expense) for the Nine Month Period
Ending December 31, 1997 was a total of $59,739. This income was made up of
$113,131 in interest income, $44,272 in interest expense, $10,038 in foreign
currency transaction losses, and $918 in miscellaneous income.
Ten Month Period From Date of Inception (June 1, 1996) through March 31, 1997
Sales. Sales of cigar and cigar accessories for the ten month period ended
March 31, 1997 were $845,571.
Cost of Sales. Cost of Sales for the period from the date of inception, June
1, 1996 through March 31, 1997 was $643,790, with a gross profit of
approximately 24%. Gross
26
<PAGE>
profit for the ten month period ended March 31, 1997 was low due to the lack of
volume purchasing bargaining power during the initial startup phase.
Selling, General and Administrative Expenses. Selling, general and
administrative expenses for the period from the date of inception (June 1, 1996)
through March 31, 1997, were $323,776, or 38.3% of sales. These costs were
disproportionately high during the initial 10 months of operations in relation
to sales due to the addition of personnel to establish market positions with
various national chains. In addition, administrative costs increased
significantly as we prepared for our increased volume.
Stock Based Compensation. During January and March of 1997 certain employees
purchased Common Stock at a price per share that has been determined to have
market value in excess of the amount paid by the employees. Additional
compensation was recorded in the amount of the excess market value, or $207,625.
Other Income/(Expenses). Other income and expense for the period from the
date of inception, June 1, 1996 through March 31, 1997, was an expense of
$21,522. This expense is made up of $21,292 in interest, $1,193 foreign currency
transaction loss, and an offset of $963 in miscellaneous income.
Seasonality.
Our operational history and the new nature of distributing cigars to
convenience outlets does not yet permit us to identify clear seasonal trends,
but we believe that some variation in convenience store impulse cigar purchases
may be tied to outdoor weather conditions. In the northern U.S. and Canada,
sales appear to improve in the warmer months and in the southern U.S. sales
appear to improve in the cooler months. Because we distribute across the U.S.
and Canada, we anticipate that any seasonal variances in the northern and
southern regions will be offsetting and not have a material impact on our
financial condition or operations.
Liquidity and Capital Resources.
We require capital to market our PCI Cigar Program, obtain additional
inventory and humidors to supply our increasing distribution network, and
develop the personnel, facilities, assets and organization infrastructure
necessary to support our expanding business. During the period from the date of
inception, June 1, 1996, through March 31, 1997, we financed our operating and
business development activities by issuing notes payable of approximately
$180,000, and shares of common stock for approximately $212,050. These funds
were used to acquire equipment in the approximate amount of $23,000, humidors in
the approximate amount of $71,000, pay organizational and deferred offering
costs in the approximate amount of $86,000, and advance funds to affiliates to
pay their prior commitments, in the approximate amount of $86,000.
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<PAGE>
After March 31, 1997, we obtained additional bridge financing in the amount
of $1,000,000 (including conversion of existing debt of $100,000) which was used
primarily to fund additional expansion of operations. During the quarter ended
June 30, 1997, we used the net proceeds from the bridge financing of $810,000 to
accelerate the expansion of the PCI Cigar Program throughout the U.S. and to
cover costs associated with the initial public offering. Humidor purchases for
the quarter were approximately $175,000, and we purchased equipment costing
approximately $81,000. Deferred costs incurred with the initial public offering
were approximately $157,000. In addition, $343,000 was used for working capital
to fund sales growth and the related trade receivables and deposits for cigar
purchases. In addition, on July 25, 1997, we obtained a $200,000 line of credit
with a bank to assist with working capital requirements until the completion of
the initial public offering. On August 11, 1997, we received an additional
capital contribution of $150,000 from certain existing shareholders.
On September 29, 1997, the Company completed an initial public offering,
including the closing of an overallotment option, of a total of $10,440,108,
with net offering proceeds of $8,131,664. For application of initial public
offering proceeds, see Item 5(b), "Use of Proceeds."
We believe that the remaining net proceeds of the initial public offering
will be sufficient to meet our anticipated expansion and working capital needs
for the foreseeable future. However, we cannot assure you that we will be able
to maintain an adequate capital position and a sufficient cash flow as we add
retail stores required by our commitments with our customers and distributors.
Nor can we assure you that we will be able to raise additional capital, if
current financing is depleted, to enable us to maintain sufficient working
capital for operating activities. We have no plans to perform any significant
product research and development, to purchase or sell any significant plant or
equipment, to significantly change our number of employees or to obtain
additional outside capital. However, if additional funding is required, we may
raise capital through the issuance of long-term or short-term debt or the
issuance of securities in private or public transactions. We cannot assure you
that we can generate sufficient revenues to satisfy the cash flow necessary to
meet our anticipated future expansion or our working capital needs.
Known Trends, Events or Uncertainties that May Impact Our Financial Condition
or Operations.
Automobile Accident. On September 16, 1997, a PCI employee was involved in an
automobile accident in which he was the driver and four passengers were injured.
Attorneys for the first three passengers have indicated that their clients will
pursue personal injury claims against PCI, but no lawsuit has been filed. A
fourth passenger has made a demand against the employee-driver and his insurer
only. PCI tendered defense of the claims to, and requested indemnification from,
our commercial general liability carrier, but the carrier has initially declined
coverage on grounds that the endorsement covering Hired and Non-Owned Auto
Liability was not yet effective.
28
<PAGE>
PCI has disputed the carrier's denial of coverage and we have asserted that PCI
obtained an oral binder of such coverage prior to the accident. PCI believes
that it has a strong basis for coverage and intends to vigorously pursue its
defenses and indemnification should an action be filed. None of the passengers
have indicated what damages they will seek against PCI. At this stage of the
claims, we cannot predict the likelihood of an unfavorable outcome or whether
the claims will have a material impact on PCI's financial condition.
Year 2000 Issues. In 1997, PCI purchased and installed an integrated software
system for financial management and accounting, upon which PCI relies heavily
and which PCI purchased, in part, upon the representation that the software was
designed to correctly process date information as the year 2000 approached and
is reached (commonly known as the "year 2000 problem"). PCI largely uses newer
computers and software which was sold as "year 2000 compliant." PCI continues to
rely, to a lesser degree, on other programs in its operations, however, which
were originally designed to recognize calendar years by their last two digits.
PCI is in the process of initiating a review of its business systems, including
its computer systems, to identify and address any problems that any of its
systems may experience as the year 2000 approaches. PCI does not expect that the
incremental costs of its review or correction of any year 2000 problem will have
a material, adverse effect on PCI's financial condition, operations or financial
statements.
Item 7 - Financial Statements
- -----------------------------
PCI's audited financial statements for the nine-month period ended December
31, 1997 are set forth commencing on page F-1, following the Index to Financial
Statements on Page 56.
Item 8 - Changes in and Disagreements with Accountants on Accounting and
- ------------------------------------------------------------------------
Financial Disclosure
- --------------------
None
29
<PAGE>
PART III
Item 9 - Directors, Executive Officers, Promoters and Control Persons;
- ----------------------------------------------------------------------
Compliance with Section 16(a) of the Exchange Act
- -------------------------------------------------
Directors and Executive Officers
Name Age Position
- ---- --- --------
John E. Greenwell.......50 Director, Chief Executive Officer, President, Chief
Operating Officer
Scott I. Lambrecht......26 Vice President of Operations and Secretary
James B. Stanley........34 Vice President of Purchasing and Assistant Secretary
William L. Anthony......54 Chairman and Independent Director
Colin A. Jones..........31 Director
Greg P. Lambrecht.......35 Director
Steven A. Lambrecht.....46 Director
Robert H. Manchot.......54 Independent Director
Atul Vashistha..........32 Independent Director
John E. Greenwell has been a director and the Company's Chief Executive
Officer since March 1, 1998 and the Company'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.
Scott I. Lambrecht has been the Vice President of Operations since August 7,
1997 and PCI's Secretary since March 4, 1998. He previously served as PCI's
Assistant Secretary from May 31, 1997 to March 4, 1998. He served as a director
from December 31, 1996 to February 17, 1997 and as PCI's interim President from
December 31, 1996 to May 3, 1997. From July 1993 through December 1996 he served
as President of SDCC. Inc., a Scottsdale, Arizona general contracting firm owned
by Steve Lambrecht. He received a
30
<PAGE>
Bachelors degree in Construction Management in 1993 from Arizona State
University in Tempe, Arizona. Scott Lambrecht is the son of Steven A. Lambrecht
and the nephew of Greg P. Lambrecht.
James B. Stanley has been Vice President of Purchasing since June 20, 1997
and PCI's Assistant Secretary since March 4, 1998. From November 1996 to June
1997, he served as Purchasing Director for PCI. From May 1996 to October 1996 he
served as an Account Executive for Computer Credit Insurance Corp. of Brea,
California in the real estate loan and mortgage insurance market. From November
1995 to May 1996 he was an Account Executive for Senior Estate Services, a
Bellevue, Washington estate planning and investment firm. From June 1994 to
November 1995 he was Operations Manager for Promark Armrest, Inc. of Everett,
Washington, a product development firm. He has owned and developed two
successful restaurants in the Seattle area over the previous six years. Mr.
Stanley received a B.A. in Business Administration from Washington State
University in 1985.
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.
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
31
<PAGE>
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.
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.
Other Executives and Key Employees
Brendan M. McGuinness has been a sales consultant to the Company since
February 1, 1998 and the Acting Vice President of Sales since March 3, 1998. Mr.
McGuinness
32
<PAGE>
previously was employed by The Dial Corporation from 1973 to 1997, culminating
with his position as the Vice President of Sales- Personal Care Division. Prior
to that position he was Vice President and General Manager of Dial's Commercial
Markets Division, which markets and distributes products serving the Lodging,
Industrial, and Medical classes of trade. He has held additional sales
management positions at The Dial Corporation, including Vice President of
National Field Sales, with responsibility for the direction of 250 consumer
products sales professionals generating annual sales exceeding $1 billion
dollars. Mr. McGuinness received a B.S. in Business from Bryant College in 1970.
He is a board member of the Arizona Chapter of the Juvenile Diabetes Foundation.
Stanley R. Hall has been the Controller since February 7, 1998. From April,
1997 to February, 1998, Mr. Hall served as Chief Financial Officer and
Controller for Pro-Innovative Concepts, Inc., a Phoenix, Arizona premium
promotion company. From January, 1995 to March, 1997 he served in various
financial management and accounting capacities in The Dial Corp's Household
Consumer Products Division and Corporate Controller's department. From 1983 to
1994, he served as Chief Financial Officer and Controller for Hyder Jojoba,
Inc., a Phoenix-based grower and marketer of jojoba seeds and oil. From 1981 to
1982, he served as Controller for The Thirteenth Regional Corporation, an
Alaskan Native Corporation based in Seattle, WA. From 1977 to 1981, he was a
Senior Accountant for Deloitte Haskins & Sells, a "Big Six" public accounting
firm. Mr. Hall received a B.B.A. in accounting from the University of Washington
in 1977. He is licensed as a Certified Public Accountant in the State of
Washington and is a member of the American Institute of Certified Public
Accountants and the Arizona Society of Certified Public Accountants.
R. Allen Vaughan was PCI's Vice President of Corporate Planning and Investor
Relations from October 1, 1997 to January 23, 1998 when he left to pursue other
opportunities. Karissa B. Nisted was PCI's Chief Financial Officer from June 20,
1997 to February 3, 1998, when she left PCI. David S. Hodges resigned as a
director, Chief Financial Officer and Treasurer on March 24, 1998 to pursue
other opportunities.
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.
33
<PAGE>
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.
34
<PAGE>
Item 10 - 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" below.
(3) Includes the payment of a one-time "Management Fee" under Greg
Lambrecht's and Colin Jones' Employment Agreements. See "Employment
Agreements" below.
(4) Includes reimbursement of $3,000 each to Colin A. Jones and Greg P.
Lambrecht for attorneys' fees related to the negotiation of various
personal agreements or agreements of J&M or Rose Hearts with PCI.
35
<PAGE>
Option/SAR Grants in Last Fiscal Year
Individual Grants
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
Number of % of Total
Securities Options / SARs Exercise
Underlying Granted to or Base
Options / SARs Employees in Price
Name Granted (#) Fiscal Year ($/Sh) Expiration Date
---- ----------- ----------- ------ ---------------
<S> <C> <C> <C> <C>
Steve Lambrecht 20,000(1) 100% $5.25 11/19/2002 (10,000)
/ CEO 03/01/2003 (10,000)
Greg Lambrecht -- -- -- --
/ VP Sales
Colin Jones / VP -- -- -- --
Int. Sales
</TABLE>
(1) Options granted pursuant to an "Amendment to Employment Agreement"
dated November 19, 1997. Options to purchase 10,000 shares vested
immediately upon the date that Lambrecht ceased to be President, or
November 19, 1997. Options to purchase an additional 10,000 shares
vested on March 1, 1998 after the Board of Directors made a
determination that Mr. Lambrecht had cooperated in a management
transition to the next Chief Executive Officer.
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR Values
(a) (b) (c) (d) (e)
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End (#) at FY-End ($)
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 $2.5625
per share.
36
<PAGE>
Director Compensation Table
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e) (f)
Number of
Securities
Annual Consulting Underlying
Name Retainer Meeting Fees/Other Number of Options/SAR
- ---- Fees ($) 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"
below.
(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" below. 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 receiving continued
compensation and benefits based on certain conduct or breaches of the Employment
Agreement.
37
<PAGE>
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 the
Company'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 the Company'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
38
<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 the Company'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.
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.
39
<PAGE>
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 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 the Company 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 the Company. The Company 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.
40
<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. The
Company 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 and $750 per meeting for meetings over four (4) hours.
41
<PAGE>
Item 11 - Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The following tables set forth certain information regarding shares of common
stock beneficially owned as of March 31, 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:
42
<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 363,708(1) 10.48%
6980 East Sahuaro Drive
Apt. 1129
Scottsdale, AZ 85254
Common Steven A. Lambrecht 256,584(1) 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.
43
<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 363,708(1) 10.48%
6980 East Sahuaro Drive
Apt. 1129
Scottsdale, AZ 85254
Common Steven A. Lambrecht 256,584(1) 7.40%
12072 North 118th Street
Scottsdale, AZ 85259
Common Scott I. Lambrecht 86,250(1) 2.49%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common James B. Stanley 26,250 (3)
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common David S. Hodges 21,048(2) (3)
5043 E. Desert Jewel
Paradise Valley, AZ 85253
Common William L. Anthony 20,048(2) (3)
7254 East Whitethorn
Scottsdale, AZ 85262
- ---------------------------------------------------------------------------------------------------------
Common All Officers and Directors 1,145,245(1)(2) 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) 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
44
<PAGE>
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.
(3) Less than 1%.
Item 12 - 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.
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
45
<PAGE>
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 (as defined below "3:1 Stock
Split"), and including shares issued on December 31, 1996 and January 9, 1997,
CAN-AM's five shareholders received 817,500 shares of PCI Common Stock,
representing all of the then-issued and outstanding shares of Common Stock of
PCI. Mr. Jones received 371,250 or 45.4% and Greg Lambrecht received 363,750 or
44.5%. At the time PCI acquired CAN-AM's shares, neither Greg P. Lambrecht nor
Colin A. Jones had any formal relationship as an incorporator, officer, director
or shareholder of PCI. PCI was formed with a view to purchasing the cigar
operations of the entities they owned and controlled, however, and both Greg P.
Lambrecht and Colin A. Jones were affiliated with PCI as promoters at the time
PCI acquired CAN-AM's shares. 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 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
46
<PAGE>
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, the Company notified Rose Hearts, Inc. that its
Distributorship Agreement with PCI would terminate on March 28, 1998.
See "Termination of Rose Hearts Distributorship Agreement."
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
47
<PAGE>
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.
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
48
<PAGE>
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 the
Company's initial public offering. Greg P. Lambrecht and Colin A. Jones, PCI
directors and officers at the time, personally 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.
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<PAGE>
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:
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
50
<PAGE>
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
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
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<PAGE>
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 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.
Item 13 - Exhibits and Reports on Form 8-K
- ------------------------------------------
(a) Exhibits
Exhibit Exhibit Name Method of Filing
- ------- ------------ ----------------
Number
- ------
3.1 Articles of Incorporation **
3.2 By-Laws, as amended ***
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4.1 Specimen Common Stock Certificate ****
4.2 Description of Rights of Security Holders *****
10.1 Working Agreement, dated November 12, Exhibit filed herewith*
1997, between CAN-AM and TRA Maritimes
10.2 Amendment to Employment Agreement, dated Exhibit filed herewith
November 19, 1997, between PCI and
Steven A. Lambrecht
10.3 Retail Agreement, dated December 4, 1997, Exhibit filed herewith*
between PCI and Mobil Oil
Corporation
10.4 Employment Agreement, dated December 15, Exhibit filed herewith
1997, between PCI and John E.
Greenwell
10.5 Letter agreement, dated February 18, 1998, Exhibit filed herewith
between PCI and Karissa B. Nisted
10.6 Industrial Real Estate Lease, dated February Exhibit filed herewith
25, 1998, between PCI and Palo
Cristi Airpark III, L.L.C.
10.7 First Amendment to Industrial Real Estate Exhibit filed herewith
Lease, dated February 26, 1998, between the
Company and Palo Cristi Airpark III, L.L.C.
10.8 Agreement, dated March 3, 1998, between the Exhibit filed herewith
Company and Colin A. Jones
10.9 Agreement, dated March 3, 1998, between the Exhibit filed herewith
Company and Greg P. Lambrecht
10.10 Agreement, dated March 3, 1998, between the Exhibit filed herewith
Company and Steven A. Lambrecht
27.1 Financial Data Schedule Exhibit filed herewith
99.1 "Underwriting" section of Registration ******
Statement on Form SB-2
* Portions of the exhibit omitted and filed separately with the
Commission pursuant to the Confidential Treatment provisions of Regulation ss.
230.406.
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<PAGE>
** Incorporated by reference to Exhibit 3.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
*** Incorporated by reference to Exhibit 3.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
**** Incorporated by reference to Exhibit 4.2 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
***** Incorporated by reference to Exhibit 4.1 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
****** Incorporated by reference to pages 56-57 of Registration Statement on
Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.
(b) Reports on Form 8-K
Date of Date
Report Filed Description
------ ----- -----------
10/23/97 11/05/97 Reporting change in fiscal year end from March
31 to December 31.
11/19/97 03/6/98 Subsequent to the December 31, 1997 fiscal
year end, reporting Management and Director
changes and settlement of dispute with
departing officers.
54
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
PREMIUM CIGARS INTERNATIONAL, LTD.
By: /s/ John E. Greenwell
------------------------------
John E. Greenwell, President, Chief Executive
Officer and Chief Operating Officer
Date: March 31, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
By: /s/ William L. Anthony Chairman of the Board of Directors 03/31/98
------------------------------
William L. Anthony
By: /s/ John E. Greenwell Director, President, Chief Executive 03/31/98
------------------------------ Officer and Chief Operating Officer
John E. Greenwell
By: /s/ Stanley R. Hall Controller and principal accounting 03/31/98
------------------------------ officer
Stanley R. Hall
By: /s/ Colin A. Jones Director 03/31/98
------------------------------
Colin A. Jones
By: /s/ Greg P. Lambrecht Director 03/31/98
------------------------------
Greg P. Lambrecht
By: /s/ Steven A. Lambrecht Director 03/31/98
------------------------------
Steven A. Lambrecht
By: /s/ Robert H. Manschot Director 03/31/98
------------------------------
Robert H. Manschot
By: /s/ Atul Vashistha Director 03/31/98
------------------------------
Atul Vashistha
</TABLE>
55
<PAGE>
<TABLE>
<S> <C> <C>
By: /s/ Scott I. Lambrecht Vice President of Operations and 03/31/98
------------------------------ Secretary
Scott I. Lambrecht
By: /s/ James B. Stanley Vice President of Purchasing and 03/31/98
------------------------------ Assistant Secretary
James B. Stanley
</TABLE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
INDEPENDENT AUDITORS' REPORT.................................................F-1
CONSOLIDATED BALANCE SHEET AS OF DECEMBER 31, 1997...........................F-2
CONSOLIDATED STATEMENT OF OPERATIONS FOR THE NINE
MONTH PERIOD ENDED DECEMBER 31, 1997 AND FOR THE PERIOD
FROM THE DATE OF INCEPTION, JUNE 1, 1996 UNTIL
MARCH 31, 1997............................................................F-3
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE NINE MONTH PERIOD ENDED DECEMBER 31, 1997
AND FOR THE PERIOD FROM THE DATE OF INCEPTION,
JUNE 1, 1996 UNTIL MARCH 31, 1997.........................................F-4
CONSOLIDATED STATEMENT OF CASH FLOWS FOR THE NINE
MONTH PERIOD ENDED DECEMBER 31, 1997 AND FOR THE
PERIOD FROM THE DATE OF INCEPTION, JUNE 1, 1996
UNTIL MARCH 31, 1997......................................................F-5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS...................................F-7
56
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For The Nine Months Ended
December 31, 1997 and For The
Period From The Date of Inception,
June 1, 1996 Through March 31, 1997
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
To The Board of Directors of
Premium Cigars International, Ltd.
We have audited the accompanying consolidated balance sheet of Premium Cigars
International, Ltd. and Subsidiary as of December 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and cash
flows for the nine months ended December 31, 1997, and for the period from the
date of inception, June 1, 1996 through March 31, 1997. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premium Cigars
International, Ltd. and Subsidiary as of December 31, 1997, and the results of
its operations, changes in stockholders' equity, and its cash flows for the nine
months ended December 31, 1997, and for the period from the date of inception,
June 1, 1996 through March 31, 1997, in conformity with generally accepted
accounting principles.
