UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C., 20549

                                   FORM 10-KSB

           ANNUAL REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF THE
                             SECURITIES ACT OF 1934

                   For the fiscal year ended December 31, 1998
                           Commission file No. 0-29414

                       PREMIUM CIGARS INTERNATIONAL, LTD.
                 (Name of small business issuer in its charter)

         Arizona                                        86-0846405
(state or other jurisdiction of          (I.R.S. Employer Identification Number)
 incorporation or organization)

                             15849 North 77th Street
                              Scottsdale, AZ 85260
                    (Address of principal office) (Zip code)

         Issuer's telephone number, including area code: (602) 922-8887

           Securities registered pursuant to Section 12(b) of the Act:
         Title of each class: Name of each exchange on which registered:
                  No par value Common Stock          Boston Stock Exchange

           Securities registered pursuant to Section 12(g) of the Act:
                            No par value Common Stock

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such shorter  periods that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes [X]  No [ ]

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-B is not contained  herein,  and will not be contained,  to the
best  of  the  registrant's   knowledge,  in  definitive  proxy  or  information
statements  incorporated  by  reference  in Part III of this Form  10-KSB or any
amendment to this Form 10-KSB. [ ]

       Issuer's revenues for its most recent fiscal year were $6,900,927.

The aggregate market value of voting stock held by non-affiliates of the Company
was approximately $1,640,100 as of March 26, 1999.

The  number of shares  outstanding  of each of the  issuer's  classes  of common
stock, as of the latest practicable date of March 31, 1999 was 3,839,092.
<PAGE>
                       PREMIUM CIGARS INTERNATIONAL, LTD.

                                   FORM 10-KSB

                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                               TABLE OF CONTENTS
                                                                            PAGE

PART I........................................................................ 4
     Item 1 - Description of Business......................................... 4
     Item 2 - Description of Property.........................................16
     Item 3 - Legal Proceedings...............................................16
     Item 4 - Submission of Matters to a Vote of Security Holders.............17

PART II.......................................................................18
     Item 5 - Market for Common Equity and Related Stockholder Matters........18
     Item 6 - Management's Discussion and Analysis of Financial Condition
               and Results of Operation.......................................21
     Item 7 - Financial Statements and Supplementary Data.....................26
     Item 8 - Changes in and Disagreements with Accountants on Accounting
               Financial Disclosure...........................................26

PART III..................................................................... 27
     Item 9 - Directors and Executive Officers, Promoters and
                Control Persons; Compliance with Section 16(a)
                of the Exchange Act...........................................27
     Item 10 - Executive Compensation.........................................30
     Item 11 - Security Ownership of Certain Beneficial Owners
                and Management................................40
     Item 12 - Certain Relationships and Related Transactions.................37
     Item 13 - Exhibits and Reports on Form 8-K...............................37

SIGNATURES....................................................................39

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS....................................40

                                       2
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                Special Note Regarding Forward-looking Statements

         Some  of  the  statements  contained  in  this  report  discuss  future
expectations,   contain  projections  of  results  of  operations  or  financial
condition or state other  "forward-looking"  information.  Those  statements are
subject to known and unknown risks,  uncertainties  and other factors that could
cause the actual results to differ  materially  from those  contemplated  by the
statements. The forward-looking  information is based on various factors and was
derived  using  numerous  assumptions.  Important  factors that may cause actual
results to differ from  forward-looking  statements and projections include, for
example:

*    failure of our products,  particularly  new products such as  PrimeTime(TM)
     and  Humidibox(TM),  to be  accepted  and have a  lasting  presence  in the
     marketplace;

*    our ability to maintain an adequate  capital position and a sufficient cash
     flow as we add retail stores and new products;

*    our ability to obtain funding to enable us to maintain  sufficient  working
     capital for operating activities;

*    any  decision by major  retail  chains to  discontinue  selling all tobacco
     products  or to  place  our  humidors  or  countertop  control  units  in a
     disadvantageous location within their stores;

*    a decline in the popularity of cigar smoking and/or possible adverse public
     opinion against cigars and cigar smoking;

*    interruptions in the availability of PrimeTime(TM);

*    changes in government regulations, tax rates, the manner of tax calculation
     and collection and similar matters relating to our products,  including any
     restriction  on the  self-service  nature  of  merchandising  displays  and
     marketing  promotions  particularly or any retroactive  application of such
     changes;

*    our ability to negotiate and maintain favorable  distribution  arrangements
     with our customers;

*    the effect of changing economic conditions;

*    the risk of any  significant  uninsured loss from  settlement  dealing with
     Proposition 65;

*    our  ability to buy  quality  premium  cigars at  favorable  prices and the
     effect on cigar prices and availability, of weather and other conditions in
     the countries that import cigars to the U.S. and Canada; and

*    other risks which may be described  in our future  filings with the SEC. We
     do not  promise to update  forward-looking  information  to reflect  actual
     results or changes in  assumptions or other factors that could affect those
     statements.

                                       3
<PAGE>
                                     PART I

ITEM 1 - DESCRIPTION OF BUSINESS

HISTORY.  PCI was  incorporated in Arizona on December 16, 1996 to be a national
and  international  distributor  of premium cigars from humidors in high traffic
retail outlets.  Shortly after incorporation,  PCI acquired CAN-AM International
Investments  Inc.  ("CAN-AM"),  a  Canadian  corporation  which  owned all cigar
accounts,  inventory  and  humidors  formerly  owned by Rose Hearts Inc.  ("Rose
Hearts") of Seattle,  Washington,  and J&M Wholesale,  Inc. ("J&M") located near
Vancouver,  British  Columbia.  PCI began trading on the NASDAQ Small Cap Market
August 28, 1997 under the stock symbol PCIG.

OPERATIONS.

WHAT WE WERE TO ACCOMPLISH DURING 1998. In our 1997 Annual Report on Form 10-KSB
we outlined  what changes we believed  would occur during 1998 and the rationale
for the changes. The following summarizes those key changes we anticipated:

*    To be a distributor is not enough; PCI must be a marketer. - The premise on
     which  PCI was  founded -  distributing  premium  cigars  via  humidors  in
     convenience,  gas and high-volume retail outlets - is fundamentally  sound,
     but it must focus on the needs of the consumer and the unique needs of each
     distribution channel.

*    Managing PCI's expanded operations requires different management skills and
     experience.  -  PCI  assembled  a  new  management  team,  particularly  in
     marketing, sales, finance and executive management.

*    Computer systems are critical to control and management decision-making.  -
     The existing systems were totally inadequate to manage our business.

*    Improved  sensitivity  to our  customer  service  function is  critical.  -
     Outsourcing customer service failed.

*    Brand names must be included in our product  line.  - The  availability  of
     premium  cigars  was  different  in early  1998  than  when PCI  began  its
     expansion.

WHAT WE  ACCOMPLISHED  DURING 1998.  PCI  aggressively  implemented  the changes
outlined in our 1997 10-KSB. Specifically:

*    During  1998,  we  pursued  the  premise  on which  PCI was  founded,  with
     increased  focus on the needs of the  consumer and the unique needs of each
     distribution  channel.
     -    We developed and  implemented  a complete  in-store  humidor  program,
          advertised the program in key trade  publications  and participated in
          key trade shows.
     -    We improved our  understanding  of the consumer who buys cigars in our
          customers'  retail outlets,  and refined our cigar selection and price
          points, even differing the selection by geographic location.
     -    We improved our  merchandising  by helping our  customers  present our
          humidor  program  to  their  consumers  more  effectively.
     -    Through  analyzing order patterns,  we learned that a humidor in every
          outlet may not be justified; we turned down orders for some placements
          that did not meet the criteria we developed.

                                       4
<PAGE>
     -    We applied  UPC  stickers  to  individual  cigars in order to help our
          customers with scanning  capabilities  on retail pricing and inventory
          control.
     -    To  expand  beyond  the  convenience  store  market,  we  developed  a
          gift-pack  sell-through  program that met the requirements of specific
          distribution   channels  (e.g.,  grocery  stores,  drug  stores,  mass
          merchandisers, warehouse clubs).
     -    We tested  the use of a  convenience  store  broker  and its  in-store
          merchandising  sales force within a limited  geographic area to see if
          humidor productivity could be improved.

*    During  1998,  PCI  assembled  a  new  management  team,   particularly  in
     marketing,  sales, finance and executive  management.
     -    John  Greenwell  was  made  CEO on  March  1,1998.  He has 28 years of
          marketing  and  executive  management  experience  within the consumer
          package goods industry.
     -    Brendan McGuinness was made Vice President of Sales and brought his 28
          years of managing  consumer  package  goods sales  forces to PCI along
          with his executive management experience.
     -    Stan Hall was hired as the  Controller  early in 1998.  In addition to
          the strong  controller  skills, he brought with him the systems skills
          the Company needed.

*    We installed and integrated computer systems.
     -    PCI  invested  time and money in refining  our systems  that deal with
          order   solicitation,   processing  and  shipping  small  packages  to
          thousands of locations.
     -    We substantially  reduced our fulfillment time, shipping time, lowered
          labor costs per  shipment,  improved  our ability to track  shipments,
          reduced our  shipping  costs,  and improved our ability to prove store
          receipt of the shipment.
     -    The result was steadily improving gross margins as 1998 progressed.
     -    Our new systems  improved our ability to manage  inventory  associated
          with merchandise that turns at retail.

*    We improved customer service.
     -    We developed and implemented an in-house  Customer Service  Department
          that  regularly  called every store  location to solicit orders and to
          help  ensure  the  in-store   humidor  was   maintained  and  properly
          merchandised.

*    We added brand names to our cigar product line.
     -    During 1998,  PCI obtained and offered our customers and consumers the
          number one selling premium cigar in the United States,  and six of the
          top  ten  selling   premium  cigar  brands  in  the  United  States  -
          MACANUDO(TM), H. UPMANN(TM), PARTAGAS(TM), BERING(TM), TE-AMO(TM), DON
          TOMAS(TM) (SOURCE: CIGAR INSIDER, 1997 Unit Sales).
     -    We implemented a cigar trade-out program replacing slower moving SKU's
          with  more  appropriate  cigars  and  price  points  for each  store's
          consumer base.

WHAT WE LEARNED DURING 1998.  Although our operations  expanded  dramatically in
1998, results of operations were disappointing in several aspects.  See Item 6 -
"Management's  Discussion  and  Analysis of Financial  Condition"  later in this
report.  We gained further  insights into PCI  operations,  and initiated  major
changes  designed to improve our business during 1998 and beyond.  The following
summarizes that activity:

                                       5
<PAGE>
*    OUR ORIGINAL  BUSINESS  ALONE WILL NOT SUPPORT PCI;  DISTRIBUTING/MARKETING
     PREMIUM  CIGARS IN HUMIDORS IS LIMITING IN TERMS OF REVENUE  GENERATION AND
     EXPENSIVE TO IMPLEMENT.  - During 1998, we aggressively pursued the premise
     on which  PCI was  founded,  with an  increased  focus on the  needs of the
     consumer  and the  unique  needs  of each  distribution  channel.  However,
     revenues generated were disappointing,  even with the program improvements.
     At the same time,  our  efforts  to  improve  the  programs  increased  our
     overhead burden, and negatively impacted profitability.

*    IN GENERAL, CIGARS WITHOUT WELL-KNOWN BRAND NAMES PROVED TO BE DIFFICULT TO
     SELL,  CREATING  AN  INVENTORY  PROBLEM.  - PCI  started  1998 with a heavy
     inventory of cigars that were purchased in anticipation of a rapid increase
     in humidor  placements.  This inventory consisted primarily of lesser-known
     cigars PCI had purchased when name brands were in short supply during 1997.
     Shipments of these lesser known cigars to our  customers  during the Fourth
     Quarter of 1997 and the First  Quarter  of 1998  resulted  in  slow-turning
     retail  inventory.  We initiated a cigar trade-out program beginning in the
     Second  Quarter  of 1998,  replacing  the  lesser  known  cigars  with more
     established  brands in order to improve retail  inventory  movement.  While
     this  strategy  worked  in  certain  locations,   it  was  not  universally
     successful.  The  return  of  these  cigars  added  to  our  already  heavy
     inventory.  Efforts to sell this inventory have met with  difficulty as the
     entire cigar industry is suffering from oversupply.

*    FULLY  INTEGRATED  SYSTEMS  PROVED  TO  BE A  VALUABLE  INVESTMENT.  -  The
     development and implementation of an integrated order  solicitation,  order
     processing,  inventory management,  and shipping system was instrumental in
     improving our gross margins.

*    ACCOUNT  RELATIONSHIPS  CONTINUE TO BE STRONG.  - We improved  our customer
     relations.  Our customers have expressed  appreciation for our efforts, our
     increasing  knowledge of the convenience  store retail channel and consumer
     package goods marketing.  As a result,  our customers  continue to view PCI
     favorably.

*    CANADA CONTINUES TO BE A DIFFICULT OPERATING ENVIRONMENT. - Can-Am revenues
     increased  during 1998 as we added new  accounts.  Adjustment  in products,
     along with the installation of an integrated accounting platform,  resulted
     in improved gross margins.  However,  increasingly aggressive tobacco taxes
     in Canada  continued  to restrict  our margin  improvement.  We expect that
     Can-Am margins will continue to lag the US operations.

*    OUR  PERFORMANCE  MADE  TRADITIONAL  FINANCING  DIFFICULT TO OBTAIN.  - Our
     difficulties  in  generating  increased  revenues via our in-store  humidor
     program, combined with our significant investment in systems and continuing
     administrative overhead, resulted in continuing operating losses throughout
     1998. To maintain adequate available funds for operations,  we attempted to
     obtain a  revolving  credit  line that  would be  secured  by our  accounts
     receivable and inventories. Unfortunately, we did not find financing during
     1998.  However, in March 1999, we obtained a $1,000,000 Accounts Receivable
     Financing package through Alliance Financial Capital.

                                       6
<PAGE>
WHAT WE  CHANGED  DURING  1998.  We  recognized  the need to expand  beyond  the
limitations of the in-store  humidor  program,  and began to pursue new products
and new methods of distributing our products leveraging PCI's experience.

*    PCI BEGAN  DEVELOPING NEW PRODUCTS DURING THE THIRD QUARTER;  WE INTRODUCED
     THEM TO OUR CUSTOMERS  DURING THE FOURTH QUARTER TO SUPPLEMENT OUR IN-STORE
     HUMIDOR PROGRAM.
     *    During the Fourth  Quarter,  we directed  sales efforts at convenience
          store chain acceptance of PrimeTime(TM) - a small tubed cigar, in four
          flavor  variations,  designed to sell for $.49 to $.69 in  convenience
          stores. We signed an exclusive contract on October 5, 1998 with Single
          Cigars, who will act as our sole supplier of PrimeTime.  Single Cigars
          supplies the retail countertop control units to us at no cost.
     *    During the Fourth Quarter,  we obtained verbal  commitments from 24 of
          the top 25 convenience store chains to test PrimeTime  beginning early
          1999.  Unfortunately,  production  start-up  problems with  PrimeTime,
          combined with the  Thanksgiving/Christmas  holidays, impeded sales. We
          shipped PrimeTime to only one account, Clark Oil (680 stores),  during
          1998. Through the end of March, 1999, PCI shipped  approximately 4,000
          countertop  PrimeTime  displays.  Based on interest expressed from new
          and existing accounts, we believe that PrimeTime could be in more than
          6,000 locations  nationwide by the end of April, 1999. We believe that
          this new product should provide significant revenue to PCI.
     *    We recognize that a large,  maintenance-intensive  humidor program may
          be  viable  only  to  a  limited  number  of  the  estimated   100,000
          convenience  stores in the United States. To expand PCI's premise,  we
          developed  the  Humidibox(TM),  a  small,  disposable,  humidor,  that
          effectively  merchandises  25 cigars in a counter space of only 4"x4".
          We introduced  the Humidibox in late 1998. It has generated  interest,
          not only among small convenience  stores,  but other locations PCI had
          not previously pursued (e.g., golf courses, bowling centers).
     *    PrimeTime and Humidibox are examples of our re-engineering  efforts to
          reduce PCI's reliance on our in-store humidor program while leveraging
          PCI's knowledge and experience.

*    DURING THE FOURTH  QUARTER,  WE BEGAN WORK ON DEVELOPING AN E-COMMERCE SITE
     THAT LEVERAGES PCI'S CORE COMPETENCIES - INTEGRATED SYSTEMS AND CONVENIENCE
     STORE  EXPERIENCE . THE SITE -  PRODUCTEXPRESS.COM  - WAS ACTIVATED IN LATE
     MARCH, 1999.
     *    We leveraged our  integrated  order  solicitation,  order  processing,
          inventory management,  and shipping system via a March, 1999 launch of
          ProductExpress.com  -  a  unique  internet  site  that  offers  retail
          consumers  a  variety  of cigar  gift  packs and  multi-brand  humidor
          assortments.   We  intend  to  add   other   products   to  the  site.
          ProductExpress.com  also  has  a  wholesale  side  that  offers  store
          managers PCI's traditional products along with other products designed
          and packaged for the needs of  convenience  stores.  The site features
          online  wholesale  purchases and 72-hour  direct store  delivery.  PCI
          intends  to expand  the site to inform  retailers  about  sales  order
          history,  selling  techniques,   merchandising  suggestions,  consumer
          demographics,  price  point  comparisons  and  provide  them  with the
          ability to share their experiences with other retailers.

