AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 3, 1997
REGISTRATION NO. 333-36263
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- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
HOLT'S CIGAR HOLDINGS, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
<TABLE>
<S> <C> <C>
DELAWARE 5993 51-0350003
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL I.R.S. EMPLOYER
INCORPORATION OR REGISTRATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
12270 TOWNSEND ROAD
PHILADELPHIA, PENNSYLVANIA 19154
(215) 676-8778
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ROBERT G. LEVIN, PRESIDENT
HOLT'S CIGAR HOLDINGS, INC.
12270 TOWNSEND ROAD
PHILADELPHIA, PA 19154
(215) 676-8778
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
Copies to:
<TABLE>
<S> <C>
MATTHEW H. LUBART, ESQ. NEIL GOLD, ESQ.
FOX, ROTHSCHILD, O'BRIEN & FRANKEL, LLP FULBRIGHT & JAWORSKI L.L.P.
(FORMED IN THE COMMONWEALTH OF PENNSYLVANIA) 666 FIFTH AVENUE
997 LENOX DRIVE, BUILDING THREE NEW YORK, NEW YORK 10103
LAWRENCEVILLE, NEW JERSEY 08648
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement for the same offering. / /
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
If delivery of a prospectus is expected to be made pursuant to Rule 434,
please check the following box. /x/
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE AN AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
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<PAGE>
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sales of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
SUBJECT TO COMPLETION -- DATED NOVEMBER 3, 1997
PROSPECTUS
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1,750,000 Shares
[LOGO] HOLT'S CIGAR HOLDINGS, INC.
Common Stock
- --------------------------------------------------------------------------------
All of the 1,750,000 shares of common stock, par value $.001 per share (the
"Common Stock"), offered hereby are being sold by Holt's Cigar Holdings, Inc.
(the "Company"). Prior to the Offering (the "Offering"), there has been no
public market for the Common Stock. It is currently anticipated that the initial
public offering price will be between $12.00 and $14.00 per share. See
"Underwriting" for a discussion of the factors to be considered in determining
the initial public offering price.
The Common Stock has been approved for quotation on The Nasdaq Stock Market's
National Market (the "Nasdaq National Market") under the symbol "HOLT."
Robert G. Levin and a partnership affiliated with two of the Company's directors
will own 45.3% and 24.4%, respectively, of the shares of Common Stock
outstanding after the Offering and, as a result, will collectively have the
ability to control the outcome of all matters submitted to a vote of the
Company's stockholders, including the election of directors.
- --------------------------------------------------------------------------------
SEE "RISK FACTORS" ON PAGES 8 TO 15 FOR A DISCUSSION OF CERTAIN MATERIAL FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON STOCK
OFFERED HEREBY.
- --------------------------------------------------------------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
================================================================================
| | Underwriting |
| Price to | Discounts and | Proceeds to
| Public | Commissions(1) | Company(2)(3)
- --------------------------------------------------------------------------------
Per Share.....| $ | $ | $
- --------------------------------------------------------------------------------
Total(4)..... | $ | $ | $
================================================================================
(1) The Company and Robert G. Levin (the "Selling Shareholder"), Chairman of the
Board, Chief Executive Officer and President of the Company, have agreed to
indemnify the several Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933. See "Principal and Selling
Shareholders" and "Underwriting."
(2) Before deducting expenses payable by the Company estimated to be $575,000.
(3) Approximately $2,700,000 of such proceeds will be used to repay indebtedness
of the Company incurred to finance the distribution of estimated
undistributed S Corporation earnings to Mr. Levin. See "Use of Proceeds."
(4) The Selling Shareholder has granted the several Underwriters a 30-day
over-allotment option to purchase up to 262,500 additional shares of Common
Stock on the same terms and conditions as set forth above. If all such
additional shares are purchased by the Underwriters, the total Price to
Public will be $ , the total Underwriting Discounts and Commissions
will be $ , the total Proceeds to Company will be $ and the
total Proceeds to Selling Shareholder will be $ . See "Principal and
Selling Shareholders" and "Underwriting."
- --------------------------------------------------------------------------------
The shares of Common Stock are offered by the several Underwriters subject to
delivery by the Company and the Selling Shareholder and acceptance by the
Underwriters, to prior sale and to withdrawal, cancellation or modification of
the offer without notice. Delivery of the shares to the Underwriters is expected
to be made at the office of Prudential Securities Incorporated, One New York
Plaza, New York, New York, on or about November , 1997.
PRUDENTIAL SECURITIES INCORPORATED JANNEY MONTGOMERY SCOTT INC.
November , 1997
<PAGE>
Pictures of (i) Ashton premium cigars and accessories; (ii) covers of sample
Holt's mail order catalogs; (iii) interior views of the Holt's Philadelphia
retail store; and (iv) exterior view of Holt's corporate office and distribution
center.
CERTAIN PERSONS PARTICIPATING IN THE OFFERING MAY ENGAGE IN TRANSACTIONS THAT
STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK, INCLUDING
PURCHASES OF THE COMMON STOCK TO STABILIZE ITS MARKET PRICE, PURCHASES OF THE
COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION IN THE COMMON STOCK
MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY BIDS. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus and information under "Risk Factors." All
information in this Prospectus gives effect to the reorganization of the Company
(the "Reorganization"), pursuant to which the Company merged newly formed
wholly-owned subsidiaries with Ashton Distributors, Inc. and Holt's Cigar
Company, Inc. in exchange for shares of the Common Stock. See "Reorganization of
the Company" and Combined Financial Statements and notes thereto. Unless
otherwise indicated, the information in this Prospectus assumes that the
Underwriters' over-allotment option will not be exercised and all references in
this Prospectus to the "Company" mean Holt's Cigar Holdings, Inc. and its
subsidiaries. All references to a "Fiscal" year refer to the fiscal year ended
March 31 of such year.
THE COMPANY
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the six months ended September 30, 1997, the Company had net sales of $17.3
million and $13.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 91.7%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The cigar market is divided into three principal categories: premium
cigars, mass market cigars and little cigars. The Company's primary product is
premium cigars, which are generally imported, hand-made or hand-rolled cigars
made with long filler, 100% natural tobacco leaf and which generally sell at
retail prices above $1.00 per cigar. According to the Cigar Association of
America, sales of all categories of cigars totalled 4.6 billion units, or $1.6
billion, in 1996, and grew from 1993 to 1996 at a compound annual growth rate
("CAGR") of 10.3% on a unit basis and 30.2% on a dollar basis. Unit sales of
premium cigars, which had remained essentially flat between 1981 and 1993,
increased at a CAGR of 36.9%, on a unit basis, from 1993 to 1996. The Cigar
Association of America reports that premium cigar imports for the six month
period ended June 30, 1997 have increased approximately 95.0% compared to cigar
imports for the same period in 1996. The Company believes that the increase in
demand for premium cigars is a result of several factors, including: (i)
increased visibility of cigar smoking; (ii) increased interest in luxury goods;
(iii) the expansion of the cigar smoking customer base; and (iv) an increase in
the number of venues that cater to cigar smoking customers. Due to the increased
demand for premium cigars, the industry continues to experience shortages in
supply and increasing prices.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar Ltd. ("Fuente Cigar"), a Dominican Republic
based manufacturer of premium cigars. Cigars made by Fuente Cigar enjoy a
worldwide reputation for the finest tobaccos, expert blends, consistency and
quality of construction. The Company believes that its relationship with Fuente
Cigar will enable the Company to continue to grow its Ashton brand as well as to
introduce new brands to be manufactured for the Company by Fuente Cigar. Two of
the executive officers of Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., are directors of the Company and a related Fuente family
partnership will own approximately 24.4% of the shares of Common Stock
outstanding upon completion of the Offering.
3
<PAGE>
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed by Fuente Cigar and the Company. In Fiscal 1996, Fiscal 1997 and the
six months ended September 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 58.1%, respectively, of its premium cigars from
Fuente Cigar.
The Company's principal objective is to enhance its position as a leading
distributor and retailer of premium cigars. The principal elements of the
Company's business strategy include: (i) strengthening the Ashton brand
primarily by increasing the volume of Ashton cigars supplied to the Company;
(ii) a continued focus on providing a broad range of premium cigar offerings
from a variety of leading manufacturers; (iii) building upon its relationship
with Fuente Cigar; (iv) using multiple distribution channels to reach a broader
customer base; and (v) a commitment to customer service and satisfaction.
The Company's growth strategy is designed to capitalize on its competitive
strengths and the significant growth trends in the premium cigar market by: (i)
introducing new premium cigar brands owned or exclusively distributed by the
Company; (ii) increasing the wholesale distribution of the Company's Ashton
brand premium cigars; (iii) expanding distribution of the Company's catalog and
the size of the Company's proprietary mailing list; and (iv) opening or
acquiring a limited number of retail stores in select markets.
The Company was incorporated on June 18, 1993 under the laws of the State
of Delaware. The Company's executive offices are located at 12270 Townsend Road,
Philadelphia, Pennsylvania 19154, and its telephone number is (215) 676-8778.
The Company's web site can be accessed at http://www.holts.com.
4
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Common Stock Offered by the Company......................... 1,750,000 shares
Common Stock to be Outstanding after the Offering(1)(2)..... 5,770,000 shares
Use of Proceeds............................................. To (i) repay outstanding
indebtedness, a portion of which
was incurred to fund a Subchapter
S distribution to Robert G.
Levin; (ii) establish new retail
stores; (iii) expand inventories
of premium cigars; (iv) expand
the Company's mail order
business; (v) introduce new
premium cigar brands; (vi)
upgrade the Company's management
information and accounting
systems; and (vii) use for
general corporate purposes,
including working capital. See
"Use of Proceeds."
Proposed Nasdaq National Market Symbol...................... HOLT
</TABLE>
- ------------------
(1) Excludes options to purchase an aggregate of 300,000 shares of Common Stock
authorized under the 1997 Employee Stock Option Plan (the "Employee Stock
Plan"), of which options to purchase 169,500 shares of Common Stock have
been granted at the initial public offering price per share, and an
aggregate of 180,000 shares of Common Stock authorized under the
Non-Management Directors Stock Option Plan (the "Director Stock Plan"), of
which options to purchase 60,000 shares of Common Stock have been granted at
the initial public offering price per share. See "Management -- Stock
Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Plans."
RISK FACTORS
The shares of Common Stock offered hereby involve a high degree of risk.
Investors should consider the material risk factors involved in connection with
an investment in the Common Stock.
------------------------
Ashton(Registered) is a registered trademark of the Company.
Holt's(Trademark), Cortesia(Trademark) and Castano(Trademark) are trademarks
with respect to which the Company has applications for registration pending.
5
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------------- ----------------
<S> <C> <C> <C> <C> <C> <C> <C>
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ -------
STATEMENT OF OPERATIONS DATA:
Net sales.............................. $3,042 $3,738 $5,662 $9,467 $17,278 $7,610 $13,424
Cost of goods sold..................... 2,039 2,412 3,041 5,159 9,566 4,145 7,318
------ ------ ------ ------ ------- ------ -------
Gross profit........................... 1,003 1,326 2,621 4,308 7,712 3,465 6,106
Operating expenses..................... 950 1,440 1,949 3,484 4,895 2,240 2,894
------ ------ ------ ------ ------- ------ -------
Income (loss) from operations.......... 53 (114) 672 824 2,817 1,225 3,212
Other income........................... -- -- -- 22 32 11 33
------ ------ ------ ------ ------- ------ -------
Income (loss) before income tax
expense.............................. 53 (114) 672 846 2,849 1,236 3,245
Income tax expense(1).................. 18 1 209 318 577 398 653
------ ------ ------ ------ ------- ------ -------
Net income (loss)...................... $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 838 $ 2,592
====== ====== ====== ====== ======= ====== =======
Pro forma net income(2)................ $ 1,699 $ 737 $ 1,942
Pro forma net income per share......... $ .41 $ .18 $ .47
Pro forma weighted average shares
outstanding(3)....................... 4,102 4,102 4,102
Supplemental pro forma data:
Net income(4)........................ $ 1,743 $ 754 $ 1,950
Net income per share................. $ .42 $ .18 $ .47
Weighted average shares
outstanding(5)..................... 4,136 4,139 4,142
SELECTED OPERATING DATA:
Percentage of net sales of premium
cigars(6)............................ 72.9% 79.0% 88.1% 84.5% 86.3% 89.2% 91.7%
Percentage of net sales of accessories
and other tobacco products........... 27.1% 21.0% 11.9% 15.5% 13.7% 10.8% 8.3%
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------------
<S> <C> <C> <C>
PRO FORMA
ACTUAL PRO FORMA(7) AS ADJUSTED(8)
------ ------------ --------------
BALANCE SHEET DATA:
Working capital........................................... $4,023 $1,870 $21,905
Total assets.............................................. 7,986 8,331 26,088
Total debt................................................ 672 2,825 --
Stockholders' equity...................................... 5,064 3,256 23,838
</TABLE>
- ------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization, increased to
include the effects of the incremental shares required to fund the repayment
of debt incurred to make a distribution in excess of earnings over the
previous year to Robert G. Levin, the sole shareholder of Ashton
Distributors, Inc.
(Footnotes continued on next page)
6
<PAGE>
(Footnotes continued from preceeding page)
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $16,800 and $8,400 for Fiscal 1997 and the six months ended
September 30, 1996 and 1997, respectively, which would have resulted
assuming the application of a portion of the net proceeds from the Offering
were used to repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
(6) Includes both wholesale and retail sales of premium cigars.
(7) Pro forma to give effect to: (i) an S Corporation distribution from Ashton
Distributors, Inc. to Robert G. Levin, its sole shareholder before the
Reorganization, of approximately $2.2 million representing accumulated but
undistributed taxable earnings through September 30, 1997; (ii) the
incurrence of debt to fund such distribution; and (iii) the related effects
of the revised capital structure and the application of purchase accounting
to the acquisition of minority interests represented by certain stock
options.
(8) Pro forma as adjusted to reflect the sale by the Company of 1,750,000 shares
of Common Stock offered hereby at a price of $13.00 per share, the mid-point
of the filing range (after deducting underwriting discounts and estimated
offering expenses), and the application of the estimated net proceeds
therefrom. See "Reorganization of the Company" and "Use of Proceeds."
7
<PAGE>
RISK FACTORS
An investment in the shares of Common Stock involves a high degree of risk.
Prospective investors should carefully consider the following risk factors, in
addition to the other information set forth in this Prospectus, in connection
with the investment in the shares of Common Stock.
When used in this Prospectus, the words "may," "will," "expect,"
"anticipate," "continue," "estimate," "project," "intend" and similar
expressions are intended to identify forward-looking statements regarding among
other things: (i) trends affecting the Company's financial condition or results
of operations; (ii) the Company's business and growth strategies; (iii) the
Company's relationship with Fuente Cigar and other manufacturers; (iv) the use
of the net proceeds to the Company of the Offering; (v) trends in the premium
cigar industry; (vi) government regulations; (vii) the Company's financing
plans; and (viii) the declaration and payment of dividends. Prospective
investors are cautioned that any forward-looking statements are not guarantees
of future performance and are subject to risks and uncertainties and that actual
results may differ materially from those included within the forward-looking
statements as a result of various factors. Factors that could cause or
contribute to such differences include, but are not limited to, those described
below, and under the heading "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and elsewhere in this Prospectus.
CONSTRAINTS ON ABILITY TO SATISFY DEMAND FOR PREMIUM CIGARS. The Company
has experienced, and expects to continue to experience, a shortage in the supply
of certain premium cigars, including its proprietary Ashton brand. Although many
premium cigar manufacturers (including Fuente Cigar from whom the Company
purchased approximately 47.0% and 58.1% of its premium cigars on a dollar basis
in Fiscal 1997 and the six months ended September 30, 1997, respectively) have
taken measures to increase production, there can be no assurance that the
Company will have access to sufficient supplies of premium cigars. With the
exception of a supply agreement between the Company and Fuente Cigar, the
Company is not a party to long-term supply contracts with any manufacturers. The
Company relies and intends in the future to rely upon the strength of its
relationships with leading manufacturers to meet its supply requirements. There
can be no assurance that the Company will be able to continue to maintain these
relationships or that such relationships will be sufficient to enable the
Company to meet future demand for its proprietary cigars and other premium
branded cigars which the Company sells. Any material inability of the Company to
expand its current supply of premium cigars in a timely manner would have a
material adverse effect on the Company's business, results of operations and
financial condition. See "Business -- Suppliers."
Cigar manufacturers have experienced, and continue to experience, shortages
of properly aged and blended tobacco ready for manufacturing, and shortages in
skilled employees for blending and rolling premium cigars. In general, the aging
process for tobacco requires that tobacco be purchased several years in advance
of actual use in the manufacturing process. Tobacco shortages may prevent the
Company from purchasing sufficient cigars to meet demand, maintaining its growth
expectations or even maintaining its current level of sales. These factors are
all outside the control of the Company, may significantly impact the ability of
the Company to secure an adequate supply of premium cigars in a timely fashion
and could have a material adverse effect on the Company's business, results of
operations and financial condition.
DEPENDENCE ON FUENTE CIGAR LTD. In Fiscal 1996, Fiscal 1997 and the six
months ended September 30, 1997, the Company purchased, on a dollar basis,
approximately 39.2%, 47.0% and 58.1%, respectively, of its premium cigars from
Fuente Cigar. Purchases from Fuente Cigar include all of the Company's Ashton
brand cigars, a significant percentage of the Company's proprietary Holt's brand
cigars, as well as proprietary Fuente Cigar brands. The Company has entered into
a Private Label Manufacturing Agreement with Fuente Cigar (the "PLMA") pursuant
to which Fuente Cigar has agreed to sell to the Company at least 5.0 million
premium cigars per year (the "Minimum Amount") and to use its best reasonable
efforts to sell additional cigars ordered by the Company. However, there can be
no assurance that such minimum supply of cigars or any additional cigars will be
provided to the Company. The PLMA permits noncompliance with the Minimum Amount
for various reasons
8
<PAGE>
including, but not limited to, a shortage of labor or the inability to secure
materials or supplies at reasonable prices. Under the PLMA, Fuente Cigar selects
the brands and sizes of the various premium cigars that may be delivered to the
Company to satisfy the Minimum Amount, which brands may include Ashton, Holt's
or cigars sold under any Fuente Cigar owned brand names. There can be no
assurance that the various sizes and brands sold by Fuente Cigar to the Company
will coincide with the preferences of the Company's customers. The Company has
also entered into an exclusive distributorship agreement with Fuente Cigar
pursuant to which the Company will be the exclusive wholesale distributor of up
to three new premium cigar brands to be developed with and manufactured by
Fuente Cigar. These agreements specifically prohibit any actions for specific
performance and damages in the event of a breach of such agreements by Fuente
Cigar. It is unlikely that the Company could replace Fuente Cigar with a
substitute supplier in a timely fashion, and any failure of Fuente Cigar to
supply premium cigars to the Company in appropriate numbers and in a timely
manner or to develop new premium cigar brands to be distributed by the Company
would have a material adverse effect on the Company's business, results of
operations and financial condition. See "Business -- Suppliers."
DEPENDENCE ON ASHTON BRAND. In Fiscal 1996, Fiscal 1997 and the six months
ended September 30, 1997, wholesale sales of Ashton brand premium cigars and
accessories represented, on a dollar basis, approximately, 38.9%, 37.6% and
38.6%, respectively, of net sales. The Company estimates that an additional
3.5%, 7.3%, and 7.5% of net sales for Fiscal 1996, Fiscal 1997 and the six
months ended September 30, 1997, respectively, consisted of sales of Ashton
brand premium cigars and accessories through the Company's retail operations.
The success of the Company's business is therefore dependent, in significant
part, on the sale of Ashton brand premium cigars and accessories. A decline in
the demand for Ashton brand premium cigars and accessories for any reason would
have a material adverse effect on the Company's business, results of operations
and financial condition.
POTENTIAL CONFLICTS OF INTEREST. Fuente Cigar is controlled by Carlos A.
Fuente, Sr. and his son, Carlos P. Fuente, Jr., each of whom is a director of
the Company. The Fuente Investment Partnership, a partnership whose interests
are beneficially owned by Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. and
Cynthia Fuente Suarez, will own approximately 24.4% of the shares of Common
Stock outstanding after the Offering. These relationships may present potential
conflicts of interest to Messrs. Fuente in their capacity as members of the
Board of Directors. The Company has established a policy that it will not enter
into or amend any agreement between the Company and any entity which is related
to Fuente Cigar, Carlos A. Fuente, Sr., Carlos P. Fuente, Jr. or Cynthia Fuente
Suarez on terms that are less favorable than those which could be otherwise
obtained from unaffiliated third parties. A majority of the disinterested
members of the Board of Directors will be required to approve any amended or new
agreements with Fuente Cigar and its related entities. Additionally, Fuente
Cigar and its affiliates are currently competitors of the Company and may
compete further with the Company in the future as Fuente Cigar: (i) makes
proprietary cigars for other distributors, including distributors in which
affiliates of Fuente Cigar own a controlling interest; and (ii) makes
proprietary cigars under its own name which compete directly with Ashton brand
premium cigars. See "Business -- Suppliers" and "Certain Transactions --
Relationship with Fuente Cigar and Related Parties."
LIMITED EXPERIENCE IN INTRODUCING NEW CIGAR BRANDS. One element of the
Company's growth strategy is to introduce and market new premium cigar brands.
To date, the Company has successfully introduced and marketed one proprietary
brand, the Ashton brand premium cigar, originally launched in 1986. The Company
expects to expand distribution in 1998 of the recently introduced Castano brand
and to exclusively distribute up to three new brands over the three year period
commencing in 1998. These brands are to be developed by Fuente Cigar and the
Company and to be manufactured by Fuente Cigar. Failure of the Company to
successfully introduce and market these new brands would have a material adverse
effect on the Company's business, results of operations and financial condition.
LIMITED EXPERIENCE IN OPENING SPECIALTY CIGAR STORES. The Company intends
to open or acquire additional retail cigar stores. To date, the Company has
opened and operated only one retail store. Although the Company's Philadelphia
store is profitable, no assurance can be given that such
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profitability can be sustained in the future or that any additional Company
stores will achieve sales and profitability comparable to the Company's
Philadelphia store. The profitable operation of new retail stores is dependent
on a number of factors, including identifying appropriate geographic markets,
evaluating the suitability of specific locations within such markets, hiring,
training and assimilating management and store level employees, negotiating
acceptable lease terms and constructing and opening new stores in a timely and
cost effective manner. There can be no assurance that the Company will be able
to successfully identify, open and operate additional retail stores.
DECLINING MARKET FOR CIGARS THROUGH 1993. According to industry sources,
the cigar industry experienced declining unit sales between 1964 and 1993. While
the cigar industry has experienced increasing annual unit sales since 1993,
there can be no assurance that recent positive trends will continue on a
long-term basis or that new customers will remain cigar smokers in the future.
See "Business -- Market Overview." In addition, the market for premium cigars,
and consequently the Company's net sales and results of operations, will be
subject to fluctuations based upon general economic conditions in the United
States. If there were to be a general economic downturn or recession in the
United States, the Company expects that the market for luxury related items such
as premium cigars would decrease. In the event of such an economic downturn or
recession, there can be no assurance that the Company's business, results of
operations and financial condition would not be materially adversely affected.
MANAGEMENT OF GROWTH; RISKS ASSOCIATED WITH EXPANSION. The Company has
experienced rapid growth over the last several years and its future operating
results will depend, in part, upon its ability to service a larger customer base
and to manage its overall expansion effectively. The Company's growth will
increase the responsibilities for both existing and new management personnel,
and will place significant demands on the Company's management, working capital
and systems. The Company will be required to expand and improve its operational
and financial systems and to expand the number of employees at all levels,
including senior management. There can be no assurance that the Company's
management information systems, accounting systems, purchasing systems,
inventory control systems, retail sales systems and internal controls will be
adequate or that the Company will be able to upgrade its systems and controls to
respond to such growth. The inability to successfully upgrade its controls and
systems could have a material adverse effect on the successful operation of the
Company's business, implementation of its growth strategy and future operating
results. If the Company is unable to manage this growth effectively, the
Company's business, results of operations and financial condition could be
materially adversely affected.
SOCIAL, POLITICAL AND ECONOMIC RISKS ASSOCIATED WITH INTERNATIONAL
TRADE. The cigars sold by the Company are manufactured outside the United
States, principally in the Dominican Republic, Honduras, Nicaragua, Jamaica and
Mexico. As a result, the Company is exposed to the risk of changes in social,
political and economic conditions inherent in foreign operations and
international trade including changes in the law and policies that govern
foreign investment and international trade in such countries, as well as, to a
lesser extent, changes in United States laws and regulations relating to foreign
investment and trade. Any such social, political or economic changes could pose,
among other things, the risk of supply interruption or significant increases in
the prices of tobacco products. Any such changes in social, political or
economic conditions may have a material adverse effect on the Company's
business, results of operations or financial conditions.
DEPENDENCE ON SHIPPERS. The Company primarily uses United Parcel Service
to ship its products. Although the recent strike by United Parcel Service
employees did not have a material adverse effect on the Company, there can be no
assurance that any future strike or work stoppage by United Parcel Service or
other major shipping carriers then being used by the Company will not have a
material adverse effect on the Company's business, results of operations and
financial condition or that alternate shipping carriers will be immediately
available and willing to deliver the Company's shipments in a timely fashion.
RELIANCE ON KEY PERSONNEL. The Company's operations will continue to
depend upon the efforts of senior personnel of the Company, including Robert G.
Levin, the Chairman of the Board,
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Chief Executive Officer and President of the Company and a well known figure in
the cigar industry. In significant part, the Company's relationships with its
manufacturers, suppliers and customers is based upon long-term personal
relationships with Mr. Levin. The loss of the services of Mr. Levin or other
senior personnel would have a material adverse effect on the Company's business,
results of operations and financial condition. Although the Company intends to
purchase and maintain key-man life insurance on Mr. Levin, the proceeds of such
insurance are not expected to be sufficient to compensate the Company for the
loss of his services. The Company's future performance will also depend to a
significant extent on its ability to identify, attract, train and retain highly
skilled sales, marketing and management personnel. There can be no assurance
that the Company will be successful in identifying, attracting or retaining such
personnel, and the failure to identify, attract and retain such personnel could
have a material adverse effect on the Company's business, results of operations
and financial condition.
FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's quarterly
operating results have fluctuated in the past and may fluctuate in the future as
a result of a variety of factors, including the timing of catalog mailings and
specialty direct mail pieces, the timing of the opening of new retail stores,
the timing of introduction of new brands and the price and availability of
premium cigars. Therefore, the results for any quarter are not necessarily
indicative of the results that the Company may achieve for any subsequent
quarter or any full year. Fluctuations caused by variations in quarterly
operating results may subsequently affect the market price of the Common Stock.
In addition, the Company expects its business to continue to exhibit some
seasonality, with increases in premium cigar and related accessory sales during
the holiday season, although the effect of this may be somewhat less evident due
to the growth in the Company's net sales. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Quarterly Results
of Operations."
EXTENSIVE AND INCREASING REGULATION OF TOBACCO PRODUCTS. The tobacco
industry is subject to regulation in the United States at the federal, state and
local levels, and the recent trend is toward increasing regulation. A variety of
bills relating to tobacco issues have been recently introduced in the United
States Congress, including bills that, if passed, would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the United States Federal Trade Commission (the "FTC") to the United States
Food and Drug Administration (the "FDA") and require the tobacco industry to
fund the FDA's oversight; (v) increase tobacco excise taxes; (vi) restrict the
access to tobacco products by, among other things, banning the distribution of
tobacco products through the mail, except for sales subject to proof of age;
(vii) require licensing of retail tobacco product sellers; (viii) regulate
tobacco product development; and (ix) require tobacco companies to pay for
healthcare costs incurred by the federal government in connection with tobacco
related diseases. Although hearings have been held on certain of these
proposals, to date none of such proposals have been passed by Congress. Future
enactment of such proposals or similar bills may have a material adverse effect
on the Company's business, results of operations and financial condition.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine.
Although certain legal challenges to the FDA's determination are pending, there
can be no assurance that such determination will not be upheld, nor that in the
future, the FDA will not prevail in an attempt to extend such jurisdiction to
cigars. In addition, a majority of states restrict or prohibit smoking in
certain public places and restrict sale of tobacco products (including cigars)
to minors. Local legislative and regulatory bodies have increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. Individual establishments such as bars and
restaurants have further prohibited pipe and cigar smoking even though other
tobacco products are permitted in such establishments. Further restrictions of a
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similar nature could have a material adverse effect on the business, results of
operations and financial condition of the Company. Numerous proposals have also
been considered at the state and local level restricting smoking in certain
public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, effective January 1, 1998,
smoking, including cigar smoking, has been banned by the State of California in
all bars, taverns and clubs where food and alcohol is served. Other legislation
recently introduced in Massachusetts would, if enacted, require warning labels
on cigar boxes. The states of Minnesota and Texas have enacted legislation which
require cigar manufacturers to provide information on the levels of certain
substances in their cigars to these states on an annual basis. There can be no
assurance that such legislation introduced in other states will not be passed in
the future or that other states will not enact similar or more restrictive
legislation. Consideration at both the federal and state level also has been
given to consequences of second hand smoke. There can be no assurance that
regulations relating to second hand smoke will not be adopted or that such
regulations or related litigation would not have a material adverse effect on
the Company's business, results of operations and financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. The National Cancer
Institute has announced that it will issue a report in 1997 describing research
into cigars and health. There can be no assurance as to the ultimate content,
timing or effect of this report or any additional regulation of cigars by any
federal, state, local or regulatory body, and there can be no assurance that any
such legislation or regulation would not have a material adverse effect on the
Company's business, results of operations and financial condition.
TOBACCO INDUSTRY LITIGATION. The tobacco industry has experienced and is
experiencing significant health-related litigation. Private plaintiffs in such
litigation are seeking compensatory and, in some cases, punitive damages, for
various injuries claimed to result from the use of tobacco products or exposure
to tobacco smoke, and some of these actions have named cigarette distributors as
well as manufacturers as defendants. Over 40 states have filed lawsuits against
the major United States cigarette manufacturers to recover billions of dollars
in damages, primarily costs of medical treatment of smokers. On June 20, 1997,
the Attorneys General of 40 states and several major cigarette manufacturers
announced a proposed settlement of the lawsuits filed by these states (the
"Proposed Settlement"). The Proposed Settlement, which will require Federal
legislation to implement, is complex and may change significantly or be
rejected. The Proposed Settlement would significantly change the way in which
cigarette companies and tobacco companies do business. Among other things, the
tobacco companies would pay hundreds of billions of dollars to the various
states; the FDA could regulate nicotine as a "drug" and tobacco products as
"drug delivery devices;" all outdoor advertising, sports event advertising and
advertising on non-tobacco products would be banned and certain class action
lawsuits and punitive damage claims against tobacco companies would be
prohibited. President Clinton recently announced that he would not support the
Proposed Settlement unless significant changes were incorporated. Therefore, the
potential impact of the Proposed Settlement on the cigar industry in general and
the Company in particular is uncertain. There can be no assurance that similar
litigation will not be brought against cigar manufacturers and distributors. The
potential costs to the Company of defending prolonged litigation and any
settlement or successful prosecution of any health-related litigation could have
a material adverse effect on the Company's business, results of operations and
financial condition. The State of Florida has entered into a separate settlement
agreement with major United States cigarette manufacturers with respect to
tobacco products, including roll-your-own and little cigars. This settlement
agreement provides, in part, for a ban on billboard and transit advertising,
significant document disclosure by the settling cigarette companies, billions of
dollars in settlement payments and certain adjustments pending the resolution of
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the Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved the
Proposed Settlement will supercede the Mississippi settlement. The recent
increase in the sales of cigars and the publicity of such increases may increase
the probability of legal claims. See "-- Extensive and Increasing Regulation of
Tobacco Products" and "Business -- The Tobacco Industry -- Litigation."
EFFECT OF INCREASES IN EXCISE TAXES. Cigars have long been subject to
federal, state and local excise taxes and such taxes frequently have been
increased or proposed to be increased, in some cases significantly, to fund
various legislative initiatives. In the past, there have been proposals by the
federal government to reform healthcare through a national program to be funded
principally through increases in federal excise taxes on tobacco products.
Enactment of new or significant increases in existing federal, state or local
excise taxes on cigars could result in decreased unit sales of premium cigars
which could have a material adverse effect on the Company's business, results of
operations and financial condition.
COMPETITION. The markets for the Company's products are highly competitive
and subject to rapid consumer change and frequent new product introductions and
extensions. The Company's wholesale distribution business faces competition from
larger, well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new entrants to the marketplace. The Company's retail
operations compete with a large number of other mail order companies, some of
which are larger and better financed than the Company. The Company also faces
significant competition from a large number of existing, and an increasing
number of new, retail stores and smoking establishments selling the same branded
products as the Company. Existing or future competitors may develop or offer the
same or similar premium cigars which may result in decreases in the Company's
sales of premium cigars. Many of these competitors have longer operating
histories and significantly greater financial, managerial, creative, sales and
marketing and other resources than the Company. The Company's ability to retain
its existing customers and attract new customers depends on the quality of its
premium cigars, the availability of product, its reputation in the industry and
its ability to maintain customer satisfaction.
RISKS RELATING TO TRADEMARKS. The Company's success is dependent, in part,
on the brand name Ashton, and in the future, will be dependent on new brand name
trademarks to be developed by the Company (including the Castano brand name), or
which are used in connection with premium cigars which the Company expects to
exclusively distribute in the United States. The Company relies primarily on
trademarks to protect the Ashton, Holt's, Cortesia and Castano names. The
illegal use of the Company's trademarks, or trademarks associated with brands
the Company exclusively distributes, as well as the cost of prosecuting or
defending claims for infringement or invalidity, or claims for indemnification
resulting from infringement claims, with or without merit, could be
time-consuming, result in costly litigation and divert management's attention
and resources.
CONTROL BY EXISTING SHAREHOLDERS. Upon completion of the Offering, Robert
G. Levin will own approximately 45.3% of the outstanding shares of Common Stock
(40.7% if the Underwriters' over-allotment is exercised in full) and the Fuente
Investment Partnership will own approximately 24.4% of the outstanding shares of
the Common Stock. Mr. Levin and such partnership are parties to a shareholder
agreement pursuant to which they have agreed to vote for each other's respective
nominees to the Board of Directors. Accordingly, the parties to such shareholder
agreement will be able to control the Company, elect all the directors and
generally direct the affairs of the Company. In addition, each of the parties to
the shareholder agreement has a right of first refusal to purchase the others'
shares, and each of the parties to such shareholder agreement have granted the
other a right to participate on a proportionate basis in any sale of Common
Stock by either party. See "Management" and "Principal and Selling
Shareholders."
PROVISIONS WITH ANTI-TAKEOVER EFFECT. Certain provisions of the Company's
Certificate of Incorporation and By-Laws, as well as the Delaware General
Corporation Law could delay or frustrate
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the removal of incumbent directors and could make difficult a merger, tender
offer or proxy contest involving the Company, even if such events could be
viewed as beneficial by the Company's shareholders. The Board of Directors of
the Company is empowered to issue preferred stock in one or more series without
shareholder action. Any issuance of this "blank-check" preferred stock could
materially limit the rights of holders of the Common Stock and render more
difficult or discourage an attempt to obtain control of the Company by means of
a tender offer, merger, proxy contest or otherwise. In addition, the Certificate
of Incorporation and By-Laws contain a number of provisions which could impede a
takeover or change in control of the Company, including, among other things,
staggered terms for members of the Board, the requiring of two-thirds vote of
shareholders to amend certain provisions of the Certificate of Incorporation or
to take any action by written consent, and a fair price requirement. Certain
provisions of the Delaware General Corporation Law to which the Company will be
subject may also discourage takeover attempts that have not been approved by the
Board. See "Description of Capital Stock -- Potential Anti-Takeover Effect of
Certain Provisions of the Certificate of Incorporation and By-Laws."
SHARES ELIGIBLE FOR FUTURE SALE. Upon completion of the Offering, the
Company will have 5,770,000 shares of Common Stock outstanding, 1,750,000
(2,012,500 if the Underwriters' over-allotment option is exercised in full) of
which will be freely tradeable without restriction or requirement of future
registration under the Securities Act of 1933, as amended (the "Securities
Act"). All of the remaining 4,020,000 shares of Common Stock are "restricted
securities" as that term is defined by Rule 144 promulgated under the Securities
Act. Of such shares, no shares will be eligible for sale in the public market
immediately following commencement of the Offering and 4,020,000 shares will
become eligible for sale 90 days following commencement of the Offering. The
Company, its officers and directors and all shareholders and certain option
holders, including the Selling Shareholder, owning upon completion of the
Offering, in the aggregate, 4,020,000 shares of Common Stock and options to
purchase 542,400 shares of Common Stock, have executed agreements pursuant to
which they have agreed that they will not, for a period of 180 days from the
date of this Prospectus, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise sell or
dispose (or announce any offer, sale, offer of sale, contract of sale, pledge,
grant of any option to purchase or other sale or disposition) of any shares of
Common Stock or other capital stock of the Company or any securities convertible
into, or exercisable or exchangeable for, any Common Stock, or other capital
stock of the Company without the prior written consent of Prudential Securities
Incorporated, on behalf of the Underwriters, except that such agreement does not
prevent the Company from granting additional options under the Employee Stock
Plan or the Director Stock Plan. Upon the expiration or release from such
lock-up agreements, 4,020,000 shares will be available for immediate sale under
Rule 144 and 542,400 additional shares subject to vested stock options could
also be sold, subject in some cases to certain volume limitations. Prudential
Securities Incorporated may, in its sole discretion, at any time and without
notice, release all or any portion of the securities subject to such lock-up
agreements. Sale of such shares in the future could adversely affect the
prevailing market price of the Common Stock. No prediction can be made as to the
effect, if any, that future sales of shares or the availability of shares for
sale will have on the market price for Common Stock prevailing from time to
time. Sale of substantial amounts of Common Stock in the public market, or the
perception of the availability of shares for sale, could adversely affect the
prevailing market price of the Common Stock and could impair the Company's
ability to raise capital through the sale of its equity securities. Beginning
nine months after the Offering, the holders of options to purchase an aggregate
of 482,400 shares of Common Stock which are "restricted securities" (the
"Registerable Securities") will be entitled to certain rights with respect to
registration of such shares. If exercised, such registration rights could result
in the Registerable Securities being sold earlier than otherwise allowable under
Rule 144, and could adversely affect the prevailing market price of the Common
Stock. See "Description of Capital Stock -- Registration Rights" and "Shares
Eligible for Future Sale."
BROAD DISCRETION IN APPLICATION OF PROCEEDS. The Company intends to
utilize approximately $11.1 million, representing approximately 53.6% of the
estimated net proceeds of the Offering, for general corporate purposes,
including working capital. Accordingly, the Company will have broad discretion
as to the application of such proceeds. An investor will not have the
opportunity to evaluate
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the economic, financial and other relevant information utilized by the Company
in determining the application of such proceeds. See "Use of Proceeds."
IMMEDIATE AND SUBSTANTIAL DILUTION. Purchasers of shares of Common Stock
in the Offering will experience an immediate and substantial dilution in the net
tangible book value of each share of Common Stock of $8.95 per share based upon
an initial public offering price of $13.00, the mid-point of the filing range.
See "Dilution."
NO PRIOR PUBLIC MARKET; POSSIBLE VOLATILITY OF STOCK PRICE. Prior to the
Offering, there has been no public market for the Common Stock, and there can be
no assurance that an active trading market for the Common Stock will develop or
be sustained upon completion of the Offering. The initial public offering price
will be determined by negotiations between the Company and the representatives
of the Underwriters based upon a number of factors, including market valuations
of other companies engaged in activities similar to those of the Company,
estimates of the business potential and prospects of the Company, the present
state of the Company's business operations, the Company's management and other
factors deemed relevant. The initial public offering price may not be indicative
of the market price of the Common Stock following completion of the Offering.
The trading price of the Common Stock could also be subject to significant
fluctuations in response to variations in quarterly results of operations,
announcements of new products or the opening or acquisition of retail stores by
the Company or its competitors, developments or disputes with respect to
proprietary rights, general trends in the industry, changes in government
legislation or litigation affecting tobacco products, general trends in the
industry, overall market conditions or other factors. In addition, the stock
markets historically have experienced extreme price and volume fluctuations
which may affect the market price of the Common Stock in a manner unrelated or
disproportionate to the operating performance of the Company. These market
fluctuations may adversely affect the market price of the Common Stock. See
"Underwriting."
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REORGANIZATION OF THE COMPANY
THE REORGANIZATION
Prior to the Reorganization, the business of the Company was conducted
through separate, but related, companies: (i) Holt's Cigar Company, Inc., a
Pennsylvania corporation engaged in the operation of the mail order catalog
business and the Philadelphia retail store ("Holt's"); (ii) Ashton Distributors,
Inc., a Pennsylvania corporation engaged in the wholesale distribution of Ashton
premium cigars and Ashton cigar-related accessories ("Distributors"); and (iii)
the Company, Holt's Cigar Holdings, Inc. (formerly known as Ashton Holdings,
Inc.), a Delaware corporation which owned the Ashton trademarks and licensed
their use to Distributors. All of the issued and outstanding shares of the
common stock of Holt's and Distributors were owned by Robert G. Levin and the
issued and outstanding shares of the common stock of Holdings were owned 60.0%
by Mr. Levin and 40.0% by the Fuente Investment Partnership. In addition, there
were outstanding options (held by persons other than Mr. Levin) to purchase
shares of the Common Stock (the "Options").
The Company, Holt's and Distributors and their respective shareholders
agreed to a plan of reorganization (the "Reorganization"), whereby, in a series
of transactions prior to the closing of the Offering: (i) the Company will amend
its Certificate of Incorporation to change its authorized common stock from
15,000 shares of Class A common stock and 5,000 shares of Class B common stock
to 25,000,000 shares of Common Stock; (ii) the Company will effect a
307.74-for-one stock split; (iii) the Company will issue an aggregate of
3,517,197 shares of Common Stock in exchange for the shares of Class A and Class
B common stock then outstanding; (iv) Holt's and Distributors will become wholly
owned subsidiaries of the Company, and the Company will issue 502,803 shares of
Common Stock to Robert G. Levin in exchange for all the outstanding common stock
of Holt's and Distributors; and (v) holders of options to purchase an aggregate
of 12% of the Company will exchange such options for options to purchase 482,400
shares of Common Stock. Immediately following the Reorganization, it is the
Company's intention to form a new Delaware subsidiary and to assign and transfer
to it all of the Company's rights in and to the Ashton, Holt's, Cortesia and
Castano trademarks and other intellectual property rights currently owned by
Holt's.
As a result of the Reorganization: (i) the Company will have issued and
outstanding 4,020,000 shares of Common Stock, of which 2,613,015 shares will be
owned by Robert G. Levin and 1,406,985 shares will be owned by the Fuente
Investment Partnership; and (ii) the Company will have issued, options to
purchase an aggregate of 482,400 shares of Common Stock at a price of $.50 per
share. At the time these options were granted, Mr. Levin and the principals of
the Fuente Investment Partnership agreed that these options would not dilute the
ownership interest of the Fuente Investment Partnership. Accordingly, Mr. Levin
has agreed that upon exercise of any such options, he will contribute to the
capital of the Company one share of Common Stock for each share purchased
pursuant to these options.
TERMINATION OF S CORPORATION STATUS
Prior to the Reorganization, Distributors operated as an S Corporation for
federal income tax purposes under Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and for state corporate income tax purposes under
comparable state laws. As a result of its status as an S Corporation, the
taxable income of Distributors has been taxed for federal and state income tax
purposes directly to Robert G. Levin, Distributors' sole shareholder, rather
than to Distributors. Following the Reorganization, Distributors will no longer
qualify as an S Corporation and it will be fully subject to federal and state
income taxes as a C Corporation under the Code.
On October 24, 1997, Distributors declared a $2.7 million dividend to
Robert G. Levin, its sole shareholder, and the Chairman of the Board, Chief
Executive Officer and President of the Company, an amount equal to Distributors'
estimated accumulated undistributed taxable income as of the Offering date.
Distributors borrowed $2.7 million to fund this distribution. Mr. Levin has
guaranteed the repayment of this borrowing. As of September 30, 1997, actual
accumulated undistributed taxable income totaled $2.2 million. Mr. Levin and
the Company have agreed to adjust the dividend to reflect the actual accumulated
earnings at the date of the Reorganization.
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USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,750,000 shares of
Common Stock offered by the Company hereby (after deducting underwriting
discounts and commissions and estimated offering expenses) are estimated to be
approximately $20.6 million, assuming an initial public offering price of $13.00
per share, the mid-point of the filing range.
The Company intends to use approximately: (i) $3.4 million to repay
outstanding indebtedness; (ii) $2.6 million to establish two new retail stores
in select urban centers; (iii) $2.0 million to increase inventories of premium
cigars; (iv) $600,000 to expand its mail order business; (v) $500,000 for the
introduction of new premium cigar brands; and (vi) $500,000 to upgrade the
Company's management information and accounting systems. The outstanding
indebtedness to be repaid with the net proceeds of the Offering includes four
different loans with approximately $2.7 million, $450,000, $146,000 and $64,000
outstanding, respectively, bearing interest at 6.0%, 8.75%, 8.5% and 9.0%,
respectively, and maturing December 1, 1997, December 2008, June 2020 and April
1998, respectively. The $2.7 million loan was incurred to finance the
distribution to Robert G. Levin, Chairman of the Board, Chief Executive Officer
and President of the Company, of the estimated $2.7 million in undistributed S
Corporation earnings of Ashton Distributors, Inc. through the date of the
Offering, which estimated earnings have been or will be taxed directly to Mr.
Levin. See "Reorganization of the Company" and "Certain Transactions." The
$450,000 loan was incurred to finance the construction of tenant improvements
for the Company's new office, warehouse and distribution facility. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
The remainder of the net proceeds of the Offering, approximately $11.1
million, will be used for general corporate purposes, including working capital
to support the growth of the Company business. In lieu of establishing new
retail stores, as described in (i) above, the Company may elect to acquire
existing retail locations and, to the extent such stores are acquired rather
than established, the Company anticipates that the cost to acquire a store will
be substantially greater than the $1.3 million allocated to establish a store.
In addition, a portion of the net proceeds may also be used for acquisition of
proprietary cigar brands and existing distributors of premium cigars. The
Company currently has no agreements with respect to the acquisition of any
retail store, cigar brand or distributor.
Pending application of the net proceeds of the Company from the Offering,
the Company intends to invest in interest-bearing bank accounts, short-term,
investment grade securities or guaranteed obligations of the United States
government.
DIVIDEND POLICY
The Company has never declared or paid any cash dividends except for S
Corporation distributions from Ashton Distributors, Inc. to its shareholder.
There are no restrictions on the declaration or payment of dividends by the
Company or any of its subsidiaries. However, the Company intends to retain
future earnings for use in its business and does not anticipate paying or
declaring any dividends on shares of its Common Stock in the foreseeable future.
The Board of Directors of the Company intends to review this policy from time to
time, after taking into account various factors such as the Company's financial
condition, results of operations, current and anticipated cash needs and plans
for expansion.
17
<PAGE>
CAPITALIZATION
The following table sets forth the current portion of long-term debt and
the capitalization of the Company at September 30, 1997 (i) on a combined basis,
(ii) on a pro forma combined basis assuming consummation of the Reorganization
and recording an S Corporation distribution of approximately $2.2 million with
respect to the undistributed earnings of Ashton Distributors, Inc. through
September 30, 1997, as well as the debt incurred to fund such distribution, and
(iii) on a pro forma as adjusted basis to give effect to the sale of 1,750,000
shares of Common Stock offered hereby (at an assumed initial public offering
price of $13.00 per share, the mid-point of the filing range) and the
application of the estimated net proceeds therefrom as described under "Use of
Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Combined Financial Statements and notes thereto appearing elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
--------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
------ --------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Current portion of long-term debt........................ $ 125 $ 125 $ --
====== ====== =======
Short-term debt to fund stockholder distribution......... -- 2,153 --
====== ====== =======
Long-term debt........................................... 547 547 --
------ ------ -------
Stockholders' equity:
Preferred stock (pro forma), no par value; 1,000,000
shares authorized; none issued...................... -- -- --
Common stock (pro forma), $.001 par value; 25,000,000
shares authorized; 4,020,000 shares issued and
outstanding and 5,770,000 shares issued and
outstanding pro forma as adjusted(1)(2)............. 91 4 6
Additional paid-in capital............................. 304 685 21,266
Retained earnings...................................... 4,719 2,567 2,566
Treasury stock......................................... (50) -- --
------ ------ -------
Total stockholders' equity.......................... 5,064 3,256 23,838
------ ------ -------
Total capitalization.......................... $5,611 $3,803 $23,838
====== ====== =======
</TABLE>
- ------------------
(1) Excludes: (i) 169,500 shares of Common Stock issuable upon the exercise of
options granted pursuant to the Employee Stock Plan; and (ii) 60,000 shares
of Common Stock issuable upon the exercise of options granted under the
Director Stock Plan. See "Management -- Stock Options."
(2) The Company also has issued options to purchase an aggregate of 482,400
shares of Common Stock at a price of $.50 per share, which options were
granted in January 1996. At the time these options were granted, Robert G.
Levin, the Company's Chairman of the Board, Chief Executive Officer and
President, and the other shareholder of the Company agreed that these
options would only dilute Mr. Levin's ownership interest. Accordingly, Mr.
Levin has agreed to contribute to the capital of the Company one share of
Common Stock for each share purchased pursuant to these options. See
"Management -- Stock Options."
18
<PAGE>
DILUTION
Purchasers of the Common Stock offered hereby will experience an immediate
and substantial dilution in the pro forma book value of the Common Stock from
the initial public offering price. At September 30, 1997, the pro forma net
tangible book value of the Company was $2.8 million, or $0.69 per share, after
giving effect to the Reorganization and a subsequent S Corporation distribution
of $2.2 million. After giving effect to the Offering (at an assumed initial
public offering price of $13.00 per share, the mid-point of the filing range),
the pro forma net tangible book value of the Common Stock would be $23.4
million, or $4.05 per share. This represents an immediate increase in pro forma
net tangible book value of $3.36 per share of Common Stock to existing
shareholders and an immediate and substantial dilution of $8.95 per share of
Common Stock to new investors purchasing shares of Common Stock in the Offering.
The following table illustrates the dilution per share:
<TABLE>
<S> <C> <C>
Assumed initial public offering price...................... $13.00
Pro forma net tangible book value before the Offering.... $0.69
Increase attributable to new investors................... 3.36
-----
Pro forma net tangible book value after the Offering....... 4.05
------
Dilution to new investors.................................. $ 8.95
======
</TABLE>
The following table summarizes the number of shares of Common Stock sold by
the Company, the total consideration paid to the Company and the average price
per share paid by the existing shareholders and by the new investors purchasing
shares of Common Stock in the Offering:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION
------------------- --------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing shareholders..... 4,020,000 69.7% $ 394,721 1.7% $ 0.10
New investors............. 1,750,000 30.3 22,750,000 98.3 13.00
--------- ------ ----------- ------
Total................... 5,770,000 100.0% $23,144,721 100.0%
========= ====== =========== ======
</TABLE>
The computations in the table set forth above exclude shares issuable
pursuant to the outstanding options granted January 1, 1996, the shares issuable
pursuant to the Employee Stock Plan and the Director Stock Plan.
19
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following table sets forth, for the periods and at the dates indicated,
summary combined financial data for the Company. The information presented below
under the captions "Statement of Operations Data" for Fiscal 1995, 1996 and 1997
and "Balance Sheet Data" as of March 31, 1996 and 1997 is derived from the
Company's audited financial statements. The Company's audited financial
statements as of March 31, 1996 and 1997 and for the three years ended March 31,
1997 are included elsewhere in this Prospectus. The selected financial data for
the Company presented below under the captions "Statement of Operations Data"
for Fiscal 1993 and 1994 and for the six months ended September 30, 1996 and
1997 and the "Balance Sheet Data" as of March 31, 1993, 1994 and 1995 and
September 30, 1997 are derived from the Company's unaudited financial
statements. In the opinion of management, such unaudited financial information
contains all adjustments (which consist only of normal recurring adjustments)
necessary to present fairly the financial position and results of operations of
the Company as of such dates and for such periods. The selected financial data
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Combined Financial
Statements and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED MARCH 31, ENDED SEPTEMBER 30,
------------------------------------------- ----------------------
1993 1994 1995 1996 1997 1996 1997
------ ------ ------ ------ ------- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales........................... $3,042 $3,738 $5,662 $9,467 $17,278 $7,610 $13,424
Cost of goods sold.................. 2,039 2,412 3,041 5,159 9,566 4,145 7,318
------ ------ ------ ------ ------- ------ -------
Gross profit........................ 1,003 1,326 2,621 4,308 7,712 3,465 6,106
Operating expenses.................. 950 1,440 1,949 3,484 4,895 2,240 2,894
------ ------ ------ ------ ------- ------ -------
Income (loss) from operations....... 53 (114) 672 824 2,817 1,225 3,212
Other income........................ -- -- -- 22 32 11 33
------ ------ ------ ------ ------- ------ -------
Income (loss) before income tax
expense........................... 53 (114) 672 846 2,849 1,236 3,245
Income tax expense(1)............... 18 1 209 318 577 398 653
------ ------ ------ ------ ------- ------ -------
Net income (loss)................... $ 35 $ (115) $ 463 $ 528 $ 2,272 $ 838 $ 2,592
====== ====== ====== ====== ======= ====== =======
PRO FORMA AND SUPPLEMENTAL PRO FORMA INCOME DATA:
Income before income tax expense.... $ 2,849 $1,236 $ 3,245
Pro forma income tax
provision(2).................... 1,133 491 1,294
Pro forma amortization of
goodwill(2)..................... 17 8 9
------- ------ -------
Pro forma net income(2)............. $ 1,699 $ 737 $ 1,942
======= ====== =======
Pro forma net income per share...... $ .41 $ .18 $ .47
======= ====== =======
Pro forma weighted average shares
outstanding(3).................... 4,102 4,102 4,102
Supplemental pro forma net
income(4)......................... $ 1,743 $ 754 $ 1,950
======= ====== =======
Supplemental pro forma net income
per share......................... $ .42 $ .18 $ .47
======= ====== =======
Supplemental pro forma weighted
average shares outstanding(5)..... 4,136 4,139 4,142
<CAPTION>
MARCH 31,
------------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996 1997 1997
------ ------ ------ ------ ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital..................... $ 431 $ 433 $ 721 $1,035 $ 2,211 $ 4,023
Total assets........................ 938 1,425 2,260 3,686 5,406 7,986
Total debt.......................... 31 88 72 497 312 672
Stockholders' equity................ 453 643 1,162 1,653 3,025 5,064
</TABLE>
(footnotes on following page)
20
<PAGE>
- ------------------
(1) Ashton Distributors, Inc., formed in June 1993, operated as an S Corporation
from its inception, and, as a result, its taxable income was passed through
to its shareholder for federal and state income tax purposes. Accordingly,
the financial statements do not include a provision for federal and state
income taxes with respect to the operations of Ashton Distributors, Inc.
(2) Pro forma net income is determined as if the Reorganization had occurred on
April 1, 1996. Ashton Distributors, Inc. will terminate its S Corporation
status as a result of the Reorganization. The pro forma information has been
computed: (i) as if the entire Company was subject to federal and all
applicable state corporate income taxes as a C Corporation for each of the
periods presented; and (ii) includes amortization of goodwill that would
have been recorded if the Reorganization had occurred on April 1, 1996.
(3) Pro forma weighted average shares outstanding is based upon the number of
shares outstanding upon completion of the Reorganization, increased to
include the effects of the incremental shares required to fund the repayment
of debt incurred to make a distribution in excess of earnings over the
previous year to Robert G. Levin, the sole shareholder of Ashton
Distributors, Inc.
(4) Supplemental pro forma net income is based on pro forma net income and gives
effect to the reduction in interest costs (net of applicable income taxes),
of $44,000, $16,800 and $8,400 for Fiscal 1997 and the six months ended
September 30, 1996 and 1997, respectively, which would have resulted
assuming the application of a portion of the net proceeds from the Offering
were used to repay certain indebtedness of the Company.
(5) Supplemental weighted average shares outstanding is calculated based upon
the pro forma weighted average shares outstanding increased by the number of
shares required to be sold to repay certain indebtedness of the Company.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All references to a "Fiscal" year refer to the fiscal year ended March 31
of such year.
OVERVIEW
The Company is a leading distributor and retailer of brand name premium
cigars, cigar-related accessories and other tobacco products. The Company's
primary focus is the premium cigar market. The following table sets forth the
net sales of the Company's products, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------- ------------------------------------
1995 1996 1997 1996 1997
------------------- ------------------- ------------------- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Premium Cigars.............. $4,988 88.1% $7,996 84.5% $14,915 86.3% $6,785 89.2 $12,304 91.7%
Accessories and Other....... 674 11.9 1,471 15.5 2,363 13.7 825 10.8 1,120 8.3
------ ----- ------ ----- ------- ----- ------ ----- ------- -----
Total....................... $5,662 100.0% $9,467 100.0% $17,278 100.0% $7,610 100.0% $13,424 100.0%
====== ===== ====== ===== ======= ===== ====== ===== ======= =====
</TABLE>
The Company's results of operations have been significantly affected by
current industry trends in the premium cigar market. Since 1993, the cigar
industry has experienced increasing consumption and retail sales across all
major categories, especially in the premium cigar segment. On a unit basis,
premium cigar sales grew at a CAGR of approximately 36.9% from 1993 to 1996,
while retail dollar sales have increased more rapidly due to price increases.
From Fiscal 1994 to Fiscal 1997, the Company's net sales increased at a CAGR of
66.6% and its sales of premium cigars increased at a CAGR of 71.6% over the same
period.
The Company's products are marketed on a wholesale basis to premium cigar
retailers nationwide, and on a retail basis through the Company's mail order
catalog and Philadelphia retail store. The following table sets forth the
Company's wholesale and retail sales, expressed in thousands of dollars and as a
percentage of net sales for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED SEPTEMBER 30,
--------------------------------------------------------------- -----------------------------------------
1995 1996 1997 1996 1997
------------------- ------------------- ------------------- ------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Wholesale............ $2,296 40.6% $3,687 38.9% $ 6,502 37.6% $2,751 36.1% $ 5,570 41.5%
Retail-Mail Order.... 1,674 29.5 3,178 33.6 6,633 38.4 3,249 42.7 5,202 38.7
Retail-Store......... 1,692 29.9 2,602 27.5 4,143 24.0 1,610 21.2 2,652 19.8
------ ----- ------ ----- ------- ----- ------ ----- ------- -----
Total................ $5,662 100.0% $9,467 100.0% $17,278 100.0% $7,610 100.0% $13,424 100.0%
====== ===== ====== ===== ======= ===== ====== ===== ======= =====
</TABLE>
The Company was incorporated in 1983, and its predecessors have been in
continuous operation since 1898. Immediately prior to the Offering, the Company
will undergo a Reorganization whereby, among other things, the Company will
acquire all of the issued and outstanding stock of Ashton Distributors, Inc. and
Holt's Cigar Company, Inc. from their sole shareholder, Robert G. Levin, in
exchange for shares of Common Stock and Ashton Distributors, Inc. will thereupon
be subject to taxation as a C Corporation. The Reorganization is intended to
qualify as a tax-free exchange under the Code. See "Reorganization of the
Company."
22
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of net sales, certain items
in the Company's statement of operations for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------------------------- ----------------------
1995 1996 1997 1996 1997
----- ----- ------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................................. 100.0% 100.0% 100.0% 100.0% 100.0%
Cost of goods sold........................ 53.7 54.5 55.4 54.5 54.5
----- ----- ------ ----- -----
Gross profit.............................. 46.3 45.5 44.6 45.5 45.5
Operating expenses........................ 34.4 36.8 28.3 29.4 21.6
----- ----- ------ ----- -----
Income from operations.................... 11.9 8.7 16.3 16.1 23.9
Other income.............................. 0.0 0.2 0.2 0.1 0.3
----- ----- ------ ----- -----
Income before income tax
expense................................. 11.9% 8.9% 16.5% 16.2% 24.2%
===== ===== ====== ===== =====
</TABLE>
SIX MONTHS ENDED SEPTEMBER 30, 1997 COMPARED TO SIX MONTHS ENDED SEPTEMBER 30,
1996
Net Sales. Net sales increased approximately $5.8 million, or 76.4%, from
$7.6 million in the six months ended September 30, 1996 to $13.4 million in the
six months ended September 30, 1997. Net sales increased primarily as a result
of the increase in net sales of premium cigars from $6.8 million for the six
months ended September 30, 1996 to $12.3 million for the comparable period in
1997. Of such increase, $3.0 million was attributable to increased retail sales
of premium cigars and $2.5 million was attributable to increased wholesale sales
of premium cigars. These increases were the result of (i) increased availability
of premium cigars from the Company's suppliers, (ii) strong demand for premium
cigars, and (iii) increases in the average selling price per cigar of premium
cigars.
Gross Profit. Gross profit increased approximately $2.6 million, or 76.2%,
from $3.5 million in the six months ended September 30, 1996 to $6.1 million in
the six months ended September 30, 1997. Gross profit as a percent of net sales
was 45.5% for the six months ended September 30, 1996 and 1997.
Operating Expenses. Operating expenses increased approximately $654,000,
or 29.2%, from $2.2 million in the six months ended September 30, 1996 to $2.9
million in the six months ended September 30, 1997. As a percentage of net
sales, operating expenses decreased from 29.4% in the six months ended September
30, 1996 to 21.6% in the six months ended September 30, 1997. This decrease was
primarily due to net sales increasing at a higher rate than the increase in
operating expenses.
FISCAL 1997 COMPARED TO FISCAL 1996
Net Sales. Net sales increased approximately $7.8 million, or 82.5%, from
$9.5 million in Fiscal 1996 to $17.3 million in Fiscal 1997. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $8.0
million in Fiscal 1996 to $14.9 million in Fiscal 1997. Of such increase, $4.6
million was attributable to increased retail sales of premium cigars and $2.3
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of (i) increased availability of premium cigars from
the Company's suppliers, (ii) strong demand for premium cigars, and (iii)
increases in the average selling price per cigar of premium cigars. The
remaining increase in net sales of approximately $900,000 was attributable to
increased sales of accessories and other products.
Gross Profit. Gross profit increased approximately $3.4 million, or 79.0%,
from $4.3 million in Fiscal 1996 to $7.7 million in Fiscal 1997. Gross profit as
a percent of net sales decreased from 45.5% in Fiscal 1996 to 44.6% in Fiscal
1997. The decrease in gross profit as a percent of net sales was
23
<PAGE>
primarily due to cigars on a retail basis being sold at a lower margin as a
result of costs from manufacturers increasing faster than market retail prices.
Operating Expenses. Operating expenses increased approximately $1.4
million, or 40.5%, from $3.5 million in Fiscal 1996 to $4.9 million in Fiscal
1997. This increase was primarily due to an increased number of employees which
increased payroll and related employee expenses, and an increase in professional
fees and sales commissions. As a percentage of net sales, operating expenses
decreased from 36.8% in Fiscal 1996 to 28.3% in Fiscal 1997. This decrease was
primarily due to net sales increasing at a higher rate than the increase in
expenses.
FISCAL 1996 COMPARED TO FISCAL 1995
Net Sales. Net sales increased approximately $3.8 million, or 67.2%, from
$5.7 million in Fiscal 1995 to $9.5 million in Fiscal 1996. Net sales increased
primarily as a result of the increase in net sales of premium cigars from $5.0
million in Fiscal 1995 to $8.0 million in Fiscal 1996. Of such increase, $1.6
million was attributable to increased retail sales of premium cigars and $1.4
million was attributable to increased wholesale sales of premium cigars. These
increases were the result of increased supply of premium cigars from the
Company's suppliers and strong demand for premium cigars. The remaining increase
in net sales of approximately $800,000 was attributable to increased sales of
accessories and other products.
Gross Profit. Gross profit increased approximately $1.7 million, or 64.4%,
from $2.6 million in Fiscal 1995 to $4.3 million in Fiscal 1996. Gross profit as
a percent of net sales decreased from 46.3% in Fiscal 1995 to 45.5% in Fiscal
1996. The decrease in gross profit as a percent of net sales was primarily due
to cigars on a retail basis being sold at a lower margin as a result of
increased costs from the manufacturers, partially offset by an increase in the
Company's wholesale prices.
Operating Expenses. Operating expenses increased approximately $1.6
million, or 78.8%, from $1.9 million in Fiscal 1995 to $3.5 million in Fiscal
1996. This increase was due to an increased number of employees which increased
payroll and related employee expenses, increased advertising expenditures and
other increased costs incurred as a result of the Company's growth. As a
percentage of net sales, operating expenses increased from 34.4% in Fiscal 1995
to 36.8% in Fiscal 1996.
QUARTERLY RESULTS OF OPERATIONS
The following table presents certain unaudited operations data for each of
the Company's preceding ten quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. $1,809 $2,450 $2,518 $2,689 $3,450 $4,160 $4,957 $4,710
Gross profit........... 826 1,086 1,157 1,239 1,472 1,993 2,227 2,020
Income from
operations........... 79 297 275 174 438 786 1,043 551
<CAPTION>
QUARTER ENDED
--------------------
JUNE 30, SEPT. 30,
1997 1997
-------- ---------
(IN THOUSANDS)
<S> <C> <C>
Net sales.............. $6,361 $7,063
Gross profit........... 2,749 3,356
Income from
operations........... 1,356 1,855
</TABLE>
The following table sets forth certain unaudited operations data as a
percentage of net sales for each of the Company's preceding ten quarters:
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MAR. 31, JUNE 30, SEPT. 30, DEC. 31, MAR. 31,
1995 1995 1995 1996 1996 1996 1996 1997
-------- --------- -------- -------- -------- --------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales.............. 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0%
Gross profit........... 45.7 44.3 46.0 46.1 42.7 47.9 44.9 42.9
Income from
operations........... 4.4 12.1 10.9 6.5 12.7 18.9 21.0 11.7
<CAPTION>
QUARTER ENDED
--------------------
JUNE 30, SEPT. 30
1997 1997
-------- --------
<S> <C> <C>
Net sales.............. 100.0% 100.0%
Gross profit........... 43.2 47.5
Income from
operations........... 21.3 26.3
</TABLE>
24
<PAGE>
The Company's quarterly operating results have fluctuated due to several
factors, including the timing of catalog mailings and specialty direct mail
pieces, the opening of the Company's retail store and the price and availability
of premium cigars. In addition, the Company expects its business to continue to
exhibit some seasonality, with increases in premium cigar and cigar-related
accessory sales during the holiday season, although the effect of this may be
somewhat less evident due to the growth in the Company's net sales.
LIQUIDITY AND CAPITAL RESOURCES
The Company has historically financed its operations through a combination
of cash generated from operations and bank debt. Net cash provided by operations
for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the six months ended September 30,
1997 of $539,000, $669,000, $1,130,000 and $1,684,000, respectively, consisted
primarily of net income, depreciation and amortization and an increase in
accounts payable, offset by increases in accounts receivable and inventory.
On January 29, 1997, the Company entered into a $400,000 line of credit
with Jefferson Bank with borrowings thereunder accruing interest at the bank's
prime rate. At September 30, 1997, the Company had no borrowings under the line
of credit. On May 5, 1995, the Company entered into a long-term note payable
with Jefferson Bank accruing interest at 9.0% and due in monthly payments. At
September 30, 1997, the outstanding balance on this note was $63,552. The note
matures in April 1998. On October 14, 1994, the Company entered into a long-term
note payable with Jefferson Bank accruing interest at 8.5% and due in monthly
payments. At September 30, 1997, the outstanding balance on this note was
$146,171. This note matures in June 2020. On June 17, 1997, the Company entered
into a construction loan agreement with Jefferson Bank to construct tenant
improvements for the Company's new office, warehouse and distribution facility.
The maximum available under this agreement is $450,000. Interest on the loan is
charged at 8.75% and the loan matures December 2008. At September 30, 1997, the
outstanding balance on this note was $450,000. The credit line and the notes
payable are secured by accounts receivable and inventory. The long-term notes
payable and the construction loan will be repaid with the net proceeds of the
Offering. On October 24, 1997, Ashton Distributors, Inc. declared a distribution
of $2.7 million to Robert G. Levin, its shareholder and Chairman of the Board,
Chief Executive Officer and President of the Company, such amount being
estimated to equal the accumulated but undistributed earnings of Ashton
Distributors, Inc. as of the date of the Offering which have been or will be
taxed as income to Mr. Levin. Ashton Distributors, Inc. borrowed this amount
from Jefferson Bank pursuant to a demand note due no later than December 1,
1997. Interest on this note accrues at the rate of 6.0%. This note is guaranteed
by Mr. Levin and will be repaid with the proceeds of the Offering.
The Company believes that the net proceeds of the Offering, together with
cash generated from its operating activities and available bank borrowings, will
be sufficient to fund its operations and expansion programs at least through the
end of Fiscal 1999.
IMPACT OF INFLATION
The Company does not believe that inflation has had a material impact on its
net sales or results of operations.
25
<PAGE>
BUSINESS
GENERAL
The Company is a leading distributor and retailer of brand name premium
cigars. The Company is the exclusive wholesale distributor of Ashton premium
cigars and Ashton cigar-related accessories, a proprietary brand owned by the
Company. The Company believes that Ashton premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Cigar Aficionado magazine has rated the Ashton brand as "very
good to excellent" in each category evaluated by the publication. The Company's
retail operations, which consist of a mail order catalog and the Company's
Philadelphia, Pennsylvania retail store, sell over 170 brands of premium cigars
as well as cigar-related accessories and other tobacco products. In Fiscal 1997
and the six months ended September 30, 1997, the Company had net sales of $17.3
million and $13.4 million, respectively, of which sales of premium cigars
represented approximately 86.3% and 91.7%, respectively. The Company believes
that the strength of the Ashton brand and the Company's distribution
capabilities, combined with increasing demand for premium cigars, will enable
the Company to continue to realize significant future growth.
The Company believes that its success is due, in part, to the popularity of
the Company's Ashton brand, which was introduced in 1986. All Ashton cigars, as
well as a portion of the Company's Holt's brand premium cigars, are manufactured
for the Company by Fuente Cigar, a Dominican Republic based manufacturer of
premium cigars. Cigars made by Fuente Cigar enjoy a worldwide reputation for the
finest tobaccos, expert blends, consistency and quality of construction. The
Company believes that its relationship with Fuente Cigar will enable the Company
to continue to grow its Ashton brand as well as to introduce new brands to be
manufactured for the Company by Fuente Cigar. Two of the executive officers of
Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr., are directors of
the Company and a related Fuente family partnership will own approximately 24.4%
of the shares of Common Stock outstanding upon completion of the Offering.
Fuente Cigar has shown its commitment to the Company through agreements which
provide for: (i) the exclusive manufacture by Fuente Cigar of Ashton brand
premium cigars; (ii) the sale to the Company of at least 5.0 million premium
cigars per year for a minimum of ten years; and (iii) the exclusive wholesale
distribution by the Company of up to three new premium cigar brands to be
developed with and manufactured by Fuente Cigar. In Fiscal 1996, Fiscal 1997 and
the six months ended September 30, 1997, the Company purchased, on a dollar
basis, approximately 39.2%, 47.0% and 58.1%, respectively, of its premium cigars
from Fuente Cigar.
MARKET OVERVIEW
The cigar market is divided into three principal categories: premium
cigars, mass market cigars (large and small) and little cigars. Premium cigars
are generally imported, hand-made or hand-rolled cigars made with long filler,
100% natural tobacco leaf and which generally sell at retail prices above $1.00
per cigar. In order to make hand-made cigars, tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch" which is placed in a
mold. Then, "wrapper" tobacco is hand-wrapped around the bunch, creating a
premium cigar.
After declining for almost thirty years from a peak in 1964, the cigar
market entered a significant growth period in 1993. According to the Cigar
Association of America, sales of all categories of cigars totaled 4.6 billion
units, or $1.6 billion, in 1996, and grew from 1993 to 1996 at a CAGR of 10.3%
on a unit basis and 30.2% on a dollar basis. Unit sales of premium cigars, which
had remained essentially flat between 1981 and 1993, increased at a CAGR of
36.9%, on a unit basis, from 1993 to 1996. The Cigar Association of America
reports that premium cigar imports for the six month period ended June 30, 1997
have increased approximately 95.0% compared to cigar imports for the same period
in 1996.
The Company believes that the increase in demand for premium cigars is the
result of several factors, including: (i) the improved image of cigar smoking
resulting from increased publicity, including the success of Cigar Aficionado
magazine and the increased visibility of cigar smoking by celebrities; (ii) the
emergence of an expanded base of younger, highly educated, affluent adults aged
25 to 35 and the growing interest of this group in luxury goods, including
premium cigars; (iii) the
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increase in the number of adults over age 40 (a demographic group believed to
smoke more cigars than any other demographic group); and (iv) the proliferation
of establishments where cigar smoking is encouraged, as well as "cigar smoker"
dinners and other special events for cigar smokers.
Cigar manufacturers have experienced a shortage of raw materials
(principally properly aged tobacco) due to increased demand for premium cigars
and the length of time necessary to cultivate, grow, harvest, age and process
the tobacco used in the manufacture of premium cigars. In addition,
manufacturers of premium cigars have reported shortages of skilled labor
necessary for processing, blending and manufacturing premium cigars, although
these manufacturers currently report that labor shortages have been easing. As a
result, wholesalers and retailers of premium cigars have experienced and
continue to experience shortages in supply and increasing prices with respect to
premium cigars.
BUSINESS STRATEGY
The Company's principal business objective is to enhance its position as a
leading distributor and retailer of a broad range of premium cigars and
cigar-related accessories. The principal elements of this business strategy
include:
Strengthening the Ashton Brand. The Company believes its proprietary
Ashton brand premium cigars are nationally recognized among the top brands due
to their flavor, consistency and quality of construction. Cigar Aficionado
magazine has consistently rated Ashton cigars as "very good to excellent" in
each category evaluated by the publication. To continue to build the Ashton
brand, the Company plans to: (i) secure an increasing volume of Ashton cigars
supplied by Fuente Cigar; (ii) expand the Ashton product line to include
additional sizes and shapes; (iii) broaden awareness of the Ashton brand name
through targeted advertising in select national and regional publications; and
(iv) increase the sales of cigar-related accessories featuring the Ashton brand
name.
Concentration on Premium Cigars. The Company is focused on the premium,
hand-made cigar market. Within this segment, the Company offers a diverse range
of sizes, shapes, tastes, blends and prices designed to appeal to the
preferences of premium cigar consumers. Products sold by the Company include
over 170 brands manufactured by companies such as Fuente Cigar, General Cigar
Company, Consolidated Cigar Holdings Corporation, Lane Limited and Villazon &
Co., Inc. (acquired by General Cigar Company in January 1997). The Company
believes that its broad offering of premium cigars is essential to maintain the
appeal of its catalog and retail store as single sources for a broad range of
premium cigar products. This concentration on premium cigars has positioned the
Company to benefit from the highest growth segment of the cigar industry.
Building on Relationship with Fuente Cigar. To secure a source of
high-quality premium cigars at a time when demand exceeds supply, the Company
entered into an amended agreement with Fuente Cigar pursuant to which Fuente
Cigar agreed to sell at least 5.0 million premium cigars per year to the Company
and to use its best reasonable efforts to sell to the Company premium cigars in
excess of the 5.0 million annual minimum. Fuente Cigar is a leading manufacturer
of premium cigars made in the Dominican Republic, and cigars made by Fuente
Cigar enjoy a worldwide reputation for use of the finest tobaccos, expert
blends, consistency and quality of construction. Fuente Cigar has manufactured
the Company's Ashton brand since 1988 and has agreed that the Company will be
the exclusive distributor of up to three new brands to be introduced over the
three year period commencing in 1998, which brands will be developed with and
manufactured exclusively by Fuente Cigar. Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr., two of the principal executive officers of Fuente Cigar, serve on
the Company's Board of Directors and their affiliated family partnership will
own approximately 24.4% of the shares of Common Stock outstanding after the
Offering. The Company believes that its relationship with Fuente Cigar is an
important element of its overall strategy of increasing sales of branded premium
cigars.
Use of Multiple Distribution Channels. The Company believes that
distribution of its products through its wholesale, catalog and retail store
channels enables it to: (i) reach a geographically broad group of customers;
(ii) maintain a strong retail presence enabling it to react quickly to changes
in customer preferences; and (iii) benefit from significant growth opportunities
available through national distribution of its branded products.
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Commitment to Customer Service. The Company believes its emphasis on
customer service and satisfaction is an integral part of its success. Catalog
and store sales personnel are trained to educate customers on the relative
merits of premium cigar products and to assist customers in making informed
purchasing decisions. In addition, the Company offers a 100% Guarantee of
Satisfaction to its customers which provides for a refund, credit or replacement
for any full or partially smoked box of cigars. The Company received the Best of
Philly award from Philadelphia magazine in 1997 as the best retail cigar store
in the Philadelphia area.
GROWTH STRATEGY
The principal elements of the Company's growth strategy are:
Introduction of New Proprietary Brands. The Company believes that the
increased popularity of premium cigars has resulted in cigar smokers who are
more informed, selective and brand conscious. At the same time, several new
brands of premium cigars have been introduced by manufacturers and distributors
seeking to capitalize on the increasing popularity of cigars. The Company
believes that many of these brands have not utilized the tobacco grades and
production methods normally associated with quality premium cigars. As a result,
the Company believes that premium cigar smokers prefer cigars with a highly
regarded brand name that are produced by respected cigar manufacturers. Under a
distributorship agreement with Fuente Cigar, the Company will be the exclusive,
worldwide distributor for up to three new premium brands to be developed by
Fuente Cigar and the Company. The Company and Fuente Cigar anticipate that these
brands will be introduced over a three year period beginning in 1998. The
Company intends to support these new brands through advertising in trade and
consumer publications and at cigar-related events. Based on its success with the
Ashton brand and its wholesale customer base of over 1,000 specialty
tobacconists, the Company believes that it is well positioned to support the
introduction of new brands.