Semple & Cooper, LLP
Phoenix, Arizona
March 5, 1998
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
December 31, 1997
ASSETS
Current Assets:
Cash and cash equivalents (Notes 1 and 2) $ 1,264,365
Available for sale securities (Notes 1 and 3) 3,470,471
Accounts receivable - trade, net (Note 1) 637,478
Inventory, net (Notes 1 and 6) 1,322,258
Other current assets 68,876
-----------
Total Current Assets 6,763,448
-----------
Property and Equipment, net (Notes 1 and 7) 195,201
-----------
Other Assets:
Humidors, net (Note 1) 761,135
Notes receivable - related parties (Note 4) 93,123
Organizational costs, net (Note 1) 34,700
Deposits 3,286
-----------
892,244
-----------
Total Assets $ 7,850,893
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable - trade 469,989
Accrued expenses
- tobacco taxes 408,129
- other (Note 9) 273,880
-----------
Total Current Liabilities 1,151,998
-----------
Commitments and Contingencies: (Notes 4 and 11) --
-----------
Stockholders' Equity: (Note 12)
Common stock - no par value, 10,000,000 shares authorized,
3,469,092 shares issued and outstanding 8,655,339
Additional paid-in capital 150,000
Common stock warrants 1,710
Foreign currency translation adjustment (Note 15) 3,371
Accumulated deficit (2,111,525)
-----------
Total Stockholders' Equity 6,698,895
-----------
Total Liabilities and Stockholders' Equity $ 7,850,893
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Nine Months Ended December 31, 1997 and
For The Period From The Date of Inception, June 1, 1996
Through March 31, 1997
Nine Months Inception
Ended Through
December 31, March 31,
1997 1997
---- ----
Net Sales $ 3,362,275 $ 845,571
Cost of Sales (Note 9) 2,798,672 643,790
----------- -----------
Gross Profit 563,603 201,781
Selling, General and Administrative 2,273,725 323,776
Stock Based Compensation (Note 12) 110,000 207,625
----------- -----------
Loss from Operations (1,820,122) (329,620)
----------- -----------
Other Income (Expense):
Interest income 113,131 --
Interest expense (44,272) (21,292)
Other 918 963
Foreign currency transaction gain (loss) (10,038) (1,193)
----------- -----------
59,739 (21,522)
----------- -----------
Net Loss $(1,760,383) $ (351,142)
=========== ===========
Loss per Share (Note 1) $ (.82) $ (.24)
=========== ===========
Weighted Average Number of Shares Outstanding 2,156,076 1,480,500
=========== ===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Nine Months Ended December 31, 1997 and
For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997
<TABLE>
<CAPTION>
Common Stock Additional
-------------------------- Paid-in Common Stock
Shares Amount Capital Warrants
------ ------ ------- --------
<S> <C> <C> <C> <C>
Balance, June 1, 1996 -- $ -- $ -- $ --
Shares issued for cash 1,433,400 212,050 -- --
Shares issued for services 47,100 207,625 -- --
Net loss for the period
from the date of
inception, June 1, 1996
through March 31, 1997 -- -- -- --
----------- ----------- ----------- -----------
Balance, March 31, 1997 1,480,500 419,675 -- --
Purchase of treasury stock (15,000) -- -- --
Treasury shares issued for
services 15,000 32,500 -- --
Additional compensation
recorded on private
transactions -- 72,500 -- --
Additional capital
contribution -- -- 150,000 --
Shares issued in initial
public offering, net of
offering costs of
$2,309,444 1,988,592 8,130,664 -- --
Proceeds from issuance
of warrants -- -- -- 1,710
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars -- -- -- --
Net loss for the nine months
ended December 31, 1997 -- -- -- --
----------- ----------- ----------- -----------
Balance at December 31,
1997 3,469,092 $ 8,655,339 $ 150,000 $ 1,710
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (CONTINUED)
For The Nine Months Ended December 31, 1997 and
For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997
<TABLE>
<CAPTION>
Foreign
Currency Total
Treasury Translation Accumulated Stockholders'
Stock Adjustment Deficit Equity
----- ---------- ------- ------
<S> <C> <C> <C> <C>
Balance, June 1, 1996 $ -- $ -- $ -- $ --
Shares issued for cash -- -- -- 212,050
Shares issued for services -- -- -- 207,625
Net loss for the period
from the date of
inception, June 1, 1996
through March 31, 1997 -- -- (351,142) (351,142)
----------- ----------- ----------- -----------
Balance, March 31, 1997 -- -- (351,142) 68,533
Purchase of treasury stock (5,000) -- -- (5,000)
Treasury shares issued for
services 5,000 -- -- 37,500
Additional compensation
recorded on private
transactions -- -- -- 72,500
Additional capital
contribution -- -- -- 150,000
Shares issued in initial
public offering, net of
offering costs of
$2,309,444 -- -- -- 8,130,664
Proceeds from issuance
of warrants -- -- -- 1,710
Aggregate adjustment
resulting from translation
of financial statements
into U.S. dollars -- 3,371 -- 3,371
Net loss for the nine months
ended December 31, 1997 -- -- (1,760,383) (1,760,383)
----------- ----------- ----------- -----------
Balance at December 31,
1997 $ -- $ 3,371 $(2,111,525) $ 6,698,895
=========== =========== =========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Nine Months Ended December 31, 1997 and
For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997
<TABLE>
<CAPTION>
Nine Months Inception
Ended Through
December 31, March 31,
1997 1997
---- ----
<S> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 2,560,015 $ 782,234
Cash paid to suppliers and employees (5,014,455) (827,701)
Interest paid (44,272) (21,292)
Interest received 47,659 --
----------- -----------
Net cash used for operating activities (2,451,053) (66,759)
----------- -----------
Cash flows from investing activities:
Purchase of investments (3,411,897) --
Purchase of property and equipment (201,829) (23,302)
Purchase of humidors (865,340) (71,451)
Disbursements for notes receivable - related parties -- (86,225)
Organizational costs (8,151) (32,386)
Deferred offering costs -- (53,550)
----------- -----------
Net cash used by investing activities (4,487,217) (266,914)
----------- -----------
Cash flows from financing activities:
Proceeds from notes payable 850,000 50,000
Payments on notes payable (900,000) --
Proceeds from notes payable - related parties 150,000 129,641
Payments on notes payable - related parties (279,641) --
Proceeds from issuance of common stock 8,179,214 212,050
Proceeds from issuance of common stock warrants 1,710 --
Contributed capital 150,000 --
----------- -----------
Net cash provided by financing activities 8,151,283 391,691
----------- -----------
Effect of exchange rate changes on cash and cash
equivalents (6,666) --
----------- -----------
Net increase in cash and cash equivalents 1,206,347 58,018
Cash and cash equivalents at beginning of period 58,018 --
----------- -----------
Cash and cash equivalents at end of period $ 1,264,365 $ 58,018
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Fi
nancial Statements
F-6
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For The Nine Months Ended December 31, 1997 and
For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997
<TABLE>
<CAPTION>
Nine Months Inception
Ended Through
December 31, March 31,
1997 1997
---- ----
<S> <C> <C>
Reconciliation of Net Loss to Net Cash Used for
Operating Activities:
Net Loss $(1,760,383) $ (351,142)
----------- -----------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 200,210 11,212
Accrued interest added to principal of notes
receivable - related parties (6,898) --
Stock issued for services 110,000 207,625
Accrued interest added to available for sale securities (58,574) --
Effect of changes in foreign currency 10,038 --
Changes in Assets and Liabilities:
Accounts receivable
- trade (573,178) (64,300)
- related parties 8,497 (8,497)
Inventory (1,195,921) (126,337)
Other current assets (53,269) (15,607)
Deposits (3,286) --
Accounts payable - trade 360,735 109,254
Accrued expenses
- tobacco taxes 307,796 100,333
- other 203,180 70,700
----------- -----------
(690,670) 284,383
----------- -----------
Net cash used for operating activities $(2,451,053) $ (66,759)
=========== ===========
</TABLE>
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-7
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates:
Nature of Operations:
Premium Cigars International, Ltd. (the "Company") is a Corporation
organized under the laws of the State of Arizona on December 16, 1996.
CAN-AM International Investments Corp. (CAN-AM), a British Columbia
Canadian corporation, was incorporated on June 20, 1996. The Company
acquired all of the outstanding stock of CAN-AM on December 31, 1996.
The business purpose of the Company is the distribution of premium
cigars using countertop humidors in convenience stores, grocery stores
and other retail outlet markets. The Company conducts business
throughout the United States. The Company's wholly-owned subsidiary,
CAN-AM, operates throughout greater Canada.
Change in Year End:
The Company elected to change its year end to December 31, effective
with the period ended December 31, 1997. The Company previously used a
March 31 fiscal year end. As a result of the change, the period ended
December 31, 1997 represents a nine month period.
Significant Transactions:
Prior to January 1, 1997, CAN-AM acquired all existing cigar accounts,
cigar related inventory, humidors, other assets and the related trade
accounts payable and tobacco tax liabilities from J&M Wholesale, Ltd.
and Rose Hearts, Inc. These corporations were owned by certain members
of the founding group of Premium Cigars International, Ltd. As all
acquisitions and account purchases were consummated within a controlled
group, the cigar operations of J&M Wholesale, Ltd. and Rose Hearts,
Inc. are included in the accompanying financial statements from the
date of commencement of cigar sales, June 1, 1996.
Principles of Consolidation:
The consolidated financial statements include the activity of Premium
Cigars International, Ltd., together with its wholly-owned subsidiary,
CAN-AM, and its predecessors cigar related activity of J&M Wholesale,
Ltd. and Rose Hearts, Inc. The activity of CAN-AM and its predecessors
is included in the consolidated financial statements from the date of
commencement of cigar operations, June 1, 1996. All significant
intercompany accounts and transactions have been eliminated.
Pervasiveness of Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets, and
liabilities and disclosure of contingent assets and liabilities, at the
date of the financial statements, and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Significant estimates are used when accounting for allowance for
doubtful accounts, inventory reserves, depreciation and amortization,
accruals, taxes, contingencies and sales returns, which are discussed
in the respective notes to the consolidated financial statements.
Cash and Cash Equivalents:
Cash equivalents are considered to be all highly liquid investments
purchased with a maturity of three (3) months or less.
F-8
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates: (Continued)
Investments:
The Company has classified its investment portfolio as
available-for-sale in accordance with the provisions of SFAS No. 115,
"Accounting for Certain Investments in Debt and Equity Securities".
Available-for-sale securities are stated at fair value with unrealized
gains and losses included in stockholders' equity. The amortized cost
of debt securities is adjusted for amortization of premiums and
accretion of discounts to maturity. Such amortization is included in
interest income. Realized gains and losses are included in other income
(expense). The cost of securities sold is based on the specific
identification method.
Accounts Receivable - Trade:
Accounts receivable - trade represents amounts earned but not collected
in connection with the sale of cigars and cigar accessories.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense
as a percentage of accounts receivable based on prior collection
history and a review of individual accounts outstanding. At December
31, 1997, an allowance has been provided for potentially uncollectible
accounts receivable in the amount of $74,198.
Inventory:
Inventory quantities and valuation were determined based upon a
physical count, and pricing of same at December 31, 1997. Inventory is
stated at the lower of cost, first-in, first-out method, or market.
Inventory quantities are periodically reviewed by management for
spoilage and an allowance is established to provide for same.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is provided
for on the straight-line method, over the following estimated useful
lives.
Computer equipment 3 years
Equipment 5-7 years
Furniture and fixtures 5-7 years
Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred. For
the nine months ended December 31, 1997, and for the period from the
date of inception, June 1, 1996 through March 31, 1997, depreciation
expense was $30,096 and $247, respectively.
Humidors:
Humidors are used to display cigars available for sale at retail
outlets. The humidors are being amortized ratably over a two (2) year
period. For the nine months ended December 31, 1997, and for the period
from the date of inception, June 1, 1996 through March 31, 1997,
amortization expense was $164,691 and $10,965, respectively.
Advertising Costs:
Advertising costs are charged to operations when incurred. For the nine
months ended December 31, 1997 and for the period from the date of
inception, June 1, 1996 through March 31, 1997, advertising expense was
$113,596 and $9,264, respectively.
Organization Costs:
Organization costs consist of costs incurred in relation to the
formation of the Corporation and its wholly-owned subsidiary. These
costs are being amortized ratably over five (5) years.
F-9
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates: (Continued)
Income Taxes:
Deferred income taxes are provided on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards. Deferred tax liabilities
are recognized for taxable temporary differences. Deferred tax assets
are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted for the effects of changes in tax laws and
rates on the date of enactment.
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange prevailing at
the balance sheet date;
Revenue and expenses at average exchange rates for the period
in which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of the
Corporation's foreign operations are deferred and included as
a separate component of stockholders' equity.
Stock-Based Compensation:
The Company has elected to follow Accounting Principles Board Opinion
No. 25, Accounting for Stock Issued to Employees (APB 25) and related
interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of employee stock options equals the
market price of the underlying stock on the date of grant, no
compensation expense is recorded. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation (Statement
123).
Loss Per Share:
During the period ended March 31, 1997, the Company's Board of
Directors approved an Initial Public Offering of its common stock which
was completed on August 29, 1997. The Initial Public Offering price to
the public was $5.25 per share. Pursuant to the Securities and Exchange
Commission rules, common stock issued for consideration below the $5.25
per share Initial Public Offering price during the twelve (12) months
prior to filing the Registration Statement, have been included in the
weighted average number of shares outstanding from the beginning of the
period. Diluted earnings per share are not presented, as their effect
is anti-dilutive.
F-10
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and
Use of Estimates: (Continued)
New Accounting Pronouncements:
During the nine months ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 128, "Earnings per
Share" (SFAS No. 128). This pronouncement provides a different method
of calculating earnings per share than was required by APB 15, Earnings
per Share. SFAS No. 128 provides for the calculation of Basic and
Diluted earnings per share. Basic earnings per share include no
dilution and is computed by dividing income available to common
stockholders by the weighted average number of common shares
outstanding for the period. Diluted earnings per share reflects the
potential dilution of securities that could share in the earnings of an
entity similar to fully diluted earnings per share. Due to net losses
for the nine months ended December 31, 1997 and the period from the
date of inception, June 1, 1996 through December 31, 1997, this
statement has no effect on its reported loss per share.
During the nine months ended December 31, 1997, the Company adopted
Statement of Financial Accounting Standards No. 129, "Disclosure of
Information about Capital Structure" (SFAS No. 129). The new standard
reinstates various securities disclosure requirements previously in
effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The adoption of SFAS No. 129 did not have a
material effect on the Company's financial position or results of
operations.
Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) is effective for financial
statements with fiscal years beginning after December 15, 1997. Earlier
application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a
full set of general-purpose financial statements. The Company does not
expect adoption of SFAS No. 130 to have a material effect, if any, on
its financial position or results of operations.
2. Concentration of Credit Risk:
The Company maintains cash balances at various financial institutions.
Deposits not to exceed $100,000 at the financial institution are
insured by the Federal Deposit Insurance Corporation. As of December
31, 1997, the Company had approximately $1,183,013 of uninsured cash.
3. Investment Securities:
The amortized cost and fair value (based on quoted market prices) of
debt securities at December 31, 1997 are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties. The following securities mature contractually in
February, 1998. Securities available for sale are as shown below:
Securities Available-for-Sale
-----------------------------
Amortized
Cost Fair Value
---- ----------
U.S. Treasury Bills $3,470,471 $3,470,471
========== ==========
F-11
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Related Party Transactions:
Notes Receivable - Related Parties:
At December 31, 1997, notes receivable - related parties are comprised
of 6% interest bearing notes from two (2) stockholders in the aggregate
amount of $86,225. The notes and all accrued interest are due on March
31, 1999. Included in the principal balance at December 31, 1997 is
accrued interest in the amount of $6,898, earned during the nine months
period ended December 31, 1997.
Notes Payable - Related Parties:
For the nine months ended December 31, 1997, and for the period from
the date of inception, June 1, 1996 through March 31, 1997, interest
expense under a note payable to a related party was $10,773 and
$19,800, respectively. The note was converted to a bridge note during
June, 1997 (See Note 12).
Commitments:
During the nine months ended December 31, 1997, the Company entered
into a distributorship agreement with Rose Hearts, Inc. which is wholly
owned by a director of the Company, which provides for commission
payments of ten percent (10%) to twenty-two percent (22%) of the
product cost to the stores. Although the Company has no other written
distributor agreements at this time, it was management's belief at the
inception of the agreement the distribution fee represented a
reasonable cost if the services were to be performed by an independent
party. During the nine months ended December 31, 1997, the Company
incurred approximately $67,000 in commission expense under this
agreement. Subsequent to year end, Management terminated the agreement
after it determined that in practice, the agreement was not as
favorable to the Company as those generally available with unaffiliated
third parties.
5. Fair Value of Financial Instruments:
Estimated fair values of the Company's financial instruments are as
follows:
December 31, 1997
-----------------
Carrying
Amount Fair Value
------ ----------
Available for sale securities $3,470,471 $3,470,471
========== ==========
The carrying amount of available for sale securities approximates fair
value. The fair market value of notes receivable - related parties
cannot be determined due to its related party nature.
6. Inventory:
As of December 31, 1997, inventory consists of the following:
Cigars $1,281,488
Cigar accessories 100,867
Reserve for inventory spoilage (60,097)
----------
$1,322,258
==========
F-12
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Property and Equipment:
At December 31, 1997, property and equipment consists of the following:
Computer equipment $ 137,373
Equipment 49,456
Furniture and fixtures 38,273
----------
225,102
Less: accumulated depreciation (29,901)
----------
$ 195,201
==========
8. Line of Credit:
As of December 31, 1997, the Company has a $1,000,000 revolving line of
credit with Johnson Bank. The line expires on December 31, 1998, and
provides for interest at the prime rate. The line is secured by
available for sale securities. At December 31, 1997, there was no
outstanding balance under the line of credit.
9. Accrued Expenses - Other:
Included in accrued expenses - other as of December 31, 1997, is an
accrual for a cigar trade-out program in the amount of $110,000 which
has been charged against cost of sales for the nine months ended
December 31, 1997. The program, which was implemented during the first
quarter of 1998 for cigars sold during 1997, is targeted at replacing
slower selling cigars with an improved product mix. The charge consists
of management's best estimate of the shipping costs and the impairment
of value of the cigars to be returned under the program. This program
is anticipated to be completed during the second quarter of 1998. The
establishment of this accrual required the use of significant estimates
by management. The Company believes the techniques and assumptions used
in establishing this accrual are appropriate.
10. Income Taxes:
At December 31, 1997, the Company has available approximately
$1,400,000 of U.S. operating loss carryforwards that may be applied
against future taxable income. In addition, the Company has a Canadian
net operating loss carryforward in the approximate amount of $135,000
(Canadian dollars). The United States and Canadian operating losses
will expire primarily through 2012 and 2004, respectively.
As of December 31, 1997, deferred income tax assets consist of:
Net operating loss carryforwards $ 570,000
Other 100,000
----------
670,000
Less: valuation allowance (670,000)
----------
Total deferred taxes $ -
==========
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset because the utilization of the assets
is uncertain.
F-13
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Commitments and Contingencies:
Operating Leases:
During the nine months ended December 31, 1997, the Company leased
office and warehouse space in Scottsdale, Arizona. In February, 1998,
the parties under the aforementioned lease mutually agreed to cancel
the agreement, and the Company entered into a non-cancellable agreement
for new property at a different location, expiring April 30, 2003. The
terms of this lease provide for monthly payments ranging from $18,000
to $19,000. The lease terms also require the Company to pay common area
maintenance, taxes, and certain other incidental costs.
A schedule of future minimum lease payments due under the
non-cancellable operating lease agreements for each of the next five
(5) years, is as follows:
Year Ending
December 31, Amount
------------ ------
1998 $ 144,000
1999 216,000
2000 216,000
2001 224,000
2002 228,000
Subsequent 76,000
----------
$1,104,000
==========
For the nine months ended December 31, 1997, rent expense under the
aforementioned operating lease agreements was $54,628.
Employment Agreements:
During 1997, the Company entered into employment agreements with three
(3) former officers of the Corporation. The agreements were cancellable
at any time by either party. The Company also has agreed to pay two (2)
of the officers a management fee in the amount of $80,000 each. The fee
was to be paid over a sixteen (16) month period. During the nine month
period ended December 31, 1997, the management fees were paid in full.
Subsequent to December 31, 1997, the above employment agreements were
terminated (See Note 16).
12. Stockholders' Equity:
Stock-Based Compensation:
During the period from the date of inception, June 1, 1996 through
March 31, 1997, the Company sold 175,500 common shares for $16,750. The
stock was valued at $1.25 per share, resulting in compensation of
$202,625. In addition, 15,000 shares were issued for services valued at
$5,000.
During the nine months ended December 31, 1997, the Company's then
Chief Executive Officer sold common stock at a price below fair market
value. As such, an additional $110,000 was recorded as compensation.
Bridge Notes:
During the nine months ended December 31, 1997, the Company obtained
$1,000,000 in bridge notes with various investors, including two (2)
related parties. The net proceeds on $900,000 of the debt was $810,000,
with an additional $100,000 of related party debt converted to bridge
notes. The bridge notes were paid in full with the proceeds of the
initial public offering. As the notes were paid in full, the $90,000 in
loan fees was expensed during the period. For the nine months ended
December 31, 1997, interest expense on the notes was approximately
$33,500.
The investors of the bridge financing were also issued common stock
purchase warrants (See below).
F-14
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Stockholders' Equity: (Continued)
Common Stock Options and Warrants:
During the nine months ended December 31, 1997, the Company issued
257,500 options to directors and officers of the Company, with 247,500
exercisable at $5.25 per share, and 10,000 exercisable at $2.69 per
share. The options expire five (5) years from the date of issuance,
with vesting periods of zero (0) to three (3) years and exercisable one
(1) year after the vesting date. As of December 31, 1997, none of the
options have been exercised.
During the nine months ended December 31, 1997, the Company, in
connection with the bridge financing, issued warrants to purchase
380,226 shares of common stock with 361,215 exercisable at $2.63 per
share, and 19,011 exercisable at $5.25 per share. The warrants expire
five (5) years from the date of issuance. As of December 31, 1997, none
of the warrants have been exercised.
During the nine months ended December 31, 1997, the Company issued
underwriter warrants to purchase 170,952 shares of common stock,
exercisable at $8.40 per share, expiring five (5) years from the date
of issuance, and exercisable one (1) year after grant date. As of
December 31, 1997, none of the warrants have been exercised.
During the nine months ended December 31, 1997, the Company issued
50,000 options to its public relations firm, exercisable at $8.40 per
share, expiring five (5) years from the date of issuance. The options
vest ratably over a five (5) year period and become exercisable one (1)
year after the vest date. No value was assigned on this transaction. As
of December 31, 1997, none of the options have been exercised.
The following summarizes stock option and warrant transactions:
<TABLE>
<CAPTION>
Stock Weighted Average
Options Warrants Exercise Price
------- -------- --------------
<S> <C> <C> <C>
Outstanding at March 31, 1997 -- -- $ --
Granted 307,500 551,178 4.93
Exercised -- -- --
Expired -- -- --
------- ------- -----
Outstanding at December 31, 1997 307,500 551,178 $4.93
======= ======= =====
</TABLE>
Information relating to stock options and warrants at December 31,
1997, summarized by exercise price, are as follows:
Exercise Weighted
Price Average
per Number Life Number
Share Outstanding (Years) Exercisable
----- ----------- ------- -----------
$2.63 361,215 5 361,215
$2.69 10,000 5 --
$5.25 266,511 5 19,011
$8.40 220,952 5 --
F-15
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
12. Stockholders' Equity: (Continued)
Common Stock Options and Warrants: (Continued)
All stock options issued to employees have an exercise price not less
than the fair market value of the Company's common stock on the date of
grant. In accordance with accounting for such options utilizing the
intrinsic value method, there is no related compensation expense
recorded in the Company's financial statements for the nine months
ended December 31, 1997. Pro forma information regarding net income
(loss) and earnings (loss) per share are required by SFAS No. 123. Had
compensation cost for stock-based compensation been determined based on
the fair value of the options at the grant dates consistent with the
method of SFAS No. 123, the Company's net loss and loss per share for
the nine months ended December 31, 1997 would have been increased to
the pro forma amounts presented below:
Nine Months Ended
December 31, 1997
-----------------
Net loss:
As reported $(1,760,383)
Pro forma (2,160,321)
Net loss:
As reported $ (.82)
Pro forma (1.05)
The fair value of the option grants is estimated as of the date of
grant utilizing the Black-Scholes option-pricing model with the
following weighted average assumptions for grants in 1997; expected
life of options three (3) years, expected volatility of 55%, risk-free
interest rate of 6%, and a 0% dividend yield. The weighted average fair
value at date of grant for options granted during 1997 approximated
$1.55.
Public Offering:
During the nine month period ended December 31, 1997, the Company
completed an initial public offering during which it sold 1,988,592
shares of its no par value common stock at a price of $5.25 per share,
sold under its Registration Statement No. 33-29985 Prospectus dated
August 21, 1997. Gross proceeds of approximately $10,440,000 were
received by the Company.
Common Stock Split:
On May 31, 1997, the Company declared a three for one (3-1) split of
its common stock. The accompanying consolidated financial statements
give retroactive effect to the stock split.
13. Concentrations:
Economic Dependency:
For the nine months ended December 31, 1997, the Company had three (3)
suppliers which accounted for approximately twenty percent (20%),
fifteen percent (15%) and fourteen percent (14%) of the Company's cigar
purchases, respectively. As of December 31, 1997, amounts due to these
suppliers included in accounts payable were approximately $29,500,
$1,000, and $52,000, respectively. For the period from the date of
inception, June 1, 1996 through March 31, 1997, the Company had a
supplier who accounted for approximately seventy-one percent (71%) of
the Company's cigar purchases.
For the nine months ended December 31, 1997, and the period from the
date of inception, June 1, 1996 through March 31, 1997, the Company's
largest customer accounted for approximately seventy percent (70%) and
eighty-two percent (82%) of the Company's sales, respectively. As of
December 31, 1997, there are accounts receivable of approximately
$82,500 due from this customer.