                                       7
<PAGE>
*    DURING THE FOURTH QUARTER, PCI DEVALUED ITS CIGAR INVENTORY.
     *    Despite PCI's efforts  throughout 1998 to sell our lesser-known  cigar
          inventory  purchased in late 1997,  including the  inventory  that was
          returned during the 1998 cigar trade-out program, we were unsuccessful
          in our  efforts  to sell this  product  at prices at or above our cost
          basis.  Compounding our problems were heavy retail  inventories in the
          industry  generally  and a  decline  in  imports  of  premium  cigars,
          suggesting a market slowdown.
     *    PCI  wrote  down the  value of its  inventory  to the lower of cost or
          estimated  market value. PCI recognized the writedown of approximately
          $430,000 during the Fourth Quarter, 1998.
     *    We were able to sell some of this inventory  during the First Quarter,
          1999 at lower prices.

*    PCI REDUCED  STAFF  DURING THE FIRST  QUARTER,  1999.  - Our new  products,
     integrated  systems,  and  declining  importance  of our  in-store  humidor
     program  lead us to reassess our staffing  needs.  We reduced  staff in the
     U.S.  by 50% in the First  Quarter,1999  and PCI  expects to  benefit  from
     reduced operating costs during 1999.

OUR CUSTOMERS.  We sell virtually all of our cigars through  convenience stores,
including stores affiliated with The Southland Corporation and Southland Canada,
Inc. which do business as 7-Eleven(TM).  We also sell through convenience stores
affiliated with Circle K(TM), Mobil(TM), AM/PM(TM), Petro Canada(TM),  Mac's(TM)
and stores supplied by the McLane Company.

PrimeTime and Humidibox,  our new products introduced late in 1998, enable us to
increase our potential  customer base beyond just the large convenience  stores.
We believe we can market  Humidibox to smaller  convenience  stores,  along with
specialty  retail  stores like golf  courses and bowling  centers.  PrimeTime is
suitable for sale in casinos, bars, liquor stores, etc.

OUR LARGEST  CUSTOMER.  Corporate and franchise stores affiliated with Southland
USA and Southland Canada (7-Eleven)  accounted for approximately 33% of our U.S.
sales and 44% of our Canadian  sales during 1998. We have steadily  expanded our
customer base  throughout  1998 and these  percentages  have  steadily  declined
throughout the year.

PCI,  Southland  USA,  or any U.S.  franchisee  has the right to  terminate  the
agreement  for any reason upon 60 day's notice.  Southland  Canada can terminate
its  arrangement  with us at any time without  notice.  Problems  with  7-Eleven
stores,  our major  customer  in Canada  and the  United  States,  would  have a
material,  adverse  impact  on our  business.  A  substantial  reduction  in our
7-Eleven  business could result in diminished  revenues for several  quarters or
more as we attempt to replace that business.

CANADIAN  SALES.  CAN-AM,  our  wholly-owned  subsidiary,  has  secured a strong
foothold in the convenience  industry with 7-Eleven  stores,  and chains such as
Petro-Canada,  Esso, Mohawk,  Mac's, TRA, Sobey's,  as well as other independent
retail outlets.  Through December 31, 1998, CAN-AM had secured retail outlets in
the Canadian  provinces of British Columbia,  Alberta,  Saskatchewan,  Manitoba,
Ontario,  Quebec,  Nova  Scotia,  Prince  Edward  Island,  Newfoundland  and New
Brunswick.  With a warehouse near Vancouver B.C., a national distribution system
and an in-house  Customer  Service  Department,  CAN-AM net sales for the twelve
month period ending December 31, 1998 were approximately US $3.2 million.

                                       8
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U.S. SALES. As of December 31, 1998 our United States operations  distributes to
stores  throughout  the United States.  PCI U.S. net sales for the  twelve-month
period  ended  December  31,  1998 were  approximately  $3.7  million.  Our U.S.
accounts include  nationally-recognized  accounts such as  7-Eleven(TM);  Circle
K(TM);  Mobil(TM);  AM/PM(TM) and stores supplied by the McLane  Company.  Other
than 7-Eleven,  which represents  approximately  33% of our total U.S. sales, no
other individual customer represents more than 12% of our U.S. sales.

DIRECT AND  THIRD-PARTY  DISTRIBUTION.  To  effectively  market  and  distribute
premium  cigars and  in-store  humidors,  we  primarily  distribute  directly to
national  convenience store chains, and to a smaller degree through  independent
national,   regional  and  local   distributors.   Direct  sales  accounted  for
approximately 86% of our total sales and third-party  distribution accounted for
14% of our total sales for the twelve-month period ended December 31, 1998.

CUSTOMER SERVICE.  The ongoing success of our  "full-service"  PCI Cigar Program
depends, in part, upon a strong customer service department. Our goal is to be a
working partner with each of our customers,  both at an individual  store level,
and at the headquarters level. Our customer service  representatives in both the
US and Canada use  databases  to  analyze  store  volume,  price  points,  cigar
selection,  provide  counsel  relative  to proper  humidification,  maintenance,
merchandising, humidor placement and reorders.

HUMIDORS,  PRIMETIME COUNTERTOP CONTROL UNITS, HUMIDIBOX. We provide, and retain
ownership of, all countertop and free-standing  cigar humidors shipped to retail
outlets.  We do not own PrimeTime  countertop control units or Humidiboxes.  Our
humidors  provide an  attractive  product  display and  increased  counter space
available for PCI's products.  Each PCI in-store humidor is a sealed case or box
that displays premium cigars in an optimal environment of humidity.

Throughout  1998 we used two suppliers of humidors  based in Arizona and Canada.
Although we have specially  designed our humidors to meet our business needs, we
believe  any  reputable   cabinet  making  company  could  meet  our  production
specifications  and  requirements.  For this  reason,  we do not  believe we are
dependent  upon a single  humidor  supplier.  Furthermore,  we expect our future
humidor purchases to be minimal.

We signed an exclusive  contract  with Single  Cigars,  October 5, 1998.  Single
Cigars will act as the sole  supplier to PCI of  PrimeTime.  Single  Cigars will
also furnish,  at no cost, the retail dispensing  mechanisms known as countertop
control units.

The mold for  Humidibox  is owned  by PCI and is  injection  molded  for us by a
supplier in Tempe, Arizona. We believe that any reputable injection molder could
meet our production specifications and requirements.

OUR  CIGARS.  We sell  name-brand  and our own  private-label  cigars  from  our
humidors,  typically  retailing from $1 to $8. We sell PrimeTime  little cigars,
targeted at 49(cent) to 69(cent) retail,  from countertop control units. We also
distribute  cigar-related  accessories as a service to our  customers,  although
revenue is very minor.

                                       9
<PAGE>
         PREMIUM CIGARS.  Our premium cigars are generally  hand-rolled and sell
         at retail price points above $1.00/cigar. Through the PCI Cigar Program
         we  distribute   primarily  large  premium  cigars  with   long-filler,
         long/medium,  and medium/short filler tobacco and high quality, natural
         leaf wrappers and binders.  In order to make hand-made  cigars,  binder
         tobacco is  hand-wrapped  around  filler to create the "bunch" which is
         placed into a mold. Then,  "wrapper" tobacco is hand-wrapped around the
         bunch, creating a premium cigar.

         MASS MARKET CIGARS.  Mass market cigars are  machine-made and generally
         have a retail price point of  approximately  $1.00/cigar or less.  Mass
         market  cigars  use  less  expensive   tobacco  than  premium   cigars.
         Manufacturers  use a variety  of  techniques  and  grades of tobacco to
         produce mass market  cigars that sell at PCI's low price  points.  Mass
         market  cigars   include  large  cigars   (weighing   more  than  three
         pounds/1,000  cigars) and smaller,  natural leaf cigars  (weighing less
         than three pounds/1,000 cigars).

         OTHER  PRODUCTS SOLD FROM  HUMIDORS.  We also sell other  cigar-related
         accessories  such as  cutters  and breath  fresheners.  We may elect to
         continue  or  discontinue  offering  these  products  in the future and
         revenue from non-cigar product sales is not significant.

         PRIMETIME is a machine-made small cigar that uses premium cigar tobacco
         and  flavorings.   PrimeTime  cigars  are  sold   individually  from  a
         countertop control unit, rather than from a humidor.

CIGAR  TRADE-OUT  PROGRAM.  The  relationship we have with our customers is very
important  to us. We have a policy to  contact  each store to provide an optimum
selection of fresh,  humidified  premium cigars at appropriate  price points for
that store's  consumer  base. We endeavor to work with personnel from each store
to maintain  proper  humidity and placement of our humidor and cigars.  Early in
1998  we  analyzed  retail  outlets  with  substandard  sales  performance,  and
identified  opportunities  to improve  product  mix. As a result,  we traded out
slower moving store inventory and replaced it with an improved product mix.

COMPETITION.   PCI  competes  with  a  smaller  number  of  primarily   regional
distributors,  including  Southern  Wine and Spirits,  Specialty  Cigars,  Inc.,
Cohabico,   Old  Scottsdale   Cigar  Company,   Inc.  and  other  small  tobacco
distributors and jobbers that service convenience stores.

The cigar  industry is dominated  by a small number of companies  which are well
known to the public;  however, during the four year cigar industry growth period
from 1993-1997,  many new but small cigar companies also entered the market.  To
our  knowledge,  these cigar  manufacturing  companies  have not yet entered the
retail  convenience  store  market  with  an in  store  humidor  program.  These
companies  include  800 JR Cigar  Company,  Inc.,  Consolidated  Cigar  Holdings
(acquired by SEITA,  a French  company  which is a major  international  tobacco
manufacturer),   General  Cigar  Company,   Swisher,   Havatampa/Phillies  Cigar
Corporation  (acquired in 1998 by Tabacalera)  and others.  These  companies may
offer an in-store  humidor  program in the future and may  currently  indirectly
compete with us, for example,  through  operating  retail  warehouse  outlets or
mail-order retail distribution centers. These cigar manufacturing companies have
larger  resources than PCI and would, if they enter the in-store humidor market,
constitute formidable competition for our business. Large wholesale distribution
companies  such as McLane  Company and Core~Mark  could also  be  competitors if
they choose to aggressively pursue an in-store humidor program.

                                       10
<PAGE>
DECREASING DEPENDENCE ON PRINCIPAL SUPPLIERS.  We do not directly manufacture or
import any cigars, and depend entirely on third party  manufacturers,  suppliers
and importers for our cigars.  Typically, we do not have supply agreements,  but
submit   purchase  orders  for  cigars.   We  currently   purchase  cigars  from
approximately 10 suppliers.

We  have  steadily  decreased  our  dependence  on any  one  supplier.  For  the
twelve-month  period  ended  December  31,  1998  our  largest  supplier,  Latin
Partners,  accounted for  approximately  43% of our total U.S. cigar  purchases.
House  of  Horvath  accounted  for  approximately  59% of total  Canadian  cigar
purchases  for the  twelve  months  December  31,  1998.  Apart  from the  named
suppliers,  no other  supplier  accounts  for more than 15% of our overall  U.S.
cigar  purchases.  We believe that we could quickly  replace our main  suppliers
with alternative  sources at comparable prices and terms and a disruption in the
supply of  cigars  from our  principal  suppliers  would not have a  significant
adverse impact on our operations.

We do have an exclusive contract with Single Cigars to provide us with PrimeTime
small cigars.  While we believe other  suppliers could provide us with PrimeTime
products, it would probably take some time to arrange for production.

CIGAR SUPPLY  GENERALLY.  We primarily sell  moderately-priced  cigars which are
hand-rolled or  machine-made  from tobacco aged six months to two years.  At the
present time, we believe there is an supply of tobacco  available in a number of
countries for these types of cigars.  However,  we also sell a limited number of
higher priced  premium cigars which require higher  quality,  longer-aged  cigar
tobacco. Our ability to acquire these cigars in the future may be constrained by
a shortage of premium  cigars made with  longer-aged  cigar  tobacco.  At times,
producers have suspended shipping certain brands of cigars when excessive demand
results  in a  shortage  of  properly  aged and  blended  tobacco.  Accordingly,
increases in demand may  adversely  affect our ability to acquire  higher priced
premium cigars.

We  purchase  cigars  which are  manufactured  by  suppliers  outside the United
States.  The price and  availability  of these  cigars are  subject to  numerous
factors out of our control,  including weather  conditions,  foreign  government
policies,   potential  trade  restrictions,   social,   political  and  economic
conditions and the overall demand for cigars. While we have expanded our base of
suppliers,  we have no  significant  written  agreements  with  suppliers,  only
ongoing relationships.  Loss of these relationships may make it difficult for us
to  replace  sources of cigars of the same  quality,  price and  quantities.  We
cannot  assure  that our current  suppliers  of cigars will be able to supply us
with sufficient quantities or at reasonable prices.

INTELLECTUAL   PROPERTY  RIGHTS.   PCI  has  obtained  Arizona  state  trademark
registrations  from the Arizona  Secretary of State's  office for the trademarks
PREMIUM CIGARS  INTERNATIONAL  and PCI. These  registrations  provide  trademark
protection only within the borders of the State of Arizona.

PCI does not currently own any United States federal trademark registrations. We
have filed  trademark  applications  in the United  States  Patent and Trademark
Office for the trademarks on some of our in-house,  private label brands. We are
already using these marks in interstate  commerce.  We filed a federal trademark
application  with the United States Patent and Trademark  Office to register the
trademark  PREMIUM CIGARS  INTERNATIONAL  and  PRIMETIME.  PCI currently owns no
patents.  We  have  filed  and  obtained  a  domain  name  registration  for our
e-commerce site, ProductExpress.com.

                                       11
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NASDAQ LISTING.  NASDAQ advised PCI by letter on October 23, 1998 that it had 90
calendar days in which to regain  compliance  with the minimum $1.00 closing bid
price  requirement for its shares, If the closing bid price did not exceed $1.00
for 10 straight  days,  PCI's shares would be delisted from the NASDAQ Small Cap
Market.  PCI satisfied the minimum bid price  requirements  in late November and
early December, 1998. Nevertheless,  on January 12, 1999 NASDAQ advised PCI that
despite its compliance  with  technical  requirements,  the staff  exercised its
broad  discretions  and  recommended  delisting  of PCI shares as of January 23,
1999. PCI disagreed with the proposed  action,  and requested an oral hearing on
this matter.  PCI will present its case for continued listing at an oral hearing
on April 8, 1999.  Any  delisting  has been  stayed  pending  the outcome of the
hearing.

BOARD OF  DIRECTORS.  In  October,  1998 Atul  Vashistha,  an outside  director,
resigned  due to his  moving out of state.  During  January,  1999 Mark  Jazwin,
President,  W.B. McKee Securities,  Inc. was added to the PCI Board of Directors
as an  additional  independent  director.  During  March,  1999 Bill Anthony and
Robert Manschot  resigned as independent  directors due to the time requirements
of  their  primary  business  commitments.  During  March,  1999  Gary  Sherman,
Executive Vice  President,  Heritage West  Securities,  Inc. was appointed as an
independent director.

GOVERNMENT REGULATION

GENERAL.  The  tobacco  industry in general has been  subject to  regulation  by
federal,  state  and local  governments,  and  recent  trends  have been  toward
increased  regulation.  Federal law  requires  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 and visibility of cigars
could  lead to an  increase  in the  regulation  of  cigars.  A variety of bills
relating to tobacco issues have been  introduced in recent  sessions of the U.S.
Congress and various state  legislatures,  including  bills that would have: (1)
prohibited or restricted the advertising  and promotion of all tobacco  products
or restricted or eliminated the deductibility of such advertising expenses,  (2)
increased  labeling  requirements  on tobacco  products to include,  among other
things,  addiction  warnings and lists of additives and toxins,  (3) banned self
service  displays of all tobacco  products,  (4) shifted  regulatory  control of
tobacco products and advertisements,  (5) substantially increased tobacco excise
taxes and (6) required  tobacco  companies to pay for health care costs incurred
by the federal government in connection with tobacco related diseases.

Respected  members of the public  health  community  and others  have called for
Federal  Food and Drug  Administration  ("FDA")  jurisdiction  over all  tobacco
products which contain  nicotine.  While no reliable  standard testing procedure
has been  established for cigars because of their many types,  sizes and shapes,
and manner of use, it is undisputed  that cigars contain  nicotine and some will
call for FDA regulation of cigars for that reason.

Cigarette  manufacturers  mounted  a  court  challenge  to  the  FDA's  existing
statutory  authority to regulate tobacco and, after a U.S.  District Court found
that the FDA was not precluded from such  regulatory  authority in general,  but
was prohibited from  restricting  advertising or promotion of tobacco  products,

                                       12
<PAGE>
appealed  the  matter to the  United  States  Court of  Appeals  for the  Fourth
Circuit.  In 1998, the Court of Appeals reversed the District Court decision and
held  that  the  FDA  has no  jurisdiction  to  regulate  tobacco.  The  FDA has
petitioned the United States Supreme Court to review that decision.

In 1997, the five largest tobacco companies announced a proposed settlement of a
number of cases  brought by the  Attorneys  General of several  states to recoup
Medicare expenses.  Congress introduced  legislation to implement the settlement
by  increasing  the  price  of  cigarettes,   regulating  all  tobacco  products
including,  in certain versions of the legislation,  those manufactured by cigar
companies (which were not a party to the suits being settled), imposing full FDA
regulation  and  adopting  new and highly  restrictive  marketing  requirements.
Although  Congress failed to adopt the legislation,  the five tobacco  companies
engaged  in the  1997  proposed  settlement  entered  into  separate  settlement
agreements in 1998 with the Attorneys  General  pursuant to which they agreed to
pay significant  amounts  annually and to certain  marketing  restrictions.  The
Master  Settlement  Agreement  ("MSA") was signed on November 23, 1998 and since
then  additional  tobacco  product   manufacturers  have  joined  as  subsequent
participating parties to the MSA.