Increase Wholesale Distribution of Proprietary Premium Cigars. The Company
expects to be able to distribute an increased number of premium cigars under the
Ashton brand, other proprietary brands and brands for which it will act as the
exclusive distributor. In anticipation of an increased supply of premium cigars,
the Company intends to expand its wholesale operations by: (i) increasing the
number of its direct sales force personnel covering wholesale acccounts; (ii)
penetrating existing accounts with a greater amount and variety of premium
cigars; and (iii) adding new accounts domestically and internationally.
Expand Catalog Distribution and Sales. The Company believes that its
catalog operations enable it to market and sell premium cigars to a large and
diverse group of customers. During Fiscal 1998, the Company distributed its
Spring/Summer catalog to a proprietary list of over 80,000 cigar smokers, cigar
purchasers and others evidencing interest in premium cigar products, compared to
35,000 and 45,000 in Fiscal 1995 and Fiscal 1996, respectively. The Company
anticipates that it will distribute its Fall/Winter catalog to over 100,000
individuals by the end of Fiscal 1998. The Company plans to increase its catalog
revenues by: (i) increasing the size of the Company's proprietary mailing list;
(ii) increasing the frequency of catalog mailings; and (iii) increasing the size
and capability of the Company's mail order operations. The Company completed a
move to a larger distribution facility in September 1997, and believes that the
larger facility will enable it to process a greater number of incoming telephone
orders and a greater volume of deliveries to its catalog customers.
Open or Acquire Selected Retail Locations. The Company intends to open or
acquire cigar stores in selected, densely populated and highly trafficked areas
where demand for premium cigars is high. New store openings or acquired stores
will enable the Company to increase its total market presence and develop a
broader base of customers for its catalog division. The Company is also
considering opening retail locations in special venues such as sports arenas and
casino/hotels.
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PRODUCTS
The Company markets a broad selection of premium cigars and related
accessories. A small percentage of the Company's sales are derived from the sale
of mass market cigars. Premium cigars accounted for approximately 88.1%, 84.5%,
86.3% and 91.7% of the Company's net sales in Fiscal 1995, Fiscal 1996, Fiscal
1997 and the six months ended September 30, 1997, respectively.
Premium Cigars. Premium cigars are generally imported, hand-made or
hand-rolled cigars made with long filler, 100% natural tobacco leaf which sell
at retail prices above $1.00 per cigar. The Company uses tobaccos of the finest
grades for its Ashton brand cigars. Such tobaccos are combined according to
brand specified formulas to create the "filler" of each cigar and "binder"
tobacco is wrapped around filler to create the "bunch," which is placed in a
mold. Then, specially selected "wrapper" tobacco is hand-wrapped around the
bunch. After the manufacturing process is complete, an Ashton cigar will
normally be aged from three months to one year in specially constructed and
climate controlled aging rooms. The premium cigars manufactured by Fuente Cigar
for the Company undergo numerous quality control procedures at each stage of the
manufacturing, aging and packaging process.
The Company markets over 170 brands of premium cigars, ranging in price
from $1.00 to $28.00 per cigar. Of these brands, Ashton, Holt's, Cortesia and
Castano are proprietary brands owned by the Company. Net sales of the Company's
proprietary cigars represented approximately 44.1%, 41.6% and 48.6% of the
Company's net sales for Fiscal 1996, Fiscal 1997 and the six months ended
September 30, 1997, respectively.
The significant growth in the Company's proprietary cigar sales has been
primarily due to an increase in the popularity of the Ashton brand. The Ashton
brand, which was introduced in 1986, is comprised of 22 different sizes and
shapes with retail prices generally between $4.50 and $17.00 per cigar. The
Company believes that the proprietary Ashton brand premium cigars are nationally
recognized as among the top brands due to their flavor, consistency and quality
of construction. Ashton brand cigars are targeted at the upper end of the
premium cigar market. Holt's and Cortesia brand premium cigars are sold by the
Company exclusively through its catalog and Philadelphia retail store. The
Holt's brand is comprised of 18 different sizes and shapes with retail prices
generally between $2.30 and $4.80 per cigar. The Holt's brand premium cigars are
targeted at the middle of the premium cigar market. The Cortesia brand is
comprised of six different sizes and shapes with retail prices generally between
$1.30 and $3.10 per cigar. The Company also distributes cigars under its
proprietary Castano brand name. The Castano brand of premium cigars was
introduced in July 1997 and has been in limited production since that time. The
Company intends to increase distribution of this brand in 1998. The Castano
brand currently has five different sizes and shapes with retail prices generally
between $4.50 and $6.75 per cigar.
The Company intends to introduce up to three more brands to be developed
with and manufactured by Fuente Cigar over the next three years under an
exclusive distributorship agreement. Management will work closely with Fuente
Cigar to develop the specific blends, wrappers and sizes for these new brands
which will be sold under trademarks owned by Fuente Cigar. See "-- Suppliers."
Accessories. The increased demand for premium cigars has led to an
increase in the market for cigar accessories such as humidors, cigar cutters,
cigar cases, lighters and ashtrays. The Company offers accessories by brand name
manufacturers, as well as accessories incorporating the Ashton trademark. Net
sales of accessories represented approximately 7.1%, 10.8%, 12.4% and 5.3% of
the Company's net sales for Fiscal 1995, Fiscal 1996, Fiscal 1997 and the six
months ended September 30, 1997, respectively.
Other Tobacco Products. The Company offers a limited selection of other
tobacco products, including mass market cigars, smokeless tobacco, pipes and
pipe tobacco for sale through its mail order catalog and retail store, as well
as a limited number of imported cigarettes which are sold only through the
Company's retail store. Pipes and pipe tobacco are also sold through the
Company's wholesale operations. Net sales of other tobacco products represented
approximately 4.8%, 4.7%,
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1.3%, 3.0% of the Company's net sales for Fiscal 1995, Fiscal 1996, Fiscal 1997
and the six months ended September 30, 1997, respectively.
MARKETING AND DISTRIBUTION
The Company distributes its Ashton brand premium cigars and cigar-related
accessories on a wholesale basis to specialty tobacconists nationwide, and also
sells premium cigars on a retail basis through its mail order catalog and its
retail store.
Wholesale Operations. The Company distributes premium cigars, cigar cases,
travel humidors and ashtrays which are marketed under the Ashton brand name and
feature the Ashton logo. Net sales from wholesale operations were $2.3 million,
$3.7 million, $6.5 million and $5.6 million for Fiscal 1995, Fiscal 1996, Fiscal
1997 and the six months ended September 30, 1997, respectively.
The Company believes that its ability to secure an increasing supply of
premium cigars under the PLMA with Fuente Cigar will allow it to better satisfy
the current demand for Ashton cigars and to increase the number of its wholesale
customers. See "-- Suppliers." At present, the Company has limited the
acceptance of new wholesale accounts in order to attempt to satisfy the demand
of its existing account base. As of September 30, 1997, the Company's wholesale
account base totaled approximately 1,200 customers.
The Company's wholesale activities are serviced by a direct sales force of
six employees who represent only the Company's brands and four independent sales
representatives who represent Company brands as well as competing brands. The
Company intends to increase the size of its direct sales force in order to: (i)
better penetrate its existing wholesale accounts; (ii) increase its wholesale
account base through the opening of new accounts; and (iii) manage the
distribution of its products to protect the overall integrity and image of the
Company's brands. Additionally, the Company has agreed to serve as the exclusive
distributor for up to three new Fuente Cigar manufactured brands to be
introduced over a three year period beginning in 1998. To support the Company's
proprietary brands and brands which the Company will distribute exclusively, the
Company intends to invest in further brand and product promotion in national
publications, trade magazines and other publications. The Company utilizes two
distributors for the distribution of its Ashton brand cigars on a limited basis
in Europe.
Retail Operations. The Company sells a broad selection of premium cigar
and related accessories through its mail order operation and its Philadelphia
retail store. The Company is committed to providing high quality customer
service and provides a 100% Guarantee of Satisfaction for every product sold.
For premium cigar purchases, the Company's 100% Guarantee of Satisfaction
provides a refund, credit or replacement for any full box of cigars provided
that less than four cigars have been smoked, and a proportionate credit if four
or more have been smoked. Any other merchandise may be returned by the customer
for a full refund, credit or replacement within ten days of receipt of the
merchandise.
Mail Order Catalog
The Company's mail order catalog markets a large selection of premium
cigars and accessories. In the current fiscal year, the Company distributed
approximately 80,000 copies of its Spring/Summer catalog and anticipates
distributing over 100,000 copies of its Fall/Winter catalog. Each of the
Company's four-color glossy catalogs contains photographs of the Company's
products and features premium cigars and other special offerings. The Company
mails its catalogs to its proprietary list of cigar smokers, cigar purchasers
and others evidencing interest in cigar products, and the Company deletes a name
from its proprietary list if there has been no sales activity for two years. In
addition, the Company produces four to eight page mailings that it distributes
four times per year. Sales associates are able to provide information on
products offered in the Company's catalogs and other mailings. The Company's
call center operates from 8:00 a.m. to 6:00 p.m. Monday to Friday, Eastern Time,
and from 9:00 a.m. to 3:00 p.m., Eastern Time, on Saturdays. Net sales from the
Company's mail order catalog were $1.7 million, $3.2 million, $6.6 million and
$5.2 million in Fiscal 1995, Fiscal 1996, Fiscal 1997 and the six months ended
September 30, 1997, respectively.
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Retail Store
The Company currently operates a 3,000 square foot retail store located in
Philadelphia, Pennsylvania. The Company's retail store contains a large,
walk-in, open-display humidor, smoking lounge, cigar lockers and accessory
retail space. The Company intends to incorporate many of these features in new
retail locations in order to establish them as "destination" stores which draw
customers from a large geographic area. The Company's store received the Best of
Philly award from Philadelphia magazine as the best retail cigar store in the
Philadelphia area in 1997. The Company intends to acquire or develop two
additional cigar stores in selected, densely populated, highly trafficked areas
where demand for premium cigars is high. The cost to develop a new retail
location is estimated to be approximately $600,000 for fit-out, furnishings and
equipment, and approximately $700,000 for the cost of inventory and initial
operating capital. With respect to any retail store acquisitions, the costs will
be dependent upon the location, size and operating performance of the store. The
Company is also considering opening retail facilities in special venues such as
sports arenas and casino/hotels. Net sales from the Company's retail store were
$1.7 million, $2.6 million, $4.1 million and $2.7 million in Fiscal 1995, Fiscal
1996, Fiscal 1997 and the six months ended September 30, 1997, respectively.
Distribution. In September 1997, the Company relocated its distribution
center to a 21,360 square foot facility located in Philadelphia, Pennsylvania.
The facility also houses the Company's corporate offices, wholesale and mail
order operations. The humidified and climate controlled cigar storage warehouse
located within this facility is approximately 5,000 square feet, a substantial
increase over the 2,200 square feet of humidified storage space at the Company's
prior facility. The specific products in stock vary from time to time depending
upon the ability of the Company to secure supplies of premium cigars, and if in
stock, such products are available for shipment to wholesale and retail
customers within one day of receipt of an order.
SUPPLIERS
The Company has long-term relationships with over 50 suppliers including
major manufacturers such as Fuente Cigar, General Cigar Company, Consolidated
Cigar Holdings Corporation, Lane Limited and Villazon & Co., Inc. Fuente Cigar
supplied approximately 39.2%, 47.0% and 58.1% of all premium cigars purchased,
on a dollar basis, by the Company during Fiscal 1996, Fiscal 1997 and the six
month period ended September 30, 1997, respectively. General Cigar Company
acquired Villazon & Co., Inc. in January 1997, and, on a combined basis, they
supplied approximately 13.4%, 18.4% and 17.6% of all premium cigars purchased,
on a dollar basis, by the Company in Fiscal 1996, Fiscal 1997 and the six months
ended September 30, 1997, respectively. No other supplier accounted for more
than 10% of the Company's premium cigar purchases during these periods. The
Company believes that maintaining and strengthening its long-term relationships
with its suppliers is essential to securing an allocation of the limited
worldwide premium cigar supply. Other than its agreements with Fuente Cigar, the
Company has no agreements relating to the supply of premium cigars.
Private Label Manufacturing Agreement with Fuente Cigar ("PLMA"). The
Company entered into the PLMA with Fuente Cigar in April 1997 whereby Fuente
Cigar agreed to sell the Company a minimum of 5.0 million premium cigars per
year for an initial term of ten years and the Company has agreed to use its best
reasonable efforts to purchase at least 5.0 million cigars during each year of
the term of the PLMA. In addition, Fuente Cigar agreed to use its best
reasonable efforts to sell to the Company premium cigars in excess of the 5.0
million per year. The premium cigars supplied by Fuente Cigar pursuant to the
PLMA include the Company's proprietary Ashton and Holt's brand premium cigars,
as well as any other premium cigars manufactured by Fuente Cigar under its
trademarks, and will be comprised of those brands in such amounts, sizes and
shapes as determined by Fuente Cigar. The PLMA represents a commitment by Fuente
Cigar to increase its supply of premium cigars to the Company. Fuente Cigar
supplied the Company with 2.1 million premium cigars in Fiscal 1996, 3.3 million
premium cigars in Fiscal 1997 and 2.3 million premium cigars in the six months
ended September 30, 1997. The purchase price for premium cigars delivered under
the PLMA is set by Fuente Cigar at the market price in effect from time to time.
The PLMA specifies that while the Company owns the trademark to the name Ashton,
Fuente Cigar owns the formula used to blend the tobacco contained in Ashton
cigars. The PLMA permits noncompliance with the obligations of Fuente
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Cigar to sell 5.0 million premium cigars per year for various reasons, including
but not limited to, a shortage of labor or the inability to secure materials and
supplies at reasonable prices. The PLMA provides that it is to be interpreted
and enforced under Florida law. However, the agreement specifically prohibits
any actions for specific performance and damages in the event of a breach of the
PLMA by Fuente Cigar. In the event that a competitor of Fuente Cigar were to
acquire control of the Company, Fuente Cigar may, after the expiration of an
eight month period commencing on the date of such change in control, give notice
of the termination of the PLMA effective one year from the date of such notice.
If Fuente Cigar does not give such notice, the PLMA will be automatically
renewed for successive one year terms if neither party gives notice of
termination.
Exclusive Distributorship Agreement. In September 1997, the Company and
Fuente Cigar entered into an exclusive distributorship agreement whereby Fuente
Cigar agreed to develop with the Company up to three new premium cigar brands to
be manufactured by Fuente Cigar, and to be exclusively distributed by the
Company on a worldwide basis. Cigars manufactured for the Company under this
agreement will be applied to the annual minimum requirement under the PLMA. The
initial term of this agreement expires on August 31, 2007. The Company is
obligated to use its best reasonable efforts to promote these new brands.
SALES AND ADVERTISING
At September 30, 1997, the Company employed six direct sales personnel in
connection with its wholesale operations, eight telephone sales associates in
the Company's mail order catalog call center and 16 sales people in the
Company's retail operations, six of whom are part-time employees. In addition,
the Company utilized four independent sales agents in connection with its
wholesale operations.
The Company's catalogs are its primary means of marketing to retail
customers. The Company targets its potential customers by originating its own
mailing list and keeping the mailing list exclusive to interested customers by
removing names from the mailing list if there has not been a purchase made
within two years. To support its retail sales, the Company utilizes local print
advertising, radio advertising during local sporting events and attends or
sponsors numerous cigar related events. The Company advertises through full page
advertisements in each issue of Cigar Aficionado magazine and through its
presence at or sponsorship of cigar related marketing events such as the "Big
Smokes" sponsored by Cigar Aficionado. Additionally, the Company relies to a
certain extent upon the reputation of the Ashton brand, Robert G. Levin, the
Company's Chairman of the Board, Chief Executive Officer and President, and
Fuente Cigar.
INFORMATION SYSTEMS
The Company has upgraded its information systems over the past year and
intends to make additional capital expenditures of approximately $500,000 from
the net proceeds of the Offering to further upgrade the capabilities of its
systems in support of anticipated growth. The Company has engaged an outside
consultant to further enhance the productivity and regularly review the
suitability of its management information systems. Additional investments are
also anticipated to enhance the Company's web site.
INTELLECTUAL PROPERTY
Ashton is a registered trademark of the Company. Holt's, Cortesia and
Castano are trademarks with respect to which the Company has applications for
registration pending. As the Company believes that its existing trademarks,
particularly the Ashton trademark, are critical to the Company's continued
success, the Company intends to vigorously defend its trademarks against any
potential infringement.
COMPETITION
The markets for the Company's products are highly competitive and subject
to rapid consumer change and frequent new product introductions and extensions.
The Company's wholesale distribution business faces competition from larger,
well-established premium cigar companies, including Fuente Cigar and its
affiliates, which manufacture and distribute numerous high-quality premium cigar
brands that are competitive with the Company's products, as well as from an
increasing number of new
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entrants to the marketplace. The Company's retail sales compete with a large
number of other mail order companies, some of which are larger and better
financed than the Company. The Company also faces significant competition from a
large number of existing, and an increasing number of new, retail stores and
smoking establishments selling the same branded products as the Company.
Existing or future competitors may develop or offer the same or similar premium
cigars which may result in decreases in the Company's sales of premium cigars.
Many of these competitors have longer operating histories and significantly
greater financial, managerial, creative, sales and marketing and other resources
than the Company. The Company's ability to retain its existing customers and
attract new customers depends on the quality of its premium cigars, the
availability of product, its reputation in the industry, and its ability to
maintain customer satisfaction. The Company's Ashton brand competes on the basis
of quality and consistency of its premium cigars and service to its wholesale
customers. The Company's retail operations compete on the basis of breadth of
product, customer service and price.
THE TOBACCO INDUSTRY
Regulation. Cigar manufacturers, like other producers of tobacco products,
are subject to regulation at the federal, state and local levels. Federal law
has recently required states, in order to receive full funding for federal
substance abuse block grants, to establish a minimum age of 18 years for the
purchase of tobacco products, together with an appropriate enforcement program.
The recent trend is toward increasing regulation of the tobacco industry, and
the recent increase in popularity of cigars could lead to an increase in
regulation of cigars. A variety of bills relating to tobacco issues have been
introduced in the U.S. Congress, including bills that would: (i) curtail the
advertising and promotion of all tobacco products and restrict or eliminate the
deductibility of such advertising expenses; (ii) increase labeling requirements
on tobacco products to include, among other things, addiction warnings and lists
of additives and toxins; (iii) modify federal preemption of state laws to allow
state courts to hold tobacco manufacturers liable under common law or state
statutes; (iv) shift regulatory control of tobacco products at the federal level
from the FTC to the FDA and require the tobacco industry to fund the FDA's
oversight; (v) increase tobacco excise taxes; (vi) restrict the access to
tobacco products by, among other things, banning the distribution of tobacco
products through the mail, except for sales subject to proof of age; (vii)
require licensing of retail tobacco product sellers; (viii) regulate tobacco
product development; and (ix) require tobacco companies to pay for health care
costs incurred by the federal government in connection with tobacco related
diseases. Although hearings have been held on certain of these proposals, to
date none of such proposals have been passed by Congress.
In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine. In
addition, a majority of states restrict or prohibit smoking in certain public
places and restrict sale of tobacco products (including cigars) to minors. Local
legislative and regulatory bodies have increasingly moved to curtail smoking by
prohibiting smoking in certain buildings or areas or by requiring designated
"smoking" areas. Individual establishments, such as bars and restaurants, have
further prohibited pipe and cigar smoking even though other tobacco products are
permitted in such establishments. Numerous proposals also have been considered
at the state and local level restricting smoking in certain public areas.
Federal law has required health warnings on cigarettes since 1965 and on
smokeless tobacco since 1986. Although no federal law currently requires that
cigars carry such warnings, California has enacted laws requiring that "clear
and reasonable" warnings be given to consumers who are exposed to chemicals
determined by the state to cause cancer or reproductive toxicity, including
tobacco smoke and several of its constituent chemicals. Similar legislation has
been introduced in other states. In addition, effective January 1, 1998,
smoking, including cigar smoking, has been banned by the State of California in
all bars, taverns and clubs where food and alcohol is served. Other legislation
recently introduced in Massachusetts would, if enacted, require warning labels
on cigar boxes. The states of Minnesota and Texas have recently enacted
legislation which require cigar manufacturers to report the levels of various
substances in their cigars on an annual basis. Consideration at both the federal
and state level also has been given to consequences of second-hand smoke.
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The U.S. Environmental Protection Agency (the "EPA") published a report in
January 1993 with respect to the respiratory health effects of second-hand
smoke, which concluded that widespread exposure to environmental tobacco smoke
presents a serious and substantial public health concern. Issuance of the
report, which is based primarily on studies of passive cigarette smokers, may
lead to further legislation designed to protect non-smokers. Also, a study
recently published in the journal Science reported that a chemical found in
cigarette smoke has been found to cause genetic damage in lung cells that is
identical to damage observed in many malignant tumors of the lung and, thereby,
directly links lung cancer to smoking. The National Cancer Institute also has
announced that it will issue a report in 1997 describing research into cigars
and health. The study and these reports could affect pending and future tobacco
regulation and litigation.
Litigation
Litigation against the cigarette industry historically has been brought by
individual cigarette smokers. In 1992, the United States Supreme Court
in Cipollone v. Liggett Group, Inc. ruled that federal legislation relating to
cigarette labeling requirements preempts state law claims based on failure to
warn consumers about the health hazards of cigarette smoking, but does not
preempt claims based on express warranty, misrepresentation, fraud or
conspiracy. To date, individual cigarette smokers' claims against the cigarette
industry generally have been unsuccessful. A jury in Florida, however, recently
determined that a cigarette manufacturer was negligent in the production and
sale of its cigarettes and sold a product that was unreasonably dangerous and
defective, awarding the plaintiffs a total of $750,000 in damages.
Current tobacco litigation generally falls within one of three categories:
class actions, individual actions or actions brought by individual states
generally to recover Medicaid costs allegedly attributable to tobacco-related
illnesses. The pending actions allege a broad range of injuries resulting from
the use of tobacco products or exposure to tobacco smoke and seek various
remedies, including compensatory and, in some cases, punitive damages together
with certain types of equitable relief such as the establishment of medical
monitoring funds and restitution. The major tobacco companies are vigorously
defending these actions.
Over 40 states have filed lawsuits against the major United States
cigarette manufacturers to recover billions of dollars in damages, primarily
costs of medical treatment of smokers. On June 20, 1997, the Attorneys General
of 40 states and several major cigarette manufacturers announced a proposed
settlement of the lawsuits filed by these states (the "Proposed Settlement").
The Proposed Settlement, which will require Federal legislation to implement, is
complex and may change significantly or be rejected. The Proposed Settlement
would significantly change the way in which cigarette companies and tobacco
companies do business. Among other things, the tobacco companies would pay
hundreds of billions of dollars to the various states; the FDA could regulate
nicotine as a "drug" and tobacco products as "drug delivery devices;" all
outdoor advertising, sports event advertising and advertising on non-tobacco
products would be banned and certain class action lawsuits and punitive damage
claims against tobacco companies would be prohibited. President Clinton recently
announced that he would not support the Proposed Settlement unless significant
changes were incorporated. Therefore, the potential impact of the Proposed
Settlement on the cigar industry in general and the Company in particular is
uncertain. The State of Florida has entered into a separate settlement agreement
with major United States cigarette manufacturers with respect to tobacco
products including roll-your-own and little cigars. The settlement agreement
provides, in part, for a ban on billboard and transit advertising, significant
document disclosure by the settling cigarette companies, billions of dollars in
settlement payments, and certain adjustments pending the resolution of the
Proposed Settlement. The State of Mississippi has announced a separate
settlement agreement with major cigarette manufacturers which provides for a
payment of $4.0 billion, however, if the Proposed Settlement is approved it will
supercede the Mississippi settlement. The recent increase in the sales of cigars
and the publicity such increases have received may have the effect of increasing
the probability of legal claims.
In May 1996, the Fifth Circuit Court of Appeals reversed a Louisiana
district court's certification of a nationwide class consisting essentially of
nicotine dependent cigarette smokers. Notwithstanding the dismissal, new class
actions asserting claims similar to those in this action recently have been
filed
34
<PAGE>
in certain states. To date, two pending class actions against major cigarette
manufacturers have been certified. The first case is limited to Florida citizens
allegedly injured by their addiction to cigarettes; the other is limited to
flight attendants allegedly injured through exposure to second-hand smoke.
Excise Taxes. Cigars have long been subject to federal, state and local
excise taxes, and such taxes frequently have been increased or proposed to be
increased in some cases significantly, to fund various legislative initiatives.
The federal excise tax rate on large cigars (weighing more than three pounds per
thousand cigars) is 12.75% of the manufacturer's selling price, net of the
federal excise tax and certain other exclusions, capped at $30.00 per thousand
cigars.
In the past, there have been various proposals by the federal government to
fund legislative initiatives through increases in federal excise taxes on
tobacco products. In 1993, the Clinton Administration proposed a significant
increase in excise taxes on cigars, pipe tobacco, cigarettes and other tobacco
products to fund the Clinton Administration's health care reform program. The
Company believes that the volume of cigars sold would have been dramatically
reduced if excise taxes were enacted as originally proposed as part of the
Clinton Administration's health care reform program. Future enactment of
significant increases in excise taxes, such as those initially proposed by the
Clinton Administration or other proposals not linked specifically to health care
reform, would have a material adverse effect on the business of the Company.
Tobacco products also are subject to certain state and local taxes. Deficit
concerns at the state level continue to exert pressure to increase tobacco
taxes. Forty-two states impose excise taxes on cigars. State cigar excise taxes
are not subject to caps similar to the federal cigar excise tax. From time to
time, the imposition of state and local taxes has had some impact on sales
regionally. The enactment of new state excise taxes and the increase in existing
state excise taxes are likely to have an adverse effect on sales of cigars.
EMPLOYEES
As of September 30, 1997, the Company had a total of 43 full time and six
part time employees, all of whom are based in the United States. Of this total,
24 full time and six part time employees were engaged in sales and marketing,
nine full time employees were employed in administration and finance, and ten
full time employees were employed in shipping and receiving. None of the
Company's employees is represented by a labor union. The Company has not
experienced any work stoppages and considers its relations with employees to be
good.
FACILITIES
The Company's principal executive and administrative offices, as well as
its warehouse, shipping, call center and customer service facilities, are
located at its leased headquarters facility in Philadelphia, Pennsylvania. The
Company currently occupies 21,360 square feet of space in the Philadelphia
facility. This facility, which was opened in September 1997, is leased for a
term of five years (with options to extend) at an aggregate annual rental of
$74,760 plus certain common area expenses, which rental will increase in
proportion to increases in the consumer price index. The Company anticipates
that this new facility will be sufficient to meet the Company's needs for the
foreseeable future. The Company leases its 3,000 square foot Philadelphia retail
store from the Company's Chairman of the Board, Chief Executive Officer and
President, Robert G. Levin, for an initial term through October 31, 2004. The
Company has the right to renew this lease for an additional five year period.
The rent paid by the Company is $75,000 per year, which rent is fixed through
the end of the renewal term. See "Certain Transactions."
LEGAL PROCEEDINGS
The Company is not currently engaged in any legal proceedings which are
expected, individually or in the aggregate, to have a material adverse effect on
the Company's business, operating results or financial condition.
35
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The Company's executive officers and directors are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Robert G. Levin...................... 51 Chairman of the Board, Chief Executive Officer and
President
Michael Pitkow....................... 49 Chief Operating Officer, Executive Vice President
and Director
Robert H. Levitt..................... 40 Chief Financial Officer
Carlos A. Fuente, Sr................. 62 Director
Carlos P. Fuente, Jr................. 43 Director
Harvey W. Grossman(1)(2)............. 60 Director
Marvin B. Sharfstein(1)(2)........... 54 Director
</TABLE>
- ------------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Robert G. Levin is the Chairman of the Board, Chief Executive Officer and
President of the Company. Mr. Levin has been engaged in the business of the
Company since 1972, and has been Chairman of the Board, Chief Executive Officer
and President since 1980.
Michael Pitkow joined the Company in October 1995 as Chief Operating
Officer and Executive Vice President and has been a Director of the Company
since September 1997. From 1985 through October 1995, Mr. Pitkow was the owner
of Pitkow Associates, a media service and marketing communications company. From
1983 to 1985, Mr. Pitkow was general manager of Cable AdNet, then Philadelphia's
largest cable advertising interconnect company.
Robert H. Levitt joined the Company as Chief Financial Officer in November
1996. From 1991 until November 1996, Mr. Levitt was a senior manager at
Schmeltzer o Master Group, P.C., the Company's independent accountants until May
1997. From 1989 through 1991, Mr. Levitt served as a controller for several
privately held companies. From 1981 through 1989, Mr. Levitt was a manager in
the emerging business group of Deloitte & Touche, L.L.P.
Carlos A. Fuente, Sr. became a Director in September 1997. Mr. Fuente, Sr.
has worked in the cigar industry his entire life, first working for his father,
Arturo Fuente, Sr., and then as President and Chairman of the Board of the
family manufacturing business which he acquired from his father in the early
1960's. The cigar manufacturing business is currently operated through Fuente
Cigar, a privately-held company owned by Fuente family interests. Mr. Fuente,
Sr. is the third of four generations of Fuente family members to own and operate
a cigar manufacturing business.
Carlos P. Fuente, Jr. became a Director in September 1993. Mr. Fuente, Jr.
is the son of Carlos A. Fuente, Sr. and has been employed by the Fuente family's
cigar manufacturing business since 1970. Mr. Fuente, Jr. has been the President
of Fuente Cigar since 1990.
Harvey W. Grossman became a Director in September 1997 and serves on the
Audit and Compensation Committees. Mr. Grossman is a certified public accountant
and a partner in Cogen Sklar LLP, a certified public accounting firm in Bala
Cynwyd, Pennsylvania. Mr. Grossman is a member of both the American and
Pennsylvania Institutes of Certified Public Accountants and was a member of the
Pennsylvania Institute of Certified Public Accountants' Forensic and Litigation
Services Committee from 1995 to 1996.
Marvin B. Sharfstein became a Director in September 1997, and serves on the
Company's Audit and Compensation Committees. Mr. Sharfstein has been a Director
of Holt's Cigar Company, Inc., and
36
<PAGE>
Ashton Distributors, Inc. the Company's wholly owned subsidiaries, since January
1996. From 1983 through February 1996, Mr. Sharfstein served as the Vice
President of Corporate Development and a Director of Cabot Medical Corp., a
publicly traded medical device manufacturer which he founded. Since February
1996, Mr. Sharfstein has been a financial consultant to a variety of businesses
through MBS Capital Corp. a merchant banking firm.
TERMS OF OFFICE AND BOARD COMMITTEES
Prior to the consummation of the Offering, the Company's Certificate of
Incorporation will be amended to provide that directors of the Company shall be
divided into three classes, as nearly equal in number as possible. The initial
term of office of the Class I Directors shall expire on the day of the first
annual meeting of stockholders following the end of Fiscal 1998 (the "1998
Annual Meeting"); the initial term of office of the Class II Directors shall
expire on the day of the annual meeting of stockholders next succeeding the 1998
Annual Meeting; and the initial term of office of the Class III Directors shall
expire on the day of the second annual meeting of stockholders succeeding the
1998 Annual Meeting. At each annual meeting of stockholders, directors elected
to succeed those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stockholders after
their election. Thus, after consummation of the Offering and effective upon the
amendment of the Certificate of Incorporation, directors will stand for election
only once in three years. Effective upon the amendment of the Certificate of
Incorporation, Messrs. Pitkow and Grossman are expected to serve as Class I
directors, Messrs. Fuente, Jr. and Sharfstein are expected to serve as Class II
directors, and Messrs. Fuente, Sr. and Levin are expected to serve as Class III
directors.
In accordance with the amendment, the affirmative vote of the holders of at
least 66 2/3% of the outstanding shares of capital stock of the Company entitled
to vote generally in the election of directors, voting together as a single
class, shall be required to alter, change, amend, repeal, or adopt any provision
inconsistent with, the provisions of the Certificate of Incorporation providing
for the classified Board of Directors.
The Audit and Compensation Committees consist of Messrs. Sharfstein and
Grossman. The Audit Committee reviews the adequacy of the Company's internal
control systems and financial reporting procedures, reviews the general scope of
the annual audit, reviews and monitors the performance of non-audit services by
the Company's independent public accountants and reviews interested transactions
between the Company and any of its affiliates. The Compensation Committee
administers the Company's Employee Stock Plan and makes recommendations to the
Board of Directors concerning salaries and non-stock compensation for the
Company's officers and employees.
SHAREHOLDERS' AGREEMENT
Pursuant to the shareholders' agreement between the Fuente Investment
Partnership and Robert G. Levin, Mr. Levin is required to vote for two directors
nominated by the Fuente Investment Partnership and the Fuente Investment
Partnership is required to vote for the balance of the Board of Directors
nominees nominated by Mr. Levin. Currently, Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr. are the directors nominated by Fuente Investment Partnership. All
other directors are the nominees of Mr. Levin. In addition, each of the Fuente
Investment Partnership and Mr. Levin (i) has a right of first refusal to
purchase the others shares and (ii) the right to participate on a proportionate
basis in any sale of the other party's Common Stock.
DIRECTOR COMPENSATION
Each director who is not an employee of the Company receives $1,000 for
each meeting of the Board attended and for each committee meeting attended.
Messrs. Carlos A. Fuente, Sr., Carlos P. Fuente, Jr., Sharfstein and Grossman
have been granted options to purchase 15,000 shares of the Common Stock, each,
pursuant to the Director Stock Plan, which options are all fully vested and
exercisable at a price equal to the initial public offering price per share. The
Director Stock Plan
37
<PAGE>
provides that options will be granted to non-employee directors of the Company
pursuant to an automatic, non-discretionary grant mechanism. Following the
Offering, each new non-employee director will automatically be granted an option
to purchase 15,000 shares of the Common Stock. Each non-employee director will
subsequently be granted an option to purchase 15,000 at each annual meeting of
stockholders beginning with the 1998 Annual Meeting of Stockholders. Each such
option will be granted at the fair market value of the Common Stock on the date
of the grant. Options granted to non-employee directors under the Director Stock
Plan vest in full upon the grant, and may be exercised immediately. See "--
Stock Options -- The Non-Management Directors Stock Option Plan."
EXECUTIVE COMPENSATION
The following table and accompanying footnotes provide certain information
concerning the compensation earned by the Company's Chief Executive Officer and
the other executive officer of the Company whose salary and bonus was in excess
of $100,000 (the "Named Officers") for Fiscal 1997:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION ALL OTHER
-------------------------------------- COMPENSATION
NAME AND POSITION SALARY($) BONUS($) OTHER($)(1) ($)(2)
- ----------------- --------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Robert G. Levin........................... $335,973 -- -- $4,750
Chairman of the Board, Chief Executive
Officer and President
Michael Pitkow............................ $111,039 $5,000 -- --
Chief Operating Officer and Executive
Vice President
</TABLE>
- ------------------
(1) Pursuant to the Securities and Exchange Commission rules on executive
compensation disclosure, "All Other Compensation" does not include
perquisites because the aggregate amount of such compensation for each of
the persons listed did not exceed the lesser of (i) $50,000 or (ii) ten
percent of the combined salary and bonus for such person in Fiscal 1997.
(2) Represents the Company's matching contribution pursuant to its 401(k)
defined contribution plan.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with Messrs. Levin and Pitkow. Mr.
Levin's employment agreement, effective as of October 1, 1997, provides for a
minimum base salary of $400,000, to be reviewed at least annually and to be
adjusted based upon his performance, and has a term of five years. This
Agreement is automatically renewed each year to maintain a five-year term if
neither party gives a notice of termination. Mr. Pitkow's employment agreement,
effective as of October 1, 1997, provides for a minimum base salary of $150,000
per year, to be reviewed at least annually, and expires on March 31, 1999.
STOCK OPTIONS
The 1997 Employee Stock Option Plan. The Employee Stock Plan, approved by
the Board of Directors and shareholders of the Company in September 1997, is
intended to provide incentives to the officers and other key employees of the
Company by providing them with opportunities to purchase shares of Common Stock
pursuant to options granted which qualify as "incentive stock options" ("ISO's")
under Section 422(b) of the Internal Revenue Code of 1986, as amended (the
"Code") or which do not qualify as ISO's ("Non-Qualified Options") (ISO and
Non-Qualified Options being referred to collectively as "Options"). Options for
up to a maximum of 300,000 shares of Common Stock can be issued under the
Employee Stock Plan.
38
<PAGE>
The Employee Stock Plan is currently administered by the Board of
Directors, although it is the intent of the Board of Directors to transfer this
responsibility to the Compensation Committee following the Offering. The
Compensation Committee will have the authority to determine those employees of
the Company to whom Options will be granted. If any Option granted under the
Employee Stock Plan expires or terminates for any reason without having been
exercised in full or ceases for any reason to be exercisable in whole or in
part, the unpurchased shares subject to such Options are again available for
grants under the Employee Stock Plan.
Grants of Options under the Employee Stock Plan can be made at any time on
or after October 1, 1997 and prior to September 30, 2006. The exercise price of
all options to be granted under the Employee Stock Plan will be the fair market
value of the Common Stock on the date of grant defined in the Employee Stock
Plan. If an optionee ceases to be employed by the Company or certain affiliated
or successor entities other than by reason of death or disability, no further
installments of the Options shall generally become exercisable, and such
optionee's Options shall terminate after the passage of ninety days from the
date of termination or such optionee's employment. Upon the occurrence of
certain events such as stock dividends and stock splits, consolidations or
mergers, an optionee's rights with respect to Options granted are to be adjusted
as provided in the Employee Stock Plan. Pursuant to the Employee Stock Plan, the
Company has granted options to purchase an aggregate of 169,500 shares of Common
Stock at an exercise price equal to the initial public offering price per share.
These options vest as to one-third of the shares on each of the anniversary
dates of the date the Company granted such options, so long as the option holder
remains in the continuous employ of the Company during such period.
The Non-Management Directors Stock Option Plan. The Director Stock Plan,
approved by the Board of Directors and shareholders of the Company in September
1997, and is intended to provide incentives to the directors of the Company who
are not employees of the Company by providing them with options to purchase
shares of Common Stock. Options for up to a maximum of 180,000 shares of Common
Stock may be issued under the Director Stock Plan.
The Director Stock Plan is currently administered by the Board of
Directors. Each outside director of the Company is automatically granted options
to purchase 15,000 shares of the Common Stock at the fair market value thereof
as defined in the Director Stock Plan on the date of each grant of Options, and
each outside director is granted Options to purchase 15,000 shares of the Common
Stock at each annual meeting of the stockholders of the Company. All of these
Options vest immediately upon grant. Upon the occurrence of certain events such
as stock dividends and stock splits, consolidations or mergers, an optionee's
rights with respect to Options granted are to be adjusted as provided in the
Director Stock Plan.
Pursuant to the Director Stock Plan, the Company granted options to each of
Messrs. Fuente, Sr., Fuente, Jr., Sharfstein and Grossman to purchase 15,000
shares of Common Stock at the initial public offering price per share.
Other Options. In January 1996, options to purchase 201,000, 201,000 and
80,400 shares of the Common Stock were granted to Michael Pitkow, Chief
Operating Officer, Executive Vice President and a director of the Company,
Marvin Sharfstein, a director the Company and Carole Cohn, Mr. Levin's sister,
respectively. These options were granted at an exercise price of $.50 per share,
the estimated fair market value at the date of grant. At the time these options
were granted, Robert G. Levin and the Fuente Investment Partnership agreed that
these options granted by the Company would not dilute the ownership interest of
the Fuente Investment Partnership. Accordingly, Mr. Levin has agreed that upon
exercise of any such options he will contribute to the capital of the Company
one share of Common Stock for each share purchased pursuant to these options.
39
<PAGE>
CERTAIN TRANSACTIONS
Relationships with Fuente Cigar and Related Parties. In Fiscal 1996,
Fiscal 1997 and for the six months ended September 30, 1997, the Company
purchased approximately $1.9 million, $3.6 million and $3.9 million,
respectively, of premium cigars from Fuente Cigar, representing approximately
39.2%, 47.0% and 58.1%, respectively, of premium cigar purchases for such
periods. At September 30, 1997, approximately $842,000 was due to Fuente Cigar
for premium cigars sold to the Company. Two of the principal executive officers
of Fuente Cigar, Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr., are directors
of the Company and a related family partnership will own approximately 24.4% of
the shares of Common Stock outstanding upon completion of the Offering. The
Company has entered into two agreements with Fuente Cigar. See "Risk Factors --
Dependence on Fuente Cigar Ltd." and " -- Potential Conflicts of Interest" and
"Business -- Suppliers." Robert G. Levin, Chairman of the Board, Chief Executive
Officer and President of the Company, and an affiliate of Fuente Cigar have also
entered into a consulting agreement whereby such affiliate paid Mr. Levin the
sum of $50,000 per year for consulting services. This agreement will be
terminated upon completion of the Offering.
Shareholders Agreement. The Fuente Investment Partnership and Robert G.
Levin have entered into an agreement which provides that Mr. Levin will vote all
of his shares of Common Stock for the election of two directors nominated by the
Fuente Investment Partnership (currently Carlos A. Fuente, Sr. and Carlos P.
Fuente, Jr.) and the Fuente Investment Partnership will vote all of its shares
of Common Stock for the remainder of the directors to be nominated by Mr. Levin.
This agreement also requires unanimous approval by the Company's Board of
Directors prior to the issuance of any preferred stock. In addition, the
agreement grants each party a right of first refusal on sales of Common Stock by
the other party and provides for each party to participate on a percentage basis
in any transaction involving the sale of Common Stock. This agreement also
provides for the Fuente Investment Partnership to have the right to acquire all
of the shares of Common Stock owned by Mr. Levin, except for up to 10% of the
then issued and outstanding shares of Common Stock, upon the death or permanent
disability of Mr. Levin, and for Mr. Levin to have the right to purchase all of
the shares of Common Stock owned by the Fuente Investment Partnership upon the
death or permanent disability of the last of Carlos A. Fuente, Sr., Carlos P.
Fuente, Jr. and Cynthia Fuente Suarez.
Philadelphia Retail Store Lease. The Company currently leases from Robert
G. Levin the entire two-story building comprising approximately 4,700 square
feet in which the Company's retail store is located. The Company's retail store
occupies 3,000 square feet on the street level, and the Company sublets
approximately 1,700 square feet on the second floor to an unrelated third party.
The Company paid approximately $48,000 and $54,000 to Mr. Levin under this lease
in Fiscal 1996 and Fiscal 1997, respectively. The term of this lease extends
through October 31, 2004 and the Company has the right to renew this lease for
an additional five year term. The current rent payable to Mr. Levin is $6,250
per month, or $75,000 per year, which rent is fixed through the end of the
renewal term.
Guaranty of Loan. The Company guaranteed certain debt of Robert G. Levin
relating to the acquisition of the building in which the Company's Philadelphia
retail store is located. The outstanding balance under that loan was $433,711 at
September 30, 1997. Mr. Levin currently guarantees certain indebtedness of the
Company. The total of this indebtedness was $659,723 at September 30, 1997. In
addition, on October 24, 1997 Mr. Levin guaranteed a loan to Ashton
Distributors, Inc. in the amount of $2.7 million, the proceeds of which were
used to fund the distribution of estimated Subchapter S earnings of Ashton
Distributors, Inc. through the date of the Offering.
Loan to Shareholder. The Company advanced payment of certain insurance
policy premiums and personal purchases of Robert G. Levin in the aggregate
amount of $23,396 as of September 30, 1997. These advances did not accrue
interest and have been repaid in full by Mr. Levin.
All of the foregoing transactions between the Company and the foregoing
persons and entities were on substantially the same terms and conditions as if
such transactions would have been entered into with unrelated third parties. The
Company has a policy to the effect that any future transactions between it and
any of its officers, directors, principal stockholders or the affiliates of the
foregoing persons be on terms no less favorable to the Company than could
reasonably be obtained in arm's length transactions with independent third
parties, and that any such transactions also be approved by a majority of the
Company's directors who are disinterested in the transaction.
40
<PAGE>
PRINCIPAL AND SELLING SHAREHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Common Stock after giving effect to the
Reorganization and as adjusted to reflect the sale of the shares of Common Stock
offered hereby, by (i) each director of the Company, (ii) each person who is
known by the Company to beneficially own 5% or more of the outstanding shares of
Common Stock, (iii) the Named Officers, (iv) the Selling Shareholder, and (v)
all of the Company's executive officers and directors as a group.
<TABLE>
<CAPTION>
PERCENTAGE OWNED
-------------------
SHARES BEFORE AFTER
NAME AND ADDRESS OF BENEFICIAL OWNER(1) BENEFICIALLY OWNED OFFERING OFFERING
- --------------------------------------- ------------------ -------- --------
<S> <C> <C> <C>
Robert G. Levin(2).................................... 2,613,015 65.0% 45.3%
Fuente Investment Partnership(3)...................... 1,406,985 35.0 24.4
Carlos A. Fuente, Sr.(4).............................. 1,421,985 35.2 24.6
Carlos P. Fuente, Jr.(4).............................. 1,421,985 35.2 24.6
Marvin B. Sharfstein(5)............................... 216,000 5.4 3.7
Michael Pitkow(5)..................................... 201,000 5.0 3.5
Harvey W. Grossman(5)................................. 15,000 * *
All directors and executive officers as a group
(7 persons)......................................... 4,080,000 100.0% 70.0%
</TABLE>
- ------------------
*Less than 1% of outstanding shares of Common Stock.
(1) Unless otherwise noted, the Company believes that all persons named in the
above table have sole voting and investment power with respect to the shares
beneficially owned by them. The address for Messrs. Levin, Pitkow and
Sharfstein is 12270 Townsend Road, Philadelphia, Pennsylvania 19154, the
address for the Fuente Investment Partnership and Messrs. Fuente is c/o
Fuente Cigar Ltd., Zona Franca, Santiago, Dominican Republic.
(2) If the Underwriters' over-allotment option is exercised in full, Mr. Levin
will sell 262,500 shares of Common Stock, reducing his beneficial ownership
to 2,350,515 shares of Common Stock or 40.7% of the outstanding shares.
Further, in the event options to purchase up to 482,400 shares of Common
Stock are exercised by certain option holders including options to purchase
201,000 shares of Common Stock held by each of Messrs. Sharfstein and
Pitkow, Mr. Levin has agreed to contribute an equal number of shares owned
by him to the Company. See "Management -- Stock Options."
(3) The Fuente Investment Partnership is a Florida general partnership, the
partnership interests are beneficially owned by Carlos A. Fuente, Sr.,
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez, principals in Fuente Cigar.
Carlos P. Fuente, Jr. and Cynthia Fuente Suarez are the children of Carlos
A. Fuente, Sr.
(4) Carlos A. Fuente, Sr. and Carlos P. Fuente, Jr. are deemed the beneficial
owners of the shares of Common Stock owned by such partnership. Also
includes options to purchase 15,000 shares of Common Stock each granted
pursuant to the Director Stock Plan.
(5) Represents shares of Common Stock which may be acquired upon the exercise of
options granted by the Company.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
GENERAL
Upon completion of the Offering, the Company will be authorized to issue
25,000,000 shares of Common Stock and 1,000,000 shares of preferred stock
immediately after the completion of the Offering, there will be 5,770,000 shares
of Common Stock outstanding.
COMMON STOCK
Holders of the Common Stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Holders of the Common Stock do not
have cumulative voting rights, and, therefore, holders of a majority of the
shares voting for the election of directors can elect all of the directors of
the Company. In such event, the holders of the remaining shares of Common Stock
will not be able to elect any directors.
Holders of the Common Stock are entitled to receive such dividends as may
be declared from time to time by the Board of Directors out of funds legally
available therefor, subject to the terms of any existing of future agreements
between the Company and its debtholders. In the event of the liquidation,
dissolution or winding up of the Company, the holders of the Common Stock are
entitled to share ratably in all assets legally available for distribution after
payment of all debts and other liabilities.
PREFERRED STOCK
The Board of Directors is authorized, subject to certain limitations
prescribed by law, without further stockholder approval, to issue from time to
time up to an aggregate of 1,000,000 shares of preferred stock in one or more
series and to fix the relative rights, preferences and limitations of the shares
within each series, including the dividend rights, voting rights, redemption and
sinking fund provisions, liquidation preferences, conversion rights and
preemptive rights and the number of shares constituting any series. The issuance
of preferred stock, while providing desirable flexibility in connection with
possible acquisitions and other corporate purposes, could adversely affect the
voting and other rights of holders of Common Stock and, under certain
circumstances, make it more difficult or costly for a third party to acquire, or
discourage a third party from attempting to acquire, control of the Company. The
Company has no present plans to issue any shares of preferred stock. Pursuant to
the Shareholders Agreement, unanimous consent of the Board of Directors is
required to authorize the issuance of any preferred stock.
STATUTORY BUSINESS COMBINATION PROVISION
Upon consummation of the Offering, the Company will be subject to the
provisions of Section 203 of the Delaware General Corporation Law ("Section
203"). Section 203 provides, with certain exceptions, that a Delaware
corporation may not engage in any of a broad range of business combinations with
a person or an affiliate, or associate of such person, who is an "interested
stockholder" for a period of three years from the date that such person became
an interested stockholder unless: (i) the transaction resulting in a person
becoming an interested stockholder, or the business combination, is approved by
the Board of the corporation before the person becomes an interested
stockholder; (ii) the interested stockholder acquired 85% or more of the
outstanding voting stock of the corporation in the same transaction that makes
such person an interested stockholder (excluding shares owned by person who are
both officers and directors of the corporation, and shares held by certain
employee stock ownership plans); or (iii) on or after the date the person
becomes an interested stockholder, the business combination is approved by the
corporation's board of directors and by the holders of at least 66 2/3% of the
corporation's outstanding voting stock at an annual or special meeting,
excluding shares owned by the interested stockholder. Under Section 203, an
"interested stockholder" is defined as any person who is (i) the owner of 15% or
more of the outstanding voting stock of the corporation or (ii) an affiliate or
associate of the corporation and who was the owner of 15% or more of the
outstanding voting stock of the corporation at any time within the
42
<PAGE>
three year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by amending its certificate of incorporation or by-laws by action of
its stockholders to exempt itself from coverage, provided that such by-law or
amendment to the Certificate of Incorporation shall not become effective until
12 months after the date that it is adopted. The Company has not adopted such an
amendment to the Certificate of Incorporation or By-laws.
LIMITATION ON DIRECTORS' LIABILITIES AND INDEMNIFICATION
Pursuant to the Company's Certificate of Incorporation and under Delaware
laws, directors of the Company are not liable to the Company or its stockholders
for monetary damages, for breach of fiduciary duty, except for liability in
connection with a breach of duty of loyalty, for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law, for
dividend payments or stock repurchases illegal under Delaware law or any
transaction in which a director has derived an improper personal benefit.
The Company's Certificate of Incorporation provides for mandatory
indemnification of directors and officers of the Company against any expense,
liability and loss to which they become subject, or which they may incur as a
result of having been a director or officer of the Company. In addition, the
Company must advance or reimburse directors and officers for expenses incurred
by them in connection with certain claims.
In addition to the indemnification provision in the Certificate of
Incorporation, the Company will enter into an Indemnification Agreement with
each of its directors and executive officers in the belief that such individuals
may become unwilling to serve the Company without assurances that adequate
liability insurance, indemnification or a combination thereof is, and will
continue to be, provided to them.
Following completion of the Offering, the Company intends to purchase
directors' and officers' liability insurance.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN PROVISIONS OF THE CERTIFICATE OF
INCORPORATION AND BY-LAWS
The Certificate of Incorporation and By-laws of the Company contain
provisions that could have an anti-takeover effect. The provisions are intended
to enhance the likelihood of continuity and stability in the composition of the
Board and in the policies formulated by the Board. These provisions also are
intended to help ensure that the Board, if confronted by an unsolicited proposal
from a third party which has acquired a block of stock of the Company, will have
sufficient time to review the proposal and appropriate alternatives to the
proposal and to act in what it believes to be the best interest of the
stockholders.
The Certificate of Incorporation provides that the Board be divided into
three classes of directors serving staggered three year terms. The
classification of the Board has the effect of making it more difficult for
stockholders to change the composition of the Board in a relatively short period
of time. At least two annual meetings of stockholders, instead of one, generally
will be required to effect a change in a majority of the Board. Such a delay may
help ensure that the Board and the stockholders, if confronted with an
unsolicited proposal by a stockholder attempting to force a stock repurchase at
a premium above market, a proxy contest or an extraordinary corporate
transaction, will have sufficient time to review the proposal and appropriate
alternatives to the proposal and to act in what it believes to be the best
interest of the stockholders. Directors, if any, elected by holders of preferred
stock voting as a class, will not be classified as aforesaid. In addition, under
Delaware law, in the case of a corporation having a classified board,
stockholders may remove a director only for cause. This provision will preclude
a stockholder from removing incumbent directors without cause.
43
<PAGE>
In addition, the Certificate of Incorporation restricts the ability of the
stockholders to take any action by written consent by requiring the approval of
two-thirds, instead of a majority, of the outstanding capital stock, and
contains a fair price requirement, pursuant to which certain merger, combination
or sale transaction proposals shall require the approval of two-thirds, instead
of a majority, of the outstanding capital stock, unless the proposal is approved
by two-thirds of the full Board of Directors or all holders of the then
outstanding capital stock (other than the stockholder making the bid) receive
cash in an amount at least equal to the highest price paid by the bidding
stockholder for shares of the capital stock of the Company during the three year
period preceding the date of such stockholder's offer or proposal. Such a
provision may have the effect of deterring takeover offers. The Certificate of
Incorporation also provides that the stockholders may not amend any of the
foregoing provisions without the approval of two-thirds of the outstanding
capital stock.
REGISTRATION RIGHTS
Pursuant to the options (the "Options") to purchase an aggregate of 482,400
shares of Common Stock which were granted to Michael Pitkow, Marvin B.
Sharfstein and Carol Cohn (the "Optionholders"), the Optionholders were granted
the right to demand that the Company register the shares of Common Stock
issuable upon the exercise of the Options at any time commencing nine months
after the effective date of this Prospectus. In addition, the Optionholders have
certain "piggy-back" registration rights. These registration rights expire on
December 31, 2005, at the expiration of the Options.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is Continental Stock
Transfer & Trust Company.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Upon completion of the Offering, the Company will have 5,770,000 shares of
Common Stock outstanding, 1,750,000 (2,012,500 if the Underwriters'
over-allotment option is exercised in full) will be freely tradeable without
restriction or requirement of further registration under the Securities Act. All
of the remaining 4,020,000 shares of Common Stock are "restricted securities" as
that term is defined in Rule 144 promulgated under the Securities Act.
Upon completion of the Offering, no shares will be eligible for sale in the
public market immediately following commencement of the offering, and, beginning
90 days after commencement of the Offering, 4,020,000 shares will become
eligible for sale pursuant to Rule 144. Upon expiration of the lock-up
agreements, no shares will become immediately eligible for sale without
restriction pursuant to Rule 144(k) (described below), and approximately
4,020,000 shares will be eligible for sale subject to the timing, volume, and
manner of sale restrictions of Rule 144. In addition, 542,400 additional shares
of Common Stock subject to outstanding vested stock options could also be sold,
subject in some cases to compliance with certain volume limitations as described
below.
In general, under Rule 144 a person (or persons whose shares are
aggregated) who has beneficially owned shares not acquired in the Offering for
at least one year (including the holding period of any prior owner except an
affiliate from whom such shares were purchased) is entitled to sell in "brokers
transactions" or to market makers, within any three month period commencing 90
days after the date of this Prospectus, a number of shares that does not exceed
the greater of (i) one percent of the number of shares of Common Stock then
outstanding (approximately 57,700 shares immediately after the completion of the
Offering) or (ii) generally, the average weekly trading volume in the Common
Stock during the four calendar weeks preceding the required filing of a Form 144
with respect to such sale. Sales under Rule 144 are generally subject to the
availability of current public information about the Company. Under Rule 144(k),
a person who is not deemed to have been an affiliate of the Company at any time
during the 90 days preceding a sale, and who has beneficially owned the shares
proposed to be sold for at least two years (including the holding period of any
prior owner other than an affiliate from whom such shares were purchased), is
entitled to sell by shares without having to comply with the manner of sale,
public information, volume limitation or notice provisions of Rule 144. Sales of
such shares by affiliates, even after the two-year holding period, must continue
to be made in broker's transactions or to market makers and are subject to the
volume limitations described above.
The Company and all of the Company's officers and directors, and all
shareholders and certain option holders, including the Selling Shareholder,
owning upon completion of the Offering, in the aggregate, 4,020,000 shares of
Common Stock and options to purchase 582,400 shares of Common Stock, have
executed agreements pursuant to which they have agreed that they will not, for a
period of 180 days from the date of this Prospectus, directly or indirectly,
offer, sell, offer to sell, contract to sell, pledge, grant any option to
purchase or otherwise sell or dispose (or announce any offer, sale, offer of
sale, contract of sale, pledge, grant of any option to purchase or other sale or
disposition) of any shares of Common Stock or other capital stock of the Company
or any securities convertible into, or exercisable or exchangeable for, any
shares of Common Stock, or other capital stock of the Company without the prior
written consent of Prudential Securities Incorporated, on behalf of the
Underwriters, except that such agreement does not prevent the Company from
granting additional options under the Employee Stock Plan or the Director Stock
Plan. Prudential Securities Incorporated may in its sole discretion, at any time
and without notice, release all or any portion of the securities subject to such
lock-up agreements.
Approximately 180 days after the date of this Prospectus, the Company
intends to file a Registration Statement on Form S-8 covering an aggregate of
approximately 962,400 shares of Common Stock (including the 482,400 shares
subject to outstanding options) that have been reserved for issuance under its
stock option and stock purchase plans, thus permitting the resale of such shares
in the public market without restriction under the Securities Act.
45
<PAGE>
The holders of an aggregate of 482,400 shares of Common Stock (including
shares issuable upon exercise of vested options) or their transferees are
entitled to certain rights with respect to the registration of such shares under
the Securities Act. See "Description of Capital Stock -- Registration Rights."
Prior to the Offering, there has been no public market for the Common
Stock. Future sales of substantial amounts of Common Stock in the public market
could adversely affect the prevailing market prices and impair the Company's
ability to raise capital through the sale of equity securities.
46
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters"), for whom Prudential
Securities Incorporated and Janney Montgomery Scott Inc. are acting as
representatives (the "Representatives"), have severally agreed, subject to the
terms and conditions contained in the underwriting agreement, (the "Underwriting
Agreement") to purchase from the Company the number of shares of Common Stock
set forth opposite their respective names:
NUMBER
OF SHARES
UNDERWRITER ---------
Prudential Securities Incorporated..........................
Janney Montgomery Scott Inc.................................
---------
Total.................................................. 1,750,000
=========
The Company is obligated to sell, and the Underwriters are obligated to
purchase, all of the shares of Common Stock offered hereby if any are purchased.
The Underwriters, through the Representatives, have advised the Company
that they propose to offer the Common Stock initially at the initial public
offering price set forth on the cover page of this Prospectus; that the
Underwriters may allow to selected dealers a concession of $ per
share; and that such dealers may reallow a concession of $ per share
to certain other dealers. After the initial public offering, the offering price
and the concessions may be changed by the Representatives.
The Selling Shareholder has granted the Underwriters an option, exercisable
for 30 days from the date of this Prospectus, to purchase up to 262,500
additional shares of Common Stock at the initial public offering price, less
underwriting discounts and commissions, as set forth on the cover page of this
Prospectus. The Underwriters may exercise such option solely for the purpose of
covering over-allotments incurred in the sale of the shares of Common Stock
offered hereby. To the extent such option to purchase is exercised, each
Underwriter will become obligated, subject to certain conditions, to purchase
approximately the same percentage of such additional shares as the number set
forth next to such Underwriters' name in the preceding table bears to 1,750,000.
The Company and the Selling Shareholder have agreed to indemnify the
several Underwriters and contribute to losses arising out of certain
liabilities, including liabilities under the Securities Act.
The Representatives have informed the Company and the Selling Shareholder
that the Underwriters do not intend to confirm sales to any accounts over which
they exercise discretionary authority.
The Company, its officers and directors, the Selling Shareholder, all other
beneficial owners of the Common Stock and holders of options to purchase Common
Stock have agreed not to, directly or indirectly, offer, sell, offer to sell,
contract to sell, pledge, grant any option to purchase or otherwise
47
<PAGE>
sell or dispose (or announce any offer, sale, offer of sale, contract of sale,
pledge, grant of any option to purchase or other sale or disposition) of any
shares of Common Stock or other capital stock or any securities convertible into
or exercisable or exchangeable for any shares of Common Stock or other capital
stock of the Company, for a period of 180 days after the date of this Prospectus
without the prior written consent of Prudential Securities Incorporated, on
behalf of the Underwriters. Prudential Securities Incorporated may in its sole
discretion, at any time and without notice, release all or any portion of the
securities subject to such lock-up agreements.
Prior to the Offering, there has been no public market for the Common Stock
of the Company. Consequently, the initial public offering price will be
determined through negotiations between the Company and the Representatives.
Among the factors to be considered in making such determination will be the
prevailing market conditions, the Company's financial and operating history and
condition, its prospects and the prospects for its industry in general, the
management of the Company and the market prices of securities for companies in
businesses similar to that of the Company.
In connection with the Offering, certain Underwriters and selling group
members (if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Shareholder, and
in such case may purchase Common Stock in the open market following the closing
of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
262,500 shares of Common Stock, by exercising the Underwriters' over-allotment
option referred to above. In addition, Prudential Securities Incorporated, on
behalf of the Underwriters, may impose "penalty bids" under contractual
arrangements with the Underwriters whereby it may reclaim from an Underwriter
(or dealer participating in the Offering) for the account of the other
Underwriters, the selling concession with respect to Common Stock that is
distributed in the Offering but subsequently purchased for the account of the
Underwriters in the open market. Any of the transactions described in this
paragraph may result in the maintenance of the price of the Common Stock at a
level above that which might otherwise prevail in the open market. None of the
transactions described in this paragraph is required, and, if they are
undertaken, they may be discontinued at any time.
LEGAL MATTERS
Certain legal matters with respect to the validity of the Common Stock
offered hereby will be passed upon for the Company by Fox, Rothschild, O'Brien &
Frankel, LLP. Certain legal matters related to the Offering will be passed upon
for the Underwriters by Fulbright & Jaworski L.L.P., New York, New York.
EXPERTS
The financial statements as of March 31, 1997 and for the year ended March
31, 1997 included in this Prospectus have been so included in reliance on the
report of Price Waterhouse LLP, independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The financial statements as of March 31, 1996 and for each of the two years
in the period ended March 31, 1996 included in this Prospectus have been so
included in reliance on the report of SchmeltzeroMaster Group, P.C., independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
48
<PAGE>
CHANGE IN INDEPENDENT ACCOUNTANTS
Effective as of May 30, 1997, the Company's Board dismissed
SchmeltzeroMaster Group, P.C. and appointed Price Waterhouse LLP as the
Company's independent accountants. The report of SchmeltzeroMaster Group, P.C.
on the Company's combined financial statements as of March 31, 1996 and for each
of the two years in the period then ended did not contain an adverse opinion or
disclaimer of opinion and was not qualified or modified as to uncertainty, audit
scope or accounting principles. In connection with the audits for the years
ended March 31, 1995 and 1996 and through May 30, 1997, there were no
disagreements with SchmeltzeroMaster Group, P.C. on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of
SchmeltzeroMaster Group, P.C. would have caused them to make reference thereto
in their report on the financial statements for such years. Prior to retaining
Price Waterhouse LLP, the Company had not consulted with Price Waterhouse LLP
regarding the application of accounting principles or the type of audit opinion
that might be rendered on the Company's financial statements.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement of Form
S-1 under the Securities Act with respect to the Company's Common Stock offered
hereby. This Prospectus does not contain all of the information set forth in the
Registration Statement and the exhibits and schedules thereto. Statements
contained in the Prospectus as to the contents of any contract or other document
referred to are not necessarily complete and in each instance reference is made
to the Registration Statement and the exhibits and schedules thereto. The
information so omitted, including exhibits and schedules, may be obtained from
the Commission at its principal office in Washington, D.C. upon the payment of
the prescribed fees, or may be examined without charge at the Public Reference
Section of the Commission, 450 Fifth Street, N.W., Washington, D.C. 20549-1004,
or at the following regional offices of the Commission: 7 World Trade Center,
Suite 1300, New York, New York 10048; and Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661-2511. Such materials also may be
accessed electronically by means of the Commission's home page on the Internet
at http://www.sec.gov.
The Company intends to furnish its shareholders with annual reports
containing financial statements audited by independent accountants.
49
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE(S)
----------
Reports of Independent Accountants.......................... F-2, F-3
FINANCIAL STATEMENTS
Combined Balance Sheets................................... F-4
Combined Statements of Operations......................... F-5
Combined Statements of Stockholders' Equity............... F-6
Combined Statements of Cash Flows......................... F-7
Notes to Combined Financial Statements.................... F-8 - F-19
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
of Holt's Cigar Holdings, Inc. and Affiliates
In our opinion, the accompanying combined balance sheet and the related combined
statements of operations, of stockholders' equity and of cash flows present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates at March 31, 1997, and the results of their
operations and their cash flows for the year then ended in conformity with
generally accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these statements in accordance with generally accepted auditing standards
which require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
Price Waterhouse LLP
Philadelphia, Pennsylvania
July 2, 1997
F-2
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders
Holt's Cigar Holdings, Inc. and Affiliates
We have audited the accompanying combined balance sheet of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the related combined
statements of operations, stockholders' equity and cash flows for each of the
two years in the period ended March 31, 1996. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statements presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Holt's Cigar
Holdings, Inc. and Affiliates as of March 31, 1996 and the results of its
operations and its cash flows for each of the two years in the period ended
March 31, 1996 in conformity with generally accepted accounting principles.
Schmeltzer o Master Group, P.C.
Certified Public Accountants
Wyncote, Pennsylvania
August 13, 1996
F-3
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, PRO FORMA
----------------------- SEPTEMBER 30, SEPTEMBER 30,
1996 1997 1997 1997
---------- ---------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Current assets:
Cash................................. $ 639,450 $ 515,520 $1,344,825 $1,344,825
Accounts receivable (net of allowance
for doubtful accounts of $19,500,
$34,500 and $40,000 (unaudited) at
March 31, 1996, 1997, and
September 30, 1997................ 464,740 1,235,669 1,506,091 1,506,091
Inventory............................ 1,557,207 2,583,877 3,390,502 3,390,502
Loan receivable -- officer........... 18,830 23,396 23,396 23,396
Prepaid expenses and other current
assets............................ 41,724 51,408 133,237 133,237
---------- ---------- ---------- ----------
Total current assets.............. 2,721,951 4,409,870 6,398,051 6,398,051
Property and equipment, net............ 817,938 848,226 1,442,531 1,442,531
Deposits............................... 8,302 15,495 15,495 15,495
Goodwill............................... -- -- -- 344,311
Other assets (net of accumulated
amortization of $120,770, $104,036
and $111,314 (unaudited) at March 31,
1996, 1997 and September 30, 1997.... 138,291 131,919 130,210 130,210
---------- ---------- ---------- ----------
Total assets........................... $3,686,482 $5,405,510 $7,986,287 $8,330,598
========== ========== ========== ==========
Current liabilities:
Lines of credit...................... $ 5,000 $ -- $ -- $ --
Current portion of long-term debt.... 148,666 129,441 125,000 125,000
Accounts payable..................... 383,671 892,999 1,045,134 1,045,134
Due to related party................. 504,000 713,800 841,824 841,824
Accrued expenses and other current
liabilities....................... 183,564 165,870 66,323 66,323
Income taxes payable................. 462,300 296,351 297,170 297,170
Short-term debt to fund stockholder
distribution...................... -- -- -- 2,153,000
---------- ---------- ---------- ----------
Total current liabilities......... 1,687,201 2,198,461 2,375,451 4,528,451
Long-term debt -- less current
portion.............................. 342,995 182,440 546,536 546,536
Deferred income taxes.................. 3,400 -- -- --
Commitments
Stockholders' equity:
Preferred stock (pro forma) no par
value, 1,000,000 shares
authorized, none
issued............................ -- -- -- --
Common stock (pro forma) $.001 par
value, 25,000,000 shares
authorized, 4,020,000 issued and
outstanding....................... 91,114 91,114 91,114 4,020
Additional paid-in capital........... 303,607 303,607 303,607 685,012
Retained earnings.................... 1,308,165 2,679,888 4,719,579 2,566,579
---------- ---------- ---------- ----------
1,702,886 3,074,609 5,114,300 3,255,611
Treasury stock, 18,000 shares at
cost.............................. (50,000) (50,000) (50,000) --
---------- ---------- ---------- ----------
Total stockholders' equity........... 1,652,886 3,024,609 5,064,300 3,255,611
---------- ---------- ---------- ----------
Total liabilities and stockholders'
equity............................... $3,686,482 $5,405,510 $7,986,287 $8,330,598
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
------------------------------------- ------------------------
1995 1996 1997 1996 1997
---------- ---------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales................ $5,662,215 $9,466,848 $17,277,940 $7,610,333 $13,424,403
Cost of goods sold....... 3,041,490 5,158,563 9,565,964 4,145,178 7,318,879
---------- ---------- ----------- ---------- -----------
Gross profit............. 2,620,725 4,308,285 7,711,976 3,465,155 6,105,524
Operating expenses....... 1,948,670 3,483,645 4,894,829 2,239,965 2,894,149
---------- ---------- ----------- ---------- -----------
Income from operations... 672,055 824,640 2,817,147 1,225,190 3,211,375
Other income............. -- 21,610 31,976 11,268 33,316
---------- ---------- ----------- ---------- -----------
Income before income tax
expense................ 672,055 846,250 2,849,123 1,236,458 3,244,691
Income tax expense....... 209,400 318,200 576,600 398,000 653,000
---------- ---------- ----------- ---------- -----------
Net income............... $ 462,655 $ 528,050 $ 2,272,523 $ 838,458 $ 2,591,691
========== ========== =========== ========== ===========
Pro forma and
supplemental pro forma
income data (unaudited)
(Note 15):
Income before income
tax expense, as
reported............ $ 2,849,123 $1,236,458 $ 3,244,691
Pro forma amortization
of goodwill......... 17,216 8,608 8,608
----------- ---------- -----------
Pro forma income before
income tax expense.. 2,831,907 1,227,850 3,236,083
Pro forma income
taxes............... 1,133,000 491,000 1,294,000
----------- ---------- -----------
Pro forma net income... $ 1,698,907 $ 736,850 $ 1,942,083
=========== ========== ===========
Pro forma net income
per share........... $ .41 $ .18 $ .47
=========== ========== ===========
Pro forma weighted
average number of
shares.............. 4,101,701 4,101,701 4,101,701
Supplemental pro forma
net income.......... $ 1,742,907 $ 753,628 $ 1,950,430
=========== ========== ===========
Supplemental pro forma
net income per
share............... $ .42 $ .18 $ .47
=========== ========== ===========
Supplemental pro forma
weighted average
number of shares.... 4,135,861 4,138,695 4,142,252
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED TREASURY
STOCK CAPITAL EARNINGS STOCK TOTAL
------- ---------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C>
Balance at March 31, 1994........ $91,100 $204,621 $ 396,960 $(50,000) $ 642,681
Net income..................... -- -- 462,655 -- 462,655
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1995........ 91,107 254,114 859,615 (50,000) 1,154,836
Net income..................... -- -- 528,050 -- 528,050
Stockholders' distributions.... -- -- (79,500) -- (79,500)
Issuance of common stock....... 7 49,493 -- -- 49,500
------- -------- ---------- -------- ----------
Balance at March 31, 1996........ 91,114 303,607 1,308,165 (50,000) 1,652,886
Net income..................... -- -- 2,272,523 -- 2,272,523
Stockholders' distributions.... -- -- (900,800) -- (900,800)
------- -------- ---------- -------- ----------
Balance at March 31, 1997........ 91,114 303,607 2,679,888 (50,000) 3,024,609
Net income (unaudited)......... -- -- 2,591,691 -- 2,591,691
Stockholders' distributions
(unaudited)................. -- -- (552,000) -- (552,000)
------- -------- ---------- -------- ----------
Balance at September 30, 1997
(unaudited).................... $91,114 $303,607 $4,719,579 $(50,000) $5,064,300
======= ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED MARCH 31, SEPTEMBER 30,
-------------------------------- -------------------------
1995 1996 1997 1996 1997
-------- -------- ---------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income..................................... $462,655 $528,050 $2,272,523 $838,458 $2,591,691
Adjustments to reconcile net income to net cash
provided by operations:
Allowance for doubtful accounts.............. 3,215 11,785 15,000 -- 5,500
Depreciation and amortization................ 54,102 114,758 140,852 59,401 59,858
Deferred income taxes........................ -- 3,400 (3,400) -- --
(Increase) decrease in:
Accounts receivable........................ (261,663) (147,803) (785,929) (433,430) (275,922)
Inventory.................................. (191,982) (462,918) (1,026,670) (230,531) (806,625)
Prepaid expenses and other current
assets.................................. (34,543) 22,115 (9,684) 21,399 (81,829)
Deposits................................... (1,560) 1,721 (7,193) (40) --
Increase (decrease) in:
Accounts payable and due to related
party................................... 236,937 209,241 719,122 218,866 280,159
Accrued expenses and other current
liabilities............................. 62,458 134,423 (17,694) 29,406 (90,135)
Income taxes payable....................... 209,400 254,200 (165,949) 211,325 819
-------- -------- ---------- -------- ----------
Net cash provided by operating
activities............................ 539,019 668,972 1,130,978 714,854 1,683,516
-------- -------- ---------- -------- ----------
Cash flows from investing activities:
Purchase of property, equipment and other
assets....................................... (256,061) (61,948) (142,762) (67,547) (661,866)
Proceeds from (advances on) loan receivable --
officer...................................... 12,120 (18,830) (4,566) (5,066) --
-------- -------- ---------- -------- ----------
Net cash used in investing activities... (243,941) (80,778) (147,328) (72,613) (661,866)
-------- -------- ---------- -------- ----------
Cash flows from financing activities:
Net (payments) proceeds from lines of credit... (194,198) 5,000 (5,000) (5,000) --
Payments on long-term debt..................... (20,755) (41,442) (201,780) (113,116) (90,345)
Payments on loan payable -- officer............ 48,218 (48,218) -- -- --
Proceeds from issuance of common stock......... 49,500 -- -- -- --
Stockholder distributions...................... -- (79,500) (900,800) (168,000) (552,000)
Proceeds from long-term debt................... -- -- -- -- 450,000
-------- -------- ---------- -------- ----------
Net cash used in financing activities... (117,235) (164,160) (1,107,580) (286,116) (192,345)
-------- -------- ---------- -------- ----------
Net (decrease) increase in cash.................. 177,843 424,034 (123,930) 356,125 829,305
Cash -- beginning of the year.................... 37,573 215,416 639,450 639,450 515,520
-------- -------- ---------- -------- ----------
Cash -- end of the year.......................... $215,416 $639,450 $ 515,520 $995,575 $1,344,825
======== ======== ========== ======== ==========
Supplemental disclosures:
Interest paid.................................. $ 18,486 $ 50,048 $ 73,184 $ 27,961 $ 13,912
======== ======== ========== ======== ==========
Income taxes paid (refunded)................... $(14,749) $ 60,594 $ 487,739 $130,000 $ 637,371
======== ======== ========== ======== ==========
Supplementary information regarding
non-cash investing and financing activities:
Non-cash acquisition of property............... $ 4,709 $574,634 $ 22,000 $ 20,000 $ --
======== ======== ========== ======== ==========
Non-cash disposition of property............... $ -- $(50,829) $ -- $ -- $ --
======== ======== ========== ======== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements include the historical
accounts of Holt's Cigar Company, Inc., Ashton Distributors, Inc. and Ashton
Holdings, Inc. all of which are controlled by a single stockholder (together the
"Company") and reflect their combined financial position, results of operations
and cash flows after elimination of intercompany accounts and transactions. The
Company is engaged in the wholesale and retail sale of premium cigars and
cigar-related accessories.
The combined financial statements have been presented as if the Company had
operated as a single combined entity for all periods presented. Such financial
statements may not necessarily present the financial position, results of
operations and cash flows the Company would have reported as a single entity
because in part, Ashton Distributors, Inc. is a Subchapter S Corporation and the
Subchapter S election will terminate upon consummation of the Company's
reorganization. (See Note 15 for unaudited combined pro forma financial
information.)
Corporate Reorganization (unaudited)
In conjunction with the Company's initial public offering, the companies
will be reorganized in a transaction among entities under common control. Prior
to the reorganization, the controlling stockholder owned 100% of the outstanding
common stock of both Holt's Cigar Company, Inc. and Ashton Distributors, Inc.
and 60% of the outstanding common stock of Ashton Holdings, Inc. Ashton
Holdings, Inc. which changed its name to Holt's Cigar Holdings, Inc., will
acquire all the outstanding common stock of Holt's Cigar Company, Inc. and
Ashton Distributors, Inc. The assets acquired and liabilities assumed of Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. are reflected in the unaudited
proforma combined balance sheet at historical costs except for the ownership
interests (represented by options) held by individuals other than the
controlling stockholder or his immediate family which have been recorded as the
acquisition of minority interests at estimated fair value.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the combined financial
statements and accompanying disclosures at the date of the financial statements.
Differences from those estimates, if any, are recorded in the period they become
known.