F-16
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
13. Concentrations: (Continued)
Foreign Operations:
For the nine months ended December 31, 1997 and for the period from the
date of inception, June 1, 1996 through March 31, 1997, the Company's
foreign subsidiary recorded revenue representing approximately
thirty-nine percent (39%) and ninety-three percent (93%) of total
revenues, respectively.
14. Statements of Cash Flows:
Non-Cash Financing and Investing Activities:
During the nine months ended December 31, 1997, the Company recognized
investing and financing activities that affected its assets,
liabilities and equity, but did not result in cash receipts or
payments. These non-cash activities are as follows:
Sales of shares of common stock by the Company's Chief
Executive Officer were valued at $2.50 per share, which
exceeded the cash sales price. Therefore, an additional
$110,000 was reported as compensation.
Accrued interest in the amount of $6,898 was added to the
principal of notes receivable - related parties.
A related party note payable in the amount of $100,000 was
converted into a bridge financing loan.
The Company added accrued interest to the principal balance of
available for sale securities in the amount of $58,574.
The Company offset $53,550 of deferred offering costs from the
prior year against the proceeds of the initial public
offering.
During the period from the date of inception, June 1, 1996 through
March 31, 1997, the Company recognized financing activities that
affected its assets, liabilities and equity, but did not result in cash
receipts or payments. These non-cash activities are as follows:
Common stock was issued for services and compensation valued
at $207,625. This was based upon 175,500 shares sold on March
5, 1997 for $16,750, which were valued at $1.25 per share.
15. Foreign Currency:
Foreign currency transactions resulted in an aggregate exchange loss of
$10,038 for the nine months ended December 31, 1997, and $1,193 for the
period from the date of inception, June 1, 1996 through March 31, 1997.
Foreign currency translations resulted in an aggregate exchange gain of
$3,371 for the nine months ended December 31, 1997, and were immaterial
for the period from the date of inception, June 1, 1996 through March
31, 1997.
16. Subsequent Events:
In February, 1998, the Company terminated its Distributorship Agreement
with Rose Hearts, Inc.
Subsequent to the year end, the Company terminated its Employment
Agreements with its then Chief Executive Officer and two (2) Vice
Presidents. As part of the severance compensation, each officer was
paid nine (9) months of salary as specified under their employment
agreements, and an additional lump-sum payment of $40,000 each as
settlement for potential claims against the Company. As part of the
settlement each of the individuals agreed to extend their non-compete
clauses for an additional six months for a total of a full year and a
half following termination of employment and released the Company from
all claims or causes of action relating to their respective employment
agreement and their employment with the Company.
F-17
EXHIBIT 10.1
WORKING AGREEMENT
Can-Am International Investment Corporation/TRA Maritimes
<TABLE>
<CAPTION>
<S> <C>
Can-Am International Investment Corporation TRA Maritimes
#106-3738 North Fraser Way P.O. Box 790
Burnaby, BC V5J 5G1 Middleton, Nova Scotia BOX IPO
Tel: 604-435-1705 Fax: 604-431-7673 Tel: (902) 825-3404 Fax: (902) 825-2425
</TABLE>
Effective Date: November 12, 1997
Between Can-Am International Investment Corporation (Can-Am) and TRA Maritimes
(Distributor)
THIS agreement is a working agreement between Can-Am and the Distributor to
introduce the Premium Cigar Program. The parties agree to the following terms
with the understanding that a complete and formal agreement has been presented
to the Distributor by Can-Am and is forthcoming and in the same general
description of this agreement. This Working Agreement, however, does not
supersede the formal agreement forthcoming.
Agreement: Can-Am will provide Distributor with humidors, cigars and related
products. The Distributor will promote and sell those cigars and related
products as authorized by Can-Am, and any other Can-Am authorized products
("Can-Am Products") on the term of this agreement.
1. Can-Am Responsibilities. Can-Am will provide Distributor with a Can-Am
Humidor, which will be owned by Can-Am and used exclusively for the
display, storage and sale of Can-Am Products. Can-Am will manage the
program through its telemerchandising and merchandising and training of
Distributor's management and field staff. Can-Am will provide training
materials to accounts at the store level.
2. Distributor Responsibilities. Distributor will display the Can-Am
Humidor on the front or main counter of Distributor's Location. Each
Can-Am Humidor will be positioned so that (a) no non-Can-Am display,
signs, labels or other materials block a customer's view of the Can- Am
Humidor, and (b) customers bays easy access to the Can-Am Humidor. The
Humidor cannot be construed as self-serve. Distributor will display
only labels, displays or signs approved by Can-Am in or on the Can-Am
Humidor. Distributor will actively promotes, market and sell Can-Am
Products in or on the Can-Am Humidor. Distributor will not sell any
product from humidors other than Can-Am authorized products, and will
not display, sell or store other produces in, on or from its Can-Am
Humidor. Distributor will comply with all applicable federal,
provincial, and local laws and regulations of Can-Am Products.
Distributor is to assist in merchandising and management efforts where
needed to make the program as effective as possible.
3. Term of Agreement. The initial term of this Agreement shall be for two
(2) calendar years from the date first written above (the "First
Term"). This Agreement shall automatically
* Confidential portions omitted and filed
separate with the Commission.
<PAGE>
renew at the expiration of the First Term for up to three (3)
additional one (1) year terms (each an "Additional Term") unless either
of the parties, at least thirty (30) calendar days prior to the
expiration of the then existing First Term or Additional Term, gives
written notice to the other party not to renew this Agreement or unless
this Agreement is terminated under other terms of this Agreement.
4. Humidors. Can-Am will provide one Can-Am Humidor to the Retail Location
at no cost. Can-Am will repair or replace, at its cost, a Can-Am
Humidor damaged due to manufacturing defects or normal wear and tear.
The Retailer will care for and maintain the Can-Am Humidor provided to
Retailer. Any Can-Am Humidor damaged by misuse, lost or stolen may be
repaired or replaced only by Can-Am; the Retailer will pay the cost of
any such repair or replacements. The replacement cost to the Retailer
for any Can-Am Humidor will be * Upon termination of this Agreement for
any reason, the Retailer, at its cost, will return all Can-Am Humidors
to Can-Am within 30 calendar days.
5. Payments. Can-Am will invoice the Distributor for Can-Am products.
Distributor agrees to pay Can-Am seven days from receipt of the
invoice, including a late charge of * of the total past due payments
should there be any. The Distributor shall collect the full invoice
amount from the Retail locations.
6. Marketing Rights. Can-Am hereby grants, and Distributor hereby accepts,
the exclusive right to sell and market Can-Am Products to and through
the convenience, grocery and gas Retail Locations in the Territory of
Atlantic Canada pursuant to the terms and provisions of this Agreement,
so long as the following conditions have been met:
(i) Within the first 90 days of this Agreement, Distributor
contracts and obtains a signed Can-Am Single Location Retailer
Agreement (or, in the event of a chain of stores, an agreement
signed by the corporation or other entity governing such
stores) * ; and
(ii)
7. Pricing
The current price schedule for Can-Am products to be provided is based
on a price margin of approximately * before tobacco tax for
distributors and approximately * after tobacco taxes for retailers.
Notwithstanding the foregoing, no assurance can be given by Can-Am as
to what actual retail price for Can-Am Products to the marketplace will
be or what the actual margins for Can-Am Products for distributors or
retailer will be since such margins are determined by the marketplace
and customer demand, and the actual price charged by distributors and
retailers for Can-Am Products will be independently determined by each
distributor and retailer. Can-Am shall pay a * rebate for the stores
selling in excess of a certain dollar amount per quarter. Subject to
revision by Can-Am, which revision shall be effective upon 90 days
prior notice, Can-Am shall initially pay a * rebate for individual
stores with retail sales of Can-Am Products in excess of * Canadian per
quarter (or, in the event of chains of stores governed by the same
entity, a * rebate for chains with stores averaging retail sales of the
Can-Am Products in excess of * Canadian per quarter).
* Confidential portions omitted and filed
separate with the Commission.
<PAGE>
Notwithstanding the foregoing, the pricing of the Can-Am Products
charged by Can-Am may be subject to change as determined by Can-Am at
Can-Am's sole discretion.
8. Shipping. Can-Am direct ships the product to the stores and is
responsible for all shipping costs related to the product. Can-Am is
not responsible for correspondence originating from the Distributor to
Can-Am.
9. Sales of Product. Can-Am, in conjunction with the Distributor, will
make a best effort to sell all product placed in a humidor. However,
Can-Am does not guarantee the sale of any product.
10. Independent Contractors; No interest in Goodwill. Distributor is, and
will be, an independent contractor. Except for tobacco taxes paid by
Can-Am on the Can-Am Products, Distributor will be responsible for
obtaining and paying for any and all taxes, cost, bonds, insurance and
licenses required for Distributor's business and its distribution, sale
and marketing of the Can- Am Products. Distributor will not acquire any
interest in any good will or trademarks associated with the Can-Am
Products.
11. Confidential Information. Distributor recognizes that as a result of
this relationship, Distributor has in the past and may in the future
develop, obtain or learn about Confidential information which is the
property of Can-Am or which Can-Am is under an obligation to treat as
confidential. Distributor agrees to use its best efforts and the utmost
diligence to guard, protect and keep confidential said Confidential
Information sand Distributor agrees that Distributor will not, during
or after the period of this Agreement, use for Distributor or others,
or divulge to others any of said Confidential Information which
Distributor may develop, obtain or learn about during or as a result of
its Distributor relationship with Can- Am, unless authorized to do so
by Can-Am in writing.
12. No Warranties. Can-Am does not give or imply any warranties relating to
Can-Am Products, including any implied warranties of merchantability
and fitness for a particular purpose. Can- Am liability, if any, to the
Distributor for alleged defective products will, under all
circumstances, be limited to repair or replacement of a product, at
Can-Am's sole option, and shall not include damages of any kind.
13. Indemnification. Distributor and Can-Am will each indemnify and hold
each other harmless, and any of their related parties, from any and all
liability directly or indirectly based upon or related to any acts
omissions of each party's employees or agents arising in connection
with this agreement.
14. Governing Law; Legal Costs. This agreement will be governed in
accordance with the laws of the Province of British Columbia and Canada
and the Courts of British Columbia shall have the exclusive
jurisdiction to hear and resolve any dispute between the parties
related to this Agreement. The prevailing party in any such dispute
relating to this Agreement shall be entitled to be paid its costs and
expenses including its legal costs on a solicitor and own client basis.
* Confidential portions omitted and filed
separate with the Commission.
<PAGE>
15. Notices. Service of any notice pursuant to this Agreement is complete
and effective: (1) three days from the date of mailing via Registered
Mail, return receipt requested and addressed to the party at the then
current address; (b) upon receipt by facsimile at the party's facsimile
number given under this Agreement. Distributor will notify Can-Am
within 5 days in written of any changes to Distributor's name, address,
facsimile or phone number.
16. Severability. In case any one or more of the provisions of this
Agreement is held to be invalid, illegal, or unenforceable in any
respect, such invalidity, illegality, or unenforceability shall not
affect other provisions. This Agreement shall be construed as if such
invalid, illegal or unenforceable provision had never been included in
this Agreement.
17. Binding on Successors and Assigns. This Agreement shall extend to and
be binding upon the heirs, legal representatives, successors and
assigns of the parties.
EXECUTED as of the Effective Date set forth above.
"Can-Am" "Distributor"
By: /s/ [signature] By: /s/ [illegible]
---------------------------------- -------------------------------------
Title: [Can-Am Officer] Title: C Store Merchandising Manager
------------------------------- ----------------------------------
Date: 11/17/97 Date: 11/17/97
-------------------------------- -----------------------------------
* Confidential portions omitted and filed
separate with the Commission.
EXHIBIT 10.2
AMENDMENT TO EMPLOYMENT AGREEMENT
This Amendment ("Amendment") to that Employment Agreement between
Steven A. Lambrecht ("Lambrecht") and Premium Cigars International, Ltd., an
Arizona corporation ("PCI") dated June 13, 1997 ("Original Agreement") is
entered into this 19th day of November, 1997.
RECITALS
--------
WHEREAS, PCI and Lambrecht desire that the Original Agreement continue
to govern the employment relationship between them with certain modifications to
ensure a smooth transition in leadership of the Company should Lambrecht, in the
future, be replaced as President or Chief Executive Officer;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, PCI and Lambrecht agree as
follows:
1. Scope of Amendment. The terms of this Amendment and all other terms not
inconsistent with this Amendment from the Original Agreement, which is
incorporated herein by this reference, will govern the employment relationship.
If any term of this Amendment conflicts with a term of the Original Agreement,
the terms of this Amendment shall control.
2. Option Grant. Subject to (i) approval by the Board of Directors, the
Independent Directors and W. B. McKee Securities, Inc. as Underwriters'
Representative (pursuant to paragraphs 4(m) and (p) of the Underwriting
Agreement dated August 25, 1997) and ratification by shareholders at the
Company's next annual shareholder meeting, (ii) the vesting schedule set forth
below, (iii) the Company's acceptance of an Accredited Investor Representation
Letter from Mr. Lambrecht and (iv) the Company's and Lambrecht's entrance into a
Stock Option Agreement, the Company shall grant to Lambrecht non-qualified
options to purchase Twenty Thousand (20,000) Shares at the initial public
offering price of $5.25 per Share, exercisable beginning one (1) year after the
date of this Amendment and continuing until five (5) years after such Amendment
date (the "Options"). After such five (5) year period, the Options shall expire.
The Options shall vest as follows:
(i) Options to purchase 10,000 shares for Lambrecht's valuable services as
President in conjunction with taking the Company public, during the
Company's early stages as a public Company, shall vest immediately upon the
date that Lambrecht ceases to be President;
(ii) Options to purchase 10,000 shares for Lambrecht's cooperation in a
smooth transition to the next Chief Executive Officer shall vest
immediately upon the date Lambrecht ceases to be Chief Executive Officer
and does not elect to remain in any executive position in the Company,
provided that the Board of Directors, in its sole discretion, makes a
determination that Lambrecht has: (a) fully cooperated with the Chief
Executive Officer successor ("Successor"); (b) fully disclosed all
information to his Successor which is necessary to his Successor's
performance as Chief Executive Officer; (c) has exhibited positive support
for his Successor before Company employees, shareholders, market
participants and the general public; and (iv) has resolved any issues
relating to his Successor confidentially with his Successor or the Board of
Directors.
Only Options which have vested, as set forth above, shall be exercisable during
the exercise period.
3. Status as a Director. The parties acknowledge that Lambrecht is currently a
director of the Company. If Lambrecht is replaced as Chief Executive Officer, he
will complete his term as a director and agrees to serve the Board in such other
capacities as the Board shall request.
4. Severance Compensation. The Severance Compensation provisions of Paragraph 7
of the Original Agreement shall remain in force according to the conditions set
forth therein, and shall be applicable in the case of Lambrecht's replacement as
CEO.
5. Payment as a Consultant. If, upon the date that Lambrecht ceases to be
President and Chief Executive Officer, Lambrecht is receiving compensation
pursuant to the Severance Compensation provisions of Paragraph 7 of the Original
Agreement, Lambrecht agrees to provide consulting services to the Company for
the period of such
<PAGE>
Severance Compensation, from time to time and as reasonably requested by the
Company, without additional compensation to Lambrecht. If the Company requests
that Lambrecht provide such consulting services after any such Severance
Compensation terminates, the Company shall pay Lambrecht $45 per hour and shall
reimburse Lambrecht for his reasonable expenses incurred as a consultant.
EXECUTED as of the first date set forth above.
"PCI" "Lambrecht
Premium Cigars International, Ltd.
/s/ William L. Anthony /s/ Steven A. Lambrecht
- ------------------------------------- ----------------------------------------
William L. Anthony, Chairman Steven A. Lambrecht
2
EXHIBIT 10.3
RETAIL AGREEMENT
This agreement ("Agreement") between Premium Cigars International (PCI) and
Mobile Oil Corporation is effective this 4 day of December, 1997.
1. Scope of Outlets Covered. This Agreement covers all Mobil retail
outlets owned or operated by Mobil ("Mobil Outlets"). PCI will offer
the products covered by this Agreement to the Mobil retail outlets
operated by Mobil's franchised dealers ("Dealer Outlets") through
separate agreements, the substantive terms of which must be the same as
this Agreement. PCI will provide Mobil with a monthly list of all Mobil
Outlets and Dealer Outlets serviced by PCI and will make a copy of any
Dealer Outlet agreement available to Mobil on request.
2. PCI Products. PCI will provide each Mobil Outlet with a PCI Humidor,
which will be owned by PCI and will be used exclusively for the
display, storage and sale of PCI Products. PCI or its authorized
distributors will stock the PCI Humidor with PCI Products. PCI will
also provide each Mobil Outlet with, cigars and related products, and
each Mobil Outlet will promote and sell those cigars and related
products as authorized by PCI, including Cigar Gone Breath Cleanser,
PCI featured magazines such as Smoke Magazine and any other
PCI-authorized and Mobil approved products ("PCI Products") according
to the terms of this Agreement.
* Confidential portions omitted and filed
separately with the Commission.
<PAGE>
3. Product Presentation and Promotion. Each Mobil Outlet will display the
PCI humidor on the front or main counter of the Outlet's location or
such other location on which the manager of the Outlet and PCI may
agree. Each PCI Humidor will be positioned so that (a) no non-PCI
displays, signs, labels or other materials block a customer's view of
the PCI Humidor. Each Mobil Outlet will display only labels, displays
or signs approved by PCI in, on or directly around the PCI Humidors.
PCI will use no PCI displays, signs or labels in any Mobil Outlet or
Dealer Outlet that Mobil, in its sole discretion, determines are
unsuitable. Each Mobil Outlet will actively promote, market and sell
only PCI Products, on or around the PCI Humidor, and will not display,
sell or store other products in, on or from the PCI Humidor. Each Mobil
Outlet will comply with all applicable federal, provincial, state and
local laws and regulations and will hold and maintain all federal,
state, provincial, and local licenses and permits required for the
sale, distribution and marketing of PCI Products. PCI will assist Mobil
by providing any information PCI may have concerning the federal,
state, provincial and local laws, regulations, permits and licenses.
4. Term of Agreement. Unless terminated by a provision of this Agreement,
this Agreement has a term of one year from the Effective Date. It will
automatically renew for three additional one-year terms, unless written
notice is provided by either party no less than sixty (60) days prior
to the renewal period. PCI or Mobil, upon any breach of this Agreement
by the other Party which has not cured within thirty (30) days of
written
* Confidential portions omitted and filed
separately with the Commission.
2
<PAGE>
notice of breach, may terminate this Agreement for any Mobil Outlet
and/or Dealer Outlet or all Mobil Outlets and Dealer Outlets at any
time by written notice to the other party which will be effective
thirty (30) days after
receipt.
5. Humidors. PCI will provide one PCI Humidor to each Mobil Outlet at no
cost. PCI will repair or replace, at its cost, a PCI Humidor damaged
due to manufacturing defects or normal wear and tear. Each Mobil Outlet
will care for and maintain the PCI Humidor provided by PCI. Any PCI
Humidor damaged by misuse, lost or stolen may be repaired or replaced
only by PCI; Mobil will pay the cost of any such repairs or
replacements. The replacement cost to Mobil will be * Upon termination
of this Agreement for any reason, Mobil will make the PCI Humidors
available at each Mobil Outlet to PCI for collection and return to PCI.
After collecting the PCI Humidors, PCI will discontinue any further
business with any and all Mobil Outlets or Dealer Outlets.
6. Payment and Price. Each Mobil Outlet will pay PCI for PCI Products
pursuant to a purchase order, * otherwise from receipt of goods,
including a late charge of * of the total past due payments. All Mobil
Outlets and Dealer Outlets will be charged a price by PCI that will
provide a * margin.
7. Independent Contractor; No Interest in Goodwill. PCI and Mobil are, and
will be, independent contractors, and no other relationship may be
inferred form this Agreement.
* Confidential portions omitted and filed
separately with the Commission.
3
<PAGE>
Except for all state cigar taxes, which will be filed and paid by PCI
on the PCI Products, each Mobil Outlet will be responsible for
obtaining and paying all taxes, costs, bonds, insurance and licenses
required for the business and its distribution, sale and marketing of
the PCI Products. Mobil will not acquire any interest in any goodwill
or trademarks associated with the PCI Products.
8. No Warranties. PCI does not give or imply any warranties relating to
PCI Products, including any implied warranties of merchantability and
fitness for a particular purpose. PCI liability, if any, to Mobil for
alleged defective products will, under all circumstances be limited to
repair or replacement of a product, at PCI's sole option.
9. Reporting.
PCI will provide Mobil with a Quarterly Cigar Category Velocity Report
detailing purchases at each location. This report will be due no later
than thirty (30) days after the end of each calendar quarter and will
include detail for each location by the Mobil station number, which
will be provided by Mobil.
10. Indemnification. Mobil and PCI will indemnify and hold each and any of
their related parties of the other harmless from any and all liability
directly or indirectly based upon or related to any acts or omissions
of each party's employees or agents arising in connection with this
Agreement. Section 8 not withstanding, PCI will indemnify and
* Confidential portions omitted and filed
separately with the Commission.
4
<PAGE>
hold Mobil and Mobil's related parties harmless from any and all
liability from the use of the PCI Products by any person or entity.
11. Governing Law; Attorney's Fees. This Agreement will be governed by the
law of the State of Virginia without consideration of Virginia's
conflict of law principals. The Courts of Fairfax County, Virginia,
including any applicable Federal Courts, will be the exclusive legal
forum to resolve any dispute between the parties related to this
Agreement. The prevailing party in any dispute relating to this
Agreement will be entitled to receive its costs, fees, and expenses,
including reasonable attorney's fees.
12. Notices. Each party will provide the other an address and point of
contact. Any notice sent pursuant to this Agreement is presumed
received five (5) days after deposit in the US Mail, postage paid
addressed, to the party at its current address. Notice send by
certified or registered mail or other delivery method providing for a
signed receipt will be effective on the date of the signed receipt.
Either party will notify the other in writing within five (5) days of
any change in name, address, phone number or person to serve as the
point of contact.
13. Severability. If any one or more of the provisions of this Agreement
are held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability will not affect any other
provision, and this Agreement will be construed
* Confidential portions omitted and filed
separately with the Commission.
5
<PAGE>
as if such invalid, illegal, or unenforceable provision had never been
included in the Agreement.
14. Binding on Successors and Assigns. This Agreement will extend to and be
binding upon the heirs, legal representatives, successors and assigns
of the parties. EXECUTED as of the Effective Date set forth above.
15. Assignment. Neither Party may assign all or any part of this Agreement
without the written consent of the other, except that Mobil may assign
this Agreement to any parent or subsidiary company of Mobil.
Premium Cigars International Mobil Oil Corporation
By: /s/ Steven A. Lambrecht 12-4-97 By: /s/ [illegible]
------------------------------------ --------------------------------
Its: C.E.O. Its: Group Category Manager
----------------------------------- -------------------------------
* Confidential portions omitted and filed
separately with the Commission.
6
EXHIBIT 10.4
EMPLOYMENT AGREEMENT
--------------------
This Employment Agreement is made and entered into this 15th day of
December, 1997, by and between Premium Cigars International, Ltd., an Arizona
corporation (the "Company") and John E. Greenwell ("Employee").
