-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NoQIpy9/WyxFCfpneIzXlfs6XvtAFOccP+SfSivcAoB4m9eIGKQSvFAJ1Rxoysj3 BlEsPlPckYT8XJTJN2RCdw== 0000950147-97-000554.txt : 19970815 0000950147-97-000554.hdr.sgml : 19970815 ACCESSION NUMBER: 0000950147-97-000554 CONFORMED SUBMISSION TYPE: SB-2/A PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19970814 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: PREMIUM CIGARS INTERNATIONAL LTD CENTRAL INDEX KEY: 0001041479 STANDARD INDUSTRIAL CLASSIFICATION: TOBACCO PRODUCTS [2100] IRS NUMBER: 860846405 FILING VALUES: FORM TYPE: SB-2/A SEC ACT: 1933 Act SEC FILE NUMBER: 333-29985 FILM NUMBER: 97663884 BUSINESS ADDRESS: STREET 1: 15651 N 83RD WAY STREET 2: SUITE 3 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 BUSINESS PHONE: 6029228887 MAIL ADDRESS: STREET 1: 15651 N 83RD WAY STREET 2: SUITE 3 CITY: SCOTTSDALE STATE: AZ ZIP: 85260 SB-2/A 1 AMENDMENT TO REGISTRATION STATEMENT ================================================================================ As filed with the Securities and Exchange Commission on August 14, 1997 Registration No. 333-29985 Securities and Exchange Commission Washington, D.C. 20549 Form SB-2/A Amendment No. 3 Registration Statement under the Securities Act of 1933 PREMIUM CIGARS INTERNATIONAL, LTD. (Exact name of registrant as specified in its charter) Arizona 2121 86-0846405 (State or jurisdiction of (Primary Standard Industrial (IRS Employer incorporation or organization) Classification Code Number) Identification No.) Premium Cigars International, Ltd. Steven A. Lambrecht, CEO 15651 North 83rd Way, Suite 3 15651 North 83rd Way, Suite 3 Scottsdale, Arizona 85260 Scottsdale, Arizona 85260 (602) 922-8887 (602) 922-8887 (Address, including zip code, and (Name, address, and telephone telephone number, including, area code, number of agent for service) of registrant's principal executive office) Copies to: Charles R. Berry, Esq. Christian J. Hoffmann, III, Esq. Michael F. Patterson, Esq. Streich Lang, P.A. Titus, Brueckner & Berry, P.C. Renaissance One 7373 North Scottsdale Road, Suite B-252 Two North Central Avenue Scottsdale Centre Phoenix, Arizona 85004-2391 Scottsdale, Arizona 85253 (602) 229-5200 (602) 483-9600 Approximate date of proposed sale to the public: As soon as practical on or after the effective date of this Registration Statement. If any securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, check the following box. [X] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [ ] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [ ] Calculation of Registration Fee ==========================================================================================================
Proposed Proposed Amount Title of each Number of Offering Maximum of class of securities Securities to be Price Per Aggregate Registration to be registered Registered Share(1) Offering Price(1) Fee - ---------------------------------------------------------------------------------------------------------- Common Stock, no par value ...... 2,185,000(2) $5.25 $11,471,250 $ 3,476.14 - ---------------------------------------------------------------------------------------------------------- Representative's Warrants ...... 170,952(3) $ .01 $ 1,710 $(4) - ---------------------------------------------------------------------------------------------------------- Common Stock, no par value ...... 170,952(5) $8.40 $ 1,435,997 $ 435.15 - ---------------------------------------------------------------------------------------------------------- TOTALS ........................ $12,908,957 $ 3,911.29(6) ========================================================================================================== (1) Estimated solely for purposes of computing the registration fee pursuant to Rule 457. (2) Includes 285,000 additional shares of Common Stock which the underwriter has the right to purchase to cover over-allotments, if any. (3) Representative's warrants exercisable at 160% of the offering price. Excludes over-allotments, if any, and includes 19,048 bridge warrants issued to William B. McKee, which are exercisable at $5.25 per share. (4) Pursuant to Rule 457(g) no fee is being paid. (5) Issuable upon exercise of representative's warrants. (6) $4,158.49 was paid with our initial filing.
The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. ================================================================================ PREMIUM CIGARS INTERNATIONAL, LTD. CROSS-REFERENCE SHEET
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS - ----------------------------------- --------------------------------- 1. Front of Registration Statement and Outside Front Cover Page of Prospectus ... Outside Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus ...................... Inside Front and Outside Back Cover 3. Summary Information and Risk Factors . Prospectus Summary; Risk Factors 4. Use of Proceeds .......................... Use of Proceeds 5. Determination of Offering Price .......... Outside Front Cover Page 6. Dilution ................................. Dilution 7. Selling Security Holders ................ Not Applicable, but see Interim Financing -- Delayed Offering By Warrant Holders 8. Plan of Distribution ..................... Outside Front Cover Page; Underwriting 9. Legal Proceedings ........................ Legal Matters 10. Directors, Executive Officers, Promoters and Control Persons ...................... Management; Principal Shareholders 11. Security Ownership of Certain Beneficial Owners and Management .................... Principal Shareholders; Certain Transactions 12. Description of the Securities ............ Description of Securities 13. Interests of Named Experts and Counsel ... Legal Matters; Experts 14. Disclosure of Commission Position on Indemnification for Securities Act Liabilities .......................... Management 15. Organization Within Last Five Years ...... Management; Principal Shareholders; Certain Transactions 16. Description of Business .................. Prospectus Summary; Business 17. Management's Discussion and Analysis or Plan of Operations .................... Management's Discussion and Analysis of Financial Conditions and Results of Operations 18. Description of Property .................. Business
PREMIUM CIGARS INTERNATIONAL, LTD. CROSS-REFERENCE SHEET (Continued)
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS - ----------------------------------- --------------------------------- 19. Certain Relationships and Related Transactions ............................. Certain Transactions 20. Market for Common Equity and Related Stockholder Matters ..................... Outside Front Cover Page; Risk Factors 21. Executive Compensation .................. Management 22. Financial Statements .................. Financial Statements 23. Engagement of Independent Accountants .... Engagement of Independent Accountants
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. SUBJECT TO COMPLETION DATED AUGUST 14, 1997 Initial Public Offering Prospectus [***PCI logo***] 1,900,000 shares of Common Stock $5.25 per share We distribute moderately ------------------------------------------ priced premium cigars and The Offering other cigars, which are sold ------------------------------------------ from our humidors placed primarily in convenience Per Share Total stores in the United States ---------- --------- and Canada. Public Price .... $ 5.25 $9,975,000 Underwriting This is our initial public discounts .... $ .525 $ 997,500 offering, and no public market Proceeds to PCI .. $4.725 $8,977,500 currently exists for our ------------------------------------------ shares. The offering price may not reflect the market price From the net proceeds, we expect to pay of our shares after the offering expenses of $674,250. The offering. underwriters have a right to purchase up to 285,000 additional shares. For --------------------- indemnification and other arrangements with the underwriters, see "Underwriting" at page 56. Proposed Trading Symbols: --------------------- NASDAQ SmallCap Market(SM) -- PCIG Boston Stock Exchange -- PCI Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved This Investment Involves a these securities, or determined if this High Degree of Risk. You Prospectus is truthful or complete. Any Should Purchase Shares Only If representation to the contrary is a You Can Afford a Complete criminal offense. Loss. See "Risk Factors" Beginning on Page 5. --------------------- Underwriting: Firm Commitment W.B. MCKEE SECURITIES, INC. KASHNER DAVIDSON SECURITIES CORP. August , 1997 IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS OF THIS INITIAL PUBLIC OFFERING MAY EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE SHARES AT LEVELS ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH STABILIZATION, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME. [INSIDE FRONT COVER] [picture of typical PCI plexiglass humidor with magazine rack and magazine typically sold from rack as used in convenience stores] [caption:] Typical plexiglass humidor with magazine rack used in convenience stores. [lit cigar in background (no caption)] ii [INSIDE FRONT COVER FOLD OUT] [pictures of five-SKU and three-SKU hand-crafted wood humidors with magazine racks and typical cigar-related magazines sold from racks] [caption:] Typical five-SKU and three-SKU wood humidors with magazine racks and magazines. [picture of clerk with on-counter humidor in convenience store] [caption:] Typical location of humidor and magazine rack in convenience store. [picture of 7-Eleven(TM) advertisement currently appearing in cigar aficionado(tm) magazine featuring PCI cigar] [caption:] Advertisement currently appearing in Cigar Aficionado(TM) magazine featuring PCI cigar. [PCI logo (no caption)] [picture of lit cigar in background (no caption)] [flat reproduction of six pci-designed cigar bands] [caption:] PCI-designed cigar bands. iii PROSPECTUS SUMMARY This summary highlights selected information contained elsewhere in this prospectus. It is not complete and may not contain all of the information that is important to you. To understand this offering fully, you should read the entire prospectus carefully, including the risk factors and financial statements. PCI Offices: Premium Cigars International, Ltd. ("PCI") , Suite 3, 15651 North 83rd Way, Scottsdale, Arizona 85260, telephone (602) 922-8887, or toll-free at (888) 724-1001. Our Business: We distribute cigars throughout the United States and Canada. We had placed our PCI Cigar Program, which includes supplying humidors, cigars, service and information, in over 2,615 stores as of July 31, 1997. We are currently expanding with national retail and distribution accounts in both the United States and Canada. Our goal is to place our PCI Cigar Program in every convenience, gas and high-traffic retail outlet. Our Concept: Premium cigars are a luxury item and are often purchased on impulse. We seek to capitalize on the recent growth of the premium cigar market by introducing our PCI Cigar Program to additional locations. Based on reports by the Cigar Association of America, following several decades of decline, premium cigar sales in the United States increased by 10.7% in 1993, 14.5% in 1994, 30.5% in 1995 and 67.0% in 1996. The PCI Cigar Program: Our complete PCI Cigar Program includes: o imported, hand-rolled short, medium and long-leaf filler premium cigars from the Dominican Republic, Honduras, Mexico, Nicaragua and the Philippines; o domestic machine-made mass market cigars; o in-store, countertop, custom made, hand-crafted wood and plexiglass humidors; o training materials and telemerchandising support to individual stores; o point-of-purchase information cards and cigar magazine racks; o telemerchandising for order fulfillment; o large, "walk-in" humidors for distribution center cigar inventory storage; and o spokesman relationship with Arie Luyendyk, the recent winner of the Indianapolis 500. 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); AM/PM(TM); Circle K(TM); Associated Grocers; SuperValu(TM)(1); and stores supplied by the McLane Company. Our Cigars: We distribute name-brand and our own private-label cigars from our humidors. Premium cigars generally retail from $1 to more than $20. We distribute low to medium-priced premium cigars, primarily in the $1 to $8 price range. We also distribute mass market cigars at around $1. Our History: Because premium cigars require special care (including humidified storage) and knowledgeable sales personnel, they were traditionally sold only in tobacco specialty shops. In June 1996, Colin Jones and Greg Lambrecht, our Vice Presidents of International and National Sales, developed their concept of - -------------- (1) Believed to be trademarks of third parties. We have no ownership interest in any of the intellectual property indicated by trademark or service mark symbols in this prospectus. 1 selling premium cigars from in-store humidors through convenience stores, grocery stores, and other retail outlets. They introduced the concept through their wholly-owned companies J&M and Rose Hearts (see below) first in Canada and then in the northwest United States. CAN-AM; Rose Hearts; In December 1996, we acquired all of the outstanding And J&M: stock of CAN-AM International Investments Corp., a British Columbia (Canada) corporation. CAN-AM had previously acquired the cigar distribution operations, including cigar accounts, humidors and inventory, of Rose Hearts, Inc., a Washington corporation wholly-owned by Greg Lambrecht, and J&M Wholesale, Ltd., a British Columbia (Canada) corporation wholly-owned by Colin Jones. J&M began distributing cigars in convenience stores in Vancouver, B.C., Canada in June 1996. Rose Hearts began its cigar distribution in Seattle, Washington in late summer 1996. Current Operations: Currently, we distribute cigars to over 2,615 convenience stores and other retailers in: Canada: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. United States: Washington, Oregon, California, Arizona, Kansas, Missouri, Utah, Idaho, Alaska, Nevada, Oklahoma, Texas, Maryland, Virginia, Colorado, Illinois, Michigan, Wisconsin, Nebraska, Georgia, Montana, Florida, Massachusetts, Connecticut, New York, New Jersey, Rhode Island, New Mexico, Pennsylvania, North Carolina, Louisiana, Alabama, Mississippi and Arkansas. We have established our PCI Cigar Program to supply cigars and in-store humidors for direct shipments and delivery and in-store merchandising in convenience stores affiliated with certain national chains. In most instances we have "master" agreements with, have negotiated and approved standard form retailer agreements with, or have other arrangements with, these national accounts. We have developed relationships with several cigar suppliers and are expanding our sources for cigars and accessories. The Offering
Securities offered ........................... 1,900,000 shares Shares outstanding at August 14, 1997 ........ 1,480,500 shares Shares to be outstanding after the offering ... 3,380,500 shares Warrants outstanding at August 14, 1997 .... 380,954 Common Stock purchase warrants Total public price ........................... $9,975,000 Underwriters' discount ..................... $ 997,500 Net proceeds ................................. $8,977,500 Estimated offering expenses .................. $ 674,250 Over-allotment .............................. Up to 285,000 shares; if the full over-allotment is purchased by the underwriters, the total public offering price, underwriting discount, and net proceeds will be $11,471,250; $1,147,125; and $10,324,125, respectively. Use of proceeds .............................. We intend to use offering proceeds to expand the PCI Cigar Program by purchasing humidors, cigars and accessories; repaying indebtedness; funding sales and marketing and providing working capital. Risk factors ................................. Investing in our shares is very risky, and you should be able to bear a complete loss of your investment. See "Risk Factors."
2 SUMMARY CONSOLIDATED FINANCIAL INFORMATION The following financial information reflects the operations of PCI (and its predecessor operations) for the period from June 1, 1996 to March 31, 1997 and for the three month period ended June 30, 1997 (unaudited). This summary financial information has been derived from the consolidated financial statements of PCI and subsidiary which appear later in this prospectus. This data should be read in conjunction with those consolidated financial statements and related notes.
June 1, 1996 to March 31, 1997 3 Months ended June 30, 1997 ------------------------------- ---------------------------- Historical Pro Forma Historical Pro Forma --------------- ------------- ------------- ------------ (Unaudited) (Unaudited) (Unaudited) Consolidated Statements of Operations: Sales .............................. $ 845,571 $ 845,571 $ 628,180 $ 628,180 Cost of sales ..................... 643,790 643,790 481,677 481,677 ----------- ---------- ---------- ---------- Gross profit ........................ 201,781 201,781 146,503 146,503 Selling, general and administrative(1) 323,776 551,276 327,439 357,439 Stock based compensation ............ 57,625 57,625 110,000 110,000 ----------- ---------- ---------- ---------- Loss from operations ............... (179,620) (407,120) (290,936) (320,936) Interest expense and miscellaneous(2) .................. 21,522 1,722 (31,233) -- ----------- ---------- ---------- ---------- Net loss ........................... $ (201,142) $ (408,842) $ (322,169) $(320,936) =========== ========== ========== ========== Weighted average shares outstanding(3) ..................... 1,480,500 3,742,406 1,480,500 3,742,406 =========== ========== ========== ========== Loss per share ..................... $ (.14) $ (.11) $ (.22) $ (.09) =========== ========== ========== ==========
June 30, 1997 ----------------------------------- Historical Pro Forma(3) -------------- ------------------ (unaudited) (unaudited) Consolidated Balance Sheet Data: Working capital ........................ $ 244,851 $ 8,708,557 Total assets ........................... $1,412,202 $ 9,582,955 Total liabilities ..................... $1,410,838 $ 410,838 Accumulated deficit ..................... ($ 523,311) ($ 605,811)(4) Shareholders' equity ..................... $ 1,364 $ 9,172,117 Net tangible book value per share ...... ($ .22) $ 2.44 - ---------- (1) Pro Forma includes additional executive compensation and management fees pursuant to executive compensation agreements. (See "Management -- Executive Compensation".) (2) Pro Forma assumes repayment of indebtedness as specified in Use of Proceeds. (3) Pro Forma assumes issuance of 1,900,000 shares in the offering and conversion of bridge warrants into 361,906 shares of Common Stock, and assumes no exercise of 19,048 bridge warrants held by William B. McKee. (4) Includes an adjustment to expense the remaining $82,500 of deferred costs of the bridge financing. 3 WHERE YOU CAN GET MORE INFORMATION At your request, we will provide you, without charge, a copy of any information incorporated by reference in this prospectus. If you want more information, write or call us at: Premium Cigars International, Ltd. Suite 3 15651 North 83rd Way Scottsdale, Arizona 85260 Telephone: (602) 922-8887 Toll Free: (888) 724-1001 Fax: (602) 922-8656 Our fiscal year ends on March 31. We intend to furnish our shareholders annual reports containing audited financial statements and other appropriate reports. In addition, we intend to become a reporting company and file annual, quarterly and current reports, proxy statements or other information with the SEC. You may read and copy any reports, statements or other information we file at the SEC's public reference room in Washington D.C. You can request copies of these documents, upon payment of a duplicating fee, by writing to the SEC. Please call the SEC at 1-800-SEC-0330 for further information on the operation of the public reference rooms. Our SEC filings are also available to the public on the SEC Internet site at http\\www.sec.gov. Special Note Regarding Forward-looking Statements Some of the statements contained in this prospectus, including information incorporated by reference, discuss future expectations, contain projections of results of operation 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 projections include, for example, o the success or failure of our efforts to implement our business strategy; o our ability to raise sufficient capital to purchase cigars and humidors to meet any unanticipated increase in the aggressive "roll-out" schedules required by our contracts and commitments with stores and distributors; o the effect of a settlement announced June 20, 1997 of litigation among 40 States and major U.S. tobacco companies; o our ability to buy quality premium cigars at favorable prices; o our ability to negotiate and maintain favorable distribution arrangements with stores affiliated with major national convenience store chains; o the effect of changing economic conditions; o any decision by major retail chains to remove all tobacco products from their shelves or place our humidors in a disadvantageous location within their stores; o changes in government regulations, tax rates and similar matters; o our ability to attract and retain quality employees; o the decline in popularity of cigar smoking; and o other risks which may be described in our future filings with the SEC. We do not promise to update forward-looking information to reflect actual results or changes in assumptions or other factors that could affect those statements. 4 RISK FACTORS Investing in PCI's Shares is very risky. You should be able to bear a complete loss of your investment. You should carefully consider the following factors, among others. Recently Organized PCI was organized in December 1996 and acquired a cigar Business; Losses distribution business which began in June 1996. PCI, During Start-up its subsidiary CAN-AM, and the predecessor cigar Operations. distribution operations of J&M and Rose Hearts, incurred losses of $201,142, or $.14 per share, on revenues of $845,571, for the period from June 1, 1996 (inception) We have incurred to March 31, 1997. We lost an additional $322,169, or losses since we $.22 per share, on revenues of $628,180, for the quarter began doing ended June 30, 1997. The rapid expansion in our accounts business. since March has substantially increased our expenses, and we have not yet realized increased revenues. Our ability to operate profitably depends on increasing our sales and distribution outlets, achieving sufficient gross profit margins, and a continuing demand for premium cigars. PCI is also subject to business risks associated with new business enterprises. We cannot assure you that PCI will operate profitably. See "Selected Historical and Pro Forma Consolidated Financial Information"; "Management's Discussion and Analysis of Results of Operations." We have met Our operations were financed to March 31, 1997 through capital needs private placements of our shares in 1997, which with private generated net proceeds of approximately $212,050. From sales of April to June 1997, we obtained debt financing by securities. issuing bridge notes which generated net proceeds of $810,000, virtually all of which was used to expand operations. We have no plans to obtain additional outside capital after we complete this offering. However, we cannot assure you that we will not need additional funds or that any needed funds will be available, if at all, on acceptable terms. If we need additional funds, our inability to raise them will have a very adverse effect on our operations. If we raise funds by selling equity securities, sales may dilute your share ownership. See "Management's Discussion and Analysis of Results of Operations." 40-State Tobacco Over 40 States have filed lawsuits against the major Litigation -- United States cigarette manufacturers to recover Proposed Settlement. billions of dollars in damages, primarily to recover costs of medical treatment for smokers on Medicaid. On June 20, 1997 the Attorneys General of 40 States and the The effect, if manufacturers announced a proposed settlement of any, of this lawsuits filed by these States. The proposed settlement, settlement on which will require that the United States Congress take the cigar industry certain action, is complex and may change significantly is uncertain. or be rejected. However, the proposal would significantly change the way United States cigarette and tobacco companies do business. Among other things: the tobacco companies will pay hundreds of billions of dollars; the FDA could regulate nicotine as a drug; class action lawsuits and punitive damages would be banned; cigarettes and smokeless tobacco could only be sold behind store counters, with no self-service; and tobacco billboards and sporting event sponsorships would be prohibited. The potential impact, if any, of the settlement and related legislation on the cigar industry is uncertain. See "Business -- Government Regulation; Tobacco Industry Litigation." 5 Florida trial; On August 1, 1997 the first trial of a State lawsuit Mississippi began in Florida. Pending approval of the 40-State settlement. settlement, the State of Mississippi announced a separate settlement agreement under which it will receive nearly $4 billion even if the 40-State Settlement is not approved. See "Business -- Government Regulations; Tobacco Industry Litigation." Extensive and The tobacco industry in general has been subject to Increasing extensive federal, state and local regulation and Regulation and taxation. Recent trends have increased regulation and Taxation of taxation of the tobacco industry. Although regulation Tobacco Products. initially focused on cigarette manufacturers, it has begun to have a broader impact on the industry as a whole, and may focus more directly on cigars in the future. Cigars are subject to federal excise taxes which vary according to the type and weight of the cigar. The recent increase in popularity of cigars could lead to an increase in regulation and taxation of cigars. Federal legislation The "balanced budget" legislation recently approved by has been approved Congress and signed by President Clinton on August 5, and proposed to 1997, increases taxes on each pack of cigarettes by 10\c regulate many in 2000 and by another 5\c in 2002. A variety of bills aspects of the relating to tobacco issues have been introduced in the tobacco industry. U.S. Congress, including bills that would: o prohibit the advertising and promotion of all tobacco products or restrict or eliminate the deductibility of tobacco advertising expenses, o increase labeling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins, o shift regulatory control of tobacco products and advertisements from the U.S. Federal Trade Commission (the "FTC") to the U.S. Food and Drug Administration (the "FDA"), and o require tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases. Hearings have been held on certain of these proposals; however, to date, none of these proposals has been passed by Congress. If enacted, these or similar proposals may adversely affect our results of operations or financial condition. See "Business -- Government Regulations." State and local A majority of states restrict or prohibit smoking in regulation and certain public places and restrict the sale of tobacco taxation of products to minors. Local legislative and regulatory smoking is bodies have increasingly moved to curtail smoking by pervasive and prohibiting smoking in certain buildings or areas or by increasing, and requiring designated "smoking" areas. Several states public pressure currently prohibit self-service sales or restrict for more point-of-sale placement of tobacco products. Further regulation exists. restrictions of a similar nature could have a substantial adverse effect on our sales or operations, such as banning self-service sales, counter access to, or display of, cigars. 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. 46 states currently tax cigars at rates ranging from 2% to 75%, and cigars are subject to local taxes as well. The number of states taxing cigars and the rates of taxation are likely to increase. In addition to governmental restrictions, certain retailers may voluntarily stop selling all tobacco products, including cigars, because of public pressure. 6 Warning labels; Although federal law has required health warnings on Second-hand smoke. cigarette packs since 1965 and on smokeless tobacco since 1986, there is no federal law requiring that cigars or their containers carry those warnings. California requires "clear and reasonable" warning to consumers who are exposed to chemicals determined by the state to cause cancer or reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Similar legislation has been introduced in other states, but did not pass. We cannot assure you that other states will not enact similar legislation. Federal and state legislatures have also considered the consequences of tobacco smoke on others who do not smoke (so called "second-hand" smoke). If regulations relating to second-hand smoke are adopted, these regulations may have a substantial adverse effect on our results of operations or financial condition. Canadian federal The Canadian government recently enacted substantial and provincial restrictions on the promotion and retail display of laws and tobacco products. The Canadian government may supplement regulations. the new legislation with implementing regulations and provincial governments may add other regulations and restrictions on tobacco products. Each Canadian Province taxes cigars at rates which vary from 45% to 95% of retail selling prices. New laws and potential additional regulations could adversely affect our Canadian business. See "Business -- Government Regulations -- Canadian Regulations -- Canadian Taxes." Possible additional Increased cigar consumption and its publicity may regulation. increase the risk of additional regulation. Recently an anti-tobacco organizational and health panel asked the FDA to regulate cigars in the same manner as cigarettes. We cannot predict the ultimate content, timing or effect of any additional regulation of tobacco products by any federal, state, local or regulatory body. Future legislation, regulation or tax policies may have a significant adverse effect on the ability of cigar manufacturers or distributors, including PCI, to generate revenues and profits. See "Business -- Government Regulation; Tobacco Industry Litigation." Dependence on One Corporate and franchise stores affiliated with The Customer Store Group. Southland Corporation ("Southland USA") and Southland Canada, Inc. ("Southland Canada") (collectively "7-Eleven") accounted for over 82% of our sales in the fiscal year ended March 31, 1997. Since then, we have 7-Eleven stores expanded our customer base, but sales to 7-Eleven stores comprise 79% still accounted for over 79% of our sales for the of our sales. quarter ended June 30, 1997. We expect that sales to 7-Eleven stores will continue to be a substantial percentage of our sales. Our plans for the coming year include rapidly expanding the number of 7-Eleven stores participating in our PCI Cigar Program. PCI, Southland USA, or any U.S. franchisee has the right to terminate our agreement for any reason upon 60 days notice. Southland Canada can terminate its arrangement with us at any time without notice. Problems with 7-Eleven stores, our major customer in Canada and the United States, could have a serious 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. See "Business -- Our Largest Customer -- Canadian Sales; CAN-AM -- U.S. Sales." 7 Nature of Convenience We have "master" agreements and other arrangements with Store Distribution corporate offices of several major convenience store Relationships. chains to place the PCI Cigar Program in corporate and participating franchise stores. However, the nature of Our agreements with the convenience store distribution business is that convenience stores supplier relationships are terminable on short notice may be terminated (usually between 30 and 120 days). In addition, while easily. "master" or approved form agreements may be automatically acceptable for use, participation in the PCI Cigar Program is usually at the discretion of each local franchise store or each region of the country. As long as demand for premium cigars remains strong, we believe that individual stores and regions will participate in our PCI Cigar Program. However, if demand and sales decline, stores may terminate participation on short notice, which could have a significant adverse effect on our business. See "Business -- Master Agreements and Arrangements with National Chains." Product placement We do not pay "slotting" fees or other inducements to competition. retailers in order to secure counter space, which could affect our ability to place our humidors on store counters. In addition, other major manufacturers or distributors may have master agreements with convenience stores which require the stores to locate that manufacturers' or distributors' tobacco or other products in a counter position that is preferential to, or at least as favorable as, the location of our humidors. This may inhibit our ability to obtain favorable counter presentation of our humidors. See "Business -- Products -- Humidors." Declining Market for According to industry sources, the cigar industry was in Cigars Through 1991. substantial decline from approximately 1973 to 1991. Cigar sales, as well as smoking in general, steadily decreased after a 1964 report of the United States The effect of Surgeon General and numerous other subsequent studies medical studies which stress the link between smoking, including on smoking. secondary smoke, and medical problems such as cancer, heart, respiratory and other diseases. "No smoking" laws, ordinances and prohibitions on cigar smoking in certain cases may have adversely affected the sale of cigar products. These factors may continue to have an adverse effect upon the cigar industry in general and our business in particular. See "Business -- Medical Studies on Smoking." Demand for Cigars; Premium cigar sales have increased dramatically in Inventory. recent years, but we cannot assure you that the trend will continue. If cigar sales trends do not continue as we anticipate or if we experience a reduction in our demand, we may accumulate excess inventory which could have an adverse effect on our business or results of operations. See "Business -- The Expanding Cigar Market." Current positive Premium cigar sales have increased since 1991, and the sales trends cigar industry has experienced very positive trends in may not continue. sales since 1993. We believe that a considerable percentage of the recent increase in cigar sales, especially with respect to premium cigars, is attributable to new cigar smokers attracted by the improving image of cigar smoking and the increased visibility of cigar smoking by celebrities. We cannot assure you that recent increases in cigar sales are indicative of long-term trends or that these new customers will continue to smoke cigars in the future. See "Business -- The Expanding Cigar Market." 8 Other Tobacco In addition to the 40-State litigation referred to Industry above, the tobacco industry has experienced and is Litigation. experiencing significant health-related litigation involving tobacco and health issues. Plaintiffs have sought and are seeking compensatory and punitive damages Current litigation for various injuries claimed to result from the use of focuses on tobacco products or exposure to tobacco smoke. One cigarettes and class-action lawsuit filed by flight attendants and smokeless tobacco. pending in Florida claims several billion dollars in damages from second-hand smoke. The proposed settlement of the 40-State litigation may substantially limit litigation, but we cannot assure that there would not be an increase in health related litigation against the cigarette and smokeless tobacco industries or similar litigation in the future against the cigar industry. Neither PCI, nor to our knowledge any other cigar distributor, is a party to tobacco industry litigation. However, should litigation involving cigars be initiated, the costs of defending prolonged litigation and any settlement or successful prosecution of any significant health-related litigation could have a substantial adverse effect on our results of operations or financial condition. See "Business -- Tobacco Industry Litigation." The potential for The recent increase in the sales of cigars and the litigation publicity such increase has received may have the effect targeting of increasing the probability of lawsuits. Also, a cigars is growing. recent study published in the journal Science reported that a chemical found in tobacco smoke has been found to cause genetic damage in lung cells that is identical to damage observed in many malignant tumors of the lung and, thereby, directly links lung cancer to smoking. The National Cancer Institute has announced that it will issue a report in 1997 describing research into cigars and health. This study and this report could affect pending and future tobacco regulation or litigation relating to cigar smoking. See "Business -- Government Regulation, Tobacco Industry -- Litigation." Dependence on a Few We do not directly manufacture or import any cigars, and Suppliers. 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 over 19 suppliers. We have relied on For the quarter ended June 30, 1997 our largest two suppliers supplier, TSG Import, Export and Manufacturing for over 75% Corporation, located in the Dominican Republic, of our cigars. accounted for approximately 40% of our cigar purchases for Canadian distributors and 38% of our total cigar purchases. Our written agreement with TSG expired on July 7, 1997, but we continue to purchase from TSG on the same terms as in our agreement. We are negotiating with TSG to reach a new agreement. Our second largest supplier, House of Horvath, Inc., accounted for 37% of our total purchases. Currently, we We have executed supply contracts with a few minor have no contracts suppliers but with none of our major suppliers. We are with major currently negotiating with manufacturers in the suppliers. Dominican Republic and elsewhere to secure multiple sources of cigars. Although we believe that we could quickly replace our main suppliers with alternative sources at comparable prices and terms, a disruption in the supply of cigars from either TSG or House of Horvath would have a significant adverse impact on our operations. See "Business -- Cigar Purchasing; Private Label and Custom Brands." 9 Risks Relating We primarily sell moderately-priced cigars which are to Supply hand-rolled or machine-made from tobacco aged six months of Cigars. to two years. At the present time, we believe there is an adequate supply of tobacco available in a number of countries for these types of cigars. However, we also sell a limited number of higher priced premium cigars which require longer-aged tobacco. Our ability to acquire these cigars in the future may be constrained by a shortage of premium cigars made with longer-aged 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. See "Business -- Cigar Production -- Cigar Purchasing; Private Label and Custom Brands." Competition. As a distributor of premium cigars, we generally compete with a smaller number of less well-known, primarily Currently, we have regional, distributors including Southern Wine and several smaller, Spirits, Specialty Cigars, Inc., Cohabico, Old primarily regional Scottsdale Cigar Company, Inc. and many other small competitors. cigar distributors. Large potential The cigar industry in general is dominated by a small competitors are number of companies which are well known to the public. cigar manufacturers These larger cigar manufacturing and wholesale companies and distribution such as 800 JR Cigar Company, Inc., Consolidated Cigar companies. Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar Company and US Tobacco, have not yet entered the retail distribution market, but may do so in the future. Also, a number of large distribution companies, such as McLane and Core*Mark, which are currently in the convenience outlet distribution business, have not yet entered the premium cigar distribution business, but may do so in the future. These cigar manufacturing and distribution companies, along with major cigarette manufacturers, have more resources than PCI. If they chose to enter the cigar distribution market, they would constitute formidable competition for our business. We cannot assure you that we can compete successfully in any market. See "Business -- Competition." Dependence on Our business is largely dependent on our ability to hire Management. and retain quality managers. Our president, Steven A. Lambrecht, has no prior experience in the business of distributing cigars or other tobacco products. We have We have a few agreements with certain officers and directors, key officers including written employment agreements with Steven A. and directors. Lambrecht, Colin A. Jones and Greg P. Lambrecht and a business consulting agreement with David S. Hodges. We also have a verbal consulting agreement with William L. Anthony. The loss of Messrs. Steven or Greg Lambrecht, Jones, Hodges or Anthony could have an adverse effect upon our business and prospects. See "Management -- Executive Compensation." Key officers and The employment agreements for each of Steven A. directors may Lambrecht, Colin A. Jones and Greg P. Lambrecht allow terminate their them to terminate their employment at any time on two employment weeks' notice. After the completion of this offering, agreements on either PCI or David S. Hodges may terminate his business short notice. consulting agreement at any time. Mr. Hodges may continue to serve as a consultant for up to six months or until he accepts other employment. Either Mr. Anthony or PCI may terminate his consulting agreement at 10 any time, with or without cause. Because of the short notice requirements, we may not be able to replace these individuals before we suffer an adverse impact on our business. See "Management -- Executive Compensation." Key-man insurance. We do not currently maintain key-man life insurance on any of our employees, but will be required to maintain $1,000,000 in key-man life insurance on Steven A. Lambrecht at least until March 31, 2002, according to the terms of our Agreement with the underwriters. See "Underwriting." Control by Management. As of August 14, 1997, our officers and directors owned approximately 75% of our outstanding shares. Upon completion of this offering, and assuming full exercise of the bridge warrants, our officers and directors will own approximately 34% of the then issued and outstanding shares, and they may be able to elect a majority of the directors and continue to control PCI. However, Arizona law allows shareholders to cumulate their votes for the election of directors and affords minority shareholders a greater opportunity to elect directors. See "Principal Shareholders." Conflicts of Interest. Certain relationships between PCI and some of our officers, directors and affiliates involve inherent conflicts of interest. In particular, Greg P. Lambrecht and Colin A. Jones own Rose Hearts and J&M, two companies that do business with us, but do not distribute cigars on behalf of others. They do not directly compete with PCI, although J&M may in the future sell Cuban cigars. Greg Lambrecht and Colin Jones are officers, and together own more than 49% of our issued and outstanding shares. After this offering, they will own approximately 22%. See "Certain Transactions." Policy for We will not enter into any transaction with a related resolving party unless the transaction or loan is on terms that conflicts of are no less favorable to us than we could obtain from an interest. unrelated third party. A majority of the disinterested, "independent" members of our board of directors must review and approve any transaction involving related parties or conflicts of interest. We entered a number of transactions before we adopted this policy and before we had any disinterested, independent directors to ratify the transactions. See "Certain Transactions -- Resolving Conflicts of Interest." Risks Relating to A portion of our proposed business involves supplying Trademarks. exclusive "private label" cigars to certain customers. The brand names used for such private labels will be important, and we intend to apply for federal trademark Currently we and tradename protection when appropriate, relying own no trademarks. primarily on trademark law to protect brand names. We do not currently own any federally registered trademarks or tradenames, but we have filed federal trademark applications for three private label names. Trademark protection We cannot assure you that any pending trademark is uncertain. application will result in a registered trademark, or that any trademark granted will be effective in thwarting competition or be held valid if subsequently challenged. Our failure to obtain trademark protection, or illegal use by others of any trademarks we may obtain, may have an adverse effect on our business, financial condition and operating results. In addition, the laws of certain foreign countries do not protect proprietary rights to the same extent as the laws of the United States or Canada. 11 Costs of We cannot assure you that claims for infringement or prosecuting and claims for damages resulting from any such infringement defending trademark will not be asserted or prosecuted against us. Even if infringement claims we obtain trademark protection for our private label are significant. names, the validity of any trademarks may be challenged. Any such claims, with or without merit, could be time consuming and costly to defend, diverting management's attention and our resources. See "Business -- Intellectual Property Rights." Effects of We purchase cigars manufactured by suppliers outside the Fluctuations in United States. The price and availability of these Cigar Costs and cigars are subject to numerous factors out of our Availability. control, including weather conditions, foreign government policies, potential trade restrictions and the overall demand for cigars. While we have expanded our base of suppliers, and our unit costs have been improving, we have no written agreements with significant suppliers, only ongoing relationships. Loss of these relationships may make it difficult for us to replace sources of cigars of equivalent 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. See "Business -- Products -- Our Cigars." Social, Political We purchase virtually all of our premium cigars from and Economic Risks manufacturers located in countries outside of the U.S., Associated with including the Dominican Republic, Mexico, Honduras, Foreign Operations Nicaragua and the Philippines. Social, political and and International economic conditions inherent in foreign operations and Trade. international trade may change, including changes in the laws and policies that govern foreign investment and international trade. To a lesser extent social, political and economic conditions may cause changes in U.S. or Canadian laws and regulations relating to foreign investment and trade. Social, political or economic changes could, among other things, interrupt cigar supply or cause significant increases in cigar prices. In particular, political or labor unrest in the Dominican Republic, Mexico or Honduras could interrupt the production of premium cigars, which would inhibit us from buying inventory. Accordingly, we cannot assure you that changes in social, political or economic conditions will not have a substantial adverse effect on our business. See "Business -- Cigar Purchasing; Private Label and Custom Brands." Possible Failure We intend to list our Common Stock on the Nasdaq to Obtain or SmallCap Market(SM) and the Boston Stock Exchange and Maintain Exchange believe that we will be able to satisfy and maintain Listings on the their current and proposed entry standards when we Nasdaq SmallCap complete this offering. If we are unable to satisfy and Market(SM) or the maintain the requirements for continued listing on the Boston Stock Nasdaq SmallCap Market(SM) or the Boston Stock Exchange, Exchange. our shares will not be traded in those markets. See "Description of Securities." Potential liquidity If our shares are not listed as intended, trading, if problems. any, would be conducted in the over-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board, which was established for securities that do not meet the Nasdaq SmallCap Market(SM) listing requirements. Consequently, selling PCI shares would be more difficult because smaller quantities of shares could be bought and sold, transactions could be delayed, and security analysts' and news media's coverage of PCI may be reduced. These factors could result in lower prices and larger spreads in the bid and ask prices for our shares. See "Description of Securities." 12 Risks of Low-priced If our shares are not listed on The Nasdaq SmallCap Shares. Market(SM) and/or the Boston Stock Exchange, they may become subject to Rule 15g-9 under the Exchange Act, which imposes additional sales practice requirements on broker-dealers that sell low-priced securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our shares and may affect the ability of holders to sell PCI shares in the secondary market. See "Description of Securities." Penny stock The Commission's regulations define a "penny stock" to regulations. be any equity security that has a market price less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock restrictions will not apply to our shares if they are listed on The Nasdaq SmallCap Market(SM) or the Boston Stock Exchange and we provide certain price and volume information on a current and continuing basis, or meet required minimum net tangible assets or average revenue criteria. We cannot assure you that our shares will qualify for exemption from these restrictions. If PCI shares were subject to the penny stock rules, the market liquidity for the shares could be adversely affected. See "Description of Securities." No Dividends We intend to retain any future earnings to fund the Anticipated. operation and expansion of our business. We do not anticipate paying cash dividends on our shares in the foreseeable future. See "Description of Securities -- Common Stock"; "Dividend Policy." Shares which may Currently, other than 380,954 of the bridge warrants and be Acquired at or options held by directors William L. Anthony and Robert Below the Offering H. Manschot to purchase 161,250 shares, there are no Price. outstanding warrants or options to acquire PCI shares. Mr. Anthony and Mr. Manschot may exercise their options to purchase shares at the offering price. The bridge warrants are exercisable at 50% of the price per share in this offering or $2.625, except for the bridge warrants held by William B. McKee, which are exercisable at the offering price of $5.25 per share, and holders are likely to exercise them, if at all, at a time when we would otherwise be able to obtain capital on terms more favorable than those provided in the bridge warrants. See "Security Ownership of Certain Beneficial Owners and Management"; "Interim Financing -- Bridge Financing and Bridge Warrants." Shares Eligible for All 1,480,500 of the currently issued and outstanding Future Sale. PCI shares are "restricted securities," as that term is defined under Rule 144. None of these shares will become eligible for sale under Rule 144 prior to December 31, 1997. Thereafter, at various times through June 20, 1998, these 1,480,500 shares will become eligible for sale under Rule 144. See "Description of Securities -- Shares Eligible for Future Sale." Contractual sale Certain of our affiliates who hold 1,480,500 shares, restrictions. 38,096 bridge warrants and 161,250 options have agreed that they will not sell their shares, warrants and options for 24 months from the date of this prospectus except that up to 10% of such securities may be sold in increments after 12 months. See "Description of Securities -- Shares Eligible for Future Sale." 13 Warrant shares; Bridge warrant holders may purchase 380,954 shares restrictions on during the five-year period commencing on completion of resale. this offering. However, the bridge warrant holders have agreed that if they exercise the bridge warrants, they will not sell the underlying shares for 12 months from the date of this prospectus without the prior approval of the underwriter. This potential delayed offering may result in the resale of bridge warrant shares at some date between one and five years from the completion of this offering. See "Interim Financing -- Delayed Offering By Warrant Holders." We cannot predict We are unable to predict the effect that sales made the depressive under Rule 144, the delayed resale of warrant shares or effect of resales. other sales may have on the then prevailing market price of our shares. It is likely that market sales of large amounts of these or other PCI shares after this offering (or the potential for those sales even if they do not actually occur), will have the effect of depressing the market price of PCI shares. See "Description of Securities -- Shares Eligible for Future Sale"; "Interim Financing -- Delayed Offering By Warrant Holders." Limited Insurance We carry general liability insurance with an aggregate Coverage. limit of $10,000,000, and product liability and health hazard insurance. These policies also cover our suppliers, manufacturers and retail outlets. However, we cannot assure you that we will not be subject to liability which is beyond the limits of our general liability, product liability and health hazard insurance coverage, and which may have an adverse effect on our business. See "Business -- Tobacco Industry Litigations." Dilution; Disparity Purchasers of shares will experience immediate and in Share Purchase substantial dilution of $2.81 in net tangible book value Price. per share, or approximately 54% of the offering price of $5.25 per share. In contrast, existing shareholders paid an average price of $0.24 per share. Some existing shareholders acquired their shares from PCI or its officers between March 10, 1997 and June 20, 1997 at prices ranging from $1.25 to $2.50 per share. See "Dilution." No Prior Market Prior to this offering, there has been no public market for Shares; for PCI shares. We cannot assure you that any trading Determination market for our shares will exist following the offering, of Public or that investors in the shares will be able to resell Offering Price. their shares at or above the offering price. The offering price for the shares will be determined through negotiations between us and W.B. McKee Securities, Inc., and may not be indicative of the market price of the shares after the offering. See "Description of Securities -- No Prior Market for Shares." Use Of Offering We will use up to $1,200,000 (approximately 14.5%) of net Proceeds to Repay offering proceeds to repay the principal amount of Debt. promissory notes issued in the bridge financing, and any outstanding balance on our bank line of credit, rather than purchase inventory or humidors to expand the PCI Cigar Program. See "Use of Proceeds" and "Interim Financing." Dependence on We use independent contract carriers to ship our Shippers humidors and cigars. We have not used United Parcel Service, and have not yet been affected by the Teamsters' strike against that company. We cannot assure you that the UPS strike, or similar work stoppages will not impact our ability to receive and distribute cigars and humidors. 14 USE OF PROCEEDS The net proceeds we receive from the sale of 1,900,000 shares, assuming an offering price of $5.25 per share, and after deducting underwriting discounts and commissions of $997,500 and offering expenses of approximately $674,250, are estimated to be $8,303,250 ($9,604,988 if the underwriter's over-allotment option is exercised in full). Offering expenses include $299,250 in non-accountable underwriter's expenses, and an estimated $375,000 in expenses such as legal, accounting, printing and various filing and registration fees and miscellaneous expenses. We expect to use the net proceeds (assuming no exercise of the underwriter's over-allotment option) as follows: [Pie chart graphic of use of proceeds]
Approximate Approximate Percentage Dollar of Net Application of Net Proceeds Amount Proceeds - --------------------------------------------------------- ------------- ------------ Purchase of Humidors(1) ................................. $4,000,000 48.2% Purchase of Cigars and Accessories(2) .................. 1,900,000 22.9 Repayment of Indebtedness(3) ........................... 1,200,000 14.5 Sales and Marketing(4) ................................. 700,000 8.4 Working Capital and general corporate purposes(5) ...... 503,250 6.0 ----------- ------ Total ................................................ $8,303,250 100.0% =========== ====== - ------------ (1) Represents the amount needed to purchase humidors to supply stores with custom-designed countertop display humidors. (2) Represents the amount needed to maintain adequate inventory levels to support retail sales turnover. Stores will keep only enough stock to fill their countertop humidors due to the care required to maintain cigar freshness. In addition, deposits are required on some overseas cigar purchase orders. (3) Represents the repayment of the bridge notes issued in 1997 with a total principal amount of $1,000,000, and the oustanding balance, if any, of a $200,000 bank credit line. The bridge notes accrue interest at a rate of 8% per year until completion of this offering and at 16% per year thereafter. The bridge notes are due on the earlier of the consummation of this offering, but may be paid up to two years from their issuance. Proceeds from the bridge notes were used to purchase cigars, humidors and related items, capital equipment and to pay salaries, business expenses, office costs and professional and consulting fees. The Consolidated Balance Sheet and the Consolidated Statement of Cash Flows in the Financial Statements included in this prospectus do not include the $200,000 bank credit line obtained on July 25, 1997. (4) Represents sales and marketing expenditures spending for trade relations events and support to further develop our relationships with major chain accounts and national distributors. (5) Represents a minimum level of working capital for general corporate purposes such as advertising, customer education, deposits and other prepaid assets.