The FDA  considered  asserting  jurisdiction  over  little  cigars  in 1995.  It
declined to do so in the final rule issued in 1996  principally  because the FDA
concluded that little cigars were not used  significantly  by teenagers.  In May
1997, the Center for Disease  Control (CDC") issued a widely  publicized  report
that has come most  often to be cited for the claim that "more than a quarter of
the nation's  teenagers have smoked a cigar in the past year." While the Company
believes the  incidence of youth usage of cigars has been  exaggerated,  the CDC
report is being cited as justification for extending  legislation to all cigars,
and for FDA jurisdiction of all cigars.

In  addition,  the  majority of states  restrict or prohibit  smoking in certain
public  places and  restrict  the sale of  tobacco  products  to  minors.  Local
legislative  and  regulatory  bodies  also have  increasingly  moved to  curtail
smoking by  prohibiting  smoking in certain  building  or areas or by  requiring
designated  "smoking" areas. Further restrictions of a similar nature could have
an adverse  effect on the sales or operations of PCI.  Numerous  proposals  also
have been considered at the state and local level restricting smoking in certain
public areas,  regulating point of sale placement,  and promotions and requiring
warning  labels.  In  California,  the  exemption  from  no-smoking  regulations
accorded taverns, bars and cigar bars expired January 1, 1998. On June 16, 1997,
Texas  passed a law which  prohibits  offering  cigarettes  or tobacco  products
(including  cigars) in a manner  that  permits a customer  direct  access to the
products,  but the law  specifically  does not apply to "that part of a business
that  is  a  humidor  or  other   enclosure   designed  to  store  cigars  in  a
climate-controlled environment."

California requires "clear and reasonable" warnings 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.  As a result,
PCI has gone to  significant  lengths to ensure the  following  warning label is
attached to its humidors in California: "WARNING: This product contains/produces
chemicals known to the State of California to cause cancer, and birth defects or
other reproductive harm." In Massachusetts, regulations mandating warning labels
on machine made cigars were recently  issued by the outgoing  Attorney  General.
Unless  revised,  these  regulations  will become  effective  August 1, 1999. In
addition,  Texas and Minnesota have recently passed ingredient,  additive and/or
nicotine  disclosure  laws  applicable  to cigars.  We cannot  assure  that such
legislation  introduced in other states will not be passed in the future or that
other states will not enact similar legislation.

                                       13
<PAGE>
Although  federal law has required health warnings on cigarettes  since 1965 and
on smokeless  tobacco since 1986,  there is no federal law requiring that cigars
carry such  warnings.  In February 1998,  the Federal Trade  Commission  ("FTC")
issued  orders to five of the largest  cigar  companies  requiring  them to file
"special reports" on their sales and advertising  expenditures.  This could lead
to regulations  and/or  legislation  respecting cigar advertising and promotion,
including  health  warning  labels.  The FTC is  expected  to send a  report  to
Congress in 1999 which could include, among other things, a recommendation for a
federal  warning label on cigars.  A petition for such a label  ("WARNING:  This
product is not a safe  alternative  to  cigarettes")  was submitted by Action on
Smoking or Health last year and remains pending before the FDA. In addition, the
"Cigars Are No Safe Alternative Act", introduced in Congress in 1998, contains a
provision which would require the FDA to develop a warning label for cigars.

Consideration  at both the  federal  and  state  level  also  has been  given to
consequences  of tobacco smoke on non-smokers (so called  "second-hand"  smoke).
The  expressed  concern of the  California  legislators  who supported the above
referred to expiration of the no-smoking  exemption for taverns,  bars and cigar
bars  was  the  effect  of   second-hand   smoke  on  the   employees   of  such
establishments.  In 1998, plaintiffs  representing the cities of Los Angeles and
San Francisco filed suit against several cigar manufacturers with respect to the
adequacy of the presently required warning as it relates to non-smokers  exposed
to second hand smoke. We cannot assure that regulations  relating to second-hand
smoke will not be adopted.

The U.S. Environmental  Protection Agency (EPA") published a report in 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.  In 1998, the EPA report was invalidated by a
Federal District Court.

In 1998, the National Cancer  Institute issued a report  describing  statistical
and other research into cigars and health.  The report was widely publicized and
could affect pending and future tobacco regulation and litigation.

Increased  cigar  consumption  and the publicity  such increase has received may
increase the risk of additional regulation.  There can be no assurance as to the
ultimate  content,  timing or effect of any  additional  regulation  of  tobacco
products  by any  federal,  state,  local  or  regulatory  body,  and  any  such
legislation  or  regulation  may  have  a  material   adverse  affect  on  PCI's
operations.

TAXES.  Cigars long have 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,  capped at $30.00 per
thousand cigars.

Based on scheduled  increases  to the federal  excise tax on  cigarettes,  which
result in  proportionate  tax  increases to the federal  excise tax on all other
tobacco products,  the tax on large cigars will increase to 18.06% on January 1,
2000,  capped at $42.50 per thousand large cigars. On January 1, 2002 the tax is
scheduled to be raised to 20.71% and capped at $48.75 per thousand large cigars.

                                       14
<PAGE>
In 1999, the Clinton  administration  proposed  additional  increases in federal
excise tax on  cigarettes  which,  if enacted as  proposed,  would  increase the
cigarette tax by approximately  141% over the already  scheduled  increases.  If
passed, these taxes will have a proportionately  significant impact on all other
tobacco  products.  PCI believes that the enactment of  significantly  increased
excise taxes could have a material  adverse  effect on our  business.  We cannot
predict the  likelihood of the passage or the  enactment of future  increases in
tobacco excise taxes as they relate to cigars.

Tobacco products also are subject to certain state and local taxes. As evidenced
by the passage of the  Proposition 10 referendum in  California,  an act used to
fund early childhood  development  programs,  children's' health and development
concerns  at  the  state  level  exert  pressure  to  increase   tobacco  taxes.
Proposition  10,  which became  effective on January 1, 1999,  raises the tax on
cigars in California from 26.17% of the manufacturer's selling price to 61.53%.

42 states currently  impose excise taxes on cigars.  Of the eight states without
tobacco  taxes,  proposals  to add such  taxes  are  pending  in  Maryland,  New
Hampshire,  Wyoming and West Virginia.  State cigar excise taxes are not subject
to caps  similar to the federal  excise tax.  The  enactment of new state excise
taxes and the  increase in  existing  state  excise  taxes are likely to have an
adverse effect on regional sales as cigar consumption generally declines.

TAX FILING COMPLIANCE  ISSUES. In March 1998, the State of New York asked PCI to
suspend  shipments of cigars to that state until the proper tax applications had
been  processed and taxes,  penalties  and interest had been paid.  PCI complied
with New York's request and was subsequently approved to resume shipments to New
York  retail   accounts.   Management  did  not  consider  this  brief  shipment
interruption to be material to its operations.

PCI has  registered  with the  appropriate  taxing  authorities  in the Canadian
provinces  and in most of the  states  in  which  it  currently  does  business.
Currently,  PCI is in arrears in the payment of tobacco taxes in several  states
in which it does  business.  Although we have posted payment bonds in several of
the states,  failure to remit taxes could have a material  adverse effect on our
operations if one or more of the states initiate enforcement actions.

CANADIAN  REGULATIONS.  The Canadian  Tobacco Act of 1997 was enacted to protect
the health of Canadians,  especially young people.  The new tobacco  legislation
affects all persons who promote or sell tobacco products.  The Act prohibits the
sale to persons  under 18 years of age,  restricts  access to  tobacco  products
through  self-service  displays and vending machines,  direct mail and regulates
advertising and promotions.

TOBACCO INDUSTRY  LITIGATION.  Historically,  the cigar industry has experienced
less  health-related   litigation  than  the  cigarette  and  smokeless  tobacco
industries have experienced.  We carry general  commercial  liability  insurance
with an aggregate  limit of $10,000,000.  However,  we cannot assure you that we
will not be subject to liability  which is not covered  beyond the limits of our
general  liability  insurance  coverage,  and which may have a material  adverse
effect upon our business.

RESEARCH  AND  DEVELOPMENT;  ENVIRONMENTAL  COMPLIANCE.  We  have  not  incurred
research and development costs associated with our products.  Historically,  PCI
has acquired cigars and accessory  product lines from its suppliers and contract

                                       15
<PAGE>
manufacturers and has typically allowed the suppliers and manufacturers to incur
the costs of product research and development. Our policy is to not warehouse or
handle in our  facilities any products that require  Material  Safety Data Sheet
("MSDS")  reporting  and  compliance.   Currently,  the  costs  and  effects  of
environmental  compliance  do  not  have a  material  effect  on  our  financial
condition or operations.

EMPLOYEES.  As of December 31, 1998, we had 69 employees in the U.S. and Canada.
Currently  we  have  approximately  44  employees.  None  of our  employees  are
represented by a labor union and we believe that employee relations are good.

ITEM 2 - DESCRIPTION OF PROPERTY

At the  beginning  of 1998,  we  subleased,  from an  independent  third  party,
approximately  8,500 square feet for our corporate offices,  warehouse,  humidor
storage and distribution  facilities  located in the Scottsdale  Airpark area of
Scottsdale,  Arizona.  Because we outgrew our facilities,  we entered into a new
building  lease on February  25, 1998 for  approximately  20,434  square feet of
office and  warehouse  space at 15849  North 77th  Street,  Scottsdale,  Arizona
85260, and moved our operations to the new facilities in late April of 1998. The
new lease expires on April 30, 2003.  The monthly rent for the first three years
(May 1998 through April 2001) is $18,000 and the monthly rent for years four and
five (May 2001  through  April 2003) is  $19,000.  PCI is also  responsible  for
common area maintenance, taxes and certain other incidental costs.

PCI also leases,  from an independent  third party,  approximately  3,064 square
feet of office and  warehouse  space in Burnaby,  British  Columbia (a suburb of
Vancouver) for CAN-AM's Canadian operations. The lease expires July 14, 2000 and
the rent is  approximately  U.S.  $1,190,  $1,373  and  $1,556 per month for the
first, second and third years of the lease, respectively.

ITEM 3 - LEGAL PROCEEDINGS

AUTOMOBILE ACCIDENT. On September 16, 1997, a PCI employee Pete Charleston,  was
involved  in an  automobile  accident  in  which  he was  the  driver  and  four
passengers were injured. Attorneys for the first three passengers have indicated
that their  clients  will pursue  personal  injury  claims  against  PCI, but no
lawsuit  has been  filed.  A fourth  passenger  has  made a demand  against  the
employee-driver and his insurer only. PCI tendered defense of the claims to, and
requested  indemnification  from, our commercial general liability carrier,  but
the carrier has  initially  declined  coverage on grounds  that the  endorsement
covering  Hired and  Non-Owned  Auto  Liability was not yet  effective.  We have
disputed the carrier's denial of coverage and we have asserted that PCI obtained
an oral binder of such coverage  prior to the accident.  We have  negotiated and
executed  a  settlement  with the  potential  claimants  pursuant  to which  Mr.
Charleston's own insurer will pay its policy limits,  $300,000 to the claimants.
The claimants have provided to PCI a covenant not to execute  against PCI or Mr.
Charleston,  and PCI has  assigned to the  claimants  any claims which PCI might
have against its insurer for denying coverage.

PROP 65.  PCI and at least  two of its  customers,  Mobil  and  Southland,  have
received notice of violations of Proposition 65, a California  regulation  which
requires warning labels on certain cancer causing  products,  including  cigars.
Proposition 65 can be enforced by private  litigants,  and PCI received a letter
from a  California  attorney,  Morse  Mehrban,  which  demanded  compliance  and
requested settlement.  PCI has since distributed to all of its retail outlets in
California a warning label to be attached to each humidor.  However, Mr. Mehrban
has brought legal action for sales which occurred prior to PCI's compliance. PCI

                                       16
<PAGE>
has  learned  that both Mobil and  Southland  also have been  named in  lawsuits
initiated by Mr.  Mehrban.  Southland  claims that the lawsuit  filed against it
arose solely from the sale of PCI's products.  Pursuant to the agreement between
Southland  and PCI,  Southland has requested  that it be  indemnified  for these
claims. Mobil has not made a similar  indemnification  request, and based on the
agreement between Mobil and PCI, Mobil probably cannot claim any indemnification
rights. PCI is currently  exploring the possibility of settling with Mr. Mehrban
all claims against PCI and its customers,  including Mobil and Southland. In the
meantime, PCI has filed a demurrer and retained California counsel to defend the
cases brought against it and Southland.

LATIN  PARTNERS.  An agreement has been reached with counsel for Latin Partners,
relating to a delay in payment for  merchandise.  The lawsuit  will be dismissed
with  prejudice  upon receipt of the final  payment and they have agreed to stay
all  proceedings  in the  litigation  as long as payments are made in accordance
with the schedule.

ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

                                       17
<PAGE>
                                     PART II

ITEM 5 - MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     (a)  Market for Common Equity.

         PCI's  common  stock  under  the  registered  name  of  Premium  Cigars
International, Ltd. is traded on the NASDAQ SmallCap Market as "PCIG" and on the
Boston Stock Exchange as "PCI."

         Set forth  below are the high and low closing  prices for PCI's  common
stock as  reported  on either the  NASDAQ  SmallCap  Market or The Boston  Stock
Exchange for the last six quarters.

Quarter                               High            Low
-------                               ----            ---

September 30, 1997                  $5.8125          $4.3750

December 31, 1997                   $5.5625          $2.0000

March 31, 1998                      $ 2.563          $ 1.313

June 30, 1998                       $ 2.438          $ 1.313

September 30, 1998                  $ 1.750          $ 0.750

December 31, 1998                   $ 1.250          $ 0.500

         As of December 31, 1998, there were  approximately 30 holders of record
of PCI's common shares, not including those shares held in brokerage accounts.

         PCI has never  declared or paid a cash  dividend  on its shares.  PCI's
Board of  Directors  will  determine  whether to pay cash  dividends  based upon
results of operations,  cash flows, financial condition and liquidity.  However,
at present,  PCI  intends to retain any  earnings  to fund the  development  and
growth of its business and does not anticipate  paying any cash dividends in the
foreseeable future.

SALE OF UNREGISTERED SECURITIES

During 1998 and through  the filing of this annual  report,  PCI sold a total of
370,000   unregistered   securities  in  private  transactions  with  accredited
investors  under  Sections 4(2) and 4(6) of the Securities  Act, as amended,  as
follows:

     (a) In January 1999, RCG Capital,  Inc. purchased 100,000 restricted shares
from PCI at a price of $0.01 per share. These shares were acquired in connection
with PCI's consulting agreement with RCG as a public relations  consultant.  PCI
may  repurchase  the  shares  over the term of the  agreement,  at the  original
issuance  price  ($0.01 per share) if certain  criteria are not met. If and when
RCG requests removal of the restrictive  legends on the shares, RCG must pay PCI
sums ranging from $0.99 to $1.49 per share.

                                       18
<PAGE>
     (b) On January 27, 1999, John Greenwell  purchased 70,000 restricted shares
at a purchase price of $0.50 per share.

     (c) In  February  1999,  Clemons F.  Walker,  Keith A. Cannon and Daniel V.
McLeon purchased 100,000, 60,000 and 40,000 restricted shares, respectively,  at
a purchase price of $0.50 per share.

     (b)  Use of Proceeds.

     PCI provides the following  information  in accordance  with Item 701(f) of
Regulation S-B:

        1.      PCI's  Registration  Statement on Form SB-2 (File No. 333-29985)
                was declared effective on August 21, 1997.

        2.      The offering commenced on August 21, 1997.

        3.      The offering did not terminate before any securities were sold.

        4(i).   On August 29, 1997,  PCI closed the sale of 1,900,000  shares of
                its  common  stock  to  W.B.   McKee   Securities,   Inc.,   the
                Underwriters' Representative (the "main offering"). On September
                24, 1997, W.B. McKee  Securities,  Inc.  purchased 88,592 of the
                285,000 shares available for the over-allotment  option provided
                for  in  PCI's  Underwriting   Agreement  (the   "over-allotment
                offering").  See  "Underwriting"  section of PCI's  Registration
                Statement  on Form  SB-2 and Item 5 herein.  The  over-allotment
                option on the remaining  196,408  shares of common stock expired
                on September 29, 1997.  Therefore,  the main offering terminated
                on August  29,  1997,  after  the sale of all of the  securities
                registered;  the over-allotment offering terminated on September
                29, 1997, with 196,408 registered shares unsold.

        4(ii).  W.B. McKee Securities,  Inc. served as the managing  underwriter
                for the offering.

        4(iii). PCI registered  common stock, no par value, in this Registration
                Statement on Form SB-2.

        4(iv).  PCI registered  2,185,000  shares of common stock, no par value,
                in its  Registration  Statement  on Form SB-2,  for an aggregate
                offering price of  $11,471,250.  These figures  include the full
                over-allotment of 285,000 shares; however, as stated above, only
                88,592 over-allotment shares were purchased by the Underwriters'
                Representative. Accordingly, PCI has sold 1,988,592 shares at an
                aggregate offering price of $10,440,108.

                                       19
<PAGE>
        4(v).   The amount of expenses  incurred  through  December  31, 1997 in
                connection with the issuance and  distribution of the securities
                registered was $2,309,444.  This amount is made up of $1,044,011
                in  underwriter's   discounts  and   commissions,   $313,203  in
                underwriter's  non-accountable  expenses,  and $952,230 in other
                expenses,  including  consulting  fees of  $108,662  to David S.
                Hodges  ($92,245  of  which  was paid in 1997  and  $16,417  was
                accrued in 1997 for amounts paid in 1998) and consulting fees of
                $10,000 to director William L. Anthony.

        4(vi).  The net offering  proceeds  after  deducting the above  expenses
                were $8,130,664.

        4(vii). From the effective date of PCI's Registration Statement,  August
                21, 1997 to December 31, 1998,  the net offering  proceeds  were
                applied as follows:  $1,200,000 to repayment of debt, $1,289,849
                to  purchase   humidors,   $2,030,445  to  purchase   inventory,
                $2,641,867  for sales and  marketing  and  $968,503 in other net
                working capital.