W I T N E S S E T H:
--------------------
WHEREAS, the Company and the Employee mutually desire to agree upon the
terms and conditions of the Employee's employment with the Company;
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged, the parties to this Agreement
hereby agree as follows:
1. Employment. The Company agrees to employ the Employee as President
and Chief Operating Officer for the Company and the Employee shall at all times
exercise his best judgment in the performance of his duties. As President, the
Employee shall report directly to the Chief Executive Officer and the Board of
Directors until Employee assumes the position of Chief Executive Officer and
then shall at all times report to the Board of Directors of the Company. The
Employee shall perform such further duties as may be required by the Company
under and subject to the instruction, direction and control of the Chief
Executive Officer or Board of Directors of the Company as applicable. All
vice-presidents and division managers shall report directly to the Chief
Operating Officer. Employee shall become the Chief Executive Officer of the
Company and the Board of Directors shall create a vacancy and appoint Employee
to such vacancy on the Board of Directors on March 1, 1998, unless this
Agreement is terminated prior to such date. Employee shall, after March 1, 1998,
also retain the capacity of Chief Operating Officer until the Board of Directors
determines otherwise. Employee's duties under this Agreement shall be
principally carried out in Maricopa County, Arizona and the parties agree to
renegotiate this Agreement should the principal geographical focus of Employee's
duties require that Employee be based elsewhere due to the relocation of the
Company's executive offices, sale of the Company or change in the location of
the Company's business. Except as otherwise provided herein, as long as Employee
remains employed with the Company, the Company shall not alter the terms of this
Agreement unless Employee and the Company agree to such modifications in
writing.
2. Devotion to Employment. Employee accepts employment with the Company
on the terms and conditions herein set forth and agrees to devote his full time
and effort to perform his duties on behalf of the Company in his position as set
forth in paragraph 1. Employee shall begin full-time execution of his duties
with the Company on Monday, December 15, 1997. The
<PAGE>
Employee shall not during the term of this Agreement be actively engaged in any
other business activity which will in any way impair his ability to properly
meet his obligations to the Company or engage in any activity competitive with
the Company or detrimental to its business. Employee agrees to comply with the
policies, standards and regulations of the Company from time to time
established.
3. Compensation. The Company agrees to pay the Employee compensation
for services as follows:
a. Commencing December 15, 1997, the initial annual salary
shall be One Hundred Twenty Thousand Dollars ($120,000) payable
bi-weekly during the term of this Agreement. Employee's annual salary
shall increase to One Hundred Fifty Thousand Dollars on the date that
Employee becomes the Chief Executive Officer of the Company. Such
salary may be adjusted by the Board of Directors of the Company at its
sole discretion. Employee understands and acknowledges that Employee is
exempt from the overtime pay requirements of the Fair Labor Standards
Act, 29 U.S.C. ss. 201 et seq.
b. Employee shall be covered under the Company's then existing
medical insurance plan. The Company retains the right to modify medical
insurance coverage as it deems appropriate. Except as otherwise
provided for by law or in paragraph 7 herein, the Company is under no
obligation or duty to provide medical coverage to the Employee after
such Employee has ceased to serve as an employee of the Company.
c. Vacation. The Employee shall be entitled to vacation as set
forth in the Company's employee manual. All vacation days must be taken
in accordance with the Company's policies, as those policies are
established from time to time.
d. Bonus Plan; Stock Option Plan. Employee shall be eligible
under a bonus plan ("Bonus Plan") and/or a stock option plan ("Stock
Option Plan") based upon the future performance of the Company in the
same manner as offered to other comparable executives of the Company.
As a part of his duties, Employee shall develop and propose to the
Board of Directors a Bonus Plan and Stock Option Plan for executives
and/or other employees of the Company on or before March 1, 1998.
Notwithstanding the foregoing,
the parties agree that Employee's bonus for the year ending December
31, 1998, shall be guaranteed to be at least $50,000.00, to be paid in
cash on or before January 15, 1999. Other than as provided in the
following sentence, if this Agreement is terminated by the Company or
Employee for any reason on or before December 31, 1998, then Employee
shall be entitled to no bonus payment hereunder. However, even if
Employee's employment is terminated, Employee shall be entitled to the
entire bonus of at least $50,000.00, to be paid in cash on or before
January 15, 1999, in any of the following two situations: (i) the
Company terminates this Agreement without Cause (as defined in
paragraph 7 below) after March 31, 1998 but on or before December 31,
1998; or (ii) Employee terminates this Agreement on account of a
Material Breach by the Company
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<PAGE>
(as defined in paragraph 7 below) after March 31, 1998 but on or before
December 31, 1998.
e. Additional Benefits. Employee shall also be offered other
benefits, insurance, stock interest savings loans or bonuses which may
be offered to other comparable executives of the Company.
4. Insurance. The Company shall maintain during the Employee's term of
employment, at the Company's expense, Director and Officer Liability Insurance.
5. Employee at Will. Employee is employed "at will". Subject to the
notice requirements set forth in paragraph 6 below, either Employee or the
Company may terminate Employee's employment at any time, for any reason, with or
without cause. Employee understands that no manager, supervisor or
representative of the Company has any authority to enter into any agreement with
Employee for employment for any specified period of time or to make any promise
or commitment contrary to the foregoing. Further, no amendment to this Agreement
will be valid or enforceable unless it is in writing and signed by the Chairman
of the Board of Directors of the Company.
6. Termination. The Employee's continued employment may be terminated
by the Employee by delivery to the other party of a written notice of
termination at least four (4) weeks prior to the termination date. The Company
may terminate Employee's continued employment at any time upon notice of
termination delivered to Employee. Upon termination of employment, the Employee
agrees to promptly return to the Company all customer records as that term is
defined in paragraph 8 herein, all confidential information, as that term is
defined in paragraph 9 herein, and all other documents and equipment pertaining
to the business of the Company. Employee further agrees that the Employee will
not at any time use any information acquired by him during the term of this
Agreement in a manner contrary to the interest of the Company, nor will the
Employee do any act or acts which may directly or indirectly induce any person
to terminate his relationship with the Company.
7. Severance Compensation. In the event Employee is terminated by the
Company, for any reason other than for "Cause" as defined below or if Employee
terminates his employment on account of a "Material Breach by the Company" as
defined below, Employee shall be entitled to the following:
a. If such termination is within the first six (6) months from
the date of this Agreement, Employee shall be entitled to his then
current salary payable bi-weekly for a three (3) month period. If such
termination is after the first six (6) months from the date of this
Agreement, Employee shall be entitled to his then current salary
payable bi-weekly for a nine (9) month period. During the period such
severance payments are made by the Company to Employee, Employee will
have no duty to mitigate the receipt of such severance payment by
obtaining other employment, and if Employee should
-3-
<PAGE>
obtain other employment, the Company shall not receive a credit for any
compensation earned by Employee and shall continue to pay the entire
severance payments required hereunder.
b. To the extent Employee has a vested interest in any stock
of the Company as of the date of termination of employment, such stock
shall be the sole property of Employee and shall be under the sole
control of the Employee; however, Employee shall have no ownership
right to any stock which has not vested.
c. Employee and his family shall continue to be eligible for
group medical coverage, at Employee's personal expense, under the
Consolidated Omnibus Budget Reconciliation Act of 1986 ("COBRA"), as
amended, for such duration as provided by existing law at the time of
termination.
d. The Board of Directors agrees to define terms to protect
Employee's and other Company executives' compensation from the effects
of certain material changes in control of the Company. Such terms shall
be agreed to on or
before March 1, 1998.
Employee shall not be entitled to any severance compensation
as provided in this paragraph 7 if the Employee has committed any of the
following which shall constitute dismissal for "Cause": (i) willful malfeasance,
willful misconduct or gross negligence in connection with his employment; (ii)
continuing refusal or inability to perform Employee's material duties hereunder
after the Company has given written notice to Employee specifying such refusal
or inability to perform such duties and, if curable, Employee cures such refusal
or inability within 30 days following the date such notice is received by
Employee, unless such refusal or inability cannot be cured within such 30 day
period at which time Employee will have an additional 30 day period to cure such
breach as long as Employee diligently pursues the cure of such refusal or
inability as set forth in such notice; (iii) any material breach by Employee of
the provisions of paragraphs 8, 9 or 10 of this Agreement after the Company has
given written notice to Employee specifying such material breach and, if
curable, Employee cures such material breach within 30 days following the date
such notice is received by Employee, unless such material breach cannot be cured
within such 30 day period at which time Employee will have an additional 30 day
period to cure such breach as long as Employee diligently pursues the cure of
such material breach as set forth in such notice; or (iv) the commission of any
felony or the conviction of a misdemeanor involving moral turpitude on the part
of Employee. Further, if during the term of payment of severance compensation,
Employee commits any of the above acts or omissions, no further severance
payments shall be made to Employee.
For purposes of this Agreement, a "Material Breach" by the Company
shall only mean any one or more of the following:
(i) Employee's title or substantial duties are changed
contrary to the title and duties set forth in paragraph 1 of this
Agreement; or
-4-
<PAGE>
(ii) Employee is required to report to persons other than as
required by paragraph 1 of this Agreement; or
(iii) Employee is required to live in a location other than
Maricopa County, Arizona, in order to perform his responsibilities and
duties under this Agreement; or
(iv) The Company fails to pay any amounts due to Employee
hereunder within ten (10) days of receipt by the Company of written
notice from Employee specifying such failure to pay.
Notwithstanding anything mentioned to the contrary herein, in the event
Employee resigns or terminates this Agreement with the Company other than for a
Material Breach by the Company or if the Company terminates Employee's
employment for Cause, Employee shall not be entitled to any severance
compensation.
8. Customer Records.
a. Employee's Obligations Regarding Customer Records. The
Employee acknowledges that the list of the Company's customers or
clients as it may exist from time to time is a valuable, special and
unique asset of the Company's business. The Employee shall not, during
or after his employment with the Company, divulge, furnish or make
accessible to anyone (other than in the regular course of the Company's
business) any names, addresses or telephone numbers of those
individuals who conduct business with the Company. In addition, the
contents of customers' files or portfolios, or any other such
information shall be kept confidential during and after the Employee's
employment with the Company. All original records and all copies
thereof of those customers who do business with the Company, including
names, or any other such information, as well as all other secrets and
confidential information of the Company shall remain the property of
the Company during and after the Employee's term of employment with the
Company.
b. Injunctive Relief for Breach. In the event of a breach or
threatened breach by the Employee of the provisions of this section,
the Company shall be entitled to an injunction restraining the Employee
from disclosing, in whole or in part, the list of the Company's
customers, any names, addresses or telephone numbers of those
individuals who conduct business with the Company, or from rendering
any services to any person, firm, partnership, joint venture,
association, or other entity to whom such information, in whole or in
part, has been disclosed or is threatened to be disclosed. Nothing
herein shall be construed as prohibiting the Company from pursuing any
other remedies available to the Company for such breach or threatened
breach, including the recovery of damages from the Employee.
-5-
<PAGE>
9. Confidential Information.
a. Employee's Obligations Regarding Confidential Information.
Employee has in the past and may in the future develop, obtain or learn
about confidential information which is the property of the Company or
which the Company is under obligation not to disclose. Employee agrees
to use his best efforts and the utmost diligence to guard and protect
said information, to treat such information as confidential, and
Employee agrees that the Employee will not, during or after the period
of his performing services for the Company, use for Employee or others,
or divulge to others any of said confidential information which
Employee may develop, obtain or learn about during or as a result of
performing services for the Company, unless authorized to do so by the
Company in writing. Employee further agrees that if this Agreement is
terminated for any reason, Employee will not take, but will leave with
the Company or return to the Company, all documents, records and papers
and all matters of whatever nature which bears or may bear the
Company's confidential information or which is in any way related,
directly or indirectly to the Company.
b. Definition of Confidential Information. For the purposes of
this Agreement, the term "confidential information" shall include but
not be limited to the following: customer lists; product designs;
pricing policies; marketing strategies; business contacts; business
plans; computer software, including all rights under licenses and other
contracts relating thereto; source code and all documents relating
thereto; all intellectual property including without limitation all
trademarks, trademark registrations and applications, service marks,
copyrights, patents, trade secrets, proprietary marketing information
and know-how; books and records including lists of customers; credit
reports; sales records; price lists; sales literature; advertising
material; manuals; processes; technology; designs; statistics data;
techniques; or any information of whatever nature which gives to the
Company an opportunity to obtain an advantage over its competitors who
do not know or use it, but it is understood that said terms do not
include knowledge, skills or information which is common to the trade
or profession of the Employee.
c. Contact with Customers and Third Parties. Upon Employee's
termination of employment with the Company, Employee agrees that for a
period of twelve (12) months from the date of termination of employment
that he shall not contact directly or indirectly any of the Company's
customers or companies which have any direct cigar-related business
dealings with the Company. Notwithstanding the foregoing, Employee may
contact customers or companies with which the Company does business
provided such business contacts do not relate directly or indirectly to
the cigar-related business.
d. Injunctive Relief for Breach. In the event of a breach or
threatened breach by the Employee of the provisions of this section,
the Company shall be entitled to an injunction restraining the Employee
from disclosing, in whole or in part, any
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<PAGE>
confidential information, or from rendering any services to any person,
firm, partnership, joint venture, association, or other entity to whom
such confidential information, in whole or in part, has been disclosed.
Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies available to the Company for such breach or
threatened breach, including the recovery of damages from the Employee.
10. Covenant Not To Compete.
a. Interests to be Protected. The parties acknowledge that
during the term of this employment, Employee will perform essential
services for the Company and for clients of the Company. Therefore,
Employee will be given an opportunity to meet, work with and develop
close working relationships with the Company's clients on a first-hand
basis and will gain valuable insight as to the clients' operations,
personnel and need for services. In addition, Employee will be exposed
to, have access to, and be required to work with, a considerable amount
of the Company's confidential and proprietary information, including
but not limited to: information concerning the Company's methods of
operation, financial information, strategic planning, operational
budget and strategies, payroll data, computer systems, marketing plans
and strategies, merger and acquisition strategies, and customer lists.
The parties also expressly acknowledge that Employee holds a highly
specialized, professional position that is the key position in one of
the Company's most significant divisions and replacing Employee in this
position would require the Company to incur substantial expense. The
parties expressly recognize that should Employee compete with the
Company in any manner whatsoever, it could seriously impair the
goodwill and diminish the value of the Company's business. The parties
acknowledge that the covenant not to compete contained in this section
has an extended duration; however, they agree that this covenant is
reasonable and it is necessary for the protection of the Company, its
shareholders and employees. For these and other reasons, and the fact
that there are many other employment opportunities available to the
Employee if he should terminate, the parties are in full and complete
agreement that the following restrictive covenants are fair and
reasonable and are freely, voluntarily and knowingly entered into.
Further, each party was given the opportunity to consult with
independent legal counsel before entering into this Agreement.
b. Restrictions on Competition. Employee agrees that he shall
not during the term of this Agreement and for a period of twelve (12)
months from the date of his termination of employment from the Company,
directly or indirectly, either as principal, partner, shareholder,
joint venturer, officer, director, consultant, member, employee or
otherwise, own any interest in, manage, control, participate in,
consult with, render services for, or in any manner engage in any
business competing, directly or indirectly, with the business of the
Company (which is cigar distribution) in any state of the United States
or foreign country in which the Company is conducting business on the
date of Employee's termination. At any time and from time to time, each
party agrees, at its expense, to take action and to execute and deliver
documents as may be reasonably necessary to effectuate the purposes of
this Covenant.
-7-
<PAGE>
c. Judicial Amendment. If the scope of any provision of this
Agreement is found by any Court to be too broad to permit enforcement
to its full extent, then such provision shall be enforced to the
maximum extent permitted by law. The parties agree that the scope of
any provision of this Agreement may be modified by a judge in any
proceeding to enforce this Agreement, so that such provision can be
enforced to the maximum extent permitted by law. If any provision of
this Agreement is found to be invalid or unenforceable for any reason,
it shall not affect the validity of the remaining provisions of this
Agreement.
d. Injunction; Remedies for Breach. Since a breach of the
provisions of this section of this Agreement could not adequately be
compensated by money damages, the Company shall be entitled, in
addition to any other right or remedy available to it at law or equity,
to an injunction restraining the breach or threatened breach and to
specific performance of any provision of this section of this
Agreement, and, in either case, no bond or other security shall be
required in connection therewith, and the parties hereby consent to the
issuance of such an injunction and to the ordering of specific
performance.
11. Notices. All notices provided for by this Agreement shall be made
in writing either (i) by actual delivery of the notice into the hands of the
parties thereunto entitled or (ii) the mailing of the notice in the United
States mail to the address, as stated below (or at such other address as may
have been designated by written notice) of the party entitled thereto, by
certified mail, return receipt requested. The notice shall be deemed to be
received on the date of its actual receipt of the party entitled thereto. All
communications hereunder shall be in writing and, if sent to the Company, shall
be delivered to:
Premium Cigars
15651 N. 83rd Way
Suite 3, Building C
Scottsdale, Arizona 85260
Fax 992-6026
Attention: David Hodges
with a copy to:
Titus, Brueckner & Berry, P.C.
7373 North Scottsdale Road
Suite B-252
Scottsdale, Arizona 85253
Attention: Kurt M. Brueckner
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<PAGE>
and, if sent to the Employee, shall be delivered to:
John E. Greenwell
16216 North 63rd Place
Scottsdale, Arizona 85254
with a copy to:
Charles W. Whetstine
8777 North Gainey Center Drive
Suite 162
Scottsdale, Arizona 85258-2106
12. Assignment. This Agreement shall inure to the benefit of and shall
be binding on and enforceable by the parties and their respective successors and
permitted assigns, as the case may be. Except as provided for herein, neither
party shall have the right to assign its rights or obligations hereunder,
without the prior written consent of the other party.
13. Miscellaneous.
a. Governing Law. This Agreement shall be governed by and
construed in accordance with the law of the State of Arizona.
b. Waiver. No waiver or modification of this Agreement shall
be valid unless in writing and duly executed by the party to be charged
therewith. Waiver by either party hereto of any breach or default by
the other party of any of the terms and provisions of this Agreement
shall not operate as a waiver of any other breach or default, whether
similar to or different from the breach or default waiver.
c. Severability. All agreements, provisions, representations,
warranties and covenants contained herein are severable, and in the
event that any one or more of them shall be held to be invalid, illegal
or unenforceable in any respect by any court of competent jurisdiction,
the validity, legality and enforceability of the remaining provisions
contained herein shall not in any way be affected thereby, and this
Agreement shall be interpreted as if such invalid, illegal or
unenforceable agreements, provisions or covenants were not contained
herein.
d. Gender. Whenever the context requires, the masculine shall
include the feminine and neuter.
e. Entire Agreement. This Agreement constitutes and embodies
the full and complete understanding and agreement of the parties hereto
provided, and supersedes all prior understandings or agreements,
whether oral or in writing. Any and all agreements
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<PAGE>
between the parties hereto, whether oral or in writing, prior to the
date hereof shall be deemed null and void.
f. Parties. This Agreement shall be binding upon and inure to
the benefit to the parties hereto, their officers, directors,
shareholders, successors, legal representatives, heirs and successors
and assigns, and no other person shall have or be construed to have any
legal or equitable right, remedy or claim under or in respect of, or by
virtue of, this Agreement or any provision herein contained.
g. Mediation; Arbitration. If a dispute arises out of or
relates to this Agreement, or the breach thereof, and if the dispute
cannot be settled through negotiation, the parties agree first to try
in good faith to settle the dispute by mediation administered by the
American Arbitration Association under its Commercial Mediation Rules.
If the dispute cannot be settled through negotiation or mediation, the
Parties agree to submit the dispute to arbitration administered by the
American Arbitration Association under its Commercial Arbitration
Rules, and judgment on the award rendered by the arbitrator(s) may be
entered in any court having jurisdiction thereof. Venue for all such
mediation and/or arbitration proceedings shall be in Maricopa County,
Arizona.
h. Attorney's Fees. The prevailing party in any litigation
hereunder shall be entitled to the recovery of its reasonable
attorneys' fees and costs from the other party. Upon Employee's entry
into this Agreement, the Company shall undertake to bear Employee's
attorney's fees incurred in the negotiation of this Agreement, in an
amount not to exceed $4,000.00.
i. Counterparts. This Agreement may be executed in two (2) or
more counterparts, each of which shall be deemed an original and all of
which, together, shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above-written.
"COMPANY" "EMPLOYEE"
PREMIUM CIGARS INTERNATIONAL, LTD.
By: /s/ Greg Lambrecht /s/ John Greenwell
------------------------------- ----------------------------------------
Its: Secretary John E. Greenwell
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EXHIBIT 10.5
[TITUS BRUECKNER & BERRY, P.C. LETTERHEAD]
February 18, 1998
HOLD FOR PICK-UP
Karissa Nisted
6746 S. Bonarden Lane
Tempe, Arizona 85283
Re: Premium Cigars International, Ltd. ("PCI")
Severance Compensation
Dear Karissa:
This letter responds to your request that PCI confirm with you the
compensation and other benefits which you are entitled to upon termination under
the terms of your Employment Agreement dated October 15, 1997 ("Employment
Agreement"). Please confirm below that the following represents your
understanding of the terms of your severance with PCI in accordance with Section
7 of your Employment Agreement:
1. That your employment with PCI terminated effective at the end of the
workday Monday, February 9, 1998;
2. For a six (6) month period, you will continue to receive your normal
salary amount, at the salary level in effect on the date your
employment was terminated minus all applicable deductions (such as for
taxes, etc.) payable biweekly;
3. Section 7(c) provides for group medical insurance eligibility, at your
own expense, under the Consolidated Omnibus Budget Reconciliation Act
of 1986 ("COBRA"), as amended, for such duration as provided by
existing law at the time of your termination; it is PCI's understanding
that, because the Company normally employed fewer than 20 employees on
a typical business day during the calendar year preceding the date of
your termination, you are not eligible for COBRA coverage;
4. That you understand that, without limitation, Sections 8, 9 and 10 of
your Employment Agreement dated October 15, 1997 represent ongoing
obligations on your part relating to PCI's customer records,
confidential information and your covenant not to compete with PCI.
<PAGE>
Karissa Nisted
February 18, 1998
Page 2
In addition to the foregoing severance terms from the Employment
Agreement, PCI waives any and all claims that it might have against you in
exchange for your mutual waiver
below.
Please contact me if you have any questions regarding this letter.
Very truly yours,
TITUS, BRUECKNER & BERRY, P.C.
/s/ Michael F. Patterson
-----------------------------------
Michael F. Patterson
MS. NISTED'S ACKNOWLEDGEMENT AND RELEASE: I acknowledge that except for the
items set forth in this letter, I have no other claims and waive all other
claims to compensation or other benefits from PCI. I waive all other claims
against the Company, its directors, officers, shareholders and agents in
exchange for the Company's mutual waiver of all claims against me. My foregoing
waiver shall not, however, be deemed to prevent me from asserting any defense in
any action brought against me by any third party and which relates to the
Company's business. Additionally, I reserve any rights I may have under the
Articles of Incorporation, Bylaws or common law for indemnification.
Date: February 18, 1998 /s/ Karissa Nisted
----------------------------------------
Karissa Nisted
COMPANY AGREEMENT TO THE TERMS SET FORTH ABOVE:
PREMIUM CIGARS INTERNATIONAL, LTD.
By: /s/ David S. Hodges Date: February 18, 1998
--------------------------------
Printed Name: David S. Hodges
Its: Chief Financial Officer
EXHIBIT 10.6
INDUSTRIAL REAL ESTATE LEASE
(SINGLE TENANT NET FORM)
ARTICLE ONE: BASIC TERMS
This Article One contains the Basic Terms of this Lease between the
Landlord and Tenant named below. Other Articles, Sections and Paragraphs of the
Lease referred to in this Article One explain and define the Basic Terms and are
to be read in conjunction with the Basic Terms.
Section 1.01. Date of Lease: February 25, 1998.
Section 1.02. Landlord (include legal entity): Palo Cristi Airpark III,
L.L.C., and Arizona limited liability company, whose address is 15685 N.
Greenway-Hayden Loop, Suite 200, Scottsdale, AZ 85260.
Section 1.03. Tenant (include legal entity): Premium Cigars
International, LTD. an Arizona corporation, whose address is 15651 N. 83rd Way,
Suite 3, Scottsdale, AZ 85260.