15 We intend to use these net proceeds to continue, and further accelerate, the rollout of the PCI Cigar Program with national chain accounts and others throughout the United States and Canada. Our plan is to reach 10,000 retail outlets by the end of this fiscal year, March 31, 1998, and add 10,000 stores each year. Our aggressive growth plans require extensive working capital to supply each store with a custom designed humidor, premium cigars and accessories. In addition, we plan to use $1,000,000 to retire the bridge financing indebtedness and an additional amount to retire the outstanding balance, if any, of a $200,000 bank credit line. See "Interim Financing -- Bridge Financing and Bridge Warrants." The use of proceeds disclosed above is subject to change. If our use of proceeds does change, we believe it would be to reallocate more proceeds to purchase cigars and humidors and less proceeds to sales and marketing. Pending use, the net proceeds will be invested in bank certificates of deposit and other fully-insured investment grade securities. Any funds we receive from exercise of the over-allotment option or the representatives' warrant will be added to working capital. CAPITALIZATION The following graph and table set forth the capitalization of PCI as of June 30, 1997, and as adjusted to reflect the sale of 1,900,000 shares at $5.25 per share, the payment of the bridge notes and the exercise of the bridge warrants, but does not include the exercise of 19,048 bridge warrants issued to William B. McKee or exercise of any of the 161,250 stock options. [Bar chart comparing actual and pro forma information]
June 30, 1997 ---------------------------- Actual As Adjusted ------------- ------------ (Unaudited) (Unaudited) Long-term liabilities ....................................... $1,000,000 $ 0 ---------- ---------- Shareholders' equity: Common Stock, no par value per share, 10,000,000 shares authorized, 1,480,500 shares issued and outstanding and 3,742,406 shares issued and outstanding as adjusted ...... 524,675 9,777,928 Accumulated deficit ....................................... (523,311) (605,811) ---------- ---------- Total Shareholders' equity .................................... 1,364 9,172,117 ---------- ---------- Total Capitalization .................................... $1,001,364 $9,172,117 ========== ==========
16 DILUTION The difference between the public offering price per share of Common Stock and the as adjusted pro forma net tangible book value per share of Common Stock after this offering constitutes the dilution to investors in this offering. Net tangible book value per share is determined by dividing the net tangible book value (total assets less intangible assets and total liabilities) by the number of outstanding shares of Common Stock. At June 30, 1997, the net tangible book value of PCI was ($330,371) or ($.22) per share of Common Stock. At June 30, 1997, after giving effect to the sale of the Common Stock offered hereby at an initial offering price of $5.25 per share (less, underwriting discounts and commissions and estimated expenses of this offering) and the exercise of 361,906 bridge warrants, the as adjusted pro forma net tangible book value at that date would be $9,133,335 or $2.44 per share. This represents an immediate increase in the adjusted pro forma net tangible book value of $2.66 per share to existing shareholders and an immediate dilution of $2.81 per share to new investors, or approximately 54% of the offering price of $5.25 per share. The following graph and table illustrate the per share dilution to new investors without giving effect to the results of operations of PCI subsequent to March 31, 1997: [Bar chart of dilution and net tangible book value per share] Public offering price .................................... $5.25 Pro forma net tangible book value at June 30, 1997 .... ($ .22) Increase attributable to new investors ................ $2.66 Net tangible book value after offering ................... $2.44 ------ Dilution to new investors ............................... $2.81 ====== 17 The following graphs and table summarize the number and percentage of shares of Common Stock purchased from PCI, the amount and percentage of consideration paid, and the average price per share paid by existing shareholders and by new investors in this offering. [3 groupings of 3 comparison bars: shares, consideration, average price per share]
Total Consideration Average Number Paid Price of ------------------------- Per Shares Percent Amount Percent Share ----------- --------- ------------- --------- -------- Existing Shareholders ...... 1,480,500 39.56% $ 357,050 3.16% $ .24 Bridge Warrant Holders ...... 361,906 9.67% $ 950,000 8.42% $2.625 Public Investors ............ 1,900,000 50.77% $ 9,975,000 88.42% $ 5.25 ---------- ------- ------------ ------- Total ..................... 3,742,406 100.00% $11,282,050 100.00% ========== ======= ============ =======
The above table assumes no exercise of (i) the underwriters' over-allotment option, (ii) the Representative's Warrants, (iii) 161,250 options held by directors, or (iv) the 19,048 bridge warrants held by William B. McKee that are exercisable at $5.25 per share. See "Risk Factors -- Immediate and Substantial Dilution," "Underwriting," and "Description of Securities." 18 SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION Set forth below is selected consolidated financial information with respect to PCI from June 1, 1996 (inception of cigar distribution activities) to March 31, 1997 and for the three months ended June 30, 1997 (unaudited). The selected consolidated financial information has been derived from the consolidated financial statements which appear elsewhere in this Prospectus. This data should be read in conjunction with the consolidated financial statements of PCI and their related notes.
June 1, 1996 to March 31, 1997 3 Months ended June 30, 1997 ------------------------------- ---------------------------- Historical Pro Forma Historical Pro Forma --------------- ------------- ------------- ------------ (Unaudited) (Unaudited) (Unaudited) Consolidated Statements of Operations: Sales ................................. $ 845,571 $ 845,571 $ 628,180 $ 628,180 Cost of sales ........................ 643,790 643,790 481,677 481,677 ----------- ---------- ---------- ---------- Gross profit ........................ 201,781 201,781 146,503 146,503 Selling, general and administrative(1) 323,776 551,276 327,439 357,439 Stock based compensation ............ 57,625 57,625 110,000 110,000 ----------- ---------- ---------- ---------- Loss from operations .................. (179,620) (407,120) (290,936) (320,936) Interest expense and miscellaneous(2) ..................... 21,522 1,722 (31,233) -- ----------- ---------- ---------- ---------- Net loss .............................. $ (201,142) $ (408,842) $ (322,169) $(320,936) =========== ========== ========== ========== Weighted average shares outstanding(3) ........................ 1,480,500 3,742,406 1,480,500 3,742,406 =========== ========== ========== ========== Loss per share ........................ $ (.14) $ (.11) $ (.22) $ (.09) =========== ========== ========== ==========
June 30, 1997 ------------------------------ Historical Pro Forma ------------ --------------- (Unaudited)(3) Consolidated Balance Sheet Data: Working capital ............... $ 244,851 $ 8,708,557 Total assets .................. $1,412,202 $ 9,582,955 Total liabilities ............... $1,410,838 $ 410,838 Shareholders' equity ............ $ 1,364 $ 9,172,117 - ------------ (1) Pro Forma includes additional executive compensation and management fees pursuant to executive compensation agreements. (See "Management -- Executive Compensation".) (2) Pro Forma assumes repayment of indebtedness as specified in Use of Proceeds. (3) Pro Forma assumes issuance of 1,900,000 shares in the offering and conversion of the bridge warrants into 361,906 shares of Common Stock, and assumes no exercise of 19,048 bridge warrants held by William B. McKee. 19 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS General 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. As of July 31, 1997, we had placed the PCI Cigar Program, which includes supplying humidors, cigars, service, and information in over 2,615 stores in the United States and Canada. We are currently expanding with national retail and distribution accounts in both countries. Our objective is to place the PCI Cigar Program in 10,000 high volume convenience, gas, grocery and drug stores and outlets by March 31, 1998 and in 30,000 to 50,000 outlets within three to five years.
Jun-96 Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97 49 91 120 227 389 559 596 629 647 671 707 745 1,550 2,615
PCI's primary focus is selling premium cigars priced at retail from $1 to $8. We market a broad range of brands as well as in-house, private label brands. PCI's founders, Colin Jones and Greg Lambrecht, have been supplying and distributing premium cigars through convenience stores and other high volume outlets since June 1996. Each has more than 12 years of experience supplying various consumer products to retail outlets. PCI has arrangements and agreements with national chain accounts to supply cigars and in-store humidors for direct delivery distribution and in-store merchandising in the United States and Canada. Customers include stores affiliated with Southland USA and Southland Canada (7-Eleven), AM/PM, Circle K, Associated Grocers, SuperValu, McLane Company, and numerous independent accounts. In addition, PCI has developed several relationships with cigar manufacturers and suppliers of cigars from the Dominican Republic, Honduras, Mexico, Nicaragua and the Philippines. We are expanding our sources for cigars and accessories. PCI has experienced rapid growth in a competitive industry, and we are working to become an industry leader in distributing cigars to convenience stores and other high traffic retail outlets. As of July 31, 1997, the PCI Cigar Program was in over 2,615 outlets and we have facilities and staffing to roll out their PCI Cigar Program in 250 to 500 outlets a week. 20 Our objective is to reach 10,000 retail outlets by the end of our fiscal year ending March 31, 1998, and add 10,000 stores per year over the next three to five years. PCI's largest customer, Southland, has over 5,000 retail stores in North America. We believe that we can reach our first year goal by further penetrating stores affiliated with national chains represented by our current customer list. In addition, the convenience and gas station segment of PCI's target market represents a significant number of retail outlets. The National Association of Convenience Stores recently reported in its "'97 State of The Industry" report that there are over 94,000 convenience stores in the United States. This excludes Canada and other key outlets for our program: grocery, drug and mass merchandising outlets. Based on our growth and size of the market for our program, products and services, we believe that our business objectives are reasonable. 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 Prospectus. Historical results and percentage relationships among accounts are not necessarily an indication of trends in operating results for any future period. The consolidated financial statements present the accounts of PCI and its wholly-owned subsidiary, CAN-AM, as well as the predecessor cigar sales activity of J&M and Rose Hearts. All significant intercompany balances and transactions were eliminated in consolidation. Results of Operations The following table sets forth the percentage of revenue represented by certain items reflected in PCI's consolidated statements of operations for the period from the date of inception, June 1, 1996 through March 31, 1997 and for the three month period ended June 30, 1997:
Period From Inception For the 3 Month June 1. 1996, Through Period Ended March 31, 1997 June 30,1997 ----------------------- ---------------- Sales ........................ 100.0% 100.0% Cost of sales ............... 76.1 76.7 --------- --------- Gross margin .................. 23.9 23.3 Selling, general, and administrative expenses ... 38.3 52.1 Stock Based Compensation ...... 6.8 17.5 --------- --------- Loss from operations ......... (21.2) (46.3) Other income/expense ......... 2.6 5.0 --------- --------- Net Loss ..................... (23.8)% (51.3)% ========= =========
Ten Month Period From Date of Inception (June 1, 1996) through March 31, 1997 Sales Sales of cigars and cigar accessories for the ten month period ended March 31, 1997 were $845,571. Cost of Sales Cost of sales for the period from the date of inception, June 1, 1996 through March 31, 1997 was $643,790, with a gross profit of approximately 24%. Our goal is to establish a consistent gross profit percentage in the range of 30% to 35%. Gross profit for the 10-month period ended March 31, 1997 was lower due to the lack of volume purchase bargaining power during the initial start-up phase. 21 Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the period from the date of inception (June 1, 1996) through March 31, 1997, were $323,776, or 38.3% of sales. These costs were disproportionately high during the initial 10 months of operations due to the addition of personnel to establish market positions with various national chains. In addition, administrative costs increased significantly as we prepared for our increased volume. Stock Based Compensation During January and March of 1997 certain employees purchased Common Stock at a per share price that has been determined to have a market value in excess of the amount paid by the employees. As such, additional compensation has been recorded. Other Income/Expense Other income and expense for the period from the date of inception, June 1, 1996 through March 31, 1997, was an expense of $21,522. This expense is made up of $21,292 in interest, $1,193 foreign currency transaction loss, and an offset of $963 in miscellaneous income. Three Month Period Ended June 30, 1996 The following discussion and analysis does not include a comparative analysis with the prior year's quarter. There was no material activity during June, 1996. Sales Sales for the ten months ended March 31, 1997 totaled $845,571. Sales for the quarter ended June 30, 1997 were $628,180. Our growth in revenue is a result of rapid store rollouts during June supported by bridge financing obtained during the quarter to expand operations in the United States from PCI's new headquarters and warehouse/distribution center in Scottsdale, Arizona. Cost of Sales Cost of sales for the quarter ended June 30, 1997 was $481,677 with a gross profit of approximately 23.3%. Our goal is to establish a consistent gross profit percentage in the range of 30% to 35%. Gross profit for the quarter ended June 30, 1997 continued to be lower due to the lack of volume purchase bargaining power during the continuing start-up phase of operations. Selling, General, and Administrative Expenses Selling, general, and administrative expenses for the quarter ended June 30, 1997 were $327,439, or 52.1% of sales. These costs were disproportionately high during the quarter due to the startup of operations in Scottsdale, Arizona and the addition of personnel to establish market positions with various national chains. Our Scottsdale, Arizona facility began shipping to stores in June 1997. In addition, administrative costs increased significantly as we continued to prepare for our increased volume and this offering. Stock Based Compensation During the quarter ended June 30, 1997 certain individuals purchased Common Stock at a per share price that has been determined to have a market value in excess of the amount paid. In addition, Common Stock valued at $37,500 was given to Arie Luyendyck to provide certain services related to the endorsement of PCI and its program. Other Income/Expense Other income and expense for the quarter ended June 30, 1997 was an expense of $31,233. This expense primarily consists of interest expense on bridge financing and a note payable as well as amortization of underwriter fees on the bridge financing. 22 Seasonality We have experienced consistent growth in monthly sales volume throughout our first year of operations, hampered only by inadequate capital to fund expansion. However, as we increase our market penetration, we may experience some seasonality in revenues that is not currently discernable. Our operational history and the new nature of distributing cigars to convenience outlets does not yet permit us to identify clear seasonal trends, but we believe that some variation in convenience store impulse cigar purchases may be tied to outdoor weather conditions. In the northern U.S. and Canada, sales appear to improve in the warmer months and in the southern U.S. sales appear to improve in the cooler months. Because we distribute across the U.S. and Canada, we anticipate that any seasonal variances in the northern and southern regions will be offsetting and not have a material impact on our financial condition or operations. Liquidity and Capital Resources We require capital to market our PCI Cigar Program, obtain additional inventory and humidors to supply our increasing distribution network, and develop the personnel, facilities, assets and organization infrastructure necessary to support our expanding business. During the period from the date of inception, June 1, 1996, through March 31, 1997, we financed our operating and business development activities by issuing notes payable of approximately $180,000, and shares of Common Stock for approximately $212,050. These funds were used to acquire equipment in the approximate amount of $23,000, humidors in the approximate amount of $71,000, pay organizational and deferred offering costs in the approximate amount of $86,000, and advance funds to affiliates to pay their prior commitments, in the approximate amount of $86,000. After March 31, 1997, we obtained additional bridge financing in the amount of $1,000,000 (including existing debt of $100,000) which has been used primarily to fund additional expansion of operations. During the quarter ended June 30, 1997, we used the net proceeds from the bridge financing of $810,000 to accelerate the expansion of the PCI Cigar Program throughout the United States and cover costs associated with this offering. Humidor purchases for the quarter were approximately $175,000, and we purchased equipment costing approximately $81,000. Deferred costs incurred with this public offering were approximately $157,000. In addition, $343,000 was used for working capital to fund sales growth and the related trade receivables and deposits for cigar purchases. In addition, on July 25, 1997 we obtained a $200,000 line of credit with a bank to assist with working capital requirements until the completion of this initial public offering. We believe that the net proceeds of this offering, together with cash flows from operations, will be sufficient to meet our anticipated expansion and working capital needs for the foreseeable future, including our commitments under three employment agreements, two management fee agreements and two consulting agreements. See "Management -- Executive Compensation." We have no plans to perform any significant product research and development, to purchase or sell any significant plant or equipment, to significantly change our number of employees or to obtain additional outside capital. However, if additional funding is required, we may raise capital through the issuance of long-term or short-term debt or the issuance of securities in private or public transactions to fund future expansion of our business. We cannot assure you that we can obtain acceptable financing for future expansion. 23 BUSINESS Introduction Historically, premium cigars and cigar-related accessories have been sold through traditional specialty tobacco retail stores. Our PCI Cigar Program distributes moderately-priced premium and other cigars through convenience stores, grocery and drug stores, gas stations and other high-traffic retail locations that traditionally have not sold premium cigars, which require special care. We have designed, and have manufactured for us, humidors which we deliver to each store. Our humidors maintain premium cigars in an appropriately humidified environment, and we periodically re-stock the humidors. We buy cigars both from importers and directly from manufacturers. We have certain of our own brands manufactured for us, but we do not directly manufacture any of our own cigars. PCI currently distributes premium cigars in 34 of the United States, and in five Canadian provinces through CAN-AM, a wholly-owned subsidiary. We are expanding our business with existing and new accounts throughout the United States and Canada. We are capitalizing on the increase in demand for premium cigars in the United States and Canada. Using direct delivery, as well as large and small distributors, we supply and distribute name brands, as well as our own private label brands of premium and other cigars, at various moderate price levels, primarily from $1 to $8. We use independent contract carriers to ship our humidors and cigars, but we have not used United Parcel Service, and have not yet been affected by the Teamsters' strike against that company. Traditionally, convenience stores, grocery and drug stores, gas stations and other locations sold cigarettes, little cigars, and non-humified mass market (dry) cigars such as White Owls(TM), Tipparillos(TM), and Swisher Sweets(TM). Those stores lacked both access to a supply of fresh (humidified) premium and other cigars and the expertise to effectively maintain and service premium cigars. As a result, cigar smokers could buy premium cigars only at specialty tobacco shops. Our two sales Vice Presidents, Colin Jones and Greg Lambrecht, have each been in the business of supplying and distributing premium cigars through convenience stores since June 1996, and each has 12 or more years experience supplying various other products to convenience store chains and other retail outlets in Canada or the northwest U.S., respectively. We have developed and will continue to develop relationships with tobacco suppliers, and are expanding our commercial and technical support systems to secure a variety of sources for products, ensure product quality, and maximize cost savings. We currently depend heavily on two suppliers, TSG Import, Export and Manufacturing Corporation and House of Horvath, Inc., but we are broadening our sources of supply. We believe we will be able to contract with a number of additional suppliers to obtain cigars on terms comparable or more favorable to our existing sources of supply, primarily because of the high quantity of cigars we purchase. We have negotiated and have entered into agreements to supply premium and other cigars and in-store humidors for direct delivery distribution and in-store merchandising. As of July 31, 1997 we were servicing 2,615 convenience stores in the States of: Washington, Oregon, California, Arizona, Texas, Kansas, Missouri, Utah, Idaho, Alaska, Nevada, Oklahoma, Maryland, Virginia, Colorado, Illinois, Michigan, Wisconsin, Nebraska, Georgia, Montana, Florida, Massachusetts, Connecticut, New York, New Jersey, Rhode Island, New Mexico, Pennsylvania, North Carolina, Louisiana, Alabama, Mississippi and Arkansas; and in the Canadian Provinces of: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. We have identified more than 10,000 retail outlets as potential PCI accounts in these states. Our current customers include stores affiliated with Southland Canada (7-Eleven), Southland USA (7-Eleven), AM/PM, Circle K, SuperValu and Associated Grocers. Our goal is to place a high quality humidor selling premium cigars and accessories in every convenience store and high traffic retail outlet. The Expanding Cigar Market In recent years, cigar smoking has regained popularity in the United States. Consumption and sales of cigars, particularly premium cigars, have increased significantly since 1993. After declining 24 from its peak in 1964, sales of cigars in the U.S. increased to 4.4 billion units in 1996 from 3.4 billion units in 1993. Sales of premium cigars, which had remained essentially flat since 1981 despite continued declines in mass market cigar sales, increased at a compound annual unit growth rate ("CAGR") of: 2.4% from 1976 to 1991; 13.9% from 1991 to 1995; and 67.0% from 1995 to 1996. We cannot assure you that this growth rate will continue. Led by growth in premium cigars, the U.S. cigar market grew at an annual rate of 8.7% from 1993 to 1996. Premium Cigar Consumption (Cigars in Millions) [bar chart of U.S. premium cigar consumption 1991 to 1996] The following table illustrates the trends in unit consumption and retail sales for the premium and mass market segments of the U.S. cigar industry from 1991 to 1996(a):
1991 1992 1993 1994 1995 1996 ---------- ---------- ---------- ---------- ---------- -------- (in millions) Unit Sales: Premium ............ 97.2 98.9 109.5 125.5 163.9 274.3 Mass Market ......... 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4 4,122.3 --------- --------- --------- --------- --------- -------- Total ............ 3,530.5 3,518.1 3,423.3 3,718.1 3,970.3 4,396.6 ========= ========= ========= ========= ========= ======== Retail Sales ...... $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0 -- - ------------ (a) Source -- Cigar Associates of America, Inc. ("CAA"). CAA's premium cigar data includes cigars imported from seven leading supplier countries, including the United States. U.S. premium cigar production was approximately 5.0 million units in 1995.