Inventory
Inventory is stated at the lower of average cost or market. Cost is
determined by the first-in first-out method. Inventory is composed of finished
goods held for re-sale.
Concentration of Credit Risk
Certain financial instruments potentially subject the Company to
concentrations of credit risk. These financial instruments consist primarily of
cash and trade accounts receivable. The Company places its temporary cash
investments with high credit quality financial institutions to limit its credit
exposure. Concentrations of credit risk with respect to trade receivables are
limited due to the large number of customers comprising the Company's customer
base, their dispersion across different geographic areas and generally short
payment terms.
F-8
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair value
of each class of financial instruments:
The carrying amounts of cash, accounts receivable, other current assets,
accounts payable, accrued expenses and other liabilities approximate fair value
because of the short maturity of those instruments.
The carrying amount of long-term debt approximates fair value, as the
interest rates on the debt approximate rates currently available to the Company
for debt with similar terms and remaining maturities.
Property and Equipment
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged against operations. Renewals and betterments that materially
extend the life of the asset are capitalized. Depreciation is computed using
straight-line and accelerated methods over the estimated useful lives of the
related assets. Useful lives range from five to thirty-nine years.
Long-lived Assets
In March 1995, Statement of Financial Accounting Standards (SFAS) No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of", was issued. SFAS No. 121 requires that long-lived assets and
certain identifiable intangibles to be held and used or disposed of by an entity
be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. During 1997, the
Company adopted this statement and determined that no impairment loss need be
recognized for applicable assets of continuing operations.
Revenue Recognition
Sales are recognized upon shipment of products.
Cost of Goods Sold
Cost of goods sold comprises the following:
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SIX MONTHS ENDED
------------------------------------ SEPTEMBER 30,
1995 1996 1997 1997
---------- ---------- ---------- ----------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Beginning inventory................. $ 902,307 $1,094,289 $1,557,207 $ 2,583,877
Purchases from:
Related party supplier
(Notes 11 and 12).............. 1,020,929 1,853,269 3,631,481 3,853,472
Other suppliers................... 2,212,543 3,768,212 6,961,153 4,272,032
Less: ending inventory.............. (1,094,289) (1,557,207) (2,583,877) (3,390,502)
---------- ---------- ---------- -----------
Cost of goods sold.................. $3,041,490 $5,158,563 $9,565,964 $ 7,318,879
========== ========== ========== ===========
</TABLE>
F-9
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
Stock Options
The Company applies Accounting Principles Board (APB) Opinion 25,
"Accounting for Stock Issued to Employees" and related interpretations in
accounting for its stock-based compensation plans.
Net Income Per Share
Net income per share is presented on a pro forma basis only. See Note 15.
Income Taxes
The Company utilizes the liability method of accounting for income taxes.
Under this method, deferred tax liabilities and assets are recognized for the
expected future tax consequences of temporary differences between the carrying
amounts and the tax bases of assets and liabilities.
Holt's Cigar Company, Inc. (Holt's) and Ashton Holdings, Inc. (Holdings)
are subchapter C corporations and therefore subject to federal and state
corporate income taxes.
Ashton Distributors, Inc. (Ashton) has elected to be taxed under the
provisions of subchapter S of the Internal Revenue Code and Pennsylvania Tax
Reform Code. Under these provisions, Ashton does not pay federal or state income
taxes on its taxable income. Instead, Ashton's income, losses and credits are
included in the individual tax return of Ashton's stockholder.
Interim Financial Statements
The interim financial data is unaudited; however, in the opinion of the
Company, the interim data includes all adjustments, consisting only of normal
recurring adjustments, necessary for a fair statement of the results of the
interim period and are prepared on the same basis as the audited annual
financial statements.
Advertising
The Company expenses the cost of advertising and promotions as incurred.
Advertising and promotions costs amounted to $228,029, $328,111, $329,057 and
$158,370 (unaudited) for the years ended March 31, 1995, 1996 and 1997 and the
six months ended September 30, 1997, respectively.
Recently Issued Accounting Standards
In October 1995, the FASB issued Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"). This Statement establishes a fair
value method of accounting for, or disclosing, stock-based compensation plans.
The Company adopted the disclosure provisions of SFAS No. 123 which require
disclosing the pro forma effect on net income and earnings per share of the fair
value method of accounting for stock-based compensation. The adoption of the
disclosure provisions did not affect the Company's combined financial condition,
results of operations, or cash flows. See Note 13.
In February 1997, the FASB issued Statement No. 128, "Earnings Per Share"
("SFAS No. 128"). This statement requires companies to present basic earnings
per share, and if applicable, diluted earnings per share instead of primary and
fully diluted earnings per share. Basic earnings per share include the weighted
average number of common shares outstanding during the period, and does not
include common stock equivalents. Under SFAS No. 128, diluted earnings per share
include the weighted average number of shares outstanding and common stock
equivalents. SFAS No. 128 must be adopted by the Company in the third quarter of
fiscal year 1998. Early adoption of SFAS No. 128 is
F-10
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES -- (CONTINUED)
not permitted. Adoption of SFAS 128 is not expected to have material effect on
the Company's earnings per share.
2. LOAN RECEIVABLE -- OFFICER
Loan receivable -- officer represents a short-term advance to an officer
with no interest being charged.
3. INCOME TAXES
As discussed in Note 1, the Company utilizes the liability method of
accounting for income taxes in accordance with SFAS 109. The effective tax rates
differ from the statutory rate primarily due to the Company's historical
corporate structure. The income recorded in Ashton Distributors, Inc. was not
subject to corporate taxation, rather the tax consequences were the
responsibility of the individual stockholder, resulting in a permanent
difference. The historical income tax expense is detailed as follows on a
separate company basis, after the effects of eliminations:
For the year ended March 31, 1997:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- ----------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................ $1,399,619 $1,603,634 $(154,130) $2,849,123
Current tax provision
Federal income tax...... 435,000 -- -- 435,000
State income tax........ 141,600 -- -- 141,600
---------- ---------- --------- ----------
Income tax expense........... 576,600 -- -- 576,600
---------- ---------- --------- ----------
Net income (loss)............ $ 823,019 $1,603,634 $(154,130) $2,272,523
========== ========== ========= ==========
</TABLE>
For the year ended March 31, 1996:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................. $752,139 $261,512 $(167,401) $846,250
Current tax provision
Federal income tax.......... 237,500 -- -- 237,500
State income tax............ 77,300 -- -- 77,300
Deferred income taxes......... 3,400 -- -- 3,400
-------- -------- --------- --------
Income tax expense............ 318,200 -- -- 318,200
-------- -------- --------- --------
Net income (loss)............. $433,939 $261,512 $(167,401) $528,050
======== ======== ========= ========
</TABLE>
F-11
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. INCOME TAXES -- (CONTINUED)
For the year ended March 31, 1995:
<TABLE>
<CAPTION>
HOLT'S CIGAR ASHTON ASHTON
COMPANY, INC. DISTRIBUTORS, INC. HOLDINGS, INC. COMBINED
------------- ------------------ -------------- --------
<S> <C> <C> <C> <C>
Income (loss) before income
tax expense................. $494,210 $296,531 $(118,686) $672,055
Current tax provision
Federal income tax.......... 160,400 -- -- 160,400
State income tax............ 49,000 -- -- 49,000
-------- -------- --------- --------
Income tax expense............ 209,400 -- -- 209,400
-------- -------- --------- --------
Net income (loss)............. $284,810 $296,531 $(118,686) $462,655
======== ======== ========= ========
</TABLE>
The historical losses in Ashton Holdings, Inc. result in a net operating
loss carryforward for tax purposes of $63,000. The tax loss carryforward is less
than the historical book losses due to the effects of the elimination of
intercompany transactions. The Company has recorded a valuation allowance
against the entire deferred tax asset of $25,830.
4. PROPERTY AND EQUIPMENT, NET
Property and equipment is detailed as follows:
<TABLE>
<CAPTION>
MARCH 31,
--------------------- SEPTEMBER 30,
1996 1997 1997
-------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Equipment.................................. $122,295 $ 223,963 $ 292,097
Furniture and fixtures..................... 185,800 205,800 213,576
Leasehold improvements..................... 617,224 636,638 1,200,255
-------- ---------- ----------
925,319 1,066,401 1,705,928
Accumulated depreciation................... (107,381) (218,175) (263,397)
-------- ---------- ----------
Property and equipment, net................ $817,938 $ 848,226 $1,442,531
======== ========== ==========
</TABLE>
Depreciation expense amounted to $16,768, $80,049, $110,794 and $45,222
(unaudited) in the years ended March 31, 1995, 1996 and 1997 and the six months
ended September 30, 1997, respectively.
5. STOCKHOLDERS' EQUITY
Stockholders' equity comprised the following:
<TABLE>
<CAPTION>
MARCH 31,
----------------- SEPTEMBER 30,
1996 1997 1997
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Common stock
Holt's Cigar Company, Inc. -- No par value, $1 stated
value, 100,000 shares authorized, 90,000 shares
issued and 72,000 outstanding..................... $90,000 $90,000 $90,000
Ashton Holdings, Inc. -- $.01 par value, 20,000
shares authorized, 10,000 shares issued and
outstanding....................................... 114 114 114
Ashton Distributors, Inc. -- No par value, 1,000
shares authorized, issued and outstanding......... 1,000 1,000 1,000
------- ------- -------
$91,114 $91,114 $91,114
======= ======= =======
</TABLE>
F-12
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. STOCKHOLDERS' EQUITY -- (CONTINUED)
<TABLE>
<CAPTION>
MARCH 31,
----------------------- SEPTEMBER 30,
1996 1997 1997
---------- ---------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Additional paid-in capital
Holt's Cigar Company, Inc....................... $ 4,721 $ 4,721 $ 4,721
Ashton Holdings, Inc............................ 298,886 298,886 298,886
---------- ---------- ----------
$ 303,607 $ 303,607 $ 303,607
========== ========== ==========
Retained earnings (accumulated deficit)
Holt's Cigar Company, Inc....................... $1,196,096 $2,019,115 $2,998,165
Ashton Holdings, Inc............................ (149,572) (303,702) (431,291)
Ashton Distributors, Inc........................ 261,641 964,475 2,152,705
---------- ---------- ----------
$1,308,165 $2,679,888 $4,719,579
========== ========== ==========
</TABLE>
6. OTHER ASSETS
Other assets include several intangible assets including restrictive
covenants, trademarks, trade name, customer list and organization costs. The
assets are being amortized over periods ranging from five to twenty years.
7. BORROWINGS
Lines of Credit
The Company maintained a line of credit of $200,000 with a bank, payable on
demand of which $5,000 was outstanding at March 31, 1996. Interest was payable
at the bank's prime rate (8.25% at March 31, 1996) plus 1%. The line was
collateralized by the personal guarantee of a stockholder. The line was
terminated in 1997.
The Company maintains another line of credit of $400,000 with a bank,
payable on demand of which no amounts were outstanding at March 31, 1996 and
1997. Interest is payable at the bank's prime rate (8.5% at both March 31, 1997
and 1996). The line is collateralized by Company assets and the personal
guarantee of a stockholder.
F-13
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
MARCH 31,
--------------------- SEPTEMBER 30,
1996 1997 1997
--------- --------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable -- bank -- due in monthly payments of $1,042
plus interest at the bank's prime rate (8.25% at both
March 31, 1997 and 1996) plus 1%, collateralized by
inventory, property and the guarantee of a stockholder. $ 36,450 $ 22,894 $ --
Note was paid off in July, 1997.........................
Notes payable -- equipment -- due in various monthly
payments ranging from $148 to $709 including interest
from 9.9% to 14%, collateralized by equipment. Payments
extend through March, 1999.............................. 22,273 25,841 11,813
Note payable -- bank-- due in monthly payments of $1,208
including interest at 8.5% (using a twenty-five year
amortization), collateralized by a second mortgage on
the retail location property owned by the stockholder,
an insurance policy on the life of a stockholder and the
guarantee of a stockholder. In June, 2000 the interest
rate changes to the prime rate plus 1%. Payments extend
through June, 2020...................................... 148,811 147,078 146,171
Note payable -- bank -- due in monthly payments of $4,042
including interest at 9%. Monthly payments increased to
$9,470 in September, 1996. Collateralized by the
assignment of rents on the real property at the retail
location, accounts receivable, inventory and a mortgage
on the retail location property, along with the
guarantee of a stockholder. Payments extend through
April, 1998............................................. 284,127 116,068 63,552
Note payable -- bank -- construction loan agreement --
Maximum amount available -- $450,000. Interest is
charged at 8.75% for the initial thirty months, prime
plus .25% for the next thirty months, adjusted
thereafter based on prime for each thirty month period.
Payable over a ten and a half year period. First six
monthly payments interest only -- monthly installments
of principal and accrued interest begin January 1, 1998.
Secured by a third lien on the accounts receivable,
inventory and property and guaranteed by a stockholder.
Payments extend through December, 2008.................. -- -- 450,000
--------- --------- ---------
Total................................................... 491,661 311,881 671,536
Less: current portion................................... (148,666) (129,441) (125,000)
--------- --------- ---------
Long-term debt.......................................... $ 342,995 $ 182,440 $ 546,536
========= ========= =========
</TABLE>
F-14
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. BORROWINGS -- (CONTINUED)
The following is a schedule of long-term debt maturities as of March, 31,
1997:
1998.............................. $129,441
1999.............................. 39,734
2000.............................. 2,492
2001.............................. 2,712
2002.............................. 2,951
Thereafter........................ 134,551
--------
$311,881
========
Total interest expense amounted to $18,486, $50,048, $73,184 and $13,912
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the six months
ended September 30, 1997, respectively.
8. LEASE COMMITMENTS
The Company leases warehouse space in Philadelphia under a noncancelable
operating lease expiring in December, 1998. The lease also requires payment of
the tenant's common area maintenance expenses. The Company also leases retail
space from a stockholder under an operating lease expiring in October, 2004. The
lease includes a five year renewal option.
The Company leases various office and warehouse equipment and an automobile
under operating leases expiring through April, 2002. The Company entered into an
operating lease agreement for a new office and warehouse facility in
Philadelphia expiring in June, 2002 with one five year renewal option.
The following is a schedule of future minimum rental payments required
under the above operating leases as of March 31, 1997:
1998.............................. $161,976
1999.............................. $181,896
2000.............................. $158,400
2001.............................. $153,303
2002.............................. $152,268
Rental expense amounted to $67,244, $100,008, $103,044 and $66,018
(unaudited) for the years ended March 31, 1995, 1996 and 1997 and the six months
ended September 30, 1997, respectively.
9. PROFIT SHARING PLAN
The Company sponsors a 401(k) contributory qualified profit sharing plan
covering substantially all of its employees. Under the Plan, the Company's
contributions are based upon the employee's elective deferral contribution. The
Company's contribution is equal to 50% of the employee's contribution up to 6%
of the employee's pre-tax salary. Contributions for the years ended March 31,
1995, 1996 and 1997 and the six months ended September 30, 1997, amounted to
$8,397, $18,463, $23,233 and $9,819 (unaudited), respectively.
10. MAJOR SUPPLIERS
During fiscal years 1995, 1996 and 1997, the Company purchased
approximately 37%, 39% and 47%, respectively, of its cigars from one supplier.
At March 31, 1996, 1997 and September 30, 1997, amounts due to the supplier were
approximately $504,000, $713,800 and $842,000 (unaudited), respectively and are
included in due to related party. This supplier is a company controlled by an
F-15
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR SUPPLIERS -- (CONTINUED)
affiliate of a stockholder of the Company. During fiscal 1997, approximately 18%
of the Company's purchases were from one other supplier. At March 31, 1997,
approximately $256,000 was due to the other supplier and included in accounts
payable.
11. COMMITMENTS
The Company is required to pay royalties to an unaffiliated individual
related to the purchase of the "Ashton" name. Royalties are based on 1% of all
purchases of cigars bearing the Ashton name through January 1, 2000. Royalties
incurred for the years ended March 31, 1995, 1996 and 1997 and the six months
ended September 30, 1997 were $12,000, $16,150, $31,616 and $30,813 (unaudited),
respectively.
The Company has guaranteed certain debt of the controlling stockholder. The
balance on such debt was $443,714 and $436,783 at March 31, 1996 and 1997,
respectively.
The Company has certain employment contracts for executives which extend
for up to five years.
12. RELATED PARTY TRANSACTIONS
The Company has a loan receivable due from the controlling stockholder (see
Note 2).
The controlling stockholder guarantees certain debt of the Company (see
Note 7).
The Company guarantees certain debt of the controlling stockholder (see
Note 11).
The Company paid rent of approximately $48,000, $54,000 and $35,000
(unaudited) to the controlling stockholder for the years ended March 31, 1996
and 1997 and the six months ended September 30, 1997, respectively (see Note 8).
The major supplier mentioned in Note 10 is a company controlled by a
stockholder of the Company. Amounts due to the related party are separately
shown on the face of the balance sheet.
13. STOCK OPTIONS
Effective January 1, 1996, three individuals were granted stock options to
purchase common stock of each of the three companies at estimated fair market
value. The individuals were an employee, an outside director, and a member of
the controlling stockholder's immediate family, respectively. After giving
effect to the organization, an aggregate of 482,400 shares are issuable pursuant
to these options at an exercise price of $.50 per share. The Company has adopted
the disclosure-only provisions of SFAS 123 "Accounting for Stock-Based
Compensation" ("SFAS No. 123"). The options expire on December 31, 2005. The
employee option vests ratably over five years, the family member and director's
options vested immediately. The controlling stockholder has agreed that upon
exercise of any such options he will contribute to the capital of the Company
one share of common stock for each share purchased pursuant to those options.
The following table summarizes the stock options outstanding for each of
the three years ended March 31, 1997:
F-16
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
13. STOCK OPTIONS -- (CONTINUED)
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
WEIGHTED-AVERAGE NUMBER OF FAIR MARKET
TOTAL NUMBER OF EXERCISE PRICE SHARES GRANTED DURING
SHARES (PRO FORMA) PER SHARE EXERCISABLE THE YEAR
------------------ ---------------- ----------- ----------------
<S> <C> <C> <C> <C>
Balance at April 1, 1994......... -- -- -- --
Balance at March 31, 1995........ -- -- -- --
Granted fiscal 1996.............. 482,400 $.50 -- $.24
Balance at March 31, 1996........ 482,400 $.50 281,400 --
Granted fiscal 1997.............. -- -- -- --
Balance at March 31, 1997........ 482,400 $.50 321,600 --
</TABLE>
The weighted average fair value was estimated on the date of grant using
the Black-Scholes option pricing model assuming no dividends or volatility, a
ten-year expected life and a risk free interest rate of 6.5%.
The Company accounts for options in accordance with APB No. 25 and
accordingly, no compensation cost has been recognized. If the Company had
elected to recognize compensation cost consistent with the method prescribed by
SFAS 123, net income would have been reduced by approximately $50,000 in fiscal
1996 and $8,000 in fiscal 1997 (no effect on pro forma earnings per share).
14. CAPITAL STRUCTURE (UNAUDITED)
As discussed in Note 1, the Company reorganized in September 1997. After
the reorganization, Holt's Cigar Holdings, Inc. has one class of common stock
with a par value of $.001. The Company, after reorganization, will have options
outstanding for the purchase of 711,900 shares of common stock. In addition, the
Company is authorized to issue 1,000,000 shares of preferred stock, the features
of which are subject to designation by the Board of Directors.
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED)
Pro Forma Balance Sheet Information
The unaudited pro forma balance sheet reflects the S Corporation estimated
distribution of $2,153,000 and the related effects of the revised capital
structure including the termination of the Company's S Corporation status
assuming such termination had occurred at September 30, 1997. No deferred taxes
resulted from such termination. The pro forma balance sheet does not give
effect to distributions that may be paid from earnings generated subsequent
to September 30, 1997.
The pro forma balance sheet also includes the goodwill resulting from the
application of purchase accounting to option holder minority interests in Holt's
Cigar Company, Inc. and Ashton Distributors, Inc. acquired in the reorganization
described in Note 1 utilizing an estimated $13.00 per share offering price. The
pro forma balance sheet includes reclassifications of certain stockholders'
equity accounts to reflect the Company's capital structure after the
reorganization.
Pro Forma Income Before Income Taxes
Pro forma net income per share is based on net income per share decreased
to give effect to the increased amortization costs of $17,216 for the year ended
March 31, 1997 and $8,608 for the six months ended September 30, 1997, and which
would have resulted if the goodwill created at the reorganization had existed at
March 31, 1996. Such goodwill is being amortized over 20 years.
F-17
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED) -- (CONTINUED)
Pro Forma Income Taxes
As discussed in Note 1 and reported in Note 3, Ashton Distributors, Inc.
does not pay federal or state income tax. Upon consummation of the
reorganization Ashton will terminate its S Corporation status and be subject to
federal and state income taxes. The pro forma provision for income taxes
represents the income tax provisions that would have been reported had the
Company been a combined C Corporation during the year ended March 31, 1997 and
the six months ended September 30, 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
MARCH 31, 1997 1997
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
Pro forma income before taxes.................... $2,831,907 $3,236,083
Current tax provisions
Federal income tax.......................... 963,000 1,100,000
State income tax............................ 170,000 194,000
---------- ----------
Income tax expense.......................... 1,133,000 1,294,000
---------- ----------
Pro forma net income............................. $1,698,907 $1,942,083
========== ==========
</TABLE>
The reconciliation between the effective pro forma income tax rate and the
U.S. federal statutory rate is as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
MARCH 31, 1997 1997
-------------- ----------------
<S> <C> <C>
U.S. Federal taxes at statutory rate............. 34.0% 34.0%
State and local taxes, net....................... 5.9 6.3
---- ----
Income tax provision............................. 39.9% 40.3%
==== ====
</TABLE>
Pro Forma Net Income Per Share
The computation of pro forma earnings per share is based on the weighted
average number of outstanding common shares during the period plus common stock
equivalents, if dilutive. Pursuant to the requirements of the Securities and
Exchange Commission, the weighted average number of outstanding common shares
includes the effects of the incremental number of shares required to fund
distributions to the shareholder of Ashton Distributors, Inc. in excess of
earnings for the preceding 12 months (including the estimated distribution of
$2,153,000). The pro forma net income per share does not give effect to
distributions that may be paid from earnings generated subsequent to September
30, 1997. As discussed in Note 1, the Company reorganized in September 1997.
After the reorganization, Holt's Cigar Holdings, Inc. has one class of common
stock with a par value of $.001. As discussed in Note 13, the Company, after
reorganization, will have options outstanding for the purchase of 482,400 shares
of common stock. The controlling stockholder has agreed that upon exercise of
any such options he will contribute to the capital of the Company one share of
common stock for each share purchased pursuant to those options, thereby
reducing his ownership interest. Historical net income per share data has not
been presented since such amounts are not deemed to be meaningful due to the
significant change in the Company's capital structure which is to occur in
connection with the Offering.
Supplemental Pro Forma Net Income Per Share
The supplemental pro forma net income per share is based on pro forma net
income, (i) increased to give effect to the reduction in interest costs of
$44,000 for the year ended March 31, 1997, $16,800 for the six months ended
September 30, 1996, and $8,400 for the six months ended September 30,
F-18
<PAGE>
HOLT'S CIGAR HOLDINGS, INC. AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
15. PRO FORMA AND SUPPLEMENTAL INFORMATION (UNAUDITED) -- (CONTINUED)
1997 (net of the applicable income taxes), which would have resulted assuming
the application of a portion of the net proceeds from the Offering were used to
repay certain indebtedness of the Company and (ii) divided by pro forma weighted
average shares plus the incremental shares issued to repay the debt.
16. SUBSEQUENT EVENTS (UNAUDITED)
In September 1997, the Board of Directors approved an Employee Stock Option
Plan. The plan allows for options to purchase up to 300,000 shares of common
stock to be granted, at their fair market value on the date of grant. The
Company expects to grant options to purchase an aggregate of 169,500 shares at
the effective date of the Offering.
In September 1997, the Board of Directors approved a "Non-Management
Directors Stock Option Plan" which allows for options to purchase up to 180,000
shares. The Company expects to grant outside directors options to purchase an
aggregate of 60,000 shares at the effective date of the Offering. Such options
will vest immediately and will be granted at their fair market value on the date
of grant.
In October 1997 the Company borrowed $2.7 million to fund a distribution to
the controlling shareholder of $2.7 million, which represents the estimated
accumulated earnings expected at the Reorganization. The controlling shareholder
and the Company have agreed to adjust the distribution to reflect the actual
accumulated earnings at the date of the Offering. The debt is payable upon
demand.
F-19
<PAGE>
[PHOTOGRAPH]
Picture of Ashton Cigars
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY, THE SELLING SHAREHOLDER OR ANY OF THE UNDERWRITERS.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY ANY SECURITY OTHER THAN THE SHARES OF COMMON STOCK OFFERED BY THIS
PROSPECTUS, NOR DOES IT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF ANY
OFFER TO BUY THE SHARES OF COMMON STOCK BY ANYONE IN ANY JURISDICTION IN WHICH
SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
UNTIL , 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED
SECURITIES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED
TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
------------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary.............................. 3
Risk Factors.................................... 8
Reorganization of the Company................... 16
Use of Proceeds................................. 17
Dividend Policy................................. 17
Capitalization.................................. 18
Dilution........................................ 19
Selected Financial Data......................... 20
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 22
Business........................................ 26
Management...................................... 36
Certain Transactions............................ 40
Principal and Selling Shareholders.............. 41
Description of Capital Stock.................... 42
Shares Eligible for Future Sale................. 45
Underwriting.................................... 47
Legal Matters................................... 48
Experts......................................... 48
Change in Independent Accountants............... 49
Additional Information.......................... 49
Index to Financial Statements................... F-1
1,750,000 Shares
HOLT'S CIGAR
HOLDINGS, INC.
Common Stock
------------------------
PROSPECTUS
------------------------
PRUDENTIAL SECURITIES INCORPORATED
JANNEY MONTGOMERY SCOTT INC.
November , 1997
================================================================================
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered hereby, other than underwriting discounts and
commissions, are itemized below.
Securities and Exchange Commission registration fee......... $ 8,538
NASD filing fee............................................. 3,318
Nasdaq National Market listing fee.......................... 50,000
Accounting Fees and Expenses................................ 150,000
Legal fees and expenses..................................... 200,000
Printing and engraving expenses............................. 120,000
Blue Sky fees and expenses (including legal fees)........... 2,500
Transfer Agent and Registrar fees and expenses.............. 10,000
Miscellaneous............................................... 30,644
--------
Total.................................................. $575,000
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Section 145 of the Delaware General Corporation Law (the "DGCL") empowers a
Delaware corporation to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative
(other than an action by or in the right of such corporation) by reason of the
fact that such person is or was a director, officer, employee or agent of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation or enterprise. A
corporation may, in advance of the final disposition of any civil, criminal,
administrative or investigative action, suit or proceeding, pay the expenses
(including attorneys' fees) incurred by any officer, director, employee or agent
in defending such action, provided that the director or officer undertakes to
repay such amount if it shall ultimately be determined that he is not entitled
to be indemnified by the corporation. A corporation may indemnify such person
against expenses (including attorneys' fees), judgments, fines and amounts paid
in settlement actually and reasonably incurred by such person in connection with
such action, suit or proceeding if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation and, with respect to any criminal action or proceeding, had no
reasonable cause to believe his conduct was unlawful.
A Delaware corporation may indemnify officers and directors in an action by
or in the right of the corporation to procure a judgment in its favor under the
same conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in the
defense of any action referred to above, the corporation must indemnify him
against the expenses (including attorneys' fees) which he actually and
reasonably incurred in connection therewith. The indemnification provided is not
deemed to be exclusive of any other rights to which an officer or director may
be entitled under any corporation's by-law, agreement, vote or otherwise.
The Company's Certificate of Incorporation includes a provision that
eliminates the personal liability of its directors to the Company or its
stockholders for monetary damages for breach of their fiduciary duty to the
maximum extent permitted by the DGCL. The DGCL does not permit liability to be
eliminated (i) for any breach of a director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) for unlawful
payments of dividends or unlawful stock repurchases or redemptions, as provided
in Section 174 of the DGCL, or (iv) for any transaction from which the director
derived an improper personal benefit. In addition, as permitted in Section 145
of the DGCL, the Certificate of Incorporation and By-Laws of the Company provide
that the Company shall
II-1
<PAGE>
indemnify its directors and officers to the fullest extent permitted by the
DGCL, including those circumstances in which indemnification would otherwise be
discretionary, subject to certain exceptions. The By-Laws also provide that the
Company shall advance expenses to directors and officers incurred in connection
with an action or proceeding as to which they may be entitled to
indemnification, subject to certain exceptions.
The indemnification provisions in the Company's Certificate of
Incorporation and By-Laws may permit indemnification for liabilities arising
under the Securities Act. Insofar as indemnification for liabilities arising
under the Securities Act may be permitted to directors, officers and controlling
persons of the Company pursuant to the foregoing provisions, or otherwise, the
Company has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
The Company currently expects to carry director and officer liability
insurance following this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the past three years, the following shares were sold by the Company
without registration under the Securities Act of 1933, as amended (the "Act").
All references to shares of the Company's Common Stock give effect to the
Reorganization.
The Company relied on the exemption from registration set forth in Section
4(2) of the Act. No fees were paid in connection with the foregoing sales of
securities.
During December 1995, the Company sold 234,497 shares of Common Stock for
an aggregate purchase price of $49,500 to Fuente Investment Partnership pursuant
to the exercise of an option.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENTS
(a) Exhibits:
1 Form of Underwriting Agreement*
2 Plan of Reorganization
3.1 Restated Certificate of Incorporation
3.2 By-Laws
5 Opinion re: Legality and Consent of Fox, Rothschild, O'Brien
& Frankel, LLP
10.1 Employment Agreement dated October 1, 1997, with Robert G.
Levin
10.2 Employment Agreement dated October 1, 1997, with Michael
Pitkow
10.3 Employment Agreement dated October 1, 1997, with Robert H.
Levitt
10.4 Private Label Manufacturing Agreement dated April 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.
10.5 Exclusive Distributorship Agreement dated September 1, 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.
10.6 Lease Agreement dated March 20, 1997 between the Company and
P. D'Andrea, Inc.
10.7 Lease Agreement between Robert G. Levin and Suzanne J. Levin
and Holt's Cigar Company Inc. dated as of November 1, 1994
10.8 License Agreement dated May 4, 1993 between Ashton Holdings
Inc. and William Ashton Taylor
10.9 1997 Employee Stock Option Plan*
10.10 Non-Management Director Stock Plan*
10.11 Amended and Restated Shareholders' Agreement dated April 27,
1997, between and among Robert G. Levin, The Fuente
Investment Partnership and Ashton Holdings, Inc.
II-2
<PAGE>
10.12 Option Agreement between the Company and Michael Pitkow
dated January 1, 1997.
10.13 Option Agreement between the Company and Marvin B.
Sharfstein dated January 1, 1997.
10.14 Option Agreement between the Company and Carole Cohn dated
January 1, 1997.
11.1 Amended Computation of Pro Forma Net Income Per Share
11.2 Amended Computation of Supplemental Pro Forma Net Income Per
Share
16 Letter re change in certifying accountant*
23.1 Consent of Schmeltzer Master Group, P.C.
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Fox, Rothschild, O'Brien & Frankel, LLP, included
as Exhibit 5
27 Financial Data Schedule
- ------------------
* Previously filed.
(b) No Financial Statements Schedules are filed as part of this Registration
Statement
ITEM 17. UNDERTAKINGS
The undersigned registrant hereby undertakes to provide to the Underwriters
at the closing specified in the Underwriting Agreement, certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
The undersigned registrant hereby undertakes that:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933, as amended, may be permitted to directors, officers
and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in
the successful defense of any action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the registrant will, unless in the opinion of
its counsel the matter has been settled by controlling precedent, submit to
a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act
of 1933, as amended, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this registration statement as of the time it was declared
effective.
(3) For the purpose of determining any liability under the Securities
Act of 1933, as amended, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Philadelphia, Commonwealth of Pennsylvania, on November 3, 1997.
HOLT'S CIGAR HOLDINGS, INC.
By: /s/ ROBERT G. LEVIN
----------------------------------
Robert G. Levin,
Chairman of the Board, Chief Executive
Officer and President
In accordance with the requirements of the Securities Act of 1933, this
Amendment No. 1 to Registration Statement on Form S-1 has been signed by the
following persons in their capacities and on the date signed.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ ROBERT G. LEVIN Chairman of the Board, Chief November 3, 1997
- -------------------------------- Executive Officer and President
Robert G. Levin
/s/ MICHAEL PITKOW Director, Chief Operating Officer November 3, 1997
- -------------------------------- and Executive Vice President
Michael Pitkow
/s/ MARVIN B. SHARFSTEIN Director November 3, 1997
- --------------------------------
Marvin B. Sharfstein
/s/ CARLOS A. FUENTE, SR. Director November 3, 1997
- --------------------------------
Carlos A. Fuente, Sr.
/s/ CARLOS P. FUENTE, JR. Director November 3, 1997
- --------------------------------
Carlos P. Fuente, Jr.
/s/ HARVEY W. GROSSMAN Director November 3, 1997
- --------------------------------
Harvey W. Grossman
/s/ ROBERT H. LEVITT Chief Financial Officer November 3, 1997
- -------------------------------- (Principal Financial
Robert H. Levitt and Accounting Officer)
</TABLE>
II-4
<PAGE>
EXHIBIT INDEX
Exhibit
Number Description
- ------ -----------
1 Form of Underwriting Agreement*
2 Plan of Reorganization
3.1 Restated Certificate of Incorporation
3.2 By-Laws
5 Opinion re: Legality and Consent of Fox, Rothschild, O'Brien
& Frankel, LLP
10.1 Employment Agreement dated October 1, 1997, with Robert G.
Levin
10.2 Employment Agreement dated October 1, 1997, with Michael
Pitkow
10.3 Employment Agreement dated October 1, 1997, with Robert H.
Levitt
10.4 Private Label Manufacturing Agreement dated April 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.
10.5 Exclusive Distributorship Agreement dated September 1, 1997
between Ashton Distributors, Inc. and Fuente Cigar Ltd.
10.6 Lease Agreement dated March 20, 1997 between the Company and
P. D'Andrea, Inc.
10.7 Lease Agreement between Robert G. Levin and Suzanne J. Levin
and Holt's Cigar Company Inc. dated as of November 1, 1994
10.8 License Agreement dated May 4, 1993 between Ashton Holdings
Inc. and William Ashton Taylor
10.9 1997 Employee Stock Option Plan*
10.10 Non-Management Director Stock Plan*
10.11 Amended and Restated Shareholders' Agreement dated April 27,
1997, between and among Robert G. Levin, The Fuente
Investment Partnership and Ashton Holdings, Inc.
10.12 Option Agreement between the Company and Michael Pitkow
dated January 1, 1997.
10.13 Option Agreement between the Company and Marvin B.
Sharfstein dated January 1, 1997.
10.14 Option Agreement between the Company and Carole Cohn dated
January 1, 1997.
11.1 Amended Computation of Pro Forma Net Income Per Share
11.2 Amended Computation of Supplemental Pro Forma Net Income Per
Share
16 Letter re change in certifying accountant*
23.1 Consent of Schmeltzer Master Group, P.C.
23.2 Consent of Price Waterhouse LLP
23.3 Consent of Fox, Rothschild, O'Brien & Frankel, LLP, included
as Exhibit 5
27 Financial Data Schedule
- ------------------
* Previously filed.
PLAN OF REORGANIZATION
AND
AGREEMENT AND PLAN OF MERGER
THIS PLAN OF REORGANIZATION AND AGREEMENT AND PLAN OF MERGER (this
"Plan") is made and entered into as of this___________ day of _____, 1997, by
and among HOLT'S CIGAR HOLDINGS, INC., a Delaware corporation (formerly known as
Ashton Holdings, Inc.) ("Parent"), HOLT'S CIGAR COMPANY, INC., a Pennsylvania
corporation ("Holt's"), NEW HOLT'S CIGAR COMPANY, INC., a newly formed
Pennsylvania corporation ("New Holt's"), ASHTON DISTRIBUTORS, INC., a
Pennsylvania corporation ("Distributors"), and NEW ASHTON DISTRIBUTORS, INC., a
newly formed Pennsylvania corporation ("New Distributors"). (The parties hereto
may sometimes be separately referred to as the "Entity" and collectively as the
"Entities".)
BACKGROUND
Parent is a Delaware corporation authorized to issue 15,000 shares of
Class A common stock, par value $0.01 per share (the "Class A Common Stock"),
and 5,000 shares of Class B common stock, par value $0.01 per share (the "Class
B Common Stock"), of which an aggregate of 11,429 shares are currently issued
and outstanding. Sixty percent (60%) of such shares are currently owned by
Robert G. Levin ("Levin").
Holt's is a Pennsylvania corporation authorized to issue 100,000
shares of common stock, no par value (the "Holt's Common Stock"), of which
10,000 shares are currently issued and outstanding and owned by Levin.
Distributors is a Pennsylvania corporation authorized to issue 1,000
shares of common stock, no par value (the "Distributors Common Stock"), of which
500 shares are currently issued and outstanding and owned by Levin.
There are currently outstanding options (held by persons other than
Levin) entitling the holders thereof to purchase an aggregate of twelve percent
(12%) of the issued and outstanding shares of the capital stock of Holt's and of
Distributors and/or of any entity with or into which Holt's and/or Distributors
are merged (the "Options").
New Holt's and New Distributors are corporations newly formed in
Pennsylvania for the purposes of entering into this Plan, with all of the issued
and outstanding capital stock of each such corporation being owned by Parent.
The Entities desire to reorganize their respective corporate
structures and relationships so as to accomplish the following objectives:
1. To amend the Certificate of Incorporation of Parent to change
its authorized common stock from 15,000 shares of Class A Common Stock and 5,000
shares of
<PAGE>
Class B Common Stock to 25,000,000 shares of common stock, par value $0.001 per
share (the "Parent Common Stock"), and 1,000,000 shares of preferred stock, no
par value (the "Parent Preferred Stock"), and to effect certain other changes
thereto;
2. To exchange each share of Class A Common Stock and Class B
Common Stock of Parent issued and outstanding for 307.7394167 shares of Parent
Common Stock;
3. To cause Holt's and Distributors to become wholly-owned
subsidiaries of Parent, such transactions to be effected by a merger of New
Holt's with and into Holt's and New Distributors with and into Distributors,
pursuant to which mergers Levin, as the sole shareholder of each of Holt's and
Distributors, shall receive shares of Parent Common Stock in exchange for his
shares in such corporations; and
4. To exchange the Options for substantially similar options to
be issued by Parent, entitling the holders thereof to purchase shares of Parent
Common Stock.
It is the intention and desire of the Entities to effect the
reorganization described above upon the terms and subject to the conditions set
forth in this Plan.
It is the further intention and desire of the Entities to provide in
this Plan the terms and conditions of the mergers described above, the mode of
carrying such mergers into effect, such amendments or changes as may be desired
to the articles of incorporation of the corporations surviving such mergers and
the manner and basis of converting or exchanging the shares of each Entity into
or for shares or other securities of the Entity surviving the merger or of
another Entity, as the case may be.
NOW, THEREFORE, in consideration of the promises and mutual
representations, warranties and covenants herein contained, the parties hereby
agree as follows:
1. Parent.
(a) Amendment of Certificate of Incorporation: Exchange of Stock.
On the Effective Date (as hereinafter defined), Parent will amend its
Certificate of Incorporation to: (i) change its authorized capitalization from
15,000 shares of Class A Common Stock and 5,000 shares of Class B Common Stock
to 25,000,000 shares of Parent Common Stock; and (ii) contain such additional
terms as are set forth in Exhibit A hereto (the "Amendment"). Upon the Effective
Date of the Amendment, Parent will exchange each share of Class A Common Stock
and Class B Common Stock then issued and outstanding for 307.7394167 shares of
Parent Common Stock. Immediately thereafter, there will be an aggregate of
4,020,000 shares of Parent Common Stock issued and outstanding.
(b) Organizational Matters. From and after the Effective Date of
the Amendment:
(i) The Board of Directors and the officers of Parent shall
be and remain the Board of Directors and officers of Parent until
<PAGE>
their respective successors are elected in accordance with the Certificate of
Incorporation and By-Laws of Parent and shall have duly qualified; and
(ii) The Certificate of Incorporation and By-Laws of Parent,
each as amended, shall be and remain the Certificate of Incorporation and
By-Laws of Parent until further changed or amended as provided by law.
2. The Mergers.
(a) The Mergers. New Holt's shall be merged with and into Holt's
and New Distributors shall be merged with and into Distributors, with Holt's and
Distributors, respectively, to be the surviving corporations (hereinafter, each
individually, a "Merger" and, collectively, the "Mergers"). On the Effective
Date of the Mergers: (i) the shares of Holt's Common Stock and the shares of
Distributors Common Stock then issued and outstanding shall, by action of the
Mergers and without any action on the part of the holder thereof, automatically
be exchanged for an aggregate of 502,803 shares of Parent Common Stock; (ii) the
shares of the common stock of New Holt's (the "New Holt's Common Stock") then
issued and outstanding shall, by action of the Mergers and without any action on
the part of the holder thereof, automatically be exchanged for an aggregate of
100 shares of Holt's Common Stock, based upon 100 shares of New Holt's Common
Stock outstanding immediately prior to the Effective Date; and (iii) the shares
of the common stock of New Distributors (the "New Distributors Common Stock")
then issued and outstanding shall, by action of the Mergers and without any
action on the part of the holder thereof, automatically be exchanged for an
aggregate of 100 shares of Distributors Common Stock, based upon 100 shares of
New Distributors Common Stock outstanding immediately prior to the Effective
Date.
(b) Organizational Matters. On the Effective Date of the Mergers:
(i) The name of the corporation which shall survive the
merger of New Holt's with and into Holt's is, and after the Effective Date shall
be, "Holt's Cigar Company, Inc.,'
(ii) The name of the corporation which shall survive the
merger of New Distributors with and into Distributors is, and after the
Effective Date shall be, "Ashton Distributors, Inc."
(iii) The Board of Directors of each of Holt's and
Distributors shall consist of Levin, Michael Pitkow and Marvin B. Scharfstein,
until their respective successors are elected in accordance with the Articles of
Incorporation and By-Laws of Holt's and Distributors, respectively, and shall
have duly qualified.
(iv) The officers of each of Holt's and Distributors shall
consist of the following individuals: Levin as President, Michael Pitkow as Vice
President and Secretary, and Robert H. Levitt as Treasurer, with such
individuals holding such offices until their respective
<PAGE>
successors are elected or appointed in accordance with the By-Laws of Holt's and
Distributors, respectively, and shall have duly qualified.
(v) The Articles of Incorporation and By-Laws of each of
Holt's and Distributors from and after the Effective Date shall be their
respective Articles of Incorporation and By-Laws, as amended through the
Effective Date, until changed or amended as provided by law.
(c) Certain Effects of Merger of New Holt's and Holt's. On the
Effective Date, the separate existence of New Holt's, except as specifically
otherwise provided by law, shall cease, whereupon Holt's and New Holt's shall
become a single corporation. Thereafter, Holt's shall possess all of the rights,
privileges, powers and franchises of a public as well as a private nature, and
be subject to all of the restrictions, disabilities and duties of each of Holt's
and New Holt's. All of the property, real, personal and mixed, and the
franchises of each of Holt's and New Holt's and all debts due on whatever
account to either of them, and all other choses in action belonging to either of
them, shall be deemed to be transferred to and vested in Holt's without further
act or deed. Holt's shall thenceforth be responsible for all the liabilities and
obligations of each of such corporations. No liens upon the property of either
of such corporations shall be impaired by such merger and any claim existing or
action or proceeding pending by or against either of such corporations may be
prosecuted to judgment as if such merger had not taken place, or Holt's may be
proceeded against or substituted in place of New Holt's.
(d) Certain Effects of Merger of New Distributors and
Distributors. On the Effective Date, the separate existence of New Distributors,
except as specifically otherwise provided by law, shall cease, whereupon
Distributors and New Distributors shall become a single corporation. Thereafter,
Distributors shall possess all of the rights, privileges, powers and franchises
of a public as well as a private nature, and be subject to all of the
restrictions, disabilities and duties of each of Distributors and New
Distributors. All of the property, real, personal and mixed, and the franchises
of each of Distributors and New Distributors and all debts due on whatever
account to either of them, and all other chose s in action belonging to either
of them, shall be deemed to be transferred to and vested in Distributors without
further act or deed. Distributors shall thenceforth be responsible for all the
liabilities and obligations of each of such corporations. No liens upon the
property of either of such corporations shall be impaired by such merger and any
claim existing or action or proceeding pending by or against either of such
corporations may be prosecuted to judgment as if such merger had not taken
place, or Distributors may be proceeded against or substituted in place of New
Distributors.
3. Exchange of Options.
(a) Pursuant to certain Stock Option Agreements, each dated
January 1, 1996 (the "1996 Stock Option Agreements"), Holt's and Distributors
granted options to Carole Cohn, Michael Pitkow and Marvin B. Scharfstein (the
"Option Holders") entitling the Option Holders to purchase an aggregate of
twelve percent (12%) of the issued and outstanding shares of the capital stock
of Holt's and of Distributors and/or of any entity with or into which Holt's
and/or Distributors is merged ("Options").
<PAGE>
(b) The Option Holders and the Entities have agreed that,
simultaneously with the closing of the sale of shares of Parent Common Stock
being offered to the public under an initial public offering under a
Registration Statement under the Securities Act of 1933, as amended, as filed
with the Securities and Exchange Commission on September 24, 1997, as the same
may be amended from time to time (the "IPO"), the Options will be exchanged for
new options (the "New Options"), subject to the execution of new stock option
agreements by the Option Holders (the "New Stock Option Agreements"), on terms
substantially similar to the terms of the 1996 Stock Option Agreements, to be
issued by Parent, entitling the Option Holders to purchase an aggregate of
482,400 shares of Parent Common Stock, which shares will represent twelve
percent (12%) of the shares of Parent Common Stock issued and outstanding prior
to the closing under the IPO. The New Stock Option Agreements granting the New
Options shall provide for: (i) "demand" registration rights, and (ii)
"piggyback" registration rights, in each case under the Securities Act of 1933,
as amended (collectively, the "Registration Rights") relating to the shares of
Parent Common Stock issuable upon the exercise of the New Options; provided,
however, that the Registration Rights will not be effective until the date that
is nine months after the closing of the IPO; and, provided, further, that the
Registration Rights will expire and/or terminate on the date on which the New
Options expire and/or terminate in accordance with their terms.
4. Contribution of Shares of Parent Common Stock by Levin.
(a) If any or all of the Option Holders should elect to exercise
any or all of the New Options in accordance with the terms thereof, then Levin
shall contribute to the capital of Parent one share of Parent Common Stock then
owned by him for each share of Parent Common Stock issued to the Option Holders
upon such exercise, up to a maximum of 482,400 shares of Parent Common Stock.
(b) If and when an Option Holder elects to exercise some of his
or her New Options, Parent shall send written notice thereof to Levin and Levin
shall have a period of 30 days in which to deliver stock certificates
representing at least the number of shares of Parent Common Stock being issued
to such Option Holder at that time. Parent shall issue and cause to be delivered
with all reasonable dispatch to Levin a new stock certificate representing the
portion of the stock certificate so delivered to Parent that is not being
contributed to the capital of Parent in accordance with this Section.
5. Closing. The closing of this Plan and the transactions contemplated
hereby (the "Closing") shall take place simultaneously with the closing of the
IPO, at a time and place mutually agreed upon by all of the Entities, or at such
earlier or later time and place as may be agreed upon by all of the Entities, in
which event the Closing shall occur as such earlier or later time and place.
(The date of such Closing will be referred to herein as the "Closing Date".)
6. Effective Date. Subject to the satisfaction of the terms and
conditions of this Plan, if this Plan is approved and adopted by the Boards of
Directors and shareholders of each of the Entities, and if the Mergers and other
transactions contemplated hereby are not thereafter
<PAGE>
abandoned as permitted by the provisions of this Plan, then a duly executed
Certificate of Amendment shall be filed with the appropriate offices of the
State of Delaware with respect to the Amendment, and duly executed Articles of
Merger shall be filed with the appropriate offices of the Commonwealth of
Pennsylvania with respect to the Mergers, such filings to be made effective as
of the Closing Date or upon such earlier date as the officers of the Entities
shall determine. This Plan shall become effective, with respect to the
Amendment, on the date when such documents have been filed with the State of
Delaware, and with respect to each of the Mergers, on the date when such
documents have been filed with the Commonwealth of Pennsylvania. The date of
such effectiveness with respect to the transactions contemplated hereby is
referred to herein as the "Effective Date." At such time, Parent's Certificate
of Incorporation shall be amended as provided herein, New Holt's shall be merged
with and into Holt's, and New Distributors shall be merged with and into
Distributors, and the separate existence of New Holt's and New Distributors
shall cease.
7. Representations and Warranties.
(a) General Representations. Each Entity represents and warrants
to each other Entity as follows:
(i) Organization. Such Entity is a corporation duly
organized, validly existing and in good standing under the laws of its state of
incorporation and has all requisite corporate power and authority to own, lease
and operate its assets and properties and to carry on its business as it is
presently being conducted.
(ii) Authorization. Such Entity has all requisite corporate
power and authority to execute and deliver this Plan, to perform its obligations
hereunder and to consummate the transactions contemplated hereby. The execution
and delivery by such Entity of this Plan, the performance by such Entity of its
obligations hereunder and the consummation by such Entity of the transactions
contemplated hereby have been duly and validly authorized by all necessary
corporate action on the part of such Entity. This Plan has been duly executed
and delivered by such Entity and constitutes the legal, valid and binding
obligation of such Entity, enforceable against such Entity in accordance with
its terms.
(iii) Conflict with Documents. The execution, delivery and
performance of, and compliance with, this Plan will not (with or without the
giving of notice or lapse of time, or both) result in any violation of, or be in
conflict with, or constitute a default under, any contract, bond, note,
indenture or other agreement or any restriction on such Entity, or any judgment,
decree, order, statute, rule or regulation to which such Entity is subject or by
which it may be bound.
(iv) Consents. No consent or approval of any third party or
governmental agency or authority is required in connection with the consummation
by such Entity of the transactions contemplated by this Plan.
(v) Litigation. Such Entity is not a party to or, to such
Entity
<PAGE>
knowledge, threatened with any suit, action, administrative charge, arbitration
or other legal or governmental proceeding which, if adversely determined, would
materially and adversely affect the performance by such Entity of its
obligations under this Plan. There is no judgment, decree, award or order
outstanding against such Entity which would materially and adversely affect the
performance by such Entity of its obligations under this Plan, nor, to such
Entity knowledge, is there any basis for any such suit, action, administrative
charge, arbitration or other legal or governmental proceeding.
(vi) Full Disclosure. No representation or warranty made by
such Entity in this Plan, and no exhibit, schedule, document, statement or
certificate furnished or to be furnished to any other Entity in connection with
the transactions contemplated hereby, contains or will contain any untrue
statement of a material fact, or omits or will omit to state a material fact
required to be stated in order to make the statement, in light of the
circumstances in which it is made and when taken together with all other
disclosures made by such Entity to any other Entity, not misleading.
(b) Specific Representations.
(i) Parent's Capitalization. Parent represents and warrants
to the other Entities that, as of the date hereof, Parent's authorized capital
stock consists of fifteen thousand (15,000) shares of Class A common stock, par
value $0.01 per share, and five thousand (5,000) shares of Class B common stock,
par value $0.01 per share, of which an aggregate of eleven thousand four hundred
twenty-nine (11,429) shares are currently issued and outstanding. There are no
treasury shares held by Parent. There are no subscriptions, warrants, options or
other rights or commitments to purchase or acquire from Parent any shares of any
class or series of the capital stock of Parent. The shares of Parent Common
Stock to be issued hereunder, when issued in accordance with the terms of this
Plan, shall be duly authorized, issued and fully paid and non-assessable.
(ii) Holt's' Capitalization. Holt's further represents and
warrants to the other Entities that, as of the date hereof, Holt's authorized
capital stock consists of one hundred thousand (100,000) shares of common stock,
no par value, of which ten thousand (10,000) shares are currently issued and
outstanding. There are no treasury shares held by Holt's. Except for the
Options, there are no subscriptions, warrants, options or other rights or
commitments to purchase or acquire from Holt's any shares of any class or series
of the capital stock of Holt's. The shares of Holt's Common Stock to be issued
hereunder, when issued in accordance with the terms of this Plan, shall be duly
authorized, issued and fully paid and non-assessable.
(iii) New Holt's Capitalization. New Holt's represents and
warrants to the other Entities that, as of the date hereof, New Holt's'
authorized capital stock consists of one thousand (1,000) shares of common
stock, of which one hundred (100) shares are currently issued and outstanding,
all of which are owned by Parent. There are no treasury shares held by New
Holt's. There are no subscriptions, warrants, options or other rights or
commitments to purchase or acquire from New Holt's any shares of any class or
series of the capital stock of New Holt's.
<PAGE>
(iv) Distributors' Capitalization. Distributors represents
and warrants to the other Entities that, as of the date hereof, Distributors'
authorized capital stock consists of one thousand (1,000) shares of common
stock, no par value, of which five hundred (500) shares are currently issued and
outstanding. There are no treasury shares held by Distributors. Except for the
Options, there are no subscriptions, warrants, options or other rights or
commitments to purchase or acquire from Distributors any shares of any class or
series of the capital stock of Distributors. The shares of Distributors Common
Stock to be issued hereunder, when issued in accordance with the terms of this
Plan, shall be duly authorized, issued and fully paid and non-assessable.
(v) New Distributors' Capitalization. New Distributors
represents and warrants to the other Entities that, as of the date hereof, New
Distributors' authorized capital stock consists of one thousand (1,000) shares
of common stock, of which one hundred (100) shares are currently issued and
outstanding, all of which are owned by Parent. There are no treasury shares held
by New Distributors. There are no subscriptions, warrants, options or other
rights or commitments to purchase or acquire from New Distributors any shares of
any class or series of the capital stock of New Distributors.
8. Covenants and Agreements. The Entities covenant and agree as
follows:
(a) Interim Operation of Business. Between the date hereof and
the Effective Date, each of the Entities shall continue to operate its
respective business in the ordinary course, consistent with past practice, and
will preserve, protect and maintain its assets and properties in the same
condition and state of repair as exists on the date of this Plan, reasonable
wear and tear excepted.
(b) Conduct of Business. Between the date hereof and the
Effective Date, none of the Entities shall: (i) issue any shares of its common
stock or any other securities of any kind, whether convertible into or
exchangeable for shares of common stock or otherwise; (ii) merge or consolidate
with or into any other corporation or any other entity or entities, (iii)
reorganize, dissolve, liquidate or adopt any plan of reorganization, dissolution
or liquidation; (iv) sell, assign or otherwise dispose of all or substantially
all of its assets; (v) pay any dividends or distributions on any of the
securities of such corporation currently outstanding; (vi) amend its Articles of
Incorporation or Certificate of Incorporation, as the case may be, or its
By-Laws; or (vii) enter into any agreement or otherwise agree to undertake any
of the foregoing.
(c) S Corporation Dividend. Subject to the closing of the IPO,
Distributors will declare a dividend payable to Levin in an amount equal to
Distributors' accumulated undistributed taxable income as of such date
(estimated to be $2,700,000), as determined by Distributors' independent
accountants based on the best available information as of the date of payment.
Such dividend will be paid by Distributors to Levin at the closing of the IPO
following a contribution to Distributors by Parent of such amount.
<PAGE>
9. Deliveries at Closing. At the Closing, each Entity shall execute
and/or deliver, and/or arrange for the execution and/or delivery, to the other
Entities such instruments, documents and stock certificates as may be reasonably
necessary to effect the consummation of the transactions contemplated by this
Plan, in form and substance reasonably satisfactory to the other Entities, as
such other Entities may reasonably request.
10. Conditions to Closing. The obligation of each Entity to close on
the transactions contemplated by this Plan shall be subject to the satisfaction
and fulfillment of each of the following conditions precedent, any or all of
which may be waived in whole or in part by such Entity: (a) that the
representations and warranties of the other Entities made in or pursuant to this
Plan are true and correct at and as of the Closing Date; (b) that all
obligations and conditions required to be performed or observed by each other
Entity have been performed or observed by such other Entity on or prior to the
Closing Date; (c) that all items required to be delivered pursuant to Section 9
have been delivered; (d) that all consents and approvals required to be obtained
in connection with the performance by the other Entities to the consummation of
this Plan, if any, have been obtained; (e) that no action or proceeding by or
before any court or other governmental or regulatory agency shall have been
instituted or threatened which seeks to restrain, prohibit or invalidate the
transactions contemplated by this Plan; and (f) that all of the 1996 Stock
Option Agreements have been cancelled or terminated by mutual agreement of the
parties thereto and all of the Option Holders have executed the New Stock Option
Agreements.
11. Termination and Abandonment.
(a) Termination. Anything in this Plan to the contrary
notwithstanding, this Plan may be terminated and the Mergers described herein
may be abandoned at any time prior to the Effective Date:
(i) By the mutual consent of all of the Entities;
(ii) By any Entity if any of the conditions to such Entity's
consummation of the terms of this Plan, as set forth in Section 10, has not been
met or waived on the Closing Date; or
(iii) By any Entity if the Mergers have not become effective
on or before December 31, 1997, unless such date is extended by the mutual
consent of the Boards of Directors of all of the Entities.
(b) Election. An election by any Entity to terminate this Plan
and abandon the Mergers shall be exercised on behalf of such Entity by its Board
of Directors.
(c) Effect of Termination. In the event of the termination of
this Plan and the abandonment of the Mergers described herein in accordance with
the terms of this Section 11, this Plan shall become void in its entirety and be
of no effect whatsoever, without any liability on the part of any of the
Entities, or on any of their respective directors, officers, shareholders or
employees.
<PAGE>
12. Agreement to Consummate; Further Assurances. Subject to the terms
and conditions of this Plan, each of the Entities agrees to use commercially
reasonable efforts to do all things necessary, proper or advisable under this
Plan, applicable laws and regulations to consummate and make effective the
transactions contemplated hereby. If, at any time after the date hereof, any
further action is necessary, proper or advisable to carry out the purposes of
this Plan, then, as soon as is reasonably practicable, each Entity to this Plan
shall take, or cause its proper officers to take, such action.
13. Amendments. This Plan may be amended, altered or changed by mutual
agreement of each of the Entities at any time prior to the Effective Date,
except that any amendment made subsequent to the adoption of this Plan by the
shareholders of any Entity shall not alter or change: (a) the amount or kind of
shares, obligations, securities, cash, property and/or rights to be received in
exchange for or on conversion of all or any of the shares of any Entity; (b) any
term of the articles of incorporation of any Entity surviving the Mergers; or
(c) any of the terms and conditions of this Plan if such change would adversely
affect the holder of any shares of any Entity. A decision by any Entity to amend
this Plan shall be made on behalf of such Entity by its Board of Directors. No
such amendment, alteration or change will be effective unless it is in writing
signed by all of the Entities.
14. Miscellaneous.
(a) Reorganization. It is the intention of the Entities and of
their respective shareholders and Boards of Directors that the Mergers shall
together constitute a "reorganization" as such term is used and defined in
Section 368(a)(2)(E) of the Internal Revenue Code of 1986, as amended.
(b) Waivers. No waiver of any right under this Plan will be
deemed effective unless contained in writing signed by the Entity charged by
such waiver, and no waiver of any right arising from any breach or failure to
perform will be deemed to be a waiver of any future such right or of any right
arising under this Plan.
(c) Successors and Assigns. None of the Entities hereto may
assign or transfer any of its rights or obligations under this Plan without the
prior written consent of the other Entity hereto. Except as otherwise expressly
provided herein, this Plan shall be binding upon and inure to the benefit of the
parties hereto and their respective heirs, representatives, successors and
permitted assigns.
(d) Titles. The titles of the Sections and subsections of this
Plan are for convenience of reference only and are not to be considered in
construing the terms and provisions hereof.
(e) Provisions Separable. The provisions of this Plan are
independent of and separable from each other, and no provision shall be affected
or rendered invalid or unenforceable by virtue of the fact that for any reason
any other or others of them may be invalid or
<PAGE>
unenforceable in whole or in part
(f) No Third Party Beneficiaries. The parties specifically intend
and agree that no one other than the parties to this Plan is or shall be deemed
to be a third party beneficiary of any of the rights or obligations set forth in
this Plan.
(g) Execution; Counterparts. This Plan may be executed in any
number of counterparts, each of which shall be deemed to be an original as
against any Entity whose signature appears thereon, and all of which shall
together constitute one and the same instrument. This Plan shall become binding
when one or more counterparts hereof, individually or taken together, shall bear
the signatures of all of the parties reflected hereon as the signatories hereto.
(h) Exhibits. All exhibits and schedules to this Agreement, if
any, are incorporated by reference into, and made a part of, this Agreement.
(i) Entire Agreement. This Plan, together with the other
documents executed in connection herewith, shall constitute the full and entire
understanding and agreement between the parties with regard to the subject
matter hereof and thereof, and supersede all prior agreements, understandings,
inducements or conditions, express or implied, oral or written, except as
contained herein or therein The express terms hereof shall control and supersede
any course of performance and/or usage of trade inconsistent with any of the
terms hereof.
IN WITNESS WHEREOF, the parties have caused this Plan of
Reorganization and Agreement and Plan of Merger to be executed by their duly
authorized officers on the day-and year first above written.
HOLT'S CIGAR HOLDINGS, INC.
By:
----------------------------------
Title:
-------------------------------
HOLT'S CIGAR COMPANY. INC.
By:
----------------------------------
Title:
-------------------------------
<PAGE>
NEW HOLT'S CIGAR COMPANY. INC.
By:
----------------------------------
Title:
-------------------------------
ASHTON DISTRIBUTORS, INC.
By:
----------------------------------
Title:
-------------------------------
NEW ASHTON DISTRIBUTORS, INC.
By:
----------------------------------
Title:
-------------------------------
JOINDER
The undersigned, intending to be legally bound hereby, for good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, does hereby agree, on behalf of himself and on behalf of his
heirs, executors, administrators, executors, successors and assigns, to be bound
by the terms of Section 4 of this Plan of Reorganization and Agreement and Plan
of Merger.
--------------------------------------
Robert G. Levin
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
HOLT'S CIGAR HOLDINGS, INC.
HOLT'S CIGAR HOLDINGS, INC. (the "Corporation"), a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"General Corporation Law") and originally incorporated in Delaware on June 18,
1993 under the Name of Ashton Holdings, Inc., does hereby certify that this
Restated Certificate of Incorporation amends and restates the Certificate of
Incorporation and was duly adopted pursuant to Section 245 of the General
Corporation Law.
The amended and restated provisions of the Certificate of Incorporation are
as follows:
I. Name. The name of the Corporation is Holt's Cigar Holdings, Inc.
II. Registered Office and Agent. The address of the registered office in the
State of Delaware is 103 Springer Building, 3411 Silverside Road, Wilmington, in
the County of New Castle, Delaware 19801. The name of its Registered Agent at
such address is Organization Services, Inc.
III. Purposes. The purposes for which the Corporation was formed are to engage
in any lawful act or activity for which corporations may be organized under the
Delaware General Corporation Law.
IV. Capital Stock. (A) The total number of shares of all classes of stock which
the Corporation shall have authority to issue is 26,000,000 shares. The shares
shall be divided into two classes, designated as follows:
(i) 25,000,000 shares of Common stock, $.001 par value.
(ii) 1,000,000 shares of Preferred Stock, no par value.
(B)Preferred stock may be issued from time to time in one or more series. The
Board of Directors is expressly authorized, in the resolution or resolutions
providing for the issuance of Preferred Stock in series, and by filing a
certificate pursuant to the law of the State of Delaware, to establish from time
to time the number of shares to be included in each such series, and to fix by
resolution the powers, designations, preferences and relative, participating,
optional or other special rights (if any), and the qualifications, limitations
or restrictions (if any), of the shares of each such series. The authority of
the Board of Directors shall include, but not be limited to, determination of
the following:
(i) The voting rights and powers (if any) of the Preferred Stock and each
series thereof;
(ii) The rates and time at which, and the terms and conditions on which,
dividends (if any) on the Preferred Stock, and each series thereof, will be
paid and any dividend preferences or rights of cumulation;
<PAGE>
(iii) The rights (if any) of the holders of the Preferred Stock, and each
series thereof, to convert the same into, or exchange the same for, shares
of other classes (or series of classes) of capital stock of the Corporation
and the terms and conditions for such conversion or exchange, including
provisions for adjustment of conversion or exchange prices or rates in such
events as the Board of Directors shall determine;
(iv) The redemption rights (if any) of the Corporation and of the holders
of the Preferred Stock, and each series thereof, and the times at which,
and the terms and conditions on which, the Preferred Stock, and each series
thereof, may be redeemed; and
(v) The rights and preferences (if any) of the holders of the Preferred
Stock, and each series thereof, upon the voluntary or involuntary
liquidation, dissolution, or winding up of the Corporation.
(C) Cumulative voting of shares of any class or series of capital stock having
voting rights is prohibited unless specifically provided for in the resolution
of the Board of Directors with respect to a series of Preferred Stock.
V. Board of Directors. The Board of Directors shall consist of not less than one
(1) nor more than fifteen (15) persons, the exact number to be fixed and
determined from time to time by resolution of the Board of Directors.
VI. Classified Board. Immediately after the filing of this Restated Certificate
of Incorporation (the "Filing Date"), the Board of Directors shall be divided
into three (3) classes, as nearly equal in number as reasonably possible,
designated as Class I, Class II, and Class III. Class I Directors shall serve
until the first annual meeting of stockholders to be held after the Filing Date.
At the first annual meeting of stockholders to be held after the Filing Date,
Class I Directors shall be elected for a term of three (3) years and, after
expiration of such term, shall thereafter be elected every three (3) years for
three (3) year terms. Class II Directors shall serve until the second annual
meeting of stockholders to be held after the Filing Date. At the second annual
meeting of stockholders to be held after the Filing Date, Class II Directors
shall be elected for a term of three (3) years and, after expiration of such
term, shall thereafter be elected every three (3) years for three (3) year
terms. Class III Directors shall serve until the third annual meeting of
stockholders to be held after the Filing Date. At the third annual meeting of
stockholders to be held after the Filing Date, Class III Directors shall be
elected for a term of three (3) years and, after expiration of such term, shall
thereafter be elected every three (3) years for three (3) year terms. Each
Director shall serve until his or her successor shall have been elected and
qualified, even though his or her term of office as herein provided has
otherwise expired, except in the event of his or her earlier death, resignation,
removal or disqualification. This Paragraph VI or any portion thereof, may be
changed by a By-Law amendment which is adopted by all of the then members of the
Board of Directors.
Notwithstanding anything contained in this Restated Certificate of Incorporation
to the contrary, the affirmative vote of the holders of at least sixty-six and
two thirds percent (66 2/3%) of the
-2-
<PAGE>
combined voting power of all shares of the Corporation entitled to vote
generally in the election of directors, voting together as a single class, shall
be required to alter, change, amend, repeal or adopt any provision inconsistent
with this Paragraph VI.
VII. Limited Liability. To the fullest extent permitted by the laws of the State
of Delaware as presently in effect or as hereafter amended from time to time, a
Director shall have no personal liability to the Corporation or stockholders for
monetary damages for breach of fiduciary duty as a Director. Any amendment to or
repeal of this Article Seven shall not adversely affect any right or protection
of a Director of this Corporation for or with respect to any acts or omissions
of such Director occurring prior to such amendment or repeal.
VIII. Indemnification. A Director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for breach of
fiduciary duty as a Director, except (i) for liability for any breach of the
Director's duty of loyalty to the Corporation or its stockholders, (ii) for acts
or omissions not in good faith or which involve intentional or a knowing
violation of the law, (iii) under Section 174 of the General Corporation Law of
Delaware, or (iv) for any transaction from which the Director derived any
improper personal benefit. If the General Corporation Law of Delaware is
hereafter amended to authorize, with the approval of a corporation's
stockholders, further reduction in the liability of a corporation's directors
for breach of fiduciary duty, then a Director of the Corporation shall not be
liable for any such breach to the fullest extent permitted by the General
Corporation Law of Delaware as so amended. Any repeal or modification of the
foregoing provisions of this Paragraph VIII by the Stockholders of the
Corporation shall not adversely affect any right or protection of a Director of
the Corporation existing at the time of such repeal or modification.
IX. By-Laws. The Board of Directors is authorized and empowered to adopt, amend
and repeal the By-Laws of the Corporation.
X. Actions by Consent. Section 228 of the Delaware Corporation Law shall not be
applicable unless the written consent is signed by the holders of at least
sixty-six and 2/3 percent (66 2/3%) of all shares of the Corporation entitled to
vote on the action and unless the resolution or other matter contained in the
written consent or consents from Stockholders has been previously approved by
all of the then members of the Board of Directors.
THE UNDERSIGNED, being the Secretary of this Corporation, does hereby declare
and certify that it this Restated Certificate is his act and deed and that the
facts stated herein are true and accordingly does hereunto set his hand this
_____ day of October, 1997.
------------------------
Michael Pitkow, Secretary
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EXHIBIT 3.2
[As adopted upon the effectiveness of
the Plan of Reorganization and
Agreement and Plan of Merger]
HOLT'S CIGAR HOLDINGS, INC.
BY-LAWS
ARTICLE I
OFFICES
Section 1. Registered Office. The registered office of the Corporation
shall be as stated in the Certificate of Incorporation or at such other location
to which the registered office shall be changed by action of the Board of
Directors.
The Corporation may also have offices at such other places both within
and without the State of Delaware as the Board of Directors may from time to
time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. Place of Meetings. All meetings of the Stockholders for the
election of Directors shall be held at such place within or without the State of
Delaware, as may be fixed from time to time by the Board of Directors, or at
such other place either within or without the State of Delaware as shall be
designated from time to time by the Board of Directors and stated in the notice
of the meeting or, in the absence of such designation, at the registered office
of the Corporation in the State of Delaware. Meetings of Stockholders for any
purpose may be held at such time and place, within or without the State of
Delaware, as shall be stated in the notice of the meeting or in a duly executed
waiver of notice thereof.
Section 2. Annual Meetings. Annual meetings of the Stockholders of the
Corporation shall be held on such date and at such time as shall be designated
from time to time by the Board
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of Directors and stated in the notice of the meeting, which date shall be within
thirteen months subsequent to the last annual meeting of Stockholders. At the
annual meeting of the Stockholders, only such business shall be conducted as
shall have been properly brought before the annual meeting.
Section 3. Notice of Annual Meeting. Written notice of the annual
meeting stating the place, date and hour of the meeting shall be given to each
Stockholder entitled to vote at such meeting not less than ten nor more than
sixty days before the date of the meeting, by or at the direction of the
President or Secretary of the Corporation.
Section 4. Business to be Conducted.
a) At an annual meeting of Stockholders, only such
business shall be conducted, and only such proposals
shall be acted upon, as shall have been brought
before the annual meeting (i) by or at the direction
of the Board of Directors or (ii) by any Stockholder
of the Corporation who is a Stockholder of record at
the time of the giving of such Stockholder's notice
provided for in this Section who shall be entitled to
vote at such meeting and who complies with the
requirements of this Section and as shall otherwise
be proper subjects for Stockholder action and shall
be properly introduced at the meeting. For a proposal
to be properly brought before an annual meeting by a
Stockholder, in addition to any other applicable
requirements, the Stockholder must have given timely
advance notice thereof in writing to the Secretary of
the Corporation. To be timely, a Stockholder's notice
must be delivered to, or mailed and received at, the
principal executive offices of the Corporation not
later than the 90th day
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prior to the first anniversary of the preceding
year's annual meeting; PROVIDED, HOWEVER, that with
respect to the annual meeting of Stockholders to be
held in 1998 or in the event that the date of the
annual meeting is more than 30 days before or more
than 60 days after such anniversary date, notice by
the Stockholder to be timely must be so delivered not
later than the close of business on the later of the
90th day prior to such annual meeting or the 10th day
following the day on which public announcement of the
date of such meeting is first made by the
Corporation. Any such Stockholder's notice to the
Secretary of the Corporation shall set forth as to
each matter the Stockholder proposes to bring before
the annual meeting (i) a description of the proposal
desired to be brought before the annual meeting and
the reasons for conducting such business at the
annual meeting, (ii) the name and address, as they
appear on the Corporation's books, of the Stockholder
proposing such business and any other Stockholders
known by such Stockholder to be supporting such
proposal, (iii) the class and number of shares of the
Corporation's stock which are beneficially owned by
the Stockholder on the date of such notice, (iv) any
financial interest of the Stockholder in such
proposal and (v) a representation that the
Stockholder intends to appear in person or by proxy
at the meeting to bring the proposed business before
the annual meeting. The presiding Officer of the
annual meeting shall determine whether the
requirements of this paragraph (a) have been met with
respect to any Stockholder proposal. If the presiding
Officer determines that a
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Stockholder proposal was not made in accordance with
the terms of this paragraph (a), he shall so declare
at the meeting and any such proposal shall not be
acted upon at the meeting.
b) Notwithstanding the foregoing provisions of this
Section, a Stockholder shall also comply with all
applicable requirements of the Securities Exchange
Act of 1934 as may be from time to time amended (the
"Exchange Act") and the rules and regulations
thereunder with respect to the matters set forth in
this Section.
Section 5. Stockholder List. The Officer who has charge of the stock
ledger of the Corporation shall prepare and make, at least ten days before every
meeting of Stockholders, a complete list of the Stockholders entitled to vote at
the meeting, arranged in alphabetical order, and showing the address of each
Stockholder and the number of shares registered in the name of each Stockholder.
Such list shall be open to the examination of any Stockholder, for any purpose
germane to the meeting, during ordinary business hours, for a period of at least
ten days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any Stockholder who is
present.
Section 6. Special Meetings. Special meetings of the Stockholders, for
any purpose or purposes, unless otherwise prescribed by statute or by the
Certificate of Incorporation, may be called at any time by the President, or by
the request in writing of a majority of the Board of Directors.
Section 7. Notice of Special Meetings. Written notice of a special
meeting, stating the place, date and hour of the meeting and the purpose or
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purposes for which the meeting is called, shall be given not less than ten nor
more than sixty days before the date of the meeting to each Stockholder entitled
to vote at such meeting.
Section 8. Purpose of Special Meeting. Business transacted at any
special meeting of Stockholders shall be limited to the purposes stated in the
notice.
Section 9. Record Date. For purposes of determining Stockholders
entitled to notice of or to vote at any meeting of Stockholders or any
adjournment thereof, or entitled to receive a distribution by the Corporation
(other than a distribution involving a purchase or redemption by the Corporation
of any of its own shares) or a share dividend, or in order to make a
determination of Stockholders for any other proper purpose, the Board of
Directors may fix in advance a date as the record date for any such
determination of Stockholders, such date in any case to be not more than sixty
(60) days and, in the case of a meeting of Stockholders, not less than ten (10)
days, prior to the date on which the particular action requiring such
determination of Stockholders is to be taken. The Board of Directors shall not
close the books of the Corporation against transfer of shares during the whole
or any part of such period. If the Board of Directors does not fix a record date
for any meeting of the Stockholders, the record date for determining
Stockholders entitled to notice of or to vote at such meeting, it shall be the
close of business on the day preceding the day on which notice is given, or, if
notice is waived, at the close of business on the day preceding the day on which
the meeting is held.
Section 10. Registered Stockholders. The Corporation shall be entitled
to recognize the exclusive right of a person registered on its books as the
owner of shares to receive dividends, and to vote as such owner, and to hold
liable for calls and assessments a person registered on its books as the owner
of shares, and shall not be bound to recognize any equitable or other claim to
or interest in such share or shares on the part of any other person, whether or
not it shall have express or other notice thereof, except as otherwise provided
by the laws of Delaware.
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Section 11. Quorum. The holders of a majority of the stock issued and
outstanding and entitled to vote thereat, present in person or represented by
proxy, shall constitute a quorum at all meetings of the Stockholders for the
transaction of business except as otherwise provided by statute or by the
Certificate of Incorporation. If, however, such quorum shall not be present or
represented at any meeting of the Stockholders, the Stockholders entitled to
vote thereat, present in person or represented by proxy, shall have the power to
adjourn the meeting from time to time, without notice other than announcement at
the meeting, until a quorum shall be present or represented. At such adjourned
meeting at which a quorum shall be present or represented, any business may be
transacted which might have been transacted at the meeting as originally
notified. If the adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each Stockholder of record entitled to
vote at the meeting.
Section 12. Voting Requirements. When a quorum is present at any
meeting, the vote of the holders of a majority of the stock having voting power,
present in person or represented by proxy, shall decide any question brought
before such meeting, unless the question is one upon which by express provision
of these By-Laws, the statutes or of the Certificate of Incorporation a
different vote is required, in which case such express provision shall govern
and control the decision of such question. Directors shall be elected by a
plurality of the votes of the shares present in person or represented by proxy
and entitled to vote on the election of Directors.
Section 13. Proxy. Unless otherwise provided in the Certificate of
Incorporation, each Stockholder shall at every meeting of the Stockholders be
entitled to one vote, in person or by proxy, for each share of the capital stock
having voting power held by such Stockholder, but no proxy shall be voted or
acted upon after three years from its date, unless the proxy provides for a
longer period.
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Section 14. Written Consent. Unless otherwise provided in the
Certificate of Incorporation, any action required to be taken at any annual or
special meeting of Stockholders of the Corporation, or any action which may be
taken at any annual or special meeting of such Stockholders, may be taken
without a meeting, without prior notice and without a vote, if a consent in
writing, setting forth the action so taken, shall be signed by the holders of at
least sixty-six and two-thirds percent (66 2/3%) of all shares of the
Corporation entitled to vote on the action and if such action has been
previously approved by all of the then members of the Board of Directors. Prompt
notice of the taking of the corporate action without a meeting by less than
unanimous written consent shall be given to those Stockholders who have not
consented in writing.