        4(viii).In  addition,   net  offering   proceeds  were  applied  to  the
                following items,  which represent a material change from the use
                of proceeds described in the Prospectus dated August 21, 1997:

                RAISES TO CERTAIN  FOUNDERS AND OTHER KEY  EMPLOYEES.  Effective
                October  1,  1997,  certain  founders  and other  key  employees
                received  raises  in the  range  of 17%  to  40%  which,  in the
                aggregate,   totalled  $150,000  on  an  annualized  basis.  The
                independent   directors   approved   these   raises  based  upon
                management's  recommendation that the raises be funded from cash
                generated from  operations.  Management  implemented  the raises
                using offering  proceeds prior to the  availability of operating
                proceeds.  Subsequently,  an independent study performed for PCI
                in  conjunction  with its  analysis  of  incentive  compensation
                alternatives  supports that the majority of the resulting salary
                levels were within the market value base compensation ranges for
                qualified   individuals   in  these   positions.   See  "Certain
                Relationships  and  Related  Transactions  - Raises  to  Certain
                Founders and Other Key  Employees" in PCI's 10-KSB filed for the
                fiscal year ended December 31, 1997.

                PAYOUT OF MANAGEMENT FEES. On November 3, 1997, PCI paid each of
                Colin A.  Jones and Greg P.  Lambrecht  $80,000,  for a total of
                $160,000,  as lump sum payments of their  management fees, which
                became  due under  their  Employment  Agreements  as a result of
                PCI's receipt of financing from its initial public offering. See
                "Certain  Relationships  and  Related  Transactions  - Payout of
                Management  Fees to Greg  Lambrecht  and  Colin  Jones" in PCI's
                10-KSB filed for the fiscal year ended December 31, 1997.

                SEVERANCE  COMPENSATION  AND  SETTLEMENT  PAYMENTS.  On March 3,
                1998,  PCI  entered  into  settlement  agreements  with  each of
                Messrs. Jones, Greg Lambrecht and Steve Lambrecht  acknowledging
                the termination of their employment  relationships with PCI. PCI
                paid each individual: (a) a lump sum payment of $40,000; and (b)
                severance  compensation  of $63,000 and other  benefits  payable
                over nine months under his individual Employment  Agreement.  In
                exchange for the lump sum payment,  each individual:  (i) agreed
                to extend his non-compete  clause for six months, for a total of
                18 months; and (ii) released PCI from all claims relating to his
                Employment  Agreement  and  employment  with PCI.  See  "Certain
                Relationships   and  Related   Transactions   -  Settlement   of
                Compensation  Disputes with  Founders" in PCI's 10-KSB filed for
                the fiscal  year ended  December  31,  1997.  In 1998,  PCI paid
                Karissa B. Nisted  $40,000 in  severance  compensation  over six
                months according to the terms of her Employment Agreement and in
                exchange for a limited release. In addition,  severance benefits
                were paid to Murphy Pierson during 1998 pursuant to the terms of
                an Employment Agreement. The aggregate total of these settlement
                and severance payments was $395,200.

                                       20
<PAGE>
ITEM 6 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         AND RESULTS OF OPERATION

You must read the  following  discussion  of the results of the  operations  and
financial  condition of PCI in  conjunction  with PCI's  consolidated  financial
statements,  including  the notes  included  elsewhere  in this  10-KSB  filing.
Historical  results are not  necessarily  an  indication  of trends in operating
results for any future period. The consolidated financial statements present the
accounts  of PCI  and  its  wholly-owned  subsidiary,  CAN-AM.  All  significant
intercompany balances and transactions were eliminated in consolidation.

RESULTS  OF  OPERATIONS.  The  following  table  sets  forth a summary  of PCI's
consolidated  statements of operations for the twelve months ending December 31,
1998,  the nine month period ended  December 31, 1997 and the  pro-forma  twelve
month period ended December 31, 1997.
<TABLE>
<CAPTION>
                                                     Nine Month        Pro-Forma Twelve
                             Year ended             Period Ended         Months Ended
                          December 31, 1998       December 31, 1997     December 31, 1997
                          -----------------       -----------------     -----------------
                                                                          (Unaudited)
                               ($000)                  ($000)                ($000)
<S>                         <C>                      <C>                   <C>
Net Sales                   $ 6,900.9                $ 3,362.3             $ 3,695.2

Gross Profit                  1,319.1                    563.6                 646.4

S,G & A and other
operating expenses            5,435.7                  2,383.7               2,795.3

Loss From Operations         (4,116.5)                (1,820.1)             (2,148.9)

Other Income                     86.7                     59.7                  48.0
                            ---------                ---------             ---------

Net Loss                    $(4,029.8)               $(1,760.4)            $(2,100.9)
                            =========                =========             =========
Loss Per Share              $   (1.16)               $    (.82)            $    (.97)
                            =========                =========             =========
Weighted Average Number of
Shares Outstanding          3,469,092                2,156,076             2,160,419
</TABLE>
                                       21
<PAGE>
FISCAL 1998 COMPARED TO FISCAL 1997

SALES.  Sales of cigars and related  items for the twelve  month  period  ending
December 31, 1998 were $6,900,927, an increase of 105% versus fiscal 1997 and an
increase  of 86.7%  compared  to the twelve  month  proforma  1997  period.  The
following table summarizes unaudited quarterly results.

                          Net Sales ($000) (Unaudited)

         1st Quarter    2nd Quarter    3rd Quarter    4th Quarter    Total Year
         -----------    -----------    -----------    -----------    ----------
1997      $  332.9       $  628.2       $1,372.3       $1,361.8       $3,695.2

1998      $1,255.9       $2,018.6       $2,000.6       $1,625.8       $6,900.9

As 1998  progressed,  sales associated with the base humidor program became more
difficult to generate. The U.S. Customer Service Department made steady progress
on improving the number of completed calls;  however,  the humidor  productivity
(as measured by average  reorder rates) and the close ratio did not improve.  If
the program is "working", the average dollars/reorder and the close ratio should
increase.  The mid-year Cigar Trade Out program  briefly  accelerated  the close
ratios and the average reorder amount, but once the program was completed, these
key numbers began to decline.  There  continues to be an  opportunity to improve
humidor  productivity (e.g., more appropriate SKU's and price points);  however,
there  may be  greater  opportunity  to focus  only on those  stores  that  have
acceptable order history, and alter the approach (i.e., humidibox,  instead of a
large  humidor,  eliminating  the account)  among  accounts  who show  continued
reluctance to support the humidor program via their lack of order history.

GROSS MARGINS.  Gross profit margin for the year ended December 31, 1998 was 19%
versus 17% for fiscal 1997 and 17% for the pro forma  twelve  month period ended
December  31,  1997.  Excluding  the effect of a writedown  of  inventory in the
fourth  quarter of 1998  discussed in Item 1 above,  gross profit margin for the
year ended  December 31, 1998 was 25%.  Gross margin has steadily  improved as a
result of PCI's integrated  systems and more favorable  purchasing  arrangements
with key suppliers and greater fixed  overhead  absorption  due to higher sales;
however, Can-Am continues to lag the U.S. and we expect that it will continue to
do so in the future. A major problem with Canadian margins is the  significantly
higher tobacco taxes.  During 1998,  U.S.  tobacco taxes were 6.4% of Net Sales,
while in  Canada,  they were 31.4% of Net Sales.  The lower  margins  during the
First Quarter were due mainly to a higher percentage of lower margin cigars that
were sold in Canada,  as well as increased labor costs incurred in consolidating
warehouse space and inspecting inventory for possible damage.

                                       22
<PAGE>
                         1998 Gross Margins (Unaudited)

         1st Quarter    2nd Quarter    3rd Quarter    4th Quarter    Total Year
         -----------    -----------    -----------    -----------    ----------

U.S.         18%             31%           34%           40%*           30%*
Canada        8%             23%           20%           19%            19%
Total
 Company     14%             27%           27%           29%*           25%*

* Before adjustment to write down inventory to the lower of cost or market.

SELLING,  GENERAL  AND  ADMINISTRATIVE.   Selling,  general  and  administrative
expenses (SG&A) were $5,435,700 for the year ended December 31, 1998 compared to
$2,383,700  for fiscal 1997 and  $2,795,300  unaudited  for the pro forma twelve
month period ended December 31, 1997. As a percentage of sales, SG&A was 79% for
the year ended  December 31, 1998 versus 71% for fiscal 1997 and 76% for the pro
forma  twelve month period  ended  December  31, 1997.  Excluding  the effect of
payment of severance  compensation during 1998, SG&A as a percentage of sales in
1998 was 73%.

SG&A is disproportionately  high relative to net sales due to the creation of an
intrastructure (people, offices, equipment, etc.) to generate future revenue and
manage operations; however, issues discussed previously have negatively impacted
revenue  growth (see Part I - Item 1 - Description  of Business).  SG&A includes
amortization  of  humidors  which are  amortized  over two  years;  however,  we
anticipate that the humidors may continue to produce revenue beyond that period.
PCI has taken steps to reduce its SG&A in 1999,  including staff reductions that
were announced previously.

OTHER INCOME/EXPENSES. Other income for the year ended December 31, 1998 totaled
$86,700  compared to $59,700 in fiscal 1997 and  $48,000  unaudited  for the pro
forma twelve month period ended December 31, 1997.  Other income consists mainly
of interest income which was earned from the investment of the proceeds from the
initial public offering in August of 1997, offset by interest expense.  Interest
expense was  incurred in 1997 on bridge  loans and other debt that was  incurred
prior to PCI's initial public  offering.  The invested  proceeds have since been
used to fund operations. PCI will incur interest expense in 1999 on its accounts
receivable financing agreement.

SEASONALITY.

Our  operational  history  suggests some variation in convenience  store impulse
cigar purchases may be tied to outdoor weather conditions.  In the northern U.S.
and Canada,  sales  appear to improve in the warmer  months and in the  southern
U.S. sales appear to improve in the cooler months.  Because we distribute across
the U.S. and Canada,  we anticipate that any seasonal  variances in the northern
and southern  regions will be offsetting  and not have a material  impact on our
financial condition or operations.

LIQUIDITY AND CAPITAL RESOURCES.

We require capital to market our PCI Cigar program,  obtain additional inventory
and  humidors to supply our  increasing  distribution  network,  and develop the
personnel,  facilities,  assets,  and organization  infrastructure  necessary to
support our expanding business.  Prior to our initial public offering, we raised
capital through the issuance of stock and notes payable,  as well as obtaining a
line of credit from a bank. On September 29, 1997 we completed an initial public
offering that resulted in net proceeds to PCI of $8,130,664. See Item 2(c), "Use
of Proceeds" for application of the proceeds.

                                       23
<PAGE>
PCI used $3.1 million for operating  activities  for the year ended December 31,
1998, which was largely attributable to the net loss incurred during the period.
Non-cash expenses (depreciation and amortization)  totalled $794,000.  Cash used
for  operations  includes  $395,000  in  severance  compensation  paid to former
management of PCI.

As of December  31, 1998 the  combined  balance of cash and  available  for sale
securities  totaled $168,000,  a decrease of $4,567,000 or 96% from December 31,
1997.  The decline is due to the net loss  incurred for the year ended  December
31, 1998 as well as PCI's  continued  additional  investments  in  humidors  and
property and equipment.

Accounts  receivable at December 31, 1998 decreased $76,000 or 12% from December
31, 1997. The decrease is largely due to improved collection efforts in the U.S.
during  1998.  A general  overall  increase  in the  receivables  balance due to
increased  sales in 1998 was offset by the  write-off of some old balances  that
existed at December 31, 1997.

Net  inventories  at December 31, 1998  increased  $3,000,  or less than 1% from
December  31, 1997.  The change is  attributable  to: 1)  inventory  returned by
customers as part of the cigar trade-out program that was implemented during the
first half of 1998; 2) a gradual shift in inventory  mix to higher  priced,  and
therefore, higher cost cigars and 3) an overall increase in the number of cigars
on hand to  support  a higher  volume of sales.  This was  offset by a  $428,000
write-down  of  our  non-core  inventory  to  estimated  market  value.  We  are
developing  programs to eliminate our  investment  in obsolete and  discontinued
cigars and expect to reduce this figure over the next several months.

As part of PCI's humidor  program,  a humidor is sent with each initial order of
cigars as new stores are added. While PCI retains ownership of the humidor,  the
store is not charged for the humidor  unless it is lost or damaged by the store.
Therefore,  as new stores continue to be added, PCI requires capital to purchase
the humidors it sends out as part of the initial order. As discussed in Part I -
Item 1 -  Description  of Business - we expect  future  humidor  purchases to be
minimal.

Capital  expenditures  (excluding  humidors) totaled $592,000 for the year ended
December 31, 1998. This included the cost of new office  furniture and leasehold
improvements for our new facility,  continued  investment in computer  equipment
and software  applications,  and warehouse  machinery and  equipment.  We do not
anticipate any significant capital spending needs for the foreseeable future.

Accounts payable and accrued expenses at December 31, 1998 increased $21,500, or
2% from December 31, 1997. Decreases in the amount of tobacco taxes payable were
largely  offset by  increases in trade  payables due to our  inability to secure
financing until 1999.

We have no  current  plans that  represent  a  material  change  from the use of
proceeds  described in the  Prospectus  dated August 21, 1997. We have secured a
$1,000,000 accounts receivable financing package which, assuming sales forecasts
are  achieved,  we believe will provide the  necessary  working  capital for our
immediate  ongoing  needs;  however,  we cannot  assure you that we can generate

                                       24
<PAGE>
sufficient  revenues  to provide  the cash flow  necessary  to meet our  ongoing
working capital needs, nor to repay prior existing trade  indebtedness.  We have
raised an  additional  $135,000  during the first  quarter of 1999  through  the
issuance  of  additional  shares  of PCI's  stock.  The Board of  Directors  has
authorized the issuance of additional  shares for up to an additional  $200,000.
However, it is likely that PCI will have to raise additional capital through the
sale of some of its assets in order to raise the necessary  capital to repay the
trade debt it has incurred  over the past several  months.  We cannot assure you
that we  will be able to sell  sufficient  assets  to  enable  us to  repay  our
outstanding trade debt in a timely manner.

KNOWN TRENDS, EVENTS OR UNCERTAINTIES THAT MAY IMPACT OUR FINANCIAL CONDITION OR
OPERATIONS.

YEAR 2000 ISSUES. We purchased most of our computers within the past year and do
not  anticipate  any  significant  problems  relative to their Year 2000 ("Y2K")
capabilities. Testing of each machine's capabilities is expected to be completed
by the end of the Second  Quarter,  1999. We have not yet  implemented a plan to
identify the non-IT  (Information  Technology) systems (i.e., those systems with
an imbedded  technology  such as  microcontrollers)  which may require repair or
replacement;  however,  given the  nature of our  operations  and the age of our
business,  we do not believe that we face any material  risk from these types of
systems.

Our business relies to a large extent on our integrated accounting, order entry,
and inventory  control systems (SBT Pro Series 5.0), which is represented by the
vendor as being Y2K  compliant.  We also rely on  standard  office  productivity
software (Microsoft Office 97) which is also represented as being Y2K compliant.
Our  EDI  software,  which  we use to  transmit  invoices  and  receive  payment
information from our largest U.S.  customer is represented to be  non-compliant.
The cost to replace  this  software is not expected to be material and we intend
to identify suitable alternatives by the end of the Second Quarter, 1999. We are
in the process of determining the compliance of our other software and expect to
have this completed by the end of the Second Quarter.

We have  begun  the  process  of  contacting  key  customers,  vendors,  service
providers  and other third  parties with whom business is conducted to determine
what  impact,  if any,  their Y2K  readiness  will have on us;  this  process is
expected to be completed by the end of the Second Quarter,  1999. Although we do
not anticipate  any material  adverse effect on our business as a result of such
parties  failure  to  achieve  Y2K  readiness,  we cannot  assure you that these
parties will have accurately assessed their Y2K readiness status.

At this time, we do not believe that we will incur any material  expenditures to
identify and replace,  as necessary,  any Y2K non-compliant  systems.  We do not
anticipate any material effect to our business from any non-compliant  PCI-owned
systems;  however,  we are unable at this time to determine what, if any, effect
on our business  will occur from any third  parties  non-compliant  systems.  We
expect  to be better  able to  assess  this  uncertainty  as we obtain  more Y2K
information from these parties.

We do not  currently  have a  contingency  plan in place to handle a "worst case
scenario",  as we believe that any non-compliant systems on our part do not pose
a material risk to PCI. If, and to the extent that we identify material risks to
PCI from third parties non-compliance, we will formulate a plan at that time.

                                       25
<PAGE>
ITEM 7 - FINANCIAL STATEMENTS

PCI's audited financial  statements for the year ended December 31, 1998 and the
nine month period ended December 31, 1997 are set forth  commencing on page F-1,
following the Index to Financial Statements on Page xx.