The growth rate in premium cigar imports continued to accelerate in 1996 and thus far in 1997. Premium cigar imports in January 1997 more than doubled compared to January 1996, with almost 24 million cigars imported in January 1997 compared to 11 million cigars in January 1996. (Source: The Cigar Insider). Sales of premium cigars have more than doubled in the span of three years. Sales of mass market cigars grew at a CAGR of 7.2% from 3.3 billion units in 1993 to 4.1 billion units in 1996. Overall growth in retail sales of cigars was primarily a combination of a shift in the sales mix to more expensive cigars as well as the increased number of cigars being sold. 25 We believe that the increase in cigar consumption and retail sales is the result of a number of factors, including: (i) the improving image of cigar smoking resulting from increased publicity, including the success of Cigar Aficionado(TM), Cigar Lover(TM), Smoke(TM) and The Cigar Smoker(TM) magazines and the increased visibility of cigar smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi Moore, Michael Jordan, Wayne Gretzsky and Jack Nicholson); (ii) the emergence of an expanding base of younger, highly educated, affluent adults age 25 to 40 with an interest in luxury goods, including premium cigars; (iii) the increase in the number of "baby boomer" adults over the age of 40 (a demographic group believed to smoke more cigars than any other demographic group); (iv) an increased number of women smoking cigars; and (v) the proliferation of establishments, such as restaurants and clubs, where cigar smoking is encouraged, as well as "cigar smokers" dinners and other special events for cigar smokers. "Cigars have recaptured their traditional image as a symbol of success, celebration and achievement it is now seen as an item of quality in keeping with such other quality items as gourmet coffees, fine wines, beer from micro-breweries, single malt scotches and single barrel bourbons." (Norman F. Sharp President, Cigar Association of America). Categories of Cigars Cigars are divided into three principal categories: premium cigars, mass market cigars and little cigars. Premium Cigars. Most premium cigars are imported, hand-rolled cigars made with long filler and all natural tobacco leaf wrappers. Other moderately-priced premium cigars use a combination of short and medium filler, are hand-rolled with all natural wrappers and are kept humidified. The Dominican Republic, Honduras and Jamaica collectively accounted for approximately 84.0% of premium cigars imported into the U.S. in 1995. Many of the finest premium cigars sold in the U.S. trace their roots to pre-Castro Cuba and the Cuban emigres who continued making premium cigars in Jamaica, Honduras, the Dominican Republic and Florida. PCI distributes primarily moderately-priced premium cigars, but also distributes a limited number of higher-priced premium cigars. Mass Market Cigars. Mass market cigars generally are domestic, machine-made cigars that use less-expensive short filler tobacco and are made with tobacco binders and either homogenized sheet wrappers or natural leaf wrappers. Sales of more expensive mass market cigars, using natural leaf wrappers, grew by 12.9% in 1995, as consumers appear to have shifted to more expensive, higher quality mass market cigars. We distribute a significant number of high quality, natural leaf wrapper, mass market cigars, including smaller-sized, humidified, natural leaf cigars. Little Cigars. Little cigars are the lowest priced cigars. Little cigars weigh less than three pounds per 1,000, and may have filters. Little cigars are not made with binders, are dry (not humidified) and are manufactured and packaged similarly to cigarettes. PCI does not distribute any little cigars. Currently, all segments of the premium cigar industry are growing rapidly, from the low and moderately-priced premium cigars which we market to the "high priced" cigar brands sold by established cigar/tobacco retail specialty shops. We believe that large importers and manufacturers of premium cigars will continue to distribute their nationally advertised, leading brands primarily through local cigar/tobacco stores because sales through other locations require supplying humidors and care instructions. As and if our market demands, we intend to sell a larger number of higher quality premium cigars. Cigar Production According to statistics compiled by The Cigar Insider, the Dominican Republic produces and exports more premium cigars into the United States than any other country in the world. It has a 26 strong lead over all other cigar exporting nations, with nearly 50% of the market. Industry experts rate cigars manufactured in the Dominican Republic third in the world in quality, trailing only those from Cuba and Jamaica. Cuban cigars cannot be exported into the United States as a result of the 1962 trade embargo. Neither PCI nor our wholly-owned subsidiary CAN-AM currently distribute or engage in any transactions involving Cuban cigars or any products of Cuban origin in any of our operations, whether in the United States, Canada or elsewhere. Our standard form supplier agreement strictly prohibits our suppliers from providing any product containing any component of Cuban origin. Cigar Purchasing; Private Label and Custom Brands We do not directly manufacture or import any cigars and rely entirely upon third party manufacturers and importers to supply us with cigars. Some of our suppliers and importers also directly manufacture some or all of the cigars they sell to us. All of our suppliers deliver the cigars to us in the U.S. after cigars have passed through customs and after all of the shipping and other import costs have been paid. We currently do not have written contracts with our two largest suppliers, but are relying upon the strength of our relationships and ongoing negotiations with them and a number of alternative suppliers to meet our current and future supply requirements. Although our current relationships with our two largest suppliers are good, if problems develop, without written contracts the relationships could end abruptly. We have developed a standard form supplier agreement that is similar to all common buyer/seller agreements for consumer products. In general terms, the agreement sets our negotiated minimum purchase requirements, and establishes delivery to us at Phoenix Sky Harbor International Airport after passing through customs and shipping is paid. The agreement allows for termination upon 120 days notice, include a warranty that no illegal substances accompany the products, prohibits disclosure or contact with each party's business relationships, and contains a covenant by the seller not to compete with us for a negotiated period. We have entered variations of our form supply agreement with two newer suppliers who currently supply only a small portion of our total needs. House of Horvath, Inc., accounted for approximately 71% of our cigar purchases from inception to March 31, 1997 (and a higher percentage in Canada). However, our purchases from House of Horvath decreased to approximately 37% of our total sales for the quarter ended June 30, 1997. We have no written contract with House of Horvath and purchase by purchase order only. We currently purchase cigars and accessories from over 19 different sources. As we have increased the volume of our cigar purchases, vendors have offered more favorable terms. TSG Import, Export and Manufacturing Corporation, a company located in the Dominican Republic, is currently our largest supplier and importer, and accounted for 38% of our total sales for the quarter ended June 30, 1997. We are operating under a verbal exclusive supply arrangement with TSG. TSG currently can manufacture 60,000 cigars a month and potentially source up to an additional 240,000 premium cigars per month. We had a written contract with TSG, which expired in July 1997. We are currently negotiating with TSG to renew our contract, but we continue to purchase cigars from TSG on the same terms as our previous agreement. We currently purchase cigars manufactured in the Dominican Republic, Mexico, Honduras, Nicaragua and the Philippines, and are working to establish relationships with additional cigar manufacturers in the Dominican Republic. In addition to brands distributed by our suppliers, we also sell cigars manufactured to our specifications by TSG and other suppliers which we distribute and sell under our own "private" label. We are negotiating with additional suppliers and customers to expand our private label operations, but we cannot assure that we will be successful. We will continue to purchase cigars manufactured by others from time to time as they become available on the open market. Our cigars are generally purchased from various suppliers to meet demands at our sales price points. 27 The recently publicized shortage of premium cigars has focused on the large importers and manufacturers that distribute well known "high priced" premium cigars to the local cigar/tobacco stores. We believe that the shelves of local cigar/tobacco stores have been, and will continue to be, low on stock due to brand name manufacturers not being able to meet the demand for their high priced, premium cigars. Supplies of the moderately-priced premium cigars we sell have remained more than adequate. Social, political or economic changes could, among other things, interrupt cigar supply or cause significant increases in cigar prices. In particular, political or labor unrest in the Dominican Republic, Mexico or Honduras could interrupt the production of premium cigars, which would inhibit us from buying inventory. Company History PCI was incorporated in Arizona in December, 1996, and shortly thereafter acquired CAN-AM International Investments Inc., a Canadian corporation ("CAN-AM") 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, B.C. PCI's National and International Sales Managers, Colin Jones and Greg Lambrecht, through J&M and Rose Hearts, respectively, developed their concept of selling premium cigars using in-store countertop humidors in convenience stores, grocery stores and other retail outlet markets in June of 1996. Colin Jones owns and operates J&M, a 12-year-old regional supplier and distributor of impulse purchase products to the convenience store market in British Columbia, Canada. Greg Lambrecht owns and operates Rose Hearts, a 14-year-old supplier and distributor of impulse purchase products to convenience stores and grocery stores in the northwestern United States including Washington, Oregon, Northern California, and Montana. Our Largest Customer. Corporate and franchise stores affiliated with Southland USA and Southland Canada (7-Eleven) accounted for over 82% of our sales in the fiscal year ended March 31, 1997. We have expanded our customer base, but sales to 7-Eleven stores still accounted for over 79% of our sales for the quarter ended June 30, 1997. We expect that sales to 7-Eleven stores will continue to account for a substantial percentage of our sales. Canadian Sales; CAN-AM. With an average of over 12 years of distribution experience in the convenience store industry, Colin Jones and Greg Lambrecht created a new company, CAN-AM, to establish a premium cigar program with 7-Eleven in five Canadian Provinces. They believe that CAN-AM was the first company to market premium cigars sold out of in-store humidors to a Canadian national convenience store chain. The first major presentation of what is now the PCI Cigar Program was to Southland Canada (7-Eleven). An initial test was conducted in 45 stores in Vancouver, B.C. and 15 stores in Edmonton, Alberta, with a possibility of expansion in 60 days if the test market was successful. After three weeks, the premium cigar program was so successful that 7-Eleven began a national program, and the PCI Cigar Program is currently in virtually all of 464 7-Eleven stores across Canada. With a warehouse near Vancouver B.C., a national distribution system, and a telemarketing service, current CAN-AM sales to 625 stores in the quarter ended June 30, 1997 were approximately $400,000 (unaudited). CAN-AM secured a strong foothold in the convenience industry with 7-Eleven stores, and is pursuing expansion through chains such as Mac's and Petro-Canada, as well as other independent retail outlets. Numerous retail outlets have approached CAN-AM to supply them with the PCI Cigar Program. Through July 31, 1997, CAN-AM has secured over 630 retail outlets in Canada and is expanding to large chain stores and through distributors. U.S. Sales. As of June 30, 1997 our United States operations distribute to 1,985 stores in 34 states. PCI U.S. sales in the quarter ending June 30, 1997 were approximately $200,000 (unaudited). 7-Eleven. Largely because of the success of the PCI Cigar Program with Southland Canada, PCI and Southland USA have negotiated and signed a master agreement to establish the PCI Cigar Program in 7-Eleven corporate stores and in all franchise stores that request the PCI Cigar Program. 28 There are over 5,300 7-Eleven stores across the United States. Under this agreement, we added approximately 500 stores a month through June, at which time we increased to 1,000 new stores a month and hope to continue at that rate until our 7-Eleven rollout is complete. Rose Hearts. The PCI Cigar Program was established in the northwest United States by Rose Hearts and Greg Lambrecht. Rose Hearts sold these accounts to CAN-AM, PCI's wholly owned subsidiary, but continues, as PCI's distributor, to service the PCI Cigar Program accounts in stores affiliated with 7-Eleven, Circle K, AM/PM and other chains in Washington, Oregon, Idaho, northern California and Alaska. Rose Hearts' owner, Greg P. Lambrecht, intends to sell or liquidate Rose Hearts in the future, at which time we expect to assume the direct service of all of the stores that Rose Hearts currently serves. Greg Lambrecht has turned over operational control of Rose Hearts to other management so that he can honor his full-time obligations to us. McLane. McLane distributes products to over 35,000 retail outlets nationwide. We believe that currently PCI is the largest supplier of premium cigars to McLane, but we are not its sole supplier of humidors or premium cigars. We now distribute to two of McLane's 16 divisions, and are negotiating with other divisions. In addition to placing the PCI Cigar Program in Circle K stores serviced by McLane in Las Vegas and one McLane account in Arizona, we have placed a large distributor humidor in a McLane facility in Goodyear, Arizona, through which McLane services its Sun West Division (Arizona and Nevada). AM/PM. We have executed an agreement with AM/PM to place the PCI Cigar Program in AM/PM convenience stores in Washington and Oregon. We have placed humidors in 106 stores, and will roll out to over 100 stores, with the potential of nearly 200 stores. If initial results are successful, we intend to present the PCI Cigar Program to AM/PM nationwide. Associated Grocers. We have executed an agency contract with Associated Grocers to distribute the PCI Cigar Program to Associated Grocers' retail outlets (421 stores) in the Northwest. We have placed humidors in over 45 Associated Grocers stores. Texaco Star Mart. We service 27 Texaco Star Mart convenience stores in the Northwest, and are negotiating to expand the PCI Cigar Program with Texaco. Growth Plus; Additional Capital Needs. We intend to grow rapidly by expanding the PCI Cigar Program distributing moderately-priced name brand and private label premium cigars and other cigars, in-store humidors, direct marketing, in-store merchandising, telemarketing, and education and training to retail outlets in the US and Canada. We have grown quickly with investor capital and bridge financing, but we have reached a point where substantial outside capital is needed to further expand the PCI Cigar Program. Overall Marketing. Colin Jones and Greg Lambrecht each have been in the impulse item distribution business for over 12 years and have established relationships with many accounts across the United States that represent additional retail outlets not yet selling premium cigars. PCI officers attended the National Association of Convenience Stores ("NACS") convention in Las Vegas and displayed our premium cigars and in-store humidors. Our humidors advertise the PCI logo, name, and toll free number. We recently entered an endorsement agreement with a celebrity spokesman, Arie Luyendyk, to help promote the PCI Cigar Program. Products The PCI Cigar Program. We offer a "full service" program to convenience stores and gas station outlets, grocery stores, and other high volume retail stores. To effectively place premium cigars and in-store humidors, we primarily distribute directly to outlets, but to a smaller degree distribute through independent local/regional and national distributors. Direct sales accounted for approximately 88% of our total sales and third-party distribution accounted for less than 12% of our total sales for the quarter ended June 30, 1997. We offer and recommend that a PCI sales representative visit each local area to educate store managers and regional supervisors about the 29 PCI Cigar Program. This presentation is accompanied by the PCI "Guide to Premium Cigars" that reviews the types of premium cigars by taste, smell, country of origin, and, most importantly, how to effectively sell premium cigars. The on-going success of our "full service" PCI Cigar Program depends, in part, on tele-merchandising. Our representatives call store managers at retail outlet locations periodically to ask specific questions relating to sales volume, humidity levels, and placement of humidors. We analyze customer feedback and make recommendations on cigar brands and price points based upon the customer profile and experience of a retail location. This system has been working effectively in Canada for several months, and is being implemented in the U.S. Humidors. We provide, and retain ownership of, all countertop humidors shipped to retail outlets. Our humidors provide an attractive product display and increase counter space available for PCI's products. In addition, we have designed and attached a magazine rack, which can be used to display and sell trade magazines such as Cigar Aficionado and Smoke. The celebrity covers used by such magazines, when displayed in the magazine rack, provide high impact, point of purchase signage. Each PCI in-store humidor is a sealed case or box that displays premium cigars in an optimal environment of humidity. Our in-store humidors come in varying sizes that can store and display 50 to 400 cigars. The most popular humidor is a stained, hand-made wood case with a clear plexiglass lid, which holds 75 to 125 cigars. PCI's in-store humidors are designed to be placed on store countertops next to the cash register for maximum exposure. Each in-store humidor is equipped with a humidifier unit and a humidity gauge to indicate when to soak the humidifier in purified water. We designed a long-lasting Spanish cedar humidifier to maintain constant humidity. Point of purchase signs which describe the characteristics of the cigars, such as the name of the cigar, country origin of the tobacco, size, flavor, and price are placed on the front of each stock keeping unit ("SKU") in the in-store humidors. PCI does not pay "slotting" fees or other inducements to retailers in order to secure counter space, which could affect our ability to place our humidors in prime locations. In addition, other major manufacturers or distributors may have agreements with convenience stores which require the stores to locate the manufacturers' or distributors' tobacco products in a counter position that is preferential to, or at least as favorable as, the location of other suppliers' products, including our humidors. This may inhibit our ability to obtain favorable counter presentation of our humidors. We currently have four suppliers of humidors which are based in Arizona, Oregon, California and Canada, our largest supplier being The Wildwood Collection of Scottsdale, Arizona. Although we have specially designed our humidors to meet our business needs, we believe any reputable cabinet making company could meet our production specifications. For this reason, we do not believe we are dependent upon any humidor supplier and we have not entered any written contracts with our humidor suppliers. Our Cigars. We distribute moderately-priced imported premium cigars, a limited number of higher-priced finest quality premium cigars, a significant number of mass-market cigars and certain accessories. We currently distribute over 60 brands of cigars. 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. 30 The manufacturing process for premium cigars includes the selection, purchase and aging of the tobacco and hand rolling of the cigars. Tobacco is selected based upon its flavor and quality. The availability and quality of tobacco varies from season to season as a result of such factors as weather conditions and the demand for the tobacco. The taste of the cigar is based on the quality and/or blend of the tobacco. We do our best to select premium cigars with a blend of imported fine aged tobaccos. After tobacco is grown, it is typically aged for periods of between three months to three years. The time period for aging cigar tobacco has been substantially reduced in recent months due to the high demand for leaf tobacco used for cigar manufacturing worldwide. The cigar industry in general has recently experienced shortages in high-priced premium cigars because of shortages of certain types of the longest aged and highest priced natural wrapper and long filler. Currently, there is an abundant supply from a number of countries of the moderately-priced premium cigars of the types distributed by PCI. Although the shortages have not materially impacted cigar production to date, we cannot assure that future shortages will not have an adverse effect on the PCI Cigar Program. Mass Market Cigars. Mass market cigars are machine-made and generally have a retail price point of $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 three pounds/1,000 cigars) and smaller, natural leaf cigars (weighing less than three pounds/1,000 cigars). We purchase significant quantities of mass market cigars from several sources for sale at our lowest price point. Mass market large cigars combine natural leaf wrapper and man-made binder made from tobacco ingredients instead of natural binder, with filler threshed into short, tobacco ingredients replacing natural tobacco leaf. Flavoring and/or plastic tips are often added to popularly priced mass market large cigars. Price Point Supplies. Our PCI Cigar Program currently provides each customer with a number of cigars at each price point established between PCI and the specific store or distributor. This strategy allows us to substitute various premium cigar brands in each price group, depending upon supplies available from time to time. Our typical humidor displays premium cigars in three or five different price point SKUs. In addition, we maintain large custom-designed display case humidors with eight or more price point SKUs for selected high-volume locations. No Returns of Unsold Product to Date. We are generally obligated to accept returns of unsold products, but because of the nature of our PCI Cigar Program, we have had no returns to date. Our program tends to eliminate returns because properly humidified premium cigars improve with age, and our program properly maintains cigars in humidifiers. In addition, we do not supply more inventory than is required, but focus on filling price points as inventory depletes. Our telemerchandisers currently maintain frequent contact with the stores we service. We cannot assure that this record will continue. Our Expansion Plans Our strategy for continuing growth and achieving profits involves filling a market niche by providing affordable, premium cigars that are conveniently accessible to the cigar smoking public. The PCI Cigar Program includes several components, including: Cigar Purchasing and Supply. Most of the cigars we sell are high quality, low to medium priced, premium cigars that are currently available in large quantities and are affordable. We do business with, and are negotiating relationships and agreements with, cigar importers and manufacturers which have relationships with tobacco plantations in the Dominican Republic and Mexico. The Dominican plantations with which we deal are located in the same valley that produces tobacco used in high priced premium cigars, and we believe that our suppliers produce cigars of similar high quality. However, we believe we can purchase and distribute these cigars at significantly 31 lower prices than those made by the brand name manufacturers. We intend to maintain the manufacturers' labels which they use in their country's local markets, and have begun to create our own private labels which may be banded on these premium cigars. We believe that we have built satisfactory supply relationships and are currently working with various cigar importers to assure that PCI will have an adequate supply of cigars at each key retail price point. We anticipate rapid expansion during the next few years, and we expect to add new suppliers to broaden our access to quality cigar and cigar accessories. We are also securing rights to distribute and place several different in-store humidors. Master Agreements and Arrangements with National Chains. A "master agreement" is a form retailer or regional distribution agreement that PCI negotiated with a major convenience store chain, which is approved for use by retail stores or regional distribution centers within the chain, but which must be accepted by each individual store or distribution region which wishes to participate in the PCI Cigar Program. We have "master" agreements and other arrangements with several major convenience store chains to place the PCI Cigar Program in corporate and franchise stores, the largest of which is Southland USA (7-Eleven). However, the nature of the convenience store distribution business is that all supplier relationships are terminable on short notice (usually on between 30 and 120 days notice). Participation in the PCI Cigar Program is usually at the discretion of each local franchise store or each region of the country. As long as demand for premium cigars remains strong, we believe that individual stores and regions will participate in our PCI Cigar Program. Regional Direct Distribution and Sales Companies. We have entered into arrangements or agreements with two regional direct distribution and sales companies to supply them with premium cigars and in-store humidors in mass quantities. These regional direct distribution and sales companies, Rose Hearts and McLane Company, will, in turn, sell, deliver direct to the stores, service, and merchandise the PCI Cigar Program. Third-party distribution accounted for less than 12% of our total sales for the quarter ended June 30, 1997. We have provided distributors with large humidors for quantity storage of cigars at distribution warehouses. Our distribution relationship with Rose Hearts is ongoing, but we anticipate that Rose Hearts' cigar distribution operations may be phased out. In that event, we would assume direct servicing of our accounts. We believe that our relationship with McLane Company and with other distribution companies with which we may contract in the future will allow us to expand the PCI Cigar Program rapidly throughout the western United States. We intend to continue to utilize and expand this sales, distribution and merchandising strategy with similar regional direct distribution and sales companies throughout the rest of the U.S. and possibly Canada. PCI entered a Distributorship Agreement on June 13, 1997 with Rose Hearts for the non-exclusive distribution to Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho, Oregon, Washington and Northern California. The agreement provides that any master agreement with a national PCI account or national distributor will supersede the Rose Hearts agreement. We pay Rose Hearts a commission equal to 10% of the wholesale cost to the store of products PCI ships to third-party stores where Rose Hearts provides only in-store merchandising support services. We pay Rose Hearts a commission equal to 22% of the wholesale cost to the store of PCI products that Rose Hearts delivers to the stores directly. We provide Rose Hearts, at our expense, with a warehouse humidor to store PCI products shipped to Rose Hearts. The agreement is terminable by either party upon 30 days written notice. Greg P. Lambrecht is the President and sole shareholder of Rose Hearts and the Secretary, Treasurer, Vice President of National Sales and a substantial shareholder of PCI. Price Point Supply Systems. We have developed a price-point-based ordering system to eliminate complications of brand-specific product ordering, minimize stock shortages, and more effectively meet demand. We group our cigars by retail price point. Store personnel simply select the 32 amount of cigars needed at each price point and phone or fax in the order. We then fill the order with cigars in stock which fall within the price point grouping. It is possible to order cigars by name, but the PCI Cigar Program provides that if a particular brand is not in stock when the order is taken, then a comparable cigar within the price point will be substituted. Extensive Education and Training Program. We believe that proper education, training, and support of store personnel can enhance the PCI Cigar Program by providing knowledge and awareness of brand popularity, cigar characteristics, care of humidors, and proven selling techniques. We have developed the "Premium Cigars International Comprehensive Guide to Premium Cigars" for distribution to store managers and employees, and a separate comprehensive package for distributors that introduces and explains the PCI Cigar Program in detail. State of the Art Management/Accounting Information Systems. Customer service and support are key factors in the success of the PCI Cigar Program. We have acquired and are implementing a modern, mid-sized integrated information system throughout PCI to support a business strategy which includes call management, order entry, credit and collection, inventory management, accounting and reporting, and decision management tools. Utilizing Distribution Companies And Telemarketing. We directly distribute the majority of our products to our customers. McLane Company and Rose Hearts are our only third party distributors and their combined distributions represent less than 12% of our total sales. Athough our relationship with Rose Hearts is ongoing, we anticipate that Rose Hearts' cigar distribution operations may be phased out. We are expanding the PCI Cigar Program through McLane Company and other third party distributors that currently deliver items to convenience stores, grocery stores, gas stations and restaurants throughout the United States and Canada. We believe we can use established national distributors to enable us to expand rapidly to thousands of stores that they already service. By using large distributors, we can consolidate the invoicing of thousands of stores and drop ship large quantities of cigars and humidors to the distributors' regional warehouses or distribution centers for delivery directly to retail stores. We plan to increase the number of telemerchandiser we use so that stores being serviced by distributors will be called regularly to check on supply, chart sales, give tips on selling and placement of the humidors, and ensure that the store managers know how to care for the humidors. Most distributors purchase the products directly from us and then resell the products to the outlet accounts they serve. The compensation for these distributors is built into their pricing from us. Because we own the accounts that Rose Hearts previously served, we retain ownership of the products Rose Hearts distributes and pay Rose Hearts a percentage commission of the wholesale cost to the store, but Rose Hearts' compensation is no more favorable than any non-related-party distributor who is compensated in the pricing structure. Advertising and Promotions; Spokesperson. We intend to support the distribution of our cigars through advertising in numerous publications, including Cigar Aficionado, Smoke, Cigar Lovers, The Cigar Smoker and other publications oriented to the type of person whom, we believe, smokes premium cigars. We also intend to expand our advertising and marketing through promotions distributed at our points of sale and through direct mail, and participation in trade shows. Recently we signed an agreement with Arie Luyendyk, winner of this year's Indianapolis 500, to be a spokesperson for PCI. Our logo is displayed on his helmet, and he will support us through personal appearances. Competition We believe that, as a distributor of premium cigars to convenience outlets, 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 many other small tobacco distributors and jobbers. The broader cigar distribution industry is dominated by a small number of companies which are well known to the public. These well-known cigar manufacturing and wholesale companies, along with major cigarette manufacturers, have not yet entered the retail distribution market. These 33 companies include 800 JR Cigar Company, Inc., Consolidated Cigar Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar Company, US Tobacco and others. These companies may do so in the future. Also a number of large distribution companies, such as McLane Company and Core*Mark, who are currently in the convenience outlet distribution business, but who have not entered the cigar distribution business, may do so in the future. These cigar manufacturing and wholesale companies have larger resources than PCI and would, if they enter the cigar distribution market, constitute formidable competition for our business. We compete by offering our PCI Cigar Program as a total package of service, convenience and quality. Our cigars are not the cheapest in the market nor the highest-end quality cigars, but we believe they represent excellent value as high quality products at fair prices and in convenient purchasing locations. Government Regulation General. The tobacco industry in general has been subject to regulation by federal, state and local governments, and recent trends have been toward increased regulation. Although regulation initially focused on cigarette manufacturers, it has begun to have a broader impact on the tobacco industry as a whole. Regulation may focus more directly on cigars in the future because of the recent increase in popularity of cigars. Regulations include labeling requirements, limitations on advertising and prohibition of sales to minors, and laws restricting smoking from public places including offices, office buildings, restaurants and other eating establishments. In addition, cigars have been subject to substantial excise taxation at the federal, state and local level, and those taxes may increase in the future. Future regulations and tax policies may have a material adverse affect upon the ability of cigar companies, including PCI, to generate revenue and profits. Excise Taxes. U.S. Federal Taxes. Effective January 1, 1991, the federal excise tax rate on large cigars (weighing more than three pounds per thousand cigars) was increased to 10.625%, capped at $25.00 per 1,000 cigars, and again increased to 12.75%, capped at $30.00 per 1,000 cigars, effective January 1, 1993. The federal excise tax is calculated based on the manufacturer's selling price, net of the federal excise tax and certain other exclusions. The federal excise tax on little cigars (weighing less than three pounds per thousand cigars) increased from $0.75 per thousand cigars to $0.9375 per 1,000 cigars effective January 1, 1991. The excise tax on little cigars increased to $1.125 per 1,000 cigars effective January 1, 1993. We do not believe that the current level of excise taxes will have a material adverse effect on our business, but we cannot assure that additional increases will not have a material adverse effect on our business. U.S. State and Local Taxes. Cigars and pipe tobacco are also subject to certain state and local taxes. Deficit concerns at the state level continue to exert pressure to increase tobacco taxes. Since 1964, the number of states that tax cigars has risen from six to 42. State excise taxes generally range from 2% to 75% of the wholesale purchase price, and are not subject to caps similar to the federal cigar excise tax. In addition, seven states have increased existing taxes on large cigars since 1988. Five states tax little cigars at the same rates as cigarettes, and four of these states have increased their cigarette taxes since 1988. State cigar excise taxes are not subject to caps similar to the federal cigar excise tax. Increases in such state excise taxes or new state excise taxes may in the future have a material adverse effect on our business. Canadian Taxes. Each Canadian province has approved CAN-AM to collect provincial taxes under the applicable province's tobacco tax act. The tax rates vary from province to province, but range from 45% of the retail selling price in Manitoba and Alberta to 95% of the retail selling price in Saskatchewan. Health Regulations. General. Cigars, like other tobacco products, are subject to regulation in the U.S. at the federal, state and local levels. Together with changing public attitudes toward smoking, a constant 34 expansion of smoking regulations since the early 1970s has been a major cause for a substantial decline in consumption. Moreover, the trend is toward increasing regulation of the tobacco industry. Federal Regulation. In recent years, a variety of bills relating to tobacco issues has been introduced in the Congress of the United States, including bills that would have: prohibited the advertising and promotion of all tobacco products and/or restricted or eliminated the deductibility of such advertising expenses; set a federal minimum age of 18 years for use of tobacco products; increased labelling requirements on tobacco products to include, among other things, addiction warnings and lists of additives and toxins; modified federal preemption of state laws to allow state courts to hold tobacco manufacturers liable under common law or state statutes; required tobacco companies to pay for health care costs incurred by the federal government in connection with tobacco related diseases; and shifted regulatory control of tobacco products and advertisements from the Federal Trade Commission to the U.S. Food and Drug Administration (the "FDA"). In some cases, hearings were held, but only one of these proposals was enacted. That law requires states, in order to receive full funding for federal substance abuse block grants, to establish a maximum age of 18 years for the sale of tobacco products along with an appropriate enforcement program. The law requires that states report on their enforcement efforts. Future enactment of the other bills may have an adverse effect on the sales or operations of PCI. Currently, the federal Consumer Product Safety Commission is working to establish such standards for cigarettes. The enabling legislation, as originally proposed, included little cigars. However, little cigars were deleted due to the lack of information on fires caused by these products. Excise Taxes; Budget Law. In recent years, many increases in cigarette excise taxes have been proposed. The "balanced budget" legislation signed into law by President Clinton on August 5, 1997 increases federal excise taxes on each pack of cigarettes by 10 cents in 2000 and an additional 5 cents in 2002. EPA Regulation. The U.S. Environmental Protection Agency (the "EPA") has recently published a report with respect to the respiratory health effects of passive smoking. The report concluded that widespread exposure to environmental tobacco smoke presents a serious and substantial public health impact. In June 1993, Philip Morris and five other representatives of the tobacco manufacturing and distribution industries filed suit against the EPA seeking a declaration that the EPA does not have the statutory authority to regulate environmental tobacco smoke, and that, in view of the available scientific evidence and the EPA's failure to follow its own guidelines in making the determination, the EPA's final risk assessment was arbitrary and capricious. The litigation is still pending. FDA Regulation. The FDA has proposed rules to regulate cigarettes and smokeless tobacco in order to protect minors. Although the FDA has defined cigarettes in such a way as to include little cigars, the ruling does not directly impact large or mass market cigars. However, once the FDA has successfully exerted authority over any one tobacco product, the practical impact may be felt by distributors and manufacturers of any tobacco product. If the FDA is successful, this may have long-term repercussions on the larger cigar industry. The major tobacco companies and advertising companies recently brought an action in federal court in North Carolina challenging FDA regulation of tobacco products. The trial court ruled, on April 25, 1997, that the FDA may regulate tobacco products under the Federal Food, Drug and Cosmetic Act. The court certified its order for immediate appeal and the ultimate resolution of the litigation is still pending. In June, 1997, the Action on Smoking and Health (ASH), an anti-tobacco organization, submitted a petition to the FDA asking it to assert jurisdiction over cigars the same way it has done over cigarettes. ASH wants the FDA to adopt rules to regulate the sale, advertising, and promotion of cigars. Its petition cites various studies on the use and dangers of cigars. A health panel, headed by C. Everett Koop, has also asked the FDA to regulate cigars. State Regulation. In addition, the majority of states restrict or prohibit smoking in certain public places and restrict the sale of tobacco products to minors. A majority of states have prohibited smoking in places such as: any public building designated as non-smoking; elevators; public 35 transportation; educational facilities; health care facilities; restaurants and workplaces. Local legislative and regulatory bodies have also increasingly moved to curtail smoking by prohibiting smoking in certain buildings or areas or by requiring designated "smoking" areas. In a few states, legislation has been introduced, but has not passed, which would require all little cigars sold in those states to be "fire-safe" little cigars, i.e., cigars which extinguish themselves if not continuously smoked. Passage of similar restrictions or regulation restricting smoking in certain places, regulating point of sale placement and promotions, requiring warning labels or relating to so-called "second-hand" smoke could have an adverse effect on our sales or operations. Certain retailers may decide to stop selling all tobacco products because of public pressure. Massachusetts lawmakers have introduced several bills to require warning labels on cigars, but none has yet passed. On June 16, 1997, Texas passed a law which prohibits offering cigarettes or tobacco products (including cigars) in a manner that permits a customer direct access to the products, but the law specifically does not apply to "that part of a business that is a humidor or other enclosure designed to store cigars in a climate-controlled environment." California Regulation -- Proposition 65. 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. However, California requires "clear and reasonable" warnings to consumers who are exposed to chemicals known to the state to cause cancer or reproductive toxicity, including tobacco smoke and several of its constituent chemicals. Violations of this law, Proposition 65, can result in a civil penalty not to exceed $2,500 per day for each violation. Although similar legislation has been introduced in other states, no action has been taken. We cannot assure you that other states will not enact similar requirements. During 1988, 26 manufacturers of tobacco products, including the largest mass-marketers of cigars, entered into a settlement of legal proceedings filed against them pursuant to Proposition 65. Under the terms of the settlement, the defendants agreed to label retail packages or containers of cigars, pipe tobaccos and other smoking tobaccos other than cigarettes manufactured or imported for sale in California with the following specified warning label: "This Product Contains/Produces Chemicals Known To The State of California To Cause Cancer, And Birth Defects or Other Reproductive Harm." Although the settlement of the Proposition 65 litigation by its terms only impacts California, it is not practical for national cigar manufacturers to confine their warning labels to cigars earmarked for sale in California. Consequently, since 1988, most boxes of mass market cigars manufactured in the United States carry cancer warning labels. Canadian Regulations. Bill C-71, The Tobacco Act, became effective in Canada on April 25, 1997. The purpose of the Act is to protect the health of Canadians, especially young people. The new tobacco legislation affects all persons who promote or sell tobacco products. The Act builds on many of the measures formerly set out in the Tobacco Sales to Young Persons Act, under which the tobacco industry in Canada was previously operating. Health Canada, an agency of the Government of Canada advises that the Canadian government may issue additional regulations to complement the new Act and that provinces may issue their own supplemental regulations. We provide you the following summary of what we believe is the current status of Canadian tobacco regulations after the effectiveness of the Act and Health Canada's stated enforcement policy. We caution you that the Act and such regulations are subject to change or supplement and Health Canada's enforcement policies may change: The Act requires promoters or retailers of tobacco products to: o refuse to sell their products to persons younger than 18 years (under 19 years in the Atlantic provinces, British Columbia and Ontario). Health Canada strongly advises retailers to require valid proof of age identification; o ensure the visibility of signs that inform the public that furnishing tobacco products to minors is prohibited by law; o refuse to sell cigarettes in a number less than 20; and o not display tobacco products in a way that lets customers handle them before purchase. 36 The Act prohibits: o the sale of tobacco products through vending machines without a security device; o mailing tobacco products directly to consumers; o delivering tobacco products across a provincial boundary except between manufacturers and retailers; and o giving promotional incentives and free gifts displaying a tobacco brand name or logo; giving rewards or incentives for buying tobacco products or for buying another product or service. Retailers may display: o signs indicating the price and availability of tobacco products, but no tobacco brand name or logo may appear on these signs; o tobacco products and smoking accessories that display a tobacco brand name or logo. After October 1, 1998, retailers may not display: o tobacco sponsorship promotions of activities, events or facilities in conjunction with the display of a tobacco product or packaging, except in places where children are prohibited by law. Advertisements must: o contain factual and brand information only (e.g.: size, number, tar content, sales data, technical specifications, etc.); o may not contain images that suggest a way of life or that appeal to youth; o may not be misleading or likely to create a false impression about a tobacco product or its emissions; and o only appear in publications mailed to a named adult, publications with an adult readership of not less than 85% or in signs in a place where young persons are not permitted by law. Health Canada has informed retailers that it will enforce the Act using a multi-staged approach. It will first notify affected parties of their obligations and give them an opportunity to comply. It will then monitor compliance and warn non-complying persons. It will pursue further enforcement only against persons who consistently fail to comply after warning. Tobacco Industry Litigation. General. Historically, the cigar industry has not experienced material health-related litigation. However, litigation against leading United States cigarette manufacturers seeking compensatory and, in some cases, punitive damages for cancer and other health effects alleged to have resulted from cigarette smoking is pending. We carry general liability insurance with an aggregate limit of $10,000,000, and product liability and health hazard insurance. These policies also cover our suppliers, manufacturers and retail outlets, however, we cannot assure you that we will not be subject to liability which is not covered beyond the limits of our general liability, product liability and health hazard insurance coverage, and which may have a material adverse effect upon our business. Proposed Settlement with States. Several states have sued tobacco companies seeking to recover the monetary benefits paid under Medicaid to treat residents allegedly suffering from tobacco-related illnesses. On June 20, 1997 the Attorneys General of 40 States and the major United States tobacco companies announced a proposed settlement of the litigation, which, if approved by the United States Congress, would require significant changes in the way United States cigarette and tobacco companies do business. The potential impact, if any, on the cigar industry is uncertain. 37 As announced, the proposed settlement would include, among other things: o U.S. tobacco companies will pay $360 billion in the first 25 years, and then $15 billion a year. o The Food and Drug Administration could regulate nicotine as a drug but could not ban it until 2009. o Sick smokers can still sue the industry. Any money they won would come out of an annual $5 billion tobacco company fund. Smokers also could receive punitive damages for any future wrongdoing by tobacco companies out of that fund. o All class-action lawsuits against the industry are banned. o No tobacco billboards or other outdoor ads. o No humans or cartoons in ads or on cigarette packs. o No brand-name sponsorship of sporting events. o Text-only ads in magazines with significant youth readership. o No Internet advertising. o No "product placement" in movies and on TV. o Black labels covering the top fourth of cigarette packs, including "Cigarettes are addictive" and "Smoking can kill you." o A cigarette vending machine ban; no self-service displays; cigarettes and smokeless tobacco sold only behind store counters. o Industry will pay fines if smoking by youths fails to drop by 30 percent in five years, 50 percent in seven years and 60 percent in 10 years. The penalty is $80 million per percentage point by which the target is missed. o No smoking in public places and most workplaces unless there are separately ventilated smoking areas. On July 2, 1997, the State of Mississippi announced a separate settlement with the tobacco industry. The State agreed to drop its current suit against the U.S. tobacco companies for health care expenses and agreed not to file a similar suit in the future. The agreement guarantees the State nearly $4 billion, even if the 40-State settlement is not approved by the Congress or the President. However, the proposed 40-State settlement, if approved, will supersede Mississippi's settlement. Other State Actions. Florida and Massachusetts have enacted statutes permitting suit against the tobacco companies to recoup such Medicaid costs, and recently, one defendant has entered into a settlement with such plaintiff states, which provides that the settling defendant will, among other things, pay a portion of its profits in the future to the plaintiff. Under the Florida statute, many of the tobacco companies' traditional defenses, such as assumption of risk, are vitiated. The statute also permits the state to establish causation (that smoking causes cancer, heart disease and other ailments) through the use of purely statistical evidence. The tobacco companies have filed suit challenging the Florida law as unconstitutional, but the Florida Supreme Court upheld the statute, and agreed that the defendants cannot use assumption of the risk as a defense against the State. Florida is the first state to commence a trial in a suit against U.S. tobacco companies. Jury selection in that case began August 1, 1997. The State is seeking to recover $1 billion that it claims taxpayers have spent through Florida's Medicaid program to treat poor people who contracted smoking related diseases, as well as seeking additional penalties through racketeering allegations. Florida's highest court has held that the State may sue a cigarette maker for costs to treat diseases linked to smoking. Also, a Florida appeals court upheld a lower court's order that requires the release of sensitive tobacco industry documents for use by the State in its suit. Class Actions. A class action suit, Castano v. American Tobacco, et al. has been filed in federal district court in New Orleans against the entire cigarette industry. On February 17, 1995, the district court granted plaintiffs' motion for class certification with regard to the liability issues of fraud, 38 breach of warranty (express or implied), intentional tort, negligence and strict liability as well as the issues of consumer protection and punitive damages. The court defined the class as "all nicotine-dependent persons in the United States," "the estates, representatives, and administrators of these nicotine-dependent cigarette smokers," and "the spouses, children, relatives and 'significant others' of these nicotine-dependent cigarette smokers as their heirs or survivors." The court defined "nicotine-dependent" to mean "all cigarette smokers who have been diagnosed by a medical practitioner as nicotine-dependent; and/or all regular cigarette smokers who were or have been advised by a medical practitioner that smoking has had or will have adverse health consequences who thereafter do not or have not quit smoking." In May 1996, the Fifth Circuit Court of Appeals reversed a Louisiana district court's certification of a nationwide class consisting essentially of nicotine dependent cigarette smokers. Notwithstanding the dismissal, new class actions asserting claims similar to those in Castano have recently been filed in certain states. To date, two pending class actions against major cigarette manufacturers have been certified. The first case is limited to Florida citizens allegedly injured by their addiction to cigarettes; the other is limited to flight attendants allegedly injured through exposure to secondhand smoke. A class-action suit is proceeding in Miami, Florida where 60,000 flight attendants are seeking billions of dollars for alleged injuries from exposure to secondhand smoke on airplanes. The plaintiffs claim that exposure to secondhand smoke in airplane cabins caused cancer and other diseases. The plaintiff's attorneys have cited a 1993 EPA report on the dangers of secondhand smoke. The attorneys have also asked the court to declare that the case will proceed, regardless of any decisions made in other settlements. We believe that this case is the first tobacco class action suit to go to trial. In another decision, Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608 (1992), the United States Supreme Court held that certain federal legislation applicable specifically to cigarette manufacturers preempts claims based on failure to warn consumers about the health hazards of smoking, but does not preempt claims based on express warranty, misrepresentation and fraud, or conspiracy. Although we believe that the effect of the Cipollone decision, which involved cigarette smoking, will not have a material adverse effect on PCI operations, there can be no assurance of what the ultimate effect, if any, of the Cipollone decision or the pending cigarette industry litigation, or cigarette and tobacco regulation, will be on the cigar industry. Although there are numerous differences between the cigar industry and the cigarette industry, the outcome of pending and future cigarette litigation may encourage various parties to bring suits on various grounds against cigar industry participants. While it is impossible to quantify what effect, if any, any such litigation may have on our operations, we cannot assure you that such litigation would not have a material adverse effect on our operations. OSHA Regulations. The federal Occupational Safety and Health Administration (OSHA) has proposed an indoor air quality regulation covering the workplace that seeks to eliminate nonsmoker exposure to environmental tobacco smoke. Under the proposed regulation, smoking must be banned entirely from the workplace or restricted to designated areas of the workplace that meet certain criteria. The proposed regulation covers all indoor workplaces under OSHA jurisdiction, including, for example, private residences used as workplaces, hotels and motels, private offices, restaurants, bars and vehicles used as workplaces. The tobacco industry is challenging the proposed OSHA regulation on legal, scientific and practical grounds. It also contends that the proposed regulation ignores reasonable alternatives. There is no guaranty, however, that this challenge will be successful. Although we do not believe that the proposed OSHA regulation would have a material adverse effect on the cigar industry or PCI, there are no assurances that such regulation would not materially adversely impact PCI. Medical Studies on Smoking Cigar sales, as well as smoking in general, decreased after a 1964 report of the United States Surgeon General. That and numerous other subsequent studies have stressed the link between smoking, including secondary smoke and medical problems, including cancer, heart, respiratory and other diseases. "No smoking" laws, ordinances and prohibitions on cigar smoking in certain cases may have adversely affected the sale of cigar products. We believe that these factors may continue to have a material adverse effect upon the cigar industry in general and our business in particular. 39 Intellectual Property Rights We intend to assert our rights under trademark, trade dress, trade secret, unfair competition and copyright laws to protect our intellectual property, including trademarks and product designs. We will protect certain of these rights through the acquisition of trademark registrations, the development of trade dress, and where appropriate, litigation against those who are, in our opinion, infringing rights which we may have. We have obtained Arizona state trademark registrations from the Arizona Secretary of State's office for the trademarks PREMIUM CIGARS INTERNATIONAL and PCI. We cannot assure that these registrations cannot be successfully challenged or invalidated. These registrations do not provide us with any trademark rights outside the borders of the State of Arizona. We do not own any United States federal trademark registrations. We have has filed three trademark applications in the United States Patent and Trademark Office for the trademarks BIG STAR, THOROUGHBRED and PURITOS BELLEZA. We intend to use these marks in interstate commerce. In addition, we intend to file federal trademark applications with the United States Patent and Trademark Office for registration of the trademarks PREMIUM CIGARS INTERNATIONAL and PCI. We have researched and are developing other trademarks and tradenames, and intend to file additional applications when appropriate. We can give no assurance that any of these applications will mature to registration or that we will be granted the right to use any trademarks or tradenames by the United States Patent and Trademark Office. Further, we cannot assure that others will not assert rights to and ownership of, the trademarks. Use of these marks may infringe the rights of others. Currently, we do not own any patents. See "Risk Factors -- Risks Relating to Trademarks." We intend to assert our intellectual property rights against infringers. In addition, although asserting our rights can result in a substantial cost to and diversion of our efforts, we believe that protecting PCI's intellectual property rights is a key component of our operating strategy. Facilities We sublease, from an independent third party, approximately 8,500 square feet for our corporate offices, warehouse, humidor storage and distribution facilities located in the Scottsdale Airpark area of Scottsdale, Arizona. Our sublease agreement expires on May 31, 1999. The annual rent for the first year is approximately $83,571 and the annual rent for the second year is approximately $85,609. PCI is currently negotiating to lease approximately 3,064 square feet of an office/warehouse facility in Burnaby, British Columbia (a suburb of Vancouver). The proposed written lease would expire July 14, 2000. The rent is approximately $1,660, $1,915 and $2,170 per month for the first, second and third years, respectively. Distribution of products in the northwest United States is handled through the Rose Hearts facility near Seattle, Washington. We neither own nor lease a facility in that area. We believe that our distribution facilities are adequate for our present needs. However, we intend to lease additional space for distribution facilities within and outside the United States and believe that additional space will be available at commercially reasonable rents. Employees As of August 14, 1997, we had 17 full time employees, of which five were executive and administrative, five were sales and marketing, and seven were warehouse and distribution personnel. None of our employees are represented by a labor union and we believe that employee relations are good. Legal Proceedings PCI is not a party to any pending lawsuits, nor do we know of any potential claims which, in the aggregate, could have a material adverse effect on PCI's financial position. 40 MANAGEMENT Executive Officers and Directors The executive officers and directors of PCI are as follows:
Name Age Position - ---------------------------- ----- -------------------------------------------------------- William L. Anthony ...... 54 Chairman of the Board of Directors and Consultant Steven A. Lambrecht ...... 46 Director, President and Chief Executive Officer David S. Hodges ......... 41 Director and Consultant Colin A. Jones ............ 31 Director, Vice President of International Sales Greg P. Lambrecht ......... 35 Director, Vice President of National Sales, Secretary, Treasurer Karissa B. Nisted ......... 41 Chief Financial Officer and Controller Robert H. Manschot ...... 54 Director James B. Stanley ......... 34 Vice President of Purchasing Scott I. Lambrecht ...... 26 Vice President of Operations, Assistant Secretary
William L. Anthony has been Chairman of the Board since June 20, 1997 and a consultant to PCI since April 1, 1997. He has agreed to serve as PCI's Chairman for a period of up to five years. He has 30 years of business and management experience and a "Big Six" accounting background with the New York office of KPMG Peat Marwick, LLP. Mr. Anthony worked for The Dial Corp from 1984 until August, 1996 culminating his position as Executive Vice President for the Consumer Product Division with annual revenue in excess of $1,000,000,000. He has held key management positions with Bechtel, the U.S. Chamber of Commerce, MAPCO and The Dial Corp. He is the owner, President and sole shareholder of Quality Computer Services, Inc. He received both a B.B.A. and an M.A. in Accounting from the University of Mississippi in 1965 and 1966 respectively. Mr. Anthony was certified as a public accountant in Louisiana in 1969. Steven A. Lambrecht has been a director and PCI's Chief Executive Officer since December 31, 1996. He has also served as PCI's President since May 3, 1997 and as Chairman of the Board from December 31, 1996 to June 20, 1997. He has 23 years of marketing and sales experience and 17 years of management experience; most of his business experience has been in real estate development and construction. He is the owner of Forum Import/Export Company, a sole proprietorship, and was co-owner of Forum Development and Construction Company, Inc., a Washington corporation. He also owns SDCC, Inc., an Arizona development and construction corporation that he founded in 1992. He has developed and sold over 20 million dollars worth of real estate since 1974. Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father of Scott I. Lambrecht. David S. Hodges has been a director since June 20, 1997 and has been a consultant to PCI since June 2, 1997. From April 1, 1997 to May 31, 1997, Mr. Hodges served PCI in a financial management capacity. From February, 1997 to April, 1997, Mr. Hodges served as Chief Financial Officer of Pro-Innovative Concepts, Inc., a Phoenix, Arizona premium promotion company. From January 1994 to September 1996 he was the Controller of The Dial Corp's Household Consumer Products Division. From 1984 to 1992 he served the R.J. Reynolds Tobacco Company in various financial and management positions. From 1980 to 1984, he served as a Senior Auditor and Consultant for public and private clients of Price Waterhouse LLP, a "Big Six" independent public accounting firm. Mr. Hodges received a B.S.B.A. in accounting from John Carroll University of Cleveland, Ohio in 1978 and an M.B.A. in Finance from the University of North Carolina at Greensboro, North Carolina in 1980. He is a Certified Public Accountant in the State of North Carolina and a member of both the American Institute of Certified Public Accountants and the North Carolina Association of Certified Public Accountants. 41 Colin A. Jones has been a director and Vice President of International Sales for PCI since May 3, 1997. He is a founder, the Co-Chairman and the President of PCI's wholly-owned subsidiary CAN-AM. He has 12 years of experience managing, marketing and selling in the convenience store and grocery store market sectors. 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. Under his employment agreement, Mr. Jones is obligated to devote his full time to PCI. Mr. Jones attended Douglas College of New Westminster, British Columbia, Canada. Greg P. Lambrecht has been the Secretary, Treasurer and Vice President of National Sales of PCI since May 31, 1997, and a director since August 7, 1997. He is the Co-Chairman and the President, National Sales, of PCI's wholly-owned subsidiary CAN-AM. 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 to over 1,200 individual accounts in Washington, Oregon and California. He graduated with a B.A. in Communications from Western Washington University in 1984. Under his employment agreement, Mr. Lambrecht is obligated to devote his full working time to PCI. Greg P. Lambrecht is the brother of Steven A. Lambrecht and the uncle of Scott I. Lambrecht. Robert H. Manschot has been a director since July 25, 1997. He has been the President and Chief Executive Officer of the NVD and Seceurop Security Services Group, an emergency services corporation in the Netherlands and the United Kingdom, since 1995. He is also the Chairman of RHEM International Enterprises, Inc., an investment, consulting and venture capital company. He was the President and Chief Executive Officer of Rural/Metro Corporation, a Nasdaq-listed emergency services corporation, from 1987 to 1995. He has served in senior management positions with KLM's hotel management company, Sheraton, and Inter Continental Hotels in the U.S., Europe, Middle East and Africa. He has served and continues to serve on numerous public and private company and institution boards, including Nasdaq-listed Action Performance Industries, Inc., and Toronto Stock Exchange-listed Samouth Capital Corporation. He holds a bachelors degree in hotel management from the School for Hospitality Management in the Hague, Netherlands, an MBA from Boston University and is a graduate of Stanford Business School's Financial Management Program. Karissa B. Nisted has been the Chief Financial Officer since June 20, 1997 and has been the Controller of PCI since May 1, 1997. She served as Controller of Parkway Manufacturing, Inc. of Phoenix, Arizona from May 1995 to April 1997. From January 1994 to March 1995 she was the Controller of Guzman, a Tempe, Arizona construction firm. From July 1991 to October 1993 she was the Controller of Coxreels, a Tempe, Arizona manufacturing company. In 1990 and 1991 she performed accounting management for Arizona Precision Sheet Metal, a Phoenix, Arizona manufacturing company. Ms. Nisted has over 19 years' experience in accounting and financial management, including audit and tax experience with Arthur Andersen & Company of Phoenix, Arizona. Ms. Nisted received a B.B.A. in Accounting from Texas A&M University in 1978. James B. Stanley has been Vice President of Purchasing since June 20, 1997. He served as Purchasing Director for PCI since November of 1996. 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. Scott I. Lambrecht has been the Assistant Secretary of PCI since May 31, 1997, and Vice President of Operations since August 7, 1997. 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 42 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. All directors hold office until the next election of directors at the annual shareholders meeting or until their successors have been elected and qualified. The Board of Directors currently consists of six members. Upon completion of the Offering, and for five years thereafter, the underwriter's representative, W.B. McKee Securities, Inc., has the right to select one member of the Board of Directors to serve the standard term of a director. The Underwriter's Representative has not yet chosen the person that it may select for director. The Bylaws permit the Board of Directors to determine the size of the Board within a range that the shareholders have set which is currently one to nine members. The Board has set its current size at seven, and has agreed to fill the vacant seat with an additional independent director within 90 days after completion of this offering. The Bylaws also require that we maintain at least two "independent directors" who are not employees or officers and who do not have a material business or professional relationship with PCI. See "Certain Transactions -- Resolving Conflicts of Interest." Indemnification of Directors and Officers Under our Articles of Incorporation, directors and former directors are generally not liable to PCI or its shareholders for the directors' actions or failures to take action. Our Articles limit director liability to the full extent that the law allows. Generally, Arizona law permits corporations to indemnify their officers and directors if the individual officer or director acted in good faith and in a manner he or she reasonably believed to be in the best interests of the corporation. A corporation may not indemnify any director that a court finds liable to the corporation or that the director received an improper personal benefit. Corporations generally must indemnify a director or officer who win a lawsuit related to being a director or officer of the corporation. PCI has not entered any indemnification agreements with its current directors and executive officers to indemnify them against liability as directors or officers. PCI is not aware of any pending or threatened litigation or proceeding involving our directors, officers, employees or agents which would require or permit indemnification. We have obtained quotes and intend to purchase comprehensive directors and officers liability coverage with an aggregate policy limit of $5,000,000 to insure our officers and directors against certain liabilities, including securities law liabilities and liabilities relating to this initial public offering. Section 8 of the Underwriting Agreement included at Exhibit 1.1 to our Registration Statement on file with the SEC, contains indemnification provisions relating to us, our officers and directors and the Underwriter's Representative and certain of its affiliates. Under that agreement, with indemnity the Underwriter's Representative and certain of its affiliates and the Underwriter's Representative indemnifies us and our directors, officers and affiliates under certain circumstances. Among other things, the indemnification includes claims under the Securities Act and untrue or alleged untrue statements or omissions in the Registration Statement or prospectus. We encourage you to obtain a copy of the Underwriting Agreement. A fuller discussion of indemnification provisions is included under "Indemnification of Officers and Directors," of our Registration Statement on file with the SEC. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or controlling persons of PCI, pursuant to the foregoing provisions, or otherwise, we have been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by PCI of expenses incurred or paid by a director, officer or controlling person of PCI in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, PCI will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 43 Executive Compensation PCI was incorporated in December 1996 and commenced operations after December 31, 1996. Neither PCI nor its wholly-owned subsidiary, CAN-AM, paid any compensation to any of its executive officers prior to January 1, 1997. The following table sets forth the annual and long-term compensation for PCI's Chief Executive Officer from January 1, 1997 through the completion of the fiscal year ended March 31, 1997. No other officers received reportable remuneration. SUMMARY COMPENSATION TABLE
Long Term Compensation ------------------------------------------------- Annual Compensation Awards Payouts -------------------------------------- --------------------------- ------------------- (a) (b) (c) (d) (e) (f) (g) (h) (i) Other Securities All Annual Restricted Under- Other Compen- Stock lying LTIP Compen- Name and sation Award(s) Options/ Payouts sation Principal Position Year Salary ($) Bonus ($) ($) ($) SARs (#) ($) ($) - ------------------------ ------ ------------ ----------- --------- ------------ ------------ --------- ------- Steven A. Lambrecht, 1997 $7,500 -- 17,991 -- -- -- -- President, Chief Executive Officer (1) Represents compensation expense for stock issued on March 10, 1997 for consideration below fair market value.