Section 1.04. Property: The Property is Landlord's 20,434 approximate
s.f. real property located at 15849 N. 77th Street, Scottsdale, AZ 85260-1754
and described or depicted in Exhibit "A" (the "Project"). The Project includes
the land, the buildings and all other improvements located on the land. The
Properly is will be improved substantially in accordance with the space plan
("Exhibit B") and the Standard Tenant Improvements and Allowances schedule
("Exhibit C"), both attached hereto and incorporated herein by reference.
Section 1.05. Lease Term: Five (5) years beginning May 1, 1998 and
ending on April 30, 2003.
a) Delay in Possession: If for any reason Landlord cannot deliver
possession of the Property to Tenant by April 15, 1998, Landlord shall not be
subject to any liability therefor, nor shall such failure affect the validity of
this Lease or the obligations of Tenant hereunder, but in such case Tenant shall
receive one (1) day of free Base Rent for each day of delay. *
* Notwithstanding the foregoing, if Landlord does not deliver possession of the
Property to Tenant on or before May 1, 1998 (except as for delays as a result of
acts of God), Landlord shall pay to Tenant a per day penalty of $1,000 payable
on Monday of each applicable week. If Landlord does not deliver possession of
the Property to Tenant on or before May 15, 1998, in addition to the foregoing
remedies, Tenant may at its option cancel this Lease.
b) Option to Extend: Provided Tenant is not then in default, Tenant
shall have the option to extend the Lease Term for one additional three (3) year
period by giving Landlord notice one hundred twenty (120) days prior to the
expiration of the original Lease Term. In such event the Base Rent for the
extended Lease Term shall be the then existing market rental rate
<PAGE>
for an approximate 20,000 s.f. comparable properly which is 100% airconditioned
with 50% office and 50% warehouse, but in no event lower than $19,000.00 per
month.
Section 1.06. Permitted Uses: (See Article Five) Corporate office and
warehousing/distribution of Premium Cigars International related products.
Section 1.07. Tenant's Guarantor: None.
Section 1.08. Brokers. Landlord's Broker: Classic Real Estate; Tenant's
Broker: Grubb and Ellis
Section 1.09. Commission Payable to Landlord's Broker: (See Article
Fourteen) By separate agreement.
Section 1.10. Initial Security Deposit: (See Section 3.03) $18,000.00.
Section 1.11. Vehicle Parking Spaces Allocated to Tenant: (See Section
4.05) 10 covered, 100% open.
Section 1.12. Rent and Other Charges Payable by Tenant:
(a) Base Rent: Eighteen Thousand and no/100 Dollars ($18,000.00) per
month for months 1 through 36, Nineteen Thousand and no/100 Dollars ($19,000.00)
for months 37 through 60.
(b) OTHER PERIODIC PAYMENTS: (i) Real Property Taxes (See Section
4.02); (ii) Utilities (See Section 4.03); (iii) Insurance Premiums (See Section
4.04); (iv) Tenant's Pro Rata Share of Common Area Expenses (100%) (See Section
4.05); (v) ---- Impounds for Insurance Premiums and Property Taxes (See Section
4.08); (vi) Maintenance, Repairs and Alterations (See Article Six).
Section 1.13. Landlord's Share of Profit on Assignment or Sublease:
(See Section 9.05) 100%) of the Profit (the "Landlord's Share").
Section 1.14 Riders: The following Riders are attached to and made a
part of this Lease: None.
Section 2.01. Lease of Property For Lease Term. Landlord leases the
Property to Tenant and Tenant leases the Property from Landlord for the Lease
Term. The Lease Term is for the period stated in Section 1.05 above and shall
begin and end on the dates specified in Section 1.05 above, unless the beginning
or end of the Lease Term is changed under any provision of this Lease. The
"Commencement Date" shall be the date specified in Section 1.05 above for the
beginning of the Lease Term, unless advanced or delayed under any provision of
this Lease.
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Section 2.02. Delay in Commencement. Except as provided in paragraph
1.05(a) herein. Landlord shall not be liable to Tenant if Landlord does not
deliver possession of the Property to Tenant on the Commencement Date.
Landlord's non-delivery of the Property to Tenant on that date shall not affect
this Lease or the obligations of Tenant under this Lease except that the
Commencement Date shall be delayed until Landlord delivers possession of the
Property to Tenant and the Lease Term shall be extended for a period equal to
the delay in delivery of possession of the Property to Tenant, plus the number
of days necessary to end the Lease Term on the last day of a month. If Landlord
does not deliver possession of the Property to Tenant on or before May 15, 1998
Date, Tenant may elect to cancel this Lease by giving written notice to Landlord
ends. If Tenant gives such notice, the Lease shall be cancelled and neither
Landlord nor Tenant shall have any further obligation to the other. If Tenant
does not give such notice, Tenant's right to cancel the Lease shall expire and
the Lease Term shall commence upon the delivery of possession of the Property to
Tenant. If delivery of possession of the Property to Tenant is delayed, Landlord
and Tenant shall, upon such delivery, execute an amendment to this Lease setting
forth the actual Commencement Date and expiration date of the Lease. Failure to
execute such amendment shall not affect the actual Commencement Date and
expiration date of the Lease.
Section 2.03. Early Occupancy. f Tenant occupies the Property prior to
the Commencement Date, Tenant's occupancy of the Property shall be subject to
all of the provisions of this Lease. Early occupancy of the Property shall not
advance the expiration date of this Lease. Tenant shall pay all other charges
except Base Rent specified in this Lease for the early occupancy period.
Section 2.04. Holding Over. Tenant shall vacate the Property upon the
expiration or earlier termination of this Lease. Tenant shall reimburse Landlord
for and indemnify Landlord against all damages which Landlord incurs from
Tenant's delay in vacating the Property. If Tenant does not vacate the Property
upon the expiration or earlier termination of the Lease and Landlord thereafter
accepts rent from Tenant, Tenant's occupancy of the Property shall be a
"month-to-month" tenancy, subject to all of the terms of this Lease applicable
to a month-to- month tenancy, except that the Base Rent then in effect shall be
increased by fifteen percent (15%).
ARTICLE THREE: BASE RENT
Section 3.01. Time and Manner of Payment. Upon execution of this Lease,
Tenant shall pay Landlord the Base Rent in the amount stated in Paragraph
1.12(a) above for the first month of the Lease Term. On the first day of the
second month of the Lease Term and each month thereafter, Tenant shall pay
Landlord the Base Rent, in advance, without offset, deduction or prior demand.
The Base Rent shall be payable at Landlord's address or at such other place as
Landlord may designate in writing.
Section 3.02. Deleted.
3
<PAGE>
Section 3.03. Security Deposit; Increases.
(a) Upon the execution of this Lease, Tenant shall deposit with
Landlord a cash Security Deposit in the amount set forth in Section 1.10 above.
Landlord may apply all or part of the Security Deposit to any unpaid rent or
other charges due from Tenant or to cure any other defaults of Tenant. If
Landlord uses any part of the Security Deposit, Tenant shall restore the
Security Deposit to its full amount within ten (10) days after Landlord's
written request. Tenant's failure to do so shall be a material default under
this Lease. No interest shall be paid on the Security Deposit. Landlord shall
not be required to keep the Security Deposit separate from its other accounts
and no trust relationship is created with respect to the Security Deposit.
(b) Each Time the Base Rent is increased, Tenant shall deposit
additional funds with Landlord sufficient to increase the Security Deposit to an
amount which bears the same relationship to the adjusted Base Rent as the
initial Security Deposit bore to the initial Base Rent.
Section 3.04. Termination; Advance Payments. Upon termination of this
Lease under Article Seven (Damage or Destruction), Article Eight (Condemnation)
or any other termination not resulting from Tenant's default, and after Tenant
has vacated the Property in the manner required by this Lease, Landlord shall
refund or credit to Tenant (or Tenant's successor) the unused portion of the
Security Deposit, any advance rent or other advance payments made by Tenant to
Landlord, and any amounts paid for real property taxes and other reserves which
apply to any time periods after termination of the Lease.
ARTICLE FOUR: OTHER CHARGES PAYABLE BY TENANT
Section 4.01. Additional Rent. All charges payable by Tenant other than
Base Rent are called "Additional Rent." Unless this Lease provides otherwise,
Tenant shall pay all Additional Rent then due with the next monthly installment
of Base Rent. The term "rent" shall mean Base Rent and Additional Rent.
Section 4.02. Property Taxes.
(a) Real Property Taxes. Tenant shall pay all real property taxes on
the Property (including any fees, taxes or assessments against, or as a result
of, any tenant improvements installed on the Property by or for the benefit of
Tenant) during the Lease Term. Subject to Paragraph 4.02(c) and Section 4.07
below, such payment shall be made at least ten (10) days prior to the
delinquency date of the taxes. Within such ten (10) day period, Tenant shall
furnish Landlord with satisfactory evidence that the real property taxes have
been paid. Landlord shall reimburse Tenant for any real property taxes paid by
Tenant covering any period of time prior to or after the Lease Term. If Tenant
fails to pay the real property taxes when due, Landlord may pay the taxes and
Tenant shall reimburse Landlord for the amount of such tax payment as Additional
Rent.
4
<PAGE>
(b) Definition of "Real Property Tax." "Real property tax" means: (i)
any fee, license fee, license tax, business license fee, commercial rental tax,
levy, charge, assessment, penalty or tax imposed by any taxing authority against
the Property; (ii) any tax on the Landlord's right to receive, or the receipt
of, rent or income from the Property or against Landlord's business of leasing
the Property; (iii) any tax or charge for fire protection, streets, sidewalks,
road maintenance, refuse or other services provided to the Property by any
governmental agency; (iv) any tax imposed upon this transaction or based upon a
re-assessment of the Property due to a change of ownership, as defined by
applicable law, or other transfer of all or part of Landlord's interest in the
Property; and (v) any charge or fee replacing any tax previously included within
the definition of real property tax. "Real property tax" does not, however,
include Landlord's federal or state income, franchise, inheritance or estate
taxes.
(c) Joint Assessment. If the Property is not separately assessed,
Landlord shall reasonably determine Tenant's share of the real property tax
payable by Tenant under Paragraph 4.02(a) from the assessor's worksheets or
other reasonably available information. Tenant shall pay such share to Landlord
within fifteen (15) days after receipt of Landlord's written statement.
(d) Personal Property Taxes.
(i) Tenant shall pay all taxes charged against trade fixtures,
furnishings, equipment or any other personal property belonging to
Tenant. Tenant shall try to have personal property taxed separately
from the Property.
(ii) If any of Tenant's personal property is taxed with the
Property, Tenant shall pay Landlord the taxes for the personal property
within fifteen (15) days after Tenant receives a written statement from
Landlord for such personal property taxes.
(e) Tenant's Right to Contest Taxes. Tenant may attempt to have the
assessed valuation of the Property reduced or may initiate proceedings to
contest the real property taxes. If required by law, Landlord shall join in the
proceedings brought by Tenant. However, Tenant shall pay all costs of the
proceedings, including any costs or fees incurred by Landlord. Upon the final
determination of any proceeding or contest, Tenant shall immediately pay the
real property taxes due, together with all costs, charges, interest and
penalties incidental to the proceedings. If Tenant does not pay the real
property taxes when due and contests such taxes, Tenant shall not be in default
under this Lease for nonpayment of such taxes if Tenant deposits funds with
Landlord or opens an interest-bearing account reasonably acceptable to Landlord
in the joint names of Landlord and Tenant. The amount of such deposit shall be
sufficient to pay the real property taxes plus a reasonable estimate of the
interest, costs, charges and penalties which may accrue if Tenant's action is
unsuccessful, less any applicable tax impounds previously paid by Tenant to
Landlord. The deposit shall be applied to the real property taxes due, as
determined at such proceedings. The real property taxes shall be paid under
protest from such deposit if such payment under protest is necessary to prevent
the Property from being sold under a "tax sale" or similar enforcement
proceeding.
5
<PAGE>
Section 4.03. Utilities. Tenant shall pay, directly to the appropriate
supplier, the cost of all natural gas, heat, light, power, sewer service,
telephone, water, refuse disposal and other utilities and services supplied to
the Property. However, if any services or utilities are jointly metered with
other property, Landlord shall make a reasonable determination of Tenant's
proportionate share of the cost of such utilities and services and Tenant shall
pay such share to Landlord within fifteen (15) days after receipt of Landlord's
written statement.
Section 4.04. Insurance Policies.
(a) Liability Insurance. During the Lease Term, Tenant shall maintain a
policy of commercial general liability insurance (sometimes known as broad form
comprehensive general liability insurance) insuring Tenant against liability for
bodily injury, property damage (including loss of use of property) and personal
injury arising out of the operation, use or occupancy of the Property. Tenant
shall name Landlord as an additional insured under such policy. The initial
amount of such insurance shall be One Million Dollars ($1,000,000) per
occurrence and shall be subject to periodic increase based upon inflation,
increased liability awards, recommendation of Landlord's professional insurance
advisers and other relevant factors. The liability insurance obtained by Tenant
under this Paragraph 4.0(a) shall (i) be primary and non-contributing; (ii)
contain cross-liability endorsements; and (iii) insure Landlord against Tenant's
performance under Section 5.05, if the matters giving rise to the indemnity
under Section 5.05 result from the negligence of Tenant. The amount and coverage
of such insurance shall not limit Tenant's liability nor relieve Tenant of any
other obligation under this Lease. Landlord may also obtain comprehensive public
liability insurance in an amount and with coverage determined by Landlord
insuring Landlord against liability arising out of ownership, operation, use or
occupancy of the Property. The policy obtained by Landlord shall not be
contributory and shall not provide primary insurance.
(b) Property and Rental Income Insurance. During the Lease Term,
Landlord shall maintain policies of insurance covering loss of or damage to the
Property in the full amount of its replacement value. Landlord shall obtain 3
bids for such insurance policies and select the lowest bid. Such policy shall
contain an inflation Guard Endorsement and shall provide protection against all
perils included within the classification of fire, extended coverage, vandalism,
malicious mischief, special extended perils (all risk), sprinkler leakage and
any other perils which Landlord deems reasonably necessary. Landlord shall have
the right to obtain flood and earthquake insurance if required by any lender
holding a security interest in the Property. Landlord shall not obtain insurance
for Tenant's fixtures or equipment or building improvements installed by Tenant
on the Property. During the Lease Term, Landlord shall also maintain a rental
income insurance policy, with loss payable to Landlord, in an amount equal to
one year's Base Rent plus estimated real property taxes and insurance premiums.
Tenant shall be liable for the payment of any deductible amount under Landlord's
or Tenant's insurance policies maintained pursuant to this Section 4.04, in an
amount not to exceed Two Thousand Dollars ($2,000). Tenant shall not do or
permit anything to be done which invalidates any such insurance policies.
6
<PAGE>
(c) Payment of Premiums. Subject to Section 4.07, Tenant shall pay all
premiums for the insurance policies described in Paragraphs 4.04(a) and (b)
(whether obtained by Landlord or Tenant) within fifteen (15) days after Tenant's
receipt of a copy of the premium statement or other evidence of the amount due,
except Landlord shall pay all premiums for non-primary comprehensive public
liability insurance which Landlord elects to obtain as provided in Paragraph
4.04(a). If insurance policies maintained by Landlord cover improvements on real
property other than the Property, Landlord shall deliver to Tenant a statement
of the premium applicable to the Property showing in reasonable detail how
Tenant's share of the premium was computed. If the Lease Term expires before the
expiration of an insurance policy maintained by Landlord, Tenant shall be liable
for Tenant's prorated share of the insurance premiums. Before the Commencement
Date, Tenant shall deliver to Landlord a copy of any policy of insurance which
Tenant is required to maintain under this Section 4.04. At least thirty (30)
days prior to the expiration of any such policy, Tenant shall deliver to
Landlord a renewal of such policy. As an alternative to providing a policy of
insurance, Tenant shall have the right to provide Landlord a certificate of
insurance, executed by an authorized officer of the insurance company, showing
that the insurance which Tenant is required to maintain under this Section 4.04
is in full force and effect and containing such other information which Landlord
reasonably requires. *
*Tenant shall have the right to approve the insurance carrier and insurance
coverage prior to paying any insurance premiums.
(d) General Insurance Provisions.
(i) Any insurance which Tenant is required to maintain under this
Lease shall include a provision which requires the insurance carrier to
give Landlord not less than thirty (30) days' written notice prior to
any cancellation or modification of such coverage.
(ii) If Tenant fails to deliver any policy, certificate or renewal
to Landlord required under this Lease within the prescribed time period
or if any such policy is cancelled or modified during the Lease Term
without Landlord's consent, Landlord may obtain such insurance, in
which case Tenant shall reimburse Landlord for the cost of such
insurance within fifteen (15) days after receipt of a statement that
indicates the cost of such insurance.
(iii) Tenant shall maintain all insurance required under this
Lease with companies holding a "General Policy Rating" of A-12 or
better, as set forth in the most current issue of "Best Key Rating
Guide". Landlord and Tenant acknowledge the insurance markets are
rapidly changing and that insurance in the form and amounts described
in this Section 4.04 may not be available in the future. Tenant
acknowledges that the insurance described in this Section 4.04 is for
the primary benefit of Landlord. If at any time during the Lease Term,
Tenant is unable to maintain the insurance required under the Lease,
Tenant shall nevertheless maintain insurance coverage which is
customary and commercially reasonable in the insurance industry for
Tenant's type of business, as that
7
<PAGE>
coverage may change from time to time. Landlord makes no representation
as to the adequacy of such insurance to protect Landlord's or Tenant's
interests. Therefore, Tenant shall obtain any such additional property
or liability insurance which Tenant deems necessary to protect Landlord
and Tenant.
(iv) Unless prohibited under any applicable insurance policies
maintained, Landlord and Tenant each hereby waive any and all rights of
recovery against the other, or against the officers, employees, agents
or representatives of the other, for loss of or damage to its property
or the property of others under its control, if such loss or damage is
covered by any insurance policy in force (whether or not described in
this Lease) at the time of such loss or damage. Upon obtaining the
required policies of insurance, Landlord and Tenant shall give notice
to the insurance carriers of this mutual waiver of subrogation.
Section 4.05. Deleted.
Section 4.06. Interest on Past Due Obligations. Any amount owed by
Tenant to Landlord which is not paid when due shall bear interest at the rate of
fifteen percent (15%) per annum from the due date of such amount. However,
interest shall not be payable on late charges to be paid by Tenant under this
Lease. The payment of interest on such amounts shall not excuse or cure any
default by Tenant under this Lease. If the interest rate specified in this Lease
is higher than the rate permitted by law, the interest rate is hereby decreased
to the maximum legal interest rate permitted by law.
Section 4.07. Impounds for Insurance Premiums and Real Property Taxes.
Tenant shall pay Landlord a sum equal to one-twelfth (1/12) of the annual real
property taxes and insurance premiums payable by Tenant under this Lease,
together with each payment of Base Rent. Landlord shall hold such payments in a
non-interest bearing impound account. If unknown, Landlord shall reasonably
estimate the amount of real property taxes and insurance premiums when due.
Tenant shall pay any deficiency of funds in the impound account to Landlord upon
written request. If Tenant defaults under this Lease, Landlord may apply any
funds in the impound account to any obligation then due under this Lease.
ARTICLE FIVE: USE OF PROPERTY.
Section 5.01. Permitted Uses. Tenant may use the Property only for the
Permitted Uses set forth in Section 1.06 above.
Section 5.02. Manner of Use. Tenant shall not cause or permit the
Property to be used in any way which constitutes a violation of any law,
ordinance, or governmental regulation or order, which interferes with the rights
of other tenants of Landlord, or which constitutes a nuisance or waste. Tenant
shall obtain and pay for all permits, including a Certificate of Occupancy,
required for Tenant's occupancy of the Property and shall promptly take all
actions necessary to comply with all applicable statutes, ordinances, rules,
regulations, orders and
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requirements regulating the use by Tenant of the Property, including the
Occupational Safety and Health Act.
Section 5.03. Hazardous Materials. As used in this Lease, the term
"Hazardous Material" means any flammable items, explosives, radioactive
materials, hazardous or toxic substances, material or waste or related
materials, including any substances defined as or included in the definition of
"hazardous substances", "hazardous wastes", "hazardous materials" or "toxic
substances" now or subsequently regulated under any applicable federal, state or
local laws or regulations, including without limitation petroleum-based
products, paints, solvents, lead, cyanide, DDT, printing inks, acids,
pesticides, ammonia compounds and other chemical products, asbestos, PCBs and
similar compounds, and including any different products and materials which are
subsequently found to have adverse effects on the environment or the health and
safety of persons except warehousing/distribution of cigars and related cigar
products and other consumer packaged goods. Tenant shall not cause or permit any
Hazardous Materials to be generated, produced, brought upon, used, stored,
treated or disposed of in or about the Property by Tenant, its agents,
employees, contractors, sublessees or invitees without the prior written consent
of Landlord. Landlord shall be entitled to take into account such other factors
or facts as Landlord may reasonably determine to be relevant in determining
whether to grant or withhold consent to Tenant's proposed activity with respect
to Hazardous Material. In no event, however, shall Landlord be required to
consent to the installation or use of any storage tanks on the Property.
Section 5.04. Signs and Auctions. Tenant shall not place any signs on
the Property without Landlord's prior written consent. Tenant shall not conduct
or permit any auctions or sheriff's sales at the Property.
Section 5.05. Indemnity. Tenant shall indemnify Landlord against and
hold Landlord harmless from any and all costs, claims or liability arising from:
(a) Tenant's use of the Property; (b) the conduct of Tenant's business or
anything else done or permitted by Tenant to be done in or about the Property,
including any contamination of the Property or any other property resulting from
the presence or use of Hazardous Material caused or permitted by Tenant; (c) any
breach or default in the performance of Tenant's obligations under this Lease;
(d) any misrepresentation or breach of warranty by Tenant under this Lease; or
(e) other acts or omissions of Tenant. Tenant shall defend Landlord against any
such cost, claim or liability at Tenant's expense with counsel reasonably
acceptable to Landlord or, at Landlord's election, Tenant shall reimburse
Landlord for any legal fees or costs incurred by Landlord in connection with any
such claim. As a material part of the consideration to Landlord, Tenant assumes
all risk of damage to property or injury to persons in or about the Property
arising from any cause, and Tenant hereby waives all claims in respect thereof
against Landlord, except for any claim arising out of Landlord's gross
negligence or willful misconduct. As used in this Section, the term "Tenant"
shall include Tenant's employees, agents, contractors and invitees, if
applicable. Landlord shall indemnify Tenant from damages or injury to any person
arising from the use of the common areas arising from Landlord's negligence in
maintaining the common areas.
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Section 5.06. Landlord's Access. Landlord or its agents may enter the
Property at all reasonable times to show the Property to potential buyers,
investors or tenants or other parties; to do any other act or to inspect and
conduct tests in order to monitor Tenant's compliance with all applicable
environmental laws and all laws governing the presence and use of Hazardous
Material; or for any other purpose Landlord deems necessary. Landlord shall give
Tenant prior notice of such entry, except in the case of an emergency. Landlord
may place customary "For Sale" or "For Lease" signs on the Property.
Section 5.07. Quiet Possession. If Tenant pays the rent and complies
with all other terms of this Lease, Tenant may occupy and enjoy the Property for
the full Lease Term, subject to the provisions of this Lease.
ARTICLE SIX: CONDITION OF PROPERTY; MAINTENANCE, REPAIRS AND ALTERATIONS
Section 6.01. Existing Conditions. Tenant accepts the Property in its
condition as of the execution of the Lease, subject lo all recorded matters,
laws, ordinances, and governmental regulations and orders. Except as provided
herein, Tenant acknowledges that neither Landlord nor any agent of Landlord has
made any representalion as to the condition of the Property or the suitability
of the Property for Tenant's intended use. Tenant represents and warrants that
Tenant has made its own inspection of and inquiry regarding the condition of the
Property and is not relying on any representations of Landlord or any Broker
with respect thereto. If Landlord or Landlord's Broker has provided a Property
Information Sheet or other Disclosure Statement regarding the Property, a copy
is attached as an exhibit to the Lease.