ITEM 8 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

None

                                       26
<PAGE>
                                    PART III

ITEM 9 - DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT DIRECTORS AND EXECUTIVE
OFFICERS


Name                       Age                  Position
----                       ---                  --------

John E. Greenwell......... 51   Director, Chief Executive Officer, President,
                                Chief Operating Officer

Scott I. Lambrecht........ 27   Vice President of Operations and Secretary

James B. Stanley.......... 35   Vice President of Purchasing and Assistant
                                Secretary

Brendan McGuinness........ 51   Vice President of Sales

Colin A. Jones............ 32   Director

Greg P. Lambrecht......... 36   Director

Steven A. Lambrecht....... 47   Director

Mark Jazwin............... 33   Independent Director

Gary Sherman.............. 50   Independent Director


   JOHN E. GREENWELL has been a director and PCI's Chief Executive Officer since
March 1, 1998 and PCI's President and Chief Operating Officer since December 15,
1997. Mr. Greenwell previously was employed by The Dial Corporation from 1984 to
1996,  culminating with his position as Executive Vice President and the General
Manager of Dial's Detergent Division. He has 29 years of marketing and executive
management  experience  in the consumer  package  goods  industry.  Prior to his
Executive  Vice  President  role with The Dial  Corporation,  Mr.  Greenwell was
Senior Vice President and General Manager of Dial's Food Division. He has served
in  consumer  marketing  responsibilities  for The Dial  Corporation,  Texize (a
former  division  of Morton  Thiokol),  Drackett  (a former  division of Bristol
Myers),  the advertising agency of Leo Burnett Company and a sales position with
The Chicago  Tribune.  Mr. Greenwell has also served as a member of the Board of
Directors for the Soap & Detergent  Association and the National Food Processors
Association.  Mr.  Greenwell  received a B.S.  degree in Business  from  Indiana
University in 1969.

   SCOTT I. LAMBRECHT has been the Vice President of Operations  since August 7,
1997 and PCI's  Secretary  since March 4, 1998.  He  previously  served as PCI's
Assistant  Secretary from May 31, 1997 to March 4, 1998. He served as a director
from December 31, 1996 to February 17, 1997 and as PCI's interim  President from
December 31, 1996 to May 3, 1997. From July 1993 through December 1996 he served
as President of SDCC. Inc., a Scottsdale, Arizona general contracting firm owned
by Steve Lambrecht. He received a Bachelors degree in Construction Management in
1993 from Arizona State University in Tempe, Arizona. Scott Lambrecht is the son
of Steven A. Lambrecht and the nephew of Greg P. Lambrecht.

                                       27
<PAGE>
   JAMES B. STANLEY has been Vice  President of  Purchasing  since June 20, 1997
and PCI's  Assistant  Secretary  since March 4, 1998. From November 1996 to June
1997, he served as Purchasing Director for PCI. From May 1996 to October 1996 he
served as an Account  Executive  for Computer  Credit  Insurance  Corp. of Brea,
California in the real estate loan and mortgage insurance market.  From November
1995 to May 1996 he was an Account  Executive  for  Senior  Estate  Services,  a
Bellevue,  Washington  estate  planning and investment  firm.  From June 1994 to
November 1995 he was Operations  Manager for Promark  Armrest,  Inc. of Everett,
Washington,  a  product  development  firm.  He  has  owned  and  developed  two
successful  restaurants  in the Seattle area over the  previous  six years.  Mr.
Stanley  received  a B.A.  in  Business  Administration  from  Washington  State
University in 1985.

     BRENDAN M.  MCGUINNESS  has been the Vice  President of Sales since May 12,
1998.  Prior to that, he was a sales consultant to PCI from February 1, 1998 and
the Acting Vice President of Sales from March 3, 1998. Mr. McGuinness previously
was employed by The Dial  Corporation  from 1973 to 1997,  culminating  with his
position as the Vice President of Sales-  Personal Care Division.  Prior to that
position he was Vice President and General Manager of Dial's Commercial  Markets
Division,   which  markets  and  distributes   products   serving  the  Lodging,
Industrial,  and  Medical  classes  of  trade.  He  has  held  additional  sales
management  positions  at The Dial  Corporation,  including  Vice  President  of
National  Field Sales,  with  responsibility  for the  direction of 250 consumer
products  sales  professionals  generating  annual  sales  exceeding  $1 billion
dollars. Mr. McGuinness received a B.S. in Business from Bryant College in 1970.
He is a board member of the Arizona Chapter of the Juvenile Diabetes Foundation.

   COLIN A. JONES has been a director since May 3, 1997. He previously served as
Vice President of International  Sales from May 31, 1997 to January 16, 1998. He
has 13 years of experience  managing,  marketing and selling to the  convenience
store and grocery  store  market.  In 1985,  he founded J&M  Wholesale,  Ltd., a
British Columbia corporation which delivers various wholesale products primarily
to convenience  store  accounts in Canada.  He continues to be the President and
Chief  Executive  Officer of J&M.  Mr.  Jones  attended  Douglas  College of New
Westminster, British Columbia, Canada.

   GREG P.  LAMBRECHT  has been a director  since August 7, 1997.  He previously
served as PCI's Vice  President of National  Sales from May 31, 1997 to March 2,
1998 and as PCI's Secretary and Treasurer from May 31, 1997 to March 4, 1998. He
has 14 years of experience  managing,  marketing and selling to the  convenience
store and grocery  store  market.  In 1984,  he founded  Rose  Hearts,  Inc.,  a
Washington   company  which  delivers  various  impulse  purchase   products  in
Washington,  Oregon and California.  He graduated with a B.A. in  Communications
from Western Washington  University in 1984. Greg P. Lambrecht is the brother of
Steven A. Lambrecht and the uncle of Scott I. Lambrecht.

   STEVEN  A.  LAMBRECHT  has  been a  director  since  December  31,  1996.  He
previously  served as PCI's Chief  Executive  Officer from  December 31, 1996 to
March 1,  1998,  as  President  from May 3,  1997 to  December  15,  1997 and as
Chairman of the Board from  December 31, 1996 to June 20, 1997.  He has 24 years
of marketing and sales experience and 18 years of management experience; most of
his business experience has been in real estate development and construction. He
is the owner of Forum  Import/Export  Company,  a sole  proprietorship,  and was
co-owner of Forum  Development  and  Construction  Company,  Inc.,  a Washington
corporation.  He also owns SDCC,  Inc., an Arizona  development and construction
corporation  that he founded in 1992.  He has developed and sold over 20 million
dollars worth of real estate since 1974.  Steven A.  Lambrecht is the brother of
Greg P. Lambrecht and the father of Scott I.
Lambrecht.

                                       28
<PAGE>
     MARK JAZWIN has been an  independent  director  since January  1999.  Since
1997,  Mr. Jazwin has been the President of W.B.  McKee  Securities,  a regional
securities  broker/dealer  headquartered  in  Scottsdale.  Previously Mr. Jazwin
served W.B. McKee Securities in a variety of positions in Corporate Finance from
1995 to 1997. Prior to 1995 Mr. Jazwin was a securities  analyst at StockVal,  a
privately held research firm.  Prior to StockVal,  Mr. Jazwin worked in a branch
office of Merrill  Lynch.  He holds a Bachelors  degree in Finance  from Arizona
State University.

     GARY  SHERMAN has been an  independent  director  since  March 1999.  He is
currently  Executive  Vice  President of Heritage  West  Securities,  a regional
broker/dealer  in  Scottsdale.  Mr. Sherman has 25 years of management and sales
experience.  Since 1990, he has been  President of both W.B.  McKee  Securities,
Inc. and Owen-Joseph Asset Management. From 1976 to 1990, he served as a General
Partner  with  Boettcher  &  Company,  a NYSE  Member  headquartered  in Denver,
Colorado;  as well as Senior  Vice  President  and  Regional  Director of Kemper
Securities  after their purchase of Boettcher in 1986.  Mr.  Sherman  majored in
Finance at the University of Denver and attended the Securities Institute at the
Wharton School of Finance.

OTHER EXECUTIVES AND KEY EMPLOYEES

   STANLEY R. HALL has been the Controller  since February 7, 1998.  From April,
1997 to  February,  1998,  Mr.  Hall  served  as  Chief  Financial  Officer  and
Controller  for  Pro-Innovative  Concepts,  Inc.,  a  Phoenix,  Arizona  premium
promotion  company.  From  January,  1995 to March,  1997 he  served in  various
financial  management  and  accounting  capacities in The Dial Corp's  Household
Consumer Products Division and Corporate Controller's  department.  From 1983 to
1994,  he served as Chief  Financial  Officer and  Controller  for Hyder Jojoba,
Inc., a Phoenix-based  grower and marketer of jojoba seeds and oil. From 1981 to
1982,  he served as  Controller  for The  Thirteenth  Regional  Corporation,  an
Alaskan  Native  Corporation  based in Seattle,  WA. From 1977 to 1981, he was a
Senior  Accountant for Deloitte Haskins & Sells, a "Big Five" public  accounting
firm. Mr. Hall received a B.B.A. in accounting from the University of Washington
in 1977.  He is  licensed  as a  Certified  Public  Accountant  in the  State of
Washington  and is a  member  of the  American  Institute  of  Certified  Public
Accountants.

COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT

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

         The  following  persons did not file any Forms 4 during the fiscal year
ended December 31, 1998 and have not provided PCI with a written  representation
that no such forms were required: William Anthony and Robert Manschot.

                                       29
<PAGE>
ITEM 10 - EXECUTIVE COMPENSATION

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
                                              Other                    Securities
Name and                                     Annual     Restricted     Underlying               All Other
Principal                            Bonus   Compen     Stock Awards    Options/      LTIP        Compen-
Position          Year   Salary ($)   ($)   -sation($)     ($)          Sars (#)    Payouts ($)   sation
--------          ----   ----------   ---   ----------  -----------    --------    -----------   ------
<S>              <C>     <C>         <C>     <C>        <C>           <C>            <C>         <C>
John
Greenwell/CEO(1)  1998   144,231       --      --            --            --          --            --

Steve                     80,546                                                                   42,850
Lambrecht/CEO(2)  1998     (5)         --      --            --            --          --          (3)(4)

Greg
Lambrecht/                83,777                                                                   42,500
VP Sales          1998     (5)         --      --            --            --          --          (3)(4)

Colin Jones /VP           75,564                                                                   43,600
Int. Sales        1998     (5)         --      --            --            --          --          (3)(4)
</TABLE>

(1)     Took office March 1, 1998.

(2)     Left office March 1, 1998.

(3)     Includes $40,000 payment to settle compensation  dispute. See "Executive
        Compensation - Employment Agreements Settlement of Compensation Disputes
        with  Founders"  in PCI's Form  10-KSB  filed for the fiscal  year ended
        December 31, 1997.

(4)     Includes fees paid for attendance at Board of Directors meetings.

(5)     Includes  nine months salary for  severance  compensation  in accordance
        with terms of  employment  agreements.  See  "Executive  Compensation  -
        Employment  Agreements"  in PCI's Form 10-KSB  filed for the fiscal year
        ended December 31, 1997.

                                       30
<PAGE>
OPTION/SAR GRANTS IN LAST FISCAL YEAR

                                    Individual Grants

                       Number of      % of Total
                       Securities     Options/SARs
                       Underlying     Granted to     Exercise or
                       Options/SARs   Employees in   Base Price
      Name             Granted (#)    Fiscal Year      ($/Sh)    Expiration Date
   ---------           ---------      -----------    ----------  ---------------
John
Greenwell / CEO             --             --           --             --

Brendan
McGuinness / VP Sales   20,000            100%       $5.25             --

(1)     Options granted  pursuant to a Stock Option Agreement dated May 8, 1998.
        Options to  purchase  10,000  shares  vested on May 8, 1998.  Options to
        purchase an additional 10,000 shares vested on September 1, 1998.


                                       31
<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
                                                  Number of
                                                  Securities              Value of
                                                  Underlying             Unexercised
                                                 Unexercised             In-the-Money
                                                 Options/SARs            Options/SARs
                                                 at FY-End(#)            at FY-End ($)
                       Shares
                     Acquired on     Value       Exercisable /          Exercisable /
      Name            Exercise     Realized ($)  Unexercisable          Unexercisable
   ---------          ---------    -----------   -------------          -------------
<S>                   <C>          <C>            <C>                <C>
                                                     40,000          Not in-the-Money and
                                                   Exercisable           Exercisable
                                                     10,000          Not-in-the-Money and
John Greenwell / CEO     --          --           Unexercisable(1)      Unexercisable

Steve Lambrecht /                                    20,000          Not-in-the-Money and
Former CEO               --          --            Exercisable           Exercisable

Brendan McGuinness                                   20,000          Not-in-the-Money and
/ VP Sales               --          --            Exercisable           Exercisable

(1)     Options to  purchase  10,000  shares at $5.25 per  share,  unexercisable
        until June 30, 1999.
</TABLE>
                                       32
<PAGE>
DIRECTOR COMPENSATION TABLE
<TABLE>
<CAPTION>
                     Annual Retainer                         Consulting        Number of
Name                    Fees ($)      Meeting Fees ($)    Fees/other Fees ($)  Shares (#)
----                    --------      ----------------    -------------------  ----------
<S>                   <C>               <C>                 <C>                 <C>
William L. Anthony         --             4,650                --                 --

Robert H. Manschot         --             2,850                --                 --

David S. Hodges            --             3,150             19,200(1)             --

Atul Vashistha             --             3,600                --                 --

Steve Lambrecht            --             2,850                 --                --

Greg Lambrecht             --             2,500                 --                --

Colin Jones                --             3,600                 --                --
</TABLE>

(1)     Consulting fees paid as termination payments under a Business Consulting
        Agreement  dated  June 2, 1997 as more  fully  described  in PCI's  Form
        10-KSB filed for the fiscal year ended December 31, 1997.

EMPLOYMENT AGREEMENTS

JOHN E.  GREENWELL has an at-will  Employment  Agreement  with PCI as President,
Chief  Executive  Officer and Chief  Operating  Officer.  The initial salary was
$120,000,  but increased,  pursuant to the agreement's terms, to $150,000 a year
upon his becoming Chief  Executive  Officer on March 1, 1998.  Mr.  Greenwell is
eligible  for any bonus plan or stock  option plan  offered to other  comparable
executives  and was  granted  a bonus of  $50,000  for the  fiscal  year  ending
December 31, 1998.  At this time,  Mr.  Greenwell has agreed to defer payment of
the $50,000 bonus for the fiscal year ending December 31, 1998. Additionally, as
of January  18,  1999 and to date,  Mr.  Greenwell  has  declined  to accept any
payment for his services rendered to PCI.

CONSULTING AGREEMENTS.  During 1998, we also had arrangements with the following
consultants:

L.G. ZANGANI, INC. AND LEONARDO G. ZANGANI AGREEMENTS.  PCI entered a Consulting
Agreement,  effective  September 16, 1997,  with L.G.  Zangani,  Inc.,  which is
discussed  in further  detail in PCI's  Form  10-KSB  filed for the fiscal  year
ending December 31, 1997. On  approximately  December 2, 1998, PCI notified L.G.
Zangani, Inc. of the termination of the Consulting Agreement.

                                       33
<PAGE>
RCG CAPITAL,  INC. On or about  December 14, 1998,  RCG Capital,  Inc.  (Mr. Max
Ramras, President/CEO) entered into a Consulting Agreement with PCI to represent
PCI as its financial  public  relations  consultant  for $5,500 per month,  plus
expenses,  and the ability to purchase 100,000 restricted shares of PCI's common
stock at a price of $.01 per share.  The shares are subject to repurchase by PCI
in the event certain  incentive  goals are not achieved.  RCG Capital,  Inc. has
agreed  to pay PCI an amount  ranging  from  $0.99 to $1.49  per share  upon the
removal of any and all restrictive legends.

STANDING  ARRANGEMENTS  FOR  OUTSIDE  DIRECTOR  COMPENSATION.  PCI has  standing
arrangements to grant each outside  director options to purchase 5,000 shares of
common stock and the  Chairman  additional  options to purchase  2,500 shares of
common  stock on February 1 of each year at the market  price on the date of the
grant,  but not less than $5.25 per share,  to vest in quarterly  increments  of
1,250 (1,875 for the Chairman) and which shall be  exercisable 1 to 5 years from
the date each quarterly increment vests. The options are non-qualified. To date,
PCI has not formally granted any such options to the outside directors. PCI also
pays all outside directors,  including non-employee directors,  for all meetings
attended  (whether  regular  or  additional  meetings)  at the  rate of $350 per
meeting for  meetings of up to four (4) hours and $750 per meeting for  meetings
over four (4) hours.

ITEM 11 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

The following  tables set forth certain  information  regarding shares of common
stock  beneficially owned as of March 31, 1999 by (i) each person or group known
to PCI, which  beneficially  owns more than 5% of the common stock; (ii) each of
PCI's officers and  directors;  and (iii) all officers and directors as a group.
The percentage of beneficial  ownership is based on 3,839,092 shares outstanding
on March 31, 1999 plus, for each person or group,  any securities that person or
group has the right to acquire  within 60 days  pursuant to  options,  warrants,
conversion privileges or other rights. Unless otherwise indicated, the following
persons  have sole  voting and  investment  power with  respect to the number of
shares set forth opposite their names:

                                       34
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS

Title of     Name and Address of        Amount and Nature of      Percent
 Class        Beneficial Owner          Beneficial Ownership      of Class
 -----        ----------------          --------------------      --------

Common   John E. Greenwell                 476,600(1)               12.41%
         16216 North 63rd Place
         Scottsdale, Arizona  85254

Common   Greg P. Lambrecht                 246,770(1)(2)             6.44%
         2323 North Central Avenue
         Suite 2004
         Phoenix, Arizona  85004

Common   Steven A. Lambrecht               266,256(1)(2)             6.94%
         11259 East Via Linda
         Suite 100-102
         Scottsdale, Arizona 85259

Common   Lincoln Heritage Life             210,476(3)                5.48%
         Insurance Company
         4343 E. Camelback Rd. #400
         Phoenix, Arizona 85018

Common   Londen Insurance Group            210,476(3)                5.48%
         4343 E. Camelback Rd. #400
         Phoenix, Arizona 85018

(1)     Includes  shares  which may be  acquired  by the  exercise of options or
        warrants within 60 days as follows:  John E.  Greenwell,  40,000 shares,
        Steven A.  Lambrecht,  21,250  shares,  and Greg.  P.  Lambrecht,  1,250
        shares.  Excludes  shares  underlying  options  which are not  currently
        exercisable as follows: John E. Greenwell, 10,000 shares.