ARTICLE III
DIRECTORS
Section 1. Number of Directors. The number of Directors which shall
constitute the whole board shall consist of not less than one (1) nor more than
fifteen (15) members, the exact number to be fixed and determined from time to
time by resolution of the Board of Directors. The Directors shall be classified
and shall be elected in accordance with Section VI of the Certificate of
Incorporation and each Director elected shall hold office until his or her
successor is elected and qualified. Directors need not be Stockholders.
Section 2. Vacancies. Vacancies and newly created Directorships
resulting from any increase in the authorized number of Directors may be filled
by a majority of the Directors then in office, though less than a quorum, or by
a sole remaining Director, and the Directors so chosen shall hold office until
the next annual election of that class of Directors for which the Directors are
chosen and until their successors are duly elected and qualified, unless sooner
displaced. If there are no Directors in office, then an election of Directors
may be held in the manner provided by statute.
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Section 3. Nomination of Directors. Subject to such rights of the
holders of one or more outstanding series of Preferred Stock of the Corporation
to elect one or more Directors in case of arrearages in the payment of dividends
or other defaults as shall be prescribed in the Certificate of Incorporation or
in the resolutions of the Board of Directors providing for the establishment of
any such series, only persons who are nominated in accordance with the
procedures set forth in this Section shall be eligible for election as, and to
serve as, Directors. Nominations of persons for election to the Board of
Directors may be made at a meeting of the Stockholders at which Directors are to
be elected (i) by or at the direction of the Board of Directors or (ii) by any
Stockholder of the Corporation who is a Stockholder of record at the time of the
giving of such Stockholder's notice provided for in this Section, who shall be
entitled to vote at such meeting in the election of Directors and who complies
with the requirements of this Section. Such nominations, other than those made
by or at the direction of the Board of Directors, shall be preceded by timely
advance notice in writing to the Secretary of the Corporation. To be timely, a
Stockholder's notice shall be delivered to, or mailed and received at, the
principal executive offices of the Corporation (i) with respect to an election
to be held at the annual meeting of the Stockholders of the Corporation, not
later than the close of business on the 90th day prior to the first anniversary
of the preceding year's annual meeting; PROVIDED, HOWEVER, that with respect to
the annual meeting of Stockholders to be held in 1998 or in the event that the
date of the annual meeting is more than 30 days before or more than 60 days
after such anniversary date, notice by the Stockholder to be timely must be so
delivered not later than the close of business on the later of the 90th day
prior to such annual meeting or the 10th day following the day on which public
announcement of the date of such meeting is first made by the Corporation; and
(ii) with respect to an election to be held at a special meeting of Stockholders
of the Corporation for the election of Directors not later than the close of
business on the tenth day following the day on which notice of the date of the
special meeting was mailed to Stockholders of the Corporation as provided in
Section 7 hereof or public disclosure of the date of the special meeting was
made, whichever first occurs. Any such Stockholder's notice to the Secretary of
the Corporation shall set forth (a) as to each person whom the Stockholder
proposes to nominate for election or re-election as a Director, (i) the name,
age, business address and residence address of such person, (ii) the principal
occupation or employment of such person, (iii) the number of shares of each
class of capital stock of the Corporation beneficially owned by such person,
(iv) the written consent of such person to having such person's name placed in
nomination at the meeting and to serve as a Director if elected and (v) any
other information relating to such person that is required to be disclosed in
solicitations of proxies for election of Directors, or is otherwise required,
pursuant to Regulation 14A under the Exchange Act, and (b) as to the Stockholder
giving the notice, (i) the name and address, as they appear on the Corporation's
books, of such Stockholder and (ii) the number of shares of each class of voting
stock of the Corporation which are then beneficially owned by such Stockholder.
The presiding Officer of the meeting of Stockholders shall determine whether the
requirements of this Section have been met with respect to any nomination or
intended nomination. If the presiding Officer determines that any nomination was
not made in accordance with the requirements of this Section, he shall so
declare at the meeting and the defective nomination shall be disregarded.
Notwithstanding the foregoing provisions of this Section, a Stockholder shall
also comply with all applicable requirements of the Exchange Act and the rules
and regulations thereunder with respect to the matters set forth in this
Section.
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Section 4. Management by Directors. The business of the Corporation
shall be managed by its Board of Directors, which may exercise all such powers
of the Corporation and do all such lawful acts and things as are not by statute
or by the Certificate of Incorporation or by these by-laws directed or required
to be exercised or done by the Stockholders.
Section 5. Removal. Directors may be removed only for cause by a
majority vote of Stockholders then entitled to vote in an election of Directors.
MEETINGS OF THE BOARD OF DIRECTORS
Section 6. Meetings. The Board of Directors of the Corporation shall
hold quarterly meetings either within or without the State of Delaware. In the
absence of specific designation, the meetings shall be held at the principal
office of the Corporation.
Section 7. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and at such place as shall from time to
time be determined by resolution adopted by the Board of Directors.
Section 8. Special Meetings. Special meetings of the Board may be
called by the President or Secretary on one days' notice to each Director,
either personally or by mail or by telegram; special meetings shall be called by
the President or Secretary or by resolution adopted by the Board of Directors,
in each case, at such time and at such place as may be stated in the notice of
the meeting.
Section 9. Quorum. At all meetings of the board, a majority of the
Directors shall constitute a quorum, except when there is a board of one (1)
Director; then one Director shall constitute a quorum for the transaction of
business. The act of a majority of the Directors present at any meeting at which
there is a quorum shall be the act of the Board of Directors, except as may be
otherwise specifically provided by statute or by the Certificate of
Incorporation. If a quorum shall not be present at any meeting of the Board of
Directors, the Directors present thereat may adjourn the meeting from time to
time, without notice other than announcement at the meeting, until a quorum
shall be present.
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Section 10. Consent in Writing. Unless otherwise restricted by the
Certificate of Incorporation or these by-laws, any action required or permitted
to be taken at any meeting of the Board of Directors or of any committee thereof
may be taken without a meeting, if all members of the board or committee, as the
case may be, consent thereto in writing, and the writing or writings are filed
with the minutes of proceedings of the board or committee.
Section 11. Telephone. Unless otherwise restricted by the Certificate
of Incorporation or these by-laws, members of the Board of Directors, or any
committee designated by the Board of Directors, may participate in a meeting of
the Board of Directors, or any committee, by means of a conference telephone or
similar communications equipment by means of which all persons participating in
the meeting can hear each other, and such participation in a meeting shall
constitute presence in person at the meeting.
COMMITTEES OF DIRECTORS
Section 12. Committees. The Board of Directors may, by resolution
passed by a majority of the whole board, designate one or more committees, each
committee to consist of one or more of the Directors of the Corporation. The
board may designate one or more Directors as alternate members of any committee,
who may replace any absent or disqualified member at any meeting of the
committee. In the absence or disqualification of a member of a committee, the
member or members thereof present at any meeting and not disqualified from
voting, whether or not he, she or they constitute a quorum, may unanimously
appoint another member of the Board of Directors to act at the meeting in the
place of any such absent or disqualified member. Any such committee, to the
extent provided in the resolution of the Board of Directors, shall have and may
exercise all the powers and authority of the Board of Directors in the
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management of the business and affairs of the Corporation, and may authorize the
seal of the Corporation to be affixed to all papers which may require it; but no
such committee shall have the power or authority in reference to amending the
Certificate of Incorporation, except that a committee may, to the extent
authorized in the resolution or resolutions providing for the issuance of shares
of stock adopted by the Board of Directors, fix any of the preferences or rights
of such shares relating to dividends, redemption, dissolution, any distribution
of assets of the Corporation or the conversion into, or the exchange of such
shares for, shares of any other class or classes of stock of the Corporation,
adopting an agreement of merger or consolidation, recommending to the
Stockholders the sale, lease or exchange of all or substantially all of the
Corporation's property and assets, recommending to the Stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending the
by-laws of the Corporation; and, unless the resolution, by-laws or the
Certificate of Incorporation expressly so provide, no such committee shall have
the power or authority to declare a dividend, to authorize the issuance of stock
or to adopt a Certificate of Ownership and Merger pursuant to Section 253 of the
Delaware Corporation Law respecting mergers between a parent and a subsidiary at
least 90% of the outstanding stock of each class of which is owned by the
parent. Such committee or committees shall have such name or names as may be
determined from time to time by resolution adopted by the Board of Directors.
Section 13. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors when required.
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COMPENSATION OF DIRECTORS
Section 14. Compensation. Unless otherwise restricted by the
Certificate of Incorporation or these by-laws, the Board of Directors shall have
the authority to fix the compensation of Directors. The Directors may be paid
their expenses, if any, of attendance at each meeting of the Board of Directors
and may be paid a fixed sum for attendance at each meeting of the Board of
Directors or a stated salary as Directors. No such payment shall preclude any
Director from serving the Corporation in any other capacity and receiving
compensation therefor. Members of special or standing committees may be allowed
like compensation for attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Manner of Notice. Whenever, under the provisions of the
statutes or of the Certificate of Incorporation or of these By-Laws, notice is
required to be given to any Director or Stockholder, it shall not be construed
to mean personal notice, but such notice may be given in writing, by mail,
addressed to such Director or Stockholder, at his or her address as it appears
on the records of the Corporation, with postage thereon prepaid, and such notice
shall be deemed to be given at the time when the same shall be deposited in the
United States mail. Notice to the Directors may also be given by telegram.
Section 2. Waiver of Notice. Whenever any notice is required to be
given under the provisions of the statutes or of the Certificate of
Incorporation or of these By-Laws, a waiver thereof in writing, signed by the
person or persons entitled to said notice, whether before or after the time
stated therein, shall be deemed equivalent thereto.
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ARTICLE V
OFFICERS
Section 1. Election of Officers. The Officers of the Corporation shall
be chosen by the Board of Directors and shall be a President, a Secretary and a
Treasurer. The Board of Directors may also choose one or more Vice-Presidents
and one or more Assistant Secretaries and Assistant Treasurers. Any number of
offices may be held by the same person, unless the Certificate of Incorporation
or these by-laws otherwise provide. The Board of Directors at its first meeting
after each annual meeting of Stockholders shall choose a President, a Secretary
and a Treasurer. The Board of Directors may appoint such other Officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 2. Salaries. The salaries of all Officers and agents of the
Corporation shall be fixed by the Board of Directors.
Section 3. Removal and Vacancy. The Officers of the Corporation shall
hold office until their successors are chosen and qualify. Any Officer elected
or appointed by the Board of Directors may be removed at any time by the
affirmative vote of a majority of the Board of Directors. Any vacancy occurring
in any office of the Corporation shall be filled by the Board of Directors.
THE PRESIDENT
Section 4. Duties of President. The President shall be the Chief
Executive Officer of the Corporation, shall preside at all meetings of the
Stockholders and the Board of Directors, shall have general and active
management of the business of the Corporation and shall see that all orders and
resolutions of the Board of Directors are carried into effect.
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Section 5. Corporate Seal. The President shall execute bonds, mortgages
and other contracts requiring a seal, under the seal of the Corporation, except
where required or permitted by law to be otherwise signed and executed and
except where the signing and execution thereof shall be expressly delegated by
the Board of Directors to some other Officer or agent of the Corporation.
THE VICE-PRESIDENT
Section 6. Vice President. In the absence of the President or in the
event of his or her inability or refusal to act, the Vice-President (or in the
event there be more than one Vice-President, the Vice-Presidents in the order
designated by the Directors, or in the absence of any designation, then in the
order of their election) shall perform the duties of the President, and when so
acting, shall have all the powers of and be subject to all the restrictions upon
the President. The Vice-Presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
THE SECRETARY AND ASSISTANT SECRETARY
Section 7. Secretary. The Secretary shall attend all meetings of the
Board of Directors and all meetings of the Stockholders and record all the
proceedings of the meetings of the Corporation and of the Board of Directors in
a book to be kept for that purpose and shall perform like duties for the
standing committees when required. He or she shall give, or cause to be given,
notice of all meetings of the Stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the Board
of Directors or President, under whose supervision he or she shall be. He or she
shall have custody of the corporate seal of the Corporation and he or she, or an
Assistant Secretary, shall have authority to affix the same to any instrument
requiring it and when so affixed, it may be attested by his or her signature or
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by the signature of such Assistant Secretary. The Board of Directors may give
general authority to any other Officer to affix the seal of the Corporation and
to attest the affixing by his or her signature.
Section 8. Assistant Secretary. The Assistant Secretary, or if there be
more than one, the Assistant Secretaries in the order determined by the Board of
Directors (or if there be no such determination, then in the order of their
election) shall, in the absence of the Secretary or in the event of his or her
inability or refusal to act, perform the duties and exercise the powers of the
Secretary and perform such other duties and have such other powers as the Board
of Directors may from time to time prescribe.
THE TREASURER AND ASSISTANT TREASURERS
Section 9. Treasurer. The Treasurer shall have the custody of the
corporate funds and securities and shall keep full and accurate accounts of
receipts and disbursements in books belonging to the Corporation and shall
deposit all moneys and other valuable effects in the name and to the credit of
the Corporation in such depositories as may be designated by the Board of
Directors.
Section 10. Disbursement of Funds. He or she shall disburse the funds
of the Corporation as may be ordered by the Board of Directors, taking proper
vouchers for such disbursements, and shall render to the President and the Board
of Directors, at its regular meetings, or when the Board of Directors so
requires, an account of all his or her transactions as Treasurer and of the
financial condition of the Corporation.
Section 11. Bond. If required by the Board of Directors, he or she
shall give the Corporation a bond (which shall be renewed every six years) in
such sum and with such surety or sureties as shall be satisfactory to the Board
of Directors for the faithful performance of the duties of his or her office and
for the restoration to the Corporation, in case of his or her death,
resignation, retirement or removal from office, of all books, papers, vouchers,
money and other property of whatever kind in his or her possession or under his
or her control belonging to the Corporation.
Section 12. Assistant Treasurer. The Assistant Treasurer, or if there
shall be more than one, the Assistant Treasurers in the order determined by the
Board of Directors (or if there be no such determination, then in the order of
their election), shall, in the absence of the Treasurer or in the event of his
or her inability or refusal to act, perform the duties and exercise the powers
of the Treasurer and shall perform such other duties and have such other powers
as the Board of Directors may from time to time prescribe.
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ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Certificates. The shares of the Corporation shall be
represented by certificates, provided that the Board of Directors may provide by
resolution or resolutions that some or all of any or all classes or series of
its stock shall be uncertificated shares. Any such resolution shall not apply to
shares represented by a certificate until such certificate is surrendered to the
Corporation. Every holder of stock in the Corporation represented by certifi-
cates, shall be entitled to have a certificate, signed by, or in the name of the
Corporation by, the Chairman or Vice-Chairman of the Board of Directors, or the
President or a Vice-President and the Treasurer or an Assistant Treasurer, or
the Secretary or an Assistant Secretary of the Corporation, representing the
number of shares registered to him, her or it in certificate form.
Section 2. Signatures. Any of or all the signatures on the certificate
may be facsimile. In case any Officer, transfer agent or registrar who has
signed or whose facsimile signature has been placed upon a certificate shall
have ceased to be such Officer, transfer agent or registrar before such
certificate is issued, it may be issued by the Corporation with the same effect
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as if he or she were such Officer, transfer agent or registrar at the date of
issue.
Section 3. Lost Certificates. The Corporation may issue a new
certificate of stock or uncertificated shares in place of any certificate or
certificates theretofore issued by the Corporation alleged to have been lost,
stolen or destroyed, upon the making of an affidavit of that fact by the person
claiming the certificate of stock to be lost, stolen or destroyed. When
authorizing such issue of a new certificate or certificates, the Board of
Directors may, in its discretion and as a condition precedent to the issuance
thereof, require the owner of such lost, stolen or destroyed certificate or
certificates, or his, her or its legal representative, to advertise the same in
such manner as it shall require and/or to give the Corporation a bond in such
sum as it may direct as indemnity against any claim that may be made against the
Corporation on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate or uncertificated shares.
Section 4. Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignation or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
ARTICLE VII
INDEMNIFICATION AND INSURANCE
Section 1. Right to Indemnification. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
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or proceeding (hereinafter a "proceeding"), whether civil, criminal,
administrative or investigative, including, without limitation, an action or
suit by or in the right of the Corporation, by reason of the fact that he or
she, or a person of whom he or she is the legal representative, is or was a
Director or Officer of the Corporation or is or was serving at the request of
the Corporation as a Director or Officer of another Corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans, whether the basis of such proceeding is
alleged action in an official capacity as Director or Officer or in any other
capacity, shall be indemnified and held harmless by the Corporation to the
fullest extent and manner authorized or permitted by the Delaware General
Corporation Law, as the same exists or may hereafter be amended (but, in the
case of any such amendment, only to the extent that such amendment permits the
Corporation to provide broader indemnification rights than said law permitted
the Corporation to provide prior to such amendment), against all expense,
liability and loss (including attorneys' fees, judgments, penalties, fines,
ERISA excise taxes or penalties and amounts paid or to be paid in settlement)
reasonably incurred or suffered by such person in connection therewith and such
indemnification shall continue as to a person who has ceased to be a Director or
Officer and shall inure to the benefit of his or her heirs, executors and
administrators; provided, however, that, except as provided in Section 5 hereof,
the Corporation shall indemnify any such person seeking indemnification in
connection with a proceeding (or part thereof) initiated by such person only if
such proceeding (or part thereof) was authorized by the Board of Directors of
the Corporation. The right to indemnification conferred in this Article shall be
a contract right and each person to whom this right to indemnification applies
shall be a third party beneficiary of such right and shall be entitled to
enforce against the Corporation all indemnification and other rights granted to
such person by this Article. Such right shall include the right to be paid by
the Corporation the expenses incurred in any such proceeding in advance of its
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final disposition; provided, however, that, if the Delaware General Corporation
Law requires, the payment of such expenses incurred by a Director or Officer in
advance of the final disposition of a proceeding shall be made only upon
delivery to the Corporation of an undertaking, by or on behalf of such Director
or Officer, to repay all amounts so advanced if it shall ultimately be
determined that such Director or Officer is not entitled to be indemnified under
this Article or otherwise. The Corporation may, by action of its Board of
Directors, provide indemnification to employees, agents or fiduciaries of the
Corporation or to any person who is or was serving at the request of the
Corporation as an employee, agent or fiduciary of another Corporation, or of a
partnership, joint venture, trust or other enterprise, including service with
respect to any employee benefit plan, with the same or lesser scope and effect
as set forth herein and in the other sections of this Article. If and to the
extent that the Delaware General Corporation Law requires that indemnification
be provided in a given instance only if the person acted in good faith and in a
manner he or she reasonably believed to be in or not opposed to the best
interests of the Corporation, and, with respect to any criminal proceeding, had
no reasonable cause to believe his or her conduct was unlawful, then termination
of any proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not of itself create a presumption that
the person did not act in good faith and in a manner which he or she reasonably
believed to be in or not opposed to the best interests of the Corporation, and,
with respect to any criminal proceeding, that he or she had reasonable cause to
believe that his or her conduct was unlawful. If the Delaware General
Corporation Law so requires, then any person who is otherwise entitled to
indemnification hereunder with respect to any threatened, pending or completed
proceeding by or in the right of the Corporation shall be indemnified in respect
of any claim, issue or matter as to which such person shall have been adjudged
to be liable to the Corporation only if and only to the extent that the Court of
Chancery or the court in which such proceeding was brought shall determine upon
application that, despite the adjudication of liability but in view of all the
circumstances of the case, such person is fairly and reasonably entitled to
indemnity for such expenses which the Court of Chancery or such other court
shall deem proper.
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Section 2. Denial of Right to Indemnification. Indemnification under
Section 1 above shall be made by the Corporation unless a determination is
reasonably and promptly made that indemnification of a Director or Officer is
not proper in the circumstances because of grounds for denying indemnification
under this Article or under applicable law. Such determination may be made only
(i) by the Board of Directors by a majority vote of a quorum consisting of
Directors who were not parties to such proceeding ("disinterested Directors"),
or (ii) by a Committee of such Directors designated by majority vote of such
Directors, even though less than a quorum, or (iii) if there are no such
Directors, or if such Directors so direct, by independent legal counsel in a
written opinion or (iv) by the Stockholders.
Section 3. Expenses in Successful Defense. Notwithstanding any other
provisions of this Article, to the extent that a Director or Officer of the
Corporation has been successful on the merits or otherwise in defense of any
proceeding referred to in Section 1 above or in defense of any claim, issue or
matter therein, he or she shall be indemnified against expenses (including
attorneys' fees) actually and reasonably incurred by him or her in connection
therewith.
Section 4. Request for Indemnification. To request indemnification,
Indemnitee shall submit to the Secretary of the Corporation a written claim or
request. Such written claim or request shall contain sufficient information to
reasonably inform the Corporation about the nature and extent of the
indemnification or advance sought by Indemnitee. The Secretary of the
Corporation shall promptly advise the Board of Directors of such request.
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Section 5. Right of Claimant to Bring Suit. If a claim under Section 1
of this Article is not paid in full by the Corporation within thirty days after
a written claim has been received by the Corporation, the claimant may at any
time thereafter bring suit against the Corporation to recover the unpaid amount
of the claim and, if successful in whole or in part, the claimant shall be
entitled to be paid also the expense of prosecuting such claim. It shall be a
defense to any such action (other than an action brought to enforce a claim for
expenses incurred in defending any proceeding in advance of its final
disposition where the required undertaking, if any is required, has been
tendered to the Corporation) that the claimant has not met the standards of
conduct which make it permissible under the Delaware General Corporation Law for
the Corporation to indemnify the claimant for the amount claimed, but the burden
of proving such defense shall be on the Corporation. Neither the failure of the
Corporation (including its Board of Directors, independent legal counsel, or its
Stockholders) to have made a determination prior to the commencement of such
action that indemnification of the claimant is proper in the circumstances
because he or she has met the applicable standard of conduct set forth in the
Delaware General Corporation Law, nor an actual determination by the Corporation
(including its Board of Directors, independent legal counsel, or its
Stockholders) that the claimant has not met such applicable standard of conduct,
shall be a defense to the action or create a presumption that the claimant has
not met the applicable standard of conduct.
Section 6. Non-Exclusivity of Rights. The rights to indemnification and
the payment of expenses incurred in a proceeding in advance of its final
disposition conferred in this Article shall not be exclusive of any right which
any person may have or hereafter acquire under any statute, provision of the
Certificate of Incorporation, by-law, agreement, vote of Stockholders or
disinterested Directors, or otherwise.
Section 7. Insurance. The Corporation may maintain insurance, at its
expense, to protect itself and any Director, Officer, employee, agent or
fiduciary of the Corporation or of another Corporation, or of a partnership,
joint venture, trust or other enterprise against any expense, liability or loss,
whether or not the Corporation would have the power to indemnify such person
against such expense, liability or loss under the Delaware General Corporation
Law.
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Section 8. Interpretation. For purposes of this Article:
a) References to "the Corporation," upon written
resolution of the Corporation's Board of Directors
shall include, in addition to the Corporation, any
constituent Corporation (including any constituent of
a constituent) absorbed in a consolidation or merger
which, if its separate existence had continued, would
have had the power and authority to in demnify its
Directors or Officers, so that any person who is or
was a Director or Officer of such constituent
Corporation, or is or was serving at the request of
such constituent Corporation as a Director or Officer
of another Corporation, shall for purposes of this
Article be deemed to hold the same position in the
Corporation as he or she held in such constituent
Corporation.
b) A person who acted in good faith and in a manner he
or she reasonably believed to be in the interest of
the participants and beneficiaries of an employee
benefit plan shall be deemed to have acted in a
manner "not opposed to the best interests of the
Corporation" as referred to in this Article.
Section 9. Amendment or Repeal. This Article may hereafter be amended
or repealed; provided, however, that no amendment or repeal shall reduce,
terminate or otherwise adversely affect the right of a person who is or was a
Director or Officer to obtain indemnification or advancement of expenses with
respect to a proceeding that pertains to or arises out of actions or omissions
that occur prior to the effective date of such amendment or repeal, which date
cannot be retroactive.
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ARTICLE VIII
GENERAL PROVISIONS
DIVIDENDS
Section 1. Declaration of Dividends. Dividends upon the capital stock
of the Corporation, subject to the provisions of the Certificate of
Incorporation, if any, may be declared by the Board of Directors at any regular
or special meeting, pursuant to law. Dividends may be paid in cash, in property,
or in shares of the capital stock, subject to the provisions of the Certificate
of Incorporation.
Section 2. Reserve. Before payment of any dividend, there may be set
aside out of any funds of the Corporation available for dividends such sum or
sums as the Directors from time to time, in their absolute discretion, think
proper as a reserve or reserves to meet contingencies, or for equalizing
dividends, or for repairing or maintaining any property of the Corporation, or
for such other purpose as the Directors shall think conducive to the interest of
the Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
ANNUAL STATEMENT
Section 3. Annual Statement. The Board of Directors shall present at
each annual meeting, and at any special meeting of the Stockholders when called
for by vote of the Stockholders, a full and clear statement of the business and
condition of the Corporation.
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CHECKS
Section 4. Checks. All checks or demands for money and notes of the
Corporation shall be signed by such Officer or Officers or such other person or
persons as the Board of Directors may from time to time designate.
FISCAL YEAR
Section 5. Fiscal Year. The fiscal year of the Corporation shall be
fixed by resolution of the Board of Directors.
SEAL
Section 6. Corporate Seal. The corporate seal shall have inscribed
thereon the name of the Corporation, the year of its organization and the words
"Corporate Seal, Delaware". The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise.
ARTICLE IX
AMENDMENTS
Section 1. By the Board of Directors. Subject to the provisions of the
Certificate of Incorporation, these Bylaws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of a majority of the
Directors present at any regular or special meeting of the Board of Directors at
which a quorum is present.
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Section 2. By the Stockholders. Subject to the provisions of the
Certificate of Incorporation, these By-Laws may be altered, amended or repealed
or new Bylaws may be adopted by the affirmative vote of the holders of at least
sixty-six and two-thirds percent (66 2/3%) of the shares of the capital stock of
the Corporation issued and outstanding and entitled to vote at any regular
meeting of Stockholders, or at any special meeting of Stockholders, provided
notice of such alteration, amendment, repeal or adoption of new By-Laws shall
have been stated in the notice of such special meeting.
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[FOX, ROTHSCHILD, O'BRIEN & FRANKEL, LLP LETTERHEAD]
November 4, 1997
Holt's Cigar Holdings, Inc.
12270 Townsend Road
Philadelphia, PA 19154
Re: Registration Statement on Form S-1
under the Securities Act of 1933, as amended
--------------------------------------------
Gentlemen:
In our capacity as counsel to Holt's Cigar Holdings, Inc., a Delaware
corporation (the "Company"), we have been asked to render this opinion in
connection with a Registration Statement on Form S-1 being filed
contemporaneously herewith by the Company with the Securities and Exchange
Commission under the Securities Act of 1933, as amended (the "Registration
Statement"), covering the registration of 2,012,500 shares of Common Stock (the
"Shares") of the Company.
In that connection, we have examined the Certificate of Incorporation, as
amended, and the By-Laws, as amended, of the Company, the Registration
Statement, corporate proceedings of the Company relating to the issuance of the
Shares and such other instruments and documents as we have deemed relevant under
the circumstances.
In making the aforesaid examination, we have assumed the genuineness of all
signatures and the conformity to original documents of all copies furnished to
us as original or photostatic copies. We have also assumed that the corporate
records furnished to us by the Company include all corporate proceedings taken
by the Company to date.
Based upon the foregoing and upon the consummation of the Plan of
Reorganization described in the Registration Statement, we are of the opinion
that:
1. The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Delaware.
2. The Shares have each been duly and validly authorized and, when issued
and paid for as described in the Registration Statement, will be duly and
validly issued, fully paid and non-assessable shares of Common Stock, par value
$.001 per share, of the Company.
We hereby consent to the use of our opinion as herein set forth as an
exhibit to the Registration Statement and to the use of our name under the
caption "Legal Matters" in the Prospectus forming a part of the Registration
Statement.
Very truly yours,
/s/ Fox, Rothschild, O'Brien & Frankel, LLP
---------------------------------------
Fox, Rothschild, O'Brien & Frankel, LLP
HOLT'S CIGAR COMPANY INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 1st day of October, 1997 by
and between Holt's Cigar Company Inc., having an office located at 12270
Townsend Road, Philadelphia, Pennsylvania (hereinafter the "Company") and ROBERT
G. LEVIN, with an address of 12270 Townsend Road, Philadelphia, Pennsylvania
(hereinafter "Employee").
WHEREAS, the Company is engaged in the business of wholesale
distribution and sale of premium cigars, other tobacco products and cigar
related accessories (the "Business"); and
WHEREAS, Employee is an executive with experience in the Company's
Business and has been the President of the Company and its Chief Executive
Officer for many years; and
WHEREAS, the Company and the Employee desire to enter this Employment
Agreement to set forth the employment relationship between the parties;
NOW, THEREFORE, the parties hereto, intending to be legally bound
thereby, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Affiliate" shall mean a corporation which, directly or indirectly,
controls, is controlled by or is under common control with the Company, and for
the purposes hereof, "control" shall mean ownership of twenty (20%) percent or
more of the Voting Stock of the corporation in question.
1.2 "Basic Salary" shall have the meaning assigned to it in Section 6
of this Agreement.
1.3 "Board" shall mean the Board of Directors of the Company as duly
constituted from time to time.
1.4 the "Business" shall have the meaning set forth in the first
recital clause of this Agreement.
<PAGE>
1.5 "Commencement Date" shall be the date of this Agreement, as stated
on page 1.
1.6 "Confidential Information" shall include, without limitation by
reason of specification, any information, including, without limitation, the
Company's research, development, inventions, designs, discoveries, products,
methods, processes, know-how, product information, research and development
information, the identity and contacts at the various customers, clients and
prospects developed or to be developed by the Company and other information
relating to such persons or entities; marketing, sales and other business
information, strategies, programs, concepts and ideas, financial data and
information relating to the various aspects of the business and affairs of the
Company, the identity and any other information relating to the employees,
suppliers, vendors, independent contractors and others with whom the Company
transacts business, and any other information relating to the business
activities and position of the Company, which (i) is or are designed to be used
in or are or may be useful in connection with the Business of the Company, and
Subsidiary or Affiliate of the Company or any Affiliate, which (ii) is private
or confidential in that it is not generally available to the public, except as
the result of a disclosure by or information supplied by the Employee, or (iii)
which gives the Company or a Subsidiary or an Affiliate an opportunity or the
possibility of obtaining an advantage over competitors who may not know or use
such information or who are not lawfully permitted to use same (hereinafter
collectively referred to as "Confidential Information"), and all of the
foregoing shall constitute Confidential Information without regard to any
labeling of such materials as "Confidential".
1.7 "Disability" shall mean the inability of Employee to perform
substantially all of the Employee's duties of employment for the Company, if
employed by the Company or a Subsidiary, pursuant to the terms of this Agreement
and by-laws of the Company as hereinafter provided, because of physical or
mental disability, where such disability shall have existed for a period of more
than ninety (90) consecutive days or an aggregate of one hundred twenty (120)
days in any three hundred sixty five (365) day period, and if a long-term
disability plan is maintained by the Company or a Subsidiary which employs
Employee, Employee is entitled to receive long-term disability payments under a
long-term disability plan of the Company or any Subsidiary which employs
Employee. The fact of whether or not a Disability exists hereunder shall be
determined by appropriate medical experts jointly selected by the Board and
Employee. The existence of a Disability means that, Employee's mental and/or
physical condition substantially interferes with Employee's performance of his
duties for the Company, and its Subsidiaries and Affiliates as specified in this
Agreement.
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1.8 "Employment Year" shall mean each twelve (12) month period, or part
thereof, during which Employee is employed hereunder, commencing on the
Commencement Date and on the same day of each subsequent calendar year, the
first such subsequent Employment Year being the twelve (12) month period which
will begin on the first anniversary of the Commencement Date.
1.9 "Market Area" shall mean the world.
1.10 "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company or partnership, institution, public
benefit corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
1.11 "Retirement" shall mean that Employee shall have reached age 65
and shall voluntarily retire under the Company's or a Subsidiary's retirement
plans (if any) applicable to him or her or any earlier actual voluntary
retirement by Employee from his employment with the Company and its
Subsidiaries.
1.12 "Subsidiary" shall mean a corporation of which more than fifty
(50%) percent of the Voting Stock is owned, directly or indirectly, by the
Company.
1.13 "Term" shall mean the term of employment of Employee under this
Agreement.
1.14 "Termination Date" shall have the meaning assigned to it in
Section 8.
1.15 "Voting Stock" shall mean the capital stock of a corporation which
gives the holder the right to vote in the election of directors for such
corporation in the ordinary course of business and not as the result of, or
contingent upon, the happening of any event.
Whenever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
2. EMPLOYMENT AND DUTIES OF EMPLOYEE.
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2.1 Employment; Title; Duties. The Company hereby employs Employee, and
Employee hereby accepts and confirms his appointment as President and Chief
Executive Officer of the Company. The principal duty of Employee shall be to
perform those services set forth on Exhibit A attached hereto and incorporated
herein, and to render services as are necessary and desirable to protect and
advance the best interests of the Company, acting, in all instances, under the
supervision of and in accordance with the policies set by the Board (the
"Duties"). Without further compensation, Employee agrees to serve (if requested
to do so and if qualified and elected) as a director of the Company and as an
officer and/or director of any Subsidiary or Affiliate.
Employee shall report to and be under the supervision of the Board.
2.2 Performance of Duties. Employee shall devote substantially all his
full working time and efforts to the performance of his duties as an executive
of the Company and to the performance of such other duties as are assigned him
from time-to-time by the Board. During the Term, Employee shall not engage in or
become employed, directly or indirectly in any business which competes with the
Business of the Company, as modified, expanded or changed from time-to-time,
without the prior written consent of the Board, nor shall Employee act as a
consultant to or provide any services to any other Person, whether on a
remunerative basis or otherwise, where the commercial or professional business
of such Person competes with the Business of the Company, as modified, expanded
or changed from time-to-time, without the prior written consent of the Board,
which consent, in both instances, may be given or withheld by the Board in the
exercise of its sole, absolute and unreviewable discretion, for any or no reason
whatsoever.
3. TERM OF EMPLOYMENT
The employment of Employee pursuant to this Agreement shall commence as
of the Commencement Date and end as of December 31, 2002, unless sooner
terminated pursuant to Section 8 of this Agreement or otherwise extended in
accordance with Section 4 of this Agreement.
4. EXTENSION OF TERM OF EMPLOYMENT
If Employee's employment hereunder has not previously been terminated
in accordance with Section 8 hereof, then on the first anniversary of the
Commencement Date the Term shall be extended for one additional year and on each
subsequent anniversary of the Commencement Date. The Term shall be extended for
one additional year, unless the Board shall provide written notice to
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Employee at least one year prior to such anniversary date that this Agreement
will not be so extended. The rights of termination set forth in Section 8 shall
be applicable during the initial, as well as any extended term.
5. COMPENSATION AND BENEFITS
The Company and/or its Subsidiaries shall pay Employee as compensation
for all the services to be rendered by him hereunder during each Employment
Year, and in consideration of the various restrictions imposed upon Employee
during the Term, and otherwise under this Agreement, the Basic Salary and other
benefits as provided for and determined pursuant to Sections 6 through 8,
inclusive, of this Agreement. Employee acknowledges that the various
restrictions and covenants given by Employee to Company hereunder, are in
consideration of the increased total compensation, including, without
limitation, any increase in salary over the Employee's salary prior to the
execution of this Agreement, if any; the extended Term of this Agreement; and
the Employee's right to participate in and the actual grant of stock options
pursuant to the Company's Incentive Stock Option Plans.
6. BASIC SALARY AND BONUS
6.1 The Company shall pay Employee, as compensation for all the
services to be rendered hereunder during each Employment Year, a salary of
$400,000 per Employment Year (as adjusted upward by the Board from time-to-time)
(the "Basic Salary"), payable in substantially equal bi-weekly payments, less
such deductions or amounts as are required to be deducted or withheld by
applicable laws or regulations, deductions for employee contributions to welfare
benefits provided by the Company or a Subsidiary to Employee and less such other
deductions or amounts, if any, as are authorized by Employee. The Basic Salary
shall be prorated for the month in which employment by the Company or a
Subsidiary commences or terminates, and for any Employment Year which is less
than twelve (12) months in duration. The Basic Salary may not be decreased, but
may be increased from time-to-time by the Board, (without Employee's
participation as a director) and once increased, shall not thereafter be
reduced.
6.2 Employee may be paid cash bonuses at the discretion of the Board
(without Employee's participation as a director) (the "Bonus").
7. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES
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7.1 Additional Benefits. The Company shall provide the following
additional benefits to Employee during the Term:
(a) participation on an equitable basis in any employee benefit plans
established for senior management employees of the Company.
(b) six (6) weeks vacation with pay in each Employment Year. There will
be no carryover of unused vacation time or pay from Employment Year
to Employment Year. Employee shall also be entitled to all holiday
privileges approved by the Board during the Term, not to be less
than six (6) days per year.
(c) the lease or financing by the Company for use by Employee (or the
Company shall reimburse Employee for these payments if the lease or
financing is in his name) of a late model luxury automobile
(excluding payments by the Company of insurance and other expenses
thereof which shall be paid by the Company in addition to such
lease or financing payments).
(d) the payment of premiums for $3,450,000 of term life insurance on
Employee's life for the benefit of the Employee.
(e) the payment of premiums for disability insurance coverage for the
Employee.
(f) Participation by Employee in such stock option plans for senior
management as the Board shall create and the shareholders of the
Company shall confirm, on such terms and subject to the terms and
conditions of each such plan, if any.
7.2 Reimbursement for Expenses. The Company shall pay or reimburse the
Employee for all reasonable expenses actually incurred or paid by him during the
Term in the performance of his services under this Agreement, upon presentation
of such bills, expense statements, vouchers or such other supporting information
as the Board may reasonably require. In the event the Company requires the
Employee to travel on business during the Term, Employee shall be reimbursed for
any reasonable travel expenses consistent with the travel policy of the Company
in effect from time-to-time in accordance with this Section 7.2.
8. TERMINATION OF EMPLOYMENT
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<PAGE>
8.1 Death. If Employee dies during the Term, on the date of his death
this Agreement shall terminate without further liability of the Company to make
further payments to Employee hereunder except with respect to amounts previously
earned, or due and owing to Employee hereunder.
8.2 Disability. If, during the Term, Employee has a Disability, the
Company may, at any time after the Employee has a Disability, terminate
Employee's employment by written notice to him and the Company shall have no
further liability to Employee hereunder except with respect to amounts
previously earned, or due and owing to Employee hereunder.
8.3 Retirement. The Agreement will be terminated by Employee's
Retirement, effective upon the date of such Retirement.
8.4 Cause. The Company may terminate the Employee's employment with the
Company at any time effective upon delivery of a written Notice of Termination
to Employee for "Cause". For the purposes of this Agreement, "Cause" shall mean:
(a) gross negligence or willful malfeasance on the part of the Employee with
respect to any of Employee's duties or responsibilities hereunder; (b)
insubordination of the Employee with respect to the written policies and
directives issued by the Board; (c) breach by the Employee of any material term,
covenant, condition or provision set forth in this Agreement; or (d) continuing
inability of the Employee to fulfill his Duties following written notification
by the Board and without Employee effecting a cure of such failures within a
reasonable time period as established by the Board on a case by case basis
pursuant to this Subsection (d).
8.5 Notice of Termination. Any purported termination of employment by
the Company or a Subsidiary by reason of Employee's Disability or for Cause
shall be communicated by written Notice of Termination to Employee. For the
purposes of this Agreement, a "Notice of Termination" shall mean a notice given
by the Company or a Subsidiary, as the case may be, which shall indicate the
specific basis for termination and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for determination of any
payments under this Agreement.
9. REPRESENTATION AND WARRANTY BY EMPLOYEE
Employee hereby represents and warrants to the Company, the same being
part of the essence of this Agreement that, as of the Commencement Date, he is
not a party to any agreement,
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contract or understanding, and that no facts or circumstances exist which would
in any way restrict or prohibit him in any material way from undertaking or
performing any of his obligations under this Agreement. The foregoing
representation and warranty shall remain in effect throughout the Term.
10. CONFIDENTIAL INFORMATION. PROPRIETARY INTERESTS AND RESTRICTIVE COVENANT
10.1 Acknowledgment of Confidentiality. Employee understands and
acknowledges that he has and will obtain Confidential Information during the
course of his employment by the Company. Employee further acknowledges that the
services to be rendered by him are of a special, unique and extraordinary
character and that, in connection with such services, he will have access to
Confidential Information vital to the Company's and its Affiliates' business.
Accordingly, Employee agrees that he shall not, either during the Term or at any
time within one (1) year after the Termination Date, (i) use or disclose any
such Confidential Information outside the Company and Affiliates; or (ii) except
as required in the proper performance of his Duties hereunder, remove or aid in
the removal from the premises of the Company and any Affiliates, of any
Confidential Information or any property or materials relating thereto.
The foregoing confidentiality provisions shall cease to be applicable
to any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Employee of his Duties
under this Section 10).
In the event that Employee is required by law or a court order to
disclose any such Confidential Information, he shall promptly notify the Company
of such requirement and provide the Company with a copy of any court order or of
any law which in his opinion requires such disclosure and, if the Company so
elects, permit the Company an adequate opportunity, at its own expense, to
contest such law or court order.
10.2 Delivery of Materials. Employee shall promptly, and without
charge, deliver to the Company on the termination of his employment hereunder,
or at any other time the Company may so request, all memoranda, notes, records,
reports, manuals, computer disks or other recordable media, videotapes,
drawings, blueprints, schematics and other documents or tangible items (and all
copies thereof) relating to the Business of the Company and its Affiliates and
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Subsidiaries (if any), and all property associated therewith, which he may then
possess or have under his dominion or control.
10.3 Customer Lists, Prospects and Contacts. Employee acknowledges that
(i) all lists of customers, prospects and their respective contacts, as well as
any referral sources of same developed during the course of Employee's
employment and/or by the Company or any Subsidiary or Affiliate (if any) are and
shall be the sole and exclusive property of the Company and its Subsidiaries and
Affiliates, as the case may be, and Employee further acknowledges and agrees
that he neither has nor shall have any personal right, title or interest
therein; (ii) that such lists and information are and must continue to be
confidential; and (iii) that such lists and information is not readily
accessible to the competitors of the Company or its Subsidiaries or Affiliates
(if any).
10.4 Ideas, Trademarks, Etc. Employee hereby acknowledges and
agrees that all the creative efforts and thought to be expended by the Employee
during the term of his employment which may be related in any manner to the
Company's Business are for the benefit of the Company and constitute "works for
hire", and the Employee hereby absolutely, irrevocably and unconditionally
assigns to the Company any and all intellectual property rights (including,
without limitation, copyrights, patents and other rights which may be considered
trade secrets or of value) to the Company, without any further payment or
consideration of any type or nature whatsoever. Employee hereby agrees to
execute and deliver to the Company any and all documents, assignments,
affidavits, applications for registration or other writings or documents
reasonably requested by the Company during the term of employment or following
termination of the employment relationship in order to assure the protection and
perfection of the Company's intellectual property rights as aforedescribed,
including written assurance of the assignment and ownership of any of the
foregoing which are developed by those working by or with the Employee who are
not subject to the terms of a similar agreement. In connection with the
foregoing, and as a condition of employment and/or continued employment by the
Company, the Employee agrees to keep records of the development of all tangible
expressions of creative work under this Agreement, and to memorialize the date
and manner of development of items and creative work which may be the subject of
intellectual property rights.
11. DISPUTES AND REMEDIES
11.1 Waiver of Trial by Jury. EMPLOYEE AND THE COMPANY HEREBY WAIVE THE
RIGHT TO A TRIAL BY JURY IN THE EVENT OF ANY DISPUTE WHICH ARISES UNDER THIS
AGREEMENT.
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11.2 Injunctive Relief. If Employee commits a breach, or threatens to
commit a breach, of any of the provisions of Section 10, the Company shall have
the following rights and remedies (each of which shall be independent of the
others, and shall be severally enforceable, and all of which shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity):
(a) the right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it
being acknowledged by Employee that any such breach or threatened
breach will or may cause irreparable injury to the Company and that
money damages will or may not provide an adequate remedy to the
Company; and
(b) the right and remedy to require Employee to account for and pay
over to the Company all compensation, profits, moneys, increments,
things of value and other benefits, derived or received by Employee
as the result of any acts or transactions constituting a breach of
any of the provisions of Section 10 of this Agreement, and Employee
hereby agrees to account for and pay over all such compensation,
profits, moneys, increments, things of value or other benefits to
the Company.
11.3 Partial Enforceability. If any provision contained in Section 10
of this Agreement, or any part thereof, is construed to be invalid or
unenforceable, the same shall not affect the remainder of Employee's agreements,
covenants, undertakings and restrictions which he has accepted, in Section 10,
and the remainder of such agreements, covenants, undertakings and restrictions
shall be given the fullest possible effect, without regard to the invalid parts.
11.4 Intention of the Parties. It is distinctly understood and agreed
that the confidentiality, proprietary rights and restrictive covenant provisions
of this Agreement have been accepted, and agreed to by Employee in contemplation
of this Agreement. It is therefore the specific intention of the parties, any
general considerations of public policy to the contrary notwithstanding, that
the provisions of Section 10 of this Agreement shall be enforced as written to
the fullest extent possible.
11.5 Adjustment of Restrictions. Despite the prior provisions of this
Section 11, if any covenant or agreement contained in Section 10, or any part
thereof, is held by any court of competent jurisdiction to be unenforceable
because of the duration of such provision, the court
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making such determination shall have the power to reduce the duration of such
provision and, in its reduced form, such provision shall be enforceable.
11.6 Attorneys Fees and Expenses. In the event that any action, suit or
other proceeding at law or in equity is brought to enforce the provisions of
this Agreement, or to obtain money damages for the breach thereof, and such
action results in the award of a judgment or money damages or in the granting of
any injunction in favor of the Company, then all reasonable expenses, including,
but not limited to, reasonable attorneys' fees and disbursements (including
those incurred on appeal) of the Company in such action, suit or other
proceeding shall (on demand of the Company) forthwith be paid over by Employee.
If such action, suit or other proceeding results in a judgment in favor of
Employee, then all reasonable expenses, including, but not limited to,
reasonable attorneys' fees and disbursements (including those incurred on
appeal) of Employee in such action, suit or other proceeding shall (on demand of
Employee) forthwith be paid over by the Company.
12. SURVIVAL.
The provisions of Section 10 and 11 and this Section 12 shall survive
termination of this Agreement and remain enforceable according to their terms.
13. SEVERABILITY.
The invalidity or unenforceability of any provision of this Agreement
shall in no way affect the validity or enforceability of any other provisions
hereof.
14. NOTICES.
All notices, demands and requests required or permitted to be given
under the provisions of this Agreement shall be deemed duly given if made in
writing and delivered personally or mailed by postage prepaid certified or
registered mail, return receipt requested, accompanied by a second copy sent by
ordinary mail, which notices shall be addressed as follows:
If to the Company:
Holt's Cigar Company Inc.
12270 Townsend Street
Philadelphia, Pennsylvania 19154
Attn: Chief Executive Officer
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with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
997 Lenox Drive, Building 3
Lawrenceville, New Jersey 08648
Att: Matthew H. Lubart, Esq.
If to the Employee:
Robert G. Levin
12270 Townsend Street
Philadelphia, Pennsylvania 19154
By notifying the other parties in writing, given as aforesaid, any
party may from time-to-time change its address or the name of any person to
whose attention notice is to be given, or may add another person, to whose
attention notice is to be given, in connection with notice to any party.
15. ASSIGNMENT AND SUCCESSORS. Neither this Agreement nor any of his
rights or duties hereunder may be assigned or delegated by Employee. This
Agreement is not assignable by the Company except to any successor in interest
which takes over all or substantially all of the business of the Company, as it
is conducted at the time of such assignment. Any corporation into or with which
the Company is merged or consolidated or which takes over all or substantially
all of the business of the Company shall be deemed to be a successor of the
Company for purposes hereof. This Agreement shall be binding upon and, except as
aforesaid, shall inure to the benefit of the parties and their respective
successors and permitted assigns. The Company will require any successor
(whether direct or indirect, by purchase, merger, consolidation or otherwise) to
all or substantially all of the business and/or assets of the Company, by
written agreement in form and substance satisfactory to Employee, to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place.
16. ENTIRE AGREEMENT, WAIVER AND OTHER.
16.1 Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
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16.2 No Waiver. No waiver or modification of any of the provisions of
this Agreement shall be valid unless in writing and signed by or on behalf of
the party granting such waiver or modification. No waiver by any party of any
breach or default hereunder shall be deemed a waiver of any repetition of such
breach or default or shall be deemed a waiver of any other breach or default,
nor shall it in anyway affect any of the other terms or conditions of this
Agreement or the enforceability thereof. No failure of the Company to exercise
any power given it hereunder or to insist upon strict compliance by Employee
with any obligation hereunder, and no custom or practice at variance with the
terms hereof, shall constitute a waiver of the right of the Company to demand
strict compliance with the terms hereof.
Employee shall not have the right to sign any waiver or modification of
any provisions of this Agreement on behalf of the Company, nor shall any action
taken by Employee reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by
instrument in writing signed by all of the parties hereto after the Commencement
Date. Neither this Agreement nor any of the rights of any of the parties
hereunder may be terminated except as provided herein.
16.3 Obligations of the Company. All amounts payable by the Company
hereunder shall be paid without notice or demand.
16.4 Rights of Beneficiaries of Employee. This Agreement shall inure to
the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable to Employee hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Employee's devisee, legatee or other designee or, if there be
not such designee, to the Employee's estate.
17. GOVERNING LAW.
This Agreement shall be governed by and construed, and the rights and
obligations of the parties hereto enforced, in accordance with the laws of the
Commonwealth of Pennsylvania
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18. HEADINGS. This Section and Subsection headings contained herein are
for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
IN WITNESS HEREOF, the parties have executed this Agreement as of the
date first written above, which shall be deemed the Commencement Date.
Attest HOLT'S CIGAR COMPANY, INC.
By: By:
--------------------------- ----------------------------
Witness: EMPLOYEE /s/ Robert G. Levin
---------------------- -----------------------
Robert G. Levin
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EXHIBIT A
The principal duty of the Employee as President and Chief Executive of
the Company shall be to perform the services set out below:
(a) Development and implementation of the overall strategy of the
Company's Operations, subject to the review and approval of such
plan by the Company's Board of Directors;
(b) Such duties and responsibilities as are established in writing by
the Company Board of Directors.
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HOLT'S CIGAR COMPANY INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 1st day of October, 1997 by and
between Holt's Cigar Company Inc., having an office located at 12270 Townsend
Road, Philadelphia, Pennsylvania (hereinafter the "Company") and MICHAEL PITKOW,
with en address of 12270 Townsend Road, Philadelphia, Pennsylvania (hereinafter
"Employee").
WHEREAS, the Company is engaged in the business of wholesale
distribution and sale of premium cigars, other tobacco products and cigar
related accessories (the "Business"); and
WHEREAS, Employee is an executive with experience in the Company's
Business and has been the Executive Vice President of the Company and its Chief
Operating Office; and
WHEREAS, the Company and the Employee desire to enter this Employment
Agreement to set forth the employment relationship between the parties;
NOW, THEREFORE, the parties hereto, intending to be legally bound
thereby, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Affiliate" shall mean a corporation which, directly or indirectly,
controls, is controlled by or is under common control with the Company, and for
the purposes hereof, "control" shall mean ownership of twenty (20%) percent or
more of the Voting Stock of the corporation in question.
1.2 "Basic Salary" shall have the meaning assigned to it in Section 6 of
this Agreement.
1.3 "Board" shall mean the Board of Directors of the Company as duly
constituted from time to time.
1.4 the "Business" shall have the meaning set forth in the first recital
clause of this Agreement.
<PAGE>
1.5 "Commencement Date" shall be the date of this Agreement, as stated
on page 1.
1.6 "Confidential Information" shall include, without limitation by
reason of specification, any information, including, without limitation, the
Company's research, development, inventions, designs, discoveries, products,
methods, processes, know-how, product information, research and development
information, the identity and contacts at the various customers, clients and
prospects developed or to be developed by the Company and other information
relating to such persons or entities; marketing, sales and other business
information, strategies, programs, concepts and ideas, financial data and
information relating to the various aspects of the business and affairs of the
Company, the identity and any other information relating to the employees,
suppliers, vendors, independent contractors and others with whom the Company
transacts business, and any other information relating to the business
activities and position of the Company, which (i) is or are designed to be used
in or are or may be useful in connection with the Business of the Company, and
Subsidiary or Affiliate of the Company or any Affiliate, which (ii) is private
or confidential in that it is not generally available to the public, except as
the result of a disclosure by or information supplied by the Employee, or (iii)
which gives the Company or a Subsidiary or an Affiliate an opportunity or the
possibility of obtaining an advantage over competitors who may not know or use
such information or who are not lawfully permitted to use same (hereinafter
collectively referred to as "Confidential Information"), and all of the
foregoing shall constitute Confidential Information without regard to any
labeling of such materials as "Confidential".
1.7 "Disability" shall mean the inability of Employee to perform
substantially all of the Employee's duties of employment for the Company, if
employed by the Company or a Subsidiary, pursuant to the terms of this Agreement
and bylaws of the Company as hereinafter provided, because of physical or mental
disability, where such disability shall have existed for a period of more than
ninety (90) consecutive days or an aggregate of one hundred twenty (120) days in
any three hundred sixty five (365) day period, and if a long-term disability
plan is maintained by the Company or a Subsidiary which employs Employee,
Employee is entitled to receive long term disability payments under a long term
disability plan of the Company or any Subsidiary which employs Employee. The
fact of whether or not a Disability exists hereunder shall be determined by
appropriate medical experts jointly selected by the Board and Employee. The
existence of a Disability means that, Employee's mental and/or physical
condition substantially interferes with Employee's performance of his duties for
the Company, and its Subsidiaries and Affiliates as specified in this Agreement.
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1.8 "Employment Year" shall mean each twelve (12) month period, or part
thereof, during which Employee is employed hereunder, commencing on the
Commencement Date and on the same day of each subsequent calendar year, the
first such subsequent Employment Year being the twelve (12) month period which
will begin on the first anniversary of the Commencement Date.
1.9 "Market Area" shall mean the world.
1.10 "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company or partnership, institution, public
benefit corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
1.11 "Retirement" shall mean that Employee shall have reached age 65 and
shall voluntarily retire under the Company's or a Subsidiary's retirement plans
(if any) applicable to him or any earlier actual voluntary retirement by
Employee from his employment with the Company and its Subsidiaries.
1.12 "Subsidiary" shall mean a corporation of which more than fifty
(50%) percent of the Voting Stock is owned, directly or indirectly, by the
Company.
1.13 "Term" shall mean the term of employment of Employee under this
Agreement.
1.14 "Termination Date" shall have the meaning assigned to it in
Section 8.
1.15 "Voting Stock" shall mean the capital stock of a corporation which
gives the holder the right to vote in the election of directors for such
corporation in the ordinary course of business and not as the result of, or
contingent upon, the happening of any event.
Whenever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
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2. EMPLOYMENT AND DUTIES OF EMPLOYEE.
2.1 Employment; Title; Duties. The Company hereby employs Employee, and
Employee hereby accepts and confirms his appointment as Executive Vice President
and Chief Operating Officer of the Company. The principal duty of Employee shall
be to perform those services set forth on Exhibit A attached hereto and
incorporated herein, and to render services as are necessary and desirable to
protect and advance the best interests of the Company, acting, in all instances,
under the supervision of and in accordance with the policies set by the Board
(the "Duties"). Without further compensation, Employee agrees to serve (if
requested to do so and if qualified and elected) as a director of the Company
and as an officer and/or director of any Subsidiary or Affiliate.
Employee shall report to and be under the supervision of the President,
Chief Executive Officer and the Board.
2.2 Performance of Duties. Employee shall devote substantially all his
full working time and efforts to the performance of his duties as an executive
of the Company and to the performance of such other duties as are assigned him
from time-to-time by the Board. During the Term, Employee shall not engage in or
become employed, directly or indirectly in any business which competes with the
Business of the Company, as modified, expanded or changed from time-to-time,
without the prior written consent of the Board, nor shall Employee act as a
consultant to or provide any services to any other Person, whether on a
remunerative basis or otherwise, where the commercial or professional business
of such Person competes with the Business of the Company, as modified, expanded
or changed from time-to-time, without the prior written consent of the Board,
which consent, in both instances, may be given or withheld by the Board in the
exercise of its sole, absolute and unreviewable discretion, for any or no reason
whatsoever.
3. TERM OF EMPLOYMENT.
The employment of Employee pursuant to this Agreement shall commence as
of the Commencement Date and end as of March 31, 1999, unless sooner terminated
pursuant to Section 8 of this Agreement or otherwise extended in accordance with
Section 4 of this Agreement.
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4. EXTENSION OF TERM OF EMPLOYMENT.
If Employee's employment hereunder has not previously been terminated in
accordance with Section 8 hereof, then on the first anniversary of the
Commencement Date the Term shall be extended for one additional year and on each
subsequent anniversary of the Commencement Date. The Term shall be extended for
one additional year, unless the Board shall provide written notice to Employee
at least thirty (30) days prior to such anniversary date that this Agreement
will not be so extended. The rights of termination set forth in Section 8 shall
be applicable during the initial, as well as any extended term.
5. COMPENSATION AND BENEFITS.
The Company and/or its Subsidiaries shall pay Employee as compensation
for all the services to be rendered by him hereunder during each Employment
Year, and in consideration of the various restrictions imposed upon Employee
during the Term, and otherwise under this Agreement, the Basic Salary and other
benefits as provided for and determined pursuant to Sections 6 through 8,
inclusive, of this Agreement. Employee acknowledges that the various
restrictions and covenants given by Employee to Company hereunder, are in
consideration of the increased total compensation, including, without
limitation, any increase in salary over the Employee's salary prior to the
execution of this Agreement, if any; the extended Term of this Agreement; and
the Employee's right to participate in and the actual grant of stock options
pursuant to the Company's Incentive Stock Option Plans.
6. BASIC SALARY AND BONUS.
6.1 The Company shall pay Employee, as compensation for all the services
to be rendered hereunder during each Employment Year, a salary of $150,000 per
Employment Year (as adjusted upward by the Board from time-to-time) (the "Basic
Salary"), payable in substantially equal bi-weekly payments, less such
deductions or amounts as are required to be deducted or withheld by applicable
laws or regulations, deductions for employee contributions to welfare benefits
provided by the Company or a Subsidiary to Employee and less such other
deductions or amounts, if any, as are authorized by Employee. The Basic Salary
shall be prorated for the month in which employment by the Company or a
Subsidiary commences or terminates, and for any Employment Year which is less
than twelve (12) months in duration. The Basic Salary may not be decreased, but
may be increased from time-to-time by the Board, (without Employee's
participation as a director) and once increased, shall not thereafter be
reduced. The Company and
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the Employee shall meet to negotiate annual increases at least thirty (30) days
prior to the expiration of any Employment Year.
6.2 Employee may be paid cash bonuses at the discretion of the Board
(without Employee's participation as a director) (the "Bonus").
7. ADDITIONAL BENEFITS AND REIMBURSEMENT FOR EXPENSES.
7.1 Additional Benefits. The Company shall provide the following
additional benefits to Employee during the Term:
(a) participation on an equitable basis in any employee benefit plans
established for senior management employees of the Company.
(b) four (4) weeks vacation with pay in each Employment Year. There
will be no carryover of unused vacation time or pay from Employment
Year to Employment Year. Employee shall also be entitled to all
holiday privileges approved by the Board during the Term, not to be
less than six (6) days per year.
(c) the lease or financing by the Company for use by Employee (or the
Company shall reimburse Employee for these payments if the lease or
financing is in his name) of an automobile (excluding payments by
the Company of insurance and other expenses thereof which shall be
paid by the Company in addition to such lease or financing
payments), and shall reimburse Employee for related expenses,
including gas, maintenance and repairs.
(d) the payment of premiums for life insurance on Employee's life for
the benefit of the Employee in amounts to be determined.
(e) the payment of premiums for disability insurance coverage for the
Employee in amounts to be determined.
(f) family medical and dental coverage.
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(g) Participation by Employee in such stock option plans for senior
management as the Board shall create and the shareholders of the
Company shall confirm, on such terms and subject to the terms and
conditions of each such plan, if any.
7.2 Reimbursement for Expenses. The Company shall pay or reimburse the
Employee for all reasonable expenses actually incurred or paid by him during the
Term in the performance of his services under this Agreement, upon presentation
of such bills, expense statements, vouchers or such other supporting information
as the Board may reasonably require. In the event the Company requires the
Employee to travel on business during the Term, Employee shall be reimbursed for
any reasonable travel expenses consistent with the travel policy of the Company
in effect from time-to-time in accordance with this Section 7.2.
8. TERMINATION OF EMPLOYMENT.
8.1 Death. If Employee dies during the Term, on the date of his death
this Agreement shall terminate without further liability of the Company to make
further payments to Employee hereunder except with respect to amounts previously
earned, or due and owing to Employee hereunder.
8.2 Disability. If, during the Term, Employee has a Disability, the
Company may, at any time after the Employee has a Disability, terminate
Employee's employment by written notice to him and the Company shall have no
further liability to Employee hereunder except with respect to amounts
previously earned, or due and owing to Employee hereunder.
8.3 Retirement. This Agreement will be terminated by Employee's
Retirement, effective upon the date of such Retirement.
8.4 Cause. The Company may terminate the Employee's employment with the
Company at any time effective upon delivery of a written Notice of Termination
to Employee for "Cause". For the purposes of this Agreement, "Cause" shall mean:
(a) gross negligence or willful malfeasance on the part of the Employee with
respect to any of Employee's duties or responsibilities hereunder, (b)
insubordination of the Employee with respect to the written policies and
directives issued by the Board; (c) breach by the Employee of any material term,
covenant, condition or provision set forth in this Agreement; or (d) continuing
inability of the Employee to fulfill his Duties following written notification
by the Board and without Employee effecting a cure
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of such failures within a reasonable time period as established by the Board on
a case by case basis pursuant to this Subsection (d).
8.5 Notice of Termination. Any purported termination of employment by
the Company or a Subsidiary by reason of Employee's Disability or for Cause
shall be communicated by written Notice of Termination to Employee. For the
purposes of this Agreement, a "Notice of Termination" shall mean a notice given
by the Company or a Subsidiary, as the case may be, which shall indicate the
specific basis for termination and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for determination of any
payments under this Agreement.
9. REPRESENTATION AND WARRANTY BY EMPLOYEE.
Employee hereby represents and warrants to the Company, the same being
part of the essence of this Agreement that, as of the Commencement Date, he is
not a party to any agreement, contract or understanding, and that no facts or
circumstances exist which would in any way restrict or prohibit him in any
material way from undertaking or performing any of his obligations under this
Agreement. The foregoing representation and warranty shall remain in effect
throughout the Term.
10. CONFIDENTIAL INFORMATION, PROPRIETARY INTERESTS AND RESTRICTIVE COVENANT.
10.1 Acknowledgment of Confidentiality. Employee understands and
acknowledges that he has and will obtain Confidential Information during the
course of his employment by the Company. Employee further acknowledges that the
services to be rendered by him are of a special, unique and extraordinary
character and that, in connection with such services, he will have access to
Confidential Information vital to the Company's and its Affiliates' business.
Accordingly, Employee agrees that he shall not, either during the Term or at any
time within one (1) year after the Termination Date, (i) use or disclose any
such Confidential Information outside the Company and Affiliates; or (ii) except
as required in the proper performance of his Duties hereunder, remove or aid in
the removal from the premises of the Company and any Affiliates, of any
Confidential Information or any property or materials relating thereto.
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The foregoing confidentiality provisions shall cease to be applicable
to any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Employee of his Duties
under this Section 10).
In the event that Employee is required by law or a court order to
disclose any such Confidential Information, he shall promptly notify the Company
of such requirement and provide the Company with a copy of any court order or of
any law which in his opinion requires such disclosure and, if the Company so
elects, permit the Company an adequate opportunity, at its own expense, to
contest such law or court order.
10.2 Delivery of Materials. Employee shall promptly, and without
charge, deliver to the Company on the termination of his employment hereunder,
or at any other time the Company may so request, all memoranda, notes, records,
reports, manuals, computer disks or other recordable media, videotapes,
drawings, blueprints, schematics and other documents or tangible items (and all
copies thereof) relating to the Business of the Company and its Affiliates and
Subsidiaries (if any), and all property associated therewith, which he may then
possess or have under his dominion or control.
10.3 Customer Lists, Prospects and Contacts. Employee acknowledges that
(i) all lists of customers, prospects and their respective contacts, as well as
any referral sources of same developed during the course of Employee's
employment and/or by the Company or any Subsidiary or Affiliate (if any) are and
shall be the sole and exclusive property of the Company and its Subsidiaries and
Affiliates, as the case may be, and Employee further acknowledges and agrees
that he neither has nor shall have any personal right, title or interest
therein; (ii) that such lists and information are and must continue to be
confidential; and (iii) that such lists and information is not readily
accessible to the competitors of the Company or its Subsidiaries or Affiliates
(if any).
10.4 Ideas, Trademarks, Etc. Employee hereby acknowledges and agrees
that all the creative efforts and thought to be expended by the Employee during
the term of his employment which may be related in any manner to the Company's
Business are for the benefit of the Company and constitute "works for hire", and
the Employee hereby absolutely, irrevocably and unconditionally assigns to the
Company any and all intellectual property rights (including, without limitation,
copyrights, patents and other rights which may be considered trade secrets or of
value) to the Company, without any further payment or consideration of any type
or nature whatsoever. Employee hereby agrees to execute and deliver to the
Company any and all documents, assignments, affidavits, applications for
registration or other writings or documents reasonably
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requested by the Company during the term of employment or following termination
of the employment relations`hip in order to assure the protection and perfection
of the Company's intellectual property rights as aforedescribed, including
written assurance of the assignment and ownership of any of the foregoing which
are developed by those working by or with the Employee who are not subject to
the terms of a similar agreement. In connection with the foregoing, and as a
condition of employment and/or continued employment by the Company, the Employee
agrees to keep records of the development of all tangible expressions of
creative work under this Agreement, and to memorialize the date and manner of
development of items and creative work which may be the subject of intellectual
property rights.
11. DISPUTES AND REMEDIES.
11.1 Waiver of Trial by Jury. EMPLOYEE AND THE COMPANY HEREBY WAIVE THE
RIGHT TO A TRIAL BY JURY IN THE EVENT OF ANY DISPUTE WHICH ARISES UNDER THIS
AGREEMENT.
11.2 Injunctive Relief. If Employee commits a breach, or threatens to
commit a breach, of any of the provisions of Section 10, the Company shall have
the following rights and remedies (each of which shall be independent of the
others, and shall be severally enforceable, and all of which shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity):
(a) the right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it
being acknowledged by Employee that any such breach or threatened
breach will or may cause irreparable injury to the Company and
that money damages will or may not provide an adequate remedy to
the Company; and
(b) the right and remedy to require Employee to account for and pay
over to the Company all compensation, profits, moneys, increments,
things of value and other benefits, derived or received by
Employee as the result of any acts or transactions constituting a
breach of any of the provisions of Section 10 of this Agreement,
and Employee hereby agrees to account for and pay over all such
compensation, profits, moneys, increments, things of value or
other benefits to the Company.
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11.3 Partial Enforceability. If any provision contained in Section 10
of this Agreement, or any part thereof, is construed to be invalid or
unenforceable, the same shall not affect the remainder of Employee's agreements,
covenants, undertakings and restrictions which he has accepted, in Section 10,
and the remainder of such agreements, covenants, undertakings and restrictions
shall be given the fullest possible effect, without regard to the invalid parts.
11.4 Intention of the Parties. It is distinctly understood and agreed
that the confidentiality, proprietary rights and restrictive covenant provisions
of this Agreement have been accepted, and agreed to by Employee in contemplation
of this Agreement. It is therefore the specific intention of the parties, any
general considerations of public policy to the contrary notwithstanding, that
the provisions of Section 10 of this Agreement shall be enforced as written to
the fullest extent possible.
11.5 Adjustment of Restrictions. Despite the prior provisions of this
Section 11, if any covenant or agreement contained in Section 10, or any part
thereof, is held by any court of competent jurisdiction to be unenforceable
because of the duration of such provision, the court making such determination
shall have the power to reduce the duration of such provision and, in its
reduced form, such provision shall be enforceable.
11.6 Attorneys Fees and Expenses. In the event that any action, suit or
other proceeding at law or in equity is brought to enforce the provisions of
this Agreement, or to obtain money damages for the breach thereof, and such
action results in the award of a judgment or money damages or in the granting of
any injunction in favor of the Company, then all reasonable expenses, including,
but not limited to, reasonable attorneys' fees and disbursements (including
those incurred on appeal) of the Company in such action, suit or other
proceeding shall (on demand of the Company) forthwith be paid over by Employee.
If such action, suit or other proceeding results in a judgment in favor of
Employee, then all reasonable expenses, including, but not limited to,
reasonable attorneys' fees and disbursements (including those incurred on
appeal) of Employee in such action, suit or other proceeding shall (on demand of
Employee) forthwith be paid over by the Company.
12. SURVIVAL.
The provisions of Section 10 and 11 and this Section 12 shall survive
termination of this Agreement and remain enforceable according to their terms.
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13. SEVERABILITY.
The invalidity or unenforceability of any provision of this Agreement
shall in no way affect the validity or enforceability of any other provisions
hereof.
14. NOTICES.
All notices, demands and requests required or permitted to be given
under the provisions of this Agreement shall be deemed duly given if made in
writing and delivered personally or mailed by postage prepaid certified or
registered mail, return receipt requested, accompanied by a second copy sent by
ordinary mail, which notices shall be addressed as follows:
If to the Company:
Holt's Cigar Company Inc.
12270 Townsend Street
Philadelphia, Pennsylvania 19154
Attn: Chief Executive Officer
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
997 Lenox Drive, Building 3
Lawrenceville, New Jersey 08648
Att: Matthew H. Lubart, Esq.
If to the Employee:
Michael Pitkow
12270 Townsend Street
Philadelphia, Pennsylvania 19154
By notifying the other parties in writing, given as aforesaid, any
party may from time-to-time change its address or the name of any person to
whose attention notice is to be given, or may add another person, to whose
attention notice is to be given, in connection with notice to any party.
15. ASSIGNMENT AND SUCCESSORS.
Neither this Agreement nor any of his rights or duties hereunder may be
assigned or delegated by Employee. This Agreement is not assignable by the
Company except to any successor in interest which takes over all or
substantially
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all of the business of the Company, as it is conducted at the time of such
assignment. Any corporation into or with which the Company is merged or
consolidated or which takes over all or substantially all of the business of the
Company shall be deemed to be a successor of the Company for purposes hereof.
This Agreement shall be binding upon and, except as aforesaid, shall inure to
the benefit of the parties and their respective successors and permitted
assigns. The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by written agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
16. ENTIRE AGREEMENT, WAIVER AND OTHER.
16.1 Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
16.2 No Waiver. No waiver or mod)fication of any of the provisions of
this Agreement shall be valid unless in writing and signed by or on behalf of
the party granting such waiver or modification. No waiver by any party of any
breach or default hereunder shall be deemed a waiver of any repetition of such
breach or default or shall be deemed a waiver of any other breach or default,
nor shall it in anyway affect any of the other terms or conditions of this
Agreement or the enforceability thereof. No failure of the Company to exercise
any power given it hereunder or to insist upon strict compliance by Employee
with any obligation hereunder, and no custom or practice at variance with the
terms hereof, shall constitute a waiver of the right of the Company to demand
strict compliance with the terms hereof.
Employee shall not have the right to sign any waiver or modification of
any provisions of this Agreement on behalf of the Company, nor shall any action
taken by Employee reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by an
instrument in writing signed by all of the parties hereto after the Commencement
Date. Neither this Agreement nor any of the rights of any of the parties
hereunder may be terminated except as provided herein.
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16.3 Obligations of the Company. All amounts payable by the Company
hereunder shall be paid without notice or demand.
16.4 Rights of Beneficiaries of Employee. This Agreement shall inure to
the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable to Employee hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Employee's devisee, legatee or other designee or, if there be
not such designee, to the Employee's estate.
17. GOVERNING LAW.
This Agreement shall be governed by and construed, and the rights and
obligations of the parties hereto enforced, in accordance with the laws of the
Commonwealth of Pennsylvania
18. HEADINGS.
This Section and Subsection headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
IN WITNESS HEREOF, the parties have executed this Agreement as of the
date first written above, which shall be deemed the Commencement Date.
Attest: HOLT'S CIGAR COMPANY, INC.
By: By: /s/ Robert G. Levin
- ----------------------- ----------------------
Witness: EMPLOYEE
/s/ Michael Pitkow
- ----------------------- --------------------------
MICHAEL PITKOW
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EXHIBIT A
The principal duty of the Employee as Executive Vice President and
Chief Operating Officer of the Company shall be to perform the services set out
below:
(a) Development and implementation of the overall strategy of the
Company's Operations, subject to the review and approval of such
plan by the Company's Board of Directors;
(b) Management of all operations of the Company; and
(c) Such duties and responsibilities as are established in writing by
the Company's President, Chief Executive Officer or Board of
Directors.
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HOLT'S CIGAR COMPANY INC.
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT is made this 1st day of October, 1997 by and
between Holt's Cigar Company Inc., having an office located at 12270 Townsend
Road, Philadelphia, Pennsylvania (hereinafter the "Company") and ROBERT H.
LEVITT, with an address of 12270 Townsend Road, Philadelphia, Pennsylvania
(hereinafter "Employee").
WHEREAS, the Company is engaged in the business of wholesale
distribution and sale of premium cigars, other tobacco products and cigar
related accessories (the "Business"); and
WHEREAS, Employee is a certified public accountant with experience with
the Company's books and records; and
WHEREAS, the Company and the Employee desire to enter this Employment
Agreement to set forth the employment relationship between the parties;
NOW, THEREFORE, the parties hereto, intending to be legally bound
thereby, agree as follows:
1. DEFINITIONS.
As used in this Agreement, the following terms shall have the meanings
set forth below:
1.1 "Affiliate" shall mean a corporation which, directly or indirectly,
controls, is controlled by or is under common control with the Company, and for
the purposes hereof, "control" shall mean ownership of twenty (20%) percent or
more of the Voting Stock of the corporation in question.
1.2 "Basic Salary" shall have the meaning assigned to it in Section 6
of this Agreement.
1.3 "Board" shall mean the Board of Directors of the Company as duly
constituted from time to time.
1.4 the "Business" shall have the meaning set forth in the first
recital clause of this Agreement.
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1.5 "Commencement Date" shall be the date of this Agreement, as stated
on page 1.
1.6 "Confidential Information" shall include, without limitation by
reason of specification, any information, including, without limitation, the
Company's research, development, inventions, designs, discoveries, products,
methods, processes, know-how, product information, research and development
information, the identity and contacts at the various customers, clients and
prospects developed or to be developed by the Company and other information
relating to such persons or entities; marketing, sales and other business
information, strategies, programs, concepts and ideas, financial data and
information relating to the various aspects of the business and affairs of the
Company, the identity and any other information relating to the employees,
suppliers, vendors, independent contractors and others with whom the Company
transacts business, and any other information relating to the business
activities and position of the Company, which (i) is or are designed to be used
in or are or may be useful in connection with the Business of the Company, and
Subsidiary or Affiliate of the Company or any Affiliate, which (ii) is private
or confidential in that it is not generally available to the public, except as
the result of a disclosure by or information supplied by the Employee, or (iii)
which gives the Company or a Subsidiary or an Affiliate an opportunity or the
possibility of obtaining an advantage over competitors who may not know or use
such information or who are not lawfully permitted to use same (hereinafter
collectively referred to as "Confidential Information"), and all of the
foregoing shall constitute Confidential Information without regard to any
labeling of such materials as "Confidential".
1.7 "Disability" shall mean the inability of Employee to perform
substantially all of the Employee's duties of employment for the Company, if
employed by the Company or a Subsidiary, pursuant to the terms of this Agreement
and by-laws of the Company as hereinafter provided, because of physical or
mental disability, where such disability shall have existed for a period of more
than ninety (90) consecutive days or an aggregate of one hundred twenty (120)
days in any three hundred sixty five (365) day period, and if a long term
disability plan is maintained by the Company or a Subsidiary which employs
Employee, Employee is entitled to receive long term disability payments under a
long term disability plan of the Company or any Subsidiary which employs
Employee. The fact of whether or not a Disability exists hereunder shall be
determined by appropriate medical experts jointly selected by the Board and
Employee. The existence of a Disability means that, Employee's mental and/or
physical condition substantially interferes with Employee's performance of his
or her dudes for the Company, and its Subsidiaries and Affiliates as specified
in this Agreement.
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1.8 "Employment Year" shall mean each twelve (12) month period, or part
thereof, during which Employee is employed hereunder, commencing on the
Commencement Date and on the same day of each subsequent calendar year, the
first such subsequent Employment Year being the twelve (12) month period which
will begin on the first anniversary of the Commencement Date.
1.9 "Market Area" shall mean the world.
1.10 "Person" shall mean any individual, sole proprietorship,
partnership, joint venture, trust, unincorporated organization, association,
corporation, limited liability company or partnership, institution, public
benefit corporation, entity or government (whether federal, state, county, city,
municipal or otherwise, including, without limitation, any instrumentality,
division, agency, body or department thereof).
1.11 "Retirement" shall mean that Employee shall have reached age 65
and shall voluntarily retire under the Company's or a Subsidiary's retirement
plans (if any) applicable to him or her or any earlier actual voluntary
retirement by Employee from his employment with the Company and its
Subsidiaries.