Steven A. Lambrecht has an at-will Employment Agreement with PCI as Chief Executive Officer dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He has agreed to devote his full time to PCI activities. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable executives. The Employment Agreement allows Mr. Lambrecht to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine (9) months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. Mr. Lambrecht's Employment Agreement also provides that he will devote his full time to PCI activities. Forum Import/Export Company and Forum Development Company, Inc. have conducted no operations since Mr. Lambrecht began working with PCI. Members of Mr. Lambrecht's family manage SDCC, Inc.'s only remaining project and the company is not currently contemplating any other major projects. Mr. Lambrecht is available to SDCC, Inc. for questions, but otherwise devotes no material time to that company. Colin A. Jones has an at-will Employment Agreement with PCI as Vice President of International Sales dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a one-time management fee of $80,000, payable over a 16-month period commencing July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales, marketing, operations, management and existing contacts with major retail distributors. He has agreed to devote his full time to PCI activities and has turned over operational control of J&M to other members of J&M's management and plans to sell or liquidate J&M in the near future. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable PCI executives. The Employment Agreement allows Mr. Jones to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. 44 Greg P. Lambrecht has an at-will Employment Agreement with PCI as Vice President of International Sales dated June 13, 1997 under which, effective May 1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a one-time management fee of $80,000, payable over a 16-month period commencing July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales, marketing, operations, management and existing contacts with major retail distributors. He has agreed to devote his full time to PCI activities and has turned over operational control of Rose Hearts to Mike Rocha. Greg Lambrecht plans to sell or liquidate Rose Hearts. He will be entitled to additional benefits, such as stock options and bonuses which may be offered in the future to comparable PCI executives. The Employment Agreement allows Mr. Lambrecht to terminate his employment at any time by delivering a written notice of termination to PCI at least two weeks prior to the termination date. PCI may terminate his employment at any time, with or without cause. If PCI terminates his employment for any reason other than for cause, as defined in the agreement, PCI must continue paying him his then-current compensation on a regular basis and premiums for continued health insurance coverage for nine months, unless he is disqualified from receiving continued compensation and benefits based on certain conduct or breaches of the Employment Agreement. We also have arrangements with the following consultants, each of whom is also a director. David S. Hodges is a director and has a Business Consulting Agreement with PCI dated June 2, 1997 under which Mr. Hodges is to assist PCI with this Offering and additional projects related to strategic planning, budgeting, accounting and reporting, business analysis, information systems and operations as requested by PCI's management. Mr. Hodges receives $60 per hour and reimbursement for business expenses and health care coverage during the term of the agreement. Upon completion of this Offering, PCI or Mr. Hodges can elect to terminate the hourly payment agreement and PCI will instead pay Mr. Hodges biweekly payments of $4,800 each for a maximum six month period or until Mr. Hodges finds other employment, at which time the payments will cease. William L. Anthony, the Chairman of PCI's Board, entered a verbal agreement with PCI, on April 1, 1997, to act as a consultant to PCI's management to assist PCI with this Offering and advise them regarding certain aspects of strategic planning, business analysis and operations, including merchandising, marketing and supply chain issues as requested by PCI's management. Mr. Anthony's services have included representing PCI in certain meetings arranged by the Underwriter's Representative with prospective underwriters and institutional investors in preparation for this Offering. He has not yet been compensated for his consulting services, but PCI has agreed to pay him $2,000 per month and to reimburse certain related expenses. Either Mr. Anthony or PCI may terminate his consulting agreement at any time, with or without cause. PCI reimbursed David S. Hodges for $1,200 in attorney's fees related to the negotiation of his consulting relationship and has agreed to reimburse Greg P. Lambrecht and Colin A. Jones for approximately $6,000 in attorneys fees related to the negotiation of various personal agreements or agreements of J&M or Rose Hearts with PCI. Neither of the law firms involved have any affiliation with PCI. PCI has no standing arrangements to compensate directors. After PCI completes this offering, PCI will determine appropriate director compensation, which may include an annual retainer fee and/or a fee for each meeting attended, plus reasonable out-of-pocket expenses. 45 CERTAIN 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 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, William L. Anthony and Robert H. Manschot. The Board of Directors has agreed to appoint an additional independent director within 90 days of completion of the offering. Our independent directors have had access, at our expense, to our counsel or to independent counsel, and have ratified all related-party transactions that are ongoing. However, we entered into a number of transactions described below before we adopted our current conflicts of interest policy and before we had sufficient disinterested, independent directors to ratify the transactions. We believe that each of those transactions was on terms that were no less favorable to us than are generally available from unaffiliated third parties. Other than the transactions described below, we do not now anticipate entering into other related-party transactions or loans. CAN-AM Acquisition of J&M and Rose Hearts. On December 31, 1996, CAN-AM issued shares of its stock in exchange for the assets and liabilities of the cigar operations of J&M and Rose Hearts, including the cigar distribution accounts of each entity. PCI director and Vice President of International Sales Colin A. Jones is the President and sole shareholder of J&M. PCI director, Secretary, Treasurer and Vice President of National Sales Greg P. Lambrecht is the President and sole shareholder of Rose Hearts. Messrs. Jones and Greg Lambrecht owned 100% of CAN-AM voting stock, and three others held non-voting shares. As set forth in PCI's consolidated financial statements for the fiscal year ended March 31, 1997, the cost of the net assets to J&M and Rose Hearts and the amount at which CAN-AM acquired the net assets was the same as its historical net cost in J&M and Rose Hearts. The combined cost, net of liabilities assumed, was approximately $1,000. The asset purchases are closed transactions and we entered the asset purchase agreements before we had sufficient disinterested, independent directors to ratify the transactions. PCI Acquisition of CAN-AM. Subsequent to the asset purchase transactions, but also on December 31, 1996, PCI acquired all of the issued and outstanding shares of CAN-AM in exchange of PCI shares. No written agreement was entered between PCI and CAN-AM's shareholders to formalize the acquisition or share exchange. As adjusted by the May 31, 1997 3:1 stock split, and including shares issued on December 31, 1996 and January 9, 1997, CAN-AM's five shareholders received 817,500 shares of PCI Common Stock, representing all of the then-issued and outstanding shares of Common Stock of PCI. Mr. Jones received 371,250 or 45.4% and Greg Lambrecht received 363,750 or 44.5%. At the time PCI acquired CAN-AM's shares, neither Greg P. Lambrecht nor Colin A. Jones had any formal relationship as an incorporator, officer, director or shareholder of PCI. PCI was formed with a view to purchasing the cigar operations of the entities they owned and controlled, however, and both Greg P. Lambrecht and Colin A. Jones were affiliated with PCI as 46 promoters at the time PCI acquired CAN-AM's shares. PCI incorporator and initial director Scott I. Lambrecht is the nephew of Greg P. Lambrecht. Colin A. Jones was elected a director of PCI on January 9, 1997, shortly after PCI acquired CAN-AM's shares. The CAN-AM acquisition is a closed transaction and we acquired CAN-AM before we had sufficient disinterested, independent directors to ratify the transaction. Jones/Lambrecht Notes Receivable. Colin A. Jones and Greg P. Lambrecht each delivered to PCI long term promissory notes to PCI for $43,112.50. The notes are dated December 31, 1996, accrue interest at eight percent, and all interest and principal are due on March 31, 1999. The notes relate to CAN-AM receivables which accrued prior to PCI's acquisition of all of CAN-AM's outstanding stock on December 31, 1996. We negotiated these notes receivable before we had sufficient disinterested, independent directors to ratify the transaction, but Messrs. Jones' and Lambrecht's repayment of the notes is ongoing, and our independent directors have ratified the transactions. J&M Management Agreement. On January 1, 1997, CAN-AM entered a Management Agreement with J&M to enable CAN-AM to reimburse J&M for any services provided to CAN-AM or on CAN-AM's behalf during the transition of J&M's Canadian operations to CAN-AM. J&M is to receive no additional sum, fee or commission other than reimbursement for J&M's expenses which are directly incurred in providing services to or on behalf of CAN-AM. At CAN-AM's sole discretion, CAN-AM may offset the reimbursement due under the Management Agreement against any related-party receivable that CAN-AM may owe to J&M. We entered this Management Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with J&M under the agreement is ongoing, and our independent directors have ratified the agreement. J&M, as a Canadian corporation wholly-owned by Colin A. Jones, continues to distribute certain wholesale and impulse purchase items to convenience stores and other accounts entirely located in Canada. J&M has, in the past, distributed certain cigars of Cuban origin to its convenience store accounts and may do so in the future. Neither PCI nor its wholly-owned Canadian subsidiary CAN-AM currently distributes any cigars or other products of Cuban origin either in the United States or Canada. PCI's standard form supplier agreement strictly prohibits its suppliers from providing any product containing any component of Cuban origin. PCI believes that any continued distribution of Cuban cigars by J&M is not competitive with, nor would represent a conflict of interest with, PCI's operations because U.S. law prohibits PCI and CAN-AM from engaging in such distribution and because J&M is not distributing on behalf of any competing cigar distribution company, PCI believes the distribution would not materially or incrementally impact PCI's operations, because Cuban cigars are already in the Canadian market. Luyendyk Endorsement Agreement. On May 1, 1997, PCI entered an Endorsement Agreement with Arie Luyendyk under which PCI would issue 15,000 shares of Common Stock (as adjusted for the 3:1 Stock Split) to Mr. Luyendyk subject to a six-month vesting schedule. In order to meet its obligations under the Endorsement Agreement without diluting the relative security positions of other shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by the 3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer and Chairman, Steven A. Lambrecht, at $0.33 per share. We entered the Endorsement Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with Mr. Luyendyk under the agreement is ongoing, and our independent directors have ratified the agreement. Rose Hearts Distributorship Agreement. On June 13, 1997, PCI entered a Distributorship Agreement with Rose Hearts for the non-exclusive distribution to Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho, Oregon, Washington and Northern California. The agreement provides that any master agreement with a national PCI account or national distributor supersedes the Rose Hearts agreement. We pay Rose Hearts a commission equal to 10% of the wholesale cost of products PCI ships to third-party stores where Rose Hearts provides only in-store merchandising support services. We pay Rose Hearts a commission equal to 22% of the wholesale cost of PCI products that Rose Hearts delivers to the stores directly. Greg P. Lambrecht is the 47 President and sole shareholder of Rose Hearts and a director and the Secretary, Treasurer, Vice President of National Sales and a substantial shareholder of PCI. We entered this Distributorship Agreement before we had sufficient disinterested, independent directors to ratify the agreement, but our relationship with Rose Hearts under the agreement is ongoing, and our independent directors have ratified the agreement. Barton Financing Settlement. On June 13, 1997, PCI entered a Full Settlement and Full Release of Equity Interest agreement among CAN-AM, Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones, Greg S. Barton and two of Mr. Barton's lenders. The agreement settled potential equity claims by Mr. Barton and his lenders regarding a September 5, 1996 loan for $110,000 at an annual interest rate of 36% to Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones and CAN-AM. CAN-AM had expressly accepted liability for the loan under the terms of each of the Asset Purchase Agreements with J&M and Rose Hearts on December 31, 1996. After PCI purchased all of CAN-AM's shares, PCI desired to extinguish the loan obligation primarily to eliminate the burden on CAN-AM's cash requirements, but also to avoid any potential, but unasserted equity claims against PCI from Mr. Barton's lenders related to the loan obligation. As a result of the settlement, PCI repaid $10,000 to one of Mr. Barton's lenders, the loan was reduced to $100,000 and Mr. Barton converted the loan to bridge financing (See "Interim Financing -- Bridge Financing"). Mr. Barton's forgiveness of the reduced $100,000 loan is the consideration he gave in exchange for an 8% bridge note for $100,000 and bridge warrants to purchase 38,095 shares of PCI Common Stock at 50% of the offering price or $2.625 per share. Greg P. Barton is a 7.45% beneficial owner of PCI's Common Stock. Greg P. Lambrecht and Colin A. Jones own and control Rose Hearts and J&M, respectively, are officers and directors of CAN-AM and are controlling shareholders, officers and directors of PCI. The settlement transaction is a closed transaction and we entered the settlement before we had sufficient disinterested, independent directors to ratify the transaction. Barton and Mullavey Loans. On or about June 18, 1996, Greg S. Barton loaned Greg P. Lambrecht and Rose Hearts $50,000 in a transaction which included an option for Mr. Barton to convert the debt to equity of Rose Hearts. Between approximately May and September 1996, Ben P. Mullavey, a prior Rose Hearts consultant, loaned $50,000 to Rose Hearts in an undocumented transaction and provided consulting services to Rose Hearts. PCI, Rose Hearts and Greg P. Lambrecht agree that the Barton and Mullavey loans are solely Rose Hearts' debt obligations which CAN-AM did not assume as a part of the December 31, 1996 Asset Purchase Agreement for Rose Hearts' cigar operations. Ben P. Mullavey communicated to PCI on April 23, 1997, that he believes he has rights to convert his debt to shares of PCI Common Stock. Mr. Mullavey did not specify any number of shares that he believes he is entitled to, but instead demanded payment of $55,000, representing the principal from his undocumented loan and $5,000 for consulting services he provided to Rose Hearts. Greg P. Lambrecht and Rose Hearts are negotiating with Messrs. Barton and Mullavey regarding a settlement of their claims, but PCI will not be a party to any settlement and will not directly issue any Common Stock to Barton or Mullavey. Because PCI is not a party to these Barton and Mullavey loans, our independent directors did not, and are not required to, review or approve the transactions. Lambrecht-LBIC Stock Sale. On June 17, 1997, Steven A. Lambrecht sold 20,000 shares of PCI Common Stock to Life of Boston Insurance Company, an Oklahoma corporation ("LBIC"). The Lambrecht-LBIC transaction was to provide additional incentive to LBIC to invest the final $250,000 to complete the Bridge Financing (See "Interim Financing -- Bridge Financing"). Steven A. Lambrecht is PCI's President and Chief Executive Officer and the beneficial owner of 17.33% of PCI's Common Stock. Lincoln Heritage Life Insurance Company, an Illinois corporation ("Lincoln"), owns 79% of the stock of LBIC. The Londen Insurance Group, an Arizona holding corporation, is the sole shareholder of Lincoln and the beneficial owner of the Shares of Common Stock held by LBIC and the bridge warrants held by Boston and Lincoln. Anthony Stock Purchase and Option Agreement. On June 20, 1997, William L. Anthony entered an Agreement to purchase 66,000 shares of PCI Common Stock for $22,000 from Steven A. Lambrecht (60,000), Colin A. Jones (3,000) and Greg P. Lambrecht (3,000). PCI, also a party to the 48 Agreement, granted Anthony a non-qualified stock option to purchase 20,000 shares at the offering price from the effective date of the offering and for one year thereafter. PCI also agreed to obtain, within 30 days after completion of this offering to purchase officer and director insurance at coverage levels which are standard for distribution companies comparable to PCI. Anthony agreed to serve as Chairman of the Board for up to five years, subject to appropriate approvals and the provisions of PCI's Bylaws. The agreement is a closed transaction that occurred before we had sufficient disinterested, independent directors to ratify the transaction. Mr. Anthony's ongoing relationship to the Board as its Chairman is subject to ongoing Board approval, and Mr. Anthony's continued service as a director generally is subject to annual shareholder reelection. On August 7, 1997, to remove certain potentially compensatory aspects of the June 20, 1997 Agreement and to maintain Mr. Anthony's status as an independent director, the parties entered a Modification Agreement which rescinded and modified certain aspects of the June 20, 1997 Agreement. The August 7, 1997 Modification Agreement rescinded the private stock purchase for all but 1,000 of the 66,000 shares and restructured the transaction so that Mr. Anthony purchased the 1,000 shares at a settlement price of $2.50 per share, and received options to acquire an additional 136,250 shares at $5.25 per share from one to five years after completion of the offering. Lambrecht-Stanley Stock Sale. On June 20, 1997, Steven A. Lambrecht sold 15,000 shares of PCI Common Stock to James B. Stanley for $5,000. James B. Stanley is PCI's Vice President of Purchasing. PCI was not a party to the transaction. Credit Line Guarantees. On July 25, 1997 PCI obtained a $200,000 credit line from Biltmore Investor Bank, N.A., an independent third-party lender. The credit line is at 1% above the prime rate and terminates upon completion of this offering. Greg P. Lambrecht and Colin A. Jones personally guaranteed the credit line. The Board of Directors ratified the entry into the credit line and ratified Messrs. Lambrecht and Jones' entry into personal guarantees on our behalf. Manschot Stock Option Grant. On July 30, 1997 PCI's Board of Directors granted Robert H. Manschot a non-qualified stock option to purchase 5,000 shares at the offering price from the effective date of the offering and for one year thereafter. The option will be issued and held in the name of RHEM Enterprises, Inc., a Company that Mr. Manschot beneficially controls. The stock grant was approved by the other disinterested director and the other independent directors approved the stock option grant. Capital Contribution Agreement. On August 8, 1997, certain holders of PCI's shares who are classified as "promoters" under applicable state securities laws and regulations, contributed a total of $150,000 as additional capital to PCI. Contributors included Steven A. Lambrecht, Greg P. Lambrecht, Colin A. Jones, Peter G. Charleston, James B. Stanley, Greg S. Barton and Daniel C. Goldman. This contribution was made to comply with promoters' equity requirements set forth in the North American Securities Administrators Association, Inc. ("NASAA") Statement of Policy Regarding Promoters' Equity Investment. No shares were issued as a result of this equity contribution and the number of outstanding shares did not change. All monies contributed came from contributors' personal funds. All of PCI's directors, including the independent directors, ratified the Capital Contribution Agreement. 49 PRINCIPAL SHAREHOLDERS Security Ownership of Certain Beneficial Owners, Management The following tables set forth certain information regarding shares of common stock beneficially owned as of August 14, 1997 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 1,480,500 shares outstanding on August 14, 1997 as adjusted for the May 31, 1994 3:1 stock split 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: Security Ownership of Certain Beneficial Owners
Percent of Class ---------------------- Title of Name and Address of Amount and Nature of Before After Class Beneficial Owner Beneficial Ownership Offering Offering - ------------ ---------------------------------- ---------------------- ---------- --------- Common Colin A. Jones 371,208 25.07% 10.98% 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Greg P. Lambrecht 363,708(2) 24.57 10.76 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Steven A. Lambrecht 256,584(2) 17.33 7.59 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Lincoln Heritage Life 210,476(1)(3) 12.60 5.89 Insurance Company 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Londen Insurance Group 210,476(1)(3) 12.60 5.89 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Life of Boston Insurance Company 115,238(1)(3) 7.31 3.32 4343 E. Camelback Rd. #400 Phoenix, Arizona 85018 Common Greg S. Barton 113,095(1) 7.45 3.31 17403 NE 45th Street Redmond, WA 98036 Common Peter G. Charleston 90,000(2) 6.08 2.66 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Scott I. Lambrecht 86,250(2) 5.83 2.55 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Corey A. Lambrecht 75,000(2) 5.07 2.22 15651 N. 83rd Way #3 Scottsdale, AZ 85260 - ------------ (1) Includes shares which may be beneficially acquired by the exercise of stock warrants within 60 days as follows: Greg S. Barton, 38,095 shares, Lincoln Heritage Life Insurance Company, 190,476 shares, Life of Boston Insurance Company 95,238 shares. (2) Steven A. Lambrecht is the brother of Greg P. Lambrecht, the father of Corey A. Lambrecht and Scott I. Lambrecht and the uncle of Peter G. Charleston. Each of the Lambrechts and Mr. Charleston disclaims any beneficial interest in the shares held by the others. 50 (3) 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.
Security Ownership of Management
Percent of Class ------------------------- Title of Name and Address of Amount and Nature of Before After Class Beneficial Owner Beneficial Ownership Offering Offering - ------------ ---------------------------- ------------------------- ---------- ------------ Common Colin A. Jones 371,208 25.07% 10.98% 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Greg P. Lambrecht 363,708(2) 24.57 10.76 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Steven A. Lambrecht 256,584(2) 17.33 7.59 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common Scott I. Lambrecht 86,250(2) 5.83 2.55 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common James B. Stanley 26,250 1.77 (3) 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common William L. Anthony 20,048(1) 1.34 (3) 15651 N. 83rd Way #3 Scottsdale, AZ 85260 Common David S. Hodges 19,048(1) 1.27 (3) 15651 N. 83rd Way #3 Scottsdale, AZ 85260 - ------------------------------------------------------------------------------------------------- Common All Officers and Directors 1,143,096(1)(2) 75.27% 33.44% as a group (8 persons) - ------------ (1) Includes shares which may be acquired by the exercise of warrants within 60 days as follows: William L. Anthony, 19,048 shares, David S. Hodges, 19,048 shares. Excludes options held by William L. Anthony and Robert H. Manschot to purchase 156,250 shares and 5,000 shares, respectively, which are not exercisable until 1 year after the date of this prospectus. (2) Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father of Corey A. Lambrecht and Scott I. Lambrecht. Each of the Lambrechts disclaims any beneficial interest in the shares held by the others. (3) Less than 1%.
Shareholders and Voting Agreement. On January 1, 1997, PCI and the following shareholders entered a Shareholders and Voting Agreement: Greg P. Lambrecht, Colin A. Jones, Greg S. Barton, Dan C. Goldman and Pat Quadrelli. Between January 9 and 11, 1997, the following persons also agreed to be bound by the agreement: Scott I. Lambrecht, Peter G. Charleston, Mike Rocha, Murphy Pierson, Lorraine Shelley, Steven A. Lambrecht, Corey A. Lambrecht and James B. Stanley. On May 31, 1997, the agreement was terminated by a majority vote of the board of directors and a majority vote of the total outstanding shares of PCI according to a provision of the agreement which allowed for voluntary termination by that means. Among other terms, the agreement (i) required the offer of the parties' shares to the other parties to the agreement or PCI prior to offering such shares to a third party, (ii) required parties to maintain confidentiality of PCI confidential information, (iii) restricted any party from competing with PCI at any time the party held PCI shares, and (iv) contained a voting agreement to break a deadlock between an even number of directors by electing (an) additional director(s). Although the agreement stated that it would not apply to publicly registered shares, the agreement was terminated to avoid any potential restriction on PCI, as a party to the agreement, in this offering and to simplify legal and transfer agent procedures regarding future transfers of restricted shares. 51 INTERIM FINANCING Bridge Financing and Bridge Warrants. Between March and June 1997, 10 accredited investors loaned PCI a total amount of $1,000,000 bridge financing in cash or conversion of prior debt of CAN-AM. The Underwriter's Representative, W.B. McKee Securities, Inc., was PCI's consultant for the bridge financing. In return for their loans, the bridge investors received promissory notes from PCI and bridge warrants to purchase 361,906 shares of PCI Common Stock at 50% of the offering price or 2.625. The bridge warrants held by William B. McKee entitle him to purchase 19,048 shares at the offering price. The following sets forth the names of the bridge investors, the amount of their cash investment or the value of other consideration given, the number of shares of Common Stock that they are entitled to purchase under the bridge warrants, and the percentage of their beneficial ownership before and after the offering:
Number of Percent Percent Common Shares Owned Owned Loan Entitled to Prior to After Name Amount Purchase Offering Offering - ----------------------------------- ------------------- --------------- -------------- -------------- Walter Adrushenko ............... $ 50,000 19,048 1.27 (6) William L. Anthony(1) ............ $ 50,000 19,048 1.34(5) (6) Greg S. Barton .................. $ 100,000(4) 38,095 7.45(5) 3.31(5) Mary A. Davis .................. $ 100,000 38,095 2.51 1.11 David S. Hodges(1) ............... $ 50,000 19,048 1.27 (6) Anthony Holden .................. $ 50,000 19,048 1.27 (6) William B. McKee(2) ............ $ 50,000 19,048 1.27 (6) Life of Boston Insurance Company(3) $ 250,000 95,238 7.31(5) 3.32(5) Lincoln Heritage Life Insurance Company(3) ..................... $ 250,000 95,238 12.60(5) 5.89(5) Martin B. Perlman ............... $ 50,000 19,048 1.27 (6) -------------- -------- Totals: ..................... $ 1,000,000 380,954 - ------------ (1) Messrs. Anthony and Hodges are directors and consultants to PCI. See "Management." (2) Principal of W.B. McKee Securities, Inc., the Underwriter's Representative. (3) Beneficially owned and controlled by the Londen Insurance Group. (4) Conversion of $100,000 debt of CAN-AM, valued by PCI as a $100,000 investment. See "Certain Transactions." (5) Includes other beneficial holdings of such persons as follows: William L. Anthony, 1,000, Greg S. Barton, 75,000, Life of Boston Insurance Company, 20,000, Lincoln Heritage Life Insurance Company, 115,238. (6) Less than 1%.