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

(3)     Represents  beneficial ownership of 20,000 shares held of record by Life
        of Boston  Insurance  Company  and of 95,057  shares  each  which may be
        acquired  directly by the exercise of stock  warrants  within 60 days by
        Lincoln  Heritage Life  Insurance  Company and Life of Boston  Insurance
        Company.  The  Londen  Insurance  Group is the sole  shareholder  of the
        Lincoln Heritage Life Insurance Company. Lincoln Heritage Life Insurance
        Company owns 79% of the shares of Life of Boston Insurance Company.

                                       35
<PAGE>
SECURITY OWNERSHIP OF MANAGEMENT

Title of     Name and Address of       Amount and Nature of          Percent
 Class        Beneficial Owner         Beneficial Ownership          of Class
 -----        ----------------         --------------------          --------

Common   Mark Jazwin                         14,226(1)                   (3)
         7702 E. Doubletree Ranch Rd.
         Suite 230
         Scottsdale, AZ 85258

Common   John Greenwell                     476,600(1)                  12.41%
         16216 North 63rd Place
         Scottsdale, Arizona

Common   Gary Sherman                        27,846(1)                   (3)
         6063 E. Cortez Drive
         Scottsdale, AZ 85254

Common   Colin Jones                        138,972                      3.62%
         7349 Via Paseo del Sur
         Suite 515-166
         Scottsdale, Arizona  85258
         V6Z-2S6

Common   Greg P. Lambrecht                  246,770(1)(2)                6.94%
         6980 East Sahuaro Drive
         Apt. 1129
         Scottsdale, Arizona 85254

Common   Steven A. Lambrecht                266,256(1)(2)                6.38%
         11259 East Via Linda
         Suite 100-102
         Scottsdale, Arizona 85259

Common   Scott I. Lambrecht                  86,250(1)(2)                2.25%
         15849 North 77th Street
         Scottsdale, Arizona 85260

Common   James B. Stanley                    26,250                      (3)
         15849 North 77th Street
         Scottsdale, Arizona 85260

Common   Brendan N. McGuinness               20,222(1)                    (3)


Common   All Officers and Directors       1,284,246(1)(2)              33.45%
             as a group (10 persons)

                                       36
<PAGE>
(1)     Includes  shares  which may be  acquired  by the  exercise of options or
        warrants within 60 days as follows:  John E.  Greenwell,  40,000 shares,
        Steven  A.  Lambrecht,  21,250  shares,  Colin  A.  Jones  and  Greg  P.
        Lambrecht,  1,250 shares each, Brendan  McGuinness,  20,000 shares, Gary
        Sherman,  9,573 shares and Mark Jazwin,  9,456 shares.  Excludes  shares
        underlying options which are not currently  exercisable as follows: John
        E. Greenwell, 10,000 shares.

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

(3)     Less than 1%.

ITEM 12 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

RESOLVING CONFLICTS OF INTEREST.

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

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

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

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

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

We currently have two independent  directors,  Mark Jazwin and Gary Sherman. Our
independent  directors  have had access,  at our  expense,  to our counsel or to
independent counsel,  and a majority of the independent  directors have ratified
all related-party transactions that are ongoing.

JONES/LAMBRECHT  NOTES  RECEIVABLE.  Colin A. Jones and Greg P.  Lambrecht  each
delivered to PCI long term promissory notes for $43,112.50.  The notes are dated
December  31,  1996,  accrue  interest  at six  percent,  and all  interest  and
principal  are due on March 31,  1999.  The notes  relate to CAN-AM  receivables
which accrued prior to PCI's acquisition of all of CAN-AM's outstanding stock on
December 31, 1996. The independent  directors have approved a one-time extension
for the  repayment of these notes to September  30, 1999.  In exchange,  Messrs.
Jones and Lambrecht have agreed to increase the interest rate for the notes from
six to ten percent.

                                       37
<PAGE>
SINGLE CIGARS, INC. As discussed in PCI's Form 10QSB filed for the quarter ended
September 30, 1998,  PCI entered into a Supplier  Agreement  with Single Cigars,
Inc., a wholly owned  subsidiary of Single Stick,  Inc.,  dated October 5, 1998,
under which  Single  Cigars,  Inc.  will  supply  little  cigars  known as Prime
Time(TM) and countertop  control units  exclusively to PCI for  distribution  by
PCI.  Greg  Lambrecht,  a  director  of  PCI,  has  entered  into  a  consulting
arrangement with Single Stick,  Inc.  Pursuant to his  relationship  with Single
Stick,  Inc.,  Greg Lambrecht will receive  consideration  including two percent
(2%) of the net collected sales price received by Single Stick,  Inc. from sales
of Prime  Time(TM)  to PCI, as well as shares of Single  Stick,  Inc. if certain
sales  criteria  are met for the  Prime  Time(TM)  product.  Additionally,  Greg
Lambrecht  received  a  retainer  and  shares of Single  Stick,  Inc.  under his
consulting  agreement with Single Stick, Inc. PCI's Board of Directors including
all of PCI's  independent  directors,  have approved the transaction with Single
Stick, Inc. and have found the terms to be fair to PCI.


ITEM 13 - EXHIBITS AND REPORTS ON FORM 8-K

   (a)   Exhibits

Exhibit
Number         Exhibit Name                                Method of Filing
------         ------------                                ----------------
3.1         Articles of Incorporation                    **

3.2         By-Laws, as amended                          ***

4.1         Specimen Common Stock Certificate            ****

4.2         Description of Rights of Security Holders    *****

10.1        Accounts Receivable Line of Credit with
            Alliance Financial Capital dated
            March 12, 1999.                              Exhibit filed herewith*

10.2        Consulting Agreement with RCG Capital, Inc.
            dated  December 14, 1998.                    Exhibit filed herewith*

27.1        Financial Data Schedule                      Exhibit filed herewith

99.1        "Underwriting" section of Registration
            Statement on Form SB-2                       ******

*       Portions of the exhibit omitted and filed separately with the Commission
        pursuant to the  Confidential  Treatment  provisions of  Regulation  ss.
        230.406.

**      Incorporated  by reference to Exhibit 3.1 of  Registration  Statement on
        Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.

                                       38
<PAGE>

***     Incorporated  by reference to Exhibit 3.2 of  Registration  Statement on
        Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.

***     Incorporated  by reference to Exhibit 4.2 of  Registration  Statement on
        Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.

****    Incorporated  by reference to Exhibit 4.1 of  Registration  Statement on
        Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.

*****   Incorporated  by reference to pages 56-57 of  Registration  Statement on
        Form SB-2 (file no. 333-29985) declared effective on August 21, 1997.

   (b)   Reports on Form 8-K

   Date of              Date
   Report               Filed                        Description
   ------               -----                        -----------
January 15, 1999    January 15, 1999    Disclosure of Proposition 65 Litigation
                                        Potential Nasdaq Delisting and Status
                                        of Financing





                                       39
<PAGE>
                                   SIGNATURES

   In accordance  with Section 13 or 15(d) of the Exchange  Act, the  registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.

PREMIUM CIGARS INTERNATIONAL, LTD.


By: /s/ John E. Greenwell
   ---------------------------------------------
   John E. Greenwell, President, Chief Executive
   Officer and Chief Operating Officer

Date: March 31, 1999

   In accordance with the Exchange Act, this report has been signed below by the
following  persons on behalf of the  registrant and in the capacities and on the
dates indicated.

         Signature                          Title                      Date
         ---------                          -----                      ----

By: /s/ John E. Greenwell        Director, President,                03/31/99
   ---------------------------   Chief Executive Officer
     John E. Greenwell           and Chief Operating Officer

By: /s/ Stanley R. Hall          Controller and principal            03/31/99
   ---------------------------   accounting officer
     Stanley R. Hall

By: /s/ Colin A. Jones           Director                            03/31/99
   ---------------------------
     Colin A. Jones

By: /s/ Greg P. Lambrecht        Director                            03/31/99
   ---------------------------
     Greg P. Lambrecht

By: /s/ Steven A. Lambrecht      Director                            03/31/99
   ---------------------------
     Steven A. Lambrecht

By: /s/ Mark Jazwin              Director                            03/31/99
   ---------------------------
     Mark Jazwin

By: /s/ Gary Sherman             Director                            03/31/99
   ---------------------------
     Gary Sherman

By: /s/ Scott I. Lambrecht       Vice President of Operations        03/31/99
   ---------------------------   and Secretary
     Scott I. Lambrecht

By: /s/ James B. Stanley         Vice President of Purchasing        03/31/99
   ---------------------------   and Assistant Secretary
     James B. Stanley

                                       40
<PAGE>
                       PREMIUM CIGARS INTERNATIONAL, LTD.
                                 AND SUBSIDIARY

                        CONSOLIDATED FINANCIAL STATEMENTS

                    For The Year Ended December 31, 1998 and
                         For The Nine Month Period Ended
                                December 31, 1997

<PAGE>
                          INDEPENDENT AUDITORS' REPORT



To The Board of Directors of
Premium Cigars International, Ltd.


We have audited the  accompanying  consolidated  balance sheet of Premium Cigars
International,  Ltd. and  Subsidiary  as of December  31, 1998,  and the related
consolidated  statements of  operations,  comprehensive  operations,  changes in
stockholders'  equity,  and cash flows for the year ended December 31, 1998, and
for the nine month period ended December 31, 1997. These consolidated  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable  assurance about whether the  consolidated  financial  statements are
free of material  misstatement.  An audit includes  examining,  on a test basis,
evidence  supporting the amounts and disclosures in the  consolidated  financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
consolidated  financial  statement  presentation.  We  believe  that our  audits
provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all material  respects,  the  financial  position of Premium  Cigars
International,  Ltd. and  Subsidiary as of December 31, 1998, and the results of
its operations,  statements of  comprehensive  income,  changes in stockholders'
equity,  and its cash flows for the year ended  December 31,  1998,  and for the
nine month period ended December 31, 1997, in conformity with generally accepted
accounting principles.

The  accompanying  financial  statements  have been  prepared  assuming that the
Company  will  continue  as a  going  concern.  As  discussed  in Note 19 to the
financial   statements,   the  Company's   significant  operating  losses  raise
substantial  doubt  about  its  ability  to  continue  as a going  concern.  The
financial  statements do not include any adjustments  that might result from the
outcome of this uncertainty.


Semple & Cooper, LLP

Phoenix, Arizona
March 18, 1999
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
                           CONSOLIDATED BALANCE SHEET
                                December 31, 1998

                                     ASSETS

Current Assets:
 Cash and cash equivalents (Notes 1 and 2)                          $   168,216
 Accounts receivable - trade, net (Note 1)                              561,259
 Notes receivable - related parties (Note 4)                            100,021
 Inventory, net (Notes 1 and 6)                                       1,325,282
 Other current assets                                                    39,106
                                                                    -----------

      Total Current Assets                                            2,193,884
                                                                    -----------

Property and Equipment, net (Notes 1 and 7)                             627,210
                                                                    -----------
Other Assets:
 Humidors, net (Note 1)                                                 888,925
 Organizational costs, net (Note 1)                                      26,536
 Deposits                                                                29,577
                                                                    -----------
                                                                        945,038
                                                                    -----------

      Total Assets                                                  $ 3,766,132
                                                                    ===========

                    LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
 Accounts payable - trade                                           $   849,748
 Accrued expenses
   - tobacco taxes                                                      103,330
   - other (Note 8)                                                     220,427
                                                                    -----------

      Total Current Liabilities                                       1,173,505
                                                                    -----------

Commitments and Contingencies: (Notes 4, 10 and 17)                          --
                                                                    -----------
Stockholders' Equity: (Note 11)
 Common stock - no par value, 10,000,000 shares
   authorized, 3,469,092 shares issued and
   outstanding                                                        8,655,339
 Additional paid-in capital                                             150,000
 Common stock warrants                                                    1,710
 Foreign currency translation adjustment (Notes 1 and 14)               (73,072)
 Accumulated deficit                                                 (6,141,350)
                                                                    -----------

Total Stockholders' Equity                                            2,592,627
                                                                    -----------

        Total Liabilities and Stockholders' Equity                  $ 3,766,132
                                                                    ===========

                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-2
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                    For The Year Ended December 31, 1998 and
                For The Nine Month Period Ended December 31, 1997


                                                                     Nine Month
                                                     Year Ended     Period Ended
                                                    December 31,    December 31,
                                                        1998            1997
                                                    -----------     -----------

Net Sales                                           $ 6,900,927     $ 3,362,275

Cost of Sales                                         5,153,947       2,798,672

Charge for inventory adjustment (Note 8)                427,830              --
                                                    -----------     -----------

Gross Profit                                          1,319,150         563,603

Selling, General and Administrative                   5,040,507       2,273,725

Officers severence                                      395,173              --

Stock Based Compensation (Note 11)                           --         110,000
                                                    -----------     -----------

Loss from Operations                                 (4,116,530)     (1,820,122)
                                                    -----------     -----------
Other Income (Expense):
 Interest income                                         96,520         113,131
 Interest expense                                           (46)        (44,272)
 Loss on sale of fixed assets and humidors              (15,492)             --
 Other                                                    9,567             918
 Foreign currency transaction loss                       (3,844)        (10,038)
                                                    -----------     -----------

                                                         86,705          59,739
                                                    -----------     -----------

Net Loss                                            $(4,029,825)    $(1,760,383)
                                                    ===========     ===========

Basic loss per Share (Note 1)                       $     (1.16)    $      (.82)
                                                    ===========     ===========

Weighted Average Number of Shares Outstanding         3,469,042       2,156,076
                                                    ===========     ===========

                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-3
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
               CONSOLIDATED STATEMENTS OF COMPREHENSIVE OPERATIONS
                    For The Year Ended December 31, 1998 and
                For The Nine Month Period Ended December 31, 1997


                                                                   Nine Month
                                                   Year Ended     Period Ended
                                                  December 31,    December 31,
                                                      1998            1997
                                                  ----------      ----------

Net Loss                                          $(4,029,825)    $(1,760,383)

Other Comprehensive Income (Loss):
  Foreign currency translation adjustment             (76,443)          3,371
                                                  -----------     -----------

Comprehensive Loss                                $(4,106,268)    $(1,757,012)
                                                  ===========     ===========


                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-4
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
           CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
                    For The Year Ended December 31, 1998 and
                For The Nine Month Period Ended December 31, 1997


                                Common Stock       Additional
                            -------------------     Paid-in   Common Stock
                            Shares       Amount     Capital     Warrants
                            ------       ------     -------     --------

Balance, March 31, 1997   1,480,500   $  419,675   $     --     $   --

Purchase of treasury
 stock                      (15,000)          --         --         --
Treasury shares issued
 for services                15,000       32,500         --         --
Additional compensation
 recorded on private
 transactions                    --       72,500         --         --
Additional capital
 contribution                    --           --    150,000         --
Shares issued in initial
 public offering, net of
 offering costs of
 $2,309,444               1,988,592    8,130,664         --         --
Proceeds from issuance
  of warrants                    --           --         --      1,710
Aggregate adjustment
 resulting from
 translation of
 financial statements
 into U.S. dollars              --           --         --         --
Net loss for the nine
 month period ended
 December 31, 1997               --           --         --         --
                          ---------   ----------   --------     ------
Balance at
December 31, 1997         3,469,092    8,655,339    150,000      1,710

Aggregate adjustment
 resulting from
 translation of
 financial statements
 into U.S. dollars              --           --         --         --
Net loss for the nine
 month period ended
 December 31, 1997               --           --         --         --
                          ---------   ----------   --------     ------
Balance at
December 31, 1998         3,469,092   $8,655,339   $150,000     $1,710
                          =========   ==========   ========     ======

                                       Foreign
                                      Currency                        Total
                           Treasury  Translation   Accumulated     Stockholders'
                            Stock     Adjustment     Deficit          Equity
                            -----     ----------     -------          ------

                          $    --    $     --    $  (351,142)     $    68,533
Balance, March 31, 1997

Purchase of treasury       (5,000)         --             --           (5,000)
 stock
Treasury shares issued      5,000          --             --           37,500
 for services
Additional compensation
 recorded on private           --          --             --           72,500
 transactions
Additional capital             --          --             --          150,000
 contribution
Shares issued in initial
 public offering, net of
 offering costs of             --          --             --        8,130,664
 $2,309,444
Proceeds from issuance         --          --             --            1,710
  of warrants
Aggregate adjustment
 resulting from
 translation of
 financial statements         --       3,371             --            3,371
 into U.S. dollars
Net loss for the nine
 month period ended            --          --     (1,760,383)      (1,760,383)
 December 31, 1997        -------    --------    -----------      -----------

Balance at                     --       3,371     (2,111,525)       6,698,895
December 31, 1997

Aggregate adjustment
 resulting from
 translation of
 financial statements         --     (76,443)            --          (76,443)
 into U.S. dollars
Net loss for the nine
 month period ended            --          --     (4,029,825)      (4,029,825)
 December 31, 1997        -------    --------    -----------      -----------

Balance at                $    --    $(73,072)   $(6,141,350)     $ 2,592,627
December 31, 1998         =======    ========    ===========      ===========

                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-5
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                    For The Year Ended December 31, 1998 and
                For The Nine Month Period Ended December 31, 1997

                                                                     Nine Month
                                                  Year Ended        Period Ended
                                                  December 31,      December 31,
                                                      1998              1997
                                                  ------------      -----------
Increase (Decrease) in Cash and
 Cash Equivalents:

Cash flows from operating activities:
 Cash received from customers                     $  6,783,202      $ 2,560,015
 Cash paid to suppliers and employees              (10,015,845)      (5,014,455)
 Interest paid                                             (46)         (44,272)
 Interest received                                      89,622           47,659
                                                  ------------      -----------