Section 6.02. Exemption of Landlord from Liability. Landlord shall not
be liable for any damage or injury to the person, business (or any loss of
income therefrom), goods, wares, merchandise or other property of Tenant,
Tenant's employees, invitees, customers or any other person in or about the
Properly, whether such damage or injury is caused by or results from: (a) fire,
steam, electricity, water, gas or rain; (b) the breakage, leakage, obstruction
or other defects of pipes, sprinklers, wires, appliances, plumbing, air
conditioning or lighting fixtures or any other cause; (c) conditions arising in
or about the Property or upon other portions of the Project, or from other
sources or places; or (d) any act or omission of any other tenant of the
Project. Landlord shall not be liable for any such damage or injury even though
the cause of or the means of repairing such damage or injury are not accessible
to Tenant. The provisions of this Section 6.02 shall now, however, exempt
Landlord from liability for Landlord's gross negligence or willful misconduct.
Section 6.03. Landlord's Obligations. Subject to the provisions of
Article Seven (Damage or Destruction) and Article Eight (Condemnation), Landlord
shall have absolutely no responsibility to repair, maintain or replace any
portion of the Property at any time except Landlord shall be responsible for
maintenance of the roof. Tenant also beneficiary of warranties on HVAC Systems.
If Landlord does have responsibility to repair or replace any portion of the
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property and fails to do so, within three (3) business days, Tenant may at its
option make such repairs and deduct the cost of such repairs due to Landlord
from the rent.
Section 6.04. Tenant's Obligations.
(a) Except as provided in Article Seven (Damage or Destruction),
Section 6.03 (maintaining the roof) and Article Eight (Condemnation), Tenant
shall keep all portions of the Property (including structural, nonstructural,
interior, exterior, and landscaped areas, portions, systems and equipment) in
good order, condition and repair (including interior repainting and refinishing,
as needed). If any portion of the Property or any system or equipment in the
Property which Tenant is obligated to repair cannot be fully repaired or
restored, Tenant shall promptly replace such portion of the Property or system
or equipment in the Property, regardless of whether the benefit of such
replacement extends beyond the Lease Term; but if the benefit or useful life of
such replacement extends beyond the Lease Term (as such term may be extended by
exercise of any options), the useful life of such replacement shall be prorated
over the remaining portion of the Lease Term (as extended), and Tenant shall be
liable only for that portion of the cost which is applicable to the Lease Term
(as extended). Tenant shall maintain a preventive maintenance contract providing
for the regular inspection and maintenance of the heating and air conditioning
system by a licensed heating and air conditioning contractor. If any part of the
Property is damaged by any act or omission of Tenant, Tenant shall pay Landlord
the cost of repairing or replacing such damaged property, whether or nol
Landlord would otherwise be obligated to pay the cost of maintaining or
repairing such property. It is the intention of Landlord and Tenant that at all
times Tenant shall maintain the portions of the Property which Tenant is
obligated to maintain in an attractive, first-class and fully operative
condition.
(b) Tenant shall fulfill all of Tenant's obligations under this Section
6.04 at Tenant's sole expense. If Tenant fails to maintain, repair or replace
the Property as required by this Section 6.04, Landlord may, upon ten (10) days'
prior notice to Tenant (except that no notice shall be required in the case of
an emergency), enter the Property and perform such maintenance or repair
(including replacement, as needed) on behalf of Tenant. In such case, Tenant
shall reimburse Landlord for all costs incurred in performing such maintenance
or repair immediately upon demand.
Section 6.05. Alterations, Additions, and Improvements.
(a) Tenant shall not make any alterations, additions, or improvements
to the Property without Landlord's prior written consent, except for
non-structural alterations which do not exceed Ten Thousand Dollars ($10,000) in
cost cumulatively over the Lease Term and which are not visible from the outside
of any building of which the Property is part. Landlord may require Tenant to
provide demolition and/or lien and completion bonds in form and amount
satisfactory to Landlord. Tenant shall promptly remove any alterations,
additions, or improvements constructed in violation of this Paragraph 6.05(a)
upon Landlord's written request. Ail alterations, additions, and improvements
shall be done in a good and workmanlike manner,
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in conformity with all applicable laws and regulations, and by a contractor
approved by Landlord. Upon completion of any such work, Tenant shall provide
Landlord with "as built" plans, copies of all construction contracts, and proof
of payment for all labor and materials.
(b) Tenant shall pay when due all claims for labor and material
furnished to the Property. Tenant shall give Landlord at least twenty (20) days'
prior written notice of the commencement of any work on the Property, regardless
of whether Landlord's consent to such work is required. Landlord may elect to
record and post notices of non-responsibility on the Property.
Section 6.06. Condition upon Termination. Upon the termination of the
Lease, Tenant shall surrender the Property to Landlord, broom clean and in the
same condition as received except for ordinary wear and tear which Tenant was
not otherwise obligated to remedy under any provision of this Lease. However,
Tenant shall not be obligated to repair any damage which Landlord is required to
repair under Article Seven (Damage or Destruction). in addition, Landlord may
require Tenant to remove any alterations, additions or improvements (whether or
not made with Landlord's consent) prior to the expiration of the Lease and to
restore the Property to its prior condition, all at Tenant's expense. All
alterations, additions and improvements which Landlord has not required Tenant
to remove shall become Landlord's property and shall be surrendered to Landlord
upon the expiration or earlier termination of the Lease, except that Tenant may
remove any of Tenant's machinery or equipment which can be removed without
material damage to the Property. Tenant shall repair, at Tenant's expense, any
damage to the Property caused by the removal of any such machinery or equipment.
In no event, however, shall Tenant remove any of the following materials or
equipment (which shall be deemed Landlord's property) without Landlord's prior
written consent: any power wiring or power panels; lighting or lighting
fixtures; wall coverings; drapes, blinds or other window coverings; carpets or
other floor coverings; heaters, air conditioners or any other heating or air
conditioning equipment; fencing or security gates; or other similar building
operating equipment and decorations.
ARTICLE SEVEN: DAMAGE OR DESTRUCTION
Section 7.01. Partial Damage to Property.
(a) Tenant shall notify Landlord in writing immediately upon the
occurrence of any damage to the Property. If the Property is only partially
damaged (i.e., less than fifty percent (50%) of the Property is untenantable as
a result of such damage or less than fifty percent (50%) of Tenant's operations
are materially impaired) and if the proceeds received by Landlord from the
insurance policies described in Paragraph, 4.04(b) are sufficient to pay for the
necessary repairs, this Lease shall remain in effect and Landlord shall repair
the damage within thirty (30) days. Landlord may elect (but is not required) to
repair any damage to Tenant's fixtures, equipment, or improvements.
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(b) If the insurance proceeds received by Landlord are not sufficient
to pay the entire cost of repair, or if the cause of the damage is not covered
by the insurance policies which Landlord maintains under Paragraph 4.04(b),
Landlord may elect either to (i) repair the damage as soon as reasonably
possible, in which case this Lease shall remain in full force and effect, or
(ii) terminate this Lease as of the date the damage occurred. Landlord shall
notify Tenant within thirty (30) days after receipt of notice of the occurrence
of the damage whether Landlord elects to repair the damage or terminate the
Lease. If Landlord elects to repair the damage, Tenant shall pay Landlord the
"deductible amount" (if any) under Landlord's insurance policies. If Landlord
elects to terminate the Lease, Tenant may elect to continue this Lease in full
force and effect, in which case Tenant shall repair any damage to the Property
and any building in which the Property is located. Tenant shall pay the cost of
such repairs, except that upon satisfactory completion of such repairs, Landlord
shall deliver to Tenant any insurance proceeds received by Landlord for the
damage repaired by Tenant. Tenant shall give Landlord written notice of such
election within ten (10) days after receiving Landlord's termination notice.
(c) If the damage to the property occurs during the last six (6) months
of the Lease Term and such damage will require more than thirty (30) days to
repair, either Landlord or Tenant may elect to terminate this Lease as of the
date the damage occurred, regardless of the sufficiency of any insurance
proceeds. The party electing to terminate this Lease shall give written
notification to the other party of such election within thirty (30) days after
Tenant's notice to Landlord of the occurrence of the damage.
Section 7.02. Substantial or Total Destruction. If the Property is
substantially or totally destroyed by any cause whatsoever (i.e., the damage to
the Property is greater than partial damage as described in Section 7.01), and
regardless of whether Landlord receives any insurance proceeds, this Lease shall
terminate as of the date the destruction occurred. Notwithstanding the preceding
sentence, if the Property can be rebuilt within thirty (30) days after the date
of destruction, Landlord may elect to rebuild the Property at Landlord's own
expense, in which case this Lease shall remain in full force and effect.
Landlord shall notify Tenant of such election within thirty (30) days after
Tenant's notice of the occurrence of total or substantial destruction. If
Landlord so elects, Landlord shall rebuild the Property at Landlord's sole
expense, except that if the destruction was caused by an act or omission of
Tenant, Tenant shall pay Landlord the difference between the actual cost of
rebuilding and any insurance proceeds received by Landlord.
Section 7.03. Temporary Reduction of Rent. If the Property is destroyed
or damaged and Landlord or Tenant repairs or restores the Property pursuant to
the provisions of this Article Seven, any rent payable during the period of such
damage, repair and/or restoration shall be reduced according to the degree, if
any, to which Tenant's use of the Property is impaired. However, the reduction
shall not exceed the sum of one year's payment of Base Rent, insurance premiums
and real property taxes. Except for such possible reduction in Base Rent,
insurance premiums and real property taxes, Tenant shall not be entitled to any
compensation, reduction, or reimbursement from Landlord as a result of any
damage, destruction, repair, or restoration of or to the Property.
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Section 7.04. Waiver. Tenant waives the protection of any statute, code
or judicial decision which grants a tenant the right to terminate a lease in the
event of the substantial or total destruction of the leased property. Tenant
agrees that the provisions of Section 7.02 above shall govern the rights and
obligations of Landlord and Tenant in the event of any substantial or total
destruction to the Property.
ARTICLE EIGHT: CONDEMNATION
If all or any portion of the Property is taken under the power of
eminent domain or sold under the threat of that power (all of which are called
"Condemnation"), this Lease shall terminate as to the part taken or sold on the
date the condemning authority takes title or possession, whichever occurs first.
If more than twenty percent (20%) of the floor area of the building in which the
Property is located, or which is located on the Property, is taken, either
Landlord or Tenant may terminate this Lease as of the date the condemning
authority takes title or possession, by delivering written notice to the other
within ten (10) days after receipt of written notice of such taking (or in the
absence of such notice, within ten (10) days after the condemning authority
takes title or possession). If neither Landlord nor Tenant terminates this
Lease, this Lease shall remain in effect as to the portion of the Property not
taken, except that the Base Rent and Additional Rent shall be reduced in
proportion to the reduction in the floor area of the Property. Any Condemnation
award or payment shall be distributed in the following order: (a) first, to any
ground lessor, mortgagee or beneficiary under a deed of trust encumbering the
Property, the amount of its interest in the Property; (b) second, to Tenant,
only the amount of any award specifically designated for loss of or damage to
Tenant's trade fixtures or removable personal property; and (c) third, to
Landlord, the remainder of such award, whether as compensation for reduction in
the value of the leasehold, the taking of the fee, or otherwise. If this Lease
is not terminated, Landlord shall repair any damage to the Property caused by
the Condemnation, except that Landlord shall not be obligated to repair any
damage for which Tenant has been reimbursed by the condemning authority. If the
severance damages received by Landlord are not sufficient to pay for such
repair, Landlord shall have the right to either terminate this Lease or make
such repair at Landlord's expense.
ARTICLE NINE: ASSIGNMENT AND SUBLETTING
Section 9.01. Landlord's Consent Required. No portion of the Property
or of Tenant's interest in this Lease may be acquired by any other person or
entity, whether by sale, assignment, mortgage, sublease, transfer, operation of
law, or act of Tenant, without Landlord's prior written consent, except as
provided in Section 9.02 below. Landlord has the right to grant or withhold its
consent as provided in Section 9.05 below. Any attempted transfer without
consent shall be void and shall constitute a non-curable breach of this Lease.
Section 9.0. Tenant Affiliate. Tenant may assign this Lease or sublease
the Property, without Landlord's consent, to any corporation which controls, is
controlled by or is under common control with Tenant, or to any corporation
resulting from the merger of or
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consolidation with Tenant ("Tenant's Affiliate"). In such case, any Tenant's
Affiliate shall assume in writing all of Tenant's obligations under this Lease.
Section 9.03. No Release of Tenant. No transfer permitted by this
Article Nine, whether with or without Landlord's consent, shall release Tenant
or change Tenant's primary liability to pay the rent and to perform all other
obligations of Tenant under this Lease. Landlord's acceptance of rent from any
other person is not a waiver of any provision of this Article Nine. Consent to
one transfer is not a consent to any subsequent transfer. If Tenant's transferee
defaults under this Lease, Landlord may proceed directly against Tenant without
pursuing remedies against the transferee. Landlord may consent to subsequent
assignments or modifications of this Lease by Tenant's transferee, without
notifying Tenant or obtaining its consent. Such action shall not relieve
Tenant's liability under this Lease.
Section 9.04. Offer to Terminate. If Tenant desires to assign the Lease
or sublease the Property, Tenant shall have the right to offer, in writing, to
terminate the Lease as of a date specified in the offer. If Landlord elects in
writing to accept the offer to terminate within twenty (20) days after notice of
the offer, the Lease shall terminate as of the date specified and all the terms
and provisions of the Lease governing termination shall apply. If Landlord does
not so elect, the Lease shall continue in effect until otherwise terminated and
the provisions of Section 9.05 with respect to any proposed transfer shall
continue to apply.
Section 9.05. Landlord's Consent.
(a) Tenant's request for consent to any transfer described in Section
9.01 shall set forth in writing the details of the proposed transfer, including
the name, business and financial condition of the prospective transferee,
financial details of the proposed transfer (e.g., the term of and the rent and
security deposit payable under any proposed assignment or sublease), and any
other information Landlord deems relevant. Landlord shall have the right to
withhold consent, if reasonable, or to grant consent, based on the following
factors: (i) the business of the proposed assignee or subtenant and the proposed
use of the Property; (ii) the net worth and financial reputation of the proposed
assignee or subtenant; (iii) Tenant's compliance with all of its obligations
under the Lease; and (iv) such other factors as Landlord may reasonably deem
relevant. If Landlord objects to a proposed assignment solely because of the net
worth and/or financial reputation of the proposed assignee, Tenant may
nonetheless sublease (but not assign), all or a portion of the Property to the
proposed transferee, but only on the other terms of the proposed transfer.
(b) If Tenant assigns or subleases, the following shall apply:
(i) Tenant shall pay to Landlord as Additional Rent under the
Lease the Landlord's Share (stated in Section 1.13) of the Profit
(defined below) on such transaction as and when received by Tenant,
unless Landlord gives written notice to Tenant and the assignee or
subtenant that Landlord's Share shall be paid by the assignee or
subtenant to Landlord directly. The "Profit" means (A) all amounts paid
to Tenant for such assignment or
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sublease, including "key" money, monthly rent in excess of the monthly
rent payable under the Lease, and all fees and other consideration paid
for the assignment or sublease, including fees under any collateral
agreements, less (B) costs and expenses directly incurred by Tenant in
connection with the execution and performance of such assignment or
sublease for real estate broker's commissions and costs of renovation
or construction of tenant improvements required under such assignment
or sublease. Tenant is entitled to recover such costs and expenses
before Tenant is obligated to pay the Landlord's Share to Landlord. The
Profit in the case of a sublease of less than all the Property is the
rent allocable to the subleased space as a percentage on a square
footage basis.
(ii) Tenant shall provide Landlord a written statement certifying
all amounts to be paid from any assignment or sublease of the Property
within thirty (30) days after the transaction documentation is signed,
and Landlord may inspect Tenant's books and records to verity the
accuracy of such statement. On written request, Tenant shall promptly
furnish to Landlord copies of all the transaction documentation, all of
which shall be certified by Tenant to be complete, true and correct.
Landlord's receipt of Landlord's Share shall not be a consent to any
further assignment or subletting. The breach of Tenant's obligation
under this Paragraph 9.05(b) shall be a material default of the Lease.
Section 9.06. No Merger. No merger shall result from Tenant's sublease
of the Property under this Article Nine, Tenant's surrender of this Lease or the
termination of this Lease in any other manner. In any such event, Landlord may
terminate any or all subtenancies or succeed to the interest of Tenant as
sublandlord under any or all subtenancies.
ARTICLE TEN: DEFAULTS; REMEDIES
Section 10.01. Covenants and Conditions. Tenant's performance of each
of Tenant's obligations under this Lease is a condition as well as a covenant.
Tenant's right to continue in possession of the Property is conditioned upon
such performance. Time is of the essence in the performance of all covenants and
conditions.
Section 10.02. Defaults. Tenant shall be in material default under this
Lease:
(a) If Tenant abandons the Property or if Tenant's vacation of the
Property results in the cancellation of any insurance described in Section 4.04;
(b) If Tenant fails to pay rent or any other charge when due, and such
failure continues for ten business days following written notice from Landlord
to Tenant thereof;
(c) If Tenant fails to perform any of the Tenant's non-monetary
obligations under this Lease for a period of thirty (30) days after written
notice from Landlord; provided that if more than thirty (30) days are required
to complete such performance, Tenant shall not be in default if Tenant commences
such performance within the thirty (30)-day period and thereafter diligently
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pursues its completion. However, Landlord shall not be required to give such
notice if Tenant's failure to perform constitutes a non-curable breach of this
Lease. The notice required by this Paragraph is intended to satisfy any and all
notice requirements imposed by law on Landlord and is not in addition to any
such requirement.
(d) (i) If Tenant makes a general assignment or general arrangement for
the benefit of creditors; (ii) if a petition for adjudication of bankruptcy or
for reorganization or rearrangement is filed by or against Tenant and is not
dismissed within thirty (30) days; (iii) if a trustee or receiver is appointed
to take possession of substantially all of Tenant's assets located at the
Property or of Tenant's interest in this Lease and possession is not restored to
Tenant within thirty (30) days; or (iv) if substantially all of Tenant's assets
located at the Property or of Tenant's interest in this Lease is subjected to
attachment, execution or other judicial seizure which is not discharged within
thirty (30) days. If a court of competent jurisdiction determines that any of
the acts described in this subparagraph (d) is not a default under this Lease,
and a trustee is appointed to take possession (or if Tenant remains a debtor in
possession) and such trustee or Tenant transfers Tenant's interest hereunder,
then Landlord shall receive, as Additional Rent, the excess, if any, of the rent
(or any other consideration) paid in connection with such assignment or sublease
over the rent payable by Tenant under this Lease.
(e) If any guarantor of the Lease revokes or otherwise terminates, or
purports to revoke or otherwise terminate, any guaranty of all or any portion of
Tenant's obligations under the Lease. Unless otherwise expressly provided, no
guaranty of the Lease is revocable.
Section 10.03. Remedies. On the occurrence of any material default by
Tenant, Landlord may, at any time thereafter, with or without notice or demand
and without limiting Landlord in the exercise of any right or remedy which
Landlord may have:
(a) Terminate Tenant's right to possession of the Property by any
lawful means, in which case this Lease shall terminate and Tenant shall
immediately surrender possession of the Property to Landlord. In such event,
Landlord shall be entitled to recover from Tenant all damages incurred by
Landlord by reason of Tenant's default, including (i) the worth at the time of
the award of the unpaid Base Rent, Additional Rent and other charges which
Landlord had earned at the time of the termination; (ii) the worth at the time
of the award of the amount by which the unpaid Base Rent, Additional Rent and
other charges which Landlord would have earned after termination until the time
of the award exceeds the amount of such rental loss that Tenant proves Landlord
could have reasonably avoided; (iii) the worth at the time of the award of the
amount by which the unpaid Base Rent, Additional Rent and other charges which
Tenant would have paid for the balance of the Lease Term after the time of award
exceeds the amount of such rental loss that Tenant proves Landlord could have
reasonably avoided; and (iv) any other amount necessary to compensate Landlord
for all the detriment proximately caused by Tenant's failure to perform its
obligations under the Lease or which in the ordinary course of things would be
likely to result therefrom, including, but not limited to, any cost or expenses
Landlord incurs in maintaining or preserving the Property after such default,
the cost of recovering possession of the Property, expenses of reletting,
including necessary renovation or
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alteration of the Property, Landlord's reasonable attorneys' fees incurred in
connection therewith, and any real estate commission paid or payable. As used in
subparts (i) and (ii) above, the "worth at the time of the award" is computed by
allowing interest on unpaid amounts at the rate of fifteen percent (15%) per
annum, or such lesser amount as may then be the maximum lawful rate. As used in
subpart (iii) above, the "worth at the time of the award" is computed by
discounting such amount at the discount rate of the Federal Reserve Bank of San
Francisco at the time of the award, plus one percent (1%). If Tenant has
abandoned the Property, Landlord shall have the option of (i) retaking
possession of the Property and recovering from Tenant the amount specified in
this Paragraph 10.03(a), or (ii) proceeding under Paragraph 10.03(b);
(b) Deleted.
(c) Pursue any other remedy now or hereafter available to Landlord
under the laws or judicial decisions of the state in which the Property is
located.
Section 10.04. Repayment of "Free" Rent. If this Lease provides for a
postponement of any monthly rental payments, a period of "free" rent or other
rent concession, such postponed rent or "free" rent is called the "Abated Rent".
Tenant shall be credited with having paid all of the Abated Rent on the
expiration of the Lease Term only if Tenant has fully, faithfully, and
punctually performed all of Tenant's obligations hereunder, including the
payment of all rent (other than the Abated Rent) and all other monetary
obligations and the surrender of the Property in the physical condition required
by this Lease. Tenant acknowledges that its right to receive credit for the
Abated Rent is absolutely conditioned upon Tenant's full, faithful and punctual
performance of its obligations under this Lease. If Tenant defaults and does not
cure within any applicable grace period, the Abated Rent shall immediately
become due and payable in full and this Lease shall be enforced as if there were
no such rent abatement or other rent concession. In such case Abated Rent shall
be calculated based on the full initial rent payable under this Lease.
Section 10.05. Automatic Termination. Notwithstanding any other term or
provision hereof to the contrary, the Lease shall terminate on the occurrence of
any act which affirms the Landlord's intention to terminate the Lease as
provided in Section 10.03 hereof, including the filing of an unlawful detainer
action against Tenant. On such termination, Landlord's damages for default shall
include all costs and fees, including reasonable attorneys' fees that Landlord
incurs in connection with the filing, commencement, pursuing and/or defending of
any action in any bankruptcy court or other court with respect to the Lease; the
obtaining of relief from any stay in bankruptcy restraining any action to evict
Tenant; or the pursuing of any action with respect to Landlord's right to
possession of the Property. All such damages suffered (apart from Base Rent and
other rent payable hereunder) shall constitute pecuniary damages which must be
reimbursed to Landlord prior to assumption of the Lease by Tenant or any
successor to Tenant in any bankruptcy or other proceeding.
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Section 10.06. Cumulative Remedies. Landlord's exercise of any right or
remedy shall not prevent it from exercising any other right or remedy.
ARTICLE ELEVEN: PROTECTION OF LENDERS
Section 11.01. Subordination. Landlord shall have the right to
subordinate this Lease to any ground lease, deed of trust or mortgage
encumbering the Property, any advances made on the security thereof and any
renewals, modifications, consolidations, replacements or extensions thereof,
whenever made or recorded. Tenant shall cooperate with Landlord and any lender
which is acquiring a security interest in the Property or the Lease. Tenant
shall execute such further documents and assurances as such lender may require,
provided that Tenant's obligations under this Lease shall not be increased in
any material way (the performance of ministerial acts shall not be deemed
material), and Tenant shall not be deprived of its rights under this Lease.