1.12 "Subsidiary" shall mean a corporation of which more than fifty
(50%) percent of the Voting Stock is owned, directly or indirectly, by the
Company.
1.13 "Term" shall mean the term of employment of Employee under this
Agreement.
1.14 "Termination Date" shall have the meaning assigned to it in
Section 8.
1.15 "Voting Stock" shall mean the capital stock of a corporation which
gives the holder the right to vote in the election of directors for such
corporation in the ordinary course of business and not as the result of, or
contingent upon, the happening of any event.
Whenever from the context it appears appropriate, each word or phrase
stated in either the singular or the plural shall include the singular and the
plural, and each pronoun stated in the masculine, feminine or neuter gender
shall include the masculine, feminine and neuter.
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2. EMPLOYMENT AND DUTIES OF EMPLOYEE.
2.1 Employment; Title; Duties. The Company hereby employs Employee, and
Employee hereby accepts and confirms his appointment as Chief Financial Officer
of the Company. The principal duty of Employee shall be to perform those
services set forth on Exhibit A attached hereto and incorporated herein, and to
render services as are necessary and desirable to protect and advance the best
interests of the Company, acting, in all instances, under the supervision of and
in accordance with the policies set by the Board (the "Duties"). Without further
compensation, Employee agrees to serve (if requested to do so and if qualified
and elected) as a director of the Company and as an officer and/or director of
any Subsidiary or Affiliate.
Employee shall report to and be under the supervision of the President
and Chief Executive Officer.
2.2 Performance of Duties. Employee shall devote substantially all his
full working time and efforts to the performance of his duties as an executive
of the Company and to the performance of such other duties as are assigned him
from time-to-time by the Board. During the Term, Employee shall not engage in or
become employed, directly or indirectly in any business which competes with the
Business of the Company, as modified, expanded or changed from time-to-time,
without the prior written consent of the Board, nor shall Employee act as a
consultant to or provide any services to any other Person, whether on a
remunerative basis or otherwise, where the commercial or professional business
of such Person competes with the Business of the Company, as modified, expanded
or changed from time-to-time, without the prior written consent of the Board,
which consent, in both instances, may be given or withheld by the Board in the
exercise of its sole, absolute and unreviewable discretion, for any or no reason
whatsoever.
3. TERM OF EMPLOYMENT.
The employment of Employee pursuant to this Agreement shall commence as
of the Commencement Date and end as of March 31, 1998, unless sooner terminated
pursuant to Section 8 of this Agreement or otherwise extended in accordance with
Section 4 of this Agreement.
4. EXTENSION OF TERM OF EMPLOYMENT.
If Employee's employment hereunder has not previously been terminated
in accordance with Section 8 hereof, then the Term shall be extended for one
additional year, unless the Board
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shall provide written notice to Employee prior to the expiration date of the
Term that this Agreement will not be so extended (a "Notice of Non-Renewal").
The rights of termination set forth in Section 8 shall be applicable during the
initial, as well as any extended term. In the event that this Agreement shall
expire and not be renewed or in the event that Employee is terminated for any
reason, excluding solely a "Termination for Cause" defined in Section 8.4,
below, the Employee shall receive three (3) months "Basic Salary", defined
below, to be paid in accordance with the then current payment schedule in effect
for other executive employees.
5. COMPENSATION BENEFITS.
The Company and/or its Subsidiaries shall pay Employee as compensation
for all the services to be rendered by him hereunder during each Employment
Year, and in consideration of the various restrictions imposed upon Employee
during the Term, and otherwise under this Agreement, the Basic Salary and other
benefits as provided for and determined pursuant to Sections 6 through 8,
inclusive, of this Agreement. Employee acknowledges that the various
restrictions and covenants given by Employee to Company hereunder, are in
consideration of the increased total compensation, including, without
limitation, any increase in salary over the Employee's salary prior to the
execution of this Agreement, if any; the extended Term of this Agreement; and
the Employee's right to participate in and the actual grant of stock options
pursuant to the Company's Incentive Stock Option Plans
6. BASIC SALARY AND BONUS.
6.1 The Company shall pay Employee, as compensation for all the
services to be rendered hereunder during each Employment Year, a salary of
$75,000 per Employment Year (as adjusted upward by the Board from time-to-time)
(the "Basic Salary"), payable in substantially equal bi-weekly payments (or
other payment periods consistent with the manner in which the Company pays its
employees generally), less such deductions or amounts as are required to be
deducted or withheld by applicable laws or regulations, deductions for employee
contributions to welfare benefits provided by the Company or a Subsidiary to
Employee and less such other deductions or amounts, if any, as are authorized by
Employee. The Basic Salary shall be prorated for the month in which employment
by the Company or a Subsidiary commences or terminates, and for any Employment
Year which is less than twelve (12) months in duration. The Basic Salary may not
be decreased, but may be increased from time-to-time by the Board and once
increased, shall not thereafter be reduced.
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6.2 Employee may be paid cash bonuses at the discretion of the Board
(the "Bonus")
7. ADDITIONAL BENEFITS REIMBURSEMENT EXPENSES.
7.1 Additional Benefits. The Company shall provide the following
additional benefits to Employee during the Term:
(a) participation on an equitable basis in any employee benefit plans
established for senior management employees of the Company.
(b) three (3) weeks vacation with pay in each Employment Year. The
Employee may carry over unused vacation time for a maximum of one
(1) Employment Year. Unused but accrued vacation time shall be
paid to Employee at such time as it shall expire pursuant to the
foregoing provisions, or at the time of any severance of
Employee's employment, except for a "Termination for Cause",
defined below, in which event Employee shall not be entitled to
any payment for accrued but unused vacation time. Employee shall
also be entitled to all holiday privileges approved by the Board
during the Term, not to be less than six (6) days per year.
(c) Participation by Employee in such stock option plans for senior
management as the Board shall create and the shareholders of the
Company shall confirm, on such terms and subject to the terms and
conditions of each such plan, if any. This provision shall in no
event be construed as a grant, promise of grant or intent to grant
Employee any stock options, all of which shall be at the sole
discretion of the Board of Directors.
7.2 Reimbursement for Expenses. The Company shall pay or reimburse the
Employee for all reasonable expenses actually incurred or paid by him during the
Term in the performance of his services under this Agreement, upon presentation
of such bills, expense statements, vouchers or such other supporting information
as the Board may reasonably require. In the event the Company requires the
Employee to travel on business during the Term, Employee shall be reimbursed for
any reasonable travel expenses consistent with the travel policy of the Company
in effect from time time in accordance with this Section 7.2.
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8. TERMINATION OF EMPLOYMENT.
8.1 Death. If Employee dies during the Term, on the date of his death
this Agreement shall terminate without further liability of the Company to make
further payments to Employee hereunder except with respect to amounts previously
earned, or due and owing to Employee hereunder.
8.2 Disability. If, during the Term, Employee has a Disability, the
Company may, at any time after the Employee has a Disability, terminate
Employee's employment by written notice to him and the Company shall have no
further liability to Employee hereunder except with respect to amounts
previously earned, or due and owing to Employee hereunder.
8.3 Retirement. This Agreement will be terminated by Employee's
Retirement, effective upon the date of such Retirement
8.4 Cause. The Company may terminate the Employee's employment with the
Company at any time effective upon delivery of a written Notice of Termination
to Employee for "Cause". For the purposes of this Agreement, "Cause" shall mean:
(a) gross negligence or willful malfeasance on the part of the Employee with
respect to any of Employee's duties or responsibilities hereunder; (b)
insubordination of the Employee with respect to the written policies and
directives issued by the Board; (c) breach by the Employee of any material term,
covenant, condition or provision set forth in this Agreement; or (d) continuing
inability of the Employee to fulfill his Duties following written notification
by the Board and without Employee effecting a cure of such failures within a
reasonable time period as established by the Board on a case by case basis
pursuant to this Subsection (d).
8.5 Notice of Termination. Any purported termination of employment by
the Company or a Subsidiary by reason of Employee's Disability or for Cause
shall be communicated by written Notice of Termination to Employee. For the
purposes of this Agreement, a "Notice of Termination" shall mean a notice given
by the Company or a Subsidiary, as the case may be, which shall indicate the
specific basis for termination and shall set forth in reasonable detail the
facts and circumstances claimed to provide a basis for determination of any
payments under this Agreement.
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9. REPRESENTATION AND WARRANTY BY EMPLOYEE.
Employee hereby represents and warrants to the Company, the same being
part of the essence of this Agreement that, as of the Commencement Date, he is
not a party to any agreement, contract or understanding, and that no facts or
circumstances exist which would in any way restrict or prohibit him in any
material way from undertaking or performing any of his obligations under this
Agreement. The foregoing representation and warranty shall remain in effect
throughout the Term.
10. CONFIDENTIAL INFORMATION, PROPRIETARY INTERESTS AND RESTRICTIVE COVENANT.
10.1 Acknowledgment of Confidentiality. Employee understands and
acknowledges that he has and will obtain Confidential Information during the
course of his employment by the Company. Employee further acknowledges that the
services to be rendered by him are of a special, unique and extraordinary
character and that, in connection with such services, he will have access to
Confidential Information vital to the Company's and its Affiliates' business.
Accordingly, Employee agrees that he shall not, either during the Term or at any
time within one (1) year after the Termination Date, (i) use or disclose any
such Confidential Information outside the Company and Affiliates; or (ii) except
as required in the proper performance of his Duties hereunder, remove or aid in
the removal from the premises of the Company and any Affiliates, of any
Confidential Information or any property or materials relating thereto.
The foregoing confidentiality provisions shall cease to be applicable
to any Confidential Information which becomes generally available to the public
(except by reason of or as a consequence of a breach by Employee of his Duties
under this Section 10).
In the event that Employee is required by law or a court order to
disclose any such Confidential Information, he shall promptly notify the Company
of such requirement and provide the Company with a copy of any court order or of
any law which in his opinion requires such disclosure and, if the Company so
elects, permit the Company an adequate opportunity, at its own expense, to
contest such law or court order.
10.2 Delivery of Materials. Employee shall promptly, and without
charge, deliver to the Company on the termination of his employment hereunder,
or at any other time the Company may so request, all memoranda, notes, records,
reports, manuals, computer disks or other
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recordable media, videotapes, drawings, blueprints, schematics and other
documents or tangible items (and all copies thereof) relating to the Business of
the Company and its Affiliates and Subsidiaries (if any), and all property
associated therewith, which he may then possess or have under his dominion or
control.
10.3 Customer Lists, Prospects and Contacts. Employee acknowledges that
(i) all lists of customers, prospects and their respective contacts, as well as
any referral sources of same developed during the course of Employee's
employment and/or by the Company or any Subsidiary or Affiliate (if any) are and
shall be the sole and exclusive property of the Company and its Subsidiaries and
Affiliates, as the case may be, and Employee further acknowledges and agrees
that he neither has nor shall have any personal right, title or interest
therein; (ii) that such lists and information are and must continue to be
confidential; and (iii) that such lists and information is not readily
accessible to the competitors of the Company or its Subsidiaries or Affiliates
(if any).
10.4 Ideas, Programs, Software, Etc. Employee hereby acknowledges and
agrees that all the creative efforts and thought to be expended by the Employee
during the term of his employment which may be related in any manner to the
Company's Business are for the benefit of the Company and constitute "works for
hire", and the Employee hereby absolutely, irrevocably and unconditionally
assigns to the Company any and all intellectual property rights (including,
without limitation, copyrights, patents and other rights which may be considered
trade secrets or of value) to the Company, without any further payment or
consideration of any type or nature whatsoever. Employee hereby agrees to
execute and deliver to the Company any and all documents, assignments,
affidavits, applications for registration or other writings or documents
reasonably requested by the Company during the term of employment or following
termination of the employment relationship in order to assure the protection and
perfection of the Company's intellectual property rights as aforedescribed,
including written assurance of the assignment and ownership of any of the
foregoing which are developed by those working by or with the Employee who are
not subject to the terms of a similar agreement. In connection with the
foregoing, and as a condition of employment and/or continued employment by the
Company, the Employee agrees to keep records of the development of all tangible
expressions of creative work under this Agreement, and to memorialize the date
and manner of development of items and creative work which may be the subject of
intellectual property rights.
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11. DISPUTES AND REMEDIES.
11.1 Waiver of Trial by Jury. EMPLOYEE AND THE COMPANY HEREBY WAIVE THE
RIGHT TO A TRIAL BY JURY IN THE EVENT OF ANY DISPUTE WHICH ARISES UNDER THIS
AGREEMENT.
11.2 Injunctive Relief. If Employee commits a breach, or threatens to
commit a breach, of any of the provisions of Section 10, the Company shall have
the following rights and remedies (each of which shall be independent of the
others, and shall be severally enforceable, and all of which shall be in
addition to, and not in lieu of, any other rights and remedies available to the
Company at law or in equity):
(a) the right and remedy to have the provisions of this Agreement
specifically enforced by any court having equity jurisdiction, it
being acknowledged by Employee that any such breach or threatened
breach will or may cause irreparable injury to the Company and
that money damages will or may not provide an adequate remedy to
the Company; and
(b) the right and remedy to require Employee to account for and pay
over to the Company all compensation, profits, moneys, increments,
things of value and other benefits, derived or received by
Employee as the result of any acts or transactions constituting a
breach of any of the provisions of Section 10 of this Agreement,
and Employee hereby agrees to account for and pay over all such
compensation, profits, moneys, increments, things of value or
other benefits to the Company.
11.3 Partial Enforceability. If any provision contained in Section 10
of this Agreement, or any part thereof, is construed to be invalid or
unenforceable, the same shall not affect the remainder of Employee's agreements,
covenants, undertakings and restrictions which he has accepted, in Section 10,
and the remainder of such agreements, covenants, undertakings and restrictions
shall be given the fullest possible effect, without regard to the invalid parts.
11.4 Intention of the Parties. It is distinctly understood and agreed
that the confidentiality, proprietary rights and restrictive covenant provisions
of this Agreement have been accepted, and agreed to by Employee in contemplation
of this Agreement. It is therefore the specific intention of the parties, any
general considerations of public policy to the contrary
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notwithstanding, that the provisions of Section 10 of this Agreement shall be
enforced as written to the fullest extent possible.
11.5 Adjustment of Restrictions. Despite the prior provisions of this
Section 11, if any covenant or agreement contained in Section 10, or any part
thereof, is held by any court of competent jurisdiction to be unenforceable
because of the duration of such provision, the court making such determination
shall have the power to reduce the duration of such provision and, in its
reduced form, such provision shall be enforceable.
11.6 Attorneys Fees and Expenses. In the event that any action, suit or
other proceeding at law or in equity is brought to enforce the provisions of
this Agreement, or to obtain money damages for the breach thereof, and such
action results in the award of a judgment or money damages or in the granting of
any injunction in favor of the Company, then all reasonable expenses, including,
but not limited to, reasonable attorneys' fees and disbursements (including
those incurred on appeal) of the Company in such action, suit or other
proceeding shall (on demand of the Company) forthwith be paid over by Employee.
If such action, suit or other proceeding results in a judgment in favor of
Employee, then all reasonable expenses, including, but not limited to,
reasonable attorneys' fees and disbursements (including those incurred on
appeal) of Employee in such action, suit or other proceeding shall (on demand of
Employee) forthwith be paid over by the Company.
12. SURVIVAL.
The provisions of Section 10 and 11 and this Section 12 shall survive
termination of this Agreement and remain enforceable according to their terms.
13. SEVERABILITY.
The invalidity or unenforceability of any provision of this Agreement
shall in no way affect the validity or enforceability of any other provisions
hereof.
14. NOTICES.
All notices, demands and requests required or permitted to be given
under the provisions of this Agreement shall be deemed duly given if made in
writing and delivered personally or mailed by postage prepaid certified or
registered mail, return receipt requested, accompanied by a second copy sent by
ordinary mail, which notices shall be addressed as follows:
11
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If to the Company:
Holt's Cigar Company Inc.
12270 Townsend Street
Philadelphia, Pennsylvania 19154
Attn: Chief Executive Officer
with a copy to:
Fox, Rothschild, O'Brien & Frankel, LLP
997 Lenox Drive, Building 3
Lawrenceville, New Jersey 08648
Att: Matthew H. Lubart, Esq.
If to the Employee:
Robert H. Levitt
12270 Townsend Street
Philadelphia, Pennsylvania 19154
Attn: Chief Executive Officer
By notifying the other parties in writing, given as aforesaid, any
party may from time-to-time change its address or the name of any person to
whose attention notice is to be given, or may add another person, to whose
attention notice is to be given, in connection with notice to any party.
15. ASSIGNMENT AND SUCCESSORS.
Neither this Agreement nor any of his rights or duties hereunder may be
assigned or delegated by Employee. This Agreement is not assignable by the
Company except to any successor in interest which takes over all or
substantially all of the business of the Company, as it is conducted at the time
of such assignment. Any corporation into or with which the Company is merged or
consolidated or which takes over all or substantially all of the business of the
Company shall be deemed to be a successor of the Company for purposes hereof.
This Agreement shall be binding upon and, except as aforesaid, shall inure to
the benefit of the parties and their respective successors and permitted
assigns. The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by written agreement in form and
substance satisfactory to Employee, to expressly assume and agree to perform
this Agreement in the same manner and to the same extent that the Company would
be required to perform it if no such succession had taken place.
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16. ENTIRE AGREEMENT, WAIVER AND OTHER.
16.1 Integration. This Agreement contains the entire agreement of the
parties hereto on its subject matter and supersedes all previous agreements
between the parties hereto, written or oral, express or implied, covering the
subject matter hereof. No representations, inducements, promises or agreements,
oral or otherwise, not embodied herein, shall be of any force or effect.
16.2 No Waiver. No waiver or modification of any of the provisions of
this Agreement shall be valid unless in writing and signed by or on behalf of
the party granting such waiver or modification. No waiver by any party of any
breach or default hereunder shall be deemed a waiver of any repetition of such
breach or default or shall be deemed a waiver of any other breach or default,
nor shall it in anyway affect any of the other terms or conditions of this
Agreement or the enforceability thereof. No failure of the Company to exercise
any power given it hereunder or to insist upon strict compliance by Employee
with any obligation hereunder, and no custom or practice at variance with the
terms hereof, shall constitute a waiver of the right of the Company to demand
strict compliance with the terms hereof.
Employee shall not have the right to sign any waiver or modification of
any provisions of this Agreement on behalf of the Company, nor shall any action
taken by Employee reduce his obligations under this Agreement.
This Agreement may not be supplemented or rescinded except by
instrument in writing signed by all of the parties hereto after the Commencement
Date. Neither this Agreement nor any of the rights of any of the parties
hereunder may be terminated except as provided herein.
16.3 Obligations of the Company. All amounts payable by the Company
hereunder shall be paid without notice or demand.
16.4 Rights of Beneficiaries of Employee. This Agreement shall inure to
the benefit of, and be enforceable by, Employee's personal or legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If Employee should die while any amounts would still be
payable to Employee hereunder if he had continued to live, all such amounts,
unless otherwise provided herein, shall be paid in accordance with the terms of
this Agreement to Employee's devisee, legatee or other designee or, if there be
not such designee, to the Employee's estate.
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17. GOVERNING LAW.
This Agreement shall be governed by and construed, and the rights and
obligations of the parties hereto enforced, in accordance with the laws of the
Commonwealth of Pennsylvania
18. HEADINGS.
This Section and Subsection headings contained herein are for reference
purposes only and shall not in any way affect the meaning or interpretation of
this Agreement.
IN WITNESS HEREOF, the parties have executed this Agreement as of the
date first written above, which shall be deemed the Commencement Date.
Attest: HOLT'S CIGAR COMPANY, INC.
By: [ILLEGIBLE] By: /s/ Robert G. Levin
---------------------------
Robert G. Levin, President
Witness: EMPLOYEE
[ILLEGIBLE] /s/ Robert H. Levitt
- ------------------------ ------------------------------
Robert H. Levitt
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EXHIBIT A
The principal duty of the Employee as Chief Financial Officer of the
Company shall be to perform the services set out below:
(a) Develop, implement and monitor all financial and management
information systems to specifications and in accordance with the
requirements of the Board of Directors and the President of the
Company;
(b) Such duties and responsibilities as are established in writing by
the Company Board of Directors.
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AMENDED AND RESTATED
PRIVATE LABEL MANUFACTURING AGREEMENT
This Amended and Restated Private Label Manufacturing Agreement (this
"Agreement") is made and entered into as of the 27th day of April, 1997, by and
between FUENTE CIGAR LTD., a corporation organized under the laws of the Turks
and Caicos Islands and having its principal headquarters in Santiago, Dominican
Republic (the "Manufacturer"), and ASHTON DISTRIBUTORS, INC., a corporation
organized under the laws of the State of Pennsylvania U.S.A., ant having its
principal headquarters in Philadelphia, Pennsylvania, U.S.A. (the "Purchaser").
RECITALS:
WHEREAS, on September 1, 1993 the parties hereto entered into a Private
Label Manufacturing Agreement (the "Original PLMA");
WHEREAS, the parties hereto desire to amend the Original PLMA, and
believe that such amendment can best be made by amending and restating the
Original PLMA in its entirety;
WHEREAS, the Manufacturer is engaged in the manufacture and sale of
cigars in the Dominican Republic, and has a legal residence under the laws of
the Dominican Republic in the City of Santiago, Dominican Republic;
WHEREAS, the Manufacturer has expertise in the development, design and
manufacture of hand-made and machine~made cigars, and as a result of such
expertise, Manufacturer has developed and designed, with the approval of the
Purchaser, tobacco blends used in certain hand-made cigars distributed and sold
by the Purchaser under various trademarks owned by or licensed to the Purchaser
(herein collectively referred to as the "Products," as further defined in
paragraph 2 hereof);
WHEREAS, the Purchaser has sales and marketing expertise, and has
determined that substantial markets exist throughout the world for the sale of
the Products, and as a result, the Purchaser desires the Manufacturer to commit
substantial resources to the manufacture of large quantities of cigars for the
Purchaser, as futher described herein; and
WHEREAS, in order to fulfill its obligation to meet the Purchaser's
demand for the Products, the Manufacturer has been required and will continue to
be required: (i) to make substantial expenditures in order to maintain, improve
and expand its present Dominican Republic manufacturing facilities and to lease
and/or purchase additional manufacturing facilities; (ii) to purchase
substantial quantities
<PAGE>
of raw materials in the form of tobacco, cellophane, paper, and wood products;
(iii) to store, treat and age substantial quantities of tobacco that will be
used to make the Products; and (iv) to make substantial investments in overhead,
labor, training, and related areas in order to continue to supply the Products
to the Purchaser.
NOW THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
hereto agree as follows:
1 AMENDMENT AND COMPLETE RESTATEMENT.
This Agreement constitutes an amendment and complete restatement of the
Original PLMA, and supersedes such Original PLMA with respect to all matters
related hereto arising on or after the date of this Agreement
2 EXCLUSIVE MANUFACTURING ARRANGEMENT.
During the term of this Agreement, the Manufacturer shall manufacture
for and sell its entire output of the Products (as defined in the immediately
succeeding sentence) exclusively to the Purchaser, upon the terms and conditions
described in this Agreement. For purposes of this Agreement, the term "Products"
shall mean all cigars bearing the "Ashton" trademark, all other cigars described
on Exhibit A hereto, and any such other cigars as the parties hereto may
mutually agree in writing in the future. During the term of this Agreement, the
Purchaser agrees that, so long as the Manufacturer fulfills the Guaranteed
Production commitment described in paragraph 3.1 hereof and the Manufacturer
uses its best reasonable efforts for additional production as set forth in
paragraph 3.2 hereof, the Purchaser shall not manufacture, contract for the
manufacture of, and/or purchase cigars bearing any trademark (whether registered
or unregistered) used in connection with the Products from any source other than
the Manufacturer.
3 PRODUCTION AND PURCHASING COMMITMENTS.
3.1 Guaranteed Production. The Manufacturer hereby guarantees to
produce and sell at least five million (5,000,000) individual cigars (the
"Guaranteed Production") to the Purchaser during each one (1) year term hereof.
The Guaranteed Production may consist of any combination of:
2
<PAGE>
3.1.1 Products sold to the Purchaser pursuant to this Agreement;
and/or
3.1.2 cigars manufactured by the Manufacturer under trademarks
owned by the Manufacturer and sold to the Purchaser by the Manufacturer or by
any other entity in which Carlos A. Fuente and/or Carlos P. Fuente and/or
Cynthia F. Suarez and/or J. Wayne Suarez, individually or any combination
thereof, directly or indirectly exercise voting control and control over all
material aspects of the management and business operations of such entity. In
addition, unless otherwise mutually agreed by the parties, in order to be
counted as part of the Guaranteed Production, all cigars described in this
paragraph 3.1.2 must be hand made in the Dominican Republic, and be of a quality
at least equal to the lowest quality Product manufactured hereunder, excluding
seconds, close outs and other off-price special or discounted Products. In
addition, in order to be counted as part of the Guaranteed Production, cigars
referenced herein which are purchased from entities other than the Manufacturer
must be sold to the Purchaser at a price not higher than the price charged by
such entity to its most favored customer for similar goods sold on similar terms
and in similar quantities to the cigars sold to the Purchaser. In the event of
an Ownership Shift (as defined in paragraph 20.1 hereof), this paragraph 31.2 is
augmented by paragraph 20.4 hereof.
Although no assurance is given by the Manufacturer as to the exact proportion of
any brand or size of cigar that will be sold as part of the Guaranteed
Production, it is the intent of the parties that the Guaranteed Production will
be composed of a variety of various brands, size and price ranges of cigars, and
that such variety shall be determined in accordance with paragraph 8 hereof.
3.2 Best Reasonable Efforts for Additional Production. The Manufacturer
shall use its best reasonable efforts, consistent with its current and
applicable business practices, to produce and sell to the Purchaser such
additional Products as the Purchaser may reasonably request from time to time,
in addition to any Products included in the Guaranteed Production.
3.3 Best Reasonable Efforts Obligation to Purchase. The Purchaser shall
use its best reasonable efforts, consistent with its current and applicable
business practices, to purchase the Guaranteed Production. Notwithstanding the
foregoing, upon submission of a purchase order and acceptance of such purchase
order by the Manufacturer pursuant to paragraph 10.2 hereof, the Purchaser shall
be obligated to purchase the quantity and type of cigars referenced in such
purchase order and to pay the amount owing with respect to such purchase order,
all in accortance with the terms and conditions contained in this Agreement.
3
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4 RIGHT OF FIRST REFUSAL; PRODUCTION OF OTHER CIGARS.
4.1 Right of First Refusal. The Purchaser agrees, understands and
acknowledges that, during the term of this Agreement, the Manufacturer shall
have a right of first refusal to exclusively manufacture for the Purchaser any
cigars developed by or for the Purchaser that bear the "Ashton" trademark or
that bear the same trademark as any other Product (as such term is defined at
such time), as well as any cigars that, with the written consent of the
Purchaser, may be developed (all or in part) by the Manufacturer for the
Purchaser (each being herein referred to as a "New Product" and collectively as
the "New Products"). If the Purchaser itself desires to manufacture a new cigar
that is a "New Product," as defined herein, or the Purchaser desires to cause a
New Product to be manufactured for the Purchaser, the Purchaser shaIl first
serve notice, in accordance with paragraph 29.4 hereof, to that effect upon the
Manufacturer, providing full and adequate description of the New Product
(including the price to be paid by Purchaser for said manufacture) to enable the
Manufacturer to determine whether the Manufacturer wishes to manufacture the New
Product. The Manufacturer shall exercise its right of first refusal to
manufacture the New Product by giving notice to the Purchaser within thirty (30)
days after receipt by the Manufacturer of the Purchaser's notice. If the
Manufacturer shall fail to give written notice to exercise its right to
manufacture the New Product within such thirty (30) day period or if earlier the
Manufacturer shall advise the Purchaser in writing that the Manufacturer waives
its right to manufacture the New Product, then the Purchaser shall have the
right to negotiate the manufacture of the New Product with third parties or to
manufacture the New Product itself and such New Product shall cease to be
subject to this Agreement; provided, however, that the Purchaser shall not in
fact engage another person to manufacture the New Product for a price more than
the price previously offered to the Manufacturer without first offering the
Manufacturer the right to manufacture at the same price and upon the same terms
as offered such other person. In carrying out the intent of the immediately
preceding sentence, the same procedure as specified hereinabove shall again be
followed, except that the written notice served upon the Manufacturer shall
specify the name and address of the person whom the Purchaser proposes to engage
to manufacture the New Product and the price and terms offered to such person.
The Manufacturer's failure to give written notice of exercise of its right to
manufacture the New Product within such thirty (30) day period or is written
advice that it waives its right to do so, as provided herein, shall not
constitute a waiver of the Manufacturer's right of first refusal to exclusively
manufacture additional New Products developed by or for the Purchaser from time
to time.
4.2 Production of "Other Cigars." The Purchaser expressly understands
and acknowledges that the Manufacturer has been and continues to be engaged in
the business of manufacturing and selling hand-made and machine-made cigars
either than the Products (the "Other Cigars"), both under its own trademarks and
pursuant to other private label manufacturing agreements, and that the
4
<PAGE>
Manufacturer, in its sole and absolute discretion, will continue to manufacture
and sell the Other Cigars. The Purchaser agrees, understands, and acknowledges
that the terms and conditions of this Agreement do not prohibit, limit or in any
way affect the Manufacturer's right to continue to manufacture and sell the
Other Cigars and/or to engage in such other business activities as deemed
appropriate by the Manufacturer in its sole discretion from time to tune.
Moreover, the Purchaser acknowledges and agrees that the Manufacturer's best
reasonable efforts production commitment in paragraph 3.2 hereof is to be
interpreted in light of the Manufacturer's continued right to produce the Other
Cigars.
5 HOLTS CIGAR COMPANY.
The Manufacturer expressly understands and acknowledges that the
Purchaser's affiliate, Holts Cigar Company ("Holts") has been engaged in the
business of selling hand-made cigars, machine-made cigars and products in
addition to the Products, and that Holts, in its sole and absolute discretion,
will continue to engage in these activities and any future related activities so
long as such activities do not involve the manufacture of the Products. Subject
to the foregoing, the Manufacturer agrees, understands, and acknowledges that
the terms and conditions contained in this Agreement do not prohibit, limit or
in any way affect Holts' right to continue to engage in such activities and/or
to engage in such other business activities as deemed appropriate by Holts in
its sole discretion from time to time. The Manufacturer further expressly
understands and acknowledges that the Purchaser may enter into a business
combination with Holt's and that upon the consummation of any such transaction,
the new or surviving entity shall have the same rights and liberties as Holt's
as set forth in the foregoing sentences, notwithstanding any such business
combination.
6 MANUFACTURING PROCESS
The Manufacturer shall have the exclusive right, in its sole and
absolute discretion, to determine the extent and nature of the manufacturing
process associated with the Products, and, subject to the Purchaser's right of
brand selection described in paragraph 8 hereof, to determine the nature, grade
and overall composition of the Products, provided that the Purchaser shall have
the right to approve the quality and workmanship of the Products resulting from
such manufacturing process. The Manufacturer agrees to manufacture the Products
substantially in compliance with the specifications set forth in Exhibit A
hereto; however, the Purchaser understands and acknowledges that the
Manufacturer may be required to modify the manufacturing process in response to
certain market and other external non-market conditions, including, but not
limited to, tobacco shortages caused by tobacco scarcity, price increases or
other factors such as diseases
5
<PAGE>
or embargoes, and the Purchaser approves of such modifications; provided,
however, that the Manufacturer may not make any modifications to the
manufacturing process or materials that would materially change the quality,
workmanship, appearance, taste or aroma of the Products without the Purchaser's
prior written consent, which consent shall not be unreasonably withheld. The
Purchaser acknowledges that the Products are an agricultural-based product, and
that variations in the appearance, taste and aroma of the Products will occur,
due to the natural variations in the appearance, taste and aroma of annual
tobacco crops. Variations in the Products due to the natural variation of the
tobacco crops shall not constitute "material" changes that would require the
approval of the Purchaser hereunder.
7 OWNERSHIP OF BLENDS.
The Purchaser expressly understands and acknowledges that the
Manufacturer has expended considerable resources in connection with the
development of the tobacco blends that are used in the manufacture of the
Products and that the Manufacturer has the right to register, under the laws of
the Dominican Republic or under the laws of any other jurisdiction, its legal
ownership of all proprietary information associated with such blends and that
the Manufacturer has taken appropriate steps to maintain the confidentiality of
such proprietary information. The Purchaser expressly agrees, understands and
acknowledges that the Manufacturer holds title to and is the owner of all
proprietary information associated with such blends and that the Purchaser shall
not exercise any ownership rights over such blends. Notwithstanding the
foregoing, the Manufacturer represents, warrants and covenants that following
termination of this Agreement it will not, directly or indirectly, market,
advertise, sell, compare, or in any manner use the "Ashton" or "Holts" names or
marks or the names or marks of any other Product manufactured hereunder in any
way to compare, contrast or relate to any products manufactured by the
Manufacturer and/or sold by the Manufacturer. In addition, the Manufacturer
expressly understands, acknowledges and agrees that following any termination of
this Agreement the Purchaser shall have the right to have cigars manufactured by
other manufacturers, which cigars may be similar in all respects to the Products
hereunder, and may contain similar blends as the Products, provided however that
the Purchaser shall not disclose any Confidential Information (as defined in
paragraph 19 hereof) in developing such other cigars.
<PAGE>
8 SELECTION OF BRANDS.
The Purchaser shall have the right to advise the Manufacturer of the
Purchaser's desired proportion of specified brands and sizes of brands of the
Products by giving the Manufacturer written or oral notice of the approximate
number of each desired brand and size, and the Manufacturer shaIl use its best
reasonable efforts to fulfill me Purchaser's desired brand and size selection.
The Purchaser acknowledges that its desired proportion of different brands and
size will be limited by the availability of tobacco. In addition, the Purchaser
acknowledges that, due to the manufacturing and aging process used to produce
the Products, changes in the desired proportion of brands and sizes may take a
year or more to be reflected in shipments to the Purchaser.
9 PURCHASE PRICES.
The purchase prices to be charged by the Manufacturer to the Purchaser
for the Products shall be paid in United States Dollars and shall initially be
in the amounts set forth on Exhibit 8 attached hereto (the "Purchase Prices").
However, because the parties hereto cannot accurately predict the actual cost of
manufacturing the Products during the entire term of this Agreement, the
Manufacturer expressly reserves the right to change the Purchase Prices charged
to the Purchaser for the Products; provided, however, the net invoice price
increase charged to the Purchaser for each shipment of the Products shall be no
greater, on a per thousand cigar basis, than the net invoice price increase
charged by the Manufacturer during the same time to any other similarly situated
United States-based importer (including affiliates of the Manufacturer) who
purchase products manufactured by the Manufacturer or any of its affiliates,
similar to the nature, grade and style of the Products. The Purchaser expressly
agrees, understands and acknowledges that it shall be bound by the terms and
conditions of this Agreement even though the Purchase Price of the Products may
change from time to time in accordance with this paragraph. Changes in the
Purchase Price may be made by the Manufacturer at any time, so long as the
Manufacturer provides the Purchaser with at least thirty (30) days' prior
written notice announcing such changes or in such other form as the Manufacturer
and the Purchaser may mutually agree, and changes in the Purchase Price shalI
become effective as of the date specified in such notice. In any event, the
parties hereto expressly agree, understand and acknowledge that the Purchase
Price shall be changed by an amount equal to any significant increase or
decrease, as the case may be, in (i) any taxes and charges which are now, or may
hereafter be, levied, imposed or charged upon the Manufacturer and associated
with or related to the Products (whether by federal, state, municipal or other
public authority, and whether domestic or foreign); (ii) any freight and
transportation costs associated with or related to the Products and borne by the
Manufacturer; and (iii) any customs
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duties (whether domestic or foreign) associated with or related to the Products
and borne by the Manufacturer.
10 PLACEMENT AND ACCEPTANCE OF PURCHASE ORDERS.
10.1 Priority. The terms and conditions set forth in this Agreement
shall apply to all purchases of the Products by the Purchaser from the
Manufacturer, and shall supersede any conflicting provisions contained in any of
the Purchaser's purchase orders or any other business forms provided by the
Purchaser or the Manufacturer (unless such purchase orders or any other business
forms are in writing, signed by both parties hereto, and expressly provide that
such conflicting provisions contained therein are intended by the parties hereto
to supersede the terms and conditions of this Agreement).
10.2 Placement of Orders; Purchase Order Acceptance. All orders for
Products must be submitted to the Manufacturer in writing. Standing purchase
orders may be submitted. Purchase orders submitted to the Manufacturer shall
only be deemed accepted upon issuance of a written acceptance by the
Manufacturer, or in lieu thereof, upon shipment of the Products referenced
therein.
10.3 Refusal and Revocation of Purchase Orders. Provided the
Manufacturer is in compliance with its obligations under paragraph 3.1 hereof,
the Manufacturer shall not be obligated to accept any purchase order from the
Purchaser for Products that, using its best reasonable efforts as required under
paragraph 3.2 hereof, the Manufacturer reasonably believes it cannot fill. In
addition, the Manufacturer may, in its sole discretion, and in addition to any
other remedies described in this Agreement, refuse to accept any purchase order,
revoke acceptance of any purchase order or refuse to deliver or delay shipment
of any previously-accepted purchase order, if the Purchaser becomes delinquent
in the payment of any of its obligations hereunder, or is in breach of any
material provision or condition of this Agreement. The revocation of acceptance,
refusal to deliver or delay of any shipment of the Products by the Manufacturer
under this paragraph 10.3 shall not be construed as a termination or breach of
this Agreement by the Manufacturer.
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11 FILING OUR PURCHASE ORDERS AND SHIPPING TERMS.
11.1 Filling of Purchase Orders.
11.1.1 The Manufacturer shall not be liable to the Purchaser or
any other person for any damages, direct, consequential or otherwise, or lost
profits from the Manufacturer's failure to fill any purchase orders, or for
delays in filling purchase orders, or for any errors in filling any such
purchase orders. Subject to the Manufacturer's commitment as to the Guaranteed
Production, if orders for all cigars (including the Manufacturer's own
trademarked cigars) received by the Manufacturer from all sources, including the
Purchaser, exceed the Manufacturer's inventory and/or work in process associated
with such cigars, the Manufacturer shall allocate availability on a basis that
the Manufacturer deems equitable or necessary, in its sole and absolute
discretion.
11.1.2 The Manufacturer may, in its sole and absolute discretion,
make partial shipments of the Purchaser's purchase orders, which shipments shall
be separately invoiced and each such separate invoice shall be paid when such
separate invoice becomes due regardless of whether the balance of the shipment
has been made or invoices for the balance of the shipment have been rendered.
Delay in delivery of any portion of a purchase order shall not relieve the
Purchaser of its obligation to accept the remaining deliveries of the Products.
11.1.3 Shipping Terms. Unless otherwise agreed to by the parties
in writing, beneficial and legal title to possession and control over, and risk
of loss and damage to, all Products shall pass to the Purchaser, or to such
financing institution or other parties as may have been designated in writing by
the Purchaser, F.O.B Santiago, Dominican Republic. For purposes of this
paragraph, the term "F.O.B." shall have the meaning ascribed thereto in
INCOTERMS (1990 version) and all amendments and revisions thereto, as published
by the International Chamber of Commerce, Paris, France.
12 INSPECTION.
The Purchaser shall have twenty (20) days from the date of delivery of
the Products to the shipping destination to inspect the Products or to cause its
agent to conduct such inspection. The Purchaser shall bear all costs and
expenses associated with inspection of the Products. Nonconforming Products may
be returned to the Manufacturer pursuant to the procedure set forth in paragraph
13 hereof. Once the Purchaser (or its agent) has completed its inspection
of the Products and found them to be satisfactory, or the Purchaser has waived
its inspection rights with respect to such Products, or the twenty (20) day time
period specified herein has passed without notification from the Purchaser to
the Manufacturer that the Products are
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nonconforming, as the case may be, the Purchaser shall not be entitled to return
the Products or seek the remedies otherwise available under paragraph 13 hereof.
13 RETURNS.
If, upon inspection, the Purchaser believes Products to be
nonconforming, the Purchaser shall notify the Manufacturer, and shall ship the
nonconforming Products to the location designated by the Manufacturer.
Nonconforming Products will be repaired, replaced or credit will be issued to
the Purchaser, in the Manufacturer's discretion, within twenty (20) days from
the date on which the Manufacturer received the Products claimed to be
nonconforming. The Manufacturer's acceptance of any Products so returned shall
not be deemed an admission that the Products are nonconforming, and, if the
Manufacturer determines that any such returned Products are not nonconforming,
such returned Products will be reshipped to the Purchaser at the Purchaser's
expense and the Purchaser will be charged for all of the shipping charges
incurred by the Manufacturer (including the costs previously assumed by the
Manufacturer for shipping such returned Products to the Manufacturer as well as
the costs of shipping such returned Products back to the Purchaser). The
Purchaser expressly waives its rights to consequential or incidental damages
relating to nonconforming Products.
14 PAYMENT TERMS.
Unless otherwise agreed in writing by the parties hereto, or except as
otherwise expressly provided in this Agreement, the Purchaser shall pay each
invoice generated by the Manufacturer in connection with the sale of the
Products within sixty (60) days from the date of such invoice. In the event the
Purchaser fails to pay any invoice within such sixty (60) day period, the
Manufacturer shall grant an additional five (5) day cure period in which the
Purchaser may make payment of such invoice. The Manufacturer agrees that the
number of days given to the Purchaser in which to pay each invoice shall be not
less than the number of days the Manufacturer grants to its most favored
private label manufacturing customers, excluding any of the Manufacturer's
private label manufacturing arrangements that existed prior to the date of this
Agreement. In the event the Purchaser fails to pay any invoice within the time
period specified in this paragraph 14, the Purchaser shall be in default of its
obligations to the Manufacturer, as described in paragraph 25.1 hereof, and the
Manufacturer shall have the right to terminate this Agreement. No
extension of these terms shall be penmitted without the Manufacturer's prior
written consent, which consent may be withheld in the Manufacturer's sole
discretion. Payment for the Products purchased by the Purchaser shall be in
United States dollars, and shall be made by electronic wire transfer or by
corporate check. Payments shall be made to the Manufacturer's address set forth
in paragraph 29.4
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hereof or to such place as shall be designated in writing from time to time by
the Manufacturer. If the Manufacturer instructs the Purchaser to send payment to
any U.S. bank, or the Manufacturer deposits the payment in any U.S. bank,
receipt of any check, draft or other commercial paper by the Manufacturer shall
not constitute payment in full until the funds representing the full amount due
and owing have fully cleared all banking channels. However, if the Manufacturer
instructs the Purchaser to send payment to any non-U.S. bank, or the
Manufacturer deposits the Purchaser's payment in any non-U.S. bank, receipt of
the check, draft of other commercial paper by the Manufacturer shall constitute
payment, provided full funds are available with respect to such check, draft or
other commercial paper at the time such check, draft or commercial paper
ultimately clears all banking channels.
15 THIRD PARTY DISTRIBUTORSHIPS; SHIPMENT SERVICES.
15.1 Notification as to Distributors. The parties hereto understand and
acknowledge that the Purchaser may, from time to time, desire to enter into
distribution relationships with various third parties who are engaged in the
business of distributing cigar and tobacco products, under which the Purchaser
may grant such distributors exclusive, nonexclusive, or other types of
distribution rights to distribute and sell the Products in specified
territories, as agreed upon by the Purchaser and such distributors from time to
time (herein referred to as collectively as the "Distributors" or individually
as a "Distributor"). The Purchaser agrees to provide written notification to the
Manufacturer of the appointment, termination, and/or modification of any such
agreements pertaining to the Distributors promptly following such appointment,
termination and/or modification, as the case may be.
15.2 Shipping and Billing Services. The parties hereto understand and
acknowledge that the Purchaser may from time to time request the Manufacturer to
(i) directly ship Products to a Distributor, (ii) directly render invoices on
behalf of the Purchaser for the Products shipped by the Manufacturer to a
Distributor, (iii) receive payment in respect of such invoices, (iv) remit
payment to the Purchaser of the amounts so collected by the Manufacturer after
the Manufacturer deducts the cost of the Products shipped on behalf of the
Purchaser to a Distributor, and (v) handle the preparation of associated
documentation pertaining to the matters described in (i)-(iv) herein. Whenever
the Purchaser makes such a request, the Manufacturer shall have the right but
not the obligation to handle the services described in (i) through (v) above.
Furthermore, the Manufacturer may make any such agreement to handle such
services subject to such conditions as the Manufacturer may impose in its sole
discretion including without limitation, an agreement by the Purchaser (1) to
pay a reasonable servicing fee, (2) to directly receive, review, and approve a
Distributor's purchase order associated with the shipment of the Products
described herein prior to the acceptance of such purchase
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order by the Purchaser, and (3) to be obligated to the Manufacturer in respect
of the Purchase Price for any Products shipped pursuant to this paragraph and in
respect of the applicable servicing fee imposed in connection with such
services. Any agreement as to the foregoing shall be treated as a part of this
Agreement. Therefore, failure of a Distributor to comply with the payment terms
as described in paragraph 14 of this Agreement in connection with an invoice
issued by the Manufacturer on behalf of the Purchaser for the Products shipped
by the Manufacturer to a Distributor or any other default of the Distributor of
the terms and conditions of this Agreement (as applicable), shall be treated as
the failure of the Purchaser to comply with such payment terms and/or such other
terms and conditions of this Agreement, and as a result the Purchaser shall be
deemed in default of this Agreement.
15.3 Status as Independent Agent. Without limiting the generality of
the foregoing, the Purchaser agrees, understands, and acknowledges that in
connection with the activities described in this paragraph 15, the Manufacturer
shall serve as an independent agent acting solely on behalf of the Purchaser
wish respect to the rendering of the services described herein. Nothing
contained in this paragraph 15 or any other provision of this Agreement shall be
construed to constitute the Purchaser as a partner, legal representative,
dependent agent or a joint venturer of the Manufacturer, nor shall either party
have any authority to bind the other in any respect, or assume or create any
obligation whatsoever, express or implied, on behalf of or in the name of the
other party, it being intended that each shall remain an independent contractor
responsible for each party's own actions.
15.4 Liabilitv and Indemnification. The Purchaser agrees that in
connection with the Manufacturer's services described in this paragraph 15, the
Manufacturer shall have no liability to the Purchaser, the Distributors or other
third parties whatsoever for the rendering of such services so long as the
Manufacturer does not engage in activities which constitute gross negligence or
willful misconduct. The Purchaser agrees to indemnify, defend and hold the
Manufacturer its officers, directors, employees, agents, successors, and assigns
harmless against any and all claims, losses, costs, liabilities, damages,
judgments, or related expenses, including attorneys' and paralegals' fees and
other costs of legal defense, whether direct or indirect, that they, or any
one or more of them, may sustain or incur as a result of (i) any acts or
omissions of the Purchaser or any of the Distributors arising out of the
arrangements described in this paragraph 15, or (ii) any acts of omissions of
the Manufacturer arising out of the Manufacturer's performance of the services
described in this paragraph 15, with the exception of any acts or omissions that
constitute gross negligence or willful misconduct of the Manufacturer.
15.5 Limited Extended Payment Terms. Notwithstanding the usual and
customary payment terms contained in paragraph 14 of this Agreement, the
Manufacturer, with respect to sales made through certain specifically identified
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Distributors, may, upon request from the Purchaser, but in the Manufacturer's
sole and absolute discretion and without any obligation to do so, agree to
modified payment terms, which modified payment terms shall not be applicable and
effective unless and until such terms are set forth in a separate written
instrument signed by both parties hereto. Such modification of the payment terms
shall be applicable only if such written instrument, specifically designates (i)
the Distributor to which the modified payment terms will apply and (ii) the
modified terms applicable to such Distributor. The Manufacturer may at any time
and from time to time, and in its sole and absolute discretion, discontinue the
modified payment terms for any or all of such designated Distributors by
notifying the Purchaser in writing of such discontinuation; provided, however,
such discontinuation shall not apply to any purchase orders that, at the time of
the Purchaser's receipt of such written notice, the Manufacturer has accepted in
accordance with the terms and conditions of this Agreement.
16 REPRESENTATIONS AND WARRANTIES OF THE PURCHASER.
The Purchaser hereby represents and warrants to the Manufacturer the
following:
16.1 Organization and Standing. The Purchaser is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Pennsylvania, with full corporate power and authority to carry on its businesses
as they are now being conducted.
16.2 Authoritv Relative to this Agreement. The execution of this
Agreement by the Purchaser and the delivery of this Agreement and the Exhibits
hereto to the Manufacturer have been duly authorized by the Purchaser, and no
further action is necessary by the Purchaser to make this Agreement and the
Exhibits hereto valid and binding upon the Purchaser and enforceable against the
Purchaser in accordance with the terms hereof or to carry out the transactions
contemplated hereby. Ihe execution, delivery, and performance of this Agreement
and the Exhibits hereto by the Purchaser shall not (i) constitute a breach or a
violation of the Articles of Incorporation or by-laws of the Purchaser or any
law, rule or regulation, agreement, indenture, deed of trust, mortgage, loan
agreement, or any other instrument to which the Purchaser is a party or by which
it is bound; (ii) constitute a violation of any order, judgment, or decree to
which the Purchaser is a party or by which any of the assets or properties of
the Purchaser is bound or affected; or (iii) result in the creation of any lien,
charge, encumbrance upon the assets or properties of the Purchaser, except as
otherwise provided herein.
16.3 Approvals and Consents. No consent, approval, or authorization
is required to be obtained by the Purchaser in connection with the execution or
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delivery of this Agreement by the Purchaser or the consummation by the
Purchaser of the transactions contemplated hereby.
17 REPRESENTATIONS AND WARRANTIES OF THIS MANUFACTURER.
The Manufacturer hereby represents and warrants to the Purchaser the
following:
17.1 Organization and Standing. The Manufacturer is a corporation duly
organized, validly existing, and in good standing under the laws of the Turks &
Caicos Islands, with full corporate power and authority to carry on its
businesses as they are now being conducted. The Manufacturer is duly qualified
to conduct its business in the Dominican Republic and has full power and
authority to fulfill its obligations under this Agreement.
17.2 Authoritv Relative to this Agreement. The execution of this
Agreement by the Manufacturer and the delivery of this Agreement to the
Manufacturer has been duly authorized by the Manufacturer, and no further action
is necessary by the Manufacturer to make this Agreement valid and binding upon
the Manufacturer and enforceable against the Manufacturer in accordance with the
terms hereof or to carry out the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement by the Manufacturer shall
not (i) constitute a breach or a violation of the Articles of Incorporation or
by-laws of the Manufacturer or of any law, rule or regulation, agreement,
indenture, deed of trust, mortgage, loan agreement, or any other instrument to
which the Manufacturer is a party or by which it is bound; (ii) constitute a
violation of any order, judgment, or decree to which the Manufacturer is a party
or by which any of the assets or properties of the Manufacturer is bound or
affected; or (iii) result in the creation of any lien, charge, encumbrance upon
the assets or properties of the Manufacturer, except as otherwise provided
herein.
17.3 Approvals and Consents. No consent, approval, or authorization is
required to be obtained by the Manufacturer in connection with the execution or
delivery of this Agreement by the Manufacturer or the consummation by the
Manufacturer of the transactions contemplated hereby.
17.4 Trade Name. The Manufacturer operates under the trade name
"Tabacalera A. Fuente & Cia." Notwithstanding the use of such tradename, the
Manufacturer owns all right, title and interest in and to, or is the lessor of,
the assets utilized in the manufacturing business that is the subject of this
Agreement, including without limitation the tobacco, molds, equipment, plant and
facilities.
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18 COMPLIANCE WITH LAWS.
The Purchaser represents and warrants that all of the Products
purchased by the Purchaser from the Manufacturer are for resale in the ordinary
course of the Purchaser's business and that the Purchaser will comply with
applicable laws relating to the collection and/or payment by the Purchaser of
value-added, sales, use, excise, customs, duties, and all other similar taxes
applicable to all such resale transactions, as well as all export or other
applicable restrictions on the sale of the Products. The Purchaser understands
and agrees that the Manufacturer, under no circumstances, has the duty or
obligation to collect or pay the taxes recited in the preceding sentence of this
paragraph. The Purchaser agrees to indemnify, defend and hold the Manufacturer
its officers, directors, employees, agents, successors, and assigns harmless
against any and all claims, losses, costs, liabilities, judgments, damages, or
related expenses, including attorneys' and paralegals' fees and other costs of
legal defense, whether direct or indirect, that they, or any of one or more of
them, may sustain or incur as a result of the Purchaser's failure to comply with
this paragraph 18.
19 CONFIDENTIALITY.
19.1 In General. The parties hereto hereby acknowledge that, in
connection with the business relationship that they have had or may in the
future have, they have been and will be exposed to and have access to certain
information with respect to each other's business operations that has not been
publicly disclosed and is not a matter of common knowledge (collectively, the
"Confidential Information"). Each of the parties agrees that it shall not, nor
shall any of its affiliates, including the agents, directors and officers
thereof, without prior written consent of the other party, at any time, in any
fashion, form or manner, either intentionally or otherwise, directly or
indirectly, divulge, disclose or communicate any of the Confidential Information
provided to such party by the other party to any third person, partnership,
joint venture, company, corporation, entity or other organization or use such
Confidential Information other than in connection with the business transactions
entered into between the parties to this Agreement, unless such Confidential
Information is used pursuant to a separate license or agreement between the
parties to this Agreement authorzing such use or unless and until such
Confidential Information is or was (i) publicly available or otherwise in the
public domain; (ii) rightfully obtained from any third party without
restrictions and without breach of this Agreement; or (iii) disclosed pursuant
to judicial action or governmental regulations or other requirements, but then
only if the disclosing party notified the other party prior to such disclosure
and reasonably cooperated with the other party in the event the other party
elected to legally contest and avoid such disclosure.
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19.2 Effect of Ownership Shift.
19.2.1 In the event of an Ownership Shift (as defined in
paragraph 20.1 hereof), the provisions of paragraph 19.1 hereof shall cease to
apply, and the provisions of this paragraph 19.2.2 shall apply to the parties.
19.2.2 The parties hereto hereby acknowledge that, in
connection with the business relationship that they have had or may in the
future have, they have been and will be exposed to and have access to certain
information with respect to each other's business operations that has not been
publicly disclosed and is not a matter of common knowledge. To the extent such
information is labelled, whether electronically or in writing, as "confidential"
or is otherwise indicated electronically or in writing to be of a private or
proprietary nature, such information shall be considered "Confidential
Information" hereunder. Each of the parties agrees that it shall not, nor shall
any of its affiliates, including the agents, directors and officers thereof,
without prior written consent of the other party, at any time, in any fashion,
form or manner, either intentionally or otherwise, directly or indirectly,
divulge, disclose or communicate any of the Confidential Information provided to
such party by the other party to any third person, partnership, joint venture,
company, corporation, entity or other organization or use such Confidential
Information other than in connection with the business transactions entered into
between the parties to this Agreement, unless such Confidential Information is
used pursuant to a separate license or agreement between the parties to this
Agreement authorizing such use or unless and until such Confidential Information
is or was (i) publicly available or otherwise in the public domain; (ii)
rightfully obtained from any third party without restrictions and without breach
of this Agreement; or (iii) disclosed pursuant to judicial action or
governmental regulations or other requirements, but then only if the disclosing
party notified the other party prior to such disclosure and reasonably
cooperated with the other party in the event the other party elected to legally
contest and avoid such disclosure.
19.2.3 The parties hereto agree that any information disclosed
prior to an Ownership Shift and deemed to be "Confidential Information" under
the terms of paragraph 19.1 hereof shall continue to be considered "Confidential
Information" and preserved as such after an Ownership Shift, even if such
information does not meet the requirements of paragraph 19.2.
20 OWNERSHIP SHIFT.
20.1 Existence and Notice of Ownership Shift. An "Ownership
Shift" shall occur if at any time Carlos A. Fuente and/or Carlos P. Fuente
and/or Cynthia F.
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Suarez, individually or any combination thereof, no longer directly or
indirectly exercise voting control over the Manufacturer and control over all
material aspects of the management and business operations of the Manufacturer.
The Manufacturer shall provide the Purchaser with written notice of the
Ownership Shift. The remaining provisions of this paragraph 20 shall apply upon
the occurrence of an Ownership Shift.
20.2 Amendment of Manufacturer's Production Commitments. Effective as
of the date of the Ownership Shift, the production commitments of the
Manufacturer set forth in paragraph 3 hereof shall be terminated and the
production commitments set forth in this paragraph 20.2 shall apply. The
Manufacturer shall be obligated to produce and sell to the Purchaser the lesser
of:
20.2.1 the quantity of Products requested by the Purchaser
pursuant to purchase orders submitted in compliance with paragraph 10 hereof; or
20.2.2 the quantity of Products that equals to the average of
the immediateIy preceding three (3) year's sales of Products from the
Manufacturer to the Purchaser (or to any successor, new or surviving entity in
the event the Purchaser participates in a business combination) (the "New
Guaranteed Production") for the remaining term of this Agreement. Provided,
however, that the New Guaranteed Production shall not be less than five million
(5,000,000) Products. In addition, beginning in the second year after the
occurrence of the Ownership Shift, the New Guaranteed Production shall be
automatically increased by five percent (5%) per year.
20.3 Amendment of Confidentiality Obligations. In addition to the other
provisions of this paragraph 20, upon the occurrence of an Ownership Shift, the
terms of paragraph 19.2 hereof shall apply.
20.4 Clarification of Purchasing Price for Fuente-branded Products. If
an Ownership Shift occurs, then in order to be counted as part of the Guaranteed
Production, Fuente-branded cigars which are purchased directly from Manufacturer
must be sold to the Purchaser at a price not higher than the price charged by
the Manufacturer to its most favored customer for similar goods sold on similar
terms and in similar quantities to the Fuente-branded cigars sold to the
Purchaser.
20.5 Right of Termination. In addition to the other provisions of this
paragraph 20, effective as of the date of the Ownership Shift, the Purchaser
shall have the right, upon delivery of one (1) year's prior written notice to
the Manufacturer, to terminate this Agreement without further cause.
20.6 Clarification Regarding Application of this Paragraph. This
paragraph shall not apply in the event that Carlos A. Fuente and Carlos P.
Fuente cease to own
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any stock in the Manufacturer, and Cynthia F. Suarez becomes the only one of the
three Fuente family members named herein to own stock in the Manufacturer.
However, in such event, the provisions of paragraph 26.4 shall apply.
21 TRADEMARK INFRINGEMENT.
The Purchaser warrants and covenants that it is the exclusive licensee
of the trademark rights associated with the Products and that the companies
identified on Exhibit C hereto are the sole and exclusive owners of the entire
and unencumbered right, title and interest in and to the trademarks identified
on Exhibit C hereto. The Purchaser undertakes to indemnify, defend and hold the
Manufacturer, its officers, directors, employees, agents, successors, and
assigns harmless from any and all claims, losses, costs, liabilities, damages,
judgments, or expenses of whatever form or nature, including attorneys' fees and
paralegals' fees and other costs of legal defense, whether direct or indirect,
that they or any one or more may sustain or incur as a result of any alleged
infringement or claim of infringement of such trademark or such other rights
relating to the manufacture, distribution, sale or use of the Products, and to
defend, upon the request of the Manufacturer, at the Purchaser's own expense,
any action which may be brought against the Manufacturer, its suppliers,
venders, or assigns under any alleged infringement or claim of infringement
pertaining to such trademark or such other rights relating to the manufacture,
distribution, sale or use of the Products. As used in this paragraph 21, the
term "claim" includes, without limitation, any claim for temporary or permanent
injunctive relief in any action for such infringement of trademark or other
rights.
22 CLOSING.
The closing of the transactions contemplated by this Agreement shall
occur at the time and date this Agreement (and the Exhibits hereto) is executed
and delivered by the parties hereto. The closing may be held by telecopy, with
counterpart execution pages circulated and signed by telecopy, followed within a
reasonable period of time by original (inked) signature pages.
23 FORCE MAJEURE.
23.1 Scope of Governance. In the event that performance by either party
of any of its obligations under this Agreement is precluded or adversely and
materially affected because of the occurrence of any event, unforeseen
development, or contingency beyond the control of such party (and "Unforseen
Event"), the rights and obligations of the parties hereto shall be governed by
this paragraph 23.
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23.2 Definitions. For purposes of this Agreement, an "Unforseen Event"
shall include, but shall not be limited to, the following: war, declared or
undeclared, revolution, insurrection, counter-revolution, isolated instances of
violence, fire, flood, tempest, interruption of transportation facilities,
riots, civil commotion, strikes, labor disputes, labor slowdowns, lockouts (or
other labor disputes affecting the parties hereto, other manufacturers or
suppliers), freight embargoes or transportation delays, shortages of labor,
inability to secure materials, supplies or power at reasonable prices or on
account of shortages, acts of God, including (but not limited to) lightning,
severe weather, earthquakes, hurricanes, or other acts of nature, acts of the
public enemy, inflation beyond the expected rate of the country to which the
event, development, or contingency pertains, prohibition of import or export of
the Products (or any components thereof), governmental orders, regulations,
restrictions, and all other similar causes.
23.3 Limited Excusal of Performance; Termination. Except as otherwise
provided herein, the affected party shall be excused from any failure to perform
under the terms and conditions of this Agreement to the extent such failure is
directly or indirectly caused by an Unforeseen Event. Any suspension of
performance by reason of this provision shall be limited to the period during
which the Unforeseen Event exists, and such suspension shall not extend or in
any manner affect the running of the time period provided for in this Agreement.
If performance by either party hereunder is suspended as a result of an
Unforseen Event for a period of one hundred and eighty (180) days or more, the
other party hereto shall, upon furnishing not less than thirty (30) days written
notice to non-performing party, have the right to terminate this Agreement.
Notwithstanding the foregoing, the Purchaser shall not, as a result of any of
the foregoing causes, be relieved or excused from paying the Manufacturer any
monies owed under this Agreement.
23.4 Best Reasonable Efforts to Make Up of Shortfall. In the event the
Manufacturer is affected by an Unforseen Event, and this Agreement is not
terminated in accordance with paragraph 23.3 hereof, the Manufacturer shall use
its best reasonable efforts to make up any shortfall in production caused by
such Unforseen Event within twelve (12) months after the resumption of
production hereunder. Similarly, in the event the Purchaser is affected by an
Unforseen Event, and this Agreement is not terminated in accordance with
paragraph 23.3 hereof, the Purchaser shall use its best reasonable efforts to
make up any shortfall in orders for Products caused by such Unforseen Event
within twelve (12) months after the resumption of purchasing hereunder.
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24 TERM.
Except as otherwise provided in this Agreement, the term of this
Agreement shall begin as of May 1, 1997 (the "Commencement Date") and shall
continue for a ten (10) year term ending April 30, 2007; provided however, that
on May 1, 2005 and on each fifth-year anniversary of such date thereafter (i.e.
May 1, 2010, May 1, 2015, etc.; the "Renewal Date"), the term of this Agreement
shall automatically be extended for an additional five (5) year term unless
either party gives the other written notice of termination of this Agreement on
or before the Renewal Date. If notice of termination is given on or before a
Renewal Date, the term of this Agreement shall not be further extended and this
Agreement shall terminate at the end of the then applicabIe ten (10) or five (5)
year term, unless earlier terminated as otherwise expressly provided for herein.
For example, the initial term of this Agreement begins on May 1, 1997 and ends
on April 30, 2007. The first Renewal Date is May 1, 2005. If no notice of
termination is sent by either party on or before May 1, 2005, the term of this
Agreement will automatically extend for an additional five (5) years, from May
1, 2007 until April 30, 2012, with the next Renewal Date occurring on May 1,
2010. However, if notice of termination is given by either party on or before
May 1, 2005, then this Agreement will not be renewed, and will expire on April
30, 2007.
25 TERMINATION OF THIS AGREEMENT BY THE MANUFACTURER.
The Manufacturer shall have the right, in addition to all other
remedies it may have at law or in equity, to terminate this Agreement and all
rights herein upon not less than thirty (30) days' written notice to the
Purchaser with respect to any monetary default, unless otherwise designated
herein, and upon not less than sixty (60) days written notice with respect to
any non-monetary default, unless otherwise designated herein, provided: (i) the
Manufacturer is in compliance with this Agreement in all material respects; (ii)
any one or more of the events of default set forth below shall occur with
respect to the Purchaser; and (iii) the Purchaser does not fully cure such
default to the satisfaction of the Manufacturer within the applicable thirty
(30) or sixty (60) day notice period or demonstrate to the satisfaction of the
Manufacturer that the Purchaser is actively and diligently pursuing such a cure
and has a substantial likelihood of promptly effecting such cure. Any notice of
default issued by the Manufacturer hereunder shal1 specify the nature of the
default which has caused such notice to be issued. The events of default are:
25.1 If the Purchaser shall fail to pay the Manufacturer any monies or
fees when due;
25.2 If the Purchaser fails to comply with any other material terms or
conditions of this Agreement;
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25.3 As set forth in paragraph 23.3 regarding a continuing force
majeure event.
25.4 Termination effective immediately, if a receiver, liquidator or
trustee of the Purchaser, or as to any material portion of its business, is
appointed by court order and such order remains in effect for more than thirty
(30) days; or the Purchaser is adjudicated bankrupt or insolvent; or any
material portion of the business of the Purchaser is sequestered by court order
and such order remains in effect for more than thirty (30) days; or a petition
is filed against the Purchaser under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution, or liquidation law
of any jurisdiction, whether now or hereafter in effect, and is not dismissed
within thirty (30) days after such filing; or
25.5 Termination effective immediately, if the Purchaser files a
petition in voluntary bankruptcy or seeks relief under any provision of any
bankruptcy, reorganization, arrangement, insolvency, readjustment of debt,
dissolution, or liquidation law of any jurisdiction, whether now or hereafter in
effect, or consents to the filing of any petition against it under such law.
26 TERMINATION OF THIS AGREEMENT BY THE PURCHASER.
The Purchaser shall have the right, in addition to all other remedies
it may have at law or in equity, to terminate this Agreement and all rights
herein upon not less than thirty (30) days' written notice to the Manufacturer
with respect to any monetary default, unless otherwise designated herein, and
upon not less than sixty (60) days written notice with respect to any
non-monetary default, unless otherwise designated herein, provided: (i) the
Purchaser is in compliance with this Agreement in all material respects; (ii)
any one or more of the events of default set forth below shall occur with
respect to the Manufacturer; and to the Manufacturer does not fully cure such
default to the satisfaction of the Purchaser within the applicable thirty (30)
or sixty (60) day notice period or demonstrate to the satisfaction of the
Purchaser that the Manufacturer is actively and diligently pursuing such a cure
and has a substantial likelihood of promptly effecting such cure. Any notice of
default issued by the Purchaser hereunder shall specify the nature of the
default which has caused such notice to be issued. The events of default are:
26.1 If the Manufacturer fails to comply with any material terms or
conditions of this Agreement; or
26.2 As set forth in paragraph 20.3 regarding an Ownership Shift; or
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26.3 As set forth in paragraph 23.3 regarding a continuing force
majeure event.
26.4 If Carlos A. Fuente and Carlos P. Fuente should both directly and
beneficially cease to own stock in the Manufacturer during the term of this
Agreement, the Purchaser shall have the right, for a period of three (3) years
following the date on which Carlos A. Fuente and Carlos P. Fuente both cease to
own any such stock, to terminate this Agreement upon ninety (90) days' prior
written notice. The right of termination set forth in this paragraph 26.4 shall
automatically expire, if not exercised, three (3) years after the date on which
Carlos A. Fuente and Carlos P. Fuente both cease to own any stock in the
Manufacturer, as described herein.
27 EFFECT OF EXPIRATION OR TERMINATION OF THIS AGREEMENT.
27.1 No Release. This Agreement shall terminate and expire
automatically, unless termination has occurred earlier as a result of a
specified default hereunder, on the date specified in the notice of termination.
Any termination of this Agreement, whether due to expiration or an earlier
termination, shall not release a party from payment of any damages sustained by
the other party, from payment of any obligations accrued hereunder, or from
performance of its obligations under the provisions of this Agreement relating
to termination, subject to and limited by the terms of this Agreement.
27.2 Acceleration of Invoices. Upon the expiration or termination of
this Agreement for any reason, whether by reason of default, lapse of time or
other cause, the due date of all invoices for the Products shall automatically
be accelerated so that they shall become due and payable as of the effective
date of the termination, even if longer terms had been provided previously. Any
termination of this Agreement, excluding termination with two (2) years' prior
notice under paragraph 24 hereof by either party, shall give the Manufacturer
the right to cancel all orders of unshipped Products.
27.3 Compensation for Certain Costs. Upon expiration or termination of
this Agreement, the Purchaser shall reimburse the Manufacturer for the
Manufacturer's out-of-pocket cost of all unused cigar labels, boxes and other
unique items that bear the trademarks associated with the Products, and the
Manufacturer shall either destroy such goods or ship such goods to the
Purchaser, in the Purchaser's discretion and at the Purchaser's cost.
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28 DISCLAIMER.
The Manufacturer makes no warranty that the Products are merchantable
or fit for any particular purpose or fit for any other purpose. The sole
responsibility of the Manufacturer shall be that it will manufacture the
Products substantially in compliance with the description set forth in Exhibit A
attached hereto, which manufacturing process may be changed from time to time in
accordance with paragraph 6 hereof, and the Manufacturer agrees that the
Products will be free from defects in material and workmanship. This warranty is
expressly made in lieu of any and all warranties and the sole liability of the
Manufacturer shall be to repair, replace or credit the Purchaser for any
Products not in conformity with such specifications (as provided in paragraph 13
hereof), and the Purchaser expressly and absolutely waives any rights that it
may have for consequential or incidental damages. Except for directly related
acts of gross negligence of the Manufacturer, the Purchaser agrees, warrants,
and covenant that it shall be solely responsible for compliance with all
federal, state, and local laws (whether such laws are of the United States of
America or other foreign jurisdictions) and regulations pertaining distribution,
marketing and sale of the Products, and without limiting the general
indemnification obligation of the Purchaser as described in paragraph 29.12
hereof, that the Purchaser shall indemnify, defend and hold the Manufacturer,
its officers, directors, employees, agents, successors and assigns harmless from
any and all claims, losses, costs, liabilities, damages, judgments, or related
expenses, including attorneys' and paralegals' fees and other costs of legal
defense, whether direct or indirect, that they or any one or more may sustain or
incur as a result to the Purchaser's failure to comply with such laws and
regulations.
THE MANUFACTURER MAKES NO INDEMNITY, REPRESENTATION OR WARRANTY, EITHER
EXPRESSED OR IMPLIED, WITH RESPECT TO THE PRODUCTS, EXCEPT FOR THE WARRANT
EXPRESSLY SET FORTH IN THIS PARAGRAPH 28, AND IN NO EVENT SHALL THE MANUFACTURER
BE LIABLE TO THE PURCHASER FOR SPECIAL OR CONSEQUENTIAL DAMAGES EXPRESSLY
PROVIDED HEREIN.
29 GENERAL PROVISIONS.
29.1 Survival of Representations; Warranties Etc. Each of the parties
to this Agreement covenants and agrees that its representations, warranties,
covenants, statements, and agreements contained in this Agreement and the
Exhibits hereto and any document delivered in connection herewith shall survive
the May 1, 1997 effective date of this Agreement (as specified in paragraph 1
hereof), and shall remain in effect during the term of this Agreement.
Paragraphs 7, 19, 21, 27, 29.1, 29.12, 29.13 and 29.14 hereof shall survive the
termination or expiration of this Agreement.
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<PAGE>
29.2 Construction. This Agreement is intended by the parties hereto as
a final expression of their agreement as a complete and exclusive statement of
the subject matter of this Agreement. No course of prior dealings between the
parties and no usage of trade shall be relevant or admissible to supplement,
explain or vary any of the terms of this Agreement. Acceptance of, or
acquiescence in, a course of performance rendered under this or any prior
agreement shall not be relevant or admissible to determine the meaning of this
Agreement even though the accepting or acquiescing party has knowledge of the
nature of the performance and an opportunity to make objection. No
representations, understandings, or agreements have been made or relied upon in
making this Agreement other than those specifically set forth herein.
29.3 Merchant Status. The Manufacturer and the Purchaser represent to
each other that they are merchants with respect to the Products. No agent,
employee, or representative of the Purchaser has made, or has any authority to
bind the Manufacturer by, any warranty, representation, or affirmation
concerning the Products. The Purchaser acknowledges that no such affirmation,
warranty or representation has been made, none has been relied upon, and none
forms the basis of this Agreement.
29.4 Notices and Consents. All notices, consents, acceptances and any
other communication required herein shall be in writing and shall be deemed
delivered upon receipt, if delivered in person; upon transmission, if sent by
electronic means (i.e. telecopy or e-mail), with electronic confirmation of
receipt, or four (4) days after posting, if sent by recognized international
expedited delivery service. No notices, consents etc may be sent by mail, due to
the unreliability of the Dominican Republic mail service. All notices, etc.
shall be sent to the parties at their respective addresses set forth below (or
at such other address for a party as shall be specified by notice given
hereunder):
If to Purchaser: Ashton Distributors, Inc.
Attn: Robert G. Levin, President
2901 Grant Avenue
Philadelphia, PA 19114
Telecopy: 215-676-9085
With a copy to: Matthew H. Lubart, Esq.
Rubin, Ehrlich & Buckley
619 Alexander Road, Suite 2
Princeton, NJ 08540
Telecopy: 609-452-2077
24
<PAGE>
If to Manufacturer: Carlos P. Fuente, President
Fuente Cigar Ltd.
Zona Franca
Santiago, Dominican Republic
Telecopy: 809-575-4969
With a copy to: William M. Sharp, Sr., Esquire
Sharp, Smith & Harrison, P.A.
4830 W. Kennedy Blvd., Suite 630
Tampa, Florida 33609
Telecopy: 813-286-4197
29.5 Severability of Provisions. Wherever possible, each provision of
this Agreement shall be interpreted in such manner as to be effective and valid,
but if any provision of this Agreement shall be prohibited by applicable law,
unenforceable in any jurdisdiction or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition,
unenforceability, or invalidity, without invalidating the remainder of such
provision or the remaining provisions of this Agreement, or affecting the
validity or enforceability of such provision in any other jurisdiction.
29.6 Language. The English language text, and American usage thereof,
shall control the interpretation of this Agreement and all writings between the
parties.
29.7 Assignment. Neither this Agreement nor any rights or privileges
hereunder shall be assigned, transferred, shared or divided, by operation of law
or otherwise, in any manner, by either party hereto without the prior written
consent of the other party, which consent may be arbitrarily withheld. Any
purported assignment or transfer not having the written consent of the party
required hereunder to give such consent shall be null and void and shall
constitute a default hereunder. Notwithstanding the foregoing, in the event a
party hereto enters into a business combination with another entity, and upon
consummation of that business combination the current owner of the affected
party, or Robert G. Levin and Carlos A. Fuente, Carlos P. Fuente and/or Cynthia
F. Suarez directly or indirectly, collectively or individually, own a majority
of the voting interests in the surviving entity resulting from the business
combination, the parties hereto agree to consent to the assignment of the
affected party's rights under this Agreement to the surviving entity of such
business combination.
29.8 Paragraph Headings; Plural; Gender Miscellaneous. The paragraph
headings contained herein are for reference only and shall not be considered as
substantive parts of this Agreement. The use of the singular or plural form
shall include the other form and the use of the masculine, feminine or neutered
gender
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<PAGE>
shall include the other gender. The words "hereof," "herein" and "thereunder"
and words of similar import when used in this Agreement, shall refer to this
Agreement as a whole, including all exhibits hereto, and not to any particular
provision of this Agreement unless otherwise specified; all references herein to
paragraphs, sections or exhibits shall refer to paragraphs or sections of this
Agreement or exhibits to this Agreement. The parties hereto acknowledge and
agree that the recitals immediately following the preamble of this Agreement are
true and correct and are incorporated herein as a part of this Agreement.
This Agreement shall be binding upon the parties hereto.
29.9 Entire Agreement; Amendment. This Agreement (including the
exhibits hereto and all documents and papers delivered pursuant hereto and any
written amendments hereof executed by the parties to this Agreement, as
specified herein) constitutes the entire agreement and supersedes all prior
agreements and understandings, oral and written, among the parties hereto with
respect to the subject matter hereof. This Agreement may be amended only by
written agreement executed by all of the parties hereto. Time is of the essence
of this Agreement and each of its provisions, and no extension of any time
period shall be binding upon any of the parties hereto unless expressly provided
herein or in writing and signed by all of the parties hereto.
29.10 Counterparts. This Agreement may be signed in any number of
counterparts, each of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
29.11 Further Assurances. The parties hereto shall execute and deliver,
or cause to be executed and delivered, such additional or further transfers,
assignments, endorsements or other instruments as the other party or its counsel
may reasonably request from time to time for purposes of carry1ng out the
transactions contemplated by this Agreement.
29.12 Indemnification.
29.12.1 The Purchaser agrees to indemnify, defend and hold the
Manufacturer, its officers, directors, employees, agents, successors, and
assigns, harmless against all claims, losses, costs, liabilities, damages,
judgments, or expenses of whatever form or nature, including attorneys' and
paralegals' fees and other costs of legal defense, whether direct or indirect,
that they, or any of them, may sustain or incur as a result of any acts or
omissions of the Purchaser including but not limited to (i) the Purchaser's
material breach of any of the provisions of this Agreement, (ii) the Purchaser's
gross negligence or other tortuous conduct, or (iii) violation by the Purchaser
of any applicable law, regulation or order in the United States of America or
any other applicable law, regulation or order.