      Net cash used for operating activities        (3,143,067)      (2,451,053)
                                                  ------------      -----------
Cash flows from investing activities:
 Purchase of investments                                    --       (3,411,897)
 Proceeds from sale of investments                   3,470,471               --
 Purchase of property and equipment                   (591,647)        (201,829)
 Proceeds from sale of fixed assets                      8,284               --
 Purchase of humidors                                 (799,947)        (865,340)
 Organizational costs                                       --           (8,151)
                                                  ------------      -----------
      Net cash provided (used) by
       investing activities                          2,087,161       (4,487,217)
                                                  ------------      -----------
Cash flows from financing activities:
 Proceeds from notes payable                                --          850,000
 Payments on notes payable                                  --         (900,000)
 Proceeds from notes payable - related parties              --          150,000
 Payments on notes payable - related parties                --         (279,641)
 Proceeds from issuance of common stock                     --        8,179,214
 Proceeds from issuance of common stock warrants            --            1,710
 Contributed capital                                        --          150,000
                                                  ------------      -----------

      Net cash provided by financing activities             --        8,151,283
                                                  ------------      -----------
Effect of exchange rate changes on cash
 and cash equivalents                                  (40,243)          (6,666)
                                                  ------------      -----------
Net increase (decrease) in cash and
 cash equivalents                                   (1,096,149)       1,206,347

Cash and cash equivalents at beginning
 of period                                           1,264,365           58,018
                                                  ------------      -----------

Cash and cash equivalents at end of period        $    168,216      $ 1,264,365
                                                  ============      ===========

                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-6
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
                CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
                    For The Year Ended December 31, 1998 and
                For The Nine Month Period Ended December 31, 1997

                                                                    Nine Month
                                                   Year Ended      Period Ended
                                                  December 31,     December 31,
                                                      1998             1997
                                                  -----------      -----------
Reconciliation of Net Loss to Net Cash
 Used for Operating Activities:

Net Loss                                          $(4,029,825)     $(1,760,383)
                                                  -----------      -----------
Adjustments to reconcile net loss to net
 cash used for operating activities:
 Depreciation and amortization                        793,649          200,210
 Loss on sale of fixed assets and humidors             15,492               --
 Accrued interest added to principal of notes
   receivable - related parties                        (6,898)          (6,898)
 Stock issued for services                                 --          110,000
 Accrued interest added to available for
  sale securities                                          --          (58,574)
 Effect of changes in foreign currency                  3,844           10,038

Changes in Assets and Liabilities:
 Accounts receivable
   - trade                                             58,436         (573,178)
   - related parties                                       --            8,497
 Inventory                                            (19,542)      (1,195,921)
 Other current assets                                  22,278          (53,269)
 Deposits                                             (19,460)          (3,286)
 Accounts payable - trade                             387,296          360,735
 Accrued expenses
   - tobacco taxes                                   (299,507)         307,796
   - other                                            (48,830)         203,180
                                                  -----------      -----------

                                                      886,758         (690,670)
                                                  -----------      -----------

Net cash used for operating activities            $(3,143,067)     $(2,451,053)
                                                  ===========      ===========

                   The Accompanying Notes are an Integral Part
                    of the Consolidated Financial Statements

                                       F-7
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. Summary of Significant Accounting Policies, Nature of Operations and
   Use of Estimates:

Nature of Operations:

Premium Cigars  International,  Ltd. (the "Company") is a Corporation  organized
under  the  laws  of  the  State  of  Arizona  on  December  16,  1996.   CAN-AM
International   Investments   Corp.   (CAN-AM),   a  British  Columbia  Canadian
corporation,  was incorporated on June 20, 1996. The Company acquired all of the
outstanding  stock of CAN-AM on December 31, 1996.  The business  purpose of the
Company is the  distribution  of premium  cigars  using  countertop  humidors in
convenience stores,  grocery stores and other retail outlet markets. The Company
conducts  business  throughout  the United  States.  The Company's  wholly-owned
subsidiary, CAN-AM, operates throughout greater Canada.

Change in Year End:

The Company  elected to change its year end to December 31,  effective  with the
period ended  December 31, 1997. The Company  previously  used a March 31 fiscal
year end.  As a result  of the  change,  the  period  ended  December  31,  1997
represents a nine month period.

Principles of Consolidation:

The  consolidated  financial  statements  include the activity of Premium Cigars
International,  Ltd.,  together with its wholly-owned  subsidiary,  CAN-AM.  All
significant intercompany accounts and transactions have been eliminated.

Pervasiveness of Estimates:

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect the  reported  amounts of  assets,  and  liabilities  and  disclosure  of
contingent assets and liabilities,  at the date of the financial statements, and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.

Significant  estimates  are used when  accounting  for  allowance  for  doubtful
accounts,  inventory reserves,  depreciation and amortization,  accruals, taxes,
contingencies and sales returns,  which are discussed in the respective notes to
the consolidated financial statements.

Cash and Cash Equivalents:

Cash  equivalents are considered to be all highly liquid  investments  purchased
with a maturity of three (3) months or less.

Accounts Receivable - Trade:

Accounts  receivable  - trade  represents  amounts  earned but not  collected in
connection with the sale of cigars and cigar accessories.

The Company follows the allowance method of recognizing  uncollectible  accounts
receivable.  The allowance method recognizes bad debt expense as a percentage of
accounts receivable based on prior collection history and a review of individual
accounts  outstanding.  At  December  31,  1998 and 1997,  allowances  have been
provided for  potentially  uncollectible  accounts  receivable in the amounts of
$37,980 and $74,198, respectively.

Inventory:

Inventory  quantities and valuation were determined based upon a physical count,
and pricing of same at December  31,  1998.  Inventory is stated at the lower of
cost,   first-in,   first-out  method,  or  market.   Inventory  quantities  are
periodically  reviewed by management for spoilage,  and/or obsolescence,  and an
allowance is established to provide for same.

                                       F-8
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Summary of Significant Accounting Policies, Nature of Operations and
   Use of Estimates: (Continued)

Property and Equipment:

Property and equipment are recorded at cost. Depreciation is provided for on the
straight-line method, over the following estimated useful lives.

             Computer equipment              3 years
             Equipment                     5-7 years
             Furniture and fixtures        5-7 years

Maintenance and repairs that neither materially add to the value of the property
nor appreciably prolong its life are charged to expense as incurred. Betterments
or renewals are capitalized when incurred.  For the year ended December 31, 1998
and for the nine month period ended December 31, 1997,  depreciation expense was
$138,049 and $30,096, respectively.

Humidors:

Humidors are used to display cigars  available for sale at retail  outlets.  The
humidors are being  amortized  ratably over a two (2) year period.  For the year
ended  December 31, 1998 and for the nine month period ended  December 31, 1997,
amortization expense was $647,435 and $164,691, respectively.

Advertising Costs:

Advertising  costs are charged to operations  when incurred.  For the year ended
December  31,  1998 and for the nine  month  period  ended  December  31,  1997,
advertising expense was $120,152 and $113,596, respectively.

Organization Costs:

Organization costs consist of costs incurred in relation to the formation of the
Corporation  and its  wholly-owned  subsidiary.  These costs are being amortized
ratably  over five (5) years.  For the year ended  December 31, 1998 and for the
nine month period ended December 31, 1997,  amortization  expense was $8,165 and
$5,837, respectively.

Income Taxes:

Deferred  income taxes are provided on an asset and  liability  method,  whereby
deferred tax assets are  recognized  for deductible  temporary  differences  and
operating  loss  carryforwards.  Deferred tax  liabilities  are  recognized  for
taxable  temporary  differences.  Deferred tax assets are reduced by a valuation
allowance  when, in the opinion of  management,  it is more likely than not that
some portion or all of the  deferred  tax assets will not be realized.  Deferred
tax assets and  liabilities  are adjusted for the effects of changes in tax laws
and rates on the date of enactment.

Translation of Foreign Currencies:

Account  balances and  transactions  denominated  in foreign  currencies and the
accounts of the  Corporation's  foreign  operations  have been  translated  into
United States funds, as follows:

          Assets and  liabilities  at the rates of  exchange  prevailing  at the
          balance sheet date;

          Revenue and expenses at average exchange rates for the period in which
          the transaction occurred;

          Exchange gains and losses arising from foreign  currency  transactions
          are included in the determination of net earnings for the period;

          Exchange  gains  and  losses  arising  from  the  translation  of  the
          Corporation's  foreign  operations  are  deferred  and  included  as a
          separate component of stockholders' equity.

                                       F-9
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

1. Summary of Significant Accounting Policies, Nature of Operations and
   Use of Estimates: (Continued)

Stock-Based Compensation:

The Company has elected to follow  Accounting  Principles  Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25) and related interpretations in
accounting for its employee  stock  options.  Under APB 25, because the exercise
price of  employee  stock  options  equals or exceeds  the  market  price of the
underlying stock on the date of grant, no compensation expense is recorded.  The
Company has adopted the  disclosure-only  provisions  of  Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation (Statement
123).

Loss per Share:

Basic loss per share of common  stock was  computed by dividing  net earnings by
the weighted average number of common shares.

Diluted  earnings per share are computed based on the weighted average number of
shares of common stock and dilutive  securities  outstanding  during the period.
Dilutive  securities are options and warrants that are freely  exercisable  into
common stock at less than market exercise  prices.  Dilutive  securities are not
included in the weighted  average number of shares when inclusion would increase
the earnings per share or decrease the loss per share.

New Accounting Pronouncements:

During the nine months ended December 31, 1997, the Company adopted Statement of
Financial  Accounting  Standards  No. 128,  "Earnings per Share" (SFAS No. 128).
This pronouncement provides a different method of calculating earnings per share
than was required by APB 15,  Earnings per Share.  SFAS No. 128 provides for the
calculation  of Basic and Diluted  earnings per share.  Basic earnings per share
include no  dilution  and is computed by  dividing  income  available  to common
stockholders by the weighted average number of common shares outstanding for the
period. Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity similar to fully diluted  earnings
per share.  Due to net losses for the year ended  December 31, 1998, and for the
nine month period ended  December 31, 1997,  this statement has no effect on its
reported loss per share.

During the nine month  period  ended  December  31,  1997,  the Company  adopted
Statement of Financial  Accounting Standards No. 129, "Disclosure of Information
about Capital  Structure"  (SFAS No. 129). The new standard  reinstates  various
securities  disclosure   requirements  previously  in  effect  under  Accounting
Principles  Board Opinion No. 15, which has been superseded by SFAS No. 128. The
adoption  of SFAS  No.  129 did not  have a  material  effect  on the  Company's
financial position or results of operations.

During the year ended  December  31,  1998,  the Company  adopted  Statement  of
Financial Accounting Standards No. 130, "Reporting  Comprehensive  Income" (SFAS
No.  130).  SFAS No. 130  establishes  standards  for  reporting  and display of
comprehensive  income  and  its  components  in a full  set  of  general-purpose
financial statements. The Company's adoption of SFAS 130 did not have a material
effect on its financial position or results of operation.

During the year ended  December  31,  1998,  the Company  adopted  Statement  of
Financial  Accounting  Standards  No.  131,  "Disclosures  about  Segments of an
Enterprise  and Related  Information",  ("SFAS No. 131").  SFAS No. 131 requires
that public  companies  report certain  information  about  operating  segments,
products,  services and geographical areas in which they operate and their major
customers. The Company's adoption of SFAS No. 131 did not have a material effect
on its financial position or results of operations.

                                      F-10
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

2. Concentration of Credit Risk:

The Company maintains cash balances at various financial institutions.  Deposits
not to exceed $100,000 at U.S. financial institutions are insured by the Federal
Deposit Insurance Corporation.  Deposits not to exceed $60,000 (CAD) at Canadian
Institutions are insured by the Canadian Deposit  Insurance  Corporation.  As of
December 31, 1998 and 1997, the Company had approximately $23,500 and $1,183,000
of uninsured cash, respectively.

3. Investment Securities:

The  amortized  cost and fair  value  (based on quoted  market  prices)  of debt
securities at December 31, 1997 are shown below. Expected maturities will differ
from contractual maturities because issuers may have the right to call or prepay
obligations  with  or  without  call  or  prepayment  penalties.

                                             Securities Available-for-sale
                                             -----------------------------
                                            Amortized
                                               Cost               Fair Value
                                            ----------            ----------
      U.S. Treasury Bills                   $3,470,471            $3,470,471
                                            ==========            ==========

During the year ended  December 31, 1998, the Company  recognized  proceeds from
the sale of available for sale securities in the amount of $3,470,471.

4. Related Party Transactions:

Notes Receivable - Related Parties:

At December 31, 1998,  notes  receivable - related  parties are  comprised of 6%
interest  bearing notes from two (2) stockholders and directors in the aggregate
amount of  $100,021.  The notes and all  accrued  interest  are due on March 31,
1999.  Included in the balance at December  31, 1998 is accrued  interest in the
amount of $13,796.  In March,  1999,  the Company's  independent  members of the
Board of Directors  granted a six month  extension of time for  repayment of the
notes,  along with an increase  in the  interest  rate to ten percent  (10%) per
annum during the extension.

Notes Payable - Related Parties:

For the nine month period ended December 31, 1997, interest expense under a note
payable to a related party was $10,773.  The note was converted to a bridge note
during June, 1997 (See Note 11).

Commitments:

During the nine month period ended December 31, 1997, the Company entered into a
distributorship  agreement with Rose Hearts,  Inc.,  which is  wholly-owned by a
director of the Company,  which provides for commission  payments of ten percent
(10%) to twenty-two  percent  (22%) of the product cost to the stores.  Although
the Company has no other  written  distributor  agreements  at this time, it was
management's  belief that at the inception of the agreement the distribution fee
represented  a  reasonable  cost  if the  services  were to be  performed  by an
independent  party.  During the nine months ended December 31, 1997, the Company
incurred  approximately  $67,000 in  commission  expense  under this  agreement.
During 1998,  management  terminated the agreement  after it determined  that in
practice,  the agreement was not as favorable to the Company as those  generally
available with unaffiliated third parties.

5. Fair Value of Financial Instruments:

The fair market value of notes receivable - related parties cannot be determined
due to its related party nature.

                                      F-11
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

6. Inventory:

As of December 31, 1998, inventory consists of the following:

         Cigars                                                      $1,585,352
         Cigar accessories                                              178,066
                                                                     ----------
                                                                      1,763,418
         Less: reserve for inventory spoilage
                 and obsolescence                                      (438,136)
                                                                     ----------
                                                                     $1,325,282
                                                                     ==========
7. Property and Equipment:

At December 31, 1998, property and equipment consists of the following:

         Computer equipment                                          $  253,125
         Equipment                                                      203,568
         Furniture and fixtures                                         291,305
         Leasehold improvements                                          44,971
                                                                     ----------
                                                                        792,969
         Less: accumulated depreciation                                (165,759)
                                                                     -----------
                                                                     $  627,210
                                                                     ===========
8. Inventory Adjustment:

As of December 31, 1998 the Company had a significant investment in its non-core
inventory  items;  i.e.,  products  that were no longer  listed on the Company's
current  price  sheet.  In order to reduce  the  investment  in this  inventory,
Management  has  implemented  a strategy  to sell these  items at a  substantial
discount.  Accordingly,  as of  December  31,  1998 the  Company  recognized  an
inventory adjustment of $427,830 to write down the value of the inventory to the
lower of cost or market.

9. Income Taxes:

At December 31, 1998, the Company has available approximately $5,300,000 of U.S.
operating loss  carryforwards that may be applied against future taxable income.
In addition,  the Company has a Canadian net operating loss  carryforward in the
approximate  amount of  $480,000  (Canadian  dollars).  The  United  States  and
Canadian operating losses expire as follows:

                                                    Amount of Unused
         Expiration During                    Operating Loss Carryforwards
      Year Ended December 31,               United States         Canadian
      -----------------------               -------------         --------
               2004                          $       --          $  135,000
               2005                                  --             345,000
               2012                           1,400,000                  --
               2013                           3,900,000                  --
                                             ----------          ----------
                                             $5,300,000          $  480,000
                                             ==========          ==========

                                      F-12
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

9. Income Taxes: (Continued)

As of December 31, 1998, deferred income tax assets consist of:

         Net operating loss carryforwards                        $1,550,000
         Other                                                      100,000
                                                                 ----------
                                                                  1,650,000
                 Less: valuation allowance                       (1,650,000)
                                                                 ----------

         Total deferred taxes                                    $       --
                                                                 ==========

The Company has  established a valuation  allowance  equal to the full amount of
the deferred tax asset because the utilization of the assets is uncertain.

10. Commitments and Contingencies:

Operating Leases:

During the nine months ended  December 31, 1997,  the Company  leased office and
warehouse space in Scottsdale, Arizona. In February, 1998, the parties under the
aforementioned  lease mutually  agreed to cancel the agreement,  and the Company
entered  into a  non-cancellable  agreement  for  new  property  at a  different
location,  expiring  April 30, 2003. The terms of this lease provide for monthly
payments  ranging  from  $18,000 to $19,000.  The lease  terms also  require the
Company to pay common area  maintenance,  taxes,  and certain  other  incidental
costs.

The  Company  also  leases  office and  warehouse  space in  Vancouver,  British
Columbia  under  a  non-cancellable  operating  lease  agreement,   expiring  in
February,  2001.  The lease  requires  monthly  payments  ranging from $1,915 to
$2,170 Canadian,  and also requires the Company to pay common area  maintenance,
taxes, and certain other incidental costs.

In addition to the above,  the Company  leases  office  equipment  under various
cancellable and non-cancellable lease agreements expiring through May, 2003. The
leases require monthly payments ranging from $70 Canadian to $645 U.S.