Tenant's right to quiet possession of the Property during the Lease Term shall
not be disturbed if Tenant pays the rent and performs all of Tenant's
obligations under this Lease and is not otherwise in default. If any ground
lessor, beneficiary or mortgagee elects to have this Lease prior to the lien of
its ground lease, deed of trust or mortgage and gives written notice thereof to
Tenant, this Lease shall be deemed prior to such ground lease, deed of trust or
mortgage whether this Lease is dated prior or subsequent to the date of said
ground lease, deed of trust or mortgage or the date of recording thereof.
Section 11.02. Attornment. If Landlord's interest in the Property is
acquired by any ground lessor, beneficiary under a deed of trust, mortgagee, or
purchaser at a foreclosure sale, Tenant shall attorn to the transferee of or
successor to Landlord's interest in the Property and recognize such transferee
or successor as Landlord under this Lease. Tenant waives the protection of any
statute or rule of law which gives or purports to give Tenant any right to
terminate this Lease or surrender possession of the Property upon the transfer
of Landlord's interest.
Section 11.03. Signing of Documents. Tenant shall sign and deliver any
instrument or documents necessary or appropriate to evidence any such attornment
or subordination or agreement to do so. If Tenant fails to do so within ten (10)
days after written request, Tenant hereby makes, constitutes and irrevocably
appoints Landlord, or any transferee or successor of Landlord, the
attorney-in-fact of Tenant to execute and deliver any such instrument or
document.
Section 11.04. Estoppel Certificates.
(a) Upon Landlord's written request, Tenant shall execute, acknowledge
and deliver to Landlord a written statement certifying: (i) that none of the
terms or provisions of this Lease have been changed (or if they have been
changed, stating how they have been changed); (ii) that this Lease has not been
cancelled or terminated; (iii) the last date of payment of the Base Rent and
other charges and the time period covered by such payment; (iv) that Landlord is
not in default under this Lease (or, if Landlord is claimed to be in default,
stating why); and (v) such other representations or information with respect to
Tenant or the Lease as Landlord may
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reasonably request or which any prospective purchaser or encumbrancer of the
Property may require. Tenant shall deliver such statement to Landlord within ten
(10) days after Landlord's request. Landlord may give any such statement by
Tenant to any prospective purchaser or encumbrancer of the Property. Such
purchaser or encumbrancer may rely conclusively upon such statement as true and
correct.
(b) If Tenant does not deliver such statement to Landlord within such
ten (10)-day period, Landlord, and any prospective purchaser or encumbrancer,
may conclusively presume and rely upon the following facts: that the terms and
provisions of this Lease have not been changed except as otherwise represented
by Landlord; (ii) that this Lease has not been cancelled or terminated except as
otherwise represented by Landlord; (iii) that not more than one month's Base
Rent or other charges have been paid in advance; and (iv) that Landlord is not
in default under the Lease. In such event, Tenant shall be estopped from denying
the truth of such facts.
Section 11.05. Tenant's Financial Condition. Within ten (10) days after
written request from Landlord, Tenant shall deliver to Landlord such financial
statements as Landlord reasonably requires to verify the net worth of Tenant or
any assignee, subtenant, or guarantor of Tenant. In addition, Tenant shall
deliver to any lender designated by Landlord any financial statements required
by such lender to facilitate the financing or refinancing of the Property.
Tenant represents and warrants to Landlord that each such financial statement is
a true and accurate statement as of the date of such statement. All financial
statements shall be confidential and shall be used only for the purposes set
forth in this Lease.
ARTICLE TWELVE: LEGAL COSTS
Section 12.01. Legal Proceedings. If Tenant or Landlord shall be in
breach or default under this Lease, such party (the "Defaulting Party") shall
reimburse the other party (the "Nondefaulting Party") upon demand for any costs
or expenses that the Nondefaulting Party incurs in connection with any breach or
default of the Defaulting Party under this Lease, whether or not suit is
commenced or judgment entered. Such costs shall include legal fees and costs
incurred for the negotiation of a settlement, enforcement of rights or
otherwise. Furthermore, if any action for breach of or to enforce the provisions
of this Lease is commenced, the court in such action shall award to the party in
whose favor a judgment is entered, a reasonable sum as attorneys' fees and
costs. The losing party in such action shall pay such attorneys' fees and costs.
Tenant shall also indemnify Landlord against and hold Landlord harmless from all
costs, expenses, demands and liability Landlord may incur if Landlord becomes or
is made a party to any claim or action (a) instituted by Tenant against any
third party, or by any third party against Tenant, or by or against any person
holding any interest under or using the Property by license of or agreement with
Tenant; (b) for foreclosure of any lien for labor or material furnished to or
for Tenant or such other person; (c) otherwise arising out of or resulting from
any act or transaction of Tenant or such other person; or (d) necessary to
protect Landlord's interest under this Lease in a bankruptcy proceeding, or
other proceeding under Title 11 of the United States Code, as amended. Tenant
shall defend Landlord against any such claim or action at Tenant's
20
<PAGE>
expense with counsel reasonably acceptable to Landlord or, at Landlord's
election, Tenant shall reimburse Landlord for any legal fees or costs Landlord
incurs in any such claim or action.
Section 12.02. Landlord's Consent. Tenant shall pay Landlord's
reasonable attorneys' fees incurred in connection with Tenant's request for
Landlord's consent under Article Nine (Assignment and Subletting), or in
connection with any other act which Tenant proposes to do and which requires
Landlord's consent.
ARTICLE THIRTEEN: MISCELLANEOUS PROVISIONS
Section 13.01. Non-Discrimination. Tenant promises, and it is a
condition to the continuance of this Lease, that there will be no discrimination
against, or segregation of, any person or group of persons on the basis of race,
color, sex, creed, national origin or ancestry in the leasing, subleasing,
transferring, occupancy, tenure or use of the Property or any portion thereof.
Section 13.02. Landlord's Liability; Certain Duties.
(a) As used in this Lease, the term "Landlord" means only the current
owner or owners of the fee title to the Property or the leasehold estate under a
ground lease of the Property at the time in question. Each Landlord is obligated
to perform the obligations of Landlord under this Lease only during the time
such Landlord owns such interest or title. Any Landlord who transfers its title
or interest is relieved of all liability with respect to the obligations of
Landlord under this Lease to be performed on or after the date of transfer.
However, each Landlord shall deliver to its transferee all funds that Tenant
previously paid if such funds have not yet been applied under the terms of this
Lease.
(b) Tenant shall give written notice of any failure by Landlord to
perform any of its obligations under this Lease to Landlord and to any ground
lessor, mortgagee or beneficiary under any deed of trust encumbering the
Property whose name and address have been furnished to Tenant in writing.
Landlord shall not be in default under this Lease unless Landlord (or such
ground lessor, mortgagee or beneficiary) fails to cure such non-performance
within thirty (30) days after receipt of Tenant's notice. However, if such
non-performance reasonably requires more than thirty (30) days to cure, Landlord
shall not be in default if such cure is commenced within such thirty (30)-day
period and thereafter diligently pursued to completion.
(c) Notwithstanding any term or provision herein to the contrary, the
liability of Landlord for the performance of its duties and obligations under
this Lease is limited to Landlord's interest in the Property, and neither the
Landlord nor its partners, shareholders, officers or other principals shall have
any personal liability under this Lease.
Section 13.03. Severability. A determination by a court of competent
jurisdiction that any provision of this Lease or any part thereof is illegal or
unenforceable shall not cancel or
21
<PAGE>
invalidate the remainder of such provision or this Lease, which shall remain in
full force and effect.
Section 13.04. Interpretation. The captions of the Articles or Sections
of this Lease are to assist the parties in reading this Lease and are not a part
of the terms or provisions of this Lease. Whenever required by the context of
this Lease, the singular shall include the plural and the plural shall include
the singular. The masculine, feminine and neuter genders shall each include the
other. In any provision relating to the conduct, acts or omissions of Tenant,
the term "Tenant" shall include Tenant's agents, employees, contractors,
invitees, successors or others using the Property with Tenant's express or
implied permission.
Section 13.05. Incorporation of Prior Agreements; Modifications. This
Lease is the only agreement between the parties pertaining to the lease of the
Property and no other agreements are effective. All amendments to this Lease
shall be in writing and signed by all parties. Any other attempted amendment
shall be void.
Section 13.06. Notice. All notices required or permitted under this
Lease shall be in writing and shall be personally delivered or sent by certified
mail, return receipt requested, postage prepaid. Notices to Tenant shall be
delivered to the address specified in Section 1.03 above, except that upon
Tenant's taking possession of the Property, the Property shall be Tenant's
address for notice purposes. Notices to Landlord shall be delivered to the
address specified in Section 1.02 above. All notices shall be effective upon
delivery. Either party may change its notice address upon written notice to the
other party.
Section 13.07. Waivers. All waivers must be in writing and signed by
the waiving party. Landlord's failure to enforce any provision of this Lease or
its acceptance of rent shall not be a waiver and shall not prevent Landlord from
enforcing that provision or any other provision of this Lease in the future.
Section 13.08. No Recordation. Tenant shall not record this Lease
without prior written consent from Landlord. However, either Landlord or Tenant
may require that a "Short Form" memorandum of this Lease executed by both
parties be recorded. The party requiring such recording shall pay all transfer
taxes and recording fees.
Section 13.09. Binding Effect; Choice of Law. This Lease binds any
party who legally acquires any rights or interest in this Lease from Landlord or
Tenant. However, Landlord shall have no obligation to Tenant's successor unless
the rights or interests of Tenant's successor are acquired in accordance with
the terms of this Lease. The laws of the state in which the Property is located
shall govern this Lease.
Section 13.10. Corporate Authority; Partnership Authority. If Tenant is
a corporation, each person signing this Lease on behalf of Tenant represents and
warrants that he has full authority to do so and that this Lease binds the
corporation. Within thirty (30) days after this Lease is signed, Tenant shall
deliver to Landlord a certified copy of a resolution of Tenant's
22
<PAGE>
Board of Directors authorizing the execution of this Lease or other evidence of
such authority reasonably acceptable to Landlord. If Tenant is a partnership,
each person or entity signing this Lease for Tenant represents and warrants that
he or it is a general partner of the partnership, that he or it has full
authority to sign for the partnership and that this Lease binds the partnership
and all general partners of the partnership. Tenant shall give written notice to
Landlord of any general partner's withdrawal or addition. Within thirty (30)
days after this Lease is signed, Tenant shall deliver to Landlord a copy of
Tenant's recorded statement of partnership or certificate of limited
partnership.
Section 13.11. Joint and Several Liability. All parties signing this
Lease as Tenant shall be jointly and severally liable for all obligations of
Tenant.
Section 13.12. Force Majeure. If Landlord cannot perform any of its
obligations due to events beyond Landlord's control, the time provided for
performing such obligations shall be extended by a period of time equal to the
duration of such events. Events beyond Landlord's control include, but are not
limited to, acts of God, war, civil commotion, labor disputes, strikes, fire,
flood or other casualty, shortages of labor or material, government regulation
or restriction and weather conditions.
Section 13.13. Execution of Lease. This Lease may be executed in
counterparts and, when all counterpart documents are executed, the counterparts
shall constitute a single binding instrument. Landlord's delivery of this Lease
to Tenant shall not be deemed to be an offer to lease and shall not be binding
upon either party until executed and delivered by both parties.
Section 13.14. Survival. All representations and warranties of Landlord
and Tenant shall survive the termination of this Lease.
ARTICLE FOURTEEN: BROKERS
Section 14.01. Deleted.
Section 14.02. Deleted.
Section 14.03. Agency Disclosure; No Other Brokers.
Landlord and Tenant each warrant that they have dealt with no other real estate
broker(s) in connection with this transaction except: CB Commercial Real Estate
Group, Inc., who represents ____________________________________________________
and ____________________________________________________________________________
who represents _________________________________________________________________
_______________________________________________________________________________.
23
<PAGE>
ARTICLE FIFTEEN: COMPLIANCE
The parties hereto agree to comply with all applicable federal, state
and local laws, regulations, codes, ordinances and administrative orders having
jurisdiction over the parties, property or the subject matter of this Agreement,
including, but not limited to, the 1964 Civil Rights Act and all amendments
thereto, the Foreign Investment In Real Property Tax Act, the Comprehensive
Environmental Response Compensation and Liability act, and The Americans With
Disabilities Act.
ADDITIONAL PROVISIONS MAY BE SET FORTH IN A RIDER OR RIDERS ATTACHED
HERETO OR IN THE BLANK SPACE BELOW. IF NO ADDITIONAL PROVISIONS ARE INSERTED,
PLEASE DRAW A LINE THROUGH THE SPACE BELOW.
Landlord and Tenant have signed this Lease at the place and on the
dates specified adjacent to their signatures below and have initialled all
Riders which are attached to or incorporated by reference in this Lease.
"LANDLORD"
Signed on _____________________, 19____ Palo Cristi Airpark III, L.L.C.
at___________________________________ By: /s/ Scott P. LeMarr, President
-------------------------------
Its: Palo Cristi Investments, Inc.
Managing Member
"TENANT"
Signed on _____________________, 19____ Premium Cigars International, Ltd.
at___________________________________ By: /s/ John Greenwell
-------------------------------
Its: President and COO
IN ANY REAL ESTATE TRANSACTION, IT IS RECOMMENDED THAT YOU CONSULT WITH
A PROFESSIONAL, SUCH AS A CIVIL ENGINEER, INDUSTRIAL HYGIENIST OR OTHER PERSON
WITH EXPERIENCE IN EVALUATING THE CONDITION OF THE PROPERTY, INCLUDING THE
POSSIBLE PRESENCE OF ASBESTOS, HAZARDOUS MATERIALS AND UNDERGROUND STORAGE
TANKS.
24
<PAGE>
THIS PRINTED FORM LEASE HAS BEEN DRAFTED BY LEGAL COUNSEL AT THE
DIRECTION OF THE SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND
OFFICE REALTORS, INC. NO REPRESENTATION ON RECOMMENDATION IS MADE BY THE
SOUTHERN CALIFORNIA CHAPTER OF THE SOCIETY OF INDUSTRIAL AND OFFICE REALTORS,
INC., ITS LEGAL COUNSEL, THE REAL ESTATE BROKERS NAMED HEREIN, OR THEIR
EMPLOYEES OR AGENTS, AS TO THE LEGAL SUFFICIENCY, LEGAL EFFECT OR TAX
CONSEQUENCES OF THIS LEASE OR OF THIS TRANSACTION. LANDLORD AND TENANT SHOULD
RETAIN LEGAL COUNSEL TO ADVISE THEM ON SUCH MATTERS AND SHOULD RELY UPON THE
ADVICE OF SUCH LEGAL COUNSEL.
25
EXHIBIT 10.7
FIRST AMENDMENT TO INDUSTRIAL REAL ESTATE LEASE
PARTIES: PALO CRISTI AIRPARK III, L.L.C., (LANDLORD)
PREMIUM CIGARS INTERNATIONAL, LTD. (TENANT)
DATE: February 26, 1998
The parties have heretofore entered into a real estate lease agreement
entitled Industrial Real Estate Lease (Single Tenant Net Form) dated February
25, 1998 for Landlord's Project located at 15849 N. 77th Street, Scottsdale,
Arizona ("Lease").
THE PARTIES HEREBY AGREE AS FOLLOWS:
In the event the provisions of this First Amendment conflict with the Lease, the
provisions of this First Amendment shall prevail. All other terms and conditions
of the Lease to remain the same, and except as expressly amended hereby, the
provisions of the Lease are hereby reaffirmed.
1. COMMENCEMENT DATE: Landlord will make every reasonable effort to complete the
Property substantially in accordance with Exhibit B in order for Tenant to take
early occupancy by April 15, 1998. In the event the Property is not complete to
the extent that Tenant can move in and conduct its business, and Tenant is not
responsible for the delay, Landlord will grant Tenant one (1) day free Base Rent
for each day of delay beyond April 15, 1998.
2. PENALTY: In addition to the free Base Rent outlined above in Section 1.05(a),
Landlord agrees to pay Tenant a penalty of $500.00 per day in the event Tenant
is not able to occupy the Property by May 5, 1998. Said penalty is for each and
every date after May 5, 1998 until such time that Project Architect issues a
Certificate of Substantial Completion. It is expressly understood by Landlord
and Tenant that events beyond the control of Landlord or acts of God could delay
the Occupancy Date. In the event that unavoidable delays occur beyond the
control of Landlord, the aforementioned penalty will be extended accordingly.
Landlord and Tenant further agree that work between Tenant and other parties are
not a party of the Lease, normal punchlist items and exterior covered carport
erection are expressly excluded from this penalty clause.
3. INSURANCE. Pursuant to Section 3.03(b) Tenant shall have the right to approve
insurance coverage obtained by Landlord prior to issuance of the insurance
policy. Said approval to be granted within three (3) business days from time of
presentation for review by Landlord's insurance representative and such approval
shall not be unreasonably withheld. In the event
<PAGE>
Tenant rejects Landlords selected insurance carrier and coverage, the Tenant
shall be required to provide comparable coverage on the Property and liability
risk naming Landlord as co-insured simultaneously with disapproving Landlord's
selected insurance package.
4. LATE CHARGES AND INTEREST ON PAST DUE OBLIGATIONS. Landlord agrees to waive
provisions for late charges in Section 4.05 of the Lease and increase the
interest on past due obligations specified in Section 4.06 to twenty percent
(20%) per annum.
5. LANDLORD'S OBLIGATIONS TO REPAIR. In the event that it becomes Landlord's
responsibility under Section 6.03 to perform repairs of the Property, such
action will be commenced within 5 business days after notice in writing by
Tenant of such event. Every effort will be made to expedite all repairs or
alterations and Landlord will assist Tenant in protecting Tenant's inventory
wherever possible. Landlord and Tenant further agree that all roof warranties
and HVAC warranties will also list Tenant as beneficiary and that Tenant agrees
to provide quarterly preventative mechanical service and maintenance while
Landlord assumes the responsibility for roof maintenance. In the event Landlord
does not respond to Tenant's written notice of repair obligation within 5
business days, Tenant may, at its option, make such repairs and bill Landlord
for reasonable reimbursement.
6. SUBSTANTIAL OR TOTAL DESTRUCTION. Pursuant to Section 7.02, Landlord and
Tenant agree that if the damaged Property cannot be substantially rebuilt within
60 days, Tenant may elect to cancel its Lease obligations excluding any remedies
Landlord may have against Tenant for any previously existing Default.
7. RIGHT OF FIRST REFUSAL. At any time during the term of this Lease, Landlord
shall have the right to sell the leased premises to any third party, provided,
however, that Tenant shall have the right of first refusal during the term of
the Lease to meet any bona fide offer to purchase on the same terms and
conditions of such offer. Tenant's right of first refusal may be exercised only
if Tenant is not in default in the performance of any of the covenants,
conditions and agreement required to be performed by Tenant under this Lease
subject to all applicable cure periods. Upon receipt of a bona fide offer to
purchase the premises which Landlord desires to accept, Landlord shall give
written notice thereof to Tenant, which shall include the name of the third
party offeror and the terms and conditions of its offer to purchase, and Tenant
shall have fifteen (15) days after receipt of such notice to meet the terms of
the offer. In the event Tenant fails to enter into an agreement to match the
third party offer within such fifteen (15) day period, Landlord shall be free to
sell the leased premises to the third party in accordance with the terms and
conditions of its offer and Tenant's right of first refusal shall terminate and
be of no further force or effect. If the Landlord substantially revises the
price or payments terms of such bona fide offer to purchase, Tenant shall have a
right of first refusal as to such revised terms. If Tenant fails to exercise its
right of first refusal and the premises are sold to the third party, the third
party shall acquire the premises subject to the Lease, without Tenant's right of
first refusal, which shall continue until the expiration or termination hereof
in accordance with its term. In the event tenant exercises its right of first
refusal and purchases the premises, the Lease shall terminate at the closing and
Tenant shall be credited any refunds prepaid in advance.
2
<PAGE>
8. RIGHT OF CANCELLATION. Landlord and Tenant acknowledge that each has a
significant invested interest in occupying the Project by April 15, 1998 and
free Base Rent penalty clauses have already been included elsewhere in this
Agreement. In the event that Landlord cannot obtain a Certificate of Substantial
Completion from the Project Architect by June 1, 1998, Tenant is not responsible
for the delay and no avoidable delays beyond the control of the Landlord have
extended the time allowed for completion of the Tenant improvement outlined on
Exhibit B and Exhibit C, Tenant may, at its sole discretion, notify landlord in
writing of its intent to cancel the Lease. From the date of the written notice,
Landlord shall have ten (10) business days to complete said improvements before
cancellation. Tenant agrees to waive its Security Deposit and hold Landlord
harmless for any other claims.
IN WITNESS WHEREOF, the parties have executed this First Amendment as of this
26th day of February 1998.
"LANDLORD" "TENANT"
Palo Cristi Airpark II, L.L.C., Premium Cigars International, LTD.,
an Arizona limited liability company an Arizona corporation
By: /s/ Scott P. LeMarr By: /s/ John Greenwell
------------------------------- --------------------------------
Scott P. LeMarr John Greenwell, President and CEO
President of Palo Cristi Investments, Inc.
Managing Member
3
EXHIBIT 10.8
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered into by and
between Premium Cigars International, Ltd., an Arizona corporation ("PCI") and
Colin A. Jones ("Jones"). PCI and Jones are collectively referred to herein as
the "Parties."
R E C I T A L S:
----------------
A. Jones entered an Employment Agreement with PCI dated June 13, 1997
(the "Employment Agreement").
B. PCI terminated Jones' employment on January 16, 1998.
C. Jones is the maker under a Promissory Note dated December 31, 1996
in favor of PCI (the "Note").
D. PCI and Jones have certain disputes regarding Jones' severance
compensation and other sums payable to Jones after his termination.
E. Without any admission of liability by either Party, the Parties
desire to avoid and resolve any further dispute or litigation regarding any
compensation or payments to Jones from the Company.
F. It is of utmost importance to PCI that Jones not compete with PCI
after his termination and PCI wishes to extend the current covenant
not-to-compete in Jones' Employment Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:
1. Settlement Contingent Upon PCI's Simultaneous Settlement with Steve
and Greg Lambrecht. This settlement is contingent upon PCI's entering into
separate settlement agreements with both Steven A. Lambrecht and Greg P.
Lambrecht regarding certain compensation and other payments that they are
claiming. If PCI has not entered into such settlement agreements with Steven A.
Lambrecht and Greg P. Lambrecht on or before 5:00 p.m. on March 3, 1998, then
this Agreement shall be null and void and of no force and effect whatsoever
against PCI or Jones.
2. Payment. Provided that the contingency in Paragraph 1 is met, PCI
shall pay Jones, within ten (10) business days after the execution of this
Agreement, the sum of Forty Thousand Dollars ($40,000.00) (the "Payment"). The
Payment is an amount which was
<PAGE>
negotiated by the Parties in exchange for the release of claims set forth in
paragraph 8 herein and in exchange for the extension of the covenant
not-to-compete in the Employment Agreement.
3. Severance Compensation. Jones acknowledges that he has already been
paid for all amounts owing at his termination, including payment for all
vacation and other benefits. He further acknowledges that he has been paid
$6,461.54 in severance compensation since his termination and that the sole
remaining amount of severance compensation to be paid is $56,538.46, which PCI
shall pay bi-weekly over a period of 35 weeks. PCI shall also pay Jones $73.85
per bi-weekly period until the nine (9) months following his termination is
completed, as a cash payment in lieu of the health insurance premium PCI was
paying for Jones at the time of his termination. Jones will be responsible to
obtain his own health insurance. Jones acknowledges that, except for the
severance compensation described in this Paragraph and the Payment and any
applicable ongoing compensation as a director, he has been paid for all services
rendered to PCI as an employee and has no right to any additional employment
compensation or employment benefits of any kind from PCI. Jones acknowledges
that the payment of severance compensation remains subject to the conditions of
the Employment Agreement, including, without limitation, the conditions of
Paragraph 7 of the Employment Agreement as that Section relates to paragraphs 8,
9 & 10 of the Employment Agreement.