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<PAGE>
29.12.2 The Manufacturer agrees to indemnify, defend and hold
the Purchaser, its officers, directors, employees, agents, successors, and
assigns, harmless against all claims, losses, costs, liabilities, damages,
judgments, or expenses of whatever form or nature, including attorneys' and
paralegals' fees and other costs of legal defense, whether direct or indirect,
that they, or any of them, may sustain or incur as a result of any acts or
omissions of the Manufacturer including but not limited to (i) the
Manufacturer's material breach of any of the provisions of this Agreement, (ii)
the Manufacturer's gross negligence or other tortuous conduct, or (iii)
violation by the Manufacturer of any law, regulation or order in the United
States of America that may be applicable to it, or any other applicable law,
regulation or order.
29.13 Remedies. The Purchaser hereby expressly waives any rights that
it may have to specific performance or any other remedies at law other than the
remedies specifically provided for in this Agreement.
29.14 Governing Law; Venue; Process. The validity, construction, and
enforcement of, and the remedies under, this Agreement shall be governed in
accordance with the laws of Florida (except that if any choice of law provision
under Florida law would result in the application of the law of a state or
jurisdiction other than Florida, such provision shall not apply). The parties
hereto expressly acknowledge and agree that the United Nations convention for
the International Sale of Goods shall not apply to this Agreement. The parties
to this Agreement agree that jurisdiction and venue shall properly lie in the
courts of the State of Florida, with respect to any legal proceedings arising
under or connected with this
27
<PAGE>
Agreement. The parties further agree that the delivery by courier of any process
shall constitute valid and lawful process against them.
IN WITNESS WHEREOF, the parties have executed this Agreement the day
and year first above written.
FUENTE CIGAR LTD.
By: /s/ Carlos P. Fuente
----------------------------------
Carlos P. Fuente, President
the "Manufacturer"
ASHTON DISTRIBUTORS, INC.
By: /s/ Robert Levin
------------------------------------
Robert Levin, President
the "Purchaser"
28
<PAGE>
LIST OF EXHIBITS
EXHIBIT A - Product Specifications
EXHIBIT B - Purchase Price
EXHIBIT C - Trademark Ownership
<PAGE>
EXHIBIT A
Holt's Dominican Bundles
Item Length Ring Packing
-----------------------------------------------------------
Presidente 8 1/2" 52 25
Chairman 7 1/2" 52 25
Churchill 7" 49 25
Rothschild 4 1/2" 50 25
#1 Extra 7" 43 25
Toro 6" 50 25
#4 5 1/2" 43 25
Holt's Classics
Item Length Ring Packing
------------------------------------------------------------
Corona 5 1/2" 44 25
Churchill 7 1/2" 52 25
Lonsdale 6 3/4" 43 25
Gran Corona 6 7/8" 48 25
Robusto 5 1/2" 50 25
Holt's Special Maduro
Item Length Ring Packing
------------------------------------------------------------
Presidente 8 1/2" 52 25
Chairman 7 1/2" 52 25
Churchill 7" 49 25
#1 6 3/4" 43 25
Toro 6" 50 25
#4 5 1/2" 43 25
Page A-1
<PAGE>
Ashton
Item Length Ring Packing
------------------------------------------------------------
Churchill 7 1/2" 52 25
Churchill 7 1/2" 52 4
Prime Minister 6 7/8" 48 25
Prime Minister 6 7/8" 48 4
8-9-8 6 1/2" 44 25
8-9-8 6 1/2" 44 5
Magnum 5" 50 25
Magnum 5" 50 4
Double Magnum 6" 50 25
Corona 5 1/3" 44 25
Corona 5 1/3" 44 5
Elegante 6 1/2" 35 25
Panetela 6" 36 25
Panetela 6" 36 5
Cordial 5" 30 25
Cordial 5" 30 5
Ashton Cabinet Select
Item Length Ring Packing
------------------------------------------------------------
#1 9" 52 10
#2 7" 46 20
#3 6" 46 20
#6 5 1/2" 52 25
#7 6 1/4" 52 25
#8 7" 49 25
#10 7 1/2" 52 20
ASHTON AGED MADURO
Item Length Ring Packing
------------------------------------------------------------
#60 7 1/2" 52 25
#50 7" 48 25
#40 6" 50 25
#30 6 3/4" 44 25
#20 5 l/2" 44 25
#10 5" 50 25
Page A-2
<PAGE>
EXHIBIT C
Trademark Ownership
Trademark Owner
- --------- -----
Ashton Ashton Holdings, Inc.
Holt's Holt's Cigar Company, Inc.
Exhibit A - Page 1
EXCLUSIVE DISTRIBUTORSHIP AGREEMENT
THIS EXCLUSIVE DISTRIBUTORSHIP AGREEMENT is made and entered into as of the
first day of September, 1997, by and between FUENTE CIGAR LTD. a corporation
organized under the laws of the Turks & Caicos Islands, British West Indies (the
"Manufacturer") and ASHTON DISTRIBUTORS, Inc., a corporation organized under the
laws of the State of Pennsylvania, United States of America (the "Distributor").
W I T N E S S E T H:
WHEREAS, FCL owns the registered trademarks set forth on Exhibit A hereto
(collectively, the "Trademarks") and manufactures cigars bearing the Trademarks
(the "Products");
WHEREAS, the Distributor desires to become the exclusive distributor of the
Products throughout the world (the "Territory"); and
WHEREAS, FCL desires to use the services of the Distributor as FCL's
exclusive distributor in the Territory on the conditions set forth in this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is hereby acknowledged by the parties hereto, the parties
hereto agree as follows:
1 APPOINTMENT.
Subject to the terms and conditions of this Agreement, FCL hereby appoints
the Distributor as its exclusive distributor to sell the Products in the
Territory during the Term of this Agreement, and the Distributor accepts such
appointment and agrees to sell the Products subject to the terms and conditions
of this Agreement. FCL shall not appoint any other distributor or sales agent
for the Products in the Territory, nor shall FCL sell the Products itself in the
Territory during the Term of this Agreement, provided, however, that nothing
herein shall prevent FCL or any other party from selling other cigars and goods
that are not "Products" as defined herein in the Territory during the Term of
this Agreement and thereafter.
<PAGE>
2 TERM.
Except as otherwise provided in this Agreement, the term of this Agreement
(the "Term") shall begin as of September 1, 1997 (the "Commencement Date") and
shall continue for a ten (10) year period ending August 31, 2007; provided,
however, that on September 1, 2005 and on each fifth-year anniversary of such
date thereafter (i.e. September 1, 2010, September 1, 2015, etc.; the "Renewal
Date"), the Term of this Agreement shall automatically be extended for an
additional five (5) year Term unless either party gives the other written notice
of termination of this Agreement on or before the Renewal Date. If notice of
termination is given on or before a Renewal Date, the Term of this Agreement
shall not be further extended and this Agreement shall terminate at the end of
the then-applicable ten (10) or five (5) year Term, unless earlier terminated as
otherwise expressly provided for herein. For example, the initial Term of this
Agreement begins on September 1, 1997 and ends on August 31, 2007. The first
Renewal Date is September 1, 2005. If no notice of termination is sent by either
party on or before September 1, 2005, the term of this Agreement will
automatically extend for an additional five (5) years, from September 1, 2007
until August 31, 2012, with the next Renewal Date occurring on September 1,
2010. However, if notice of termination is given by either party on or before
September 1, 2005, then this Agreement will not be renewed, and will expire on
August 31, 2007.
3 REPRESENTATIONS OF THE DISTRIBUTOR.
3.1 Organization and Standing. The Distributor is a corporation duly
organized, validly existing, and in good standing under the laws of the State of
Pennsylvania, with full corporate power and authority to carry on its businesses
as they are now being conducted.
3.2 Authority Relative to this Agreement. The execution of this Agreement
by the Distributor and the delivery of this Agreement and the Exhibits hereto to
FCL have been duly authorized by the Distributor, and no further action is
necessary by the Distributor to make this Agreement and the Exhibits hereto
valid and binding upon the Distributor and enforceable against the Distributor
in accordance with the terms hereof or to carry out the transactions
contemplated hereby. The execution, delivery, and performance of this Agreement
and the Exhibits hereto by the Distributor shall not (i) constitute a breach or
a violation of the Articles of Incorporation or by-laws of the Distributor or
any law, rule or regulation, agreement, indenture, deed of trust, mortgage, loan
agreement, or any other instrument to which the Distributor is a party or by
which it is bound; (ii) constitute a violation of any order, judgment, or decree
to which the Distributor is a party or by which any of the assets or properties
of the Distributor is bound or
2
<PAGE>
affected; or (iii) result in the creation of any lien, charge, encumbrance upon
the assets or properties of the Distributor, except as otherwise provided
herein.
3.3 Approvals and Consents. No consent, approval, or authorization is
required to be obtained by the Distributor in connection with the execution or
delivery of this Agreement by the Distributor or the consummation by the
Distributor of the transactions contemplated hereby.
4 REPRESENTATIONS OF FCL.
FCL hereby represents and warrants to the Distributor the following:
4.1 Organization and Standing. FCL is a corporation duly organized, validly
existing, and in good standing under the laws of the Turks & Caicos Islands,
with full corporate power and authority to carry on its businesses as they are
now being conducted. FCL is duly qualified to conduct its business in the
Dominican Republic and has full power and authority to fulfill its obligations
under this Agreement.
4.2 Authority Relative to this Agreement. The execution of this Agreement
by FCL and the delivery of this Agreement to the Distributor has been duly
authorized by FCL, and no further action is necessary by FCL to make this
Agreement valid and binding upon FCL and enforceable against FCL in accordance
with the terms hereof or to carry out the transactions contemplated hereby. The
execution, delivery, and performance of this Agreement by FCL shall not (i)
constitute a breach or a violation of the Articles of Incorporation or by-laws
of FCL or of any law, rule or regulation, agreement, indenture, deed of trust,
mortgage, loan agreement, or any other instrument to which FCL is a party or by
which it is bound; (ii) constitute a violation of any order, judgment, or decree
to which FCL is a party or by which any of the assets or properties of FCL is
bound or affected; or (iii) result in the creation of any lien, charge,
encumbrance upon the assets or properties of FCL, except as otherwise provided
herein.
4.3 Approvals and Consents. No consent, approval, or authorization is
required to be obtained by FCL in connection with the execution or delivery of
this Agreement by FCL or the consummation by FCL of the transactions
contemplated hereby.
5 DISTRIBUTOR'S DUTIES.
5.1 Required and Permitted Activities. The Distributor shall:
3
<PAGE>
5.2 Use its best reasonable efforts to promote and sell the Products in
the Territory;
5.2.1 Conduct its business in its own name, maintain a sales office and
pay its own costs and expenses;
5.2.2 Handle all customer complaints and claims;
5.2.3 Notify FCL in writing of any filing, registration, claim, or
proceeding involving the Distributor's advertisement or sale of the Products, or
the use of the Trademarks in connection with sales of the Products, within
fifteen (15) days of the Distributor's direct or indirect knowledge of such
claim or proceeding;
5.2.4 Provide FCL with any information which is necessary to comply with
all labeling, registration, marketing and other applicable legal requirements in
the Territory.
5.3 Prohibited Activities. The Distributor shall not:
5.3.1 Bind FCL to any contract;
5.3.2 Make representations, warranties or guarantees with respect to the
Products;
5.3.3 Use the name "Fuente" or the Trademarks in any manner, except as
set forth in Section 12 hereof.
6 PRICE.
6.1 Prices Charged to the Distributor. The purchase prices to be charged by
FCL to the Distributor for the Products shall be paid in United States Dollars
and shall initially be in the amounts set forth on Exhibit B attached hereto
(the "Purchase Prices"). However, because the parties hereto cannot accurately
predict the actual cost of manufacturing the Products during the entire Term of
this Agreement, FCL expressly reserves the right to change the Purchase Prices
charged to the Distributor for the Products; provided, however, the net invoice
price increase charged to the Distributor for each shipment of the Products
shall be no greater, on a per thousand cigar basis, than the net invoice price
increase charged by FCL during the same time to any other similarly situated
United States-based importer (including affiliates of FCL) who purchase products
manufactured by FCL or any of its affiliates, similar to the nature, grade and
style of the Products. The Distributor
4
<PAGE>
expressly agrees, understands and acknowledges that it shall be bound by
the terms and conditions of this Agreement even though the Purchase Price of the
Products may change from time to time in accordance with this paragraph. Changes
in the Purchase Price may be made by FCL at any time, so long as FCL provides
the Distributor with at least thirty (30) days' prior written notice announcing
such changes or in such other form as FCL and the Distributor may mutually
agree, and changes in the Purchase Price shall become effective as of the date
specified in such notice. In any event, the parties hereto expressly agree,
understand and acknowledge that the Purchase Price shall be changed by an amount
equal to any significant increase or decrease, as the case may be, in (i) any
taxes and charges which are now, or may hereafter be, levied, imposed or charged
upon FCL and associated with or related to the Products (whether by federal,
state, municipal or other public authority, and whether domestic or foreign);
(ii) any freight and transportation costs associated with or related to the
Products and borne by FCL; and (iii) any customs duties (whether domestic or
foreign) associated with or related to the Products and borne by FCL.
6.2 Prices Charged to Customers. It is expressly acknowledged by the
parties hereto that, although FCL may suggest prices at which the Products might
be sold to customers, FCL does not have and does not claim any right to
determine the price at which the Distributor sells the Products to customers;
the Distributor shall determine the price at which the Products shall be sold to
customers, in the Distributor's sole discretion.
7 PLACEMENT AND ACCEPTANCE OF PURCHASE ORDERS.
7.1 Priority. The terms and conditions set forth in this Agreement shall
apply to all purchases of the Products by the Distributor from FCL, and shall
supersede any conflicting provisions contained in any of the Distributor's
purchase orders or any other business forms provided by the Distributor or FCL
(unless such purchase orders or any other business forms are in writing, signed
by both parties hereto, and expressly provide that such conflicting provisions
contained therein are intended by the parties hereto to supersede the terms and
conditions of this Agreement).
7.2 Placement of Orders; Purchase Order Acceptance. All orders for Products
must be submitted to FCL in writing. Standing purchase orders may be submitted.
Purchase orders submitted to FCL shall only be deemed accepted upon issuance of
a written acceptance by FCL, or in lieu thereof, upon shipment of the Products
referenced therein.
5
<PAGE>
7.3 Refusal and Revocation of Purchase Orders. FCL shall not be obligated
to accept any purchase order from the Distributor for Products that, using its
best reasonable efforts, FCL reasonably believes it cannot fill. In addition,
FCL may, in its sole discretion, and in addition to any other remedies described
in this Agreement, refuse to accept any purchase order, revoke acceptance of any
purchase order or refuse to deliver or delay shipment of any previously-accepted
purchase order, if the Distributor becomes delinquent in the payment of any of
its obligations hereunder, or is in breach of any material provision or
condition of this Agreement. The revocation of acceptance, refusal to deliver or
delay of any shipment of the Products by FCL under this Section 7.3 shall not be
construed as a termination or breach of this Agreement by FCL.
8 FILLING OF PURCHASE ORDERS AND SHIPPING TERMS.
8.1 Acknowledgement of Limited Supply. The Distributor acknowledges that
tobacco and skilled labor shortages may limit or interrupt production of all or
some of the Products at any time and that FCL is not obligated to sell any
certain number of the Products to the Distributor hereunder.
8.2 No Damage Claims. FCL shall not be liable to the Distributor or any
other person for any damages, direct, consequential or otherwise, or lost
profits from FCL's failure to fill any purchase orders, or for delays in filling
purchase orders, or for any errors in filling any such purchase orders. The
Distributor acknowledges that shortages of labor and raw materials may make it
impossible for FCL to fill all purchase orders submitted for the Products. If
orders for all cigars received by FCL from all sources, including the
Distributor, exceed FCL's available labor and/or raw material supplies, FCL
shall allocate availability on a basis that FCL deems equitable or necessary, in
its sole and absolute discretion.
8.3 Partial Shipments. FCL may, in its sole and absolute discretion, make
partial shipments of the Distributor's purchase orders, which shipments shall be
separately invoiced and each such separate invoice shall be paid when such
separate invoice becomes due regardless of whether the balance of the shipment
has been made or invoices for the balance of the shipment have been rendered.
Delay in delivery of any portion of a purchase order shall not relieve the
Distributor of its obligation to accept the remaining deliveries of the
Products.
8.4 Shipping Terms. Unless otherwise agreed to by the parties in writing,
beneficial and legal title to possession and control over, and risk of loss and
damage to, all Products shall pass to the Distributor, or to such financing
institution or other parties as may have been designated in writing by the
Distributor, F.O.B. Santiago, Dominican Republic. For purposes of this
paragraph, the term "F.O.B." shall have
6
<PAGE>
the meaning ascribed thereto in INCOTERMS (1990 version) and all amendments and
revisions thereto, as published by the International Chamber of Commerce, Paris,
France.
9 INSPECTION.
The Distributor shall have twenty (20) days from the date of delivery of
the Products to the shipping destination to inspect the Products or to cause its
agent to conduct such inspection. The Distributor shall bear all costs and
expenses associated with inspection of the Products. Nonconforming products may
be returned to FCL pursuant to the procedure set forth in Section 10 hereof.
Once the Distributor (or its agent) has completed its inspection of the Products
and found them to be satisfactory, or the Distributor has waived its inspection
rights with respect to such Products, or the twenty (20) day time period
specified herein has passed without notification from the Distributor to FCL
that the Products are nonconforming, as the case may be, the Distributor shall
not be entitled to return the Products or seek the remedies otherwise available
under Section 10 hereof.
10 RETURNS.
If, upon inspection, the Distributor believes Products to be nonconforming,
the Distributor shall notify FCL, and shall ship the nonconforming Products to
the location designated by FCL. Nonconforming Products will be repaired,
replaced or credit will be issued to the Distributor, in FCL's discretion,
within twenty (20) days from the date on which FCL received the Products claimed
to be nonconforming. FCL's acceptance of any Products so returned shall not be
deemed an admission that the Products are nonconforming, and, if FCL determines
that any such returned Products are not nonconforming, such returned Products
will be reshipped to the Distributor at the Distributor's expense and the
Distributor will be charged for all of the shipping charges incurred by FCL
(including the costs previously assumed by FCL for shipping such returned
Products to FCL as well as the costs of shipping such returned Products back to
the Distributor). The Distributor expressly waives its rights to consequential
or incidental damages relating to nonconforming Products.
11 PAYMENT TERMS.
Unless otherwise agreed in writing by the parties hereto, or except as
otherwise expressly provided in this Agreement, the Distributor shall pay each
invoice generated by FCL in connection with the sale of the Products within
sixty (60) days from the date of such invoice. In the event the Distributor
fails to pay any
7
<PAGE>
invoice within such sixty (60) day period, FCL shall grant an additional
five (5) day cure period in which the Distributor may make payment of such
invoice. FCL agrees that the number of days given to the Distributor in which to
pay each invoice shall be not less than the number of days FCL grants to its
most favored distributor customers, excluding any of FCL's distributor
arrangements that existed prior to the date of this Agreement (whether in
written or oral form). In the event the Distributor fails to pay any invoice
within the time period specified in this Section 11, the Distributor shall be in
default of its obligations to FCL, as described in paragraph 15.1 hereof, and
FCL shall have the right to terminate this Agreement. No extension of these
terms shall be permitted without FCL's prior written consent, which consent may
be withheld in FCL's sole discretion. Payment for the Products purchased by the
Distributor shall be in United States dollars, and shall be made by electronic
wire transfer or by corporate check. Payments shall be made to FCL address set
forth in paragraph 20.4 hereof or to such place as shall be designated in
writing from time to time by FCL. If FCL instructs the Distributor to send
payment to any U.S. bank, or FCL deposits the Distributor's payment in any U.S.
bank, receipt of any check, draft or other commercial paper by FCL shall not
constitute payment in full until the funds representing the full amount due and
owing have fully cleared all banking channels. However, if FCL instructs the
Distributor to send payment to any non-U.S. bank, or FCL deposits the
Distributor's payment in any non-U.S. bank, receipt of the check, draft of other
commercial paper by FCL shall constitute payment, provided full funds are
available with respect to such check, draft or other commercial paper at the
time such check, draft or commercial paper ultimately clears all banking
channels.
12 TRADEMARKS AND TRADE NAMES.
12.1 Use of Trademarks. The Distributor agrees not to market the Products
under any name except the name assigned to such Product by FCL.
12.2 Ownership of Marks. The Distributor expressly acknowledges and agrees
that the Trademarks are the exclusive property of FCL and that the Distributor
has and shall have no right, title or interest in the Trademarks, or any
goodwill related thereto, during and/or after the Term of this Agreement. The
Distributor represents and warrants that the Distributor has not sought or
obtained, and agrees not to seek or obtain, in the Territory or elsewhere, any
registration embodying the Trademarks and further agrees to discontinue all use
of the Trademarks immediately upon the termination of this Agreement.
12.3 Imitative Products. The Distributor specifically agrees not to
manufacture or sell any product imitative of the Products identified with the
Trademarks.
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12.4 Enhancement of Value. The Distributor agrees that its right to use
Trademarks, and any goodwill related thereto, is limited solely to the right to
use said Trademarks and related goodwill in advertising and promotion of the
Products pursuant to this Agreement, that all such use and goodwill shall inure
to the benefit of FCL, and that any enhancement in the value of the Trademarks,
or any goodwill related thereto, in the Territory or elsewhere, which results
from the efforts or actions of the Distributor shall be effected to FCL's sole
benefit and shall not give rise to any compensation to the Distributor.
12.5 Infringement. The Distributor agrees to notify FCL immediately of any
infringement or imitation of the Products or the Trademarks which comes to the
attention of the Distributor during the Term of this Agreement.
13 FORCE MAJEURE.
13.1 Scope of Governance. In the event that performance by either party of
any of its obligations under this Agreement is precluded or adversely and
materially affected because of the occurrence of any event, unforeseen
development, or contingency beyond the control of such party (and "Unforeseen
Event"), the rights and obligations of the parties hereto shall be governed by
this Section 13.
13.2 Definitions. For purposes of this Agreement, an "Unforeseen Event"
shall include, but shall not be limited to, the following: war, declared or
undeclared, revolution, insurrection, counterrevolution, isolated instances of
violence, fire, flood, tempest, interruption of transportation facilities,
riots, civil commotion, strikes, labor disputes, labor slowdowns, lockouts (or
other labor disputes affecting the parties hereto, other manufacturers or
suppliers), freight embargoes or transportation delays, shortages of labor,
inability to secure materials, supplies or power at reasonable prices or on
account of shortages, acts of God, including (but not limited to) lightning,
severe weather, earthquakes, hurricanes, or other acts of nature, acts of the
public enemy, inflation beyond the expected rate of the country to which the
event, development, or contingency pertains, prohibition of import or export of
the Products (or any components thereof), governmental orders, regulations,
restrictions, and all other similar causes.
13.3 Limited Excusal of Performance; Termination. Except as otherwise
provided herein, the affected party shall be excused from any failure to perform
under the terms and conditions of this Agreement to the extent such failure is
directly or indirectly caused by an Unforseen Event. Any suspension of
performance by reason of this provision shall be limited to the period during
which the Unforseen Event exists, and such suspension shall not extend or in any
manner
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affect the running of the time period provided for in this Agreement. If
performance by either party hereunder is suspended as a result of an Unforseen
Event for a period of one hundred and eighty (180) days or more, the other party
hereto shall, upon furnishing not less than thirty (30) days written notice to
non-performing party, have the right to terminate this Agreement.
Notwithstanding the foregoing, the Distributor shall not, as a result of any of
the foregoing causes, be relieved or excused from paying FCL any monies owed
under this Agreement.
13.4 Best Reasonable Efforts to Make Up of Shortfall. In the event FCL is
affected by an Unforseen Event, and this Agreement is not terminated in
accordance with paragraph 13.3 hereof, FCL shall use its best reasonable efforts
to make up any shortfall in production caused by such Unforseen Event within
twelve (12) months after the resumption of production hereunder. Similarly, in
the event the Distributor is affected by an Unforseen Event, and this Agreement
is not terminated in accordance with paragraph 13.3 hereof, the Distributor
shall use its best reasonable efforts to make up any shortfall in orders for
Products caused by such Unforseen Event within twelve (12) months after the
resumption of purchasing hereunder.
14 INDEMNIFICATION.
14.1 The Distributor agrees to indemnify, defend and hold FCL, its
officers, directors, employees, agents, successors, and assigns, harmless
against all claims, losses, costs, liabilities, damages, judgments, or expenses
of whatever form or nature, including attorneys' and paralegals' fees and other
costs of legal defense, whether direct or indirect, that they, or any of them,
may sustain or incur as a result of any acts or omissions of the Distributor
including but not limited to (i) the Distributor's material breach of any of the
provisions of this Agreement, (ii) the Distributor's gross negligence or other
tortuous conduct, or (iii) violation by the Distributor of any applicable law,
regulation or order in the United States of America or any other applicable law,
regulation or order.
14.2 FCL agrees to indemnify, defend and hold the Distributor, its
officers, directors, employees, agents, successors, and assigns, harmless
against all claims, losses, costs, liabilities, damages, judgments, or expenses
of whatever form or nature, including attorneys' and paralegals' fees and other
costs of legal defense, whether direct or indirect, that they, or any of them,
may sustain or incur as a result of any acts or omissions of FCL including but
not limited to (i) FCL's material breach of any of the provisions of this
Agreement, (ii) FCL's gross negligence or other tortuous conduct, or (iii)
violation by FCL of any applicable law, regulation or order.
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15 TERMINATION OF THIS AGREEMENT BY FCL.
FCL shall have the right, in addition to all other remedies it may have at
law or in equity, to terminate this Agreement and all rights herein upon not
less than thirty (30) days' written notice to the Distributor with respect to
any monetary default, unless otherwise designated herein, and upon not less than
sixty (60) days written notice with respect to any non-monetary default, unless
otherwise designated herein, provided: (i) FCL is in compliance with this
Agreement in all material respects; (ii) any one or more of the events of
default set forth below shall occur with respect to the Distributor; and (iii)
the Distributor does not fully cure such default to the satisfaction of FCL
within the applicable thirty (30) or sixty (60) day notice period or demonstrate
to the satisfaction of FCL that the Distributor is actively and diligently
pursuing such a cure and has a substantial likelihood of promptly effecting such
cure. Any notice of default issued by FCL hereunder shall specify the nature of
the default which has caused such notice to be issued. The events of default
are:
15.1 If the Distributor shall fail to pay FCL any monies or fees when due;
15.2 If the Distributor fails to comply with any other terms or conditions
of this Agreement;
15.3 As set forth in Section 13.3 regarding a continuing force majeure
event;
15.4 Termination effective immediately, if a receiver, liquidator or
trustee of the Distributor, or as to any material portion of its business, is
appointed by court order and such order remains in effect for more than thirty
(30) days; or the Distributor is adjudicated bankrupt or insolvent; or any
material portion of the business of the Distributor is sequestered by court
order and such order remains in effect for more than thirty (30) days; or a
petition is filed against the Distributor under any bankruptcy, reorganization,
arrangement, insolvency, readjustment of debt, dissolution, or liquidation law
of any jurisdiction, whether now or hereafter in effect, and is not dismissed
within thirty (30) days after such filing; or
15.5 Termination effective immediately, if the Distributor files a petition
in voluntary bankruptcy or seeks relief under any provision of any bankruptcy,
reorganization, arrangement, insolvency, readjustment of debt, dissolution, or
liquidation law of any jurisdiction, whether now or hereafter in effect, or
consents to the filing of any petition against it under such law.
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16 TERMINATION OF THIS AGREEMENT BY THE DISTRIBUTOR.
The Distributor shall have the right, in addition to all other remedies it
may have at law or in equity, to terminate this Agreement and all rights herein
upon not less than thirty (30) days' written notice to FCL with respect to any
monetary default, unless otherwise designated herein, and upon not less than
sixty (60) days written notice with respect to any non-monetary default, unless
otherwise designated herein, provided: (i) the Purchaser is in compliance with
this Agreement in all material respects; (ii) any one or more of the events of
default set forth below shall occur with respect to FCL; and (iii) FCL does not
fully cure such default to the satisfaction of the Purchaser within the
applicable thirty (30) or sixty (60) day notice period or demonstrate to the
satisfaction of the Purchaser that FCL is actively and diligently pursuing such
a cure and has a substantial likelihood of promptly effecting such cure. Any
notice of default issued by the Purchaser hereunder shall specify the nature of
the default which has caused such notice to be issued. The events of default
are::
16.1 If FCL fails to comply with any material terms or conditions of this
Agreement; or
16.2 As set forth in Section 13.3 hereof regarding a continuing force
majeure event.
17 EFFECT OF EXPIRATION OR TERMINATION OF THIS AGREEMENT.
17.1 No Release. This Agreement shall terminate and expire automatically,
unless termination has occurred earlier as a result of a specified default
hereunder, on the date specified in the notice of termination. Any termination
of this Agreement, whether due to expiration or an earlier termination, shall
not release a party from payment of any damages sustained by the other party,
from payment of any obligations accrued hereunder, or from performance of its
obligations under the provisions of this Agreement relating to termination,
subject to and limited by the terms of this Agreement.
17.2 Acceleration of Invoices. Upon the expiration or termination of this
Agreement for any reason, whether by reason of default, lapse of time or other
cause, the due date of all invoices for the Products shall automatically be
accelerated so that they shall become due and payable as of the effective date
of the termination, even if longer terms had been provided previously. Any
termination of this Agreement, excluding termination with two (2) years' prior
notice under Section 2 hereof by either party, shall give FCL the right to
cancel all orders of unshipped Products.
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17.3 Reversion of Rights. All rights granted to the Distributor under or
pursuant to this Agreement shall cease, and where appropriate revert to FCL.
18 CONFIDENTIALITY.
The parties hereto hereby acknowledge that, in connection with the business
relationship that they have had or may in the future have, they have been and
will be exposed to and have access to certain information with respect to each
other's business operations that has not been publicly disclosed and is not a
matter of common knowledge (collectively, the "Confidential Information"). Each
of the parties agrees that it shall not, nor shall any of its affiliates,
including the agents, directors and officers thereof, without prior written
consent of the other party, at any time, in any fashion, form or manner, either
intentionally or otherwise, directly or indirectly, divulge, disclose or
communicate any of the Confidential Information provided to such party by the
other party to any third person, partnership, joint venture, company,
corporation, entity or other organization or use such Confidential Information
other than in connection with the business transactions entered into between the
parties to this Agreement, unless such Confidential Information is used pursuant
to a separate license or agreement between the parties to this Agreement
authorizing such use or unless and until such Confidential Information is or was
(i) publicly available or otherwise in the public domain; (ii) rightfully
obtained from any third party without restrictions and without breach of this
Agreement; or (iii) disclosed pursuant to judicial action or governmental
regulations or other requirements, but then only if the disclosing party
notified the other party prior to such disclosure and reasonably cooperated with
the other party in the event the other party elected to legally contest and
avoid such disclosure.
19 DISCLAIMER.
FCL makes no warranty that the Products are merchantable or fit for any
particular purpose or fit for any other purpose. The sole responsibility of FCL
shall be that the Products will be substantially in compliance with the
description set forth in Exhibit A attached hereto, although all parties hereto
acknowledge that the manufacturing process may be changed from time to time, and
the Products will be free from defects in material and workmanship. This
warranty is expressly made in lieu of any and all warranties and the sole
liability of FCL shall be to repair, replace or credit the Distributor for any
Products not in conformity with such specifications (as provided in Section 10
hereof), and the Distributor expressly and absolutely waives any rights that it
may have for consequential or incidental damages. Except for directly related
acts of gross negligence of FCL, the Distributor agrees, warrants, and covenants
that it shall be solely responsible for compliance with all federal,
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state, and local laws (whether such laws are of the United States of
America or other foreign jurisdictions) and regulations pertaining to
distribution, marketing and sale of the Products, and without limiting the
general indemnification obligation of the Distributor as described in Section
14.1 hereof, that the Distributor shall indemnify, defend and hold FCL, its
officers, directors, employees, agents, successors and assigns harmless from any
and all claims, losses, costs, liabilities, damages, judgments, or related
expenses, including attorneys' and paralegals' fees and other costs of legal
defense, whether direct or indirect, that they or any of one or more may sustain
or incur as a result to the Distributor's failure to comply with such laws and
regulations.
FCL MAKES NO INDEMNITY, REPRESENTATION OR WARRANTY, EITHER EXPRESSED OR IMPLIED,
WITH RESPECT TO THE PRODUCTS, EXCEPT FOR THE WARRANTY EXPRESSLY SET FORTH IN
THIS SECTION 19, AND IN NO EVENT SHALL FCL BE LIABLE TO THE DISTRIBUTOR FOR
SPECIAL OR CONSEQUENTIAL DAMAGES EXPRESSLY PROVIDED HEREIN.
20 GENERAL PROVISIONS.
20.1 Survival of Representations, Warranties, Etc. Each of the parties to
this Agreement covenants and agrees that its representations, warranties,
covenants, statements, and agreements contained in this Agreement and the
Exhibits hereto and any document delivered in connection herewith shall survive
the September 1, 1997 effective date of this Agreement, and shall remain in
effect during the term of this Agreement. Sections 12.2, 16, 17, 18, 19, 20.12
and 20.13 hereof shall survive the termination or expiration of this Agreement.
20.2 Construction. This Agreement is intended by the parties hereto as a
final expression of their agreement as a complete and exclusive statement of the
subject matter of this Agreement. No course of prior dealings between the
parties and no usage of trade shall be relevant or admissible to supplement,
explain or vary any of the terms of this Agreement. Acceptance of, or
acquiescence in, a course of performance rendered under this or any prior
agreement shall not be relevant or admissible to determine the meaning of this
Agreement even though the accepting or acquiescing party has knowledge of the
nature of the performance and an opportunity to make objection. No
representations, understandings, or agreements have been made or relied upon in
making this Agreement other than those specifically set forth herein.
20.3 Merchant Status. FCL and the Distributor represent to each other that
they are merchants with respect to the Products. No agent, employee, or
representative of the Distributor has made, or has any authority to bind FCL by,
any
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warranty, representation, or affirmation concerning the Products. The
Distributor acknowledges that no such affirmation, warranty or representation
has been made, none has been relied upon, and none forms the basis of this
Agreement.
20.4 Notices and Consents. All notices, consents, acceptances and any other
communication required herein shall be in writing and shall be deemed delivered
upon receipt, if delivered in person; upon transmission, if sent by electronic
means (i.e. telecopy or e-mail), with electronic confirmation of receipt, one
(1) day after posting, if sent by recognized expedited delivery service, or four
(4) days after posting, if sent by First Class Mail. All notices, etc. shall be
sent to the parties at their respective addresses set forth below (or at such
other address for a party as shall be specified by notice given hereunder):
If to Distributor: Ashton Distributors, Inc.
Attn: Robert G. Levin, President
12270 Townsend Rd.
Philadelphia, PA 19154
Telecopy: 215-676-9085
With a copy to: Matthew H. Lubart, Esq.
Princeton Pike Corporate Center
997 Lenox Drive, Building 3
Lawrenceville, NJ 08648-2311
Telecopy: 609-896-1469
If to FCL: Carlos P. Fuente, President
Fuente Cigar Ltd.
P.O. Box 5175
Tampa, Florida 33675
Telecopy: 809-575-4969
With a copy to: William M. Sharp, Sr., Esquire
Sharp, Smith & Harrison, P.A.
4830 W. Kennedy Blvd., Suite 630
Tampa, Florida 33609
Telecopy: 813-286-4197
20.5 Severability of Provisions. Wherever possible, each provision of this
Agreement shall be interpreted in such manner as to be effective and valid, but
if any provision of this Agreement shall be prohibited by applicable law,
unenforceable in any jurisdiction or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition,
unenforceability, or invalidity, without invalidating the remainder of such
provision or the remaining provisions
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of this Agreement, or affecting the validity or enforceability of such
provision in any other jurisdiction.
20.6 Language. The English language text, and American usage thereof, shall
control the interpretation of this Agreement and all writings between the
parties.
20.7 Assignment. Neither this Agreement nor any rights or privileges
hereunder shall be assigned, transferred, shared or divided, by operation of law
or otherwise, in any manner, by either party hereto without the prior written
consent of the other party, which consent may be arbitrarily withheld. Any
purported assignment or transfer not having the written consent of the party
required hereunder to give such consent shall be null and void and shall
constitute a default hereunder.
20.8 Paragraph Headings: Plural; Gender Miscellaneous. The paragraph
headings contained herein are for reference only and shall not be considered as
substantive parts of this Agreement. The use of the singular or plural form
shall include the other form and the use of the masculine, feminine or neutered
gender shall include the other gender. The words "hereof," "herein," and
"hereunder" and words of similar import when used in this Agreement, shall refer
to this Agreement as a whole, including all exhibits hereto, and not to any
particular provision of this Agreement unless otherwise specified; all
references herein to paragraphs, sections or exhibits shall refer to paragraphs
or sections of this Agreement or exhibits to this Agreement. The parties hereto
acknowledge and agree that the recitals immediately following the preamble of
this Agreement are true and correct and are incorporated herein as a part of
this Agreement. This Agreement shall be binding upon the parties hereto.
20.9 Entire Agreement: Amendment. This Agreement (including the exhibits
hereto and all documents and papers delivered pursuant hereto and any written
amendments hereof executed by the parties to this Agreement, as specified
herein) constitutes the entire agreement and supersedes all prior agreements and
understandings, oral and written, among the parties hereto with respect to the
subject matter hereof. This Agreement may be amended only by written agreement
executed by all of the parties hereto. Time is of the essence of this Agreement
and each of its provisions, and no extension of any time period shall be binding
upon any of the parties hereto unless expressly provided herein or in writing
and signed by all of the parties hereto.
20.10 Counterparts. This Agreement may be executed simultaneously in any
number of counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
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20.11 Further Assurances. The parties hereto shall execute and deliver, or
cause to be executed and delivered, such additional or further transfers,
assignments, endorsements or other instruments as the other party or its counsel
may reasonably request from time to time for purposes of carrying out the
transactions contemplated by this Agreement.
20.12 Remedies. The Distributor hereby expressly waives any rights that it
may have to specific performance or any other remedies at law other than the
remedies specifically provided for in this Agreement.
20.13 Governing Law; Venue; Process. The validity, construction, and
enforcement of, and the remedies under, this Agreement shall be governed in
accordance with the laws of Florida (except that if any choice of law provision
under Florida law would result in the application of the law of a state or
jurisdiction other than Florida, such provision shall not apply). The parties to
this Agreement agree that jurisdiction and venue shall properly lie in the
courts of the State of Florida, with respect to any legal proceedings arising
under or connected with this Agreement. The parties further agree that the
delivery by courier of any process shall constitute valid and lawful process
against them.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day
and year first above written.
FUENTE CIGAR LTD.
By:
-----------------------------
Carlos P. Fuente, President
ASHTON DISTRIBUTORS, INC.
By:
-----------------------------
Robert G. Levin, President
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Exhibit A
Exclusive Products
------------------
Bohemia(R)
Flor de Orlando(R)
Premiun Dominicana(R)
[specifications for all products to come]
18
EXHIBIT 10.6
LEASE AGREEMENT
1 PARTIES
THIS AGREEMENT, made this 20th day of March, 1997, by and between P.
D'ANDREA, INC., a Pennsylvania corporation, having a mailing address of 12270
Townsend Road, Philadelphia, PA 19154 (hereinafter called "Lessor"), and HOLT'S
CIGAR COMPANY, INC., a Pennsylvania corporation, and ASHTON DISTRIBUTORS, INC.,
a Pennsylvania corporation, both having a mailing address prior to the
"Commencement Date" of this Lease of 2901 Grant Avenue, Philadelphia, PA 19114
(hereinafter together called "Lessee"), said parties intending to be legally
bound to the following.
2 DEMISED PREMISES
a. WITNESSETH THAT: Lessor does hereby demise and let unto Lessee a
portion of a building, containing approximately 21,360 square feet and more
particularly described on Exhibit "A" attached hereto, being part of the
premises situate at and commonly known as 12270 TOWNSEND ROAD, PHILADELPHIA,
PENNSYLVANIA, said space being hereinafter referred to as the "demised
premises". The building and ground of which the demised premises is a part is
hereinafter referred to as the "Property".
b. USE. The demised premises shall be used and occupied as and for
WHOLESALE DISTRIBUTION AND THE SALE AT WHOLESALE OF CIGARS AND ACCESSORIES;
INCIDENTAL SALE AT RETAIL OF CIGARS BY THE BOX (TO THE EXTENT PERMITTED BY
ZONING AND OTHER GOVERNMENTAL REGULATIONS); SALES AND ADMINISTRATIVE OFFICES;
AND OTHER OFFICE USE, and for no other purpose. Other uses of the demised
premises shall be subject to Lessor's consent, which shall not be unreasonably
withheld.
c. In the event that any other portion of the building shall become
available for leasing, Lessor covenants and agrees that it shall not lease any
portion of the building to a tobacconist, provided that Lessee is not in default
under this Lease Agreement and is operating a tobacconist business in the
demised premises. Said term, "tobacconist," shall be construed in its broadest
possible usage.
3 TERM
The term of this Lease shall be for a period of FIVE YEARS AND SIX
MONTHS, commencing on a date (the "Commencement Date") on which Lessor delivers
possession of the demised premises to Lessee (but not later than MARCH 15,
1997), and expiring AUGUST 31, 2002. Lessee shall have an option to extend the
term of this Lease, as more fully set forth in Section 32 hereof.
4 MINIMUM RENT
The minimum rental for the term of the Lease shall be as follows:
a. There is no minimum rent for the period from the Commencement Date
to AUGUST 31, 1997.
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b. The minimum rent for the period SEPTEMBER 1, 1997 to AUGUST 31,
1999, shall be at a rate of SEVENTY-FOUR THOUSAND SEVEN HUNDRED SIXTY DOLLARS
($74,760.00) per annum; payable in equal, consecutive monthly installments of
SIX THOUSAND TWO HUNDRED THIRTY DOLLARS ($6,230.00).
c. The minimum annual rental for each lease year during the period from
SEPTEMBER 1, 1999 to AUGUST 31, 2002, shall be the total of i) the minimum
annual rental payable for each preceding lease year, plus ii) an amount computed
by multiplying such minimum annual rental by the smaller of (A) 0.05 (5.00%), or
(B) the percentage increase of the Bureau of Labor Statistics Consumer Price
Index, Urban Wage Earners and Clerical Workers, (Revised CPI-W), Philadelphia,
Pennsylvania, All Items Series A, (1967=100)(the "Consumer Price index"), for
the month which is three (3) months prior to the commencement date of the then
current lease year over the same index for the month which is three (3) months
prior to the commencement date of the preceding lease year. The percentage
increase in (B) above shall be determined by first obtaining the difference, if
any, between the more recent and earlier indices and then dividing such
difference by the earlier index. Such rental shall be payable in equal monthly
installments. In no event shall the minimum annual rental for any lease year
during the above mentioned period be less than the total minimum annual rental
payable for the preceding lease year. In the event the Consumer Price Index is
discontinued, it is agreed that the index taking its place shall be used.
Said minimum rent shall be paid in advance in equal, consecutive
monthly installments on the first day of each and every month during the term of
this Lease. The two installments shall be paid upon execution hereof. If the
Commencement date is not the first day of a calendar month, the first
installment of minimum rent shall be prorated accordingly.
5 INABILITY TO GIVE POSSESSION
Lessor or Lessee's Agent shall notify Tenant in writing of the date
when possession of the demised premises will be delivered to Lessee. If Lessor
is unable to give Lessee possession of the demised premises, as herein provided,
by reason of the holding over of a previous occupant, or by reason of any cause
beyond the control of the Lessor, the Lessor shall not be liable in damages to
the Lessee therefor. Lessor shall inform Lessee in writing of any such delay in
the commencement of the term so that Lessee can make appropriate interim
arrangements elsewhere. It is agreed and understood, however, that if Lessor is
unable to give Lessee possession of the demised premises by MARCH 1, 1997, then
Lessee, at its option and as its sole and exclusive remedy, may terminate this
Lease Agreement by written notice to Lessor given within ten (10) days following
MARCH 1, 1997.
6 ADDITIONAL RENT
The parties intend that the rent payable hereunder shall be an
absolutely net return to Lessor for the term of this Lease, undiminished by the
taxes or any of them or any part thereof, or any other carrying charges,
maintenance charges, repairs, third party management costs, or any other charges
of any kind or nature whatsoever, except Lessor's income taxes, and Lessor shall
not be required to furnish any utilities or perform any services of any kind or
nature whatsoever. Landlord represents, however, that the building is connected
to electricity, gas and water and sewer lines that are available to the demised
premises.
a. Damages for Default. Lessee agrees to pay as rent in addition to the
minimum rental herein reserved any sums which may become due by reason of the
failure of Lessee to comply with the covenants of this lease and any and all
damages, costs and expenses which the Lessor may suffer or incur by reason of
any default of the Lessee or failure on its part to comply
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with the covenants of this lease, and each of them, and also all damages to the
demised premises caused by any act or neglect of the Lessee.
b. Taxes. Lessee further agrees to pay as additional rent, in addition
to the minimum rental herein reserved, FORTY-THREE PERCENT (43%) of all
governmental charges, impositions, assessments and taxes assessed on or imposed
upon the land and building which constitute the Property. The amount due
hereunder on account of such taxes shall be apportioned for that part of the
first and last tax fiscal years covered by the term hereof. Lessor shall
promptly forward to Lessee with a bill for taxes payable hereunder copies of all
bills received by Lessor for taxes which shall be assessed or levied against the
Property. Lessee shall promptly, within TEN (10) DAYS after receipt of said bill
from Lessor, pay the amount specified in said bill to Lessor. Lessee agrees,
however, that any failure on the part of Lessor to submit to Lessee bills
received by Lessor for taxes shall not be deemed a waiver, abrogation or
limitation of Lessee's obligation to pay all taxes imposed on the demised
premises as above provided, but Lessor shall be responsible for all interest and
penalties incurred by reason of Lessor's delay in transmitting such bills to
Lessee.
If there are additional increases, additional and/or new taxes assessed
upon the demised premises and Lessor fails or refuses to appeal said assessment
or taxes, Lessee, after written notice to Lessor, may do so at Lessee's expense.
c. Insurance. Lessee further agrees to pay Lessor as additional rent
all increases in fire insurance premiums upon the demised premises and/or the
buildings of which the demised premises is a part, due to an increase in the
rate of fire insurance premiums in excess of the rate on the demised premises at
the time of making this lease, if said increase is caused by any act or neglect
of the Lessee or the nature of the Lessee's business. Lessee further agrees to
comply, at its own cost and expense, with any recommendation, rule or regulation
of any authorized insurance rating bureau which will enable the Lessor to effect
a reduction in the fire insurance rate on the building of which the herein
demised premises is a part or on the contents therein, so long as said
compliance does not adversely and materially affect the business of Lessee.
d. Utilities. Lessee shall pay for any and all utilities supplied to
and used and consumed upon the demised premises during the term of this Lease
and any renewal or extension thereof.
e. Cost of Operations. Lessee further agrees to pay as additional rent,
within TEN (10) DAYS of presentation of a bill therefor, FORTY-THREE PERCENT
(43%) of Lessor's cost for operating the common area of the Property, including,
but not limited to painting, lighting, policing, replacement, resurfacing,
maintenance, repair, cleaning, and landscaping of the parking area, walks and
ways, building exterior, signage, exterminating, inspections, management fees
and any other costs of operating and maintaining the Property, utility lines,
and local or municipal fire protection or hydrant charges, but not snow removal.
Lessee shall be responsible for its own snow removal, unless it desires to
engage Lessor's contractor, in which event it will pay as additional rent 43% of
Lessor's cost for snow removal. Lessor shall in no event charge as Lessee's
share of Lessor's cost of operations under this paragraph e for any one (1)
year an amount that exceeds by more than ten percent (10%) an amount equal to
forty-three percent (43%) of the average of Lessor's cost of operations
(computed in accordance with this paragraph e) for the previous three (3) years.
Lessor, within forty-five days following the end of each year of the
term of this Lease, shall supply to Lessee an annual reconciliation of all
additional rent charges. Lessee reserves the right to have its auditors review
the books and records of Lessee with respect to items of additional rent for the
purpose of verifying amounts of additional rent billed to Lessee, and if it is
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found by the auditors that additional rent is overstated by five percent (5%),
then the reasonable cost of the audit shall be borne by Lessor.
f. Payment of Rent. If Lessee disputes the amount of rent or additional
rent due under this Lease, Lessee agrees to pay the amount claimed by Lessor.
Lessee shall, however, have the right to proceed by law to recover any excess
payment.
7 PLACE OF PAYMENT
All rent shall be payable without prior notice or demand at the office
of Lanard & Axilbund, Inc., 399 Market Street, Philadelphia, Pennsylvania, 19106
or at such other place as Lessor, or successor Lessor, may from time to time
designate by notice in writing. All rent paid under this paragraph to Lanard &
Axilbund as Lessor's agent shall be deemed to have been paid to Lessor so that
Lessor shall have no further claim against Lessee for any rent so paid.
8 AFFIRMATIVE COVENANTS OF LESSEE
Lessee covenants and agrees that it will without demand, during the
term of this lease or any renewal hereof:
a. Payment of Rent. Pay the rent and all other charges herein reserved
as rent on the days and times and at the place that the same are made payable,
and that if Lessor shall at any time or times accept said rent or rent charges
after the same shall have become due and payable, such acceptance shall not
excuse delay upon subsequent occasions, or constitute or be construed as a
waiver of any of Lessor's rights, except that Lessor's acceptance of payment in
full of the amount of a payment default shall constitute a cure of such default.
Lessee agrees that any charge or payment herein reserved, included, or agreed to
be treated or collected as rent and/or any other charges or taxes, expenses, or
costs herein agreed to be paid by the Lessee may be recovered by the Lessor by
distraint or other process in the same manner as rent due and in arrears.
b. Cleaning, Repairing, etc. Keep the demised premises clean and free
from all ashes, dirt and refuse matter, replace all broken glass, windows,
doors, etc. in the demised premises. Keep all waste and drainpipes from the
demised premises open; repair all damage to plumbing in the demised premises;
keep the demised premises in good order and repair, reasonable wear and tear
excepted. Lessee agrees to surrender the demised premises in the same condition
in which Lessee has herein agreed to keep them.
c. Plate Glass. Properly insure all plate glass, if any, in the demised
premises and immediately replace same, if damaged or broken, at Lessee's own
cost and expense.
d. Requirements of Public Authorities. Comply with any requirements of
any of the constituted public authorities, and with the terms of any State or
Federal statute or local ordinance or regulation applicable to Lessee or its use
of the demised premises, including without limitation the Americans with
Disabilities Act, if applicable, and save Lessor harmless from penalties, fines,
costs, or damages resulting from failure so to do.
e. Fire. Use every reasonable precaution against fire.
f. Rules and Regulations. Comply with rules and regulations of Lessor
promulgated as hereinafter provided, provided that such rules and regulations do
not have a material adverse effect on Lessee's business.
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g. Surrender of Possession. Peaceably deliver up and surrender
possession of the demised premises to the Lessor at the expiration or sooner
termination of this Lease, promptly delivering to Lessor at its office all keys
for the demised premises.
h. Notice of Fire. Give to Lessor prompt written notice of any
accident, fire or damage occurring on or to the demised premises.
i. Condition of Pavement. In the event that all or a portion of the
demised premises is at street or pavement level, Lessee shall be responsible for
the condition of the pavement, curb, cellar doors, awnings and other erections
in the pavement during the term of this lease or any renewal hereof, shall keep
the pavement free from snow and ice, and shall be, and hereby agrees, that
Lessee is solely liable for any accidents due or alleged to be due to their
defective condition, or to any accumulations of snow and ice.
9 NEGATIVE COVENANTS OF LESSEE
Lessee covenants and agrees that it will do none of the following
things without the consent in writing of Lessor first had and obtained:
a. Use of Demised Premises. Occupy the demised premises in any other
manner or for any other purpose than as above set forth.
b. Assignment and Subletting. Assign, mortgage or pledge this lease or
underlet or sublease the demised premises, or any part thereof, or permit any
other person, firm or corporation to occupy the demised premises, or any part
thereof; nor shall any assignee or sublessee assign, mortgage, or pledge this
lease or such sublease, without an additional written consent by the Lessor, and
without such consent no such assignment, mortgage or pledge shall be valid. If
the Lessee becomes insolvent, or makes an assignment for the benefit of
creditors, or if a petition in bankruptcy is filed by or against the Lessee or a
bill in equity or other proceeding for the appointment of a receiver for the
Lessee is filed, or if the real or personal property of the Lessee shall be sold
or levied upon by any Sheriff, Marshall or Constable, the same shall be a
violation of this covenant. In the event Lessee is a corporation or partnership,
the sale of a controlling interest in the corporation or partnership shall be
deemed an assignment under this section.
c. Signs. Place or allow to be placed any stand, booth, sign or show
case upon the doorsteps, vestibules or outside walls or pavements of said
demised premises, or paint, place, erect, or cause to be painted, placed or
erected any sign, projection or device on or in any part of the demised
premises. Lessee shall remove any sign, projection or device painted, placed or
erected, if permission has been granted, and restore the walls, etc., to their
former conditions, at or prior to expiration of this lease. In case of the
breach of this covenant (in addition to ail other remedies given to Lessor in
case of the breach of any conditions or covenants of this lease} Lessor shall
have the privilege of removing said stand, booth, sign, show case, projection or
device, and restoring said walls, etc., to their former condition, and Lessee,
at Lessor's option, shall be liable to Lessor for any and all expenses so
incurred by Lessor.
d. Alterations/Improvements. Make any alterations, improvements or
additions to the demised premises. Lessor agrees, however, that it shall not
unreasonably withhold its consent to non-structural alterations and improvements
that do not adversely affect the building. Lessee, in requesting such consent,
shall submit for Lessor's review and approval plans and specifications for such
alterations and improvements. All alterations, improvements, additions, or
fixtures, whether installed before or after the execution of this lease, shall
remain upon the premises at the expiration or sooner termination of this lease
and become the property of Lessor, unless
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Lessor shall, prior to or in connection with the termination of this lease,
have given written notice to Lessee to remove the same, in which event Lessee
will remove such alterations, improvements and additions and repair any
resulting damage. Should Lessee fail so to do, Lessor may, at Lessor's option,
do so, and Lessee agrees to pay, as additional rent, the cost thereof. Subject
to the foregoing obligation to repair damage resulting from their removal, and
provided that Lessee is not in default under this Lease, Lessee may remove the
fixtures and improvements that are set forth in Exhibit "B", attached hereto and
made a part hereof.
e. Machinery. Use or operate any machinery that, in Lessor's opinion,
is harmful to the building or disturbing to Lessor or other tenants occupying
other parts thereof.
f. Weights. Place any weights in any portion of the demised premises
beyond the safe carrying capacity of the structure.
g. Fire Insurance. Do or suffer to be done, any act, matter or thing
objectionable to the fire insurance companies whereby the fire insurance or any
other insurance now in force or hereafter to be placed on the demised premises,
or any part thereof, or on the building of which the demised premises may be a
part, shall become void or suspended, or whereby the same shall be rated as a
more hazardous risk than at the date of execution of this Lease, or employ any
person or persons objectionable to the fire insurance companies or carry or have
any benzine or explosive matter of any kind in and about the demised premises.
In case of a breach of this covenant (in addition to all other remedies given to
Lessor in case of the breach of any of the conditions or covenants of this
Lease), Lessee agrees to pay to Lessor as additional rent any increase of
premiums on insurance carried by Lessor or by other tenants in the building of
which the demised premises is a part, on the demised premises, or any part
thereof, or on such building, caused in any way by the occupancy or conduct of
Lessee.
h. Removal of Goods. Remove, attempt to remove or manifest an intention
to remove all or substantially all of Lessee's goods or property from or out of
the demised premises otherwise than in the ordinary and usual course of
business, unless Lessee deposits with Lessor an additional security deposit in
the amount of five (5) times the then current monthly minimum rent and continues
to pay and perform all of its other obligations under this Lease.
i. Vacate Demised Premises. Vacate or desert said premises during the
term of this lease, or permit the same to be empty and unoccupied, unless Lessee
deposits with Lessor the additional security deposit referred to in paragraph h
above,
j. Wheeled Vehicles. Use or permit to be used on the demised premises
any handtrucks, dollies and/or any other wheeled vehicles unless they are
equipped with rubber or urethane tires, or the like. Lessee shall be responsible
for the repair and/or cleaning up of any marking, scoring or other damage to
floors caused by wheeled vehicles.
10 LESSOR'S RIGHTS
Lessee covenants and agrees that Lessor shall have the right to do the
following things and matters in and about the demised premises:
a. Inspection of Demised Premises: At all times by itself or its duly
authorized agents to go upon and inspect the demised premises and every part
thereof, with reasonable prior notice except in case of an emergency, and/or at
its option to make repairs, alterations and additions to the demised premises or
the building of which the demised premises is a part.
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b. Rules and Regulations. At any time or times and from time to time to
make such rules and regulations as in its judgment may from time to time be
necessary for the safety, care and cleanliness of the premises, and for the
preservation of good order therein, so long as such rules and regulations do not
materially adversely affect the business operation of Lessee. Such rules and
regulations shall, when written notice thereof is given to Lessee, form a part
of this lease.
c. Sale or Rent Sign, Prospective Purchasers or Tenants. For a period
not to exceed six (6) months prior to the expiration of the term of this Lease,
to display a "For Sale" sign at any time prior to the expiration of this lease
or a "For Rent", or both "For Rent" and "For Sale" signs; and all of said signs
shall be placed upon such part of the premises as Lessor may elect and may
contain such maker as Lessor shall require, except however, such signs will not
interfere with the business operations of Lessee. Prospective purchasers or
tenants authorized by Lessor may inspect the premises at reasonable hours at any
time. If, however, Lessee prohibits or refuses to permit Lessor or its agents or
any prospective purchasers or tenants authorized by Lessor to inspect the
demised premises as hereinabove mentioned, Lessee shall be in default under this
Lease and, in addition to all other damages payable to Lessor for default,
Lessee shall be held responsible for any loss of rent that may be incurred by
Lessor by reason of the fact that Lessee has prohibited Lessor or its agents,
prospective purchasers or tenants from inspecting the herein demised premises as
hereinabove set forth.
11 RESPONSIBILITY OF LESSEE
Lessee agrees to be responsible for and to release and hereby releases
and agrees to indemnify Lessor from all liability by reason of any injury or
damage, whether caused by a condition existing at the inception of this Lease or
occurring thereafter, to any person or property in the demised premises, whether
belonging to the Lessee or any other person caused by any fire, breakage or
leakage in any part or portion of the demised premises, or any part or portion
of the building of which the demised premises is a part, or from water, rain or
snow that may leak into, issue or flow from any part of the said demised
premises, or of the building of which the demised premises is a part, from the
drains, pipes, or plumbing work of the same, or from any place or quarter,
unless such breakage, leakage, injury or damage be caused by or result from the
negligence of Lessor or its servants or agents.
Lessee also agrees to be responsible for and to release and hereby
releases and agrees to indemnify Lessor from all liability by reason of any
damage or injury, whether caused by a condition existing at the inception of
this Lease or occurring thereafter, to any person or thing which may arise from
or be due to the use, misuse or abuse of all or any of the elevators, hatches,
openings, stairways, hallways of any kind whatsoever which may exist or
hereafter be erected or constructed on the demised premises, or from any kind of
injury which may arise from any other cause whatsoever on the said demised
premises or elsewhere on the Property, including without limitation, driveways,
parking areas and pavements, unless such damage, injury, use, misuse or abuse be
caused by or result from the negligence of Lessor, its servants or agents.
12 EVENT OF DESTRUCTION
a. Total. In the event that the demised premises or the building of
which the demised premises is a part is totally destroyed or so damaged by fire
or other casualty that the same cannot be repaired or restored within one
hundred twenty (120) days following the fire or casualty, this lease shall, at
Lessor's or, if the demised premises are damaged to such extent, at Lessee's
option, absolutely cease and determine, and the rent shall abate for the balance
of the term.
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b. Partial. If the damage caused as above be only partial and such that
the demised premises can be restored to their then condition within a reasonable
time, as determined by Lessor, the Lessor may, at its option, restore the same
with reasonable promptness, reserving the right to enter upon the demised
premises for that purpose, or terminate this Lease. Lessor shall make such
election to restore the demised premises or terminate this Lease by giving
notice thereof to Lessee at the demised premises within thirty (30) days from
the date Lessor receives notice that the demised premises have been damaged. In
the event the demised premises cannot be or are not repaired, for whatever
reason, within one hundred twenty (120) days following the damage, Lessee shall
have the right to terminate this Lease Agreement and vacate the demised
premises, such right to be exercised by written notice to Lessor given within
ten (10) days following such one hundred twenty (120) day period. The Lessor
also reserves the right to enter upon the demised premises whenever necessary to
repair damage caused by fire or other casualty to the building of which the
demised premises is a part, even though the effect of such entry be to render
the demised premises or a part thereof untenantable. In either event the rent
shall be apportioned and suspended during the time the Lessor is in possession,
taking into account the proportion of the demised premises rendered untenantable
and the duration of the Lessor's possession. If a dispute arises as to the
amount of rent due under this section, Lessee agrees to pay the full amount
claimed by Lessor. Lessee, however, shall have the right to proceed by law to
recover the excess payment, if any.
c. Damage for Interruption of Use. Lessor shall not be liable for any
damage, compensation or claim by reason of inconvenience or annoyance arising
from the necessity of repairing any portion of the building, the interruption in
the use of the demised premises, or the termination of this Lease by reason of
the destruction of the demised premises.
13 MISCELLANEOUS AGREEMENTS AND COVENANTS
a. Representation of Condition of Demised Premises. The Lessor has let
the demised premises in their present condition and without any representations
on the part of the Lessor, its officers, employees, servants and/or agents. It
is understood and agreed that Lessor is under no duty to make repairs or
alterations at the time of letting or at any time thereafter, except as
expressly provided herein.
b. Zoning. It is understood and agreed that the Lessor does not warrant
or undertake that the Lessee shall be able to obtain a permit under any zoning
ordinance or regulation for such use as Lessee intends to make of the said
premises, and nothing in this lease contained shall obligate the Lessor to
assist Lessee in obtaining said permit; the Lessee further agrees that in the
event a permit cannot be obtained by Lessee under any zoning ordinance or
regulation, this lease shall not terminate without Lessor's consent, and the
Lessee shall use the premises only in a manner permitted under such zoning
ordinance or regulation.
c. Effect of Repairs on Rental. No contract entered into or that may be
subsequently entered into by Lessor with Lessee, relative to any alterations,
additions, improvements or repairs, nor the failure of Lessor to make such
alterations, additions, improvements or repairs as required by any such
contract, nor the making by Lessor or its agents or contractors of such
alterations, additions, improvements or repairs shall in any way affect the
payment of the rent or said other charges at the time specified in this lease.
d. Agency. It is expressly understood and agreed that Lanard &
Axilbund, Inc. shall act as Lessor's agent ("Agent") for the sole purpose of
collecting rent under this Lease and shall not in any event be held liable to
the Lessor or to the Lessee for the fulfillment or non-fulfillment of any of the
terms or conditions of this Lease; for the return to Lessee upon termination of
this Lease, or under any circumstances, of rent or of other sums received by it,
or by
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any error of omission or commission of the Agent or its employees or for any
action or proceeding that may be taken by the Lessor against the Lessee or by
the Lessee against the Lessor.
e. Waiver of Custom. It is hereby covenanted and agreed, any law, usage
or custom to the contrary notwithstanding, that Lessor shall have the right at
all times to enforce the covenants and provisions of this Lease in strict
accordance with the terms hereof, notwithstanding any conduct or custom on the
part of the Lessor in refraining from so doing at any time or times; and
further, that the failure of Lessor at any time or times to enforce its rights
under said covenants and provisions strictly in accordance with the same shall
not be construed as having created a custom in any way or manner contrary to the
specific terms, provisions and covenants of this Lease or as having in any way
or manner modified the same.
f. Conduct of Lessee. This lease is granted upon the express condition
that Lessee and/or the occupants of the premises herein leased, shall not
conduct themselves in a manner which, in the reasonable opinion of Lessor,
interferes with the use, occupancy, enjoyment or business activity of others
occupying the building or properties adjoining the Property, and that if at any
time during the term of this lease or any extension or continuation thereof,
Lessee or any occupier of the demised premises shall have conducted himself,
herself or themselves in such a manner, Lessee shall be taken to have broken the
covenants and conditions of this lease, and Lessor will be entitled to ail of
the rights and remedies granted and reserved herein, for the Lessee's failure to
observe any of the covenants and conditions of this lease.
g. Failure of Lessee to Repair. In the event of the failure of Lessee
promptly to perform the covenants of Section 8(b) hereof or any other section of
this Lease containing Lessee's repair and maintenance obligations following any
applicable notice, cure rights and grace periods, Lessor may go upon the demised
premises and perform such covenants, the cost thereof, at the sole option of
Lessor, to be charged to Lessee as additional and delinquent rent.
h. Mutual Waiver of Subrogation. Lessor shall not be liable to Lessee,
under the terms of this Lease or otherwise, for any loss or damage to Lessee's
property or interest to the extent that Lessee is insured against such loss or
damage or is required under the terms of this lease to be so insured. Lessee
shall not be liable to Lessor under the terms of this Lease or otherwise, for
any loss or damage to Lessor's property or interest to the extent that Lessor is
insured against such loss or damage. Each of the parties agrees that all
policies of property and/or casualty insurance maintained by that party, shall
contain a clause or endorsement providing in substance that the insurance shall
not be prejudiced if the insured has, prior to that date and time of loss or
damage, waived the right of recovery from any person or persons.
14 REMEDIES OF LESSOR
Subject to the notice and cure provisions set forth in Section 35 of
this lease, if the Lessee:
a. Does not pay in full when due any and all installments of rent
and/or any other charge or payment herein reserved, included, or agreed to be
treated or collected as rent and/or any other charge, expense, or cost herein
agreed to be paid by the Lessee; and/or
b. Violates and/or fails to perform or otherwise breaks any covenant or
agreement herein contained; and/or
c. Vacates the demised premises or removes or attempts to remove or
manifests an intention to remove any goods or property therefrom otherwise than
in the ordinary and usual course of business without having first paid and
satisfied the Lessor in full for all rent and
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other charges then due or that may thereafter become due until the expiration
of the then current term, above mentioned; and/or
d. Becomes insolvent, or makes an assignment for the benefit of
creditors, or if a petition in bankruptcy is filed by or against the Lessee, and
provided a petition against Lessee is not dismissed within sixty (60) days of
filing, or a bill in equity or other proceeding for the appointment of a
receiver for the Lessee is filed, or if proceedings for reorganization or for
composition with creditors under any State or Federal law be instituted by or
against Lessee, or if the real or personal property of the Lessee shall be sold
or levied upon by any Sheriff, Marshall or Constable, then and in such event or
events, there shall be deemed to be a breach of this lease, and thereupon at the
option of the Lessor,
i. The rent for the entire unexpired balance of the term of
this lease, as well as all other charges, payments, costs and expenses herein
agreed to be paid by the Lessee, or at the option of Lessor any part thereof,
and also all costs and officers' commissions including watchmen's wages and
further including the five percent chargeable by Act of Assembly to the Lessor,
shall, in addition to any and all installments of rent already due and payable
and in arrears and/or any other charge or payment herein reserved, included or
agreed to be treated or collected as rent, and/or any other charge, expense or
cost herein agreed to be paid by the Lessee which may be due and payable in
arrears, be taken to be due and payable and in arrears as if by the terms and
provisions of this lease, the whole balance of unpaid rent and other charges,
payments, taxes, costs and expenses were on that date payable in advance; and if
this lease or any part thereof is assigned, or if the premises or any part
thereof is sublet, Lessee hereby irrevocably constitutes and appoints Lessor
Lessee's agent to collect the rents due from such assignee or sublessee and
apply the same to the rent due hereunder without in any way affecting Lessee's
obligation to pay any unpaid balance of rent due hereunder; or
ii. This lease and the term hereby created determine and
become absolutely void without any right on the part of the Lessee to save the
forfeiture by payment of any sum due or by other performance of any condition,
term or covenant broken; whereupon, Lessor shall be entitled to recover damages
for such breach in an amount equal to the amount of rent reserved for the
balance of the term of this lease, less the fair rental value of the said
demised premises, for the residue of said term.
15 FURTHER REMEDY OF LESSOR
In the event of any default as set forth in Section 14 and the exercise
by Lessor of its rights under subsection (d)(i) thereof, Lessor, or anyone
acting on Lessor's behalf, may, at Lessor's option, without terminating this
lease, re-enter and re-let, for Tenant's account, the demised premises or any
part or parts thereof to any person or persons, and on such terms and conditions
as may, in Lessor's discretion, seem best, and Lessee shall be liable for all
costs incurred in connection with such reletting (including without limitation
the cost of alterations and broker's commissions) and for any loss of rent for
the balance of the then current term.
16 CONFESSION OF JUDGMENT
If the rent and/or charges hereby reserved as rent shall remain unpaid
on any day when the same ought to be paid, Lessee hereby empowers any
Prothonotary or attorney of any Court of Record to appear for Lessee in any and
all actions which may be brought for rent and/or charges, payments, costs and
expenses reserved as rent, or agreed to be paid by the Lessee and/or to sign for
Lessee an agreement for entering in any competent Court an action or actions for
the recovery of rent or other charges or expenses, and in said suits or in said
action to confess judgment against
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Lessee for all or any part of the fees or charges specified in this Lease and
then unpaid including, at Lessor's option, additional charges, payments, costs
and expenses to be paid by Lessee hereunder, and for interests and costs
together with an attorney's fee of not less than five percent (5%) of all of the
foregoing, or Five Thousand Dollars ($5,000.00), whichever shall be the greater.
Such authority shall not be exhausted by one exercise thereof, but judgment may
be confessed as aforesaid from time to time as often as any of said additional
charges payable hereunder shall fall due or be in arrears, and such powers may
be exercised as well after the expiration of the original term and/or during any
extension or renewal of this Lease.
LESSEE ACKNOWLEDGES THAT SECTIONS 16 AND 17 OF THIS LEASE CONTAIN
AUTHORIZATION TO CONFESS JUDGMENT, THAT IT HAS CONSULTED LEGAL COUNSEL WITH
RESPECT THERETO AND THAT IT UNDERSTANDS THAT THE EXERCISE BY LESSOR OF THE
CONFESSIONS WILL RESULT IN THE ENTRY OF JUDGMENT AGAINST LESSEE AND THE SALE OR
ATTACHMENT OF, OR EXECUTION UPON, LESSEE'S PROPERTY (INCLUDING WITHOUT
LIMITATION PERSONAL PROPERTY, REAL PROPERTY AND BANK ACCOUNTS) WITHOUT PRIOR
NOTICE OR THE OPPORTUNITY FOR A HEARING.
17 EJECTMENT
When this Lease shall be determined by term, covenant or condition
broken either during the original term of this Lease or any renewal or extension
thereof, and also when and as soon as the term hereby created or any extension
thereof shall have expired, it shall be lawful for any attorney as attorney for
Lessee to file an agreement for entering in any competent Court an action or
judgment in ejection against Lessee and all persons claiming under Lessee for
the recovery by Lessor of possession of the demised premises, for which this
Lease shall be his sufficient warrant, whereupon, if Lessor so desires, a writ
of possession may issue forthwith, and provided that if for any reason after
such action shall have been commenced the same shall be determined and the
possession of the demised premises shall remain in or be restored to Lessee,
Lessor shall have the right upon any subsequent default or defaults, or upon
termination of this Lease as hereinbefore set forth, to bring one or more action
or actions as hereinbefore set forth to recover possession of the demised
premises.
18 AFFIDAVIT OF DEFAULT
In any action of ejectment and/or for additional charges in arrears,
Lessor shall first cause to be filed in any such action an affidavit made by it
or someone acting for it setting forth the facts necessary to authorize the
entry of judgment, of which facts such affidavit shall be conclusive evidence,
and if a true copy of this Lease (and of the truth of the copy such affidavit
shall be sufficient evidence) be filed in such action, it shall not be necessary
to file the original as a warrant of attorney, any rule of Court, custom of
practice to the contrary notwithstanding.
19 WAIVERS BY LESSEE
Lessee expressly waives the benefits of all laws, now or hereafter in
force, exempting any goods on the demised premises, or elsewhere from distraint,
levy or sale in any legal proceedings taken by the Lessor to enforce any rights
under this lease. Lessee further waives the right of inquisition on any real
estate that may be levied upon to collect any amount which may become due under
the terms and conditions of this lease, and does hereby voluntarily condemn the
same and authorizes the Prothonotary to enter a fieri facias or other process
upon Lessee's voluntary condemnation, and further agrees that the said real
estate may be sold on a fieri facias or other process. Lessee, however,
expressly does not waive any right it may have to seek judicial relief under law
in the event judgment is confessed against Lessee under this Lease. If
proceedings shall
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be commenced by Lessor to recover possession under the Acts of Assembly, either
at the end of the term or sooner termination of this lease, or for nonpayment of
rent or any other reason, Lessee specifically waives the right to the three
months' notice required by the Act of December 14, 1863, and to the fifteen or
thirty days' notice required by the Act of April 3, 1830, and agrees that five
days' notice shall be sufficient in either or any such case.
20 RIGHT OF ASSIGNEE OF LESSOR
The right to enter judgment against Lessee and to enforce all of the
other provisions of this Lease herein provided for may, at the option of any
assignee of this Lease, be exercised by any assignee of the Lessor's right,
title and interest in this Lease in his, her or their own name, notwithstanding
the fact that any or all assignments of the said right, title and interest may
not be executed or witnessed in accordance with the Act of Assembly of May 28,
1715, 1Sm. L. 99, and all supplements and amendments thereto that have been or
may hereafter be passed and Lessee hereby expressly waives the requirements of
said Act of Assembly and any and all laws regulating the manner and/or form in
which such assignment shall be executed and witnessed.
21 REMEDIES CUMULATIVE
All of the remedies hereinbefore given to Lessor and all rights and
remedies given to it by law and equity shall be cumulative and concurrent,
provided that the notice and grace periods set forth in Section 35 of this Lease
have been observed. No termination of this Lease or the taking or recovering of
the demised premises shall deprive Lessor of any of its remedies or actions
against the Lessee for rent due at the time or which, under the terms hereof,
would in the future become due as if there had been no termination, or for other
sums due at the time or which, under the terms hereof, would in the future
become due as if there had been no termination, nor shall the bringing of any
action for rent or breach of covenant, or the resort to any other remedy herein
provided for the recovery of rent be construed as a waiver of the right to
obtain possession of the demised premises.
22 CONDEMNATION
In the event that the premises demised or any part thereof is taken or
condemned for a public or quasi-public use, this lease shall, as to the part so
taken, terminate, or if ten percent (10%) or more of the demised premises are
taken, Lessee may terminate this Lease Agreement, any such termination to be
effective as of the date title shall vest in the condemnor, and rent, if this
Lease is not terminated, shall abate in proportion to the square feet of leased
space taken or condemned or shall cease if the entire premises be so taken. In
either event the Lessee waives ail claims against the Lessor by reason of the
complete or partial taking of the demised premises. Nothing herein contained
shall be construed as a waiver of any rights Lessee may have under the Eminent
Domain Code or other law against the condemning authority for removal expenses,
business location damages, and/or moving expenses, providing however that this
shall in no way affect or detract from any award payable to Lessor by the
condemning authority.
23 SUBORDINATION
This lease and all its terms, covenants and provisions are and each of
them is subject and subordinate to any lease or other arrangement or right to
possession, under which the Lessor is in control of the demised premises, to the
rights of the owner or owners of the demised premises and of the land or
buildings of which the demised premises are a part, to all rights of the
Lessor's landlord and to any and all mortgages and other encumbrances now or
hereafter placed upon the demised premises or upon the land and/or the buildings
containing the same; and the Lessee
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expressly agrees that if Lessor's tenancy, control, or right to possession
shall terminate either by expiration, forfeiture or otherwise, then this lease
shall, at the option of the party to whose rights this lease has been
subordinated, thereupon immediately terminate and the Lessee shall, thereupon,
give immediate possession; and Lessee hereby waives any and all claims for
damages or otherwise by reason of such termination as aforesaid. Lessor
represents and warrants that as of the date of execution of this lease, there
are no mortgages affecting the Property. The subordination of this lease to any
future mortgage affecting the Property shall be subject to the express condition
that Lessee's rights under this lease shall not be disturbed so long as Lessee
is performing all of its obligations under this lease. Lessor and Lessee
acknowledge that Lessor holds the Property under a ground lease from Velma
D'Andrea and Louis D'Andrea (the "Ground Lease"), and Lessor warrants and
represents to Lessee that Lessor has the right under the Ground Lease to enter
into this lease.