A  schedule  of future  minimum  lease  payments  due under the above  mentioned
non-cancellable  operating lease agreements for each of the next five (5) years,
is as follows:

            Year Ending
            December 31,                             Amount
            ------------                             ------
               1999                                $  242,170
               2000                                   243,499
               2001                                   237,013
               2002                                   235,945
               2003                                    76,000
                                                   ----------
                                                   $1,034,627
                                                   ==========

For the  year  ended  December  31,  1998 and for the nine  month  period  ended
December  31,  1997,  rent  expense  under the  aforementioned  operating  lease
agreements was $281,750 and $54,628, respectively.

The schedule above  represents  future  minimum  payments for leases in both the
U.S. and Canada.  Future minimum  payments for leases  transacted in Canada have
been  translated  into U.S.  dollars,  using the  exchange  rate in effect as of
December 31, 1998.

                                      F-13
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

10. Commitments and Contingencies: (Continued)

Purchase Agreement:

In October,  1998,  the Company  entered into an  agreement  with a supplier for
product  purchases.  The  agreement  is for a period of five (5)  years  with an
automatic  five (5) year renewal.  In order for supplier to  exclusively  supply
products to the Company, the Company must satisfy the following minimum purchase
requirements:

               Year Ended
              December 31,                Cost
              ------------                ----
                 1999                 $ 3,040,000
                 2000                   7,200,000
                 2001                  15,360,000
                 2002                  20,640,000
                 2003                  28,000,000

The agreement is subject to negotiation  after the initial five (5) year period.
Payment  for the  minimum  purchase  requirements  is not  guaranteed  under the
agreement;  the Company is obligated  to pay only for  products  which have been
ordered  and  delivered.  If the  Company  fails  to meet the  minimum  purchase
requirements  the  contract  is  cancellable  at the  suppliers  option,  and if
cancelled,  the Company will  transfer to supplier all rights to the  trademarks
associated with the product.

Financial Relations Agreement:

On December 15, 1998, the Company  entered into an agreement for the performance
of various financial and public relation duties.  The agreement is for a term of
eighteen (18) months,  cancellable after nine (9) months,  with monthly payments
of $5,500. In addition to the monthly  payments,  the Company is required to pay
certain incidental and out-of-pocket costs. The agreement also requires that the
Company  sell the  provider  100,000  shares of  restricted  common  stock at an
initial price of $.01 per share; to be held by the Company. The Company may then
repurchase the stock over the life of the contract, at the original issue price,
if certain  performance  criteria are not met. No compensation has been recorded
in the accompanying  financial  statements for the year ended December 31, 1998,
pending  attainment of the performance  criteria.  If the provider  achieves the
performance  criteria,  they  have  the  right to  request  the  removal  of the
restrictive  legend from the shares. At that time the provider shall pay between
$.99 and $1.49 per share as additional consideration.

                                      F-14
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Stockholders' Equity:

Stock-Based Compensation:

During the nine month period ended  December 31, 1997,  the Company's then Chief
Executive Officer sold common stock at a price below fair market value. As such,
an additional $110,000 was recorded as compensation.

Bridge Notes:

During the nine months ended December 31, 1997, the Company obtained  $1,000,000
in bridge notes with various investors,  including two (2) related parties.  The
net proceeds on $900,000 of the debt was $810,000,  with an additional  $100,000
of related party debt  converted to bridge notes.  The bridge notes were paid in
full with the proceeds of the initial public offering. As the notes were paid in
full,  the $90,000 in loan fees was  expensed  during the  period.  For the nine
months ended December 31, 1997,  interest expense on the notes was approximately
$33,500.

The investors of the bridge  financing  were also issued  common stock  purchase
warrants (See below).

Common Stock Options and Warrants:

During the year ended December 31, 1998, the Company issued 20,000 options to an
officer of the  Company.  The  options  are  exercisable  at $5.25 per share and
expire five (5) years from the date of issuance.  As of December 31, 1998,  none
of the options have been exercised.

During the nine months  ended  December  31, 1997,  the Company  issued  257,500
options to directors and officers of the Company,  with 247,500  exercisable  at
$5.25 per share,  and 10,000  exercisable at $2.69 per share. The options expire
five (5) years from the date of issuance,  with  vesting  periods of zero (0) to
three (3) years and are  exercisable  one (1) year after the vesting date. As of
December 31, 1998, none of the options have been exercised.

During the nine month period ended December 31, 1997, the Company, in connection
with the bridge financing,  issued warrants to purchase 380,226 shares of common
stock with 361,215  exercisable  at $2.63 per share,  and 19,011  exercisable at
$5.25 per share.  The warrants  expire five (5) years from the date of issuance.
As of December 31, 1998, none of the warrants have been exercised.

During the nine month  period  ended  December  31,  1997,  the  Company  issued
underwriter warrants to purchase 170,952 shares of common stock,  exercisable at
$8.40  per  share,  expiring  five (5)  years  from the  date of  issuance,  and
exercisable  one (1) year after grant date. As of December 31, 1998, none of the
warrants have been exercised.

During the nine month period ended  December 31, 1997, the Company issued 50,000
options  to its then  public  relations  firm,  exercisable  at $8.40 per share,
expiring five (5) years from the date of issuance. The options vest ratably over
a five (5) year period and become  exercisable one (1) year after the vest date.
No value was assigned on this transaction.  As of December 31, 1998, none of the
options have been exercised.

                                      F-15
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Stockholders' Equity: (Continued)

Common Stock Options and Warrants: (Continued)

The following summarizes stock option and warrant transactions:

                                     Stock                    Weighted Average
                                    Options        Warrants    Exercise Price
                                    -------        --------    --------------
Outstanding at March 31, 1997            --             --        $     --
  Granted                           307,500        551,178            4.93
  Exercised                              --             --              --
  Expired                                --             --              --
                                    -------        -------        --------
Outstanding at December 31, 1997    307,500        551,178            4.93

  Granted                            20,000             --            5.25
  Exercised                              --             --              --
  Expired                                --             --              --
                                    -------        -------        --------

Outstanding at December 31, 1998    327,500        551,178        $   4.94
                                    =======        =======        ========

Information  relating to stock  options  and  warrants  at  December  31,  1998,
summarized by exercise price, are as follows:

        Exercise                      Weighted
         Price                        Average
          per          Number           Life           Number
         Share       Outstanding       (Years)       Exercisable
         -----       -----------       -------       -----------
         $2.63         361,215           5            361,215
         $2.69          10,000           5             10,000
         $5.25         286,511           5            280,511
         $8.40         220,952           5            220,952

All stock options  issued to employees  have an exercise price not less than the
fair  market  value of the  Company's  common  stock on the  date of  grant.  In
accordance  with  accounting  for such options  utilizing  the  intrinsic  value
method,  there is no related  compensation  expense  recorded  in the  Company's
financial statements for the year ended December 31, 1998 and for the nine month
period ended  December 31, 1997.  Pro forma  information  regarding net loss and
loss  per  share  are  required  by SFAS  No.  123.  Had  compensation  cost for
stock-based  compensation been determined based on the fair value of the options
at the grant dates consistent with the method of SFAS No. 123, the Company's net
loss and loss per share for the year ended  December  31,  1998 and for the nine
month period ended December 31, 1997, would have been increased to the pro forma
amounts presented below:
                                    Year Ended           Period Ended
                                    December 31,         December 31,
                                       1998                 1997
                                    ------------         ------------
    Net Loss:
      As reported                  $(4,029,825)         $(1,760,383)
      Pro forma                     (4,105,725)          (2,160,321)

    Loss per Share:
      As reported                  $     (1.16)         $      (.82)
      Pro forma                          (1.18)               (1.05)

The  fair  value  of the  option  grants  is  estimated  as of the date of grant
utilizing the  Black-Scholes  option-pricing  model with the following  weighted
average  assumptions for grants in 1998 and 1997 respectively;  expected life of
options  three (3)  years,  expected  volatility  of 129% and 55%  respectively,
risk-free  interest rate of 6%, and a 0% dividend  yield.  The weighted  average
fair  value  at  date  of  grant  for  options  granted  during  1998  and  1997
approximated $1.35 and $1.55, respectively.

                                      F-16
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

11. Stockholders' Equity: (Continued)

Public Offering:

During the nine month period ended December 31, 1997,  the Company  completed an
initial  public  offering  during which it sold  1,988,592  shares of its no par
value  common stock at a price of $5.25 per share,  sold under its  Registration
Statement  No.  33-29985  Prospectus  dated August 21, 1997.  Gross  proceeds of
approximately $10,440,000 were received by the Company.

Common Stock Split:

On May 31, 1997, the Company  declared a three for one (3-1) split of its common
stock.  The  accompanying  consolidated  financial  statements give  retroactive
effect to the stock split.

12. Concentrations:

Economic Dependency:

For the year ended  December 31, 1998,  the Company had two (2) suppliers  which
accounted for approximately fourteen percent (14%) and thirteen percent (13%) of
the Company's cigar purchases,  respectively.  As of December 31, 1998,  amounts
due to these suppliers included in accounts payable were  approximately  $49,480
and $50,520,  respectively.  For the nine month period ended  December 31, 1997,
the Company had three (3) suppliers  which  accounted for  approximately  twenty
percent (20%), fifteen percent (15%) and fourteen percent (14%) of the Company's
cigar purchases, respectively.

For the  year  ended  December  31,  1998 and for the nine  month  period  ended
December 31, 1997, the Company's  largest customer  accounted for  approximately
thirty-eight   (38%)  and  seventy   percent  (70%)  of  the  Company's   sales,
respectively.  As of  December  31,  1998,  there  are  accounts  receivable  of
approximately $83,120 due from this customer.

Foreign Operations:

For the  year  ended  December  31,  1998 and for the nine  month  period  ended
December  31,  1997,  the  Company's   foreign   subsidiary   recorded   revenue
representing approximately forty-six percent (46%) and thirty-nine percent (39%)
of total revenues, respectively.

13. Statements of Cash Flows:

Non-Cash Financing and Investing Activities:

During the year ended  December  31,  1998,  the  Company  recognized  financing
activities  that  affected  its  assets and  equity,  but did not result in cash
receipts or cash payments. These non-cash activities are as follows:

Accrued  interest  in the amount of $6,898 was added to the  principal  of notes
receivable - related parties.

During the nine month period ended  December  31, 1997,  the Company  recognized
investing and financing  activities  that affected its assets,  liabilities  and
equity,  but did not  result  in  cash  receipts  or  payments.  These  non-cash
activities are as follows:

          Sales of shares  of  common  stock by the  Company's  Chief  Executive
          Officer were valued at $2.50 per share,  which exceeded the cash sales
          price. Therefore, an additional $110,000 was reported as compensation.

                                      F-17
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

13. Statements of Cash Flows: (Continued)

Non-Cash Financing and Investing Activities: (Continued)

          Accrued interest in the amount of $6,898 was added to the principal of
          notes receivable - related parties.

          A related  party note payable in the amount of $100,000 was  converted
          into a bridge financing loan.

          The  Company  added  accrued  interest  to the  principal  balance  of
          available for sale securities in the amount of $58,574.

          The Company offset  $53,550 of deferred  offering costs from the prior
          year against the proceeds of the initial public offering.

14. Foreign Currency:

Foreign currency  transactions  resulted in an aggregate exchange loss of $3,844
for the year ended  December  31,  1998,  and $10,038 for the nine month  period
ended December 31, 1997. Foreign currency  translations resulted in an aggregate
exchange loss of $73,072 as of December 31, 1998, and an aggregate exchange gain
of $3,371 as of December 31, 1997.

15. Subsequent Events:

Subsequent  to December  31, 1998,  the Company was  notified by NASDAQ  Listing
Qualifications that the staff was recommending the de-listing of PCI shares from
the NASDAQ Small Cap Market,  despite the Company's  technical  compliance  with
NASDAQ's  continuing listing  requirements.  The Company intends to defend their
current listing and has scheduled a hearing with the NASDAQ later this year.

Subsequent  to December 31, 1998,  two of the  Company's  independent  directors
resigned due to the time requirements of their primary business commitments, and
two new independent directors have been appointed.

Subsequent  to December 31,  1998,  the Company  entered into an agreement  with
Alliance  Financial  Capital,  Inc.  (AFC) for the  factoring  of the  Company's
accounts  receivable.  The terms of the  agreement  provide  for a total  credit
facility of  $1,000,000 at an initial  advance rate of 80% of eligible  accounts
receivable.  The agreement is for a period of one year, and is collateralized by
various corporate assets. The agreement provides AFC with full recourse.

Subsequent to December 31, 1998, the Company  executed a settlement and covenant
not to execute  agreement  with several  individuals  regarding a lawsuit  filed
against the Company in relation to an automobile  accident involving an employee
of the Company.  The Company was effectively  released from any obligation under
the agreement.

16. Year 2000 Issue: (Unaudited)

Like other  companies,  the Company could be adversely  affected if the computer
systems it, its suppliers or customers use do not properly process and calculate
date-related  information  and data from the period  surrounding  and  including
January 1, 2000. This is commonly known as the "Year 2000" issue.  Additionally,
this issue could  impact  non-computer  systems and devices  such as  production
equipment,  elevators,  etc. At this time,  the Company does not believe that it
will incur any material expenditures to identify and replace, as necessary,  any
Y2K  non-compliant  systems.  It does not anticipate any material  effect to its
business from any non-compliant Company owned systems;  however, it is unable at
this time to determine  what, if any, effect on its business will occur from any
third parties non-compliant systems. It expects to be better able to assess this
uncertainty as it obtains more Y2K information from these parties.

                                      F-18
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

17. Litigation Matters:

At December 31, 1998,  the Company is involved in litigation  with an individual
who alleges that the Company  violated the  requirements  of  Proposition  65, a
California Statutory Scheme which requires that manufacturers,  distributors and
retailers of certain  products  provide  warnings to consumers of the  potential
harm which may result from the  consumption  of those  products.  The  complaint
seeks unspecified  statutory penalties along with costs and attorney's fees. The
Company  intends to vigorously  contest the case.  The  Company's  legal counsel
cannot estimate a reasonable range for potential  outcome at this time. As such,
no amount has been accrued for any potential loss as of December 31, 1998 in the
accompanying financial statement.

18. Segment Information:

The Company's  products and services are broken down in the following  divisions
for financial reporting purposes:

(1)  Premium Cigars (U.S. Operations)
(2)  Can-Am (Canadian Operations)

Following is selected segment information:
<TABLE>
<CAPTION>
                                                          Nine Month Period
                Year Ended December 31, 1998           Ended December 31, 1997
                ----------------------------           -----------------------
               Premium                               Premium
               Cigars       Can-am      Total        Cigars        Can-am       Total
               ------       ------      -----        ------        ------       -----
<S>          <C>          <C>         <C>          <C>           <C>          <C>
Sales, Net   $3,697,338   $3,203,589  $6,900,927   $2,044,587    $1,317,688   $3,362,275

Interest
  Income         96,520           --      96,520      113,131            --      113,131

Interest
  Expense            --           46          46       33,489        10,783       44,272

Depreciation
  and Amort-
  ization       593,081      200,568     793,649      164,163        36,047      200,210

Operating
  Loss        3,759,310      357,220   4,116,530    1,739,172        80,950    1,820,122
</TABLE>

                                      F-19
<PAGE>
                PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

                              December 31, 1998
                              -----------------
                     Premium
                      Cigars        Can-Am          Total
                    ---------      ---------      ---------
Total Assets        2,475,543      1,290,589      3,766,132
                    =========      =========      =========

During  the year ended  December  31,  1998,  Premium  Cigars  and  Can-Am  made
disbursements  for the  purchase of fixed  assets and humidors in the amounts of
$807,509 and $ 584,085, respectively.

19. Going Concern:

The  accompanying  financial  statements  have been prepared in conformity  with
generally accepted accounting principles, which contemplates continuation of the
Company as a going  concern.  However,  the  Company  has  sustained  continuing
operating losses.

As shown in the  accompanying  statements of operations the Company has incurred
net losses of $4,029,825 and $1,760,383,  for the year and the nine month period
ended December 31, 1998 and 1997, respectively. Unaudited information subsequent
to  December  31, 1998  indicates  that the losses are  continuing,  albeit at a
reduced rate.

The above  conditions  indicate  that the  Company  may be unable to continue in
existence.  The financial  statements do not include any adjustments relating to
the recoverability and classification of recorded asset amounts,  or the amounts
and  classification of liabilities that might be necessary should the Company be
unable to continue in existence.

Management  has  implemented  a plan to  address  the  operating  losses and the
resultant  need  for  additional  capital.  The  following  highlights  the  key
components of this plan:

+    The Company has  introduced  a new product line of small,  flavored,  tubed
     cigars targeted at the convenience store market. This new product will also
     allow the company to pursue channels of distribution (casinos, bars, liquor
     stores, bowling alleys, etc.) that were not previously available to it.
+    A small, disposable humidor has been developed which will allow the Company
     to place humidified cigars in smaller  convenience stores where a full size
     humidor would be space prohibitive.
+    An  e-commerce  site was  opened in March  1999  which  will  leverage  the
     Company's core  competencies - knowledge of the convenience  store industry
     and its integrated order processing and shipping systems.
+    The Company  raised  $135,000  during the first quarter of 1999 through the
     sale of  restricted  stock.  The  Board of  Directors  has  authorized  the
     issuance of up to an additional $200,000 in stock.
+    The Company obtained a $1,000,000 accounts receivable  financing package in
     March 1999 that will enable it to turn its  receivables  into cash  quicker
     than the current operating cycle allows. In addition, the Company continues
     to explore  financing  alternatives  for its  inventory  and  furniture and
     fixtures.
+    The  Company  reduced  its U.S.  personnel  headcount  by 50%  based on its
     changing business needs.
+    The Company is exploring  alternatives  to sell some of its assets in order
     to raise additional capital.

                                      F-20