The bridge notes accrue 8% annual interest until the closing of the offering under this prospectus. After the offering closes, the bridge notes bear interest at 16%. The bridge notes are due on the earlier of the closing of this offering or six months from issuance. If not paid within one year from issuance, the bridge notes convert into new one year notes amortized over four quaterly payments. PCI intends to repay the bridge notes using proceeds from the offering. Proceeds from the bridge financing were used to purchase cigars, humidors and related items and capital equipment and pay salaries, business expenses and office costs, and professional and consulting fees. Sales By Warrant Holders. The holders of the bridge warrants, have the right to exercise those warrants on or after the first day that our shares are traded. However, the holders of the warrants to purchase all 380,954 shares have agreed that if they exercise the warrants they will not sell the underlying shares for 12 months from the date of this prospectus, subject to regulatory or exchange modification or approval, without the prior approval of the Underwriter's Representative. From the end of the 12-month period and for the remainder of the exercise period of the warrants, 52 we must include the shares underlying the warrants in any subsequent registration statement we file for any sale of our Common Stock or the warrant holders may demand that we register the shares underlying the warrants. This potential resale of the shares underlying the warrants would occur at some date between one and five years from the completion of this offering. PCI will not receive any proceeds from the resale of the shares underlying the bridge warrants. Shares could be sold from time to time in transactions (which may include block transactions by or for the account of the bridge warrant holders) in the over-the-counter market, on any market in which PCI shares are traded, including the Nasdaq SmallCap Market, the Boston Stock Exchange or in negotiated transactions, a combination of such methods or otherwise. Sales may be made at fixed prices which may be changed, at market prices or in negotiated transactions, a combination of such methods or otherwise, and shares may be transferred by gift. Under applicable SEC rules and regulations, namely Rule 102 of Regulation M, any person engaged in the distribution of shares may not simultaneously engage in market-making activities in our securities during the applicable "cooling-off" period (which runs from at least one and possibly five business days before the beginning of the distribution and continues until the distribution is over). This means that if we offer more shares of our Common Stock to the public at some future date, and the underwriters of the subsequent offering are also distributing the shares underlying the bridge warrants, the underwriters will not be able to make a market in our shares during the applicable restrictive period. For two years following the completion of this offering, the Underwriter's Representative in this offering has a right of first refusal to participate as underwriter, co-underwriter or placement agent for any public or private offering of our securities. However, the underwriters in this offering have not agreed to and are not obligated to act as broker-dealer in resales of the shares underlying the warrants and the selling shareholders may be required, and in the event the underwriter in the delayed offering is a market-maker, will likely be required, to sell such securities through another broker-dealer. In addition, each selling shareholder will be subject to the applicable provisions of the Exchange Act and the rules and regulations thereunder, including Rule 102 of Regulation M, which may limit the timing of the purchases and sales of shares of PCI's securities by such persons. The selling shareholders and broker-dealers, if any, acting in connection with any sale of shares underlying warrants might be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act and any commission received by them and any profit on the resale of the securities might be deemed to be underwriting discount and commissions under the Securities Act. We have informed the holders of the bridge warrants that the anti-manipulative rules under the Securities Exchange Act of 1934, including Regulation M, may apply to their sales in the market in any offering of shares underlying warrants. PCI has also informed the holders of the bridge warrants of the need for delivery of copies of a current prospectus prior to any sale of their underlying shares. PCI is unable to predict what effect the sale of underlying shares may have on the then prevailing market price of PCI Common Stock. 53 DESCRIPTION OF SECURITIES General. PCI is authorized to issue 10,000,000 shares of Common Stock, no par value. Stock Split. On May 31, 1997, PCI's shareholders unanimously approved a three-for-one forward stock split ("3:1 Stock Split"). Each issued and outstanding share of PCI's Common Stock was reclassified as three shares of Common Stock, no par value. The 3:1 Stock Split did not affect the number of shares of Common Stock which may be acquired by the holders of the bridge warrants, because the anti-dilution provisions of the bridge warrants are only affected by reclassifications which occur after the date of this prospectus. Common Stock. Holders of Common Stock are entitled to one vote for each share on all matters submitted to a shareholder vote. Holders of Common Stock are entitled to share in all dividends that the Board of Directors, in its discretion, declares from legally available funds. In any liquidation, each outstanding share entitles its holder to participate pro rata in the assets that remain after PCI pays liabilities. 1,480,500 shares of Common Stock are currently issued and outstanding, and upon completion of this offering, assuming the underwriters do not exercise their over-allotment option, 3,380,500 shares of Common Stock will be outstanding. Shareholders have no preemptive or other rights to subscribe for or purchase additional shares of any class of stock or of any other securities of PCI, nor are there any redemption or sinking fund provisions that relate to the Common Stock. All outstanding shares of Common Stock are, and the shares underlying all warrants and options will be validly issued, fully paid, and nonassessable have at the time PCI issues them. Arizona law allows shareholders to cumulate their votes for the election of directors. This means that shareholders may multiply the total number of shares they are entitled to vote by the total number of directors for whom they are entitled to vote, and may apply that product to elect a single director or distribute that product among two or more candidates. For example, at a meeting to elect three directors, a stockholder holding 100 voting shares could cast 300 votes for a single candidate, or could cast any combination totalling 300 votes for two or more candidates. Arizona's cumulative voting rights may allow shareholders holding a minority of PCI's shares a greater opportunity to elect a director even though management or larger shareholders control a substantial percentage of PCI's shares. Shares Eligible for Future Sale. Other than the outstanding shares of Common Stock issued in this offering, all of the presently issued and outstanding shares of Common Stock are "restricted securities" as that term is defined in SEC Rule 144. Rule 144 governs resales of restricted securities for the account of any person (other than an issuer), and restricted and unrestricted securities for the account of an "affiliate" of the issuer. Restricted securities generally include any securities acquired directly or indirectly from an issuer or its affiliates which were not issued or sold in a public offering registered under the Securities Act. An affiliate of the issuer is any person who directly or indirectly controls, is controlled by, or is under common control with, the issuer. PCI's affiliates may include our directors, executive officers and persons directly or indirectly owning 10% or more of our outstanding Common Stock. Under Rule 144, unregistered resales of restricted Common Stock cannot be made until the restricted shares have been held for one year from the later of when the shares were acquired from PCI or an affiliate of PCI. Thereafter, shares of Common Stock may be resold without registration subject to Rule 144's volume limitation, aggregation, broker transaction, notice filing requirements, and requirements concerning publicly available information about PCI (the "Applicable Requirements"). Resales by PCI's affiliates of restricted and unrestricted Common Stock are subject to the Applicable Requirements. The volume limitations provide that a person (or persons who must aggregate their sales) cannot, within any three-month period, sell more than the greater of (i) one percent of the then outstanding shares, or (ii) the average weekly reported trading volume during the four calendar weeks preceding each sale. A person who is not deemed an "affiliate" of PCI and who has beneficially owned shares for at least two years would be entitled to sell such shares under Rule 144 without regard to the Applicable Requirements. If a public market develops for PCI's Common Stock, PCI is unable to predict the effect that sales made under Rule 144 or other sales may have on the then prevailing market price of the 54 Common Stock. None of the 1,480,500 presently outstanding shares of Common Stock will become eligible for sale under Rule 144 prior to December 31, 1997. Thereafter, at various times through March 10, 1998, all 1,480,500 shares of Common Stock will become eligible for sale pursuant to Rule 144. In addition, certain of our affiliates who hold 1,480,500 presently outstanding shares of Common Stock, 57,144 bridge warrants and 161,250 options have agreed that they will not sell their shares, warrants and options for 24 months from the date of this prospectus except for 10% of the shares, warrants and options which the agreement releases at 2.5% per quarter in the second year. No Prior Market for Shares. Prior to the offering, there has been no public market for PCI shares. The offering price for the shares was determined through negotiations between us and the W.B. McKee Securities, Inc., and may not be indicative of the market price of the shares after the offering. The Nasdaq SmallCap Market(SM) and the Boston Stock Exchange are considering our applications to list our Common Stock with them and we believe that we will be able to satisfy and maintain their current and proposed entry and maintenance standards when we complete this offering. If we are unable to satisfy the requirements for continued listing on Nasdaq or the Boston Stock Exchange, our shares will not be traded in those markets. In the event our shares are not listed as contemplated, trading, if any, would be conducted in the over-the-counter market in the so-called "pink sheets" or the OTC Bulletin Board, established for securities that do not meet the Nasdaq SmallCap Market(SM) listing requirements. Consequently, the liquidity of our securities could be impaired, not only in the number of securities which could be bought and sold, but also through delays in the timing of transactions, reduction in security analysts' and the news media's coverage of PCI, and lower prices and larger differences in bid and ask prices for our securities. If our securities are not listed on the Nasdaq SmallCap Market(SM) and/or the Boston Stock Exchange, they may become subject to Rule 15g-9 under the 1934 Act, which imposes additional sales practice requirements on broker-dealers which sell such securities to persons other than established customers and institutional accredited investors. For transactions covered by this rule, a broker-dealer must make a special suitability determination for the purchaser and have received the purchaser's written consent to the transaction prior to sale. Consequently, the rule may affect the ability of broker-dealers to sell our shares and may affect the ability of holders to sell our shares in the secondary market. The SEC's regulations define a "penny stock" to be any equity security that has a market price less than $5.00 per share or with an exercise price of less than $5.00 per share, subject to certain exceptions. The penny stock restrictions will not apply to our shares if they are listed on The Nasdaq SmallCap Market(SM) or the Boston Stock Exchange and we provide certain price and volume information on a current and continuing basis or meet required minimum net tangible assets or average revenue criteria. We cannot assure you that our shares will qualify for exemption from these restrictions. If PCI shares were subject to the penny stock rules, the market liquidity for the shares could be severely adversely affected. Transfer Agent The transfer agent ("Transfer Agent") for the Common Stock and warrant agent for the underwriter warrants is American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444, Denver, Colorado 80202-1817, (303) 298-5370. DIVIDEND POLICY PCI has never declared or paid a cash dividend on its shares. We currently intend to retain any earnings to fund the development and growth of our business and we do not anticipate paying any cash dividends in the foreseeable future. PCI's Board of Directors will determine whether to pay cash dividends based upon our results of operations, cash flows, financial condition and liquidity. 55 UNDERWRITING CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE, PURCHASES TO COVER SOME OR ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES AND THE IMPOSITION OF PENALTY BIDS. See "Plan of Distribution." Subject to the terms and conditions of the Underwriting Agreement, the underwriters named below have severally agreed to purchase from PCI the following number of shares set forth opposite their names at the public offering price, less the underwriting discounts and commissions set forth on the cover page of this prospectus: Underwriter Number of Shares ------------------------------------------ ----------------- W.B. McKee Securities, Inc. ............ 950,000 Kashner Davidson Securities Corp. ...... 950,000 ---------- Total ............................. 1,900,000 ========== The Underwriting Agreement provides that the obligations of the underwriters are subject to certain conditions precedent and that the underwriters will purchase all shares offered in this offering if any of the shares are purchased. W.B. McKee Securities, Inc. as underwriter's representative advised PCI that the underwriters will offer the shares they purchase directly to the public at the offering price on the cover page of this prospectus and to certain dealers at a price that represents a concession of $.2625 per Share, or 5.0% per Share. The underwriter's representative also advised PCI that it will not sell any of the shares to accounts over which it exercises discretionary authority, but that certain dealers may do so. After the initial public offering of the shares, the underwriters may change the offering price and the selling terms. We granted the underwriter's representative an over-allotment option, exercisable not later than 45 days after the date of this prospectus, to purchase up to 285,000 shares (equal to 15% of the number of shares sold in the offering), at the public offering price, less the underwriting discounts and commissions listed on the cover page of this prospectus, solely for the purpose of covering any over-allotments. We agreed to pay the underwriter's representative a non-accountable expense allowance of 3% of the offering proceeds from the sale of the shares. We estimated the expense allowance at $299,250, $25,000 of which has already been paid, or $344,138 if the underwriter's representative exercises the over-allotment option. At the closing of this offering, PCI will sell to the underwriter's representative, at a price of $.01 each, representative's warrants to purchase up to 170,952 shares. Each representative's warrant will be exercisable for a four-year period, commencing one year from the date of this prospectus, at an exercise price equal to $8.40 per share (160% of the public offering price of the shares). We will issue one share of Common Stock upon exercise of each representative's warrant. The representative's warrants will contain anti-dilution provisions providing for appropriate adjustments in any recapitalization, reclassification, stock dividend, stock split or similar transaction by PCI. The representative's warrants do not entitle the representative to any rights as a shareholder of PCI until the underwriter's representative exercises them. The representative's warrants may only be transferred to officers and directors of the underwriter's representative who are also shareholders of the underwriter's representative. For the exercise period of the representative's warrant, the holder(s) will have the opportunity to profit from a rise in the market value of the Common Stock, which will dilute the interest of the other PCI shareholders. We expect that the holder(s) of the representative's warrants will exercise them at 56 a time when PCI would, in all likelihood, be able to obtain any capital it needs from an offering of its unissued Common Stock on terms more favorable to PCI than the terms in the representative's warrant, which may adversely affect the terms on which PCI can obtain additional financing. We have granted certain demand and piggyback registration rights for the Common Stock underlying the representative's warrants. On one occasion, at the underwriter's representative's request, at any time during the five-year period commencing one year after the date of this prospectus, PCI will prepare and file a post-effective amendment or new registration statement permitting the sale of the representative's warrants and/or underlying securities and use its best efforts to keep the registration statement effective under the Securities Act for a nine-month period following the effective date. We will bear the cost of that amendment or registration statement. Also, if PCI files an equity offering registration statement under the Securities Act at any time during the five-year period following the date of this prospectus, the holders of the representative's warrants or underlying securities will include in such registration statement all or part of the underlying securities at the request of the holders. PCI, any selling security holders and the underwriter's representative have agreed to indemnify each other against certain liabilities in connection with the Registration Statement, including liabilities under the Securities Act. The indemnification is limited or unavailable in certain circumstances, including where legally unavailable. All of the present shareholders of PCI have agreed not to offer, sell or otherwise dispose of all of their outstanding Common Stock or Common Stock issuable upon exercise of options for a period of 18 months after completion of this offering without prior consent of the underwriter's representative. See "Principal Shareholders." Upon closing of the Offering, the Representative will have the right to select one member of the Board of Directors to serve for a five year term. PCI does not currently maintain key-man life insurance on any of its employees, but the terms of our agreement with the underwriters require us to maintain $1,000,000 in key-man life insurance on Steven A. Lambrecht at least until March 31, 2002. The previous paragraphs are a brief summary of the terms of the Underwriting Agreement and is not complete. A copy of the Underwriting Agreement is on file with the SEC as an exhibit to the registration statement. See "Available Information." PLAN OF DISTRIBUTION In connection with this offering certain underwriters may engage in passive market making transactions in the shares on NASDAQ in accordance with Rule 103 of Regulation M. In connection with this offering, the underwriters' selling group members (if any) and their respective affiliates may engage in transactions that stabilize, maintain or otherwise affect the market price of our shares. These transactions may include stabilization transactions permitted by Rule 104 of Regulation M, under which persons may bid for or purchase shares to stabilize its market price. The underwriters may also create a "short position" for their own account by selling more shares in the offering than they are committed to purchase, and in that case they may purchase shares in the open market after this offering is completed to cover all or a part of their short position. The underwriters' representative may also cover all or a portion of their short position, up to 285,000 shares, by exercising their over-allotment option described above and on the cover of this prospectus. Also, W.B. McKee Securities, Inc., on behalf of the underwriters, may impose "penalty bids," under contractual arrangements with the underwriters, that allow it to reclaim from an underwriter (or dealer participating in this offering) for the account of the other underwriters, the selling concession on the shares that the underwriters distribute in the offering but later purchase for their account in the open market. Any of these transactions may maintain the price of the shares at a higher level than the level which the shares might otherwise bear in the open market. None of these transactions is required, and if the underwriters, selling agents or others engage in the transactions, they may also stop at any time. 57 LEGAL MATTERS Titus, Brueckner & Berry, P.C., 7373 North Scottsdale Road, Scottsdale Centre, Suite B-252, Scottsdale, Arizona 85253, counsel for PCI, have given their opinion that the shares of Common Stock offered in this Prospectus will, when sold, be legally issued, fully paid and nonassessable. Streich Lang, P.A., Renaissance One, Two North Central Avenue, Phoenix, Arizona 85004, has represented the underwriter's representative in connection with this Offering. EXPERTS The financial statements of PCI included in this prospectus have been audited by Semple & Cooper, LLP, independent certified public accountants, as stated in their report which immediately precedes the financial statements. We include the financial statements in reliance on Semple & Cooper, LLP's report, which was given on that firm's authority as experts in accounting and auditing. GLOSSARY Bridge warrants Warrants to purchase shares of PCI's Common Stock at 50% of the offering price, except that the exercise price for William B. McKee's warrants is $5.25. Bridge financing Interim financing of $1,000,000 from nine investors between March and June 1997; Investors received promissory notes for the amount of their investment and warrants to purchase shares of PCI's Common Stock. CAN-AM CAN-AM International Investments Corp., a British Columbia (Canada) corporation and wholly-owned subsidiary of PCI. All of PCI's Canadian cigar operations are conducted through CAN-AM. EPA The U.S. Environmental Protection Agency. Exchange Act The Securities Exchange Act of 1934, as amended. FDA The U.S. Food and Drug Administration. FTC The Federal Trade Commission. J&M J&M Wholesale, Ltd., a British Columbia (Canada) corporation wholly-owned and controlled by Colin A. Jones. Mr. Jones is an officer and director of CAN-AM and an officer, director and controlling shareholder of PCI. Master agreement A form retailer or regional distribution agreement that we negotiated with a major convenience store chain, which is approved for use by retail stores or regional distribution centers within the chain, but which must be accepted by each individual store or distribution region which wishes to participate in the PCI Cigar Program. Merchandising Full-service, in-store support of a retail location including cleaning, supplying and maintaining the humidor, rotating stock and providing training to store management and personnel. NACS National Association of Convenience Stores. Nasdaq SmallCap Market(SM) An interdealer quotation system for smaller companies operated by Nasdaq. Nasdaq The National Automated Dealer Quotation System operated by The Nasdaq Stock Market, Inc. 58 Offering price The price per share printed on the cover of this prospectus. Offering Our initial public offering of its shares under this prospectus and registered under its registration statement. Over-allotment option Options that we have granted to the underwriter, exercisable for 45 days from the date of this Prospectus, to purchase up to an additional 285,000 shares to cover excess allotments to participants. PCI Premium Cigars International, Ltd. PCI Cigar Program Our cigar distribution program, including premium and mass market cigars, humidors, service, training and sales. Prospectus This document. Registration statement Our registration statement on Form SB-2 filed with the SEC as of the date of this prospectus, which includes exhibits and other information that is not included in this prospectus. Representative's warrants Warrants to purchase 170,952 Shares exercisable at 160% of the Offering Price; issued to the underwriters as additional compensation. Rose Hearts Rose Hearts, Inc, a Washington corporation that is wholly-owned and controlled by Greg P. Lambrecht, who is an officer and director of CAN-AM and an officer and controlling shareholder of PCI. SEC The Securities and Exchange Commission. Securities Act The Securities Act of 1933, as amended. Shares Shares of PCI's Common Stock, no par value. 3:1 stock split A 3:1 forward split of PCI's shares approved by PCI's shareholders on May 31, 1997. Transfer agent and warrant American Securities Transfer & Trust, Inc. agent Underwriters W.B. McKee Securities, Inc., Kashner Davidson Securities Corp. and others who may be named in a syndicate of co-underwriters. Underwriter's representative W.B. McKee Securities, Inc. Underwriting discount Compensation to the underwriter's representative in the form of a 10% discount of underwriter's representative's purchase price from the offering price. "We" Premium Cigars International, Ltd.
ADDITIONAL INFORMATION We filed a registration statement with the SEC on Form SB-2 relating to the shares offered in this prospectus. This prospectus does not contain all of the information included in the registration statement. For further information about PCI and the shares we are offering in this prospectus, refer to the registration statement and its exhibits. The statements we make in this prospectus regarding the content of any contract or other document are necessarily not complete, and you may examine the copy of the contract or other document that we filed as an exhibit to the registration statement. All our statements about those contracts or other documents are qualified in their entirety by referring you to the exhibits to the registration statement. See "Where You Can Get More Information." 59 THIS PAGE INTENTIONALLY LEFT BLANK CONSOLIDATED FINANCIAL STATEMENTS Index to Consolidated Financial Statements Independent Auditor's Report .................................... F-2 Consolidated Balance Sheets .................................... F-3 Consolidated Statements of Operations ........................... F-4 Consolidated Statements of Changes in Stockholders' Equity ...... F-5 Consolidated Statements of Cash Flows ........................... F-6 Notes to Consolidated Financial Statements ..................... F-7 F-1 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 March 31, 1997, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for the period from the date of inception, June 1, 1996 through March 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit 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 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 audit provides 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 March 31, 1997, and the results of its operations, changes in stockholders' equity, and its cash flows for the period from the date of inception, June 1, 1996 through March 31, 1997, in conformity with generally accepted accounting principles. Semple & Cooper, L.L.P. Phoenix, Arizona June 18, 1997 F-2 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED BALANCE SHEETS ASSETS
March 31, June 30, 1997 1997 ----------- ------------ (Unaudited) Current Assets: Cash and cash equivalents (Note 1) ............... $ 58,018 $ 26,424 Accounts receivable (Notes 1 and 2) -- trade .......................................... 64,300 267,575 -- related parties .............................. 158,497 163,119 Inventory (Notes 1 and 3) ........................ 126,337 94,853 Other current assets .............................. 15,607 103,718 ---------- ----------- Total Current Assets ........................... 422,759 655,689 ---------- ----------- Property and Equipment, Net (Notes 1 and 4) ......... 23,055 102,317 ---------- ----------- Other Assets: Humidors, net (Note 1) ........................... 60,486 223,882 Notes receivable -- related parties (Note 2) ...... 86,225 98,579 Organizational costs, net (Note 1) ............... 32,386 38,782 Deferred costs (Notes 1 and 5) ..................... 53,550 292,953 ---------- ----------- 232,647 654,196 ---------- ----------- $ 678,461 $1,412,202 ========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Notes payable (Note 5) ........................... $ 50,000 $ 0 Notes payable -- related parties, current portion (Note 2) ....................................... 19,641 19,641 Accounts payable -- trade ........................ 109,254 179,260 Accrued expenses -- tobacco taxes ................................. 100,333 114,670 -- other ....................................... 70,700 97,267 ---------- ---------- Total Current Liabilities ..................... 349,928 410,838 ---------- ---------- Long-Term Liabilities: Notes payable, long-term portion (Note 5) ......... -- 1,000,000 Notes payable -- related parties, long-term portion (Note 2) ....................................... 110,000 -- ---------- ---------- 110,000 1,000,000 ---------- ---------- Commitments: (Notes 2 and 7) ........................ -- -- ---------- ---------- Stockholders' Equity: (Note 8) Common stock -- no par value, 10,000,000 shares authorized, 1,480,500 shares issued and outstanding as of March 31, 1997 and June 30, 1997 (unaudited), respectively .................................... 419,675 524,675 Accumulated deficit .............................. (201,142) (523,311) ---------- ---------- Total Stockholders' Equity ........................... 218,533 1,364 ---------- ---------- Total Liabilities and Stockholders' Equity ......... $ 678,461 $1,412,202 ========== ========== The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-3 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF OPERATIONS For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 and For The Three Month Period Ended June 30, 1997 (Unaudited)
Inception Three Month Through Period Ended March 31, June 30, 1997 1997 --------------- ------------- (Unaudited) Net Sales .......................................... $ 845,571 $ 628,180 Cost of Sales ....................................... 643,790 481,677 ----------- ---------- Gross Profit ....................................... 201,781 146,503 Selling, General and Administrative ............... 323,776 327,439 Stock Based Compensation ........................... 57,625 110,000 ----------- ---------- Loss from Operations .............................. (179,620) (290,936) ----------- ---------- Other Income (Expense): Interest Expense ................................. (21,292) (32,508) Other .......................................... 963 1,080 Foreign currency transaction gain (loss) ......... (1,193) 195 ----------- ---------- (21,522) (31,233) ----------- ---------- Net Loss .......................................... $ (201,142) $ (322,169) =========== ========== Loss per Share (Note 1) ........................... $ (.14) $ (.22) =========== ========== Weighted Average Number of Shares Outstanding ...... 1,480,500 1,480,500 =========== ========== The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-4 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 and For the Three Month Period Ended June 30, 1997 (Unaudited)
Common Stock Total ------------------------ Accumulated Treasury Stockholders' Shares Amount Deficit Stock Equity ----------- ---------- ------------- ---------- -------------- Balance, June 1, 1996 ......... -- $ -- $ -- $ -- $ -- Shares issued for cash ......... 1,433,400 362,050 -- -- 362,050 Shares issued for services ...... 47,100 57,625 -- -- 57,625 Net loss ........................ -- -- (201,142) -- (201,142) --------- --------- ---------- -------- ---------- Balance, March 31, 1997 ......... 1,480,500 419,675 (201,142) -- 218,533 --------- --------- ---------- -------- ---------- Purchase of treasury stock ...... (15,000) -- -- (5,000) (5,000) Shares issued for services ...... 15,000 32,500 -- 5,000 37,500 Additional compensation recorded on private transactions ...... -- 72,500 -- -- 72,500 Net loss for the three month period ended June 30, 1997 (unaudited) .................. -- -- (322,169) -- (322,169) --------- --------- ---------- -------- ---------- Balance, June 30, 1997 ......... 1,480,500 $524,675 $ (523,311) $ -- $ 1,364 ========= ========= ========== ======== ========== The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-5 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS For The Period From The Date of Inception, June 1, 1996 Through March 31, 1997 and For the Three Month Period Ended June 30, 1997 (Unaudited)
Inception Three Month Through Period Ended March 31, June 30, 1997 1997 -------------- ------------- (Unaudited) Increase (Decrease) in Cash and Cash Equivalents: Cash flows from operating activities: Cash received from customers .............................. $ 782,234 $ 425,985 Cash paid to suppliers and employees ........................ (827,701) (744,129) Interest paid ............................................. (21,292) (25,008) ---------- ---------- Net cash used for operating activities .................. (66,759) (343,152) ---------- ---------- Cash flows from investing activities: Purchase of property and equipment ........................ (23,302) (81,074) Purchase of humidors ....................................... (71,451) (174,960) Disbursements for notes receivable -- related parties ...... (86,225) (12,354) Organizational costs ....................................... (32,386) (8,151) Deferred offering costs .................................... (53,550) (156,903) ---------- ---------- Net cash used by investing activities ..................... (266,914) (433,442) ---------- ---------- Cash flows from financing activities: Proceeds from notes payable ................................. 50,000 810,000 Repayment of notes payable ................................. -- (50,000) Proceeds from note payable -- related party ............... 129,641 -- Repayment of notes payable -- related party ............... -- (10,000) Proceeds from issuance of common stock ..................... 212,050 -- Purchase of treasury stock ................................. -- (5,000) ---------- ---------- Net cash provided by financing activities ............... 391,691 745,000 ---------- ---------- Net increase (decrease) in cash and cash equivalents ......... 58,018 (31,594) Cash and cash equivalents at beginning of period -- 58,018 ---------- ---------- Cash and cash equivalents at end of period ..................... $ 58,018 $ 26,424 ========== ========== Reconciliation of Net Loss to Net Cash used for Operating Activities: Net Loss ...................................................... $ (201,142) $ (322,169) ---------- ---------- Adjustments to reconcile net loss to net cash used for operating activities: Depreciation and amortization .............................. 11,212 15,131 Stock issued for services and compensation .................. 57,625 110,000 Amortization of deferred loan fees ........................ -- 7,500 Changes in Assets and Liabilities: Accounts receivable -- trade ................................................ (64,300) (203,275) -- related parties ....................................... (8,497) (4,622) Inventory ................................................... (126,337) 31,484 Other current assets ....................................... (15,607) (88,111) Accounts payable -- trade ................................. 109,254 70,006 Accrued expenses -- tobacco taxes .......................................... 100,333 14,337 -- other ................................................ 70,700 26,567 ---------- ---------- 134,383 (20,983) ---------- ---------- Net cash used for operating activities ..................... $ (66,759) $ (343,152) ========== ========== The Accompanying Notes are an Integral Part of the Consolidated Financial Statements
F-6 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 principal 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 in five Canadian Provinces. The Company has elected a March 31 fiscal year end. Significant Transactions: Prior to January 1, 1997, CAN-AM acquired all existing cigar accounts, cigar related inventory, humidors, other assets and the related trade accounts payable and tobaco tax liabilities from J&M Wholesale, Ltd. and Rose Hearts, Inc. These corporations were owned by the principal stockholders of Premium Cigars International, Ltd. As all acquisitions and account purchases were consummated within a controlled group, the cigar operations of J&M Wholesale, Ltd. and Rose Hearts, Inc. are included in the accompanying financial statements from the date of commencement of cigar sales, June 1, 1996. Principles of Consolidation: The consolidated financial statements include the activity of Premium Cigars International, Ltd., together with its wholly-owned subsidiary, CAN-AM, and its predecessors cigar related activity of J&M Wholesale, Ltd. and Rose Hearts, Inc. The activity of CAN-AM and its predecessors is included in the consolidated financial statements from the date of commencement of cigar operations, June 1, 1996. All significant intercompany accounts and transactions have been eliminated. Pervasiveness of Estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets, and liabilities and disclosure of contingent assets and liabilities, at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Interim Financial Statements: The interim financial statement for the three month period ended June 30, 1997 is unaudited. In the opinion of management, such statement reflects all adjustments (consisting only of normal recurring adjustments) necessary for a fair representation of the results of the interim periods. The results of operations for the three month period ended June 30, 1997 are not necessarily indicative of the results for the entire year. The interim financial statement for the period from the date of inception, June 1, 1996, through June 30, 1996 is not presented as there was no significant activity in that period. Cash and Cash Equivalents: Cash equivalents are considered to be all highly liquid investments purchased with a maturity of three (3) months or less. F-7 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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 a review of individual accounts outstanding. In the opinion of the management, all accounts receivable outstanding at March 31, 1997 and June 30, 1997, are considered fully collectible and therefore, no allowance has been provided for potentially uncollectible accounts receivable. Inventory: Inventory quantities and valuation were determined based upon a physical count, and pricing of same at March 31, 1997 and June 30, 1997. Inventory is stated at the lower of cost, first-in, first-out method, or market. Inventory quantities are reviewed for obsolescence periodically. 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. 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. Humidors: Humidors are used primarily to display cigars available for sale at retail outlets. The humidors are being amortized ratably over a two (2) year period. For the period from the date of inception, June 1, 1996 through March 31, 1997, amortization expense was $10,965, and $11,564 (unaudited) for the three month period ended June 30, 1997. 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. Deferred Costs: Deferred costs primarily represent costs incurred in connection with the Company's proposed Initial Public Offering of its common stock and will be offset against the proceeds of the offering, or expensed if not successful. 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. F-8 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 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: (i) assets and liabilities at the rates of exchange prevailing at the balance sheet date; (ii) revenue and expenses at average exchange rates for the period in which the transaction occurred; (iii) exchange gains and losses arising from foreign currency transactions are included in the determination of net earnings for the period; (iv) 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. Loss Per Share: During the period ended March 31, 1997, the Company's Board of Directors approved an Initial Public Offering of its common stock. The Initial Public Offering price to the public is $5.25 per share. Pursuant to the Securities and Exchange Commission rules, common stock issued for consideration below the $5.25 per share Initial Public Offering price during the twelve (12) months prior to filing the Registration Statement, have been included in the weighted average number of shares outstanding for all periods presented. New Accounting Pronouncements: Statement of Financial Accounting Standards No. 128, Earnings per Share (SFAS 128). This pronouncement provides a different method of calculating earnings per share than is currently required by APB 15, Earnings per Share. SFAS 128 provides for the calculation of Basic and Diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income available to common shareholders 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 entry similar to fully diluted earnings per share. This pronouncement is effective for fiscal years and interim periods after December 15, 1997; early adoption is not permitted. The Company has not determined the effect, if any, of adoption on its EPS computation(s). Statement of Financial Accounting Standards No. 129 "Disclosure of Information about Capital Structure" (SFAS No. 129) issued by the FASB is effective for financial statements ending after December 15, 1997. 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 Company does not expect adoption of SFAS No. 129 to have a material effect, if any, on its financial position or results of operations. Statements of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for financial statements with fiscal years beginning after December 15, 1997. Earlier application is permitted. SFAS No. 130 establishes standards for reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. The Company does not expect adoption of SFAS No. 130 to have a material effect, if any, on its financial position or results of operations. F-9 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 2. Related Party Transactions: Accounts Receivable -- Related Parties: Accounts receivable -- related parties as of March 31, 1997 and June 30, 1997 are, in the opinion of management, short-term in nature and are non-interest bearing. The receivable includes $150,000 of an additional capital contribution receivable which was remitted to the Company subsequent to June 30, 1997. Notes Receivable -- Related Parties: As of March 31, 1997 and June 30, 1997, notes receivable -- related parties are comprised of 8% interest bearing notes from the principal stockholders in the amount of $86,225 and $98,579 (unaudited), respectively. The notes receivable are due on March 31, 1999. Notes Payable -- Related Parties: At March 31, 1997 and June 30, 1997, notes payable related parties consist of the following: March 31, June 30, 1997 1997 ----------- ------------ (Unaudited) Non-interest bearing note to a stockholder, due on demand; unsecured ........................... $ 19,641 $ 19,641 36% interest bearing note to a stockholder, with monthly interest-only payments, due May, 1998; unsecured; converted to bridge financing during the three month period ending June 30, 1997 (see Note 5) ............... 110,000 -- --------- --------- 129,641 19,641 Less: current portion .............................. (19,641) (19,641) --------- --------- $ 110,000 $ -- ========= ========= For the period from the date of inception, June 1, 1996 through March 31, 1997 and for the three month period ended June 30, 1997, the Company incurred interest expense in relation to the above notes payable from related parties in the approximate amounts of $19,800 and $9,900 (unaudited), respectively. Commitments: During the three month period ended June 30, 1997, the Company entered into a distributorship agreement with Rose Hearts 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 is managements belief that the distribution fee represents a reasonable cost if the services were to be performed by an independent party. During the quarter ended June 30, 1997, the Company paid approximately $5,000 (unaudited) in commissions under this agreement. 3. Inventory: As of March 31, 1997 and June 30, 1997, inventory consists of the following: March 31, June 30, 1997 1997 ----------- ------------ (Unaudited) Cigars .................. $124,684 $93,478 Cigar accessories ...... 1,653 1,375 --------- -------- $126,337 $94,853 ========= ======== F-10 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 4. Property and Equipment: At March 31, 1997 and June 30, 1997, property and equipment consists of the following: March 31, June 30, 1997 1997 ----------- ------------ (Unaudited) Equipment ........................... $ 3,090 $ 92,716 Furniture and fixtures ............... 10,212 11,660 -------- -------- 13,302 104,376 Less: accumulated depreciation ...... (247) (2,059) -------- -------- 13,055 102,317 Equipment held for sale ............ 10,000 -- -------- -------- $ 23,055 $102,317 ======== ======== 5. Notes Payable: As of March 31, 1997, the notes payable consists of a $50,000 operating line of credit with Biltmore Investors Bank, with interest at two percent (2%) above the lenders index rate. The note is due December 18, 1997, and is secured by various assets. The note was paid in full during the three month period ending June 30, 1997. As of June 30, 1997 (unaudited), notes payable consists of $1,000,000 in bridge notes with various investors. 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 are payable the earlier of the date of the closing of an initial public offering, or six (6) months after the offering date. However, if they are not paid within 12 months from issuance, the bridge notes convert into new one-year notes payable in four quarterly payments. Interest is at 8% until the offering date and 16% after the offering if not paid in full. In addition, the $90,000 in loan fees was recorded in deferred costs and is being amortized over the estimated term of the notes. For the quarter ending June 30, 1997, interest expense on the notes was approximately $14,000 and amortization of the loan fees was $7,500. The investors of the bridge financing were also issued common stock purchase warrants. (see Note 8) 6. Income Taxes: As of June 30, 1997, the Company has available approximately $475,000 (unaudited) of U.S. operating loss carryforwards that may be applied against future taxable income and will expire primarily in 2012. In addition, the Company has a Canadian net operating loss carryforward in the approximate amount of $25,000 (unaudited), expiring primarily through 2004. The Company has established a valuation allowance equal to the full amount of the deferred tax asset of approximately $190,000 (unaudited), resulting from the loss carryforwards. The Company established an allowance because the utilization of the loss carryforwards is uncertain. 7. Commitments: Employment Agreements: The Company has entered into employment agreements with three (3) officers of the Corporation. The agreements are cancellable at any time by either party. The Company has agreed to pay two (2) of the officers a management fee in the amount of $80,000. The fee is to be paid over a sixteen (16) month period. In addition, the Company has retained a consultant to assist with the Initial Public Offering, for a maximum fee of $62,400. F-11 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) Operating Lease: The Company is leasing office and warehouse space in Scottsdale, Arizona, under a non-cancellable operating lease agreement, expiring May 31, 1999. The terms of the lease provide for monthly payments ranging from $5,878 to $7,134. The lease terms also require the Company to pay common area maintenance, taxes, and certain other incidental costs. A schedule of future minimum lease payments due under the non-cancellable operating lease agreement for each of the next two (2) years, is as follows: Year Ending June 30, Amount ----------- --------- (unaudited) 1998 .............................. $ 83,741 1999 .............................. 85,609 --------- $169,350 ========= As this lease was executed during the three month period ended June 30, 1997, there was no rent expense under the aforementioned operating lease agreement for the period from the date of inception, June 1, 1996 through March 31, 1997. Rent expense for the three month period ended June 30, 1997 was $14,736 (unaudited). 8. Stockholders' Equity: Common Stock Options and Warrants: During the quarter ended June 30, 1997 (unaudited), the Company, in connection with the bridge financing, issued warrants to purchase 380,954 shares of common stock with 361,906 exercisable at $2.625 per share and 19,048 exercisable at $5.25 per share. The warrants expire five years from the date of issuance. As of June 30, 1997, none of the warrants have been exercised. In June 1997 (unaudited), the Company issued 156,250 options to the Chairman of the Board of Directors exercisable at $5.25 per share expiring five years from the date of issuance. As of June 30, 1997, none of the options have been exercised. Common Stock Split: In May, 1997, the Company declared a three for one split of its common stock. The accompanying consolidated financial statements give retroactive effect to the stock split. Proposed Offering: The Company is currently in the process of filing a Form SB-2 Registration Statement with the Securities and Exchange Commission to register its common stock for sale to the public. The offering is intended to issue 1,900,000 common shares at $5.25 per share. 