4. Withholding. PCI shall make no deduction or withholding from the
Payment in Paragraph 2 in reliance upon Jones affirmative representation that he
will be solely responsible for any and all taxes and other amounts owed on such
payments. PCI will be required to withhold all taxes and other normal
withholdings from the severance compensation amounts described in Paragraph 3.
5. Employment Agreement.
a. Compensation. Except for the Payment and severance
compensation as described in paragraphs 2 and 3 herein, Jones hereby
waives any and all rights to any monetary or other compensation under
the Employment Agreement, including without limitation, any
compensation pursuant to paragraph 3 of the Employment Agreement or any
severance compensation pursuant to paragraph 7 of the Employment
Agreement. Jones expressly acknowledges that he has been paid in full
for all services rendered to PCI prior to the date of this Agreement
including without limitation wages and vacation pay through the date of
termination.
b. No Options or Bonus. Jones expressly waives any right to
any options or bonuses which have been or may in the future be offered
to any employee of PCI.
c. Continuing Obligations; Extension of Covenant Not To
Compete. Notwithstanding anything contained within this Agreement to
the contrary, Jones expressly acknowledges that his obligations
pursuant to Paragraphs 8, 9, 10 and 13 of the Employment Agreement
relating to Customer Records, Confidential Information and the Covenant
Not To Compete and PCI's remedies under the Employment Agreement for
Jones' violations of said provisions and Miscellaneous Provisions
provided therein
2
<PAGE>
shall continue and remain in full force and effect for the term set
forth in the Employment Agreement. However, in exchange for the
Payment, the term of the Covenant Not To Compete as set forth in
paragraph 10(b) of the Employment Agreement shall be extended for an
additional six (6) months for a total of 18 months from the date of
Jones' termination from PCI.
6. Status as a Director. This Agreement shall not affect Jones' status
as a director of PCI, and Jones shall be entitled to the compensation paid to,
or options granted to, outside directors and Jones shall be treated as an
outside director effective upon the date of termination of his employment with
PCI.
7. Note; No Defense Related to This Settlement. The Parties agree that
this Agreement shall have no effect upon the principal amount or interest due
under, or due date of, the Note and Jones expressly acknowledges that the Note,
and his obligations thereunder, remain in full force and effect. Jones agrees
that he shall not, directly or indirectly, raise this Agreement, or any of the
terms of this Agreement, or the claims settled hereby, as a defense or offset to
his obligations and liability under the Note.
8. Release of Claims. Except for the obligations created by and the
rights expressly reserved within this Agreement, Jones does hereby and forever
discharge PCI and each of its stockholders, predecessors, successors, assigns,
agents, directors, officers, employees, representatives, consultants,
affiliates, lawyers, and all persons acting by, through, under, or in concert
with them, or any of them, of and from any and all manners of action or actions,
cause or causes of action, in law or in equity, suits, liabilities, claims,
demands, damages, losses, costs or expenses, of any nature whatsoever,
(hereinafter collectively "claims") arising out of or relating to the Employment
Agreement or Jones' employment with PCI. As stated more particularly in
Paragraph 9 herein, both Parties expressly reserve the right to bring an action
to enforce this Agreement and the obligations and rights expressly reserved
herein. It is the Parties intention that the foregoing release shall be
effective as a full and final accord and satisfaction, and as a bar to all
claims against PCI as set forth above, except for an action to enforce this
Agreement or any rights expressly reserved within this Agreement.
9. Further Actions. The Parties may plead this Agreement as a full and
complete defense to, and as the basis for an injunction against, any action,
suit or other proceeding which either Party hereto may institute, prosecute or
attempt in breach of this Agreement.
10. Costs. The Parties will bear their own costs, expenses and
attorneys' fees, whether taxable or otherwise, incurred in or arising out of or
connected with the negotiation of this Agreement and the disputes settled
herein.
11. Construction of this Agreement. This Agreement has been freely
entered into by the Parties, each of whom has been represented by separate
counsel. The validity, effect and performance of this Agreement shall be
governed and construed by the laws of the State of Arizona. This Agreement shall
be construed liberally to effect its purpose, and the Parties waive
3
<PAGE>
any rule requiring strict construction against or in favor of either Party. The
Agreement shall be construed as if drafted by the Parties jointly.
12. Integration Clause. This Agreement embodies the full and complete
understanding and agreement between the Parties with respect to the matters
addressed herein. This paragraph may be waived or modified only in a writing
signed by the party to be charged.
13. Severability. If any term of this Agreement shall be found invalid,
void or unenforceable, that term shall be severed from this Agreement and the
remaining terms enforced as specified herein.
14. Prevailing Party. In any action arising out of this Agreement, the
prevailing party or parties shall be entitled to an award of reasonable
attorneys' fees and costs incurred in such action, which award shall be made by
the Court, and shall be in addition to any other relief to which such party or
parties are entitled. The Parties expressly consent to the jurisdiction and
venue of Maricopa County, Arizona Superior Court for the resolution of any
future disputes.
15. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the Parties, their officers, directors,
representatives, agents, employees, attorneys, heirs, personal representatives,
successors and assigns.
16. No Admission of Liability. The Parties agree that this final
compromise and settlement is not and shall not be used as an admission of
liability or responsibility.
17. Counterparts. This Agreement may be executed in counterparts which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this ____ day of March, 1998.
PREMIUM CIGARS INTERNATIONAL, LTD.
By /s/ John E. Greenwell /s/ Colin A. Jones
-------------------------------------- -----------------------------------
John E. Greenwell, President Colin A. Jones
and Chief Executive Officer
4
EXHIBIT 10.9
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered into by and
between Premium Cigars International, Ltd., an Arizona corporation ("PCI") and
Greg P. Lambrecht ("Lambrecht"). PCI and Lambrecht are collectively referred to
herein as the "Parties."
R E C I T A L S:
----------------
A. Lambrecht entered an Employment Agreement with PCI dated June 13,
1997 (the "Employment Agreement").
B. PCI terminated Lambrecht's employment on March 2, 1998.
C. Lambrecht is the maker under a Promissory Note dated December 31,
1996 in favor of PCI (the "Note").
D. PCI and Lambrecht have certain disputes regarding Lambrecht's
severance compensation and other sums payable to Lambrecht.
E. Without any admission of liability by either Party, the Parties
desire to avoid and resolve any further dispute or litigation regarding any
severance compensation or payments to Lambrecht from the Company.
F. It is of utmost importance to PCI that Lambrecht not compete with
PCI in the future and PCI wishes to extend the current covenant not-to-compete
in Lambrecht's Employment Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:
1. Settlement Contingent Upon PCI's Simultaneous Settlement with Steve
Lambrecht and Colin Jones. This settlement is contingent upon PCI's entering
into separate settlement agreements with both Steven A. Lambrecht and Colin A.
Jones regarding certain compensation and other payments that they are claiming.
If PCI has not entered into such settlement agreements with Steven A. Lambrecht
and Colin A. Jones on or before 5:00 p.m. on March 3, 1998, then this Agreement
shall be null and void and of no force and effect whatsoever against PCI or
Lambrecht.
2. Payment. Provided that the contingency in Paragraph 1 is met, PCI
shall pay Lambrecht, within ten (10) business days after the execution of this
Agreement, the sum of Forty Thousand Dollars ($40,000.00) (the "Payment"). The
Payment is an amount which was
1
<PAGE>
negotiated by the Parties in exchange for the release of claims set forth in
paragraph 8 herein and in exchange for the extension of the covenant
not-to-compete in the Employment Agreement.
3. Severance Compensation. Lambrecht acknowledges that the sole
remaining amount of severance compensation to be paid is $63,000, which PCI
shall pay bi-weekly over a period of 39 weeks. PCI shall also pay Lambrecht
$73.85 per bi-weekly period until the nine (9) months following his termination
is completed, as a cash payment in lieu of the health insurance premium for
Lambrecht at the time of his termination. Lambrecht will be responsible to
obtain his own health insurance. Lambrecht acknowledges that, except for the
severance compensation described in this Paragraph and the Payment and any
applicable ongoing compensation as a director, he has been paid for all services
rendered to PCI as an employee and has no right to any additional employment
compensation or employment benefits of any kind from PCI. Lambrecht acknowledges
that he is not entitled to any vacation or compensation in lieu of vacation.
Lambrecht acknowledges that the payment of severance compensation remains
subject to the conditions of the Employment Agreement, including, without
limitation, the conditions of Paragraph 7 of the Employment Agreement as that
Section relates to paragraphs 8, 9 & 10 of the Employment Agreement.
4. Withholding. PCI shall make no deduction or withholding from the
Payment in Paragraph 2, in reliance upon Lambrecht's affirmative representation
that he will be solely responsible for any and all taxes and other amounts owed
on, or ordinarily withheld from, such Payment. PCI will be required to withhold
all taxes and other normal withholdings from the severance compensation amounts
described in Paragraph 3.
5. Employment Agreement.
a. Compensation. Except for the Payment and severance
compensation described in paragraphs 2 and 3 herein, Lambrecht hereby
waives any and all rights to any monetary or other compensation under
the Employment Agreement, including without limitation, any
compensation pursuant to paragraph 3 of the Employment Agreement or any
severance compensation pursuant to paragraph 7 of the Employment
Agreement. Lambrecht expressly acknowledges that he has been paid in
full for all services rendered to PCI prior to the date of this
Agreement, including without limitation wages and vacation pay through
the date of termination.
b. No Options or Bonus. Lambrecht expressly waives any right
to any options or bonuses which have been or may in the future be
offered to any employee of PCI.
c. Continuing Obligations; Extension of Covenant Not To
Compete. Notwithstanding anything contained within this Agreement to
the contrary, Lambrecht expressly acknowledges that his obligations
pursuant to Paragraphs 8, 9, 10 and 13 of the Employment Agreement
relating to Customer Records, Confidential Information and the Covenant
Not To Compete and PCI's remedies under the Employment Agreement for
Lambrecht' violations of said provisions and Miscellaneous Provisions
provided therein shall continue and remain in full force and effect for
the term set forth in the
2
<PAGE>
Employment Agreement. However, in exchange for the Payment, the term of
Covenant Not To Compete as set forth in paragraph 10(b) of the
Employment Agreement shall be extended for an additional six (6) months
for a total of 18 months from the date of Lambrecht's termination from
PCI.
6. Status as a Director. This Agreement shall not affect Lambrecht's
status as a director of PCI, and Lambrecht shall be entitled to the compensation
paid to, or options granted to, outside directors and Lambrecht shall be treated
as an outside director effective upon the date of termination of his employment
with PCI.
7. Note; No Defense Related to This Settlement. The Parties agree that
this Settlement shall have no effect upon the principal amount or interest due
under, or due date of, the Note and Lambrecht expressly acknowledges that the
Note, and his obligations thereunder, remain in full force and effect. Lambrecht
agrees that he shall not, directly or indirectly, raise this Agreement, or any
of the terms of this Agreement, or the claims settled hereby, as a defense or
offset to his obligations and liability under the Note.
8. Release of Claims. Except for the obligations created by and the
rights expressly reserved within this Agreement, Lambrecht does hereby and
forever discharge PCI and each of its respective stockholders, predecessors,
successors, assigns, agents, directors, officers, employees, representatives,
consultants, affiliates, lawyers, and all persons acting by, through, under, or
in concert with them, or any of them, of and from any and all manner of action
or actions, cause or causes of action, in law or in equity, suits, liabilities,
claims, demands, damages, losses, costs or expenses, of any nature whatsoever,
(hereinafter collectively "claims") arising out of or relating to the Employment
Agreement or Lambrecht's employment with PCI. As stated more particularly in
Paragraph 9 herein, both Parties expressly reserve the right to bring an action
to enforce this Agreement and the obligations and rights expressly reserved
herein. It is the Parties intention that the foregoing release shall be
effective as a full and final accord and satisfaction, and as a bar to all
claims against PCI as set forth above, except for an action to enforce this
Agreement or any rights expressly reserved within this Agreement.
9. Further Actions. The Parties may plead this Agreement as a full and
complete defense to, and as the basis for an injunction against, any action,
suit or other proceeding which either Party hereto may institute, prosecute or
attempt in breach of this Agreement.
10. Costs. The Parties will bear their own costs, expenses and
attorneys' fees, whether taxable or otherwise, incurred in or arising out of or
connected with the negotiation of this Agreement and the disputes settled
herein.
11. Construction of this Agreement. This Agreement has been freely
entered into by the Parties, each of whom has been represented by separate
counsel. The validity, effect and performance of this Agreement shall be
governed and construed by the laws of the State of Arizona. This Agreement shall
be construed liberally to effect its purpose, and the Parties waive any rule
requiring strict construction against or in favor of either Party. The Agreement
shall be construed as if drafted by the Parties jointly.
3
<PAGE>
12. Integration Clause. This Agreement embodies the full and complete
understanding and agreement between the Parties with respect to the matters
addressed herein. This paragraph may be waived or modified only in a writing
signed by the party to be charged.
13. Severability. If any term of this Agreement shall be found invalid,
void or unenforceable, that term shall be severed from this Agreement and the
remaining terms enforced as specified herein.
14. Prevailing Party. In any action arising out of this Agreement, the
prevailing party or parties shall be entitled to an award of reasonable
attorneys' fees and costs incurred in such action, which award shall be made by
the Court, and shall be in addition to any other relief to which such party or
parties are entitled. The Parties expressly consent to the jurisdiction and
venue of Maricopa County, Arizona Superior Court for the resolution of any
future disputes.
15. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the Parties, their officers, directors,
representatives, agents, employees, attorneys, heirs, personal representatives,
successors and assigns.
16. No Admission of Liability. The Parties agree that this final
compromise and settlement is not and shall not be used as an admission of
liability or responsibility.
17. Counterparts. This Agreement may be executed in counterparts which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this 3rd day of March, 1998.
PREMIUM CIGARS INTERNATIONAL, LTD.
By /s/ John E. Greenwell /s/ Greg P. Lambrecht
---------------------------------- -----------------------------------
John E. Greenwell, President Greg P. Lambrecht
and Chief Executive Officer
4
EXHIBIT 10.10
AGREEMENT
---------
THIS AGREEMENT (the "Agreement") is made and entered into by and
between Premium Cigars International, Ltd., an Arizona corporation ("PCI") and
Steven A. Lambrecht ("Lambrecht"). PCI and Lambrecht are collectively referred
to herein as the "Parties."
R E C I T A L S:
----------------
A. Lambrecht entered an Employment Agreement with PCI dated June 13,
1997 (the "Employment Agreement").
B. Lambrecht entered an Amendment to Employment Agreement with PCI on
November 19, 1997 (the "Amendment").
C. PCI terminated Lambrecht's employment on March 1, 1998.
D. PCI and Lambrecht have certain disputes regarding Lambrecht's
severance compensation and other sums payable to Lambrecht.
E. Without any admission of liability by either Party, the Parties
desire to avoid and resolve any further dispute or litigation regarding any
compensation or payments to Lambrecht from the Company.
F. It is of utmost importance to PCI that Lambrecht not compete with
PCI after his termination and PCI wishes to extend the current covenant
not-to-compete in Lambrecht's Employment Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which is hereby acknowledged, the Parties agree as follows:
1. Settlement Contingent Upon PCI's Simultaneous Settlement with Colin
A. Jones and Greg P. Lambrecht. This settlement is contingent upon PCI's
entering into separate settlement agreements with both Colin A. Jones and Greg
P. Lambrecht regarding certain compensation and other payments that they are
claiming. If PCI has not entered into such settlement agreements with Steven A.
Lambrecht and Greg P. Lambrecht on or before 5:00 p.m. on March 3, 1998, then
this Agreement shall be null and void and of no force and effect whatsoever
against PCI or Lambrecht.
2. Payment. Provided that the contingency in Paragraph 1 is met, PCI
shall pay Lambrecht, within ten (10) business days after the execution of this
Agreement, the sum of Forty Thousand Dollars ($40,000.00) (the "Payment"). The
Payment is an amount which was
1
<PAGE>
negotiated by the Parties in exchange for the release of claims set forth in
paragraph 7 herein and in exchange for the extension of the covenant
not-to-compete in the Employment Agreement.
3. Severance Compensation. Lambrecht acknowledges the sole remaining
amount of severance compensation to be paid is $63,000, which PCI shall pay
bi-weekly over a period of 39 weeks. PCI shall also pay Lambrecht $73.85 per
bi-weekly period until the nine (9) months following his termination is
completed, as a cash payment in lieu of the health insurance premium for
Lambrecht at the time of his termination. Lambrecht will be responsible to
obtain his own health insurance. Lambrecht acknowledges that, except for the
severance compensation described in this Paragraph, the Payment and the 20,000
options to purchase PCI Common Stock, which rights have vested and approved by
the Board of Directors as described in Paragraph 2 (i) and (ii) of the
Amendment, and any applicable ongoing compensation as a director, he has been
paid for all services rendered to the PCI as an employee and has no right to any
additional employment compensation or employment benefits of any kind from PCI.
Lambrecht acknowledges that he is not entitled to any vacation or compensation
in lieu of vacation. Lambrecht acknowledges that the payment of severance
compensation remains subject to the conditions of the Employment Agreement,
including, without limitation, the conditions of Paragraph 7 of the Employment
Agreement as that Section relates to paragraphs 8, 9 & 10 of the Employment
Agreement.
4. Withholding. PCI shall make no deduction or withholding from the
Payment or payment in lieu of health insurance premium in Paragraphs 2 and 3, in
reliance upon Lambrecht affirmative representation that he will be solely
responsible for any and all taxes and other amounts owed on such payments.
5. Employment Agreement.
a. Compensation. Except for the Payment and severance
compensation described in paragraphs 2 and 3 herein, Lambrecht hereby
waives any and all rights to any monetary or other compensation under
the Employment Agreement. Lambrecht expressly acknowledges that he has
been paid in full for all services rendered to PCI prior to the date of
this Agreement, including without limitation wages and vacation pay
through the date of termination.
b. No Options or Bonus. Except for the options described in
Paragraph 2(ii) of the Amendment, Lambrecht expressly waives any right
to any options or bonuses which have been or may in the future be
offered to any employee of PCI.
c. Continuing Obligations; Extension of Covenant Not To
Compete. Notwithstanding anything contained within this Agreement to
the contrary, Lambrecht expressly acknowledges that his obligations
pursuant to Paragraphs 8, 9, 10 and 13 of the Employment Agreement
relating to Customer Records, Confidential Information and the Covenant
Not To Compete and PCI's remedies under the Employment Agreement for
Lambrecht's violations of said provisions and Miscellaneous Provisions
provided therein shall continue and remain in full force and effect for
the term set forth in the
2
<PAGE>
Employment Agreement. However, in exchange for the Payment, the term of
the Covenant Not To Compete as set forth in paragraph 10(b) of the
Employment Agreement shall be extended for an additional six (6) months
for a total of 18 months from the date of Lambrecht's termination from
PCI. During the duration of the Covenant Not To Compete, Lambrecht
shall present to the Board any potential conflict with such covenant
and a majority of the Board of Directors shall determine whether an
actual conflict exists with the business of the Company (which is cigar
distribution).
6. Status as a Director. This Agreement shall not affect Lambrecht's
status as a director of PCI, and Lambrecht shall be entitled to the compensation
paid to, or options granted to, outside directors and Lambrecht shall be treated
as an outside director effective upon the date of termination of his employment
with PCI.
7. Release of Claims. Except for the obligations created by and the
rights expressly reserved within this Agreement, Lambrecht does hereby and
forever discharge PCI and each of its respective stockholders, predecessors,
successors, assigns, agents, directors, officers, employees, representatives,
consultants, affiliates, lawyers, and all persons acting by, through, under, or
in concert with them, or any of them, of and from any and all manner of action
or actions, cause or causes of action, in law or in equity, suits, liabilities,
claims, demands, damages, losses, costs or expenses, of any nature whatsoever,
(hereinafter collectively "claims") arising out of or relating to the Employment
Agreement or Lambrecht's employment with PCI. As stated more particularly in
Paragraph 8 herein, both Parties expressly reserve the right to bring an action
to enforce this Agreement and the obligations and rights expressly reserved
herein. It is the Parties intention that the foregoing release shall be
effective as a full and final accord and satisfaction, and as a bar to all
claims against PCI as set forth above, except for an action to enforce this
Agreement or any rights expressly reserved within this Agreement.
8. Further Actions. The Parties may plead this Agreement as a full and
complete defense to, and as the basis for an injunction against, any action,
suit or other proceeding which either Party may institute, prosecute or attempt
in breach of this Agreement.
9. Costs. The Parties will bear their own costs, expenses and
attorneys' fees, whether taxable or otherwise, incurred in or arising out of or
connected with the negotiation of this Agreement and the disputes settled
herein.
10. Construction of this Agreement. This Agreement has been freely
entered into by the Parties. PCI has been represented by counsel and PCI advised
Mr. Lambrecht of his right to seek counsel, but Mr. Lambrecht elected to
represent himself. The validity, effect and performance of this Agreement shall
be governed and construed by the laws of the State of Arizona. This Agreement
shall be construed liberally to effect its purpose, and the Parties waive any
rule requiring strict construction against or in favor of either Party. The
Agreement shall be construed as if drafted by the Parties jointly.
3
<PAGE>
11. Integration Clause. This Agreement embodies the full and complete
understanding and agreement between the Parties with respect to the matters
addressed herein. This paragraph may be waived or modified only in a writing
signed by the party to be charged.
12. Severability. If any term of this Agreement shall be found invalid,
void or unenforceable, that term shall be severed from this Agreement and the
remaining terms enforced as specified herein.
13. Prevailing Party. In any action arising out of this Agreement, the
prevailing party or parties shall be entitled to an award of reasonable
attorneys' fees and costs incurred in such action, which award shall be made by
the Court, and shall be in addition to any other relief to which such party or
parties are entitled. The Parties expressly consent to the jurisdiction and
venue of Maricopa County, Arizona Superior Court for the resolution of any
future disputes.
14. Binding Effect. This Agreement shall be binding upon, and shall
inure to the benefit of, the Parties, their officers, directors,
representatives, agents, employees, attorneys, heirs, personal representatives,
successors and assigns.
15. No Admission of Liability. The Parties agree that this final
compromise and settlement is not and shall not be used as an admission of
liability or responsibility.
16. Counterparts. This Agreement may be executed in counterparts which
together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of this 3rd day of March, 1998.
PREMIUM CIGARS INTERNATIONAL, LTD.
By /s/ John E. Greenwell /s/ Greg P. Lambrecht
---------------------------------- -----------------------------------
John E. Greenwell, President Greg P. Lambrecht
and Chief Executive Officer
4
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> APR-01-1997
<PERIOD-END> DEC-31-1997
<EXCHANGE-RATE> 1
<CASH> 1,264,365
<SECURITIES> 3,470,471
<RECEIVABLES> 637,478
<ALLOWANCES> (74,198)
<INVENTORY> 1,322,258
<CURRENT-ASSETS> 6,763,448
<PP&E> 195,201
<DEPRECIATION> (29,201)
<TOTAL-ASSETS> 7,850,893
<CURRENT-LIABILITIES> 1,151,988
<BONDS> 0
0
0
<COMMON> 8,655,339
<OTHER-SE> 155,081
<TOTAL-LIABILITY-AND-EQUITY> 7,850,893
<SALES> 3,362,275
<TOTAL-REVENUES> 0
<CGS> 2,798,672
<TOTAL-COSTS> 5,182,397
<OTHER-EXPENSES> (59,739)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 44,272
<INCOME-PRETAX> (1,760,383)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,760,383)
<EPS-PRIMARY> (0.82)
<EPS-DILUTED> 0
</TABLE>