24 RENEWAL
It is mutually agreed that either party hereto may terminate this Lease
at the end of the term by giving to the other party written notice thereof at
least THREE (3) MONTHS prior thereto, but in default of such notice this Lease
shall continue upon the same terms and conditions in force immediately prior to
the expiration of the term hereof as are herein contained, except only that the
minimum rent shall be adjusted by the percentage increase of the Bureau of Labor
Statistics Consumer Price Index, Urban Wage Earners and Clerical Workers,
(Revised CPI-W), Philadelphia, Pennsylvania, (All Items Series A), (1967 = 100),
over the period during which the last rent for the preceding term was in effect,
for a further period of ONE (1} YEAR, and so on from year to year unless or
until terminated by either party hereto, giving the other THREE (3) MONTHS
written notice for removal previous to expiration of the then current term;
provided, however, that should this Lease be continued for a further period
under the terms hereinabove mentioned, any allowances given Lessee on the rent
during the original term shall not extend beyond such original term, and further
provided, however, that if Lessor, prior to the last date hereunder for giving
notice of termination of the then current term, shall have given written notice
of its intention to change the terms and conditions of this Lease, and Lessee
shall not, within ten (10) business days of the date of such notice, notify
Lessor of Lessee's rejection of such changes, which rejection shall constitute
Lessee's notice of its intention to vacate the demised premises at the end of
the then current term, Lessee shall be considered as Lessee under this Lease as
modified by the terms and conditions mentioned in such notice for a further term
as above provided, unless said notice shall fix a different term, in which event
the term fixed in said notice shall apply; if Lessee shall give notice, as
stipulated above, of its intention to vacate the demised premises at the end of
the then current term, and shall fail or refuse so to vacate, then it is
expressly agreed that Lessor shall have the option either (a) to disregard the
notice so given as having no effect, in which event all the terms and conditions
of this Lease as modified by Lessor's notice shall continue thereafter with full
force precisely as if such notice from Lessee had not been given, or (b) to
regard this Lease as terminated, whereupon the Lessee expressly agrees to vacate
said premises within ten (10) business days of the date of written notice from
Lessor. If either party shall have given notice of termination in accordance
with the provisions of this Lease or this Lease shall otherwise by its terms
terminate, and Lessee shall refuse or fail to vacate the demised premises at the
end of the then current term, then it is expressly agreed that Lessor shall have
the option of (a) disregarding such notice of termination or provision for
termination as having no effect, and of regarding this Lease as having been
renewed on the same terms and conditions for a further period of one (1) year,
or (b) of regarding this Lease as terminated, whereupon the Lessee expressly
agrees to vacate the premises within ten (10) business days of the date of
written notice from Lessor. Nothing herein contained shall deprive Lessor of any
other rights or remedies afforded by this Lease or by law by reason of Lessee's
failure to vacate the demised premises at the expiration of the then current
term of this Lease.
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25 NOTICES
All notices required to be given by Lessor to Lessee shall be sent by
registered or certified mail, return receipt requested, and after the
Commencement Date shall be addressed to the demised premises. All notices given
by Lessee to Lessor must be given by registered or certified mail, and as
against Lessor the only admissible evidence that notice has been given by Lessee
shall be registry return receipt signed by Lessor or its agent. In the event
that Lessor shall mail notice to Lessee as aforesaid, the date of mailing shall
be the valid date of service.
26 LEASE CONTAINS ALL AGREEMENTS
It is expressly understood and agreed by and between the parties hereto
that this Lease and the Riders attached hereto and forming a part hereof set
forth all the promises, agreements, conditions and understandings between Lessor
or its Agent and Lessee relative to the demised premises, and that there are no
promises, agreements, conditions or understandings, either oral or written,
between them other than are herein set forth. It is further understood and
agreed that, except as herein otherwise provided, no subsequent alteration,
amendment, change or addition to this Lease shall be binding upon Lessor or
Lessee unless reduced to writing and signed by them.
27 BROKERAGE AGREEMENT
Lessor acknowledges that it has entered into an Exclusive Agency
Agreement (Lease) with Agent, dated October 4, 1995, and Lessor hereby agrees
that its obligations to Agent under said Agreement shall continue throughout the
term of this Lease and for the term of any renewal option while this Lease
remains in effect. It is agreed and understood by Lessor and Agent that the term
"gross rental" as used in the Exclusive Agency Agreement refers only to "minimum
rent" payable under Paragraph 4 of this Lease and not to any items of additional
rent payable under this Lease.
28 BROKERS; INDEMNIFICATION
Lessor and Lessee represent and warrant to each other that they have
dealt with no brokers in this transaction other than Lanard & Axilbund, who was
retained by Lessor and whose commission shall be paid by Lessor pursuant to the
Exclusive Agency Agreement referred to in Section 27 of this Lease. If any other
broker asserts a claim based on alleged dealings with Lessor or Lessee in
connection with this Lease Agreement, such party (Lessor or Lessee, as
applicable) shall indemnify and hold harmless the other from and against all
cost and liability arising out of such claim.
29 HEIRS AND ASSIGNEES
All rights and liabilities herein given to, or imposed upon, the
respective parties hereto shall extend to and bind the several and respective
heirs, executors, administrators, successors and assigns of said parties; and if
there shall be more than one Lessee, they shall all be bound jointly and
severally by the terms, covenants and agreements herein, and the word "Lessee"
shall be deemed and taken to mean each and every person or party mentioned as a
Lessee herein, be the same one or more; and if there shall be more than one
Lessee, any notice required or permitted by the terms of this Lease may be given
by or to any one thereof, and shall have the same force and effect as if given
by or to all thereof. No rights, however, shall inure to the benefit of any
assignee of Lessee unless the assignment to such assignee has been approved by
Lessor in writing as aforesaid.
30 HEADINGS NO PART OF LEASE
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Any headings preceding the text of the several sections or sub-sections
hereof are inserted solely for convenience of reference and shall not constitute
a part of this Lease, nor shall they affect its meaning, construction or effect.
31 SERVICES & UTILITIES
The Lessor shall not be held responsible or liable for its inability to
furnish, if any, heat, service and/or use of the passenger and freight elevators
and loading docks, electricity, steam, water, sprinkler system and/or any other
service supplied by Lessor, due to any breakdown or failure of the apparatus
supplying same and/or while undergoing repairs and/or through any rule or order
of any of the properly constituted authorities and/or through any other cause of
whatsoever nature. Lessee acknowledges that it has inspected the Demised
Premises and the utility and other services provided thereto and accepts the
same "AS IS."
32 OPTION TO RENEW
Provided that (a) at the time of exercise and at all times prior to the
commencement of this option Lessee shall not be in default under any of the
provisions of this Lease, and b) Lessee has not been TEN (10) DAYS or more days
late in the payment of rent more than a total of THREE (3) times during the
lease term and all preceding extensions, Lessee shall be granted an option to
extend the term hereof for a further period of FIVE (5) YEARS, commencing
SEPTEMBER 1, 2002 and expiring AUGUST 31, 2007, which option shall be
exercisable in the manner and at the time specified below. The minimum annual
rental payable during such extended period shall be as follows: the minimum
annual rental for the lease year from September 1, 2002 to August 31, 2003 shall
be the total of (i) the minimum annual rental payable for the lease year from
September 1, 1997 to August 31, 1998, plus (ii) an amount computed by
multiplying such annual rental by the percentage increase of the Consumer Price
Index, as defined in Paragraph 4c of this Lease, for June, 2002 over the same
index for June 1997; and the minimum annual rental for each lease year during
the period from September 1, 2003 to August 31, 2007, shall be the total of i)
the minimum annual rental payable for each preceding lease year, plus ii) an
amount computed by multiplying such annual rental by the smaller of (A) 0.05
(5.00%), or (B) the percentage increase of the Consumer Price Index for the
month which is three (3) months prior to the commencement date of the then
current lease year over the same index for the month which is three (3) months
prior to the commencement date of the preceding lease year. The aforesaid
percentage increases shall be determined by first obtaining the difference, if
any, between the more recent and earlier indices and then dividing such
difference by the earlier index. Such rental shall be payable in equal monthly
installments. In no event shall the minimum annual rental for any lease year
during the above mentioned period be less than the total minimum annual rental
payable for the preceding lease year. In the event the Consumer Price Index is
discontinued, it is agreed that the index taking its place shall be used.
Lessee shall exercise said option by giving Lanard & Axilbund, Inc.,
Agent for Lessor, written notice of its intention to do so by registered or
certified mail, return receipt requested, on or before March 1, 2002.
Anything contained in this Lease to the contrary notwithstanding, in
the event Lessee shall not exercise the option herein granted, this Lease shall
terminate absolutely and without further notice from either party on the
expiration date of the original term, namely, August 31, 2002, subject however,
to the provisions of Paragraph 24 of this Lease, and except that in the event
Lessee shall occupy the demised premises for any period of time after the
expiration date of the
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original term without the consent of Lessor, then, at the option of Lessor,
exercisable by written notice within THIRTY {30) DAYS after the expiration date
of the original term, Lessee shall be deemed to have exercised this option by
its holdover and shall be bound by the terms and conditions of the option set
forth herein.
If the option herein granted is exercised or deemed to have been
exercised by Lessee's holdover as provided above, or if not exercised and the
parties hereto enter into an extension or renewal of this Lease Agreement,
Paragraph 24 shall become effective as of the first day of the renewal or
extension period, but not before. The said option may be exercised to extend the
term hereof one (1) time only. Except as expressly provided in this clause, upon
the exercise of the option herein granted all of the terms and provisions of
this Lease shall apply during the extended term.
33 SECURITY DEPOSIT
Upon the execution of the Lease, Lessee shall pay to Lanard & Axilbund,
Inc., Agent for Lessor ("Agent"), the sum of SIX THOUSAND TWO HUNDRED THIRTY
DOLLARS ($6,230.00), which sum shall be held by Agent as collateral security for
Lessee's faithful performance hereunder, receipt of which is hereby acknowledged
by Agent.
In the event Lessor should allege that Lessee is in default hereunder,
the security deposit and accrued interest shall be forthwith applicable on
account of sums which may be due Lessor by reason of such default and Agent,
without liability therefor, shall, upon written demand of Lessor setting forth
the basis of default, disburse to Lessor such amounts as Lessor requests, and
Lessor agrees to hold harmless, indemnify and defend Agent on account of such
disbursements. Such application of the security deposit shall be in addition to
all other rights and remedies accruing to Lessor hereunder. At the termination
of Lessee's tenancy and upon surrender of the demised premises as provided for
in the Lease, the unapplied balance of the security deposit, if any, shall be
returned to Lessee.
Agent shall place said security deposit in an interest bearing escrow
savings account, and Lessee, provided Lessee shall not be in default hereunder,
shall be entitled to the interest earned thereon at the termination of said
Lease. Agent shall be entitled to reasonable legal costs incurred as a result of
any lawsuit arising out of this section, said cost to be borne by the
non-prevailing party. If Lessee shall be in default, Lessee agrees that the
interest earned on said security deposit shall be applicable to any rent or
additional rent due under the Lease.
The party who, as provided above, is entitled at the termination of
this Lease to receive the interest on the security deposit not previously
applied on account of Lessee's default, is hereinafter referred to as the
"Interest Beneficiary". The Interest Beneficiary agrees, promptly upon request
from Agent, to provide its Tax I.D./Social Security number to Agent and to
execute a U.S. Government Form W-9. Agent shall have no obligation to place the
security deposit in a banking institution pending Interest Beneficiary's
compliance with the foregoing. However, at its election, escrowee may, until
such times as the Interest Beneficiary complies with the foregoing, place the
security deposit in a bank account of Agent's name and tax I.D. number, and any
interest accruing during such period shall be the sole property of Agent, who
shall also be responsible for payment of income taxes due thereon.
In the event of the sale or transfer of Lessor's interest in the
building, Lessor shall have the right to transfer the security deposit to such
purchaser or transferee, in which event Lessee shall look only to the new lessor
for the return of the security deposit, and Lessor shall thereupon be
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released from all liability to Lessee for the return of such security deposit.
It is understood that no part of the security deposit is to be considered as the
last rental due under the terms of the Lease.
34 LESSEE'S INSURANCE
Lessee hereby covenants and agrees, at its own cost and expense, to
take out and maintain in full force and effect at all times until the expiration
or earlier termination of the Lease, a comprehensive liability insurance policy
in the sum of Two Million Dollars ($2,000,000.00) aggregate insuring against
loss of life and bodily injury and Five Hundred Thousand Dollars ($500,000.00),
or such other limit as Lessor may from time to time specify, on an "occurrence"
basis, insuring against property damage in, on, about, or adjacent to the
demised premises, as well as business interruption insurance in an amount
comparable to that carried by other businesses of comparable size to Lessee's
business, and insurance covering loss and damage to Lessee's personal property,
contents, improvements and betterments in, on or about the demised premises, in
an amount equal to the full replacement value thereof. Such policy or policies
shall name Lessor and Agent as named insureds, without cross suits exclusion,
(except for Lessee's contents coverage), shall be non-cancelable without thirty
(30) days prior written notice to Lessor without exculpation of the insurer in
the event it fails to give such notice, and shall be satisfactory to Lessor in
form and content. Lessee shall deliver such policy or policies, or a certificate
of insurance evidencing same (Accord Form 27 with respect to Property
Insurance), to Lessor prior to Lessee's taking possession of the demised
premises, such delivery being a condition precedent to the commencement of the
Lease. Lessee hereby agrees to indemnify, defend and hold Lessor harmless of and
from any and all claims of whatever nature, including attorney's fees and costs,
arising from, or in connection with, Lessee's use and occupancy of the Property.
In clarification of the requirements set forth above, the coverage
obtained by Lessee shall be written on an "occurrence" basis, if available. If
an "occurrence" basis form is not available, Lessee must purchase "tail"
coverage for the most number of years available, and Lessee must also purchase
"tail" coverage if the retroactive date of an "occurrence" basis form is changed
so as to leave a gap in coverage for occurrences that might have occurred in
prior years. If a "claims made" policy is ever used, the policy must be endorsed
so that Lessor is given the right to purchase "tail" coverage should Lessee for
any reason not do so or if the policy is to be canceled for nonpayment of
premium. Any such payment by Lessor on behalf of Lessee shall be considered
Additional Rent.
35 DEFAULT
It is understood and agreed that twice per any twelve (12) month
period, but not more often, Lessor shall be obligated to give Lessee written
notice of Lessee's failure to pay rent after it shall become due, and FOURTEEN
(14) DAYS opportunity to cure such breach of Lease, prior to Lessee's being
considered in default by reason of the non-payment of rent. Further, twice per
any twelve (12) month period, but not more often, Lessor shall be obligated to
give Lessee written notice of Lessee's failure to do, or refrain from doing, any
act or thing required by Lessee under the Lease or under law (other than the
payment of monies or the covenants undertaken under Paragraphs 9(h), 9(i), 14(c)
and 14(d) hereof), and TWENTY (20) DAYS opportunity to cure such breach of
Lease, or, if same cannot be cured within said TWENTY (20) DAY period, to
commence to cure and proceed therewith diligently and continually prior to
Lessee's being considered in default by reason of such non-payment or
non-performance. Lessee shall have no right to the benefit of the grace periods
hereunder more than two (2) times during any twelve (12) month period.
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36 LEASE TAXES
If federal, state or local law now or hereafter imposes any tax,
assessment, levy, state and local realty transfer tax, or other charge (other
than any income tax) directly or indirectly upon Lessor with respect to this
Lease or the value thereof or upon the Lessee's use or occupancy of the demised
premises, or upon rent, additional rent or any other sums payable under this
Lease or upon this transaction (all of which are herein called "Lease Taxes"),
Lessee shall pay to Lessor, as additional rent and upon demand, the amount of
said Lease Taxes unless Lessee is prohibited by law from paying same, in which
event the minimum rent shall be increased by the amount of said taxes.
37 REPAIRS AND MAINTENANCE
Lessee agrees to accept the demised premises in the physical order and
condition existing on the date of commencement of the term of this Lease and
Lessee shall, except as specified in Sections 39 and 40 below, throughout the
term hereof, at Lessee's sole expense, make all necessary or appropriate
repairs, replacements and renewals, interior and exterior, structural and
non-structural, foreseen and unforeseen, ordinary and extraordinary, required to
keep and maintain the demised premises and all systems, equipment and apparatus
appurtenant thereto, or used in connection therewith, including the loading
docks, dock area and related equipment, in good order and condition, with the
express exception of the roof, exterior support walls, load bearing walls and
buried pipes which shall be the sole responsibility of Lessor, and Lessee shall
return the demised premises to Lessor in such good order and condition at the
expiration of this Lease, ordinary wear and tear not caused by the negligence of
Lessee, or those employed or acting for Lessee, alone excepted. Any repairs,
replacements and renewals and/or labor or materials performed and/or furnished
in, on or about the demised premises shall be performed or furnished in strict
compliance with all applicable laws, regulations, ordinances and requirements of
all duly constituted municipal authorities or other governmental bodies having
jurisdiction, and the requirements of any Board of Fire Underwriters having
jurisdiction. Lessee at its sole cost and expense, shall be responsible for its
snow removal, unless Lessee shall choose to use Lessor's snow removal
contractor, in which case Lessee shall pay forty-three percent (43%) of the cost
of all snow removal for the Property.
38 HVAC MAINTENANCE
Lessee shall be responsible to keep the heating, ventilation and
air-conditioning system presently in the demised premises in good operating
order, and Lessee agrees to take out and maintain in full force and effect,
throughout the term of this Lease and any extension or renewal thereof, a
standard maintenance contract for said HVAC system, providing a minimum of two
(2) inspections per year, at its own cost and expense. Any and all repairs
and/or maintenance requirements for said HVAC system not included as part of the
standard maintenance contract shall be the responsibility of Lessor. If,
however, Lessee installs any additional HVAC equipment in the demised premises,
Lessee shall be solely responsible for the maintenance, repair and replacement
of such additional equipment, which shall be Lessee's property and may be
removed by Lessee at the termination of this Lease, provided that Lessee repairs
all damage incident to the installation and removal of same.
39 ROOF AND STRUCTURAL
Lessor shall be responsible for the condition and continued repair of
all plumbing, drain pipes leaking from the pavement, curb or street to the
demised premises unless damage thereto is caused by Lessee's negligence or
non-permissible use of the demised premises. Lessor shall also be responsible
for the condition and repair of all structural and load bearing walls unless
damage
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thereto is caused by Lessee's negligence or non-permissible use of the demised
premises. The costs of repairs thereto shall be borne by Lessor and shall not
constitute part of operating costs of the Property. Upon receipt of written
notice from Lessee, Lessor agrees, at its expense, to repair, with due
diligence, allowing for delays on account of weather, availability of materials
and labor and force majeure, any leaks in the roof or make any repairs to the
exterior structural portions of the building on the demised premises, provided
such repairs are not made necessary by any act or neglect on the part of Lessee,
its servants, invitees, licensees, agents or contractors. In no event, however,
shall Lessor be liable to Lessee, its servants, invitees, licensees, agents or
contractors for any loss or damage due to, or alleged to be due to, any leaks
from the said roof and/or caused by failure to make repairs to the exterior
structural portions of the demised premises during the term of this Lease or any
renewal thereof.
40 ALTERATIONS AND IMPROVEMENTS
Lessee may, at its own cost and expense, make the following
non-structural alterations and improvements to the demised premises in
connection with Lessee's use thereof, provided such alterations and improvements
shall not adversely affect the structural soundness of the building of which the
demised premises is a part. Lessee's proposed alterations and improvements are
as follows:
a. construct approximately 6,000 to 8,000 sq. ft. of air conditioned,
heated space consisting of offices, a showroom, and an additional bathrooms; and
b. installation of a humidor for storage of its cigars.
All such alterations and improvements shall be in accordance with plans
and specifications to be supplied by Lessee, which plans shall in all instances
first be subject to Lessor's approval, which approval shall not be unreasonably
withheld. Lessee shall provide Lessor with evidence that each contractor has
adequate workers compensation insurance and general liability insurance in the
amount of at least $2,000,000.00 for injury or death to any person or persons in
any one occurrence and property damage to the limit of $100,000.00, together
with a certificate from the insurer, who shall be reasonably satisfactory to
Lessor, to the effect that such insurance may not be canceled or substantially
modified without at least ten (10) days prior written notice to Lessor. Lessee
shall furnish a guaranty by each of Lessee's prime contractors and materialmen,
for the benefit of Lessor, Lessee, and such other parties as Lessor shall
designate, that all work, materials and equipment will be provided in accordance
with the approved plans and specifications, and that they will promptly upon
notice correct and repair, at their own cost and expense, any deficiency,
defect, default or imperfection of materials, equipment or workmanship which
appears within one (1) year after completion of their work or installation.
No work or installation by Lessee at the demised premises shall be done
except after filing a waiver of the right to file any lien therefor (commonly
known as a "Mechanic's Lien") in the local Prothonotary's office or elsewhere as
provided by law, so as to constitute an effective waiver by anyone having a
right to file such lien. If any such mechanic's lien, claim or complaint on a
mechanic's lien is filed, Lessee shall cause it to be discharged or satisfied
within fifteen (15) days of service or upon notice of same, whichever shall be
sooner.
In making any approved alterations and improvements, Lessee shall
comply with any and all laws, statutes, ordinances, rules, regulations and
requirements of the municipal and other duly constituted governmental
authorities and insurance organizations, as well as the Americans with
Disabilities Act of 1990, as it may be amended from time to time.
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Unless Lessor, prior to the expiration of this Lease, gives notice to
Lessee to remove said alterations and improvements, or any portion of same, such
alterations and improvements shall remain upon the demised premises and become
part of the property of Lessor. If Lessee shall be permitted to remove any such
alterations and improvements at the expiration or earlier termination of the
Lease, Lessee shall, at its own expense, repair all damage resulting from such
removal. In the event Lessee shall fail to remove the said alterations and/or
improvements and restore the demised premises as herein provided, Lessor shall
have the right to go upon the demised premises to do so and Lessee agrees to pay
the cost thereof as additional rent. With respect to those alterations and
improvements which Lessor has elected to have remain upon the demised premises,
Lessee agrees that title to same shall vest in Lessor and Lessor agrees that
Lessee shall not be obligated to remove same.
If, as a result of any alteration and/or improvement which may be made
to the demised premises by Lessee either pursuant to this clause or without
authorization from the Lessor, any person and/or property shall be injured
and/or damaged, liability therefor shall be the sole responsibility of the
Lessee, and Lessee hereby agrees to indemnify and hold Lessor harmless of and
from any and all claims of whatever nature arising from, or in connection with,
any such alterations and/or improvements.
41 [INTENTIONALLY OMITTED.]
42 SIGN
Notwithstanding anything elsewhere herein contained to the contrary,
Lessee shall, at Lessee's sole cost and expense, have the privilege of placing
or erecting signs and/or plaques upon the herein demised premises and/or the
building of which it is a part, which signs and/or plaques shall be similar in
size, style, content and location to those of the other tenants and occupants of
the said building. The placing or erecting of such signs and/or plaques shall be
subject to and in compliance with any and all laws, statutes, ordinances, rules,
regulations and requirements of the municipal and other duly constituted
authorities and insurance organizations; provided however, the plans and
specifications therefor shall first be submitted to Lessor for written approval
as to size, character and location, which approval shall not be unreasonably
withheld; and further provided that upon the expiration of the within term or
any sooner determination of the Lease, or any renewal or extension thereof,
Lessee will, at its own cost and expense, remove such signs and/or plaques and
restore the premises as well as the building to its condition prior to the
erection thereof, reasonable wear and tear excepted. Lessee shall defend,
protect and save Lessor harmless of and from any claims for injuries to persons
or damage to property caused by the placing, maintenance, repair or removal of
said signs and/or plaques.
43 SUBLET
Original Lessee only may sublet all of the herein demised premises and
only provided the business of the sublessee shall be no more hazardous than that
of Lessee's present business and shall be consistent, in Lessor's opinion, with
other uses in the facility of which the demised premises is a part, and provided
further that Lessee shall obtain the prior written approval from Lessor, which
approval shall not be unreasonably withheld, but which may properly be withheld
if Lessor, in its sole discretion, deems the reputation of the proposed
sublessee or the nature of its business to be objectionable. Lessee shall not be
relieved of any responsibility or liability under the terms of this Lease by
reason of any subletting. Lessee shall not sublet the demised premises at a
rental higher than that as set forth in this Lease.
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<PAGE>
44 LESSOR'S LIABILITY
There shall be no personal liability in respect to any of the covenants
or conditions of this Lease and same shall or may not be imposed upon Lessor, or
any officer, director, shareholder, partner, employee, or agent of Lessor
(hereinafter collectively referred to as "Lessor's Parties" for the purpose of
this Paragraph). Lessee shall look solely to the equity of the Lessor in the
Property for satisfaction of the remedies of Lessee in the event of a breach by
Lessor of any of the covenants or conditions of this Lease, and no other
property or assets of Lessor's Parties shall be subject to levy, execution or
other enforcement procedure for the satisfaction of Lessee's remedies in the
event of a violation by Lessor of any of the above specified provisions.
In case Lessor or any successor owner of the demised premises shall
convey or otherwise dispose of the demised premises or of the interest of Lessor
in and to this Lease, all liabilities and obligations on the part of Lessor, or
successor owner as Lessor, under this Lease accruing after such conveyance or
disposal shall thereafter terminate, and thereupon all such liabilities and
obligations shall be binding upon the new owner of the demised premises.
45 ESTOPPEL CERTIFICATES/FINANCIAL STATEMENTS
Lessee agrees at any time and from time to time, within five (5) days
after Lessor's written request, to execute, acknowledge and deliver to Lessor a
written instrument in recordable form certifying that this Lease Agreement is
unmodified and in full force and effect (or if there have been modifications,
that it is in full force and effect as modified and stating the modifications),
the expiration date and the dates to which rent, additional rent and other
charges have been paid in advance, if any, security deposit, if any, and stating
whether or not to the best knowledge of the signer of such certificate Lessor is
in default in the performance of any covenant, agreement or condition contained
in this Lease Agreement and, if so, specifying each such default of which the
signer may have knowledge, it being intended that any such statement delivered
pursuant to this section may be relied upon by any prospective purchaser of the
fee or any mortgagee thereof or any assignee of Lessor's interest in this Lease
Agreement or of any mortgage upon the fee of the premises, or any part thereof.
Lessee shall provide financial statements of Holt's Cigar Company,
Inc., prepared by independent accountants, to be prepared and submitted to
Lessor in a form reasonably acceptable to Lessor no more than once each year,
within one hundred twenty (120) days after the close of each respective entity's
fiscal year. Lessor shall not, except in connection with the financing or sale
of the demised premises, furnish such reports to a third party. The first
statement due hereunder shall be provided at or before execution of this Lease.
Lessee shall not be required to submit financial statements of Ashton
Distributors, Inc. to Lessor.
46 LATE PAYMENT CHARGE
If Lessee does not pay rent on the day when same shall become due and
payable, and such failure shall continue for a period of ten (10) days, Lessee
shall pay to Lessor a service charge of three (3%) percent of the late payment,
and if not paid by the last day of the month, the late payment shall continue to
incur interest at the rate of one and one-half (1 1/2%) percent per month (or
part thereof) retroactive to the first of the month, (or such lesser charge as
may be the legal maximum for a debtor of the same nature and character as Lessee
in the jurisdiction in which the premises is located) on the amount of such rent
or additional rent or all of them, for each month or a portion of a month that
same shall remain unpaid; provided, however, that such service charge shall, in
no event, be less that Twenty-five Dollars ($25.00) for any month or a portion
of a month that rent or additional rent shall remain unpaid. Such service charge
shall be for the purpose of defraying administrative expenses of Lessor, and is
not intended as a penalty against Lessee. The
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<PAGE>
provisions of this paragraph shall not preclude Lessor from exercising its
options as set forth in any other section of this Lease or as provided by law.
47 HAZARDOUS SUBSTANCES
Lessee is on notice and hereby acknowledges the dangers and the
possibility of liens being placed on the Property in the event it places, causes
or allows to be placed on the Property hazardous substances as that term is
defined in Section 101(14) of the Comprehensive Environmental Response
Compensation and Liability Act (the "Act"), 42 U.S.C. Section 9601(14), or any
other governmental or agency act defining such material now or hereafter
promulgated. Lessee agrees to comply with all laws by any local, state or
federal authority or agency regarding the handling, generation, storage, use or
disposal of such hazardous substances, and to take all necessary precautions to
prevent spills of same on or about the Property. As used in this section,
hazardous substances shall also include petroleum and asbestos products and
medical waste. Furthermore, Lessee shall, at its own expense, comply with all
present and future "Environmental Cleanup" laws and the regulations promulgated
by the State of Pennsylvania, the United States Government and its agencies, and
shall make all submissions to, provide all information to, and comply with ail
requirements of, the bureau and agencies of the State of Pennsylvania and the
United States Government and, at Lessor's election, have an independent
inspection and report prepared at Lease termination.
Should such body or other department of the State of Pennsylvania
determine that a cleanup plan be prepared and that a cleanup be undertaken
because of any spills or discharges of hazardous substances or wastes at the
demised premises which occur during the term of this Lease, then Lessee shall,
at its own expense, prepare and submit the required plans and financial
assurances, and carry out the approved plans. At no expense to Lessor, Lessee
shall promptly provide all information requested by Lessor for preparation of
non-applicability affidavits when requested by Lessor. Lessee shall indemnify,
defend and save Lessor harmless from all fines, suits, procedures, claims and
actions of any kind or from any loss (including diminution in value and/or loss
of rents) arising out of or in any way connected with any spills or discharges
of hazardous substances or wastes at the demised premises which occur during the
term of this Lease or from any breach of this Lease; and from ail fines, suits,
procedures, claims and actions of any kind arising out of Lessee's failure to
provide all information, make all submissions and take all actions required by
any agency or department of the State of Pennsylvania or the United States
Government. Lessee's obligations and liabilities under this paragraph shall
continue so long as Lessor remains responsible for any spills or discharges of
hazardous substances or wastes at the demised premises which occur during the
term of this Lease. Lessee's failure to abide by the terms of this paragraph
shall be restrainable by injunction.
48 HOLDOVER
If Lessee shall retain possession of the demised premises or any
portion thereof without Lessor's consent following the expiration of the Lease
or sooner termination for any reason, then Lessee shall pay to Lessor for each
day of such retention triple the amount of the daily rental as of the last month
prior to the date of expiration or termination. Lessee shall also indemnify,
defend. protect and hold Lessor harmless from any loss, liability or cost,
including reasonable attorney's fees, resulting from delay by Lessee in
surrendering the demised premises, including, without limitation, any claims
made by any succeeding Lessee founded on such delay. Acceptance of rent by
Lessor following expiration or termination shall not constitute a renewal of
this Lease, and
-22-
nothing contained in this section shall waive Lessor's right of reentry or any
other right. Unless Lessor consents in writing to Lessee's holding over, Lessee
shall be only a Lessee at sufferance, whether or not Lessor accepts any rent
from Lessee while Lessee is holding over without Lessor's written consent.
Additionally, in the event that upon termination of the Lease Lessee has not
fulfilled its obligation with respect to the repairs and cleanup of the demised
premises or any other Lessee obligations as set forth in this Lease, then Lessor
shall have the right to perform any such obligations as it deems necessary at
Lessee's sole cost and expense, and any time required by Lessor to complete such
obligations shall be considered a period of holding over and the terms of this
section shall apply.
49 RECOVERY FUND, ETC.
As required by the Pennsylvania Real Estate Licensing and Registration
Act, Lessee and Lessor acknowledge notice of the following: (a) The Pennsylvania
legislature has established a real estate recovery fund whose purpose is to
compensate persons who obtain a judgement because of fraud, misrepresentation or
deceit of any agent. For further information call (717) 783-3658; (b) Agent's
fee and the expiration date of a listing agreement, if any, are negotiable, and
(c) the broker is the agent of the Lessor, not the Lessee.
50 APPROVAL
This lease is subject to the approval of Lessor, to be obtained within
five (5) days of the date of execution by Lessee. If Lessor's approval is not
obtained as provided above, any monies paid by Lessee shall be returned to
Lessee.
Pending lease approval, Lanard & Axilbund, Inc., acting as agent for
Lessor, may deposit any such monies in its Escrow Account; however, such
depositing shall not constitute an approval of this lease by Lessor.
51 QUIET ENJOYMENT
Upon payment by Tenant of minimum rent and all additional rent and upon
the observance and performance by Lessee of all the terms, covenants,
conditions, provisions and agreements of this Lease on Lessee's part to be
observed and performed, Lessee shall peaceably and quietly hold and enjoy the
demised premises for the term of this Lease without hindrance or interruption by
Lessor or by any person or persons lawfully claiming or holding by, through or
under Lessor, subject, nevertheless, to the terms, covenants, conditions and
provisions of the Lease.
52 ALLOWANCE FOR TENANT IMPROVEMENTS
Lessor shall provide Lessee with an allowance for the alterations and
improvements to be constructed in the demised premises by Lessee in a total
amount up to the lesser of (i) twenty percent (20%) of the amount actually
expended by lessee for alterations and improvements in the demised premises from
the Commencement Date through August 31, 1997, or (ii) Forty-Five Thousand
Dollars ($45,000.00). As soon as practicable following August 31, 1997, Lessee
shall submit to Lessor, as documentation supporting the amount of the allowance
to be given under this Section, an itemized written statement detailing the
improvements and alterations constructed by Lessee in the demised premises and
the amount expended by Lessee for each item, together with copies of receipted
invoices for each item. The allowance shall be paid by means of a monthly credit
against base rent so long as Lessee continues to perform all of its obligations
under this Lease, such monthly credit to be equal to the total permitted
allowance divided by 120. In the event Lessee does not exercise its option to
renew this Lease for an additional five (5) years beyond
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<PAGE>
the initial term in accordance with Section 32 of this Lease, Lessee shall not
be entitled to and shall have no claim against Lessor for the remaining portion
of the allowance that was not paid as a monthly credit against base rent during
the initial term, and Lessor shall retain such remaining amount.
53 RIGHT OF FIRST OFFER
Lessor agrees that if, during the term of this Lease, Lessor desires to
voluntarily lease any space in the building on the Property, Lessor shall notify
Lessee of the lease rental rate, term of lease and other terms and conditions
upon which Lessor is willing to lease the space to Lessee. Lessee shall have a
period of ten (10) business days to notify Lessor whether or not it will lease
the space upon the stated terms and conditions. If Lessee agrees to lease the
space upon the stated terms and conditions, Lessor and Lessee shall negotiate in
good faith the lease based upon the previously stated terms and conditions, and
shall attempt to conclude and execute a lease within forty-five (45) calendar
days of Lessee's notice agreeing to lease the space. If, despite the good faith
efforts of Lessor and Lessee, no lease for the space is signed within such
forty-five (45) calendar day period, then Lessor shall have the right to market
the space to outside parties and Lessee shall have no further right of first
offer or other preferential right with regard to that particular space. If
Lessee, upon receiving Lessor's terms and conditions for leasing the space on
the stated terms, fails to respond to Lessor within ten (10) business days or
refuses to lease the space on the stated terms, then Lessor shall have the right
to market the space to outside parties, free of any rights of Lessee with
respect to such space. Lessee shall, within five (5) days of any request by
Lessor, provide Lessor with a written certificate specifying that Lessor has
informed Lessee of the availability of certain space (and specifying the space),
whether or not Lessee wished to lease the space, what the terms and conditions
of the proposed lease were, whether Lessee agreed to lease the space and any and
all other information reasonably requested by Lessor.
54 JOINT AND SEVERAL LIABILITY
Holt's Cigar Company, Inc. and Ashton Distributing, Inc. together
constitute "Lessee" under this Lease Agreement, and each of them shall be
jointly and severally liable for all payment and performance obligations of
Lessee under this Lease Agreement.
IN WITNESS WHEREOF, the parties hereto have executed this Lease the day
and year first above written, and intend to be legally bound thereby.
LESSOR: P. D'ANDREA, INC.
By: /s/ Velma D'Andrea
-----------------------------------
President
Attest: /s/ Elizabeth [ILLEGIBLE]
-------------------------------
Secretary
(corporate seal)
(Signatures continued on next page)
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<PAGE>
(Signatures continued from previous page)
The undersigned, having examined the above Lease and agreements, hereby
agrees to accept them and approves of them in their entirety.
LESSEE: HOLT'S CIGAR COMPANY, INC.
By: /s/ [ILLEGIBLE]
-------------------------------------
President
Attest: /s/ [ILLEGIBLE]
----------------------------------
Secretary
(corporate seal)
ASHTON DISTRIBUTORS, INC.
By: /s/ [ILLEGIBLE]
-------------------------------------
President
Attest: /s/ [ILLEGIBLE]
----------------------------------
Secretary
(corporate seal)
AGENT: LANARD & AXILBUND, INC.
By: /s/ [ILLEGIBLE]
-------------------------------------
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<PAGE>
EXHIBIT "A"
Description of Demised Premises
-26-
<PAGE>
This page shows a floor plan of premises
EXHIBIT "A"
<PAGE>
EXHIBIT B
1. Internal Humidor. A humidor room similar in nature to a commercial cooler
will be constructed encompassing approximately 5,000 square feet. The room will
be super insulated and the humidity and temperature will be precisely controlled
to maintain the proper environment for the long and short term storage of
cigars.
Neither the room itself nor the humidification or temperature control
equipment will pierce the outside walls or roof of the building, will be
contained within the existing structure and will be accessible only from within
the demised premises.
2. Humidification Equipment. Humidification equipment designed to keep a 5,000
square foot humidor with the proper humidity for the long and short term
storage of cigars
3. Temperature Control Equipment. Heat/air conditioning equipment designed to
work in conjunction with the humidification equipment for 5,000 square foot
humidor and to keep said room at the proper temperature for the short and long
term storage of cigars.
<PAGE>
Form W-9
(Rev. April 1990)
Department of the Treasury
Internal Revenue Service
- --------------------------------------------------------------------------------
Request for Taxpayer
Identification Number and Certification
- --------------------------------------------------------------------------------
Give this form
to the requester. Do
NOT sent to IRS.
- --------------------------------------------------------------------------------
Please print or type
- --------------------------------------------------------------------------------
Name (If joint names, list first and circle the name of the person or entity
whose number you enter in Part 1 below. See instructions under "Name" if your
name has changed.)
Holt's Cigar Co., Inc.
- --------------------------------------------------------------------------------
Address (number and street)
2901 Grant Avenue
- --------------------------------------------------------------------------------
City, state, and ZIP code
Phila., PA 19114
- --------------------------------------------------------------------------------
Part I Taxpayer Identification Number (TIN)
- --------------------------------------------------------------------------------
Enter your taxpayer identification number in
the appropriate box. For indiduals and sole
proprietors, this is your social security number.
For other entities, it is your employer
identification number. If you do not have a
number, see How To Obtain a TIN, below.
Note: If the account is in more than one name,
see the chart on page 2 for guidelines on whose
number to enter.
Social security number
|_|_|_|-|_|_|-|_|_|_|_|
or
Employer identification number
|_|_|-|_|_|_|_|_|_|_|
- --------------------------------------------------------------------------------
----------------------------------------
List account number(s)
here (optional)
----------------------------------------
Part II For Payees Exempt From
Backup Withholding (See
instructions)
----------------------------------------
----------------------------------------
Requester's name and address (optional)
----------------------------------------
- --------------------------------------------------------------------------------
Certification.--Under penalties of perjury, I certify that:
(1) The number shown on this form is my correct taxpayer identification number
(or I am waiting for a number to be issued to me), and
(2) I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service (IRS) that I am subject to backup withholding as a result of a
failure to report all interest or dividends, or (c) the IRS has notified me
that I am no longer subject to backup withholding.
Certification Instructions.--You must cross out item (2) above if you have been
notified by IRS that you are currently subject to backup withholding because of
underreporting interest or dividends on your tax return. For real estate
transactions, item (2) does not apply. For mortgage interest paid, the
acquisition or abandonment of secured property, contributions to an individual
retirement arrangement (IRA), and generally payments other than interest and
dividends, you are not required to sign the Certification, but you must provide
your correct TIN. (Also see Signing the Certification under Specific
Instructions, on page 2.)
- --------------------------------------------------------------------------------
Please
Sign
Here Signature xxxx, CFO Date 3/4/97
- --------------------------------------------------------------------------------
Instructions
(Section references are to the Internal Revenue Code.)
Purpose of Form.--A person who is required to file an information return with
IRS must obtain your correct taxpayer identification number (TIN) to report
income paid to you, real estate transactions, mortgage interest you paid, the
acquisition or abandonment of secured property, or contributions you made to an
individual retirement arrangement (IRA). Use Form W-9 to furnish your correct
TIN to the requester (the person asking you to furnish your TIN), and, when
applicable, (1) to certify that the TIN you are furnishing is correct (or that
you are waiting for a number to be issued). (2) to certify that you are not
subject to backup withholding, and (3) to claim exemption from backup
withholding if you are an exempt payee. Furnishing your correct TIN and making
the appropriate certifications will prevent certain payments from being subject
to the 20% backup withholding.
Note: If a requester give you a form other than a W-9 to request your TIN, you
must use the requester's form.
How To Obtain a TIN.--If you do not have a TIN, apply for one immediately. To
apply, get Form SS-5, Application for a Social Security Number Card (for
individuals), from your local office of the Social Security Administration, or
Form SS-4, Application for Employer Identification Number (for businesses and
all other entities), from your local Internal Revenue Service office.
To complete Form W-9 if you do not have a TIN, write "Applied For" in the
space for the TIN in Part I, sign and date the form, and give it to the
requester. Generally, you will then have 60 days to obtain a TIN and furnish it
to the requester. If the requester does not receive your TIN within 60 days,
backup withholding, if applicable, will begin and continue until you furnish
your TIN to the requester. For reportable interest or dividend payments, the
payer must exercise one of the following options concerning backup withholding
during this 60-day period. Under option (1), a payer must backup withhold on any
withdrawals you make from your account after 7 business days after the requester
receives this form back from you. Under option (2), the payer must backup
withold on any reportable interest or dividend payments made to your account,
regardless of whether you make any withdrawals. The backup withholding under
option (2) must begin no later than 7 business days after the requester receives
this form back. Under option (2), the payer is required to refund the amounts
withheld if your certified TIN is received within the 60-day period and you were
not subject to backup withholding during that period.
Note: Writing "Applied For" on the form means that you have already applied for
a TIN OR that you intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include your
TIN, sign and date the form, and give it to the requester.
What Is Backup Withholding?--Persons making certain payments to you are
required to withhold and pay to IRS 20% of such payments under certain
conditions. This is called "backup withholding." Payments that could be subject
to backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee compensation, and certain payments
from fishing boat operators, but do not include real estate transactions.
If you give the requester your correct TIN, make the appropriate
certifications, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding. Payments you
receive will be subject to backup withholding if:
(1) You do not furnish your TIN to the requester, or
(2) IRS notifies the requester that you furnished an incorrect TIN, OR
(3) You are notified by IRS that you are subject to backup withholding
because you failed to report all your interest and dividends on your
tax return (for reportable interest and dividends only), or
(4) You fail to certify to the requester that you are not subject to
backup withholding under (3) above (for reportable interest and
dividend accounts opened after 1983 only), or
(5) You fail to certify your TIN. This applies only to reportable
interest, dividend, broker, or barter exchange accounts opened after
1983, or broker accounts considered inactive in 1983.
Except as explained in (5) above, other reportable payments are subject to
backup withholding only if (1) or (2) above applies.
Certain payees and payments are exempt from backup withholding and
information reporting. See Payees and Payments Exempt From Backup Withholding,
below, and Exempt Payees and Payments under Specific instructions, on page 2, if
you are an exempt payee.
Payees and Payments Exempt From Backup Withholding.--The following is a list of
payees exempt from backup withholding and for which no information reporting is
required. For interest and dividends, all listed payees are exempt except item
(9). For broker transactions, payees listed in (1) through (13) and a person
registered under the Investment Advisers Act of 1940 who regularly acts as a
broker are exempt. Payments subject to reporting under sections 6041 and 6041A
are generally exempt from backup withholding only if made to payees described in
items (1) through (7), except that a corporation that provides medical and
health care services or bills and collects payments for such services is
- --------------------------------------------------------------------------------
Form W-9. (Rev. 4-90)
AGREEMENT OF LEASE
(Triple Net)
THIS AGREEMENT OF LEASE is by and between Robert Levin and Suzanne Levin,
husband and wife ("Landlord") and Holt's Cigar Company, Inc. ("Tenant").
Landlord and Tenant, intending to be legally bound hereby, agree as follows:
1. Premises.
Landlord does hereby demise and let unto Tenant and Tenant does hereby
lease and take from Landlord for the term and upon the terms, covenants,
conditions and provisions set forth herein all of the building ("Building") on a
tract of land ("Parcel") located at 1522 Walnut Street, Philadelphia,
Pennsylvania (the Building, the Parcel and any other improvements thereon being
herein collectively called the "Premises").
2. Tenant's Work.
Tenant agrees to perform any work which is necessary for the use and
enjoyment of the Premises by Tenant. All of such work shall be performed by
Tenant in compliance with all applicable governmental requirements, the
requirements of this Lease and the requirements of all mortgages and
encumbrances of record to which this Lease is subject.
3. Term and Extension.
The term of this lease shall commence on November 1, 1994 (herein called
the "Commencement Date"). Unless sooner terminated in accordance with the terms
hereof, the term of this lease shall end without the necessity of notice from
either party on October 31, 2004 ("Expiration Date"). Tenant shall have the
right to extend the term of this Lease for one additional term of up to five (5)
years, such extension to be upon the terms and conditions of this Lease and upon
such other terms and conditions as are reasonably required by Landlord in a
notice given to Tenant at least thirty (30) days prior to the commencement of
the extension term.
<PAGE>
4. Use of Premises.
Tenant may use the Premises for any lawful use.
5. Rent.
(a) Minimum Annual Rent. Each month of the initial term of this lease
Tenant shall pay rent, without notice or demand, and without set off, due and
payable on the first day of each calendar month. Each Month of any extension
term of this lease Tenant shall pay rent of Fifty-three Thousand Four Hundred
and Ninety-six ($53,496.00) Dollars per year, payable in equal monthly
installments of Four Thousand Four Hundred and Fifty-eight ($4,458.00) Dollars
per month without notice or demand, and without set off, due and payable on the
first day of each calendar month. Minimum annual rent for any partial month
shall be prorated. Unless otherwise specifically provided, all sums shall be
paid to Landlord at the address given in Article 24 hereof.
(b) Net Lease. It is the purpose and intent of Landlord and Tenant that
the minimum total rent referred to above shall be absolutely net to Landlord
such that Tenant shall be responsible for all costs of renovating, improving,
operating and maintaining the Premises, including without limitation, the costs
of insurance, real estate taxes, utilities and all repairs and maintenance of
the Premises and that Landlord shall have no obligation or responsibility to pay
or reimburse Tenant for any of such costs.
(c) Debt Service. The "debt service on the Premises" shall be a sum
equal to the aggregate monthly amount of principal, interest, service fees, late
fees and other costs and fees of any nature due under any mortgages on the
Premises which secure loans made to Landlord for the acquisition, renovation,
expansion or improvement of the Premises or for the refinancing of any such
loans.
6. Impositions.
Used in this lease the term "Impositions" refers to all levies, taxes,
assessments and all charges, imposts or burdens of whatsoever kind and nature,
ordinary or extraordinary, which are applicable to the term of this lease, and
which are assessed or imposed against the Premises by any state or municipal
government or public authority, or under any law, ordinance or regulation
thereof, or pursuant to any recorded covenants or agreements upon or with
respect to the Premises or any part thereof, any improvements thereto or this
lease.
- 2 -
<PAGE>
7. Insurance.
(a) Liability. Tenant, at Tenant's sole cost and expense, shall
maintain and keep in effect throughout the term insurance against liability for
bodily injury (including death) or property damage in or about the Premises
under a policy of comprehensive general public liability insurance, with such
limits as to each as may be reasonably required by Landlord from time to time,
but not less than $3,000,000 combined single limit. The policies of
comprehensive general public liability insurance shall name Landlord, Tenant and
any mortgagee (if Landlord so requests) as the insured parties. Each such policy
shall provide that it shall not be cancelable without at least thirty (30) days
prior written notice to Landlord and to any mortgagee named in an endorsement
thereto and shall be issued by an insurer and in a form satisfactory to
Landlord, which form shall exculpate Landlord and mortgagee from all defenses of
the insurer against Tenant except non-payment of the premium. At least ten (10)
days prior to the Commencement Date and each anniversary of the Commencement
Date, a certificate of insurance shall be delivered to Landlord and to any
mortgagee designated by Landlord. If Tenant shall fail, refuse or neglect to
obtain or to maintain any insurance that it is required to provide or to furnish
Landlord with satisfactory evidence of coverage on any such policy, Landlord
shall have the right to purchase such insurance. All such payments made by
Landlord shall be recoverable by Landlord from Tenant, together with interest
thereon, as additional rent promptly upon being billed therefor.
(b) Property. Tenant, at Tenant's sole cost and expense, shall maintain
and keep in effect on all of the Premises and all of Tenant's property and on
Tenant's alterations or improvements to the Premises throughout the term fire
insurance and insurance with respect to risks from time to time included under
an "All-Risk" endorsement, in amounts sufficient to prevent Landlord or Tenant
from becoming co-insurers of any loss but in any event in amounts not less than
100% of the then full insurable value of such items.
(c) Other Insurance. Tenant, at tenant's sole cost and expense shall
throughout the term keep in effect such other insurance coverage as Landlord
shall reasonably require, including without limitation, workmen's compensation
insurance.
- 3 -
<PAGE>
8. Repairs and Maintenance: Surrender.
Tenant, at its sole cost and expense and throughout the term of this lease,
shall keep and maintain the entire Premises in a neat and orderly condition
including any necessary repairs or replacements, whether structural or
nonstructural. At the expiration or earlier termination of the term hereof,
Tenant shall promptly yield up, clean and neat, and in the same condition, order
and repair in which they are required to be kept throughout the term hereof, the
Premises and all improvements, alterations and additions thereto, ordinary wear
and tear excepted.
9. Utilities.
Tenant shall be solely responsible to arrange for, install meters, and to
pay for any utility service and for any janitorial or trash removal or other
service necessary for its use of the Premises.
10. Governmental and Other Regulations.
Tenant shall not violate any laws, ordinances, notices, orders, rules,
regulations or requirements of any federal, state or municipal government or any
department, commission, board or officer thereof, or of the National Board of
Fire Underwriters or any other body exercising similar functions, or of the
rules adopted by the Landlord, relating to the Premises or to the use or manner
of use of the Premises by Tenant and shall at its own expense keep the Premises
in compliance with all of such requirements.
11. Alterations, Additions and Fixtures.
(a) Subject to the provisions of Article 12 hereof, Tenant shall have
the right to install in the Premises any trade fixtures from time to time during
the term of this lease; provided, however that no such installation or removal
thereof shall affect the structural portion of the Premises and that Tenant
shall repair and restore any damage or injury to the Premises caused thereby.
(b) Tenant shall not make or permit to be made any alterations,
improvements or additions to the Premises without on each occasion first
presenting to Landlord plans and specifications therefor and obtaining
Landlord's prior written consent thereto which consent shall not be unreasonably
withheld. If Landlord shall
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<PAGE>
consent to any such proposed alterations, improvements, or additions, then
Tenant shall make the proposed alterations, improvements and additions at
Tenant's sole cost and expense. Any and all alterations, improvements and
additions to the Premises which are constructed, installed or otherwise made by
Tenant shall be the property of Tenant until the expiration or sooner
termination of this lease; at that time all such alterations and additions shall
remain on the Property and become the property of Landlord without payment
therefor by Landlord; unless, upon the termination of this lease, Landlord shall
give written notice to Tenant to remove the same; in which event Tenant will
remove such alterations, improvements and additions, and repair and restore any
damage to the Premises caused by the installation or removal thereof.
12. Mechanics' Liens.
Tenant shall promptly pay any contractors and materialmen who supply labor,
work or materials to Tenant at the Premises so as to minimize the possibility of
a lien attaching to the Premises. Tenant shall take all steps permitted by law
in order to avoid the imposition of any mechanic's, laborer's or materialman's
lien upon the Premises. Should any such lien or notice of lien be filed for work
performed for Tenant other than by Landlord, Tenant shall bond against or
discharge the same within fifteen (15) days after the lien or claim is filed or
formal notice of said lien or claim has been issued regardless of the validity
of such lien or claim. Nothing in this lease is intended to authorize Tenant to
do or cause any work or labor to be done or any materials to be supplied for the
account of Landlord, all of the same to be solely for Tenant's account and at
Tenant's risk and expense.
13. Landlord's Right of Entry.
(a) Tenant shall permit Landlord and the authorized representatives of
Landlord and of any mortgagee or any prospective mortgagee to enter the Premises
at all reasonable times, upon notice reasonable under the circumstances, for the
purpose of (i) inspecting them or (ii) making any necessary repairs thereto and
performing any work therein. During the progress of any work on the Premises,
Landlord will attempt not to inconvenience Tenant, but shall not be liable for
inconvenience, annoyance, disturbance, loss of business or other damage to
Tenant by reason of making any repair or by bringing or storing materials,
supplies, tools and equipment in the Premises during the performance of any
work, and the obligations of Tenant under this lease shall not be thereby
affected in any manner whatsoever.
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<PAGE>
(b) Landlord shall have the right at all reasonable times to enter and
to exhibit the Premises for the purpose of sale or mortgage, and, during the
last nine (9) months of the term of this lease, to enter and to exhibit the
Premises to any respective tenant and to place a sign advertising the
availability of the Premises.
14. Damage by Fire or Other Casualty.
If the Premises or Building shall be damaged or destroyed by fire or other
casualty, Tenant shall promptly notify Landlord, and Tenant, subject to the
availability of adequate insurance proceeds and subject to the requirements of
Landlord's mortgagee, promptly shall repair the damage to substantially the same
condition in which they were immediately prior to such damage or destruction.
Tenant shall not be entitled to an abatement of rent or of any other charges and
Tenant shall be responsible to repair any damage to Tenant's property.
15. Indemnification of Landlord.
Tenant will indemnify Landlord and save Landlord harmless from and against
any and all claims, actions, damages, liability and expense (including without
limitation fees of attorneys, investigators and experts) in connection with loss
of life, personal injury or damage to property caused to any person in or about
the Premises or arising out of the occupancy or use by Tenant of the Premises or
any part thereof or occasioned wholly or in part by any act or omission of
Tenant, its agents, contractors, employees, licensees or invitees; unless such
loss, injury or damage was caused by the gross negligence of Landlord, its
agents, contractors, employees, licensees or invitees. Without limiting the
foregoing, Tenant will forever release and hold Landlord harmless from all
claims arising out of damage to Tenant's property unless such damage occurs as a
result of Landlord's gross negligence. In case any such claim, action or
proceeding is brought against Landlord, upon notice from Landlord and at
Tenant's sole cost and expense, Tenant shall resist or defend such claim, action
or proceeding or shall cause it to be resisted or defended by an attorney
acceptable to Landlord.
16. Condemnation.
If all of the Premises are taken by a condemnation; or if any part of the
Premises is taken by a condemnation and the remainder thereof is insufficient
for the reasonable operation therein of Tenant's business; or if any of the
Property is taken by
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<PAGE>
a condemnation and, in Landlord's sole opinion, it would be impractical or the
condemnation proceeds are insufficient to restore the remainder of the Property;
then, in any such event, this lease shall terminate and all obligations
hereunder shall cease as of the date upon which possession is taken by the
condemnor and the rent herein reserved shall be apportioned and paid in full by
Tenant to Landlord to that date and all rent prepaid for periods beyond that
date shall forthwith be repaid by Landlord to Tenant.
17. Quiet Enjoyment.
Tenant, upon paying the minimum rent, additional rent and other charges
herein provided for, and observing and keeping all covenants, agreements and
conditions of this lease on its part to be kept, shall quietly have and enjoy
the Premises during the term of this lease without hindrance or molestation by
anyone claiming by or through Landlord, subject, however, to the exceptions,
reservations and conditions of this lease and to exceptions and restrictions of
record.
18. Assignment and Subletting.
Tenant shall not assign, mortgage, pledge or encumber this lease, or sublet
the whole or any part of the Premises, without the prior written consent of
Landlord which consent shall not be unreasonably withheld. This prohibition
against assigning or subletting shall be construed to include a prohibition
against any assignment or subletting by operation of law, and/or a transfer by
any person or persons controlling Tenant on the date of the lease of such
control to a person or persons not controlling Tenant on the date of the lease.
In the event of any assignment of this lease made with or without Landlord's
consent, Tenant nevertheless shall remain liable for the performance of all of
the terms, conditions and covenants of this lease and shall require any assignee
to execute and deliver to Landlord an assumption of liability agreement in form
satisfactory to Landlord, including an assumption by the assignee of all of the
obligations of Tenant and the assignee's ratification of and agreement to be
bound by all the provisions of this lease. Landlord shall be entitled to, and
Tenant shall promptly remit to Landlord, any profit which may inure to the
benefit of Tenant as a result of any subletting of the Premises or assignment of
this lease, whether or not consented to by Landlord.
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<PAGE>
19. Subordination.
This Lease and Tenant's rights hereunder shall be subject and subordinate
at all times in hen and priority to any mortgage or other encumbrance now or
hereafter placed upon or affecting the Premises, and to all renewals,
modifications, consolidations and extensions thereof, without the necessity of
any further instrument or act on the part of Tenant. Tenant shall execute and
deliver upon demand any further instrument or instruments confirming the
subordination of this lease to the lien of any such mortgage or to the lien of
any other mortgage if requested to do so by Landlord, and any further instrument
or instruments of attornment that may be desired by any such mortgagee or
Landlord. Notwithstanding the foregoing, any mortgagee may at any time
subordinate its mortgage to this lease, without Tenant's consent, by giving
notice in writing to Tenant, and thereupon this lease shall be deemed prior to
such mortgage without regard to their respective dates of execution and
delivery, and in that event such mortgagee shall have the same rights with
respect to this lease as though this lease had been executed prior to the
execution and delivery of the mortgage and had been assigned to such mortgagee.
20. Tenant's Certificate.
Tenant, at any time and from time to time and within ten (10) days after
Landlord's written request, shall execute, acknowledge and deliver to Landlord a
written instrument in recordable form certifying that this lease is unmodified
and in full force and effect (or, if there have been modifications, that it is
in full force and effect as modified and stating the modifications); certifying
that Tenant has accepted possession of the Premises; stating the date on which
the term of the lease commenced and the dates to which minimum rent, additional
rent and other charges have been paid in advance, if any; stating that to the
best knowledge of the signer of such instrument Landlord is not in default of
this lease (or if there is an alleged default on the part of Landlord,
describing the same); stating any other fact or certifying any other condition
reasonably requested by Landlord or required by any mortgagee or prospective
mortgagee or purchaser of the Premises or any interest therein, and stating that
it is understood that such instrument may be relied upon by any mortgagee or
prospective mortgagee or purchaser of the Premises or any interest therein or by
any assignee of Landlord's interest in this lease or by any assignee of any
mortgagee. The foregoing instrument shall be addressed to Landlord and to any
mortgagee, prospective mortgagee, purchaser or other party specified by
Landlord.
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<PAGE>
21. Curing Tenant's Defaults.
If Tenant shall be in default in the performance of any of its obligations
hereunder, Landlord, without any obligation to do so, in addition to any other
rights it may have in law or equity, may elect to cure such default on behalf of
Tenant after written notice (except in the case of emergency) to Tenant. Tenant
shall reimburse Landlord upon demand for any sums paid or costs incurred by
Landlord in curing such default, including interest thereon from the respective
dates of Landlord's making the payments and incurring such costs, which sums and
costs together with interest thereon shall be deemed additional rent payable
promptly upon being billed therefor.
22. Defaults--Remedies.
(a) Defaults. It shall be an event of default:
(i) If Tenant does not pay in full when due any and all
installments of minimum rent or additional rent or any other charges or payments
whether or not herein included as rent and such failure continues for a period
of five (5) days after notice from Landlord; or
(ii) If Tenant violates or fails to perform or otherwise breaches
any agreement, term, covenant or condition herein contained and such violation
or failure continues for a period of twenty (20) days after notice from
Landlord, or
(iii) If Tenant becomes insolvent or bankrupt in any sense or makes
an assignment for the benefit of creditors or offers a composition or settlement
to creditors, or if a petition in bankruptcy or for reorganization or for an
arrangement with creditors under any federal or state law is filed by or against
Tenant, or a bill in equity or other proceeding for the appointment of a
receiver, trustee, liquidator, conservator or similar official for any of
Tenant's assets is commenced, or if any of the real or personal property of
Tenant shall be levied upon by any sheriff, marshal or constable; provided,
however, that any proceeding brought by anyone other than the parties to this
lease under any bankruptcy, reorganization arrangement, insolvency,
readjustment, receivership or similar law shall not constitute a default until
such proceeding, decree, judgment or order has continued unstayed for more than
sixty (60) consecutive days.
9
<PAGE>
(iv) If any of the events enumerated in Paragraph (a) (iii) of this
Article shall happen to any guarantor of this lease;
(b) Remedies. Then, and in any such event, Landlord shall have all
rights and remedies available at law or in equity, including but not limited to
the following rights:
(i) Late Charges. To charge a late payment penalty of five (5%)
percent of any amount owed to Landlord pursuant to this lease which is not paid
within five (5) days of the date which is set forth in the lease if a date is
specified, or, if a date is not specified, within fifteen (15) days of the
mailing of a bill therefor by Landlord. If Landlord incurs a penalty or
additional fee of any nature in connection with any payment which Tenant has
failed to make within the times required in this lease, Tenant shall pay
Landlord, in addition to such sums, the full amount of such penalty incurred by
Landlord.
(ii) Acceleration. To accelerate the whole or any part of the rent
for the entire unexpired balance of the term of this lease, as well as all other
charges, payments, costs and expenses herein agreed to be paid by Tenant, and
any rent or other charges, payments, costs and expenses if so accelerated shall,
in addition to any and all installments of rent already due and payable and in
arrears, and any other charge or payment herein reserved, included or agreed to
be treated or collected as rent and any other charge, expense or cost herein
agreed to be paid by Tenant which may be due and payable and in arrears, be
deemed due and payable as if, by the terms and provisions of this lease, such
accelerated rent and other charges, payments, costs and expenses were on that
date payable in advance.
(iii) Re-entry: Termination; Reletting. To reenter the Premises,
together with all additions, alterations and improvements, and, at the option of
Landlord, remove all persons and all or any property therefrom, either by
summary dispossess proceedings or by any suitable action or proceeding at law or
by force or otherwise, without being liable for prosecution for damages
therefor, and repossess and enjoy the Premises. Upon recovering possession of
the Premises by reason of or based upon or arising out of a default on the part
of Tenant, Landlord may, at Landlord's option, either terminate this lease or
make such alterations and repairs as may be necessary in order to relet the
Premises and relet the Premises or any part or parts thereof, either in
Landlord's name or otherwise, for a term or terms which may, at Landlord's
option, be less than or exceed the period which would otherwise have
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<PAGE>
constituted the balance of the term of this lease and at such rent or rents and
upon such other terms and conditions as in Landlord's sole discretion may seem
advisable and to such person or persons as may in Landlord's discretion seem
best; upon each such reletting all rents received by Landlord from such
reletting shall be applied: first, to the payment of any costs and expenses of
such reletting, including brokerage fees and attorney's fees and all costs of
such alterations and repairs; second, to the payment of any indebtedness other
than rent due hereunder from Tenant to Landlord; third, to the payment of rent
due and unpaid hereunder; and the residue, if any, shall be held by Landlord and
applied in payment of future rent as it may become due and payable hereunder. If
such rentals received from such reletting during any month shall be less than
that to be paid during that month by Tenant, Tenant shall pay any such
deficiency to Landlord. Such deficiency shall be calculated and paid monthly. No
such reentry or taking possession of the Premises or the making of alterations
or improvements thereto or the reletting thereof shall be construed as an
election on the part of Landlord to terminate this lease unless written notice
of such intention be given to Tenant. Landlord shall in no event be liable in
any way whatsoever for failure to relet the Premises or, in the event that the
Premises or any part or parts thereof are relet, for failure to collect the rent
thereof under such reletting. Tenant, for Tenant and Tenant's successors and
assigns, hereby irrevocably constitutes and appoints Landlord as Tenant's and
their agent to collect the rents due and to become due under all subleases of
the Premises or any parts thereof without in any way affecting Tenant's
obligation to pay any unpaid balance of rent due or to become due hereunder.
Notwithstanding any such reletting without termination, landlord may at any time
thereafter elect to terminate this lease for such previous breach.
(iv) Termination. To terminate this lease and the term hereby
created without any right on the part of Tenant to waive the forfeiture by
payment of any sum due or by other performance of any condition, term or
covenant broken. Whereupon Landlord shall be entitled to recover, in addition to
any and all sums and damages for violation of Tenant's obligations hereunder in
existence at the time of such termination, damages for Tenant's default in
amount equal to the amount of the rent reserved for the balance of the term of
this lease, as well as all other charges, payments, costs and expenses herein
agreed to be paid by Tenant, all discounted at the rate of six percent (6%) per
annum to their then present worth, less the fair rental value of the Premises
for the remainder of said term, also discounted at the rate of six
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percent (6%) per annum to its then present worth, all of which amount shall be
immediately due and payable from Tenant to Landlord.
(v) Remedies Cumulative. All of the remedies hereinbefore given to
Landlord and all rights and remedies given to it by law, shall be cumulative,
and concurrent. No determination of this lease or the taking or recovering of
the Premises shall deprive Landlord of any of its remedies or actions against
the Tenant for rent then due or which would thereafter come due as if there had
been no determination of this lease or recovery of the premises, or for damages,
or for the breach of any covenant herein contained, nor shall the bringing of
any action for rent or damages or breach of covenant, or the resort to any other
remedy herein provided for the recovery of rent or damages be construed as a
waiver of the right to obtain possession of the premises.
(c) Non-Waiver. No waiver by Landlord of any breach by Tenant of any of
Tenant's obligations, agreements or covenants herein shall be a waiver of any
subsequent breach or of any obligation, agreement or covenant, nor shall any
forbearance by Landlord to seek a remedy for any breach by Tenant be a waiver by
Landlord of any rights and remedies with respect to such or any subsequent
breach.
23. Liability of Landlord and Tenant.
(a) Landlord. The word "Landlord" is used herein to include the
Landlord named above as well as its heirs, successors and assigns, each of whom
shall have the same rights, remedies, powers, authorities and privileges as he
would have had the originally signed this lease as Landlord. Any such person,
whether or not named herein, shall have no liability hereunder after he ceases
to hold title to the Premises except for obligations which may have theretofore
accrued. Neither Landlord nor any principal of Landlord nor any owner of the
Building or the Parcel, whether disclosed or undisclosed, shall have any
personal liability with respect to any of the provisions of this lease or the
Premises, and if Landlord is in breach or default with respect to Landlord's
obligations under this lease or otherwise, Tenant shall look solely to the
equity of Landlord in the Premises for the satisfaction of Tenant's remedies.
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<PAGE>
(b) Tenant. The word "Tenant" is used herein to include the Tenant
named above as well as its successors and assigns, each of which shall be under
the same obligations, liabilities and disabilities and each of which shall have
the same rights, privileges and powers as it would have possessed had it
originally signed this lease as Tenant. Each and every of the persons named
above as Tenant shall be bound jointly and severally by the terms, covenants and
agreements contained herein. However, no such rights, privileges or powers shall
inure to the benefit of any assignee of Tenant, immediate or remote, unless the
assignment to such assignee is permitted or has been approved in writing by
Landlord. Any notice required or permitted by the terms of this lease may be
given by or to any one of the persons named above as Tenant, and shall have the
same force and effect as if given by or to all thereof.
24. Notices.
All notices demands, requests, consents, certificates and waivers required
or permitted hereunder from either party to the other shall be in writing and
sent by United States certified mail, return receipt requested, postage prepaid.
Notices to Tenant shall be addressed to the Premises.
Notices to Landlord shall be addressed to:
Mr. Robert Levin
Holt's Cigar Company, Inc.
2901 Grant Avenue
Philadelphia, PA 19114
with a copy to any mortgagee or other party designated by Landlord. Either party
may at any time, in the manner set forth for giving notices to the other,
specify a different address to which notices to it shall be sent.
25. Security Deposit.
There is no security deposit under this lease.
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<PAGE>
26. Mortgages, Easements and Installment Sales Agreements.
Tenant agrees to comply with the terms and conditions of any mortgages,
easements, installments sales agreements or other instruments affecting the
Premises of which Landlord gives Tenant notice. In the even that Landlord fails
to perform any obligation of Landlord under this Lease, shall give notice
thereof to each mortgagee and installment sale seller of which Tenant has notice
and shall give each a period (noncumulative) of thirty days in which to remedy
such failure of Installment.
IN WITNESS WHEREOF, each party hereto has caused this agreement to be duly
executed under seal.
LANDLORD
By: /s/ Robert Levin
-------------------------------
ROBERT LEVIN
By: /s/ Suzanne Levin
-------------------------------
SUZANNE LEVIN
TENANT
By: /s/ Robert Levin, Pres.
-------------------------------
Robert Levin, President
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<PAGE>
ADDENDUM TO LEASE AGREEMENT
This Addendum to the Agreement of Lease dated this 5th day of March 1997,
between ROBERT LEVIN and SUZANNE LEVIN, husband and wife ("LESSOR") and HOLT'S
CIGAR COMPANY, INC. ("LESSEE") for the One ($1.00) Dollar and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree to be legally bound hereby agree as follows:
1. Paragraph 5 shall be amended as follows:
(a) Minimum Annual Rent. Each month of the initial term of this lease,
Tenant shall pay rent, without notice or demand, and without set off, due and
payable on the first day of each calendar month. The Minimum Annual Rent shall
be Sixty Thousand ($60,000.00) Dollars payable in equal monthly installments of
Five Thousand ($5,000.00) Dollars per month.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on
the day and date first above written.
LANDLORD:
By: /s/ Robert Levin
-------------------------------
ROBERT LEVIN
By: /s/ Suzanne Levin
-------------------------------
SUZANNE LEVIN
TENANT:
HOLT'S CIGAR COMPANY
By: /s/ Robert Levin
-------------------------------
ROBERT LEVIN, PRESIDENT
<PAGE>
ADDENDUM TO LEASE AGREEMENT
This Addendum to the Agreement of Lease dated this 1st day of June, 1997,
between ROBERT LEVIN and SUZANNE LEVIN, husband and wife ("LESSOR") and HOLT'S
CIGAR COMPANY, INC. ("LESSEE') for the One ($1.00) Dollar and other good and
valuable consideration, the sufficiency of which is hereby acknowledged, the
parties agree to be legally bound hereby agree as follows:
1. Paragraph 5 shall be amended as follows:
(a) Minimum Annual Rent. Each month of the initial term of this lease,
Tenant shall pay rent, without notice or demand, and without set off, due and
payable on the first day of each calendar month. The Minimum Annual Rent shall
be Seventy-five Thousand ($75,000.00) Dollars payable in equal monthly
installments of Six Thousand Two-hundred and Fifty ($6,250.00) Dollars per
month.
IN WITNESS WHEREOF, the parties have hereunto set their hands and seals on
the day and date first above written.
LANDLORD:
By: /s/ Robert Levin
-------------------------------
ROBERT LEVIN
By: /s/ Suzanne Levin
-------------------------------
SUZANNE LEVIN
TENANT:
HOLT'S CIGAR COMPANY
By: /s/ Robert Levin
-------------------------------
ROBERT LEVIN, PRESIDENT
<PAGE>
EXHIBIT 10.8
AGREEMENT
This AGREEMENT made this 4th date of May, 1993 between ROBERT LEVIN, a
U.S. citizen residing at 825 Pardee Lane, Wyncote, Pennsylvania 19095, U.S.A.
(hereinafter LEVIN) and WILLIAM TAYLOR a/k/a WILLIAM JOHN ASHTON-TAYLOR, a
British citizen of 1 Old Church Rise, Romford, Essex RM7 OAW, England
(hereinafter TAYLOR):
WHEREAS, TAYLOR is the sole record owner of the trademark ASHTON in the
United Kingdom and U.K. Registration B1387769 in International Class 34, dated
December 19, 1988 for the trademark ASHTON; and
WHEREAS, LEVIN and TAYLOR are record co-owners of the ASHTON trademark
in the U.S. and U.S. Trademark Registration 1,376,628 in Class 34 dated
December 24, 1985; and
WHEREAS, LEVIN and TAYLOR are co-owners and co-applicants for the
registration of the trademark ASHTON in the following countries:
France, Serial No. 92/438 138 filed October 5, 1992;
Japan, Serial No. 299070/92 filed October 9, 1992;
Benelux, Serial No. 786591 filed October 1, 1992; and
WHEREAS, LEVIN wishes to obtain sole and complete title to the
above-mentioned ASHTON trademark, trademark registrations and applications; and
WHEREAS, TAYLOR is desirous of transferring TAYLOR'S rights in and to
the above registrations and applications to LEVIN as well as any other rights
which TAYLOR may have in the ASHTON trademark anywhere in the world which TAYLOR
may presently own but not listed above;
<PAGE>
NOW THEREFORE in consideration a one time payment of U.S. ninety
thousand dollars to be paid to TAYLOR for transfer of said rights to LEVIN;
NOW THEREFORE TAYLOR hereby transfers, assigns and sells TAYLOR's
rights to the trademark ASHTON to LEVIN of the trademark registrations and
applications signed above, and any and all other worldwide trademark rights of
any kind whatsoever which TAYLOR may have in any country of the world for the
trademark ASHTON, subject to the provisions hereinafter set forth.
In furtherance thereof TAYLOR agrees to execute any formal papers
necessary in any particular country to transfer any record title from TAYLOR to
LEVIN within 90 (Ninety) days from the date of the AGREEMENT.
TAYLOR shall be paid the full consideration stated above within 90
(Ninety) days from the date of this AGREEMENT.
If after the signing of this AGREEMENT LEVIN shall desire that the
particular Assignment Agreements for each country should be transferred to a
corporation designated by LEVIN instead of to LEVIN, LEVIN shall so notify
TAYLOR in writing and TAYLOR shall assign said rights to said corporation
designated by LEVIN in place of LEVIN.
LEVIN shall pay TAYLOR a royalty of one percent (1%) on all purchases
of cigars bearing the ASHTON trademark sold by LEVIN during TAYLOR's lifetime
(or upon TAYLOR's demise to TAYLOR's estate) but in no event after January 1,
2000.
LEVIN hereby grants an exclusive worldwide personal license to TAYLOR
under the trademark ASHTON with regard to "pipes". LEVIN and/or TAYLOR shall
execute any papers necessary to record TAYLOR as licensee or registered user
under the laws of a particular country where required.
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<PAGE>
Such said personal license with regard to "pipes" shall be considered a
lifetime paid up royalty-free license proposal to TAYLOR; provided however, that
TAYLOR shall have the right to transfer TAYLOR's paid license with regard to
"pipes" to a third party during TAYLOR's lifetime, upon written notification to
LEVIN. If however such transfer by TAYLOR shall be prior to January 1, 2000, all
payment of royalties by LEVIN to TAYLOR shall be intentionally terminated as of
the date of said transfer.
LEVIN shall have the right to control the quality of pipes made under
the license to TAYLOR and for purposes of this AGREEMENT the standards of
quality presently existing with regard to the manufacturing of ASHTON pipes by
TAYLOR are deemed of satisfactory quality. Should such quality in the opinion of
LEVIN materially vary from the standard of quality of pipes now manufactured by
TAYLOR, LEVIN has the right to terminate this exclusive license by 60 (Sixty)
days notice to TAYLOR.
In this AGREEMENT should LEVIN designate a corporation to which the
trademark rights are to be assigned said name of said corporation will
effectively take the place of LEVIN in the wording of this AGREEMENT.
Upon the demise of TAYLOR, LEVIN or his assigns owning the ASHTON
trademark, shall pay TAYLOR's estate a sum equal to five percent (5%) of all
pipe sales under the ASHTON trademark commencing with the date of TAYLOR's
demise.
LEVIN ans TAYLOR mutually agree that the provisions and terms of this
AGREEMENT shall be held in confidence by both parties.
LEVIN and TAYLOR agree that this AGREEMENT shall be governed by the
laws of the State of Pennsylvania, U.S.A.
In this Agreement should LEVIN designate a corporation to which the
trademark rights are to be assigned LEVIN shall procure that the said
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<PAGE>
corporation enters into a direct agreement with TAYLOR to observe and perform
the terms and conditions undertaken by LEVIN in this Agreement; further, LEVIN
agrees to compensate TAYLOR for any loss incurred as a result of the said
corporation failing to comply with its obligations to TAYLOR. If the said
corporation is or becomes insolvent it is agreed that LEVIN shall remain fully
liable to observe and perform the terms and obligations on his part expressed
herein.
There shall be deemed as incorporated in this Agreement the terms of
any and all endorsements attached hereto and signed by both parties.
Notice to the parties shall be as per the following:
ROBERT LEVIN
825 Pardee Lane
Wyncote, Pennsylvania 19095
United States of America
WILLIAM TAYLOR
1 Old Church Rise
Romford, Essex RM7 OAW
England
EXECUTED AT 1 Old Church Rise, Romford this 4th date of May, 1993.
/s/ Robert Levin
--------------------------------
ROBERT LEVIN
/s/ William Taylor
--------------------------------
WILLIAM TAYLOR a/k/a
/s/ William John Ashton-Taylor
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WILLIAM JOHN ASHTON-TAYLOR
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17th APRIL, 1993
AMENDMENTS TO AGEEMENT
- ----------------------
1) 1% OF ALL PURCHASES OF ASHTON CIGARS TO BE MADE TO BILL OR HIS ESTATE UNTIL
THE YEAR 2000.
2) BILL HAS THE RIGHT WITH THE CONTROLLER OF THE ASHTON TRADE MARK TO TRANSFER
THE LICENSE FOR ASHTON PIPES ONLY. IF THIS HAPPENS BEFORE THE YEAR 2000 ALL
PAYMENT OF ROYALTIES WILL CEASE.
3) UPON WILLIAM TAYLOR'S DEMISE THE CONTROLLING COMPANY OF THE ASHTON TRADE
MARK WILL PROVIDE TAYLOR'S ESTATE WITH 5% OF ALL FUTURE PIPE SALES.
SIGNED: WILLIAM JOHN ASHTON-TAYLOR
/s/ William John Ashton-Taylor
ROBERT LEVIN
/s/ Robert Levin
SHAREHOLDERS' AGREEMENT
THIS SHAREHOLDERS' AGREEMENT (the "Agreement") is made and entered into as
of the __ day of September 1997, between and among the FUENTE INVESTMENT
PARTNERSHIP, a Florida general partnership ("Fuente"), ROBERT G. LEVIN ("Levin")
(hereinafter Levin and Fuente are referred to individually at times as a
"Stockholder" and collectively at times as the "Stockholders"), and HOLT'S CIGAR
HOLDINGS, INC., a Delaware corporation ("Holdings").