9. Foreign Currency: Foreign currency transactions resulted in an aggregate exchange loss of $1,193 for the period from the date of inception, June 1, 1996 through March 31, 1997 and an aggregate exchange gain of $195 (unaudited) for the three month period ending June 30, 1997. Foreign currency translation gains or losses were immaterial for the periods. F-12 PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued) 10. Statements of Cash Flows: Non-Cash Financing and Investing Activities: During the period from the date of inception, June 1, 1996 through March 31, 1997, the Company recognized financing activities that affected its assets, liabilities and equity, but did not result in cash receipts or payments. These non-cash activities are as follows: Common stock was issued for services and compensation valued at $57,625 and an additional capital contribution for common stock was recorded for a capital contribution receivable in the amount of $150,000. During the three month period ended June 30, 1997 (unaudited), the Company recognized investing and financing activities that affected its assets, liabilities and equity, but did not result in cash receipts or paymants. 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. A related party note payable in the amount of $100,000 was converted into a bridge financing loan. (see Note 5) 11. Economic Dependency: For the period from the date of inception, June 1, 1996 through March 31, 1997, the Company's largest supplier accounted for approximately seventy-one percent (71%) of the Company's cigar purchases. As of March 31, 1997, this supplier had an account payable balance of approximately $15,000. For the period from the date of inception, June 1, 1996 through March 31, 1997, the Company's largest customer accounted for approximately eighty-two percent (82%) of the Company's sales. As of March 31, 1997, there are accounts receivable of approximately $50,000 due from this customer. For the three month period ended June 30, 1997 (unaudited), the Company's two largest suppliers accounted for approximately thirty-eight percent (38%), and thirty-seven percent (37%) of the Company's cigar purchases, respectively. As of June 30, 1997, these suppliers had an aggregate account payable balance of approximately $15,800. For the three month period ended June 30, 1997 (unaudited), the Company's largest customer accounted for approximately seventy-nine percent (79%) of the Company's sales. As of June 30, 1997, there are accounts receivable of approximately $160,000 due from this customer. 12. Subsequent Events: Subsequent to June 30, 1997, the $150,000 additional capital contribution receivable was paid in full. In July 1997, the Company obtained a $200,000 note from Biltmore Investors Bank in Phoenix, Arizona. Interest is at the prime rate plus 1%. The note is due the earlier of the completion of an initial public offering or January 31, 1998. F-13 [INSIDE BACK COVER] [picture of race car driver Arie Luyendyk in Indy 500 winner's circle with helmet bearing PCI logo] [caption] Arie Luyendyk, winner of 1997 Indy 500, in winner's circle with PCI logo on helmet. [picture of Luyendyk's helmet with PCI logo (no caption)] [picture of Luyendyk driving Indy 500 race car (no caption)] [PCI logo (no caption)] [background picture of lit cigar (no caption)] II-14 =========================================== ================================== We have not authorized any dealer, salesperson or other person to give any information or represent anything not contained in this Prospectus. You must not rely on any unauthorized information. This Prospectus does not offer to sell or buy any shares in any 1,900,000 Shares jurisdiction where it is unlawful. The information in this Prospectus is current as of August , 1997. ------------------- TABLE OF CONTENTS ------------------- [LOGO] Page ----- Prospectus Summary ..................... 1 Summary Consolidated Financial Common Stock Information ........................... 3 Where You Can Get More Information ...... 4 Risk Factors ........................... 5 Use of Proceeds ........................ 15 Capitalization ........................ 16 --------------- Dilution ................................. 17 Selected Historical and Pro Forma PROSPECTUS Consolidated Financial Information ... 19 Management's Discussion and Analysis of --------------- Results of Operations ............... 20 Business .............................. 24 Management .............................. 41 Certain Transactions ..................... 46 Principal Shareholders .................. 50 Interim Financing ..................... 52 Description of Securities ............... 54 Dividend Policy ........................ 55 Underwriting ........................... 56 W.B. MCKEE SECURITIES, INC. Plan of Distribution .................. 57 Legal Matters ........................... 58 Experts ................................. 58 KASHNER DAVIDSON SECURITIES, Glossary ................................. 58 CORP. Additional Information .................. 59 Consolidated Financial Statements ...... F-1 Until , 1997 (25 days after the August , 1997 date of this Prospectus) all dealers that buy, sell or trade these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. =========================================== ================================== PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS See also "Management," "Indemnification of Directors and Officers." PCI's Articles of Incorporation provide that no director or former director shall be liable to PCI or its shareholders for monetary damages or for breach of fiduciary duty or for any action taken or any failure to take any action as a director or officer. The Articles continue that the liability of directors is limited or eliminated to the fullest extent permitted by law and provide that no repeal or modification of such limitation of liability may adversely affect any right or protection of a director or officer existing at the time of such repeal or modification. Generally, Arizona statutory law permits indemnification of an officer or director if such individual acted in good faith and with respect to conduct of an official capacity, in a manner he or she reasonably believed to be in the best interests of the corporation and in all other cases, at least not opposed to the corporation's best interests, and with respect to any criminal action or proceeding, had no reasonable cause to believe his or her conduct was unlawful. A corporation may never indemnify any director who is adjudged liable to the corporation or who is adjudged, regardless of the nature of the proceeding, liable on the basis that the director received an improper personal benefit. Unless a corporation's articles of incorporation provide otherwise, a corporation must indemnify a director or officer who is the prevailing party on merits or otherwise for the director's or officer's reasonable expenses in the defense of a proceeding to which the director or officer was a party because he or she is or was a director or officer of the corporation. PCI has not entered any agreement with its current directors and executive officers pursuant to which it is obligated to indemnify those persons. At present, PCI is not aware of any pending or threatened litigation or proceeding involving a director, officer, employee or agent of PCI in which indemnification would be required or permitted. We have obtained comprehensive directors and officers liability coverage with an aggregate policy limit of $5,000,000 to insure our directors and officers against certain liabilities, including securities law liabilities and liabilities relating to this initial public offering effective April 25, 1997. We also refer you to Section 8 of the Underwriting Agreement included at Exhibit 1.1, which we incorporate to this disclosure by this reference. The indemnification provisions relate to our officers and directors and the underwriter's representative which has potential control over PCI because it can nominate a director for a five year period from the completion of this Offering. That Section grants extensive indemnification rights from us to the underwriter's representative and certain of its affiliates and requires the underwriter's representative to indemnify us and our directors, officers and affiliates under certain circumstances. We qualify this entire summary of the Underwriting Agreement indemnification provisions by referring you to that document directly, but in general: We must indemnify the underwriter's representative and affiliates if they become subject to claims under the Securities Act issue, or otherwise, and the claims are: (i) based on our failure to perform our obligations under agreements with the underwriter's representative, or (ii) based on untrue or alleged untrue statements in the registration statement or any preliminary or final prospectus, or material omissions or alleged material omissions in those documents, unless we were relying on certain written information that the underwriter's representative or certain affiliates provided us; and The underwriter's representative must indemnify us, our officers, directors and affiliates if we become subject to claims under the Securities Act or otherwise, and the claims are: (i) based on the underwriter's representative's or certain affiliates' failure to perform our obligations under agreements with us, or II-1 (ii) based on untrue or alleged untrue statements in the registration statement or any preliminary or final prospectus, or material omissions or alleged material omissions in those documents, if we were relying on certain written information that the underwriter's representative or certain affiliates provided us. ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION SEC registration fee ..................... $ 4,158 Blue sky filing fees ..................... $ 42,000* Transfer agent and engraving fees ......... $ 750 Accounting fees ........................... $ 80,000* NASD corporate finance filing fee ......... $ 1,875 Boston Stock Exchange listing fee ......... $ 7,500 Nasdaq SmallCap Market(SM) listing fee ...... $ 8,481 Legal fees ................................. $ 175,000* Printing and engraving costs ............... $ 50,000 Miscellaneous .............................. $ 5,236* ---------- Total .............................. $ 375,000* ========== - ------------ * Estimated. ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES Set forth below is information concerning the issuance by PCI of its securities since its organization in December 1996 (other than securities issued in this offering). All such securities are restricted securities and the certificates bear restrictive legends. All share issuances are adjusted to reflect the effect of the 3:1 Stock Split. In each of the transactions for which we assert exemption from registration under Section 4(2) of the Act, with the exception of the shares issued to Mike Rocha, the purchaser executed some form of written subscription offer or agreement which contained representations about the unregistered nature of the shares, his access to full information regarding the corporation and the shares, his understanding regarding the restrictions on transfer of the shares and his intent to acquire the shares for investment purposes only and not with a view to resale. On August 8, 1997 certain holders of shares who are classified as "Promoters" under applicable state securities laws and regulations contributed a total of $150,000 as additional capital to PCI. This contribution was made to comply with promoters' equity requirements set forth in the North American Securities Administrators Association, Inc. ("NASAA") Statement of Policy Regarding Promoters' Equity Investment. No shares were issued as a result of this equity contribution, and the number of outstanding shares did not change. (a) In connection with PCI's acquisition of all of the issued and outstanding shares of CAN-AM on December 31, 1996, aggregated with additional shares issued on January 9, 1997, PCI issued 817,500 shares of Common Stock to the following founders, employees or consultants in a stock-for-stock transaction for certain class "A" (non-voting) and Class "B" (voting) shares of CAN-AM: Name Shares Consideration - ------------------------------- ----------------------- ---------------------- Greg P. Lambrecht ...... 363,750 95 CAN-AM "A" Shares 1 CAN-AM "B" Share Colin A. Jones ......... 371,250 95 CAN-AM "A" Shares 1 CAN-AM "B" Share Greg S. Barton ......... 22,500 6 CAN-AM "A" Shares Daniel C. Goldman ...... 52,500 4 CAN-AM "A" Shares Pat Quadrelli ......... 7,500 2 CAN-AM "A" Shares ---------------------- ---------------------- Totals ............... 817,500 Shares $1,000 Value to PCI II-2 The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition at the time of the issuance, Greg P. Lambrecht and Colin A. Jones were PCI promoters and the owners of entities which sold cigar operations to PCI. Greg S. Barton was a $100,000 creditor of CAN-AM and a creditor of Rose Hearts, which sold its cigar operations to PCI. Daniel C. Goldman was a financial consultant to Rose Hearts, J&M and CAN-AM and PCI, and a PCI director from January 9, 1997 to February 17, 1997. Pat Quadrelli was a lender to CAN-AM prior to the time that it was acquired by PCI. As set forth in PCI's consolidated financial statements for the fiscal year ended March 31, 1997, the cost of the net assets to J&M and Rose Hearts and the amount at which CAN-AM acquired the net assets was the same as its historical net cost in J&M and Rose Hearts. The combined cost, net of liabilities assumed, was approximately $1,000. (b) On January 9, 1997, PCI issued 15,000 shares of Common Stock to Mike Rocha as compensation for past services provided to PCI and which PCI valued at $5,000. The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and Mr. Rocha was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. He was given full access to financial and other information concerning PCI and the shares. At the time of the issuance, Mr. Rocha was an employee of Rose Hearts and a consultant to PCI. (c) From January 9 to 12, 1997, PCI issued shares of Common Stock to certain directors, officers, employees, consultants and accredited investors for cash as follows: Name Shares Consideration ---------------------------- --------- -------------- Lorraine Shelley ......... 82,500 $ 27,200 Kathy Keil ............... 82,500 $ 27,200 Scott I. Lambrecht ...... 86,250 $ 25,500 Steven A. Lambrecht ...... 82,500 $ 27,200 Corey A. Lambrecht ...... 75,000 $ 27,200 James B. Stanley ......... 11,250 $ 10,000 Greg S. Barton ............ 52,500 $ 50,000 -------- --------- Total ..................... 472,500 $194,300 The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Scott I. Lambrecht and Steven A. Lambrecht were PCI directors, Lorraine Shelley was a director, Secretary and Treasurer of PCI. Ms. Shelley, and Kathy Keil, were PCI consultants who owned a convenience store distributorship and previously worked with Rose Hearts in handling its accounts. Corey A. Lambrecht was a Senior Account Executive for PCI and the brother and son of directors Scott I. Lambrecht and Steven A. Lambrecht, respectively. James B. Stanley was PCI's Purchasing Director (now Vice President of Purchasing) and Greg S. Barton was a founding shareholder and, as described under (a), a substantial lender to CAN-AM and Rose Hearts. II-3 (d) On March 5, 1997, PCI's Board of Directors authorized a private placement of a maximum of 195,000 shares of PCI Common Stock to its existing shareholders. On March 10, 1997, PCI issued the following additional shares of Common Stock to its existing shareholders in exchange for cash: Name Shares Consideration ---------------------------- --------- -------------- Peter G. Charleston ...... 90,000 $ 3,750 Steven A. Lambrecht ...... 60,000 $10,000 Murphy Pierson ............ 15,000 $ 1,250 Daniel C. Goldman ......... 10,500 $ 1,750 -------- -------- Total ..................... 175,500 $16,750 The issuance of the Common Stock was exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and each purchaser was a "sophisticated" or otherwise suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Peter G. Charleston was the National Sales and Training Director and responsible for PCI's largest U.S. account. Steven A. Lambrecht was a PCI director, Murphy Pierson was a PCI Account Executive, and Dan C. Goldman, as described under (a), was a financial consultant to PCI, a founding shareholder and a former director. (e) As described above under "Interim Financing -- Bridge Financing," between March and June 1997, ten (10) accredited bridge investors loaned PCI a total amount of $1,000,000 in increments of $50,000. PCI received $900,000 in cash and $100,000 in forgiveness of prior debt of CAN-AM. In return for their loans, the bridge investors received bridge notes from PCI in the amount of their loans and bridge warrants to purchase shares of PCI Common Stock at fifty percent (50%) of the public offering price except that the exercise price is $5.25 per share for the warrants held by William B. McKee. The names of the bridge investors, the cash amount or value of consideration they provided to PCI, and the number of shares of Common Stock that they are entitled to purchase under the bridge warrants are set forth in the prospectus under "Interim Financing -- Bridge Financing." The issuance of the bridge notes and bridge warrants was exempt from the registration requirements of the Securities Act pursuant to Sections 4(2) and 4(6) thereof and Rule 506 of the SEC. Each bridge investor was an accredited investor within the meaning of Rule 501 and a "sophisticated" or otherwise suitable investor within the meaning of the Section 4(2) exemption. Each bridge investor was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, of the ten (10) bridge investors, David S. Hodges was a PCI consultant and promoter and is currently a director, William L. Anthony was a PCI consultant and is currently a director, William B. McKee is the Chairman of the Board of the underwriter's representative in this offering and Greg S. Barton, as set forth in (a) and (c) above, was a founding shareholder and a substantial lender to CAN-AM and Rose Hearts. The remaining four bridge investors, along with the other bridge investors, made representations to PCI regarding their net worth and income, their ability to accept the risk of the investment, their access, examination and satisfaction with information about PCI and the investment, that they had adequate means to provide for their current financial needs, that they believed the investment was suitable to their personal financial circumstances and that they were either relying on their own financial advisor or that their education, business experience and financial sophistication enabled them to evaluate the economic merits of their investment. PCI conducted no advertisement or public solicitation in connection with the transaction and filed a Notice of Sales of Securities on Form D on July 3, 1997 and amended the Form D on July 16, 1997. (f) As described above under "Certain Transactions," on May 1, 1997, PCI entered an Endorsement Agreement with Arie Luyendyk, an accredited investor, under which PCI issued 15,000 shares of Common Stock to Mr. Luyendyk subject to a six-month vesting schedule. In order to meet its obligations under the Endorsement Agreement without diluting the relative security positions of other shareholders prior to the offering, PCI repurchased 15,000 (as adjusted by the 3:1 Stock Split) II-4 shares of its Common Stock from its Chief Executive Officer and Chairman, Steven A. Lambrecht at $0.33 per share, and transferred them to Mr. Luyendyck. PCI valued Mr. Luyendyk's entry into the Endorsement Agreement and the placement of PCI's logo on his helmet at the Indy 500 at $37,500. The issuance of the shares of Common Stock to Mr. Luyendyk were exempt from the registration requirements of the Securities Act pursuant to Section 4(2) thereof and he was a suitable investor within the meaning of that exemption. Each purchaser was given full access to financial and other information concerning PCI and the shares. In addition, at the time of issuance, Mr. Luyendyk became PCI's spokesperson, and made substantial and specific representations to PCI regarding his net worth and income, his ability to bear the economic risk of losing the entire investment, his capability to evaluate the risks and merits of the investment, and his examination to his satisfaction of corporate and financial information regarding PCI and the investment. ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS 1.1(2) Form of Underwriting Agreement. 1.2(2) Form of Promotional Shares Lock-Up Agreement. 1.3 Form of Master Agreement Among Underwriters. 1.4 Form of Selected Dealer's Agreement. 1.5 Form of Lock-Up Agreement for Shares Underlying Bridge Warrants. 1.6 Registration Rights Agreement. 3.1 Articles of Incorporation of PCI. 3.2 Amended and Restated By-Laws, dated May 3, 1997. 3.3(2) Amendment to Bylaws, dated July 30, 1997. 3.4 Certificate of Incorporation and Company Act Memorandum of CAN-AM. 4.1 Pages from Articles of Incorporation and Bylaws defining the rights of security holders. 4.2 Specimen Common Stock Certificate. 4.3(2) Form of Underwriter's Share Purchase Warrant. 4.4 Investment Banking Agreement dated December 14, 1996 between Registrant and Underwriter. 4.5 Letter of Intent dated March 31, 1997 between Registrant and Underwriter. 4.6 Form of Subscription to Acquire Warrant between Registrant and Bridge Investors to which the Form of Bridge Note and Form of Bridge Warrant are exhibits. 5.1(2) Opinion of Titus, Brueckner & Berry, P.C. 9.1 Shareholders and Voting Agreement, dated January 1, 1997 (terminated May 31, 1997). 10.1 Business Loan Agreement, dated September 5, 1996, among Greg S. Barton, Rose Hearts, Inc., Greg P. Lambrecht, J&M Wholesale, Ltd., Colin A. Jones, and CAN-AM. 10.2 Asset Purchase Agreement, dated December 31, 1996, between CAN-AM International Investments Corp. and Rose Hearts, Inc. 10.3 Asset Purchase Agreement, dated December 31, 1996, between CAN-AM International Investments Corp. and J&M Wholesale, Ltd. 10.4 Promissory Note, dated December 31, 1996, between Colin A. Jones and PCI. 10.5 Promissory Note, dated December 31, 1996, between Greg P. Lambrecht and PCI. II-5 10.6 Management Agreement, dated January 1, 1997, between CAN-AM International Investment Corp. and J&M Wholesale, Ltd. 10.7(1) Letter Agreement for Supply of Brand Name and Private Label Cigars, dated January 7, 1997, between Registrant and TSG Import, Export and Manufacturing Corporation. 10.8(1) Cigar Display and Merchandising Agreement, dated April 1, 1997, between the Registrant and The Southland Corporation (7-Eleven Stores/U.S.A.). 10.9(1) Agency Relationship Agreement, dated April 8, 1997, between the Registrant and Associated Grocers, Inc. 10.10(1) Retailer Agreement, dated April 15, 1997, between the Registrant and Arizona Region, Region 3100, Circle K Stores, Inc. 10.11(1) Retailer Agreement, dated April 29, 1997, between the Registrant and Express Stop, Inc. 10.12 Endorsement Agreement, dated May 1, 1997, between the Registrant and Arie Luyendyk. 10.13 Standard Sublease, dated May 5, 1997, between the Registrant and Michael R. Ellison, Inc. 10.14(1) Agency Relationship Agreement, dated May 8, 1997, between the Registrant and SuperValu, Inc. 10.15(1) Retailer Agreement, dated May 22, 1997, between the Registrant and Prestige Stations, Inc. (AM/PM Stores). 10.16 Business Consulting Agreement, dated June 2, 1997, between the Registrant and David S. Hodges. 10.17 Employment Agreement, dated June 13, 1997, between the Registrant and Steven A. Lambrecht. 10.18 Employment Agreement, dated June 13, 1997, between the Registrant and Greg P. Lambrecht. 10.19 Employment Agreement, dated June 13, 1997, between the Registrant and Colin A. Jones. 10.20 Distributorship Agreement, dated June 13, 1997, between the Registrant and Rose Hearts, Inc. 10.20.1(2) Letter Agreement dated August 12, 1997, amending the June 13, 1997 Distributorship Agreement between the Registrant and Rose Hearts, Inc. 10.21 Settlement and Full Release of Equity Interest, dated June 13, 1997, among the Registrant and Greg P. Lambrecht, Colin A. Jones, Rose Hearts, Inc., CAN-AM International Investment Corp., J&M Wholesale Ltd., Greg S. Barton, Lucille B. Barnes and Kelli D. Martin. 10.22 Agreement, dated June 20, 1997 by and between Steven A. Lambrecht, Greg P. Lambrecht, Colin A. Jones, William B. Anthony and PCI. 10.22.1(2) Modification Agreement, dated August 7, 1997, amending June 20, 1997 Agreement. 10.23 Stock Purchase Agreement, dated June 20, 1997 between Steven A. Lambrecht and James B. Stanley. 10.24(1) Retailer Agreement, dated June 3, 1997, between CAN-AM International Investment Corp. and Silcorp Limited. 10.25(1) Retailer Agreement, dated July 1, 1997, between the Registrant and Central Region, Circle K Stores, Inc. and Stax Stores. 10.26(1) Supplier Agreement, dated June 23, 1997, between the Registrant and Primadonna Cigar Company. II-6 10.27(1) Supplier Agreement, dated June 23, 1997, between the Registrant and Universal Premium Cigars, Inc. 10.28 Offer to Lease, dated July 1, 1997, between the Registrant and Marine Way Estates Ltd. 10.29(2) Capital Contribution Agreement, dated August 8, 1997. 10.30(2) Promissory Note and Personal Guarantees dated July 25, 1997 evidencing Credit Line between Registrant and Biltmore Investors Bank, N.A. 11.1(2) Statement Regarding Computation of Per Share Earnings. 21.1 Subsidiary List. 23.1 Consent of Semple & Cooper, LLP. See "Consent of Independent Certified Accountants." 23.2(2) Consent of Titus, Brueckner & Berry, P.C. (included in Exhibit 5.1). 27.1(2) Financial Data Schedule. - ------------ (1) Portions of the exhibit omitted and filed separately with the Commission pursuant to the Confidential Treatment provisions of Regulation ss. 230.406. (2) Filed with this Amendment.
ITEM 28. UNDERTAKINGS The undersigned Registrant hereby undertakes: (1) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (i) To include any prospectus required by Section 10(a)(3) of the Securities Act; (ii) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement; (iii) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. (2) For determining liability under the Securities Act, to treat each post-effective amendment as a new registration statement of the securities offered, and the offering of the securities at that time to be the initial bona fide offering. (3) To remove from the registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. (4) To provide to the underwriter at the closing specified in the underwriting agreement certificates in such denominations and registered in such names as required by the underwriter to permit prompt delivery to each purchaser. (5) Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officer or controlling persons of the registrant, pursuant to the foregoing provisions, or otherwise, the registrant has been advised that, in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered hereunder, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling II-7 precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. (6) For determining any liability under the Securities Act, to treat the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the issuer under Rule 424(b)(I), or (4) or 497(h) under the Securities Act as part of this registration statement as of the time the Commission declared it effective. (7) For determining any liability under the Securities Act, to treat each post-effective amendment that contains a form of prospectus as a new registration statement for the securities offered in the registration statement, and that offering of the securities at that time as the initial bona fide offering of those securities. II-8 SIGNATURES In accordance with the requirements of the Securities Act of 1933, as amended, the Registrant has duly caused this amended registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Scottsdale, State of Arizona on this the 14th day of August, 1997. PREMIUM CIGARS INTERNATIONAL, LTD. By: /s/ STEVEN A. LAMBRECHT -------------------------------------- Steven A. Lambrecht President and Chief Executive Officer By: /s/ GREG P. LAMBRECHT -------------------------------------- Greg P. Lambrecht Secretary and Vice President of National Sales Pursuant to the requirements of the Securities Act of 1933, as amended, this amended registration statement has been signed by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. Each person whose signature appears below hereby authorizes Steven A. Lambrecht, Greg P. Lambrecht, David A. Hodges or any of them acting in the absence of the others, as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission.
Date Signature Capacity in Which Signed - ----------------- ---------------------------------- ------------------------------------------- August 14, 1997 /s/ WILLIAM L. ANTHONY Chairman of the Board ------------------------------- William L. Anthony August 14, 1997 /s/ STEVEN A. LAMBRECHT Director and Principal Executive Officer ------------------------------- Steven A. Lambrecht August 14, 1997 /s/ COLIN A. JONES Director and Vice President of ------------------------------- International Sales Colin A. Jones August 14, 1997 /s/ GREG P. LAMBRECHT Director and Secretary, Treasurer and ------------------------------- Vice President of National Sales Greg P. Lambrecht August 14, 1997 /s/ DAVID S. HODGES Director ------------------------------- David S. Hodges August 14, 1997 Director ------------------------------- Robert H. Manschot August 14, 1997 /s/ KARISSA B. NISTED Principal Financial Officer and Controller ------------------------------- Karissa B. Nisted
II-9 EX-1.1 2 UNDERWRITING AGREEMENT PREMIUM CIGARS INTERNATIONAL, LTD. 1,900,000 Shares of Common Stock UNDERWRITING AGREEMENT (the "Agreement") ____________, 1997 W. B. McKee Securities, Inc. 3003 North Central Avenue Suite 100 Phoenix, Arizona 85012 Ladies and Gentlemen: Premium Cigars International, Ltd., an Arizona corporation ("Company"), proposes to sell an aggregate of 1,900,000 shares of common stock, no par value per share ("Firm Stock"), to W. B. McKee Securities, Inc. ("Representative") on the terms and conditions set forth herein. The Company also proposes to sell, at the Representative's option, an aggregate of up to 285,000 additional shares of Comon Stock (the "Option Stock") as discussed more thoroughly in Section 2 below. The Company further agrees to issue, upon the Closing Date as hereafter defined in Section 2, the Representative's warrants more fully discussed in Section 4(o) below ("Representative's Warrants"). The Firm Stock and the Option Stock are herein collectively called the "Stock." In consideration of the mutual agreements contained herein and of the interests of the parties in the transactions contemplated hereby, the parties hereto agree as follows: 1. Representations and Warranties of the Company. The Company represents, warrants and agrees as follows: (a) A registration statement on Form SB-2 (File No. 333-29985 with respect to the Firm Stock and Option Stock has been prepared by the Company in conformity with the requirements of the Securities Act of 1933, as amended ("Act"), and the rules and regulations ("Rules and Regulations") of the Securities and Exchange Commission ("Commission") thereunder and has been filed with the Commission under the Act. Copies of such registration statement, including any pre-effective and post-effective amendments thereto, the preliminary prospectus (meeting the requirements of Rule 430A of the Rules and Regulations) contained therein and the exhibits, financial statements and schedules, as finally amended and revised, have heretofore been delivered by the Company to the Representative. Such registration statement is herein referred to as the "Registration Statement," upon filing of the prospectus referred to below with the Commission, shall be deemed to include all information omitted therefrom in reliance upon Rule 430A and contained in the prospectus referred to below, has been declared effective by the Commission under the Act. The form of prospectus first filed by the Company with the Commission pursuant to its Rule 424(b) and Rule 430A is herein referred to as the "Prospectus." Such preliminary prospectus included in the Registration Statement prior to the time it becomes effective is herein referred to as a "Preliminary Prospectus." (b) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Arizona, with full corporate power and corporate authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse effect upon the business or property of the Company. (c) The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable and have been issued in compliance with all federal and state securities laws; all of the Units to be issued and sold by the Company pursuant to this Agreement have been duly authorized and, when issued and paid for as contemplated herein, the components thereof will be validly issued, fully paid and nonassessable; and no preemptive rights of stockholders exist with respect to any of the Units or the issue and sale thereof; no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such stockholder under the Act in the public offering contemplated herein except as disclosed in the Registration Statement; all necessary and proper corporate proceedings have been taken to validly authorize such Units and no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Units to be sold by the Company as contemplated herein. (d) The Common Stock of the Company conforms in all material respects to the description thereof in the Registration Statement. Except as specifically disclosed in the Registration Statement and the financial statements of the Company and the related notes thereto, the Company does not have outstanding any options to purchase, or any preemptive rights or other -2- rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell shares of its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans, and of the options or other rights granted and exercised thereunder, set forth in the Prospectus, are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. The Company and its affiliates are not currently offering any securities other than the Firm Stock and Option Stock, nor have they offered or sold any of the Company's securities, except as described in the Registration Statement. (e) The Commission has not issued any order preventing or suspending the use of any Preliminary Prospectus relating to the proposed offering of the Firm Stock nor instituted or threatened instituting proceedings for that purpose. The Registration Statement contains, and the Prospectus and any amendments or supplements thereto will contain, all statements which are required to be stated therein by and in all respects conform or will conform, as the case may be, to the requirements of, the Act and the Rules and Regulations. Neither the Registration Statement nor any amendment thereto, and neither the Prospectus nor any supplement thereto, contains or will contain as the case may be, any untrue statement of a material fact or omits or will omit to state any material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading; provided, however, that the Company makes no representations or warranties as to information contained in or omitted from the Registration Statement or the Prospectus, or any such amendment or supplement, in reliance upon, and in conformity with, written information furnished to the Company by or on behalf of any underwriter through the Representative, specifically for use in the preparation thereof. (f) The financial statements of the Company, together with related notes and schedules as set forth in the Registration Statement, present fairly in all material respects the financial position and the results of operations of the Company, at the indicated dates and for the indicated periods. Such financial statements, schedules and related notes have been prepared in accordance with generally accepted accounting principles, consistently applied throughout the periods involved, and all adjustments necessary for a fair presentation of results for such periods have been made. The summary and selected financial and statistical data and schedules included in the Registration Statement present fairly the information shown therein and have been compiled on a basis consistent with the financial statements presented therein. No other financial statements or schedules are required to be included in the Registration Statement. (g) There is no action, suit or proceeding pending or, to the best knowledge of the Company, after due inquiry, threatened against the Company before any court or regulatory, governmental or administrative agency or body, which might result in a material adverse change in the business or financial condition of the Company, except as set forth in the Registration Statement. The Company is not subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or arbitral -3- forum, which might result in a material adverse change in the business, assets or condition of the Company. (h) The Company has good and marketable title to all of the properties and assets reflected in either the financial statements or as described in the Registration Statement and such properties and assets are not subject to liens, mortgages, security interests, pledges or encumbrances of any kind, except for such encumbrances that, individually or in the aggregate, would not have a material adverse effect on the business or financial condition of the Company. The Company occupies its leased properties under valid and binding leases conforming in all material respects to the description thereof set forth in the Registration Statement. (i) The Company has filed all federal, state, local and foreign income tax returns which have been required to be filed and has paid all taxes indicated by said returns and has paid all tax assessments received by it. There is no income, sales, use, transfer or other tax deficiency or assessment which has been or might reasonably be expected to be asserted or threatened against the Company which might result in a material adverse change in the business or financial condition of the Company. The Company has paid all sales, use, transfer and other taxes applicable to it and its business and operations. (j) Since the respective dates as of which information is given in the Registration Statement, as it may be amended or supplemented, (i) there has not been any material adverse change in or affecting the condition, financial or otherwise, of the Company or the earnings, business affairs, management, or business prospects of the Company, whether or not occurring in the ordinary course of business, (ii) there has not been any transaction entered into by the Company, other than transactions in the ordinary course of business or transactions specifically described in the Registration Statement as it may be amended or supplemented, (iii) the Company has not sustained any material loss or interference with its businesses or properties from fire, flood, windstorm, accident or other calamity, (iv) the Company has not paid or declared any dividends or other distribution with respect to its capital stock and the Company is not in default in the payment of principal of or interest on any outstanding debt obligations, and (v) there has not been any change in the capital stock (other than the sale of the Units or the exercise of outstanding stock options or warrants as described in the Registration Statement) or material increase in indebtedness of the Company. The Company does not have any material contingent obligation which is not disclosed in the Registration Statement (or contained in the financial statements or related notes thereto), as such may be amended or supplemented. (k) The Company is not in violation or default under any provision of its articles of incorporation or bylaws or any of its agreements, leases, license, contracts, franchises, mortgages, permits, deeds of trust, indentures or other instruments or obligations to which the Company is a party or by which it or any of its properties is bound or may be materially affected (collectively, "Contracts"), where such violation or default would have a material adverse effect on the business or financial condition of the Company. -4- (l) The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in a breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company is a party or by which the Company or any of its property may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company, or violate any of the provisions of the articles of incorporation or bylaws of the Company or violate any order, judgment, statute, rule or regulation applicable to the Company of any court or of any regulatory, administrative or governmental body or agency or arbitral forum having jurisdiction over the Company or any of its property. (m) The Company has the legal right, corporate power and corporate authority to enter into this Agreement and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is legally binding upon and enforceable against the Company in accordance with its terms (except as the enforceability may be subject to or limited by bankruptcy, insolvency, reorganization, arrangement, moratorium or other similar laws affecting the rights of creditors generally and subject to the effect of general principles of equity). (n) Each approval, registration, qualification, license, permit, consent, order, authorization, designation, declaration or filing by or with any regulatory, administrative or other governmental body or agency necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (except such additional actions as may be required by the National Association of Securities Dealers, Inc. ("NASD") or may be necessary to qualify the Stock for public offering under state securities or Blue Sky laws has been obtained or made and each is in full force and effect. (o) The Company is not an owner or assignee of any patents or patent rights; the Company is not aware of any pending or threatened action, suit, proceeding or claim by others, either domestically or internationally, that the Company is violating any patents, patent rights, copyrights, trademarks or trademark rights, service marks, trade names, licenses or royalty arrangements, or rights thereto of others, or governmental, regulatory or administrative authorizations, orders, permits, certificates and consents. (p) There are no Contracts or other documents required to be described in the Registration Statement or to be filed as exhibits to the Registration Statement by the Act or by the Rules and Regulations which have not been described or filed as required. (q) The Company is conducting business in compliance with all applicable laws, rules and regulations of the jurisdictions in which it is conducting business, except where the failure to so comply would not have a material adverse effect on the business or financial condition of the Company. The Company possesses adequate certificates or permits issued by the appropriate federal, state and local regulatory authorities necessary to conduct its business and to -5- retain possession of its properties. The Company has not received any notice of any proceeding relating to the revocation or modification of any of these certificates or permits. (r) All transactions among the Company and the officers, directors, and affiliates of the Company have been accurately disclosed in the Prospectus, to the extent required to be disclosed in the Prospectus in accordance with the Act and the Rules and Regulations. As used in this Agreement, the term "affiliate" shall mean a person or entity controlling, controlled by or under common control with any specified person or entity, or the ability to direct, directly or indirectly, the management or policies of the controlled person or entity, whether through the ownership of voting securities, by contract, positions of employment, family relationships, service as an officer, director or partner of the person or entity, or otherwise. (s) The Company has not, directly or indirectly, (i) made any unlawful contribution to any candidate for public office, or failed to disclose fully any contribution in violation of law, or (ii) made any payment to any federal, state, local or foreign governmental officer or official, or other person charged with similar public or quasi-public duties, other than payments required or permitted by the laws of the United States or any other such jurisdiction. (t) The Company maintains insurance of the types and in the amounts which it deems adequate for its business and which is customary for companies in its industry, including, but not limited to, general liability insurance and insurance covering all real and person property owned or leased by the Company against theft, damage, destruction, acts of vandalism and all other risks customarily insured against, all of which insurance is in full force and effect. (u) Semple & Cooper LLP, who have certified the financial statements filed with the Commission as part of the Registration Statement, are independent public accountants as required by the Act and the Rules and Regulations. (v) The Company has taken all appropriate steps reasonably necessary to assure that no offering, sale or other disposition of any Common Stock of the Company will be made for a period of eighteen months after the date of the Prospectus. The Company will also take steps to assure that no director, executive officer or 5% or greater stockholder will sell or otherwise dispose of any shares of Common Stock held by them for a period of eighteen (18) months after the date of the Prospectus. (w) As of the effective date hereof, the Company is classified as a "C" corporation with the Internal Revenue Service. (x) The Company's board of directors consists of those persons listed in the Prospectus. Except as disclosed in the Prospectus, none of such persons is employed by the Company nor is any of them affiliated with the Company, except for service on its board of directors. -6- (y) Except as provided for herein, no broker's or finder's fees or commissions are due and payable by the Company, and none will be paid by it. (z) The Company is eligible to use Form SB-2 for the registration of the Stock. (aa) Neither the Company, nor to its knowledge, any person other than any underwriter, has made any representation, promise or warranty, whether verbal or in writing, to anyone, whether an existing stockholder or not, that any of the Stock will be reserved for or directed to them during the proposed public offering. 2. Purchase, Sale and Delivery of the Firm Stock. On the basis of the representations, warranties and covenants herein contained, and subject to the conditions herein set forth, the Company agrees to sell to the Representative and the Representative agrees to purchase, at the gross price per share of Common Stock indicated in the Prospectus ("Initial Price") less the Representative's discount of ten percent (10%) of the Initial Price of the Firm Stock. Payment for the Firm Stock to be sold hereunder is to be made by bank wire or certified or bank cashier's check(s) drawn to the order of the Company for the Firm Stock, against delivery of certificates therefor to the Representative. Such payment and delivery are to be made at the offices of Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004, at 10:00 a.m., M.S.T., on ____________, 1997 (the third business day after the date of this Agreement), such time and date being herein referred to as the "Closing Date." (As used herein, "business day" means a day on which the Nasdaq is open for trading and on which banks in Arizona are open for business and not permitted by law or executive order to be closed.) The certificates for the Firm Stock shall be in definitive form with engraved borders and will be delivered two full business days prior to the Closing Date to W. B. McKee Securities, Inc., Attention: William B. McKee, 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012, in such denominations and in such registrations as the Representative requests in writing not later than the second full business day prior to the Closing Date, and will be made available for inspection by the Representative at least two business days prior to the Closing Date at the offices of Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004. In addition, on the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, the Company grants an option to the Representative to purchase the Option Stock at the Initial Price, less the Representative's discount. The maximum number of shares of Option Stock to be sold by the Company is equal to fifteen percent (15%) of the number of shares of Firm Stock. The option granted hereby may be exercised in whole or in part, but only once, and at any time upon written notice given within 30 days after the Closing Date, by the Representative, to the Company, as the case may be, setting forth the number of shares of Option Stock as to which the Representative is exercising the option, the names and denominations in which the Option Stock is to be registered and the time and date at which such certificates are to be delivered. The certificates for the Option Stock are to be delivered to a location designated by the Representative no later than one full business day after -7- the exercise of such option (such time and date being herein referred to as the "Option Closing Date"). The option with respect to the Option Stock granted hereunder may be exercised solely to cover over-allotments in the sale of the Firm Stock by the Representative or to permit purchases by the Representative to the extent permitted by law. The Representative may cancel such option at any time, in whole or in part, prior to its expiration, by giving written notice of such cancellation to the Company. To the extent, if any, that the option is exercised, payment for the Option Stock shall be made on the Option Closing Date by bank wire or certified or bank cashier's check(s) drawn to the order of the Company, for the Option Stock against delivery of certificates therefor at the offices of the Representatives noted above. 3. Offering by the Representative. It is understood that the Representative is to make a public offering of the Firm Stock as soon as the Representative deems it advisable to do so. The shares of Firm Stock are to be initially offered to the public at the Initial Price set forth in the Prospectus. The Representative may from time to time thereafter change the public offering prices and other selling terms. To the extent, if at all, that any Option Stock is purchased pursuant to Section 2 hereof, the Representative will offer them to the public on the foregoing terms. The Representative shall have the right to associate with other dealers as it may determine and shall have the right to grant to such persons such concessions out of the underwriting discount to be received by the Representative as it may determine, under and pursuant to a Master Selected Dealers' Agreement in the form filed as an exhibit to the Registration Statement. 4. Covenants of the Company. The Company covenants and agrees with the Representative that: (a) The Company will (i) prepare and timely file with the Commission under Rule 424(b) of the Rules and Regulations a prospectus containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Rules and Regulations and (ii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representative shall not previously have been advised and furnished with a copy or to which the Representative shall have reasonably objected in writing or which is not in compliance with the Rules and Regulations. (b) The Company will advise the Representative promptly and will confirm such advice in writing (i) when the Registration Statement has become effective, (ii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information, or (iii) of the issuance by the Commission or any state securities commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose, and the Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. -8- (c) The Company will cooperate with the Representative in endeavoring to qualify the Stock for sale under the securities laws of such jurisdictions as the Representative may have reasonably requested in writing and will make such applications, file such documents, furnish such information and take such other actions as may be reasonably required by federal or state securities laws or regulations (including but not limited to appointing additional independent directors or advisors to the board of directors) whether before, during or after the offering. The Company will, from time to time, prepare and file such statements, reports, and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representative may reasonably request for distribution of the Stock; provided, however, that the Company shall not be required to register or qualify as a foreign corporation or to take any action that would subject it to service of process in suits, other than relating to the sale of the Stock, in any jurisdiction where it is not now so subject. (d) The Company will qualify the Stock for trading on the National Association of Securities Dealers Automated Quotation System ("Nasdaq") Small Cap Market and use best efforts to maintain such listing (or a listing on another national securities exchange) thereafter for a period of no less than five (5) years. (e) The Company will make such applications, file such documents, and furnish such information as necessary to list the Company's securities in the securities listing manuals of Standard & Poor's Corporation or Moody's Industrial Services contemporaneous with the filing of the Prospectus with the Commission, and shall maintain listing in such manuals thereafter for a period of no less than five years. The Company will take such other similar steps as are reasonably necessary to obtain exemptions for secondary trading of the Company's securities in various U.S. jurisdictions specified by the Representative. (f) The Company will deliver to, or upon the order of, the Representative, from time to time, as many copies of any Preliminary Prospectus as the Representative may request. The Company will deliver to, or upon the order of, the Representative during the period when delivery of a Prospectus is required under the Act, as many copies of the Prospectus in final form, or as thereafter amended or supplemented, as the Representative may request. The Company will deliver to the Representative at or before the Closing Date, five signed copies of the Registration Statement and all amendments thereto, including all exhibits filed therewith, and will deliver to the Representative such number of copies of the Registration Statement, without exhibits, but including any information incorporated by reference, and of all amendments thereto, as the Representative may request. (g) If during the period in which a Prospectus is required by law to be delivered by an underwriter or dealer any event shall occur as a result of which, in the judgment of the Company or in the opinion of counsel for the Representative, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission an appropriate amendment to the -9- Registration Statement or supplement to the Prospectus so that the Registration Statement, including the Prospectus as so amended or supplemented, will not be misleading, or so that the Registration Statement, including the Prospectus, will comply with law. (h) The Company will make generally available to its stockholders, as soon as it is practicable to do so, but in any event not later than 15 months after the effective date of the Registration Statement, an earnings statement in reasonable detail, covering a period of at least 12 consecutive months beginning after the effective date of the Registration Statement, which earnings statement shall satisfy the requirements of Section 11 (a) of the Act and Rule 158 of the Rules and Regulations and will advise the Representative in writing when such statement has been so made available and will furnish the Representative with a true and correct copy thereof. (i) The Company will apply the net proceeds of the sale of the Stock sold by it in accordance with the statements under the caption "USE OF PROCEEDS" in the Prospectus. Prior to the application of such net proceeds, the Company will invest or reinvest such proceeds only in Eligible Investments. For the purposes of this Agreement, "Eligible Investments" shall mean the following investments so long as they have maturities of one year or less: (i) obligations issued or guaranteed by the United States or by any person controlled or supervised by or acting as an instrumentality of the United States pursuant to authority granted by Congress; (ii) obligations issued or guaranteed by any state or political subdivision thereof rated either Aa or higher, or MIG 1 or higher, by Moody's Investors Service, Inc. or AA or higher, or an equivalent, by Standard & Poor's Corporation, both of New York, New York, or their successors; (iii) commercial or finance paper which is rated either Prime-1 or higher or an equivalent by Moody's Investors Services, Inc. or A-1 or higher or an equivalent by Standard & Poor's Corporation, both of New York, New York, or their successors; and (iv) certificates of deposit or time deposits of banks or trust companies, organized under the laws of the United States, having a minimum equity of $250,000,000. (j) The Company has required each of its directors, executive officers and 5% or greater shareholders to enter into agreements not to sell any shares of the Company's Common Stock for eighteen months after the date of the Prospectus. The Company has furnished the Representative with an executed copy of each such agreement. (k) The Company shall make original documents and other information relating to the Company's affairs available upon request to the Representative and to its counsel at the Company's office for inspection and copies of any such documents will be furnished upon request to the Representative and to its counsel. Included within the documents made available have been at least the articles of incorporation and all amendments thereto, the bylaws and all amendments thereto, minutes of all of the meetings of the incorporators, directors and stockholders, all financial statements and copies of all Contracts to which the Company is a party or in which the Company has an interest. -10- (l) The Company has appointed American Securities Transfer & Trust, Inc., 1825 Lawrence Street, Suite 444, Denver, CO 80202-1817, as the Company's transfer agent and registrar, respectively. Unless the Representative otherwise consents in writing, the Company will continue to retain a transfer agent reasonably satisfactory to the Representative for a period of one year following the Closing. The Company will make arrangements to have available at the office of the transfer agent sufficient quantities of certificates representing as may be needed for the quick and efficient transfer of the Units as contemplated hereunder and for the one year period following the Closing. (m) Except with the Representative's approval, the Company agrees that the Company will not do any of the following for 180 days after the Closing Date or the Option Closing Date, whichever occurs later: (i) Undertake or authorize any change in its capital structure or authorize, issue or permit any public or private offering of additional securities; (ii) Authorize, create, issue or sell any funded obligations, notes or other evidences of indebtedness, except in the ordinary course of business; or (iii) Consolidate or merge with or into any other corporation or effect a material corporate reorganization of the Company. (n) The Company shall deliver to the Representative a warrant ("Representative's Warrant") to purchase, for a price of $.01 per Representative's Warrant, up to 170,989 shares of the Company's Common Stock, which entitles the Representative to purchase one share of common stock at an exercise price per Representative's Warrant equal to 160% of the aggregate of the Initial Purchase Price. The Representative's Warrants shall be in the form attached hereto as Appendix "A." The terms of the Common Stock issuable upon exercise of the Representative's Warrants shall be identical to those as offered to the public. The Representative's Warrants shall be exercisable at any time commencing one year from the effective date of the Registration Statement and continuing for four years thereafter. (i) The Company shall reserve and at all times have available a sufficient number of shares of its Common Stock to be issued upon the exercise of the Representative's Warrants. (ii) The Company and the Representative agree that the Representative may designate that the Representative's Warrants be issued in varying amounts directly to its officers, partners, other underwriters and selling group members. However, such designation will only be made by the Representative if it determines and substantiates to the Company that such issuance will not violate the applicable rules of the NASD. The Representative and the Company agree that any transfers -11- of the Representative's Warrants will only be made if they do not violate the registration provisions of the Act. (iii) Upon written request of the Representative or the then holder(s) of at least fifty percent (50%) of (i) the total unexercised Representative's Warrants (based on the shares of Common Stock purchasable directly or indirectly thereunder) and (b) the shares of Common Stock included in the Representative's Warrants issued upon the exercise of the Representative's Warrants, made at any time within the period commencing one (1) year from the Effective Date and ending four (4) years thereafter, the Company will file on no more than one (1) occasion a Registration Statement under the Act, registering or qualifying, as the case may be, the Representative's Warrants and/or all of the securities underlying them provided that the Company has available current financial statements. The Company agrees to use its best efforts to cause the above filings to be declared effective by the Commission. All expenses of such registrations or qualifications, including, but not limited to, legal, accounting, printing and mailing fees will be borne by the Company. (iv) In addition to the above, the Company understands and agrees that if, at any time during the term of the Representative's Warrants, it files a post-effective amendment or new registration statement with the Commission pursuant to the Act, or files a Notification on Form 1-A under the Act for a public offering of securities, either for the account of the Company or for the account of any other person, the Company, at its own expense, will offer to said holder(s) the opportunity to register or qualify the Representative's Warrants and/or all of the securities underlying them for offering to the public. This right shall be prior to any registration rights granted by the Company to holders of the Company's currently outstanding securities. (o) For a period of five years from the Effective Date, the Company shall provide the Representative with routine internal forecasts if any such reports are prepared by the Company for general dissemination. (p) During the period of the proposed public offering and for 12 months from the effective date of the Registration Statement, the Company will not, without the Representative's prior written consent, sell, contract to sell, issue for other purposes or otherwise dispose of any securities of the Company other than (a) shares of Common Stock issuable on the exercise of any options, warrants, or other rights which are disclosed in the Prospectus and (b) shares of Common Stock issuable upon the exercise of options granted to employees, officers or directors after the date of this Agreement if such options are reasonable and are granted in good faith and at prices which are not less than 85% of the fair market value of the Common Stock on the date of grant of such options. -12- (q) For a period commencing on the date hereof and ending 12 months after the date of the Prospectus, neither the Company nor any of its officers or directors will hold discussions with any member of the news media or issue news releases or other publicity about the Company regarding the financial condition of any significant event of the Company without the approval of the Company's legal counsel named in the Prospectus under the heading "Legal," or such other counsel as may be approved by the Representative. During such period, the Company will deliver to the Representative copies of such news releases or other publicity about the Company promptly after distribution thereof. (r) The Company will appoint, as a member of its Board of Directors for a period of not less than five (5) years from the date of the Prospectus, an individual designated by the Representative, such term to commence upon the Closing Date. Such designee shall be entitled to receive reimbursement for all reasonable costs incurred in attending such meetings, including, but not limited to, food, lodging and transportation. (s) The Company will employ an investor relations firm reasonably acceptable to the Representative upon completion of the offering. (t) The Company will retain an analyst reasonably satisfactory to the Representative after the completion of the offering, to prepare and distribute a research report at the end of the quiet period and six months thereafter. 5. Costs and Expenses. The Company will pay or cause to be paid all costs, expenses and fees in connection with the offering or incident to the performance of the obligations of the Company under this Agreement, including, without limiting the generality of the foregoing, the following: (a) all expenses (including any transfer taxes) incurred in connection with the delivery to the Representative of the Stock sold hereunder; (b) all fees and expenses (including, without limitation, fees and expenses of the Company's accountants and counsel, but excluding fees and expenses of counsel for the Representative) in connection with the preparation, printing, filing, delivery and shipping of the Registration Statement (including the financial statements therein and all amendments and exhibits thereto), Preliminary Prospectuses and the Prospectus as amended or supplemented, and any Blue Sky Memoranda; (c) all filing fees and fees and disbursements incurred in connection with the qualification of the Stock under the applicable state securities laws; (d) filing and listing fees of the Commission, NASD, Nasdaq, and any other similar entity in connection with the offering; (e) the cost of printing certificates representing the Stock; (f) the costs and charges of any transfer agent or registrar; (g) the costs of preparing, printing and distributing bound volumes for the Representative and their counsel; and (h) the costs of placing "tombstone advertisements" in any publications which may be selected by the Representative, and all other costs and expenses incident to the performance of its obligations under this Agreement which are not otherwise provided for in this Section. The Company shall use a printer acceptable to the Representative. Any transfer taxes imposed on the sale of the Stock to the Representative will be paid by the Company. Additionally, the Company shall pay to the Representative a non-accountable expense allowance of 3% of the gross amount to be raised hereunder, payable at the -13- Closing(s), of which $25,000 has already been paid by the Company in connection with this offering. Any amounts advanced, on a non-accountable basis, to the Representative on or before the date hereof, which shall be credited to the allowance noted above. This expense allowance is in addition to the Representative's discount. The Representative shall be responsible for the fees of its counsel, except as noted otherwise in this Section 5. The Company shall not be required to pay for any of the Representative's other expenses, except that if this Agreement shall not be consummated because the conditions in Section 7 hereof are not satisfied, or because this Agreement is terminated by the Representative pursuant to Section 6 hereof, or by reason of any failure, refusal or inability on the part of the Company to perform any undertaking or satisfy any condition of this Agreement or to comply with any of the terms hereof on its part to be performed, unless such failure to satisfy said condition or to comply with said terms be due solely to the default of the Representative, then the Company shall reimburse the Representative solely on an accountable basis for out-of-pocket expenses, including fees and disbursements of counsel, incurred in connection with investigating, marketing and proposing to market the Units or in contemplation of performing its obligations hereunder. 6. Conditions of Obligations of the Representative. The obligations of the Representative to purchase the Firm Stock on the Closing Date and the Option Stock, if any, on the Option Closing Date are subject to the accuracy, as of the Closing Date or the Option Closing Date, as the case may be, of the representations and warranties of the Company contained herein, and to the performance by the Company of its covenants and obligations hereunder and to the following additional conditions: (a) The Registration Statement shall have become effective not later than August ____, 1997, or such later date and time as may be consented to in writing by the Representative. No stop order suspending the effectiveness of the Registration Statement, as amended from time to time, shall have been issued and no proceedings for that purpose shall have been taken or, to the best knowledge of the Company, after due inquiry, shall be contemplated by the Commission or any state securities commission. (b) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, the opinion of Titus, Brueckner & Berry, P.C., counsel for the Company, dated the Closing Date or the Option Closing Date, as the case may be, addressed to the Representative substantially in the form and to the effect that: (i) The Company has been duly incorporated and is validly existing as a corporation in good standing under the laws of its jurisdiction of incorporation, with full corporate power and corporate authority to own or lease its properties and conduct its business as described in the Registration Statement; the Company is duly qualified to transact business in all jurisdictions in which the conduct of its business requires such qualification, except where the failure to qualify would not have a material adverse affect upon the business or financial condition of the Company. -14- (ii) To the best of such counsel's knowledge, the Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the outstanding shares of Common Stock of the Company have been duly authorized and validly issued, are fully paid and nonassessable. (iii) All of the Stock to be issued and sold by the Company pursuant to this Agreement have been duly authorized by all necessary corporate action and, when issued and paid for as contemplated herein, will be validly issued, fully paid and nonassessable. Further, to the best of such counsel's knowledge, no preemptive rights of stockholders exist with respect to any of the Units or the issue and sale thereof; no stockholder of the Company has any right pursuant to any agreement which has not been waived or honored to require the Company to register the sale of any securities owned by such stockholder under the Act in the public offering contemplated herein; and no further approval or authority of the stockholders or the Board of Directors of the Company is required for the issuance and sale of the Stock to be sold by the Company as contemplated herein. (iv) The certificates evidencing the Stock to be delivered hereunder are in due and proper form under Delaware law and the Stock conforms in all material respects to the description thereof contained in the Prospectus. (v) Except as specifically disclosed in the Registration Statement and the financial statements of the Company, and the related notes thereto, to the best of such counsel's knowledge, the Company does not have outstanding any options to purchase, or any preemptive rights or other rights to subscribe for or to purchase, any securities or obligations convertible into, or any contracts or commitments to issue or sell its capital stock or any such options, rights, convertible securities or obligations. The descriptions of the Company's stock option and other stock-based plans, and any other options or warrants heretofore granted by the Company, set forth in the Prospectus are accurate summaries and fairly present the information required to be shown with respect to such plans and rights in all material respects. (vi) The Registration Statement has become effective under the Act and to the best of such counsel's knowledge no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act and nothing has come to such counsel's attention to lead them to believe that such proceedings are contemplated; any required filing of the Prospectus and any supplement thereto pursuant to Rule 424(b) of the Rules and Regulations has been made in the manner and within the time period required by such Rule 424(b). (vii) The Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all -15- material respects with the requirements of the Act and the Rules and Regulations (except that such counsel need express no opinion as to the financial statements, schedules and other financial and statistical information included therein). (viii) Such counsel does not know of any Contracts or other documents required to be filed as exhibits to the Registration Statement or described in the Registration Statement or the Prospectus which are required to be filed or described, which are not so filed or described as required, and such Contracts and documents as are summarized in the Registration Statement or the Prospectus are fairly summarized in all material respects. (ix) There is no action or suit pending before any court of the United States of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; there is no action, suit or proceeding threatened against the Company before any U.S. court or regulatory, governmental or administrative agency or arbitral forum of a character required to be disclosed in the Prospectus pursuant to the Act and the Rules and Regulations; to the best of such counsel's knowledge, the Company is not a party or subject to the provisions of any injunction, judgment, decree or order of any court, regulatory body, administrative agency or other governmental body or agency or arbitral forum. Nothing has come to the attention of such counsel that would suggest that the Company is not conducting business in compliance with all applicable laws, statutes, rules and regulations of the State of Arizona and of the United States of America, except where the failure to so comply would not have a material adverse effect on the business or financial condition of the Company. (x) The execution and performance of this Agreement and the consummation of the transactions herein contemplated do not and will not conflict with or result in the breach of, or violation of, any of the terms or provisions of, or constitute, either by itself or upon notice or the passage of time or both, a default under, any Contract to which the Company is a party or by which the Company or any of its property may be bound or affected, except where such breach, violation or default would not have a material adverse effect on the business or financial condition of the Company, or violate any of the provisions of the articles of incorporation or bylaws of the Company or violate any statute, judgment, decree, order, rule or regulation known to such counsel or any court or of any governmental, regulatory or administrative body or agency or arbitral forum having jurisdiction over the Company or any its property. (xi) The Company is not in violation or default under any provision of any of its certificate of incorporation or bylaws and the Company is not in violation or of default under any Contracts to which the Company is a party or by which it or any of its properties is bound or may be affected, except where such violation -16- or default would not have a material adverse effect on the business or financial condition of the Company. (xii) The Company has the corporate power and authority to enter into this Agreement on behalf of itself and perform the transactions contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company. This Agreement is the legal, valid and binding obligation of the Company, enforceable in accordance with its terms, subject to customary exceptions for bankruptcy, insolvency, reorganization, arrangement, moratorium or similar laws relating to or affecting the rights of creditors generally and except that enforceability may be subject to the effect of general principles of equity, except to the extent that the enforceability of the indemnification provisions of this Agreement may be limited by consideration of public policy under federal and state securities laws. (xiii) All approvals, consents, orders, authorizations, designations, registrations, permits, qualifications, licenses, declarations or filings by or with any regulatory, administrative or governmental body necessary in connection with the execution and delivery by the Company of this Agreement and the consummation of the transactions herein contemplated (other than as may be required by the NASD as to which such counsel need express no opinion) have been obtained or made and all are in full force and effect. In rendering such opinion such counsel may rely as to matters governed by the laws other than Federal laws of the United States of America on local counsel in applicable jurisdictions, provided that such counsel shall state that they believe that they and the Representative are justified in relying on such other counsel. As to factual matters, such counsel may rely on certificates (provided at Closing and available to the Representative and its counsel) obtained from directors and officers of the Company, its stockholders, and from public officials. Matters stated to counsel's knowledge need be based only on the actual knowledge of the attorneys involved in the representation of the Company. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, or any amendment thereto, at the time the Registration Statement or amendment became effective, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information and statistical data and information included therein). -17- Such counsel shall permit Streich Lang, P.A. to rely upon such opinion in rendering its opinion under Section 6(c). (c) The Representative shall have received from Streich Lang, P.A., counsel for the Representative, an opinion dated the Closing Date or the Option Closing Date, as the case may be, substantially to the effect that: (i) the Company is a validly organized and existing corporation under the laws of the State of Arizona; (ii) the Company has authorized and outstanding capital stock as set forth under the caption "Capitalization" in the Prospectus; the authorized shares of the Company's Common Stock have been duly authorized; to the best of such counsel's knowledge, the outstanding shares of the Company's Common Stock have been duly authorized and validly issued and are fully paid and nonassessable; all of the Units conform to the description thereof contained in the Prospectus; the Stock to be sold by the Company pursuant to this Agreement has been duly authorized and will be validly issued, fully paid and nonassessable when issued and paid for as contemplated by this Agreement; and no preemptive rights of stockholders exist with respect to any of the Stock or the issue and sale thereof; (iii) the Registration Statement has become effective under the Act and to the best of the knowledge of such counsel, no stop order proceedings with respect thereto have been instituted or are pending or threatened under the Act; (iv) the Registration Statement, all Preliminary Prospectuses, the Prospectus and each amendment or supplement thereto comply as to form in all material respects with the requirements of the Act and the applicable Rules and Regulations thereunder (except that such counsel need express no opinion as to the financial statements, schedules and other financial or statistical information included therein); and (v) this Agreement has been duly authorized, executed and delivered by the Company. In rendering such opinion, Streich Lang, P.A. may rely on the opinion of counsel referred to in paragraph (b) of this Section 6. In addition to the matters set forth above, such opinion shall also include a statement to the effect that nothing has come to the attention of such counsel which leads them to believe that the Registration Statement, the Prospectus or any amendment thereto contains any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading or the Prospectus or any amendment or supplement thereto, at the time it was filed pursuant to Rule 424(b) or at the Closing Date or the Option Closing Date, as the case may be, contained an untrue statement of a material fact or omitted to state a material fact required to be stated therein or necessary to make the statements therein, in light of the circumstances under which they were made, not misleading (except that such counsel need express no view as to financial statements, schedules and other financial information included therein). With respect to such statement, Streich Lang, P.A. may state that their belief is based upon the procedures set forth therein, but is without independent check and verification. (d) The Representative shall have received at or prior to the effective date of the Registration Statement, and at the Closing Date, from Streich Lang, a memorandum or summary, in form and substance satisfactory to the Representative, with respect to the qualification for offering and sale by the Representative of the Stock under the state securities or Blue Sky laws of such jurisdictions as the Representative may have designated to the Company. -18- (e) The Representative shall have received on the date hereof and on the Closing Date and the Option Closing Date, as the case may be, a signed letter from Semple & Cooper, LLP, auditors for the Company, dated the date hereof, the Closing Date and the Option Closing Date, as the case may be, which shall confirm, on the basis of a review in accordance with the procedures set forth in the letter signed by such firm and dated and delivered to the Representative on the date noted above the following matters: (i) They are independent public accountants with respect to the Company within the meaning of the Act. (ii) The financial statements and schedules included in the Registration Statement and Prospectus covered by their reports therein set forth comply as to form in all material respects with the applicable accounting requirements of the Act. (iii) On the basis of procedures (but not an examination in accordance with generally accepted auditing standards) consisting of a reading of the minutes of meetings and consents of the shareholders and board of directors of the Company and the committees of such board subsequent to December 31, 1996, as set forth in the minute books of the Company, inquiries of officers and other employees of the Company who have responsibilities for financial and accounting matters with respect to transactions and events subsequent to December 31, 1996, and such other specified procedures and inquires to a date not more than five days prior to the date of such letter, nothing has come to their attention which in their judgment would indicate that (A) with respect to the period subsequent to December 31, 1996, there were, as of the date of the most recent available monthly consolidated financial statements of the Company and, as of a specified date not more than five days prior to the date of such letter, any changes in the capital stock or long-term indebtedness of the Company or payment or declaration of any dividend or other distribution, or decrease in net current assets, total assets or net stockholder's equity, in each case as compared with the amounts shown in the most recent audited consolidated financial statements included in the Registration Statement and the Prospectus, except for changes or decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter or (B) during the period from December 31, 1996, to the date of the most recent available monthly unaudited consolidated financial statements of the Company and to a specified date not more than five days prior to the date of such letter, there was any decrease, as compared with the corresponding period in the prior fiscal year, in total revenues or total or per share net income, except for decreases which the Registration Statement and the Prospectus disclose have occurred or may occur or which are set forth in such letter. -19- (iv) Stating that they have compared specific dollar amounts, numbers of shares, percentages of revenues and earnings and other financial information pertaining to the Company set forth in the Registration Statement and the Prospectus, which have been specified by the Representative, to the extent that such amounts, numbers and percentages and information may be derived from the general accounting and financial records of the Company and its subsidiaries or from schedules furnished by the Company, and excluding any questions requiring an interpretation by legal counsel, with the results obtained from the application of specified reasonings, inquiries and other appropriate procedures specified by the Representative (which procedures do not constitute an examination in accordance with generally accepted auditing standards) set forth in such letter heretofore delivered, and found them to be in agreement. (v) Such other matters as may be reasonably requested by the Representative. All such letters shall be in form and substance satisfactory to the Representative and its counsel. (f) The Representative shall have received on the Closing Date or the Option Closing Date, as the case may be, a certificate or certificates of the Chief Executive Officer and the Chief Financial Officer of the Company to the effect that, as of the Closing Date or the Option Closing Date, as the case may be, each of them jointly and represents as follows: (i) The Registration Statement has become effective under the Act and no stop order suspending the effectiveness of the Registration Statement has been issued, and no proceedings for such purpose have been taken or are, to the best of their knowledge, after due inquiry, contemplated or threatened by the Commission or any state securities commissions. (ii) They do not know of any investigation, litigation, or proceeding instituted or threatened against the Company of a character required to be disclosed in the Registration Statement which is not so disclosed; they do not know of any Contract or other document required to be filed as an exhibit to the Registration Statement which is not so filed; and the representations and warranties of the Company contained in the Agreement are true and correct in all material respects as of the Closing Date or the Option Closing Date, as the case may be, as if such representations and warranties were made as of such date. (iii) They have carefully examined the Registration Statement and the Prospectus and, in their opinion, as of the effective date of the Registration Statement, the statements contained in the Registration Statement were and are correct, in all material respects, and such Registration Statement and Prospectus do not omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which -20- they were made, not misleading and, in their opinion, since the effective date of the Registration Statement, no event has occurred which should be set forth in a supplement to or an amendment of the Prospectus which has not been so set forth in such supplement or amendment. (g) The Company shall have furnished to the Representative such further certificates and documents confirming the representations, warranties and covenants contained herein and related matters as the Representative may reasonably have requested. Each such certificate shall be deemed a representation and warranty of the Company as to the statements made therein. The opinions and certificates described in this Agreement shall be deemed to be in compliance with the provisions hereof only if they are in all respects satisfactory to the Representative to Streich Lang, P.A., counsel for the Representative. If any of the conditions herein above provided for in this Section 6 shall not have been fulfilled when and as required by this Agreement to be fulfilled, the obligations of the Representative hereunder may be terminated by the Representative by notifying the Company of such termination in writing or by telegram at or prior to the Closing Date or the Option Closing Date, as the case may be. In such event, the Company and the Representative shall not be under any obligation to each other (except to the extent provided in Sections 5 and 8 hereof). 7. Conditions of the Obligations of the Company. The obligations of the Company to sell and deliver the Units required to be delivered as and when specified in this Agreement are subject to the conditions that at the Closing Date or the Option Closing Date, as the case may be, no stop order suspending the effectiveness of the Registration Statement shall have been issued and in effect or proceedings therefor initiated or threatened. 8. Indemnification. (a) The Company agrees to indemnify and hold harmless the Representative and its respective affiliates, directors, officers, partners, employees, agents, counsel, and representatives, (collectively, "Underwriter Parties") against any losses, claims, damages or liabilities to which such Underwriter Parties or any one or more of them may become subject under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Company or any of its affiliates, directors, officers, employees, agents, counsel, and representatives (collectively, the "Company Parties") to perform any obligation hereunder or any other agreement among any of the Company Parties and any of the Underwriter Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus or any amendment or supplement thereto, or (iii) the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in light of the circumstances under which -21- they were made, and will reimburse each Underwriter Party for any legal or other expenses incurred by such Underwriter Party in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that (X) the Company will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement, or alleged untrue statement, or omission or alleged omission made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information contained in the last paragraph on the cover page and the paragraph relating to stabilization on page 2 of the Prospectus or Preliminary Prospectus and in the section thereof entitled "Underwriting"), and (Y) such indemnity with respect to any Preliminary Prospectus shall not inure to the benefit of any Underwriter Parties from whom the person asserting any such loss, claim, damage or liability purchased the Stock which is the subject thereof if such person did not receive a copy of the Prospectus (or the Prospectus as amended or supplemented at or prior to the confirmation of the sale or such Stock to such person in any case where such delivery is required by the Act and the untrue statement or omission of a material fact contained in such Preliminary Prospectus was corrected in the Prospectus (or the Prospectus as amended or supplemented.) This indemnity agreement will be in addition to any liability which the Company may otherwise have. (b) The Representative will indemnify and hold harmless the Company Parties against any losses, claims, damages or liabilities to which the Company Parties or any one or more of them may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) arise out of or are based upon (i) any failure by the Underwriter Parties to perform any obligations hereunder or any other agreement among any of the Underwriter Parties and any of the Company Parties, (ii) any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement, any Preliminary Prospectus, the Prospectus, or any amendment or supplement thereto, or (iii) the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made; and will reimburse any legal or other expense reasonably incurred by the Company Parties in connection with investigating or defending any such loss, claim, damage, liability, action or proceeding; provided, however, that the Representative will be liable in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission has been made in the Registration Statement, any Preliminary Prospectus, the Prospectus, or such amendment or supplement, in reliance upon and in conformity with written information furnished to the Company by or through the Representative specifically for use in the preparation thereof (which the parties hereto agree is limited solely to that information contained in the last paragraph on the cover page and the paragraph relating to stabilization on page 2 of the Prospectus or Preliminary Prospectus and in the section thereof entitled "Underwriting"). This indemnity agreement will be in addition to any liability which the Representative may otherwise have. -22- (c) In case any proceeding (including any governmental investigation) shall be instituted involving any person in respect of which indemnity maybe sought pursuant to this Section 8, such person ("indemnified party") shall promptly notify the person against whom such indemnity may be sought (the "indemnifying party") in writing. No indemnification provided for in Section 8(a) or (b) shall be available to any party who shall fail to give notice as provided in this Section 8(c) if the party to whom notice was not given was unaware of the proceeding to which such notice would have related and was prejudiced by the failure to give such notice, but the failure to give such notice shall not relieve the indemnifying party or parties from any liability which it or they may have to the indemnified party for contribution or otherwise than on account of the provisions of Section 8(a) or (b). In case any such proceeding shall be brought against any indemnified party and it shall notify the indemnifying party or the commencement thereof, the indemnifying party shall be entitled to participate therein and, to the extent that it shall wish, jointly with any other indemnifying party similarly notified, to assume the defense thereof, with counsel satisfactory to such indemnified party and shall pay as incurred the fees and disbursements of such counsel related to such proceeding. In any such proceeding, any indemnified party shall have the right to retain its own counsel at its own expense. Notwithstanding the foregoing, the indemnifying party shall pay as incurred the fees and expenses of the counsel retained by the indemnified party in the event (i) the indemnifying party and the indemnified party shall have mutually agreed to the retention of such counsel or (ii) the named parties to any such proceeding (including any impleaded parties) include both the indemnifying party and the indemnified party and representation of both parties by the same counsel would be inappropriate due to actual or potential differing interests between them. It is understood that the indemnifying party shall not, in connection with any proceeding or related proceedings in the same jurisdiction, be liable for the reasonable fees and expenses of more than one separate firm for all such indemnified parties. Such firm shall be designated in writing by the Representative in the case of parties indemnified pursuant to Sections 8(a) and by the Company in the case of parties indemnified pursuant to Section 8(b). The indemnifying party shall not be liable for any settlement of any proceeding effected without its written consent but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party from and against any loss or liability by reason of such settlement or judgment. (d) If the indemnification provided for in this Section 8 is unavailable to or insufficient to hold harmless an indemnified party under Section 8(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to therein, then each indemnifying party shall contribute to the amount paid or payable by such indemnified party as a result of such losses, claims, damages or liabilities (or actions or proceedings in respect thereof) in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Representative on the other from the offering of the Stock. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law or if the indemnified party failed to give the notice required under Section 8(c) above, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Representative on the -23- other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Representative on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bear to the total underwriting fees and commissions received by the Representative, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Representative on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Representative agree that it would not be just and equitable if contributions pursuant to this Section 8(d) were determined by pro rata allocation or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 8(d). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 8(d) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. (e) In any proceeding relating to the Registration Statement, any Preliminary Prospectus, the Prospectus or any supplement or amendment thereto, each party against whom contribution may be sought under this Section 8 hereby consents to the jurisdiction of any court having jurisdiction over any other contributing party, agrees that process issuing from such court may be served upon him or it by any other contributing party and consents to the service of such process and agrees that any other contributing party may join him or it as an additional defendant in any such proceeding in which such other contributing party is a party. 9. Notices. All communications hereunder shall be in writing and, except as otherwise provided herein, will be mailed, delivered, telecopied, or telegraphed and confirmed as follows: if to the Representative, to W. B. McKee Securities, Inc., 3003 North Central Avenue, Suite 100, Phoenix, Arizona 85012; Telephone (602) 954-7365; Fax (602) 266-5774, Attention: Gary J. Sherman, with a copy to Streich Lang, P.A., Renaissance One, Two N. Central Avenue, Phoenix, Arizona 85004; Telephone (602) 229-5200; Fax (602) 229-5690; Attention: Christian J. Hoffmann, III, Esq.; if to the Company, to Premium Cigars International, Ltd., 10855 N. Frank Lloyd Wright Blvd., Suite 100-102, Scottsdale, Arizona 85259; telephone, (602) 922-8887; Fax (602) ___-____; Attention: Steven J. Lambrecht, President; with a copy to Titus, Brueckner & Berry, 7373 North Scottsdale Road, Suite B-252, Scottsdale, Arizona 85253-3527, Attention: Charles R. Berry, Esq.; telephone (602) 483-9600; fax (602) 483-3215. -24- 10. Termination. This Agreement may be terminated by the Representative by notice to the Company as follows: (a) at any time prior to the earlier of (i) the time the Firm Stock is released by the Representative for sale by notice to the Representative, or (ii) 5:00 P.M., M.S.T., on the first business day following the date of this Agreement; (b) at any time prior to the Closing itself if any of the following has occurred: (i) since the respective dates as of which information is given in the Registration Statement and the Prospectus, any material adverse change or any development involving a prospective material adverse change in or affecting the business or financial condition of the Company, or the earnings, business affairs, management or business prospects of the Company, whether or not arising in the ordinary course of business, (ii) any outbreak of hostilities or other national or international calamity or crisis or change in economic or political conditions if the effect of such outbreak, calamity, crisis or change on the financial markets or economic conditions would, in reasonable judgment of the Representative, have a material adverse effect on the securities markets in the United States, (iii) suspension of trading in securities on the Nasdaq or the New York Stock Exchange, Inc. or the American Stock Exchange or limitation on prices (other than limitations on hours or numbers of days of trading) for securities on either such Exchange, (iv) the enactment, publication, decree or other promulgation of any federal or state statute, regulation, rule or order of any court or other governmental authority which in the reasonable opinion of the Representative materially and adversely affects or will materially or adversely affect the business or operations of the Company, (v) declaration of a banking moratorium by either federal or Arizona authorities or (vi) the taking of any action by any federal, state or local government or agency in respect of its monetary or fiscal affairs which in the reasonable opinion of the Representative have a material adverse effect on the securities markets in the United States or the business prospects of the Company; or (c) as provided in Section 6 of this Agreement. This Agreement also may be terminated by the Representative, by notice to the Company, as to any obligation of the Representative to purchase the Option Stock, upon the occurrence at any time at or prior to the Option Closing Date of any of the events described in subparagraph (b) above or as provided in Section 6 of this Agreement. 11. Successors. This Agreement has been and is made solely for the benefit of the Representative and the Company and their respective successors, executors, administrators, heirs and assigns, and the Underwriter Parties and Company Parties referred to herein, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Units merely because of such purchase. 