W I T N E S S E T H:
--------------------
WHEREAS, the Stockholders own certain shares of the issued and outstanding
common stock, $.001 par value per share, of Holdings (the "Stock");
WHEREAS, Holdings and the Stockholders believe it to be in their best
interests to provide for the continuity of management and policies of Holdings
by imposing certain restrictions and obligations on themselves and the Stock;
and
WHEREAS, the Stockholders desire to facilitate liquidation of the Stock of
a deceased or disabled individual Stockholder.
NOW, THEREFORE, in consideration of the mutual covenants and agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which is acknowledged by the parties hereto, the parties hereto
agree as follows:
I. RESTRICTION ON TRANSFER OF STOCK
No Stockholder shall at any time during the existence of this Agreement,
directly or indirectly, sell, assign, transfer, mortgage, encumber, pledge or
otherwise deal with or dispose of all or any part of the shares of the Stock now
owned or hereafter acquired by him, without first obtaining the written consent
of the other Stockholder or, in the absence of such written consent, without
first complying with the terms and conditions of this Agreement.
Notwithstanding the foregoing, Levin shall be permitted to transfer up to
482,400 shares of Stock to Holdings free of the restrictions set forth in this
Agreement, if he is required to do so pursuant to the terms of the Agreement and
Plan of Reorganization, dated September 23, 1997, by and among the parties to
this Shareholders' Agreement as well as other entities.
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II. TRANSFER OF STOCK DURING LIFETIME; THIRD PARTY OFFERS.
A. Offer to Sell. Except as otherwise provided in this Agreement, no
Stockholder shall, during such Stockholder's lifetime (in the case of an
individual Stockholder) or at any time during the existence of this Agreement
(in the case of a Stockholder that is a business entity) sell, assign, transfer,
encumber, mortgage, pledge or in any way dispose of all or any portion of his
Stock, except on the terms and conditions set forth in this Agreement. If any
Stockholder desires to dispose of all or any part of his Stock, he shall first
serve written notice (the "Offer to Sell") to that effect upon the other
Stockholder, stating the number of shares desired to be sold or otherwise
disposed of, the payment terms, the name and address of the purchaser (or if no
purchaser is designated because the desired disposition will be made in the
public market, a statement to that effect), and offering to sell such shares to
the other Stockholder in accordance with the terms and conditions of this
Agreement (a photocopy of the offer, if applicable, shall accompany the Offer to
Sell). For purposes of this Agreement, the proposed transfer of an interest in
Fuente in such a manner whereby Carlos A. Fuente, Carlos P. Fuente and/or
Cynthia F. Suarez, whether individually or in any combination thereof, as a
result of such transfer, would no longer have direct or indirect voting control
and control over the management and business operations of Fuente, shall be
considered an Offer to Sell all of the Stock then owned by Fuente on the terms
set forth in this Section II.
B. Procedure for Acceptance or Rejection of Offer to Sell.
1. The other Stockholder shall have the right (but not the obligation)
to purchase all of the Stock offered for sale by the selling Stockholder,
as described in the Offer to Sell, by giving written notice of acceptance to the
selling Stockholder within five (5) days after delivery of the Offer to Sell by
the selling Stockholder.
2. In the event the other Stockholder fails or refuses to purchase all
of the Stock offered for sale by the selling Stockholder, then subject to
the provisions of Section II.D. hereof, the selling Stockholder shall be free to
sell or otherwise dispose of the shares of Stock described in the Offer to Sell
that have not been purchased by the other Stockholder (a) during the sixty (60)
day period immediately following the expiration of the time herein above
provided in Section II.(B)(1) for the Stockholder's acceptance of the Offer to
Sell, and (b) at a price and on terms and conditions that are equivalent to or
more favorable to the selling Stockholder than those set forth in the Offer to
Sell; provided however, that the price may be adjusted to reflect fluctuations
in the trading price of Holdings' Stock between the date the Offer to Sell is
delivered and the date of the actual sale of the Stock. Upon the
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expiration of such sixty (60) day period, the provisions of this Agreement shall
reattach in full to all of the Stock not sold or otherwise disposed of during
such sixty (60) day period.
C. Price and Terms of Purchase. In the event that any Stock is to be
purchased by the other Stockholder pursuant to the terms of this Section II.,
the following provisions shall apply:
1. Each share of Stock to be purchased by the other Stockholder
pursuant to the terms of this Section II. shall be purchased at the purchase
price specified in the Offer to Sell; provided however, that the price may be
adjusted to reflect fluctuations in the trading price of Holdings' Stock
between the date the Offer to Sell is delivered and the date of the actual sale
of the Stock.
2. The closing for the sale of the Stock and the purchase price of the
Stock shall be paid, in accordance with the terms specified in the Offer
to Sell.
D. Co-Sale Agreement.
1. In the event that a Stockholder (the "Selling Stockholder") desires
to sell any Stock and the Selling Stockholder has complied with the terms
of this Section II., and the other Stockholder (the "Remaining Stockholder") has
not elected to purchase all such shares, the Remaining Stockholder shall have
the option to elect to sell a portion of the Stock owned by the Remaining
Stockholder on the terms set forth in the Offer to Sell, by notifying the
Selling Stockholder in writing of its election to do so (such election must be
made within the five (5) day period specified in paragraph (B)(1) of this
Section II.). The Remaining Stockholder must elect, if at all, to sell up to the
same proportion of the Stock owned by him as the Stock which the Selling
Stockholder has included in the Offer to Sell bears to the total Stock then
owned by the Selling Stockholder. If the Remaining Stockholder does not respond
in writing within said five (5) day period, it shall be deemed to have elected
not to sell any shares. If, at the end of said five (5) day period, the
Remaining Stockholder has not elected to sell any of its shares, the Selling
Stockholder shall be free to sell any or all of its Stock, on the same terms and
conditions that are equivalent to or less favorable than those set forth in the
Offer to Sell; provided however, that the price may be adjusted to reflect
fluctuations in the trading price of Holdings' Stock between the date the Offer
to Sell is delivered and the date of the actual sale of the Stock. If the
selling Stockholder's shares of its Stock are not sold to the proposed purchaser
within the sixty (60) day period described in Section II.(B)(2) hereof, the
selling Stockholder shall not be permitted to sell any such shares without again
complying with the provisions of Section II.
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2. If the Remaining Stockholder has properly notified the Selling
Stockholder of the Remaining Stockholder's desire to sell shares pursuant to
paragraph (D)(1) of this Section II., the Remaining Stockholder shall be
entitled to sell some or all of such shares owned by the Remaining Stockholder
and desired to be sold by the Remaining Stockholder along with the shares of the
Selling Stockholder, such amount to be determined according to the following
provisions. The Selling Stockholder shall use his best reasonable efforts to
interest the proposed purchaser in purchasing shares from the Remaining
Stockholder as well, and in identifying additional interested purchasers in the
event the proposed purchaser is unwilling or unable to purchase all shares which
the Stockholders desire to sell. If the Selling Stockholder is unable to obtain
purchasers for all of the shares proposed for sale by the Selling Stockholder
then in such event, each of the Stockholders shall be entitled to participate in
the sale to the proposed purchaser on a pro rata basis.
III. TRANSFERS IN TRUST AND TO CONTROLLED ENTITIES.
A. Transfer to Trust. Any Stockholder who is an individual may make a
gratuitous transfer during his lifetime, without the written consent of the
other parties to this Agreement (but with prompt written notice of any such
transfer to be given to the other Stockholder), of all or any part of his Stock
to a revocable trust in which the Stockholder retains the absolute power to have
the transferred Stock returned to him.
B. Transfer to Controlled Entities or Partners. The Stockholders may make a
transfer, without the written consent of the other Stockholder to this Agreement
(but with prompt written notice of any such transfer to be given to the other
parties) of all or any part of its Stock:
(i) in the case of Levin, to a partnership, corporation, limited
liability company, family partnership or other business entity, but only if
voting control and control over the management and business operations of such
partnership, corporation, etc. is thereafter held and continues to be held by
Levin at all times;
(ii) in the case of Fuente, (x) to Carlos A. Fuente, Carlos P. Fuente
and/or Cynthia F. Suarez, or (y) to a partnership, corporation, limited
liability company, family partnership or other business entity but only if
voting control and control over the management and business operations of such
partnership, corporation, etc. is thereafter held and continues to be held at
all times by Carlos A. Fuente, Carlos P. Fuente and/or Cynthia F. Suarez, either
individually or in any combination.
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C. Controlling Predecessor Stockholder. After any transfer under Section
III.(A) or III.(B) hereof, the Stockholder making such transfer shall be
referred to herein as the "Controlling Predecessor Stockholder" with respect to
such Stock.
D. Continued Application of This Agreement. Any Stock transferred
pursuant to this Section III. shall remain subject to this Agreement, and upon
receipt of delivery of the share certificates representing the transferred
Stock, the transferee shall be bound by the terms and conditions of this
Agreement, including but not limited to the terms providing for purchase upon
death or disability of a Controlling Predecessor Stockholder who is an
individual, or the death or disability of Carlos A. Fuente, Carlos P. Fuente and
Cynthia F. Suarez. Upon request of a party hereto, the transferee shall
acknowledge in writing that the Stock transferred remains subject to this
Agreement, and that such transferee shall be bound by the terms and conditions
of this Agreement. The making of any transfer permitted by this Section III.
shall not relieve or alter the Controlling Predecessor Stockholder's obligations
under this Agreement, and without waiver of any rights of the non-transferring
Stockholder under this Agreement, the parties to this Agreement may enforce such
obligations directly against the Controlling Predecessor Stockholder as if such
transfer had not occurred.
IV. ENCUMBRANCE OR PLEDGE OF STOCK.
No Stockholder shall have the right to encumber or pledge all or any
part of his Stock unless the other Stockholder provides his prior written
consent to such pledge agreement or arrangement, as the case may be, and such
consent shall include, among other provisions, a requirement that the pledgee of
such pledged Stock shall accept such Stock subject to the terms and conditions
of this Agreement, and upon request of the other Stockholder, the pledgee shall
acknowledge in writing that the pledged Stock remains subject to this Agreement.
Further, such consent shall require the pledge agreement or arrangement, as the
case may be, to include a requirement that (a) in the event any pledged Stock is
purchased in accordance with this Agreement, the proceeds shall be paid to the
pledgor and pledgee as their interests appear, and the pledged Stock shall be
released to the purchaser; (b) in the event of any dispute or ambiguity
regarding the respective rights of the pledgor or pledgee, the purchaser shall
be entitled to disburse all proceeds to the party in possession of the share
certificate representing the pledged Stock; and, (c) in the event the pledgee of
any pledged Stock shall exercise any right or remedy under any security or stock
pledge agreement, as the case may be, or attempt to cause a public or private
sale of such Stock, the pledgee shall notify the other Stockholder and such
notice shall be deemed to be an Offer to Sell made under Section II. hereof at a
purchase price determined in accordance with Section VIII. hereof.
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V. PURCHASE OF STOCK ON DISABILITY OR DEATH OF LEVIN.
If Levin, whether in his capacity as a direct Stockholder or as a
Controlling Predecessor Stockholder, dies or is deemed to be totally disabled
(as that term is defined in Section VII. hereof), Fuente shall have the right,
but not the obligation, to purchase such portion of the Stock owned by Levin as
would be required, when combined with the Stock already owned by Fuente at that
time, to give Fuente ownership of fifty-one percent (51%) of the issued and
outstanding stock of Holdings, and Levin or his personal representative or his
transferee pursuant to Section III. hereof, as the case may be, shall sell such
portion of his or its Stock as is requested by Fuente (up to such combined
fifty-one percent (51%) ownership). Notwithstanding the foregoing, Levin shall
have the right to transfer up to ten percent (10%) of the issued and outstanding
stock of Holdings to his children, and such stock shall not be subject to
purchase by Fuente pursuant to this Section V. Fuente's right to purchase stock
from Levin (or his estate) as described herein, shall continue for a period of
thirty (30) days after the date on which Levin dies or is deemed to be totally
disabled. If the rights set forth in this Section V.(A) are not exercised within
such thirty (30) day period, Fuente's rights hereunder shall terminate. The
closing of any transaction hereunder shall occur not more than ninety (90) days
after notice is given of the intent of Fuente to purchase stock hereunder and
each share of Stock to be purchased by Fuente pursuant to the terms and
conditions of this Section V. shall be purchased at the purchase price specified
in Section VIII hereof.
VI. PURCHASE OF STOCK ON DEATH OR DISABILITY OF FUENTE'S PARTNERS.
If at any time all three of Carlos A. Fuente, Carlos P. Fuente and
Cynthia F. Suarez are deemed to be totally disabled (as that term is defined in
Section VII. hereof) or are deceased (or any combination thereof as to the three
(3) individuals), Levin shall have the right, but not the obligation, to
purchase all or any portion of the Stock owned by Fuente, and Fuente shall sell
such portion of its Stock as is requested by Levin under the terms and
conditions of Section VI. This right shall continue for a period of thirty (30)
days after the date on which Carlos A. Fuente, Carlos P. Fuente and Cynthia F.
Suarez are all deemed to be totally disabled or dead (or any combination thereof
as to the three (3) individuals). If the rights set forth in this Section VI.
are not exercised within such thirty (30) day period, Levin's rights hereunder
shall terminate. The closing of any transaction hereunder shall occur not more
than ninety (90) days after notice is given of the intent of Levin to purchase
stock hereunder and each share of Stock to be purchased by Levin pursuant to the
terms and conditions of this Section VI. shall be purchased at the purchase
price specified in Section VIII. hereof.
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VII. DEFINITION OF "TOTALLY DISABLED."
For purposes of this Agreement, an individual shall be deemed "totally
disabled" if he is so incapacitated that he is unable to engage in normal bodily
and mental functions, is unable to use substantially all of his motor skills,
and is only able to conduct respiratory bodily functions and those other bodily
functions that are required in order to be medically certified as being alive,
and such condition continues for a continuous period of one hundred eighty (180)
days (hereinafter referred to as the "continuous period of disability"). In the
event of any dispute as to whether or not such disability has in fact occurred,
the parties hereto agree to abide by the decision of a panel of three
physicians. The parties (or their representatives) shall each appoint one member
to the panel, and the third member of the panel shall be appointed by the other
two members. Levin, Carlos A. Fuente, Carlos P. Fuente and Cynthia F. Suarez
agree to make themselves available for and submit to examinations by such
physicians. Failure to submit to any such examination shall constitute an
admission of total disability. The expenses of such panel of physicians shall be
borne equally by Fuente and Levin. For purposes of this provision, the term
"day" shall mean any and all days of the week, including any and all legal
holidays.
VIII. PURCHASE PRICE.
For purposes of Sections IV., V. and VI., the purchase price for the Stock
shall be determined as follows: (a) if on the date of the proposed dosing
Holdings' Stock is listed on any national securities exchange, its average
closing price on such exchange during the ten trading days immediately preceding
the proposed closing, or, if listed on more than one such exchange, on the
exchange on which Holdings' Stock shall have had the largest total trading
volume; (b) if on the date of the proposed closing Holdings' Stock is not listed
on an exchange, at the average closing price appearing on the National
Association of Securities Dealers, Inc. Automated Quotation System (NASDAQ)
during the ten trading days immediately preceding the proposed closing; or (c)
if on the date of the proposed closing Holdings' Stock is not publicly traded,
at the purchase price equal to the fair market value of Holdings' Stock on the
date of the proposed closing, as determined by the investment banking firm
mutually selected by Fuente and Levin (or their representatives). If Fuente and
Levin (or their representatives) are unable to agree upon an investment banking
firm then each party (or their representatives) hereto agrees to abide by the
decision of a panel of three investment banking firms. The parties or their
representatives shall each appoint one member to the panel and the third member
of the panel shall be appointed by the other two members. The expenses of such
panel of investment bankers shall be borne equally by Fuente and Levin.
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IX. PAYMENT OF PURCHASE PRICE
At the closing of any purchase of Stock under this Agreement, the purchaser
of the Stock shall pay the entire purchase price in cash.
X. AFFIRMATIVE COVENANTS.
A. Issuance of Preferred Stock. Holdings, Levin and Fuente agree that, from
the date of this Agreement and until the termination of this Agreement (as
provided in Section XIV. hereof), Holdings shall not issue any shares of its
preferred stock without first obtaining the unanimous written consent of all of
the members of the Board of Directors of Holdings.
B. Board of Directors and Officers. The Stockholders hereby covenant and
agree to vote their shares of Stock, in trust, in accordance with the terms of
this Section X.(B). Levin hereby agrees to vote his shares of Stock in favor of
the election of two nominees to Holdings' Board of Directors to be selected by
Fuente and to the extent that the terms of the members of Holdings' Board of
Directors are staggered, to vote his shares so that the Fuente nominees have
different terms. Carlos A. Fuente and Carlos P. Fuente are hereby designated as
Fuente's initial nominees to Holdings' Board of Directors. Fuente hereby agrees
to cause its shares of Stock to be voted in favor of the election of Robert G.
Levin to the Board of Directors, and further to cause its shares of Stock to be
voted so as to elect such other persons to the Board of Directors of Holdings as
Levin may nominate. The parties understand and agree that Levin shall have the
right to elect an unlimited number of additional members of the Board of
Directors in his sole discretion; it being understood whether or not Levin
should so appoint additional members, the actions of the Board of Directors
shall be subject to and limited by the provisions of Section X.(A) hereof.
C Acknowledgement of Competitive Activities. Holdings acknowledges that
Fuente Cigar and its related entities are competitors of Holdings and that
Fuente Cigar and its related entities will continue to sell Fuente-related
branded premium cigars through distribution and retail channels which are
directly or indirectly competitive with the business operations of Holdings.
Fuente and its related entities reserve the right in the future to engage in
activities that compete, directly or indirectly, with the business activities of
Holdings. Fuente Cigar and related entities have exclusive control over the
distribution activities of their Fuente-related brands and Fuente Cigar and
related entities will continue to exercise control over such activities.
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XI. ENDORSEMENT ON SHARE CERTIFICATES
Simultaneously with the execution of this Agreement, the Stockholders shall
deliver to Holdings any share certificates (pertaining to the Stock) subject
hereto and the following endorsement shall be placed on the face of each
certificate: "The sale, encumbrance or other disposition of the shares
represented by this certificate is subject to the terms and conditions of an
Agreement dated September __, 1997 by and among the holder of this certificate,
and another Shareholder, a copy of which Agreement is on file in the office of
this Corporation and will be furnished without charge to any Stockholder upon
request."
After such endorsement, the certificates shall be returned as soon as
practicable to their respective owners who shall be entitled, subject to the
terms hereof, to exercise all rights and interests therein. All Stock hereafter
issued shall bear the same endorsement. Upon the termination of this Agreement,
such certificates shall be surrendered to Holdings and new certificates without
the foregoing endorsement shall be issued in lieu thereof.
XII. GOVERNING LAW; VENUE; PROCESS.
The validity, construction, and enforcement of, and the remedies under,
this Agreement shall be governed in accordance with the laws of Delaware (except
that if any choice of law provision under Delaware law would result in the
application of the law of a state or jurisdiction other than Delaware, such
provision shall not apply). The parties to this Agreement agree that
jurisdiction and venue shall properly lie in the courts of the State of
Delaware, with respect to any legal proceedings arising under or connected with
this Agreement. The parties further agree that the delivery by courier of any
process shall constitute valid and lawful process against them.
XIII. AMENDMENT.
This Agreement may be amended, altered or revoked at any time upon the
unanimous mutual agreement of Holdings and the Stockholders in writing.
XIV. TERMINATION OF AGREEMENT.
A. Events of Termination. This Agreement shall terminate upon:
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1. Execution of a written instrument by Holdings and the Stockholders
terminating this Agreement; or
2. The bankruptcy, receivership or dissolution of Holdings;
3. The disposal of Stock by one of the Stockholders in accordance with
the terms of this Agreement which results in that Stockholder owning less than
five percent of the issued and outstanding shares of Holdings' Stock.
B. Enforceability of Rights, Benefits and Duties after Termination. All
rights, benefits and duties that accrue hereunder prior to the termination of
this Agreement shall nevertheless be enforceable by the parties to this
Agreement and their legal representatives, successors and assigns after the
termination of this Agreement.
XV. DOCUMENTARY STAMPS.
Whenever any Stock is sold or otherwise transferred and whenever any
documents or instruments are transferred pursuant to the terms hereof, the
transferor of such Stock and such documents and instruments shall affix thereto
the necessary documentary stamps.
XVI. COUNTERPARTS.
This Agreement may be executed in any number of counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument. Counterpart execution pages may be circulated and signed by
telecopy, followed within a reasonable period of time by original (inked)
signature pages.
XVII. NOTICE
All notices, consents, acceptances and any other communication required herein
shall be in writing and shall be deemed delivered upon receipt, if delivered in
person; upon transmission, if sent by electronic means (i.e. telecopy or
e-mail), with electronic confirmation of receipt, or four (4) days after
posting, if sent by recognized international expedited delivery service. No
notices, consents etc.. may be sent by mail, due to the unreliability of the
Dominican Republic mail service. All notices, etc. shall be sent to the parties
at their respective addresses set forth below (or at such other address for a
party as shall be specified by notice given hereunder):
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If to Holdings: Robert G. Levin, President
Holt's Cigar Holdings, Inc.
c/o Ashton Distributors, Inc.
12770 Townsend Road
Philadelphia, PA 19154
Telecopy: 215-676-9085
If to Levin: Mr. Robert G. Levin
c/o Holt's Cigar Holdings, Inc.
12270 Townsend Road
Philadelphia, PA 191154
Telecopy: 215-676-9085
With a copy to: Matthew H. Lubart, Esq.
Fox, Rothschild, O'Brien & Frankel
Princeton Pike Corporate Center
997 Lenox Drive, Building 3
Lawrenceville, NJ 08648-2311
Telecopy: 609-896-1469
If to Fuente: Carlos A. Fuente, General Partner
Fuente Investment Partnership
c/o Fuente Cigar Ltd.
Zona Franca Industrial
Santiago, Dominican Republic
Telecopy: 809-575-3542
With a copy to: William M. Sharp, Esq.
Sharp, Smith & Harrison, P.A.
4830 W. Kennedy Blvd., Suite 630
Tampa, Florida 33609
Telecopy: 813-286-4197
Any notice required to be given hereunder to the estate of a deceased
Stockholder shall be sent to the personal representative of the estate at his
address, or if no personal representative is appointed, to the deceased
Stockholder at his last designated address. As soon as practical after being
appointed, the personal representative of the estate of a deceased Stockholder
shall notify the other parties hereto of his address by notice sent in
conformity with the foregoing requirements. Any party from time to time may
change his address to which notice is to be sent pursuant hereto by sending a
notice of such change in conformity with the foregoing requirements to the other
parties and the legal representative of the estate of a deceased Stockholder.
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XVIII. SEVERABILITY OF PROVISIONS.
Wherever possible, each provision of this Agreement shall be interpreted in
such manner as to be effective and valid, but if any provision of this Agreement
shall be prohibited by applicable law, unenforceable in any jurisdiction or
invalid under applicable law, such provision shall be ineffective to the extent
of such prohibition, unenforceability, or invalidity, without invalidating the
remainder of such provision or the remaining provisions of this Agreement, or
affecting the validity or enforceability of such provision in any other
jurisdiction.
XIX. ASSIGNMENT.
Neither this Agreement nor any rights or privileges hereunder shall be
assigned, transferred, shared or divided, by operation of law or otherwise, in
any manner, by a party hereto without the prior written consent of the other
party, which consent may be arbitrarily withheld. Any purported assignment or
transfer not having the written consent of the party required hereunder to give
such consent shall be null and void and shall constitute a default hereunder.
XX. ENTIRE AGREEMENT; AMENDMENT.
This Agreement (including the exhibits hereto and all documents and papers
delivered pursuant hereto and any written amendments hereof executed by the
parties to this Agreement, as specified herein) constitutes the entire agreement
and supersedes all prior agreements and understandings, oral and written, among
the parties hereto with respect to the subject matter hereof. This Agreement may
be amended only by written agreement executed by all of the parties hereto. Time
is of the essence of this Agreement and each of its provisions, and no extension
of any time period shall be binding upon any of the parties hereto unless
expressly provided herein or in writing and signed by all of the parties hereto.
XXI. FURTHER ASSURANCES.
The parties hereto shall execute and deliver, or cause to be executed and
delivered, such additional or further transfers, assignments, endorsements or
other instruments as the other party or its counsel may reasonably request from
time to time for purposes of carrying out the transactions contemplated by this
Agreement.
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XXII. PARAGRAPH HEADINGS; PLURAL; GENDER; MISCELLANEOUS.
The paragraph headings contained herein are for reference only and shall
not be considered as substantive parts of this Agreement. The use of the
singular or plural form shall include the other form and the use of the
masculine, feminine or neutered gender shall include the other gender. The words
"hereof," "herein," and "hereunder" and words of similar import when used in
this Agreement, shall refer to this Agreement as a whole, including all exhibits
hereto, and not to any particular provision of this Agreement unless otherwise
specified; all references herein to paragraphs, sections or exhibits shall refer
to paragraphs or sections of this Agreement or exhibits to this Agreement. The
parties hereto acknowledge and agree that the recitals immediately following the
preamble of this Agreement are true and correct and are incorporated herein as a
part of this Agreement. This Agreement shall be binding upon the parties hereto.
IN WITNESS WHEREOF, the parties have set their hands and seals the day and
year first above written.
HOLT'S CIGAR HOLDINGS, INC.,
a Delaware corporation
By:
----------------------------------
Robert G. Levin,
President
"Holdings"
FUENTE INVESTMENT PARTNERSHIP
a Florida general partnership
By:
----------------------------------
Carlos A. Fuente, General Partner
"Fuente"
----------------------------------
Robert G. Levin, Individually
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THIS OPTION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND THIS OPTION MAY NOT BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS OPTION
AND THE SHARES ISSUABLE UPON ITS EXERCISE ARE SUBJECT TO THE TERMS OF THAT
CERTAIN SHAREHOLDERS AGREEMENT AND IRREVOCABLE PROXY DATED AS OF JANUARY 1,
1996, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
JANUARY 1, 1996 OPTION TO PURCHASE COMMON STOCK
OF
HOLT'S CIGAR CO. or SUCCESSOR
This is to certify that, FOR VALUE RECEIVED (including, without limitation
the execution of the Shareholders Agreement in form and content attached
hereto), MICHAEL PITKOW (hereinafter referred to as the "Holder") is hereby
granted an option to purchase, subject to the provisions of this correspondence,
from the undersigned FIVE (5.00) PERCENT of the common stock of the Company
(hereinafter referred to as the "Common Stock") at any time and from time to
time, subject to the vesting provisions described below, for a price calculated
based upon a TWO MILLION ($2,000,000) DOLLAR valuation of the Company as of the
date of this Option. In the event that the Company merges, consolidates,
or combines with: (a) Ashton Holdings, Inc.; (b) Ashton Distributors, Inc.
and/or (c) any entity in or with respect to which Carlos A. Fuente, Carlos P.
Fuente and/or Cynthia Suarez Fuente (and/or members of their respective
immediate family's) are principals (a "Merger" and "Merged Entity",
respectively), then, in such event, this Option shall be for then purchase of up
to FIVE (5.00) PERCENT of each such entity, and the exercise price shall be
allocated pursuant to mutual agreement, or if not, then pursuant to a binding
arbitration conducted pursuant to the rules for Commercial Arbitration
promulgated by the American Arbitration Association then in effect. Thus, the
Option Price of the Common Stock would be ONE HUNDRED THOUSAND ($100,000)
DOLLARS for the exercise of the five percent option for the Company and/or the
Merged Entity without regard to any dilution of the value of Holt's due to any
such prospective business transaction. In all other events, including
acquisitions or mergers of entities not classified as a Merger above these
Options, and the rights relating to the shares of Common Stock issuable upon
exercise, shall be subject to dilution in the same manner as the holders of the
remaining equity and rights to equity in the Company or a Merged Entity. The
shares of Common Stock deliverable upon the exercise of this Option described
above are sometimes hereinafter referred to as the "Option Shares". The exercise
price for the purchase of the Option Shares as described above is sometimes
hereinafter referred to as the "Exercise Price".
1. Exercise, Vesting and Termination of Option. (a) This Option, which may
be transferred or assigned subject to the provisions of the Securities Act of
1933, as amended, shall vest TWENTY (20%) PERCENT on each January 1, commencing
January 1, 1997, except that this Option shall immediately and automatically
become fully vested upon the first to occur of any of the following events: (1)
the death or permanent disability of Robert Levin; (2) upon any sale or transfer
of common stock of the Company such that Robert Levin does not own fifty (50%)
percent of the Company's or a Merged Entity's Common Stock; (3) the death or
permanent disability of Michael Pitkow; or (4) upon the declaration of
effectiveness of a registration statement filed with the Securities and Exchange
Commission under the Securities Act of 1933, as amended, for the sale of the
Company's common stock to the public in an initial public offering.
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(b) This Option, subject to vesting as described above, may be exercised in
whole but not in part, from time to time on or after the date hereof until
December 31, 2005.
(c) Notwithstanding the foregoing, if Holders's employment with the Company
and any Merged Entity is terminated for any reason other than for death or
disability, this Option shall expire on the date of termination of employment;
provided that the Board of Directors of the Company or any Merged Entity may, in
its sole discretion, by written notice given to Holder, permit Holder to
exercise the Stock Option during a period ending on the earlier of: (i) ninety
(90) days after such termination of employment; or (ii) the date the Option
expires in accordance with its terms. During such periods, this Option may be
exercised by Holder with respect to the same number of shares of Common Stock,
in the same manner, and to the same extent, which the Holder could have
exercised on the date of termination, and this Option shall be cancelled with
respect to all remaining shares of Common Stock.
(d) If Holder's employment with the Company and any subsidiaries is
terminated due to his disability or death, this Option may be exercised by the
Holder with respect to the same number of shares of Common Stock, in the same
manner, and to the same extent as if Holder had continued employment for the
twelve (12) month period after his termination of employment and this Option
shall be cancelled with respect to all remaining shares of Common Stock;
provided that in the event Holder shall die at a time when this Option, or a
portion thereof, is exercisable by him, the Stock Option shall be exercisable in
whole or in part during the applicable period set forth herein by legatee or
legatees of the Holder under Holder's will, or by his executors, personal
representatives or distribute.
(e) Upon receipt by the Company of this Option at its offices, or by the
stock transfer agent of the Company at its offices, in proper form for exercise,
the Holder shall be deemed to be the Holder of record of the shares of Common
Stock issuable upon such exercise notwithstanding that the stock transfer books
of the Company shall then be closed or that the certificates representing such
shares of Common Stock shall not then be actually deliverable to the Holder.
Upon the exercise in whole of this Option, the Company shall issue, or shall
cause the stock transfer agent to issue certificates for the total number of
shares of Common Stock purchased, in such names and denominations as are
required by the Holder, and the Company shall, or shall direct the stock
transfer agent to deliver such certificates to or in accordance with the written
instructions of the Holder.
2. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Option, there shall be reserved for issuance and/or
delivery upon the exercise hereof such number of shares of its Common Stock as
may be required for issuance and delivery upon the exercise in full of this
Option.
3. Exchange, Transfer, Assignment or Loss of Option. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, at its offices, or to the stock transfer
agent, at its offices, for other Options of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is not transferable, except with
respect to the parents, siblings, spouse or children of the original holder, or
trusts for any of their benefit, and is subject to compliance with the
Securities Act of 1933, as amended (hereinafter referred to as the "Act"),
Section 14 of this Option, any applicable state securities or blue-sky laws, and
the Shareholders Agreement. Upon surrender of this Option to the Company at its
offices, or
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to the stock transfer agent, if any, at its offices, together with the
Assignment Form annexed hereto duly executed and funds aufficient to pay any
transfer tax, the Company shall, without further charge or costs, execute and
deliver a new Option in the name of the permitted assignee named in the
Assignment Form, and this Option shall promptly be canceled. This Option may be
divided or combined with other Options which carry the same rights upon
presentation hereof at the offices of the Company, or at the offices of the
stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Options are to be issued, and signed by the
holder thereof. The term "Option", as used herein includes any Options into
which this Option may be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Option, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of like
tenor and date. Any such new Option executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not
this Option is lost, stolen, destroyed or mutilated, and shall be at any time
enforceable by anyone.
4. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder hereunder are limited to those expressed in
this Option. Notwithstanding anything contained in this Option to the contrary,
this limitation shall not in any manner limit or affect any rights, benefits or
entitlements of the Holder as may be set forth in the Shareholders Agreement,
further notwithstanding that this Option has not yet been exercised in any part.
5. Covenants of the Company. The Company hereby covenants that: (a) it will
take no corporate action the effect of which would be to render the par value of
the Option Shares issuable hereunder greater than the Exercise Price; and (b)
such Option Shares as may be issued pursuant to the exercise of this Option
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all liens, charges and encumbrances with respect to the issuance
thereof.
6. Registration Rights. If (but without obligation to do so) the Company
proposes to register any of its stock or other securities in connection with a
public offering, the Company shall, each such time, promptly give the Holder
hereof written notice of such registration and the Company hereby agrees to
grant to the Holder the right to cause the Option Shares or the shares of Common
Stock which may be issuable pursuant to this Option, to be included in the
proposed registration. The Company further agrees to sell any Option Shares
which are purchased prior to the effective date of any such offering in the same
manner and upon the same terms and conditions as securities are being sold in
each such registered offering, subject, however, to the right of the Company to
require the holder of this Option or the Option Shares to execute a written
instrument whereby the holder agrees not to sell the Option or the Option Shares
for a reasonable period of time required by the underwriter of such initial
public offering (the "Lock-Up"), and provided the the other holders of the
Company's Common Stock execute similar Lock-Up agreements.
7. Adjustment of Shares Purchasable. The number of shares of the Common
Stock of the Company purchasable hereunder and the Exercise Price per share are
subject to adjustment from time to time as specified in this Option.
8. Recognition of Registered Owner. Prior to the due presentment for
registration of transfer of assignment of this Option, the Company may treat the
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<PAGE>
registered owner as the party exclusively entitled to receive notices and
otherwise to exercise the rights and enticements hereunder.
9. Effect of Recapitalization. Subject to the provisions of the first
paragraph of the Option with respect to a Merged Entity or a business
combination between Holt's, Ashton Distributors, Inc., and Ashton Holdings,
Inc., in the event of any other "Dilution Event" defined below, the following
shall apply:
(a) Dilution Event. If at any time, or from time to time, the Company
shall (i) by stock dividend, split, reverse split, reclassification of
shares or otherwise, or changes as a whole of the outstanding Common
Stock into a different number or class of shares; (ii) issue or sell
shares of its Common Stock, including shares held in the Company's
treasury, for a consideration per share less than: (A) the Exercise
Price in effect immediately prior to the issuance or sale of such
shares, or without any consideration; or (B) the fair market value of
such shares as determined by the Company's Board of Directors,
whichever is less; (iii) For an amount of consideration per share
which is less than: (A) the Exercise Price in effect immediately prior
to the issuance or sale of such shares, or without any consideration;
or (B) the fair market value of such shares as determined by the
Company's Board of Directors, whichever is less, issue Options,
warrants or option agreements convertible into or exchangeable or
exercisable for shares of Common Stock (or for other securities which
are themselves convertible into or exercisable or exchangeable for
shares of Common Stock or such other securities), in whole or in part,
whether or not such subscription, conversion, exercise or exchange is
conditioned upon the payment of consideration or the occurrence of any
contingent or non-contingent future event, a "Dilution Event" shall
have occurred.
(b) Exercise Price and Share Adjustment. (i) Exercise Price Adjustment.
Upon, and at the time of any Dilution event, and thereafter upon and
at the time of each further Dilution Event, the Exercise Price in
effect immediately prior to each such Dilution event shall be changed
to a price determined by the formula {X/Y}, where "X" equals the sum
of (A) the total number of shares of Common Stock outstanding
immediately prior to such Dilution event multiplied by the Exercise
Price in effect immediately prior to such Dilution event, plus (B) the
consideration, if any, received by the Company upon such sale,
issuance, dividend, split or reclassification; and where "Y" equals
the total number of shares of Common Stock outstanding immediately
after such Dilution Event. Solely for the purposes of this Section 9
and Section 10, below, the number of shares of Common Stock
outstanding at any time shall include the aggregate number of shares
issued or issuable (subject to readjustment upon the actual issuance
thereof) upon the exercise in full of option, rights, Options and upon
conversion, exchange or exercise of convertible or exchangeable
securities, but shall not include shares held in the Company's
treasury.
(ii) Number of Purchasable Shares Adjustment. Upon each
adjustment of the Exercise Price pursuant to Section 9(b)(i), the
total number of shares of Common Stock purchasable hereunder shall be
the number of shares purchasable immediately prior to each such
Dilution event multiplied by that certain fraction, the numerator of
which shall be the Exercise Price in effect immediately prior to such
Dilution Event, and the
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<PAGE>
denominator of which shall be the Exercise Price in effect immediately
after such Dilution Event.
(iii) Effective Date and Reissued Options. In respect of any
adjustment or change in the Exercise Price or the number of shares
purchasable hereunder, any substituted, changed, reissued or partial
form of this Option thereafter issued shall express the Exercise Price
and the number of shares of Common Stock purchasable thereunder as
determined by this Section 9. In the case of the issuance of
additional shares of Common Stock as a dividend, the aggregate number
of shares of the Common Stock issued in payment of such dividend shall
be deemed to have been issued at the close of business on the record
date fixed for such for the determination of the shareholders entitled
to such dividend, and shall be deemed to have been issued without
consideration; provided however, that if the Company, after fixing
such record date, shall legally abandon its plan to so issue Common
Stock as a dividend, no adjustment of Exercise Price and number of
shares of Common Stock purchasable hereunder shall be required by
reason of the fixing of such record date.
(iv) Definitions for use in Calculations. Solely for the purposes
of this Section 9 and Section 10, below, the number of shares of
Common Stock outstanding at any time shall include the aggregate
number of shares issued or issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise in full of option, rights,
Options and upon conversion, exchange or exercise of convertible or
exchangeable securities, but shall not include shares held in the
Company's treasury. Solely for the purposes of this Section 9 and
Section 10, below, consideration paid or payable for any security
shall be an amount equal to the result of the formula {A/B}, where "A"
equals the sum of the original price paid or payable per share or unit
of such security upon the issuance of each of such securities, if any,
plus, the price or prices paid or payable upon any and all
subscriptions, conversions, exercises or exchanges (or any combination
thereof) necessary for the acquisition of any and all of the Common
Stock underlying such security, and where "B" equals the aggregate
number of shares of Common Stock issuable upon the full subscription,
conversion, exercise or exchange (or combination thereof) of each of
such securities. The expiration or termination of any of the foregoing
rights or entitlements shall cause a like adjustment in the formula
set forth in the foregoing sentence. No adjustments under this Section
9 shall be made in the event of an exercise of the rights, or
termination in whole or in part, of this Option.
10. Effect of Merger. If at any time or from time to time while this Option
is outstanding in whole or in part, the Company effects any consolidation or
merger with any other corporation or entity (except with respect to a Merger, in
which event this Option shall be governed by the terms of the first paragraph of
this document), the Holder shall thereafter be enticed upon exercise to
purchase, with respect to each share of Common Stock purchasable hereunder
immediately before such consolidation or merger becomes effective, the
securities or other consideration to which a holder of one (1) share of Common
Stock is entitled to in such consolidation or merger without any change in or
payment in addition to the Exercise Price in effect immediately prior to any
such merger or consolidation. The Company shall take any necessary steps in
connection with any consolidation or merger to assure that all the provisions of
this Option shall thereafter be applicable to any securities or other
consideration so deliverable upon the exercise of this
5
<PAGE>
Option. The Company shall not consolidate or merge unless, prior to
consummation, the successor corporation (if other than the Company) assumes the
obligations of this Section 10 by written instrument executed and mailed to the
registered owner at the address of the owner on the books of the Company. A sale
or lease of all or substantially all of the assets of the Company for a
consideration (apart from the assumption of obligations) consisting primarily of
securities is deemed a consolidation or merger for the purposes of this
Section 10.
11. Notice of Adjustment. On the happening of any event requiring an
adjustment of the Exercise Price or the number of shares purchasable hereunder,
the Company shall forthwith give written notice to the registered owner stating
the adjusted Exercise Price and/or the adjusted number and kind of securities or
other property purchasable hereunder resulting from the event, and setting forth
in reasonable detail the method of calculation and the facts upon which the
calculations were based. The Board of Directors of the Company, acting in good
faith, shall determine such calculations.
12. Notice and Effect of Dissolution. In the event of a voluntary or
involuntary dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger contemplated in Section 10, above), is
at any time proposed, the Company shall give at least thirty (30) days prior
written notice to the registered owner of this Option. Such notice shall set
forth: (a) the record date (which shall be at least thirty (30) days after the
giving of notice) as of which holders of Common Shares will be entitled to
receive distributions as a result of the transaction; (b) a reasonably detailed
description of the transaction; (c) a reasonably detailed description of the
distributions to be made to the holders of the Common Shares as a result of the
transaction; and (e) an estimate of the fair value of the distributions. On the
date of the transaction, if it actually occurs, this Option and all rights
hereunder shall terminate.
13. Notices. Notices shall be given by postage pre-paid registered mail,
return receipt requested, and shall be addressed to the address of the
registered owner on the books of the Company. Notices shall be deemed given
three (3) days after deposit of the foregoing with the United States Postal
Service.
14. Compliance with the Act. Unless a current registration statement under
the Act shall be in effect with respect to the securities to be issued upon the
exercise of this Option, the Holder hereof, by accepting this Option, covenants
and agrees that at the time of exercise hereof, such Holder shall deliver to the
Company a written statement that the securities acquired by the Holder upon the
exercise of the Option are for the account of the Holder for investment
purposes, and are not acquired with a view to, or for sale in connection with
any public distribution thereof.
Attest: Holt's Cigar Co.
By: /s/ Robert Levin
- ----------------------------- ---------------------------
, Secretary Robert Levin, President
6
<PAGE>
By execution below and acceptance of this Option Agreement from Holt's Cigar
Company, Michael Pitkow hereby acknowledges and agrees that this Option
Agreement, together with the Employment Agreement between Michael Pitkow and
Holt's Cigar Company satisfies in full any and all promises, commitments,
obligations, duties, liabilities and agreements made between Michael Pitkow and
all Holt's Cigar Company, Ashton Distributors, Inc., Ashton Holdings, Inc. and
Robert Levin (the "Holt's Entities") with respect to any and all compensation of
nature or type whatsoever to which Michael Pitkow may be entitled as a result of
his prior, present and future efforts on behalf of the Holt's Entities, except
solely for his continued right to the compensation set forth in the said
Employment Agreement, and Michael Pitkow hereby releases and waives any and all
other claims to compensation from or participation in any of the Holt's
Entities, and acknowledges that he has been advised to seek the advice of
independent counsel prior to the execution hereof.
Witness: /s/ Michael Pitkow
- ------------------------- -----------------------
Michael Pitkow
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THIS OPTION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND THIS OPTION MAY NOT BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS OPTION
AND THE SHARES ISSUABLE UPON ITS EXERCISE ARE SUBJECT TO THE TERMS OF THAT
CERTAIN IN SHAREHOLDERS AGREEMENT AND IRREVOCABLE PROXY DATED AS OF JANUARY 1,
1996, A COPY OF WHICH IS ON FILE WITH THE SECRETARY OF THE COMPANY.
JANUARY 1, l996 OPTION TO PURCHASE COMMON STOCK
OF
HOLT'S CIGAR CO. or SUCCESSOR
This is to certify that, FOR VALUE RECEIVED (including, without limitation
the execution of the Shareholders Agreement in form and content attached
hereto), MARVIN B. SHARFSTEIN (hereinafter referred to as the "Holder") is
hereby granted an option to purchase, subject to the provisions of this
correspondence, from the undersigned FIVE (5.00) PERCENT of the common stock of
the Company (hereinafter referred to as the "Common Stock") at any time and from
time to time, subject to the vesting provisions described below, for a price
calculated based upon a TWO MILLION ($2,000,000) DOLLAR valuation of the Company
as of the date of this Option. In the event that the Company merges,
consolidates, combines or the like with: (a) Ashton Holdings, Inc.; (b) Ashton
Distributors, Inc. and/or (c) any entity in or with respect to which Carlos A.
Fuente, Carlos P. Fuente and/or Cynthia Suarez Fuente (and/or members of their
respective immediate families) are principals (a "Merger" and "Merged Entity",
respectively), then, in such event, this Option shall be for the purchase of up
to FIVE (5.00) PERCENT of each such entity, and the exercise price shall be
allocated pursuant to mutual agreement, or if not, then pursuant to a binding
arbitration conducted pursuant to the rules for Commercial Arbitration
promulgated by the American Arbitration Association then in effect. Thus, the
Option Price of the Common Stock would be ONE HUNDRED THOUSAND ($100,000)
DOLLARS for the exercise of the five (5.00%) percent option for the Company
and/or the Merged Entity without regard to any dilution of the value of Holt's
due to any such prospective business transaction. In all other events, including
acquisitions or mergers of entities not classified as a Merger above these
Options, and the rights relating to the shares of Common Stock issuable upon
exercise, shall be subject to dilution in the same manner as the holders of the
remaining equity and rights to equity in the Company or a Merged Entity. The
shares of Common Stock deliverable upon the exercise of this Option described
above are sometimes hereinafter referred to as the "Option Shares". The exercise
price for the purchase of the Option Shares as described above is sometimes
hereinafter referred to as the "Exercise Price".
1. Exercise and Vesting of Option. This Option, which may be transferred or
assigned subject to the provisions of the Securities Act of 1933, as amended,
shall vest immediately upon issuance, in full. This Option may be exercised in
whole but not in part, from time to time on or after the date hereof until
December 31, 2005. Upon receipt by the Company of this Option at its offices, or
by the stock transfer agent of the Company at its offices, in proper form for
exercise, the Holder shall be deemed to be the Holder of record of the shares of
Common Stock issuable upon such exercise notwithstanding that the stock transfer
books of the Company shall then be closed or that the certificates representing
such shares of Common Stock shall not then be actually deliverable to the
Holder. Upon the exercise in whole of this Option, the Company shall issue, or
shall cause the stock transfer agent to issue certificates for the total number
<PAGE>
of shares of Common Stock purchased, in such names and denominations as are
required by the Holder, and the Company shall, or shall direct the stock
transfer agent to deliver such certificates to or in accordance with the written
instructions of the Holder.
2. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Option, there shall be reserved for issuance and/or
delivery upon the exercise hereof such number of shares of its Common Stock as
may be required for issuance and delivery upon the exercise in full of this
Option.
3. Exchange, Transfer, Assignment or Loss of Option. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, at its offices, or to the stock transfer
agent, at its offices, for other Options of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is not transferable, except with
respect to the parents, siblings, spouse or children of the original holder, or
trusts for any of their benefit, and is subject to compliance with the
Securities Act of 1933, as amended (hereinafter referred to as the "Act"),
Section 14 of this Option, any applicable state securities or blue-sky laws, and
the Shareholders Agreement. Upon surrender of this Option to the Company at its
offices, or to the stock transfer agent, if any, at its offices, together with
the Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without further charge or costs, execute and
deliver a new Option in the name of the permitted assignee named in the
Assignment Form, and this Option shall promptly be canceled. This Option may be
divided or combined with other Options which carry the same rights upon
presentation hereof at the offices of the Company, or at the offices of the
stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Options are to be issued, and signed by the
holder thereof. The term "Option", as used herein includes any Options into
which this Option my be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Option, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of like
tenor and date. Any such new Option executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not
this Option is lost, stolen, destroyed or mutilated, and shall be at any time
enforceable by anyone.
4. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder hereunder are limited to those expressed in
this Option. Notwithstanding anything contained in this Option to the contrary,
this limitation shall not in any manner limit of affect any rights, benefits or
entitlements of the Holder as may be set forth in the Shareholders Agreement,
further notwithstanding that this Option has not yet been exercised in any part.
5. Covenants of the Company. The Company hereby covenants that: (a) it will
take no corporate action the effect of which would be to render the par value of
the Option Shares issuable hereunder greater than the Exercise Price; and (b)
such Option Shares as may be issued pursuant to the exercise of this Option
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all liens, charges and encumbrances with respect to the issuance
thereof.
6. Registration Rights. If (but without obligation to do so) the Company
proposes to register any of its stock or other securities in connection with a
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<PAGE>
public offering, the Company shall, each such time, promptly give the Holder
hereof written notice of such registration and the Company hereby agrees to
grant to the Holder the right to cause the Option Shares or the shares of Common
Stock which may be issuable pursuant to this Option, to be included in the
proposed registration. The Company further agrees to sell any Option Shares
which are purchased prior to the effective date of any such offering in the same
manner and upon the same terms and conditions as securities are being sold in
each such registered offering, subject, however, to the right of the Company to
require the holder of this Option or the Option Shares to execute a written
instrument whereby the holder agrees not tO sell the Option or the Option Shares
for a reasonable period of time required by the underwriter of such initial
public offering (the "Lock-Up"), and provided the other holders of the Company's
Common Stock execute similar Lock-Up agreements.
7. Adjustment of Shares Purchasable. The number of shares of the Common
Stock of the Company purchasable hereunder and the Exercise Price per share are
subject to adjustment from time to time as specified in this Option.
8. Recognition of Registered Owner. Prior to the due presentment for
registration of transfer of assignment of this Option, the Company may treat the
registered owner as the party exclusively entitled to receive notices and
otherwise to exercise the rights and entitlements hereunder.
9. Effect of Recapitalization. Subject to the provisions of the first
paragraph of the Option with respect to a Merged Entity or a business
combination between Holt's, Ashton Distributors, Inc., and Ashton Holdings,
Inc., in the event of any other "Dilution Event" defined below, the following
shall apply:
(a) Dilution Event. If at any time, or from time to time, the Company
shall (i) by stock dividend, split, reverse split, reclassification of
shares or otherwise, or changes as a whole the outstanding Common
Stock into a different number or class of shares; (ii) issue or sell
shares of its Common Stock, including shares held in the Company's
treasury, for a consideration per share less than: (A) the Exercise
Price in effect immediately prior to the issuance or sale of such
shares, or without any consideration; or (B) the fair market value of
such shares as determined by the Company's Board of Directors,
whichever is less; (iii) For an amount of consideration per share
which is less than: (A) the Exercise Price in effect immediately prior
to the issuance or sale of such shares, or without any consideration;
or (B) the fair market value of such shares as determined by the
Company's Board of Directors, whichever is less, issue Options,
warrants or option agreements convertible into or exchangeable or
exercisable for shares of Common Stock (or for other securities which
are themselves convertible into or exercisable or exchangeable for
shares of Common Stock or such other securities), in whole or in part,
whether or not such subscription, conversion, exercise or exchange is
conditioned upon the payment of consideration or the occurrence of any
contingent or non-contingent future event, a "Dilution Event" shall
have occurred.
(b) Exercise Price and Share Adjustment. (i) Exercise Price Adjustment.
Upon, and at the time of any Dilution event, and thereafter upon and
at the time of each further Dilution Event, the Exercise Price in
effect immediately prior to each such Dilution event shall be changed
to a price determined by the formula {X/Y}, where "X" equals the sum
of (A) the total number of shares of Common Stock outstanding
immediately prior tO such Dilution
3
<PAGE>
event multiplied by the Exercise Price in effect immediately prior to
such Dilution event, plus (B) the consideration, if any, received by
the Company upon such sale, issuance, dividend, split or
reclassification; and where "Y" equals the total number of shares of
Common Stock outstanding immediately after such Dilution Event. Solely
for the purposes of this Section 9 and Section 10, below, the number
of shares of Common Stock outstanding at any time shall include the
aggregate number of shares issued or issuable (subject to readjustment
upon the actual issuance thereof) upon the exercise in full of option,
rights, Options and upon conversion, exchange or exercise of
convertible or exchangeable securities, but shall not include shares
held in the Company's treasury.
(ii) Number of Purchasable Shares Adjustment. Upon each adjustment of the
Exercise Price pursuant to Section 9(b)(i), the total number of shares
of Common Stock purchasable hereunder shall be the number of shares
purchasable immediately prior to each such Dilution event multiplied
by that certain fraction, the numerator of which shall be the Exercise
Price in effect immediately prior to such Dilution Event, and the
denominator of which shall be the Exercise Price in effect immediately
after such Dilution Event.
(iii) Effective Date and Reissued Options. In respect of any adjustment or
change in the Exercise Price or the number of shares purchasable
hereunder, any substituted, changed, reissued or partial form of this
Option thereafter issued shall express the Exercise Price and the
number of shares of Common Stock purchasable thereunder as determined
by this Section 9. In the case of the issuance of additional shares of
Common Stock as a dividend, the aggregate number of shares of the
Common Stock issued in payment of such dividend shall be deemed to
have been issued at the close of business on the record date fixed
for the determination of the shareholders entitled to such dividend,
and shall be deemed to have been issued without consideration;
provided however, that if the Company, after fixing such record date,
shall legally abandon its plan to so issue Common Stock as a dividend,
no adjustment of Exercise Price and number of shares of Common Stock
purchasable hereunder shall be required by reason of the fixing of
such record date.
(iv) Definitions for use in Calculations. Solely for the purposes of this
Section 9 and Section 10, below, the number of shares of Common Stock
outstanding at any time shall include the aggregate number of shares
issued or issuable (subject to readjustment upon the actual issuance
thereof) upon the exercise in full of option, rights, Options and upon
conversion, exchange or exercise of convertible or exchangeable
securities, but shall not include shares held in the Company's
treasury. Solely for the purposes of this Section 9 and Section 10,
below, consideration paid or payable for any security shall be an
amount equal to the result of the formula {A/B}, where "A" equals the
sum of the original price paid or payable per share or unit of such
security upon the issuance of each of such securities, if any, plus,
the price or prices paid or payable upon any and all subscriptions,
conversions, exercises or exchanges (or any combination thereof)
necessary for the acquisition of any and all of the Common Stock
underlying such security, and where "B" equals the aggregate number of
shares of Common Stock issuable upon the full subscription,
conversion, exercise or exchange (or combination thereof) of
4
<PAGE>
each of such securities. The expiration or termination of any of the
foregoing rights or enticements shall cause a like adjustment in the
formula set forth in the foregoing sentence. No adjustments under this
Section 9 shall be made in the event of an exercise of the rights, or
termination in whole or in part, of this Option.
10. Effect of Merger. If at any time or from time to time while this Option
is outstanding in whole or in part, the Company effects any consolidation or
merger with any other corporation or entity (except with respect to a Merger, in
which event this Option shall be governed by the terms of the first paragraph
of this document), the Holder shall thereafter be entitled upon exercise to
purchase, with respect to each share of Common Stock purchasable hereunder
immediately before such consolidation or merger becomes effective, the
securities or other consideration to which a holder of one (1) share of Common
Stock is entitled to in such consolidation or merger without any change in or
payment in addition to the Exercise Price in effect immediately prior to any
such merger or consolidation. The Company shall take any necessary steps in
connection with any consolidation or merger to assure that all the provisions of
this Option shall thereafter be applicable to any securities or other
consideration so deliverable upon the exercise of this Option. The Company shall
not consolidate or merge unless, prior to consummation, the successor
corporation (if other than the Company) assumes the obligations of this Section
10 by written instrument executed and mailed to the registered owner at the
address of the owner on the books of the Company. A sale or lease of all or
substantially all of the assets of the Company for a consideration (apart from
the assumption of obligations) consisting primarily of securities is deemed a
consolidation or merger for the purposes of this Section 10.
11. Notice of Adjustment. On the happening of any event requiring an
adjustment of the Exercise Price or the number of shares purchasable hereunder,
the Company shall forthwith give written notice to the registered owner stating
the adjusted Exercise Price and/or the adjusted number and kind of securities or
other property purchasable hereunder resulting from the event, and setting forth
in reasonable detail the method of calculation and the facts upon which the
calculations were based. The Board of Directors of the Company, acting in good
faith, shall determine such calculations.
12. Notice and Effect of Dissolution. In the event a voluntary or
involuntary dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger contemplated in Section 10, above), is
at any time proposed, the Company shall give at least thirty (30) days prior
written notice to the registered owner of this Option. Such notice shall set
forth: (a) the record date (which shall be at least thirty (30) days after the
giving of notice) as of which holders of Common Shares will be entitled to
receive distributions as a result of the transaction; (b) a reasonably detailed
description of the transaction; (c) a reasonably detailed description of the
distributions to be made to the holders of the Common Shares as a result of the
transaction; and (e) an estimate of the fair value of the distributions. On the
date of the transaction, if it actually occurs, this Option and all rights
hereunder shall terminate.
13. Notices. Notices shall be given by postage pre-paid registered mail,
return receipt requested, and shall be addressed to the address of the
registered owner on the books of the Company. Notices shall be deemed given
three (3) days after deposit of the foregoing with the United States Postal
Service.
14. Compliance with the Act. Unless a current registration statement under
the Act shall be in effect with respect to the securities to be issued upon the
exercise of this Option, the Holder hereof, by accepting this Option, covenants
and agrees that at the
5
<PAGE>
time of exercise hereof, such Holder shall deliver to the Company a written
statement that the securities acquired by the Holder upon the exercise of the
Option are for the account of the Holder for investment purposes, and are not
acquired with a view to, or for sale in connection with any public distribution
thereof.
Attest: Holt's Cigar Co.
By: /s/ Robert Levin
-----------------------
Robert Levin, Secretary
6
THIS OPTION HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED, AND THIS OPTION MAY NOT BE SOLD, ENCUMBERED OR OTHERWISE TRANSFERRED
EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT, OR, IF AN EXEMPTION
SHALL BE APPLICABLE, THE HOLDER SHALL HAVE DELIVERED AN OPINION OF COUNSEL
ACCEPTABLE TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED. THIS OPTION
AND THE SHARES ISSUABLE UPON ITS EXERCISE ARE SUBJECT TO THE TERMS OF THAT
CERTAIN SHAREHOLDERS AGREEMENT AND IRREVOCABLE PROXY DATED AS OF JANUARY 1,
1996, A COPY OF WHICH IS ON THE WITH THE SECRETARY OF THE COMPANY.
JANUARY 1, 1996 OPTION TO PURCHASE COMMON STOCK
OF
HOLT'S CIGAR CO. or SUCCESSOR
This is to certify that, FOR VALUE RECEIVED (including, without limitation
the execution of the Shareholders Agreement in form and content attached
hereto), CAROLE COHN (hereinafter referred to as the "Holder") is hereby granted
an option to purchase, subject to the provisions of this correspondence, from
the undersigned TWO (2.00) PERCENT of the common stock of the Company
(hereinafter referred to as the "Common Stock") at any time and from time to
time, subject to the vesting provisions described below, for a price calculated
based upon a TWO MILLION ($2,000,000) DOLLAR valuation of the Company as of the
date of this Option. In the event that the Company merges, consolidates,
combines or the like with: (a) Ashton Holdings, Inc.; (b) Ashton Distributors,
Inc. and/or (c) any entity in or with respect to which Carlos A. Fuente, Carlos
P. Fuente and/or Cynthia Suarez Fuente (and/or members of their respective
immediate family's) are principals (a "Merger" and "Merged Entity",
respectively), then, in such event, this Option shall be for then purchase of up
to TWO (2.00) PERCENT of each such entity, and the exercise price shall be
allocated pursuant to mutual agreement, or if not, then pursuant to a binding
arbitration conducted pursuant to the rules for Commercial Arbitration
promulgated by the American Arbitration Association then in effect. Thus, the
Option Price of the Common Stock would be FORTY THOUSAND ($40,000) DOLLARS for
the exercise of the two percent option for the Company and/or the Merged Entity
without regard to any dilution of the value of Holt's due to any such
prospective business transaction. In all other events, including acquisitions or
mergers of entities not classified as a Merger above these Options, and the
rights relating to the shares of Common Stock issuable upon exercise, shall be
subject to dilution in the same manner as the holders of the remaining equity
and rights to equity in the Company or a Merged Entity. The shares of Common
Stock deliverable upon the exercise of this Option described above are sometimes
hereinafter referred to as the "Option Shares". The exercise price for the
purchase of the Option Shares as described above is sometimes hereinafter
referred to as the "Exercise Price".
1. Exercised and Vesting of Option. This Option, which may be transferred
or assigned subject to the provisions of the Securities Act of 1933, as amended,
shall vest immediately upon issuance, in full. This Option may be exercised in
whole but not in part, from time to time on or after the date hereof until
December 31, 2005. Upon receipt by the Company of this Option at its offices, or
by the stock transfer agent of the Company at its offices, in proper form for
exercise, the Holder shall be deemed to be the Holder of record of the shares of
Common Stock issuable upon such exercise notwithstanding that the stock transfer
books of the Company shall then be closed or that the certificates representing
such shares of Common Stock shall not then be actually deliverable to the
Holder. Upon the exercise in whole of this Option, the Company shall issue, or
shall cause the stock transfer agent to issue certificates for the total number
<PAGE>
of shares of Common Stock purchased, in such names and denominations as are
required by the Holder, and the Company shall, or shall direct the stock
transfer agent to deliver such certificates to or in accordance with the written
instructions of the Holder.
2. Reservation of Shares. The Company hereby agrees that at all times
during the term of this Option, there shall be reserved for issuance and/or
delivery upon the exercise hereof such number of shares of its Common Stock as
may be required for issuance and delivery upon the exercise in full of this
Option.
3. Exchange, Transfer, Assignment or Loss of Option. This Option is
exchangeable, without expense, at the option of the Holder, upon presentation
and surrender hereof to the Company, at its offices, or to the stock transfer
agent, at its offices, for other Options of different denominations entitling
the holder thereof to purchase in the aggregate the same number of shares of
Common Stock purchasable hereunder. This Option is not transferable, except with
respect to the parents, siblings, spouse or children of the original holder, or
trusts for any of their benefit, and is subject to compliance with the
Securities Act of 1933, as amended (hereinafter referred to as the "Act"),
Section 14 of this Option, any applicable state securities or blue-sky laws, and
the Shareholders Agreement. Upon surrender of this Option to the Company at its
offices, or to the stock transfer agent, if any, at its offices, together with
the Assignment Form annexed hereto duly executed and funds sufficient to pay any
transfer tax, the Company shall, without further charge or costs, execute and
deliver a new Option in the name of the permitted assignee named in the
Assignment Form, and this Option shall promptly be canceled. This Option may be
divided or combined with other Options which carry the same rights upon
presentation hereof at the offices of the Company, or at the offices of the
stock transfer agent, if any, together with a written notice specifying the
names and denominations in which new Options are to be issued, and signed by the
holder thereof. The term "Option", as used herein includes any Options into
which this Option may be divided or exchanged. Upon receipt by the Company of
evidence satisfactory to it of the loss, theft, destruction or mutilation of
this Option, and (in the case of loss, theft or destruction) of reasonably
satisfactory indemnification, and upon surrender and cancellation of this
Option, if mutilated, the Company will execute and deliver a new Option of like
tenor and date. Any such new Option executed and delivered shall constitute an
additional contractual obligation on the part of the Company, whether or not
this Option is lost, stolen, destroyed or mutilated, and shall be at any time
enforceable by anyone.
4. Rights of the Holder. The Holder shall not, by virtue hereof, be
entitled to any rights of a stockholder in the Company, either at law or in
equity, and the rights of the Holder hereunder are limited to those expressed in
this Option. Notwithstanding anything contained in this Option to the contrary,
this limitation shall not in any manner limit of affect any rights, benefits or
entitlements of the Holder as may be set forth in the Shareholders Agreement,
further notwithstanding that this Option has not yet been exercised in any part.
5. Covenants of the Company. The Company hereby covenants that: (a) it will
take no corporate action the effect of which would be to render the par value of
the Option Shares issuable hereunder greater then the Exercise Price; and (b)
such Option Shares as may be issued pursuant to the exercise of this Option
will, upon issuance, be duly and validly issued, fully paid and nonassessable
and free from all liens, charges and encumbrances with respect to the issuance
thereof.
6. Registration Rights. If (but without obligation to do so) the Company
proposes to register any of its stock or other securities in connection with a
2
<PAGE>
public offering, the Company shall, each such time, promptly give the Holder
hereof written notice of such registration and the Company hereby agrees to
grant to the Holder the right to cause the Option Shares or the shares of Common
Stock which may be issuable pursuant to this Option, to be included in the
proposed registration. The Company further agrees to sell any Option Shares
which are purchased prior to the effective date of any such offering in the same
manner and upon the same terms and conditions as securities are being sold in
each such registered offering, subject, however, to the right of the Company to
require the holder of this Option or the Option Shares to execute a written
instrument whereby the holder agrees not to sell the Option or the Option Shares
for a reasonable period of time required by the underwriter of such initial
public offering (the "Lock-Up"), and provided that the other holders of the
Company's Common Stock execute similar Lock-Up agreements.
7. Adjustment of Shares Purchasable. The number of shares of the Common
Stock of the Company purchasable hereunder and the Exercise Price per share are
subject to adjustment from time to time as specified in this Option.
8. Recognition of Registered Owner. Prior to the due presentment for
registration of transfer of assignment of this Option, the Company may treat the
registered owner as the party exclusively entitled to receive notices and
otherwise to exercise the rights and entitlements hereunder.
9. Effect of Recapitalization. Subject to the provisions of the first
paragraph of the Option with respect to a Merged Entity or a business
combination between Holt's, Ashton Distributors, Inc., and Ashton Holdings,
Inc., in the event of any other "Dilution Event" defined below, the following
shall apply:
(a) Dilution Event. If at any time, or from time to time, the Company
shall (i) by stock dividend, split, reverse split, reclassification of
shares or otherwise, or changes as a whole the outstanding Common
Stock into a different number or class of shares; (ii) issue or sell
shares of its Common Stock, including shares held in the Company's
treasury, for a consideration per share less than: (A) the Exercise
Price in effect immediately prior to the issuance or sale of such
shares, or without any consideration; or (B) the fair market value of
such shares as determined by the Company's Board of Directors,
whichever is less; (iii) For an amount of consideration per share
which is less than: (A) the Exercise Price in effect immediately prior
to the issuance or sale of such shares, or without any consideration;
or (B) the fair market value of such shares as determined by the
Company's Board of Directors, whichever is less, issue Options,
warrants or option agreements convertible into or exchangeable or
exercisable for shares of Common Stock (or for other securities which
are themselves convertible into or exercisable or exchangeable for
shares of Common Stock or such other securities), in whole or in part,
whether or not such subscription, conversion, exercise or exchange is
conditioned upon the payment of consideration or the occurrence of any
contingent or non-contingent future event, a "Dilution Event" shall
have occurred.
(b) Exercise Price and Share Adjustment. (i) Exercise Price Adjustment.
Upon, and at the time of any Dilution event, and thereafter upon and
at the time of each further Dilution Event, the Exercise Price in
effect immediately prior to each such Dilution event shall be changed
to a price determined by the formula {X/Y}, where "X" equals the sum
of (A) the total number of shares of Common Stock outstanding
immediately prior to such Dilution
3
<PAGE>
event multiplied by the Exercise Price in effect immediately prior to
such Dilution event, plus (B) the consideration, if any, received by
the Company upon such sale, issuance, dividend, split or
reclassification; and where "Y" equals the total number of shares of
Common Stock outstanding immediately after such Dilution Event. Solely
for the purposes of this Section 9 and Section 10, below, the number
of shares of Common Stock outstanding at any time shall include the
aggregate number of shares issued or issuable (subject to readjustment
upon the actual issuance thereof) upon the exercise in full of option,
rights, Options and upon conversion, exchange or exercise of
convertible or exchangeable securities, but shall not include shares
held in the Company's treasury.
(ii) Number of Purchasable Shares Adjustment. Upon each
adjustment of the Exercise Price pursuant to Section 9(b)(i), the
total number of shares of Common Stock purchasable hereunder shall be
the number of shares purchasable immediately prior to each such
Dilution event multiplied by that certain fraction, the numerator of
which shall be the Exercise Price in effect immediately prior to such
Dilution Event, and the denominator of which shall be the Exercise
Price in effect immediately after such Dilution Event.
(iii) Effective Date and Reissued Options. In respect of any
adjustment or change in the Exercise Price or the number of shares
purchasable hereunder, any substituted, changed, reissued or partial
form of this Option thereafter issued shall express the Exercise Price
and the number of shares of Common Stock purchasable thereunder as
determined by this Section 9. In the case of the issuance of
additional shares of Common Stock as a dividend, the aggregate number
of shares of the Common Stock issued in payment of such dividend shall
be deemed to have been issued at the close of business on the record
date fixed for the determination of the shareholders entitled
to such dividend, and shall be deemed to have been issued without
consideration; provided however, that if the Company, after fixing
such record date, shall legally abandon its plan to so issue Common
Stock as a dividend, no adjustment of Exercise Price and number of
shares of Common Stock purchasable hereunder shall be required by
reason of the fixing of such record date.
(iv) Definitions for use in Calculations. Solely for the purposes
of this Section 9 and Section 10, below, the number of shares of
Common Stock outstanding at any time shall include the aggregate
number of shares issued or issuable (subject to readjustment upon the
actual issuance thereof) upon the exercise in full of option, rights,
Options and upon conversion, exchange or exercise of convertible or
exchangeable securities, but shall not include shares held in the
Company's treasury. Solely for the purposes of this Section 9 and
Section 10, below, consideration paid or payable for any security
shall be an amount equal to the result of the formula {A/B}, where "A"
equals the sum of the original price paid or payable per share or unit
of such security upon the issuance of each of such securities, if any,
plus, the price or prices paid or payable upon any and all
subscriptions, conversions, exercises or exchanges (or any combination
thereof) necessary for the acquisition of any and all of the Common
Stock underlying such security, and where "B" equals the aggregate
number of shares of Common Stock issuable upon the full subscription,
conversion, exercise or exchange (or combination thereof) of
4
<PAGE>
each of such securities. The expiration or termination of any of the
foregoing rights or entitlements shall cause a like adjustment in the
formula set forth in the foregoing sentence. No adjustments under this
Section 9 shall be made in the event of an exercise of the rights, or
termination in whole or in part, of this Option.
10. Effect of Merger. If at any time or from time to time while this Option
is outstanding in whole or in part, the Company effects any consolidation or
merger with any other corporation or entity (except with respect to a Merger, in
which event this Option shall be governed by the terms of the first paragraph
of this document), the Holder shall thereafter be entitled upon exercise to
purchase, with respect to each share of Common Stock purchasable hereunder
immediately before such consolidation or merger becomes effective, the
securities or other consideration to which a holder of one (1) share of Common
Stock is entitled to in such consolidation or merger without any change in or
payment in addition to the Exercise Price in effect immediately prior to any
such merger or consolidation. The Company shall take any necessary steps in
connection with any consolidation or merger to assure that all the provisions of
this Option shall thereafter be applicable to any securities or other
consideration so deliverable upon the exercise of this Option. The Company shall
not consolidate or merge unless, prior to consummation, the successor
corporation (if other than the Company) assumes the obligations of this Section
10 by written instrument executed and mailed to the registered owner at the
address of the owner on the books of the Company. A sale or lease of all or
substantially all of the assets of the Company for a consideration (apart from
the assumption of obligations) consisting primarily of securities is deemed a
consolidation or merger for the purposes of this Section 10.
11. Notice of Adjustment. On the happening of any event requiring an
adjustment of the Exercise Price or the number of shares purchasable hereunder,
the Company shall forthwith give written notice to the registered owner stating
the adjusted Exercise Price and/or the adjusted number and kind of securities or
other property purchasable hereunder resulting from the event, and setting forth
in reasonable detail the method of calculation and the facts upon which the
calculations were based. The Board of Directors of the Company, acting in good
faith, shall determine such calculations.
12. Notice and Effect of Dissolution. In the event a voluntary or
involuntary dissolution, liquidation or winding up of the Company (other than in
connection with a consolidation or merger contemplated in Section 10, above), is
at any time proposed, the Company shall give at least thirty (30) days prior
written notice to the registered owner of this Option. Such notice shall set
forth: (a) the record date (which shall be at least thirty (30) days after the
giving of notice) as of which holders of Common Shares will be enticed to
receive distributions as a result of the transaction; (b) a reasonably detailed
description of the transaction; (c) a reasonably detailed description of the
distributions to be made to the holders of the Common Shares as a result of the
transaction; and (e) an estimate of the fair value of the distributions. On the
date of the transaction, if it actually occurs, this Option and all rights
hereunder shall terminate.
13. Notices. Notices shall be given by postage pre-paid registered mail,
return receipt requested, and shall be addressed to the address of the
registered owner on the books of the Company. Notices shall be deemed given
three (3) days after deposit of the foregoing with the United States Postal
Service.
14. Compliance with the Act. Unless a current registration statement under
the Act shall be in effect with respect to the securities to be issued upon the
exercise of this Option, the Holder hereof, by accepting this Option, covenants
and agrees that at the
5
<PAGE>
time of exercise hereof, such Holder shall deliver to the Company a written
statement that the securities acquired by the Holder upon the exercise of the
Option are for the account of the Holder for investment purposes, and are not
acquired with a view to, or for sale in connection with any public distribution
thereof.
Attest: Holt's Cigar Co.
By: Robert Levin
- ----------------------------- ----------------------
, Secretary Robert Levin, President
RELEASE AND ACKNOWLEDGEMENT
As a material incentive to the issuance of the foregoing Option, CAROLE
COHN, the Option grantee, hereby releases and relinquishes, now and forever any
claim, right, title, interest or entitlement on behalf of herself, and all other
persons, heirs, administrators, successors and assigns with respect to any
equity interest which she had or may have had in or to an equity ownership
possession in or to Holt's Cigar Company, Inc., Ashton Distributors, Inc. or
Ashton Holdings, Inc., and hereby acknowledges and agrees that, except for the
foregoing Option, Carole Cohn does not now own or have any right, title or
interest in or to any of the foregoing entities, nor does she have any claims
against the current or past owners of the equity interests in the foregoing
entities.
Carole Cohn hereby acknowledges that she has been advised, and has had the
opportunity to seek the advice of independent counsel prior to her execution of
this Release and Acknowledgment.
/s/ Carole Cohn
- ----------------------------- ---------------------
Witness Carole Cohn
6
Holt's Cigar Holdings, Inc.
Pro Forma Net Income Per Share
<TABLE>
<CAPTION>
Year Ended Six Months Six Months
March 31, 1997 Ended September 30, 1996 Ended September 30, 1997
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Pro forma net income $1,698,907 $ 736,850 $1,942,083
---------- ---------- ----------
Weighted average shares
outstanding 4,020,000 4,020,000 4,020,000
Equivalent shares necessary
to fund distributions to
shareholders in excess of
earnings 81,701 81,701 81,701
---------- ---------- ----------
4,101,701 4,101,701 4,101,701
---------- ---------- ----------
Pro forma net income per
share $ 0.41 $ 0.18 $ 0.47
========== ========== ==========
</TABLE>
Holt's Cigar Holdings, Inc.
Supplemental Pro Forma Net Income Per Share
<TABLE>
<CAPTION>
Year Ended Six Months Six Months
March 31, 1997 Ended September 30, 1996 Ended September 30, 1997
-------------- ------------------------ ------------------------
<S> <C> <C> <C>
Pro forma net income $1,698,907 $ 736,850 $1,942,083
---------- ---------- ----------
Reversal of interest
expense, net of tax, on
assumed payment of debt as
of beginning of period 44,000 16,778 8,347
Supplemental pro forma
net income $1,742,907 $ 753,628 $1,950,430
---------- ---------- ----------
Weighted average shares
outstanding 4,020,000 4,020,000 4,020,000
Equivalent shares necessary
to fund distributions to
shareholders in excess of
earnings 81,701 81,701 81,701
Equivalent shares necessary
to fund payment of debt 34,160 36,994 40,551
---------- ---------- ----------
Supplemental pro forma weighted
average shares outstanding 4,135,861 4,138,695 4,142,252
---------- ---------- ----------
Supplemental pro forma
net income per share $ 0.42 $ 0.18 $ 0.47
========== ========== ==========
</TABLE>
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 1 to the Registration Statement on Form S-1 of our report dated August 13,
1996, relating to the combined financial statements of Holt's Cigar Holdings,
Inc. and Affiliates, which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
Schmeltzer o Master Group, P.C.
Wyncote, Pennsylvania
November 3, 1997
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 1 to the Registration Statement on Form S-1 of our report dated July 2,
1997, relating to the combined financial statements of Holt's Cigar Holdings,
Inc. and Affiliates, which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Philadelphia, Pennsylvania
November 3, 1997
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1997 MAR-31-1998
<PERIOD-START> APR-01-1996 APR-01-1997
<PERIOD-END> MAR-31-1997 SEP-30-1997
<EXCHANGE-RATE> 1 1
<CASH> 516 1,345
<SECURITIES> 0 0
<RECEIVABLES> 1,270 1,546
<ALLOWANCES> 35 40
<INVENTORY> 2,584 3,391
<CURRENT-ASSETS> 4,410 6,398
<PP&E> 1,066 1,706
<DEPRECIATION> 218 263
<TOTAL-ASSETS> 5,406 7,986
<CURRENT-LIABILITIES> 2,198 2,375
<BONDS> 182 547
0 0
0 0
<COMMON> 91 91
<OTHER-SE> 2,934 4,974
<TOTAL-LIABILITY-AND-EQUITY> 5,406 7,986
<SALES> 17,278 13,424
<TOTAL-REVENUES> 17,278 13,424
<CGS> 9,566 7,319
<TOTAL-COSTS> 9,566 7,319
<OTHER-EXPENSES> 4,895 2,894
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 73 14
<INCOME-PRETAX> 2,849 3,245
<INCOME-TAX> 577 653
<INCOME-CONTINUING> 2,273 2,592
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 2,273 2,592
<EPS-PRIMARY> .41 .47
<EPS-DILUTED> .41 .47
</TABLE>