12. Miscellaneous. The reimbursement, indemnification and contribution agreements contained in this Agreement and the representations and warranties in this Agreement shall remain -25- in full force and effect regardless of (a) any termination of this Agreement, (b) any investigation made by or on behalf of any Underwriter Party, or by or on behalf of any Company Party and (c) delivery of and payment for the Units under this Agreement. This Agreement and any notices delivered hereunder may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. This Agreement and any and all notices may be delivered by telecopy and shall be effective upon receipt, with the original of such document to be deposited promptly in the U.S. Mail. This Agreement and all disputes and controversies relating hereto or in connection with the transactions contemplated hereby shall be governed by, and construed in accordance with, the laws of the State of Arizona. [THIS SPACE INTENTIONALLY LEFT BLANK] -26- If the foregoing agreement is in accordance with your understanding of our agreement, please sign and return to us the enclosed duplicates hereof, whereupon it will become a binding agreement among the Company and the Representative in accordance with its terms as of the date first above written. Sincerely yours, PREMIUM CIGARS INTERNATIONAL, LTD. By ---------------------------- Steven J. Lambrecht President The foregoing Underwriting Agreement is hereby confirmed and accepted as of ___________, 1997. W. B. MCKEE SECURITIES, INC. By -------------------------------- Gary J. Sherman President -27- EX-1.2 3 PROMOTIONAL SHARES LOCK-UP AGREEMENT PROMOTIONAL SHARES LOCK-UP AGREEMENT I. Parties. This Promotional Shares Lock-Up Agreement ("Agreement"), which was entered into this _____ day of August, 1997, by and between Premium Cigars International, Ltd. ("Issuer"), whose principal place of business is located in Scottsdale, Arizona, and ______________________________________________ ("Security Holder") witnesses that: A. Registration in Merit Review States. The Issuer has filed a Coordinated Equity Review application with the Securities Administrators of the States of Alaska, Arizona, Arkansas, Idaho, Indiana, Iowa, Kansas, Kentucky, Maine, Massachusetts, Michigan, Mississippi, Montana, New Mexico, North Dakota, Oklahoma, Oregon, Pennsylvania, South Dakota, Texas, Vermont, Virginia and Washington ("Administrators") and with other jurisdictions to register certain of its Equity Securities for sale to public investors who are residents of those states ("Registration"); B. Security Holder and Promoter. The Security Holder is the owner of the Issuer's shares of common stock or similar securities and/or possesses convertible securities, warrants, options or rights which may be converted into, or exercised to purchase shares of common stock or similar securities of the Issuer. Security Holder, along with other promoters who have entered the Promotional Shares Lock-Up Agreement, are collectively referred to as "Promoters." C. Condition of Registration in Merit Review States. As a condition to Registration, the Issuer and Security Holder ("Signatories") agree to be bound by the terms of this Agreement. II. Agreement to Lock-Up/Transfer Prohibitions. The Security Holder agrees not to sell, pledge, hypothecate, assign, grant any option for the sale of, or otherwise transfer or dispose of, whether or not for consideration, directly or indirectly Promotional Shares as defined in the North American Securities Administrators Association ("NASAA") Statements of Policy Regarding Corporate Securities Definitions and on Promotional Shares and all certificates representing stock dividends, stock splits, recapitalizations, and the like, that are granted to, or received by, the Security Holder while the Promotional Shares are subject to this Agreement ("Restricted Securities") on the following terms: A. Term of Lock-Up. The term of this Agreement shall begin on the date that the Registration is declared effective by the Administrators ("Effective Date") and shall terminate: 1. Two years following the completion of the offering; or 2. On the date the Registration has been terminated if no securities were sold pursuant thereto; or 1 3. If the Registration has been terminated, the date that checks representing all of the gross proceeds that were derived therefrom and addressed to the public investors have been placed in the U.S. Postal Service with first class postage affixed; or 4. On the date the securities subject to this agreement become "Covered Securities," as defined under the National Securities Markets Improvement Act of 1996. B. Release of Certain Restricted Securities in Second Year. Beginning one year from the date of completion of the Offering, two and one-half percent (2.5%) of the Restricted Securities shall be released from the restrictions of this Agreement each quarter pro rata among the Promoters. C. Release of Remaining Restricted Securities after Second Year. All remaining Restricted Securities shall be released from any restriction under this Agreement on the second anniversary from the date of completion of the Offering. D. Securities Not Restricted. This Agreement shall not apply to any securities of the Issuer which Security Holder acquires after the effective date of the Registration and which are not related by stock dividend, stock split or recapitalization to the Restricted Securities. III. Other Issuer or Security Holder Obligations. The Signatories agree and will cause the following: A. Priority of Asset Distributions. In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the Issuer's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is not a Promoter, which results in the distribution of the Issuer's assets or securities ("Distribution"), while this Agreement remains in effect that: 1. All holders of the Issuer's Equity Securities will initially share on a pro rata, per shares basis in the Distribution, in proportion to the amount of cash or other consideration that they paid per share for their Equity Securities (provided that the Administrator has accepted the value of the other consideration), until the shareholders who purchased the Issuer's Equity Securities pursuant to the public offering ("Public Shareholders") have received, or have had irrevocably set aside for them, an amount that is equal to one hundred percent (100%) of the public offering's price per share times the number of shares of Equity Securities that they purchased pursuant to the public offering and which they still hold at the time of the Distribution, adjusted for stock splits, stock dividends, recapitalizations and the like; and 2 2. All holders of the Issuer's Equity Securities shall thereafter participate on an equal, per share basis times the number of shares of Equity Securities they hold at the time of the Distribution, adjusted for stock splits, stock dividends, recapitalizations and the like. 3. The Distribution may proceed on lesser terms and conditions than the terms and conditions stated in paragraphs 1 and 2 above if a majority of the Equity Securities that are not hold by Security Holders, officers, directors, or Promoters of the Issuer, or their associates or affiliates vote, or consent by consent procedure, to approve the lesser terms and conditions. B. Restrictions Survive Distribution. In the event of a dissolution, liquidation, merger, consolidation, reorganization, sale or exchange of the issuer's assets or securities (including by way of tender offer), or any other transaction or proceeding with a person who is a Promoter, which results in a Distribution while this Agreement remains in effect, the Restricted Securities shall remain subject to the terms of this Agreement. C. Permitted Transfers. 1. Restricted Securities may be transferred by will, the laws of descent and distribution, the operation of law, or by order of any court of competent jurisdiction and proper venue. 2. Restricted Securities of a deceased Security Holder may be hypothecated to pay the expenses of the deceased Security Holder's estate. The hypothecated Restricted Securities shall remain subject to the terms of this Agreement. Restricted Securities may not be pledged to secure any other debt. 3. Restricted Securities may be transferred by gift to the Securities Holder's family members, provided that the Restricted Securities shall remain subject to the terms of this Agreement. D. Voting Rights. With the exception of paragraph III.A.3 above, the Restricted Securities shall have the same voting rights as similar Equity Securities not subject to the Agreement. E. Legend Requirements. 1. A notice shall be placed on the face of each stock certificate of the Restricted Securities covered by the terms of the Agreement stating that the transfer of the stock evidenced by the certificate is restricted in accordance with the conditions set forth on the reverse side of the certificate; and 3 2. A typed legend shall be placed on the reverse side of each stock certificate of the Restricted Securities representing stock covered by the Agreement which states that the sale or transfer of the shares evidenced by the certificate is subject to certain restrictions until _____________ (that date which is two years after the date of the completion of the Offering) pursuant to an agreement between the Security Holder (whether beneficial or of record) and the Issuer, which agreement is on file with the Issuer and the stock transfer agent from which a copy of available upon request without charge. F. Modification. This Agreement may be modified only with the written approval of the Administrators. IV. Issuer Technical Requirements. The Issuer will cause the following: A. Copy to Administrators. A manually signed copy of the Agreement signed by the Signatories to be filed with the Administrators prior to the Effective Date; B. Copy to Transfer Agent. Copies of the Agreement and a statement of the per share initial public offering price to be provided to the issuer's stock transfer agent; C. Stop Transfer Restrictions. Appropriate stop transfer orders to be placed with the Issuer's stock transfer agent against the sale or transfer of the shares covered by the Agreement prior to its expiration, except as may otherwise be provided in this Agreement; D. Uncertificated Securities. The above stock restriction legends to be placed on the periodic statement sent to the registered owner if the securities subject to this Agreement are uncertificated securities. Pursuant to the requirements of this Agreement, the Signatories have entered into this Agreement, which may be written in multiple counterparts and each of which shall be considered an original. The Signatories have signed the Agreement in the capacities, and on the dates, indicated. 4 IN WITNESS WHEREOF, the Signatories have executed this Agreement. PREMIUM CIGARS INTERNATIONAL, LTD. By_____________________________________ Steven A. Lambrecht, President - --------------------------------------- Signature - --------------------------------------- Printed Name of Security Holder - --------------------------------------- Title, if applicable 5 EX-3.3 4 AMENDMENT TO THE BYLAWS OF PCI AMENDMENT TO THE BYLAWS OF PREMIUM CIGARS INTERNATIONAL, LTD. July 30, 1997 Pursuant to a Board of Directors resolution on July 30, 1997 the Bylaws of Premium Cigars International, Ltd. are hereby amended as follows: ARTICLE III of the Bylaws is amended by adding Section 14: Section 14. Independent Director Approval of Certain Transactions. a. Definition of Independent Director. An "Independent Director" is member of the Corporation's Board of Directors who: 1. is not an officer or employee of the Corporation, its subsidiaries or their affiliates or associates and has not been an officer or employee of the Corporation, its subsidiaries or their affiliates or associates within the last two years; and 2. is not a "Promoter" of the Corporation, which is defined as: a. a person who alone, or in conjunction with one or more other persons, directly or indirectly took the initiative in founding or organizing the Corporation or controls the Corporation; b. a person who, directly or indirectly, receives as consideration for services and/or property rendered, five percent (5%) or more of any class of the Corporation's equity securities or five percent (5%) or more of the proceeds from the sale of any class of the Corporation's equity securities; c. a person who: (i) is an officer or director; or (ii) anyone who legally or beneficially owns, directly or indirectly, five percent (5%) or more of any class of the Corporation's equity securities; d. a person who is an affiliate or an associate of a person specified in subsections a, b, or c. e. "Promoter" does not include: (i) a person who receives securities or proceeds solely as underwriting compensation if that person otherwise falls outside of the definition of a promoter in a, b, or c; (ii) an unaffiliated institutional investor. 3. Does not have a material business or professional relationship with the Corporation or any of its affiliates or associates. For purposes of determining whether or not a business or professional relationship is material, the gross revenue derived by the Independent Director from the Corporation, its affiliates and associates shall be deemed material per se if it exceeds five percent (5%) of the Independent Director's: (i) annual gross revenue, derived from all sources, during either of the last two years; or (ii) net worth, on a fair market value basis. b. Requirement to Maintain At Least Two Independent Directors. The Corporation shall, at all times, maintain at least two Independent Directors on the Board of Directors. c. Policy Regarding Resolution of Conflicts of Interest. The Corporation shall follow the following policy regarding all related-party transactions and to loans or the forgiveness of loans, whether or not to a related-party: (i) the Corporation will not enter 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 the Corporation than the Corporation could obtain from an unrelated or unaffiliated third party; and (ii) a majority of the Independent Directors 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 the Corporation's expense, to the Corporation's counsel or to their own independent legal counsel; and (iii) when there are only two Independent Directors, both directors must approve the transaction. EX-4.3 5 WARRANT THESE SECURITIES MAY NOT BE PUBLICLY OFFERED OR SOLD UNLESS AT THE TIME OF SUCH OFFER OR SALE, THE PERSON MAKING SUCH OFFER OR SALE DELIVERS A PROSPECTUS MEETING THE REQUIREMENTS OF SECTION 10 OF THE SECURITIES ACT OF 1933 FORMING A PART OF A REGISTRATION STATEMENT, OR POST-EFFECTIVE AMENDMENT THERETO, WHICH IS EFFECTIVE UNDER SAID ACT, UNLESS IN THE OPINION OF COUNSEL TO THE CORPORATION, SUCH OFFER AND SALE IS EXEMPT FROM THE PROVISIONS OF SECTION 5 OF SAID ACT. WARRANT For the Purchase of 170,952 Shares of Common Stock, No Par Value Per Share, of PREMIUM CIGARS INTERNATIONAL, LTD. (Incorporated Under the Laws of the State of Arizona) Void After 5 P.M., July _____, 2002 No. ___ Warrant to Purchase One Hundred Seventy Thousand Nine Hundred Fifty-Two (170,952) Shares of Common Stock. THIS IS TO CERTIFY, that, for value received, W. B. McKEE SECURITIES, INC. ("Representative") or registered assigns, is entitled, subject to the terms and conditions hereinafter set forth, on or after July ____, 1998 and at any time prior to 5 p.m., M.S.T., on July _____, 2002 but not thereafter, to purchase such number of shares ("Shares") of Common Stock, no par value per share ("Common Stock"), of PREMIUM CIGARS INTERNATIONAL, LTD., an Arizona corporation ("Company"), from the Company as is set forth above and upon payment to the Company of $8.40 per Share ("Purchase Price") if and to the extent this Warrant is exercised, in whole or in part, during the period this Warrant remains in force, subject in all cases to adjustment as provided in Article II hereof, and to receive a certificate or certificates or other evidence of ownership representing the Shares so purchased, upon presentation and surrender to the Company of this Warrant, with the form of subscription attached hereto duly executed, and accompanied by payment of the Purchase Price of each Unit purchased. 1. Terms of the Warrant 1.1 Time of Exercise. Subject to the provisions of Sections 1.5 and 3.1 hereof, this Warrant may be exercised at any time and from time to time after 9:00 a.m., M.S.T., on July_______, 1998 ("Exercise Commencement Date"), but no later than 5:00 p.m., M.S.T., July_______, 2002 ("Expiration Time") at which point it shall become void, and all rights hereunder shall thereupon cease. 1.2 Manner of Exercise. 1.2.1 The holder of this Warrant ("Holder") may exercise this Warrant, in whole or in part, upon surrender of this Warrant with the form of subscription attached hereto duly executed, to the Company at its corporate office in Phoenix, Arizona together with the full Purchase Price for the Shares to be purchased in lawful money of the United States, or by certified check, bank draft or postal or express money order payable in United States dollars to the order of the Company, and upon compliance with and subject to the conditions set forth herein. 1.2.2 Upon receipt of this Warrant with the form of subscription duly executed and accompanied by payment of the aggregate Purchase Price for the Shares for which this Warrant is then being exercised, the Company shall cause to be issued certificates or other evidence of ownership, for the total number of whole Shares for which this Warrant is being exercised in such denominations as are required for delivery to the Holder, and the Company shall thereupon deliver such documents to the Holder or its nominee. 1.2.3 In case the Holder shall exercise this Warrant with respect to less than all of the Shares that may be purchased under this Warrant, the Company shall execute a new Warrant for the balance of the Shares that may be purchased upon exercise of this Warrant and deliver such new Warrant to the Holder. 1.2.4 The Company covenants and agrees that it will pay when due and payable any and all taxes which may be payable in respect of the issue of this Warrant, or the issue of any Shares upon the exercise of this Warrant. The Company shall not, however, be required to pay any tax which may be payable in respect of any transfer involved in the issuance or delivery of this Warrant or of the Shares in a name other than that of the Holder at the time of surrender, and until the payment of such tax the Company shall not be required to issue such Shares. 1.3 Exchange of Warrant. This Warrant may be split-up, combined or exchanged for another Warrant or Warrants of like tenor to purchase a like aggregate number of Shares. If the Holder desires to split-up, combine or exchange this Warrant, he shall make such request in writing delivered to the Company at its corporate office and shall surrender this Warrant and any other Warrants to be so split-up, combined or exchange, the Company shall execute and deliver to the person entitled thereto a Warrant or Warrants, as the case may be, as so requested. The Company shall not be required to effect any split-up, combination or exchange which will result in the issuance of a Warrant entitling the Holder to purchase upon exercise a fraction of a Share. The Company may require the Holder to pay a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any split-up, combination or exchange of Warrants. -2- 1.4 Holder as Owner. Prior to due presentment for registration of transfer of this Warrant, the Company may deem and treat the Holder as the absolute owner of this Warrant (notwithstanding any notation of ownership or other writing hereon) for the purpose of any exercise hereof and for all other purposes, and the Company shall not be affected by any notice to the contrary. 1.5 Transfer and Assignment. Prior to 9:00 a.m., M.S.T., on July ____, 1998, this Warrant may not be sold, hypothecated, exercised, assigned or transferred, except to individuals who are officers and directors of the Representative or any successor to its business or pursuant to the laws of descent and distribution. After 9:00 a.m., M.S.T., on July ____, 1998, and until the expiration of the Warrant, the Warrant shall be assignable and transferable in accordance with and subject to the provisions of the Securities Act of 1933; provided, however, that if not exercised immediately upon such transfer or assignment, the Warrant shall immediately lapse. 1.6 Method for Assignment. Any assignment permitted hereunder shall be made by surrender of this Warrant to the Company at its principal office with the form of assignment attached hereto duly executed and funds sufficient to pay any transfer tax. In such event, the Company shall, without charge, execute and deliver a new Warrant in the name of the assignee named in such instrument of assignment and this Warrant shall promptly be canceled. This Warrant may be divided or combined with other Warrants which carry the same rights upon presentation thereof at the corporate office of the Company together with a written notice signed by the Holder, specifying the names and denominations in which such new Warrants are to be issued. 1.7 Rights of Holder. Nothing contained in this Warrant shall be construed as conferring upon the Holder the right to vote or to consent or to receive notice as a stockholder in respect of any meetings of stockholders for the election of directors or any other matter, or as having any rights whatsoever as a stockholder of the Company. If, however, at any time prior to the expiration of this Warrant and prior to its exercise, any of the following shall occur: 1.7.1 the Company shall take a record of the holders of its shares of Common Stock for the purpose of entitling them to receive a dividend or distribution payable otherwise than in cash, or a cash dividend or distribution payable otherwise than out of current or retained earnings; as indicated by the accounting treatment of such dividend or distribution on the books of the Company; or 1.7.2 the Company shall offer to the holders of its Common Stock any additional shares of capital stock of the Company or securities convertible into or exchangeable for shares of capital stock of the Company, or any option, right or warrant to subscribe therefor; or 1.7.3 there shall be proposed any capital reorganization or reclassification of the Common Stock, or a sale of all or substantially all of the assets of the Company, or a consolidation or merger of the Company with another entity; or -3- 1.7.4 there shall be proposed a voluntary or involuntary dissolution, liquidation or winding up of the Company; then, in any one or more of said cases, the Company shall cause to be mailed to the Holder, at the earliest practicable time (and, in any event, not less than thirty (30) days before any record date or other date set for definitive action), written notice of the date on which the books of the Company shall close or a record shall be taken to determine the stockholders entitled to such dividend, distribution, convertible or exchangeable securities or subscription rights, or entitled to vote on such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be. Such notice shall also set forth such facts as shall indicate the effect of such action (to the extent such effect may be known at the date of such notice) on the Purchase Price and the kind and amount of the Common Stock and other securities and property deliverable upon exercise of this Warrant. Such notice shall also specify the date as of which the holders of the Common Stock of record shall participate in said distribution or subscription rights or shall be entitled to exchange their Common Stock for securities or other property deliverable upon such reorganization, reclassification, sale, consolidation, merger, dissolution, liquidation or winding up, as the case may be (on which date, in the event of voluntary or involuntary dissolution, liquidation or winding up of the Company, the right to exercise this Warrant shall terminate). Without limiting the obligation of the Company to provide notice to the holder of actions hereunder, it is agreed that failure of the Company to give notice shall not invalidate such action of the Company. 1.8 Lost Certificates. If this Warrant is lost, stolen, mutilated or destroyed, the Company shall, on such reasonable terms as to indemnity or otherwise as it may impose (which shall, in the case of a mutilated Warrant, include the surrender thereof, issue a new Warrant of like denomination and tenor as, and in substitution for, this Warrant, which shall thereupon become void. Any such new Warrant shall constitute an additional contractual obligation of the Company, whether or not the Warrant so lost, stolen, destroyed or mutilated shall be at any time enforceable by anyone. 1.9 Covenants of the Company. The Company covenants and agrees as follows: 1.9.1 at all times it shall reserve and keep available for the exercise of this Warrant such number of authorized Shares as are sufficient to permit the exercise in full of this Warrant; 1.9.2 prior to the issuance of any Shares upon exercise of this Warrant, the Company shall secure the listing of such Shares upon any securities exchange or automated quotation system upon which the shares of the Company's Common Stock are listed for trading; and 1.9.3 all Shares here when issued upon the exercise of this Warrant will be validly issued, fully paid, non-assessable and free of preemptive rights. -4- 2. Adjustment of Purchase Price and Number of Shares Purchasable Upon Exercise 2.1 Recapitalization. In case the Company shall, while this Warrant remains unexercised, in whole or in part, and in force effect a recapitalization of such character that the Shares purchasable hereunder shall be changed into or become exchangeable for a larger or smaller number of shares, then, after the date of record for effecting such recapitalization, the number of Shares Common Stock which the Holder hereof shall be entitled to purchase hereunder shall be increased or decreased, as the case may be, in direct proportion to the increase or decrease in the number of shares of Common Stock by reason such recapitalization, and of the Purchase Price, per share, whether or not in effect immediately prior to the time of such recapitalization, of such recapitalized Common Stock shall in the case of an increase in the number of such Shares be proportionately reduced, and in the case of a decrease in the number of such Shares shall be proportionately increased. For the purposes of this Section 2.1, a stock dividend, stock split-up or reverse split shall be considered as a recapitalization and as an exchange for a larger or smaller number of shares, as the case may be. 2.2 Merger or Consolidation. In case of any consolidation of the Company with, or merger of the Company into, any other corporation, or in case of any sale or conveyance of all or substantially all of the assets of the Company other than in connection with a plan of complete liquidation of the Company, then, as a condition of such consolidation, merger or sale or conveyance, adequate provision shall be made whereby the Holder shall thereafter have the right to purchase and receive, upon the basis and upon the terms and conditions specified in this Warrant and in lieu of Shares immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby, such shares of stock or securities as may be issued in connection with such consolidation, merger or sale or conveyance, with respect to or in exchange for the number of outstanding shares of Common Stock equal to the number of shares of Common Stock immediately theretofore purchasable and receivable upon the exercise of the rights represented hereby had such consolidation, merger or sale or conveyance, not taken place, and in any such case appropriate provision shall be made with respect to the rights and interests of the Holder of this Warrant to the end that the provisions hereof shall be applicable as nearly as may be in relation to any shares of stock or securities thereafter deliverable upon the exercise hereof. 2.3 Notice of Dissolution or Liquidation. Except as otherwise provided in Section 2.2 above, in the case of any sale or conveyance of all or substantially all of the assets of the Company in connection with a plan of complete liquidation of the Company, in the case of the dissolution, liquidation or winding-up of the Company, all rights under this Warrant shall terminate on a date fixed by the Company, such date so fixed to be not earlier than the date of the commencement of the proceedings for such dissolution, liquidation or winding-up and not later than thirty (30) days after such commencement date. Notice of such termination of purchase rights shall be given to the Holder at least thirty (30) days prior to such termination date. 2.4 Statement of Adjustment. Any adjustment pursuant to the provisions of this Section 2 shall be made on the basis of the number of Shares of Common Stock which the Holder would -5- have been entitled to acquire by exercise of this Warrant immediately prior to the event giving rise to such adjustment and, as to the Purchase Price per Share in effect immediately prior to the rise to such adjustment. Whenever any such adjustment is required to be made, the Company shall forthwith determine the new number of Shares of Common Stock which the Holder hereof shall be entitled to purchase hereunder and/or such new Purchase Price per Share and shall prepare, retain on file and transmit to the Holder within 10 days after such preparation a statement describing in reasonable detail the method used in calculating such adjustment. 2.5 No Fractional Shares. Anything contained herein to the contrary notwithstanding, the Company shall not be required to issue any fraction of a Share in connection with the exercise of this Warrant, and in any case where the Holder would, except for the provisions of this Section 2.6, be entitled under the terms of this Warrant to receive a fraction of a Share upon such exercise, the Company shall upon the exercise and receipt of the Purchase Price issue the largest number of whole Shares purchasable upon exercise of this Warrant. The Company shall not be required to make any cash or other adjustment in respect of such fraction of a Share to which the Holder would otherwise be entitled. The Holder, by the acceptance of this Warrant, expressly waives his right to receive a certificate for any fraction of a Share upon exercise hereof. 2.6 No Change in Form Required. The form of Warrant need not be changed because of any change pursuant to this Section in the Purchase Price or in the number of Shares purchasable upon exercise of this Warrant. 3. Registration Under the Securities Act of 1933 3.1 Registration and Legends. This Warrant has been registered under the Securities Act of 1933, as amended ("Act"). The Shares issuable upon exercise of this Warrant have been registered under the Act on Form SB-2, SEC File No. 333-29985 ("Registration Statement"). Upon exercise, in part or in whole, of this Warrant, the Shares shall bear the following legend: The shares represented by the certificate have been registered under the Securities Act of 1933, as amended, solely for sale to the holder of a warrant to purchase, which holder may be deemed to be an underwriter of such shares within the provisions and for purposes only of the Securities Act of 1933, as amended. The issuer of these shares will agree to a transfer hereof only if: (1) an amended or supplemented prospectus setting forth the terms of the offer has been filed as part of a post-effective amendment to the Registration Statement under which these shares are registered or as part of a new registration statement under which these shares are registered, if then required, and such post-effective registration statement or new registration statement has become effective under the Securities Act of 1933, as amended, or (2) counsel to the issuer is reasonably satisfied that no such post-effective amendment or new registration statement is required. -6- 3.2 No-Action Letter. The Company agrees that it shall be satisfied that no post-effective amendment or new registration is required for the public sale of the Shares if it shall be presented with a letter from the Staff of the Securities and Exchange Commission ("Commission") stating in effect that, based upon stated facts which the Company shall have no reason to believe are not true in any material respect, the Staff will not recommend any action to the Commission if such Shares are offered and sold without delivery of a prospectus, and that, therefore, no post-effective amendment to the Registration Statement under which such shares are to be registered or new registration statement is required to be filed. 3.3 Registration Rights. The Company has agreed, upon the Representative's demand, to register the Shares underlying the Warrants, to file all necessary post-effective amendments to the Registration Statement or a new Registration Statement, if then required, and to file all necessary undertakings with the Securities and Exchange Commission so as to permit the Representative, or any assignee of the Representative, the right to sell publicly the Shares issued on exercise of the Warrants, on one occasion at any time within five (5) years from the effective date of the Company's Registration Statement filed in 1997, as described in the Underwriting Agreement ("Underwriting Agreement") between the Company and the Representative, dated ___________, 1997. 3.4 Inclusion in Company Registration Statement. In the event that the Representative does not exercise its right to demand that the Shares underlying the Warrants be registered, the Company agrees to include any Shares issuable upon exercise of the Warrants in any Registration Statement filed by the Company at any time within five (5) years from the effective date of the Company's Registration Statement as filed in 1997, as described in the Underwriting Agreement. 3.5 Covenants Regarding Registration. In connection with any registration under Section 3.2 or 3.3 hereof, the Company covenants and agrees as follows: 3.5.1 The Company shall use its best efforts to have any post-effective amendment or new registration statement declared effective at the earliest possible time, and shall furnish such number of prospectuses as shall be reasonably requested. 3.5.2 The Company shall pay all costs, fees, and expenses in connection with all post-effective amendments or new registration statement sunder Section 3.2 and Section 3.3 hereof including, without limitation, the Company's legal and accounting fees, printing expenses, blue sky fees and expenses, except that the Company shall not pay for any of the following costs and expenses: (a) underwriting discounts and commissions allocable to the Shares, (b) state transfer taxes, (c) brokerage commissions, (d) fees and expenses of counsel and accountants for the holder of the Warrants or Shares. 3.5.3 The Company will take all necessary action which may be required in qualifying or registering the Shares included in any Registration Statement or post-effective amendment or new registration statement for offering and sale under the securities or blue sky -7- laws of such states as are requested by the holders of such Shares, provided that the Company shall not be obligated to execute or file any general consent to service or process or to qualify as a foreign corporation to do business under the laws of any such jurisdiction. 3.5.4 The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 3.6 Indemnity. 3.6.1 The Company shall indemnify and hold harmless each person registering securities pursuant to this Section ("Seller") and each underwriter, within the meaning of the Act, who may purchase from or sell for any Seller any of the Shares from and against any and all losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or new registration statement or any supplemented prospectus under the Act included therein required to be filed or furnished by reason of this Section, or caused by any omission or alleged omission to state therein or necessary to make the statements therein not misleading, except insofar as such losses, claims, damages or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished or required to be furnished in writing to the Company by such Seller or underwriter within the meaning of such Act; provided, however, that the indemnity agreement set forth in the Section 3.6 with respect to any prospectus which shall be subsequently amended prior to the written confirmation of sale of any Shares shall not inure to the benefit of any Seller or underwriter from whom the person asserting any such losses, claims, damages or liabilities purchased such Shares which are the subject thereof (or to the benefit of any person controlling such Seller or underwriter), if such Seller or underwriter failed to send or give a copy of the prospectus as amended to such person at or prior to the written confirmation of the sale of such Shares and if such amended prospectus did not contain any untrue statement or alleged untrue statement or omission or alleged omission giving rise to such cause, claim, damage, or liability. 3.6.2 Each Seller which avails itself of the procedures under Section 3 shall indemnify and secure the agreement of any underwriter which the Seller employs to indemnify the Company, its directors, each officer signing the related post-effective amendment or registration statement and each person, if any, who controls the Company, within the meaning of the Act from and against any losses, claims, damages, and liabilities caused by any untrue statement or alleged untrue statement of a material fact contained in any post-effective amendment or registration statement or any prospectus required to be filed or furnished by reason of this Section or caused by any omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, insofar as such losses, claims, damages, or liabilities are caused by any untrue statement or alleged untrue statement or omission or alleged omission based upon information furnished in writing to the Company by any such Seller or underwriter expressly for use therein. -8- 3.7 Agreements. The agreements in this Section shall continue in effect regardless of the exercise and surrender of this Warrant. 3.8 Proceeds of Sale. The Holder shall be entitled to pay the Purchase Price for the Shares purchasable upon the exercise of this Warrant out of the proceeds of any sale of the Shares purchasable upon its exercise. 4. Other Matters 4.1 Payment of Taxes. The Company will from time to time promptly pay, subject to the provisions of Section 1.2.4 hereof, all taxes and charges that may be imposed upon the Company in respect of the issuance or delivery of this Warrant or the Shares purchasable upon the exercise of this Warrant. 4.2 Binding Effect. All the covenants and provisions of this Warrant by or for the benefit of the Company shall bind and inure to the benefit of its successors and assigns hereunder. 4.3 Notices. Notices or demands pursuant to this Warrant to be given or made by the Holder to or on the Company shall be sufficiently given or made if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed, until another address is designated in writing by the Company, as follows: Premium Cigars International, Ltd. 10855 N. Frank Lloyd Wright Blvd. Suite 100-102 Scottsdale, Arizona 85259 Notices to the Holder provided for in this Warrant shall be deemed given or made by the Company if sent by certified or registered mail, return receipt requested, postage prepaid, and addressed to the Holder at his last known address as it shall appear on the books of the Company. 4.4 Governing Law. The validity, interpretation and performance of this Warrant shall be governed by the laws of the State of Arizona. 4.5 Parties Bound and Benefitted. Nothing in this Warrant expressed and nothing that may be implied from any of the provisions hereof is intended, or shall be construed, to confer upon, or give to, any person or corporation other than the Company and the Holder any right, remedy or claim under promise or agreement hereof, and all covenants, conditions, stipulations, promises and agreements contained in this Warrant shall be for the sole and exclusive benefit of the Company and its successors and of the Holder, its successors and, if permitted, its assignees. 4.6 Headings. The Article headings herein are for convenience only and are not part of this Warrant and shall not affect the interpretation thereof. -9- IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under its corporate seal as of the _____ day of July, 1997. PREMIUM CIGARS INTERNATIONAL, LTD. By: ------------------------------------ Steven J. Lambrecht [Corporate Seal] Attest: - ----------------------------------- , Secretary - ------------------------ -10- PREMIUM CIGARS INTERNATIONAL, LTD. Assignment FOR VALUE RECEIVED, W. B. McKEE SECURITIES, INC. hereby sells, assigns and transfers unto ________________ the within Warrant and the rights represented thereby, and does hereby irrevocably constitute and appoint _______________________________ Attorney, to transfer said Warrant on the books of the Company, with full power of substitution. Dated: ----------------------- Signed: ----------------------------- Signature guaranteed: - ----------------------------- -11- Subscription Form PREMIUM CIGARS INTERNATIONAL, LTD. 10855 N. Frank Lloyd Wright Blvd. Suite 100-102 Scottsdale, Arizona 85259 The undersigned hereby irrevocably subscribes for the purchase of the shares ("Shares") of your Common Stock pursuant to and in accordance with the terms and conditions of this Warrant, and herewith makes payment, covering such Shares of Common Stock which should be delivered to the undersigned at the address stated below, and, if said number of Shares shall not be all of the Shares purchasable hereunder, that a new Warrant of like tenor for the balance of the remaining Shares purchasable hereunder be delivered to the undersigned at the address stated below. The undersigned agrees that: (1) the undersigned will not offer, sell, transfer or otherwise dispose of any such Shares unless either (a) a registration statement, or post-effective amendment thereto, covering such Shares have been filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended ("Act"), and such sale, transfer or other disposition is accompanied by a prospectus meeting the requirements of Section 10 of the Act forming a part of such registration statement, or post-effective amendment thereto, which is in effect under the Act covering the Shares to be so sold, transferred or otherwise disposed of, or (b) counsel to PREMIUM CIGARS INTERNATIONAL, LTD. ("Company") satisfactory to the undersigned has rendered an opinion in writing and addressed to the Company that such proposed offer, sale, transfer or other disposition of the Shares is exempt from the provisions of Section 5 of the Act in view of the circumstances of such proposed offer, sale, transfer or other disposition; (2) the Company may notify the transfer agent for its Common Stock that the certificates for the Shares acquired by the undersigned are not to be transferred unless the transfer agent receives advice from the Company that one or both of the conditions referred to in (1)(a) and (1)(b) above have been satisfied; and (3) the Company may affix the legend set forth in Section 3.1 of this Warrant to the certificates for Shares hereby subscribed for, if such legend is applicable. Dated: Signed: -------------------------- --------------------------- Address: -------------------------- ---------------------------------- Signature Guaranteed: - --------------------------------- -12- EX-5.1 6 LEGAL OPINION August 14, 1997 Premium Cigars International, Ltd. Suite 3 15651 North 83rd Way Scottsdale, Arizona 85260 Re: Form SB-2 Registration Statement -------------------------------- Gentlemen: We have acted as counsel for Premium Cigars International, Ltd., an Arizona corporation (the "Company"), in connection with the preparation of your Registration Statement relating to 1,900,000 shares of Common Stock, no par value, of the Company, as well as up to 285,000 shares available pursuant to the underwriter's over-allotment option, and up to 170,989 shares issuable pursuant to representative's warrants. As your counsel in connection with preparation of the Registration Statement, we have undertaken such examination as we have deemed relevant. On the basis of and subject to the foregoing, it is our opinion that the shares to be issued and sold by the Company as described in the Registration Statement (including the shares issuable after valid exercise of the representative's warrants) have been duly authorized and, when issued and sold on the terms described in the Registration Statement, will be legally issued, fully paid and nonassessable. We consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of our name under the heading "Legal Matters" in the Registration Statement. Very truly yours, /s/ Titus, Brueckner & Berry EX-10.20.1 7 ROSE HEARTS DISTRIBUTORSHIP AGREEMENT August 13, 1997 Via Telefacsimile (451-6226) and First-Class Mail Terry Warren, Esq. 15608 North Pima Road Suite B-11, 150 Scottsdale, Arizona 85260 Re: Rose Hearts, Inc. Distributorship Agreement Dear Terry: The purpose of this letter is to amend and clarify the terms and conditions of the distributorship agreement between Rose Hearts, Inc. ("Rose Hearts") and Premium Cigars International, Ltd. ("PCI"). In keeping with PCI's policy for resolving conflicts of interest, Rose Hearts' distributorship agreement shall not be on terms less favorable to PCI than those terms that PCI could obtain from an unrelated or unaffiliated third party, such as McLane Distributing or Core- Mark Distributing. If the independent directors of PCI determine that any term or condition contained in the Rose Hearts' distributorship agreement is less favorable to PCI than the similar term or condition of PCI's agreement with another distributor comparable to or larger than Rose Hearts, then such term or condition shall, upon 30 days' prior written notice to Rose Hearts of such amended term or condition, be amended to provide PCI with the more favorable term or condition. Further, either Rose Hearts or PCI may terminate the distributorship agreement on 30 days' written notice to the other. PCI believes that these changes are in keeping with Rose Hearts' disclosures and with PCI's policy for resolving conflicts of interest. If Rose Hearts accepts these changes, please obtain Rose Heart's signature below and return the letter to PCI in care of the undersigned. Very truly yours, TITUS, BRUECKNER & BERRY, P.C. /s/ Michael F. Patterson Michael F. Patterson ACKNOWLEDGMENT OF AGREEMENT WITH TERMS SET FORTH ABOVE: PREMIUM CIGARS INTERNATIONAL, LTD. ROSE HEARTS, INC. By:/s/ Steven A. Lambrecht By: /s/ Greg P. Lambrecht -------------------------- ------------------------- Steven A. Lambrecht, President Greg P. Lambrecht, President EX-10.22.1 8 MODIFICATION AGREEMENT MODIFICATION AGREEMENT THIS MODIFICATION AGREEMENT (this "Modification Agreement") is made and entered into as of August 7, 1997 by and between Steven A. Lambrecht, Greg P. Lambrecht and Colin A. Jones (collectively "Seller"), William L. Anthony ("Anthony") and Premium Cigars International, Inc. ("PCI"). Seller, Anthony and PCI are collectively referred to as the Parties. WHEREAS, the Parties entered an Agreement on June 20, 1997 ("Original Agreement"), whereby, among other things, Anthony purchased from Seller 66,000 shares of Common Stock, no par value (the "Shares") and PCI granted Anthony an option to purchase 20,000 shares of Common Stock at the price per share printed in the Prospectus relating to PCI's initial public offering ("IPO"); and WHEREAS, the Parties desire to modify the Original Agreement by rescinding the sale of 65,000 of the Shares and by changing the number and terms of the stock options grant to Anthony, but otherwise to preserve the terms of the Original Agreement; NOW THEREFORE, in consideration of the covenants, agreements, warranties and representations contained in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties agree as follows: 1. Recission of Stock Purchase. Anthony and Seller rescind the sale of 65,000 of the 66,000 shares sold in the Original Agreement and the restructuring of the sale of the remaining 1,000 Shares to purchase them at a settlement value of $2.50 per Share or for a total of $2,500. Upon signing this Modification Agreement, Seller will return to Anthony the remainder of $19,500 in cash and Anthony will return to Seller the remaining 65,000 Shares as follows: Anthony returns Cash Repaid to Shares to Amount Anthony by Amount --------- ------ ---------- ------ Steve Lambrecht 59,084 Steve Lambrecht $17,726 Greg Lambrecht 2,958 Greg Lambrecht $ 887 Colin Jones 2,958 Colin Jones $ 887 ------ ------- TOTALS: 65,000 $19,500 2. Modification of Stock Option Grant. PCI and Anthony amend the terms of the option grant to purchase 20,000 shares in the Original Agreement and PCI grants Anthony an additional non-qualified option to purchase 136,250 shares of PCI Common Stock at the price per share printed in the Prospectus relating to the IPO. The options may be exercised from a date which is one year after the effective date of the IPO and until a date that is five (5) years after the effective date of the IPO. Anthony acknowledges that, upon exercise of the options, in whole or in part, the shares purchased will be restricted shares within the meaning of Rule 144 pursuant to the Securities Act of 1933, as amended and that such shares may not be resold unless they are registered or unless an exemption from registration is available. Anthony also acknowledges that the shares underlying the options may not be resold prior to 18 months after the effective date of the IPO, according to the terms of a separate Lock-Up Agreement between Anthony and PCI. The terms of the aggregate options to purchase 156,250 shares shall be more fully set forth in a Stock Option Agreement between PCI and Anthony and if there is any conflict between the terms of this Modification Agreement and the terms of the Stock Option Agreement regarding the options, the terms of the Stock Option Agreement shall control. 3. No Modification of Remaining Terms of Original Agreement. The Parties agree that, except for the terms expressly rescinded or modified in this Modification Agreement, all other terms of the Original Agreement shall remain in full force and effect. Notwithstanding the foregoing, however, should a conflict exist between the terms of this Modification Agreement and the terms of this Original Agreement, the terms of this Modification Agreement shall control. 4. Counterparts. This Modification Agreement may be executed in one or more counterparts and by delivery of a facsimile signature, each of which shall be considered part and valid acceptance of the agreement. 2 The parties have executed this Modification Agreement as of the date first set forth above. "SELLER" "Anthony" /s/ Steven A. Lambrecht /s/ William L. Anthony - --------------------------- ------------------------------ Steven A. Lambrecht William L. Anthony /s/ Greg P. Lambrecht - --------------------------- Greg P. Lambrecht /s/ Colin A. Jones - --------------------------- Colin A. Jones PREMIUM CIGARS INTERNATIONAL, INC. By /s/ Steven A. Lambrecht ------------------------- Steven A. Lambrecht, President 3 EX-10.29 9 CAPITAL CONTRIBUTION AGREEMENT CAPITAL CONTRIBUTION AGREEMENT THIS CAPITAL CONTRIBUTION AGREEMENT ("Agreement") is made and entered into as of August 8, 1997 by and among Premium Cigars International, Inc. ("PCI") and certain undersigned shareholders ("Contributing Shareholders"). PCI and Contributing Shareholders are collectively referred to herein as the Parties. WHEREAS, PCI has filed a registration statement relating to an initial public offering ("IPO") of its shares of Common Stock; WHEREAS, although the IPO will not register shares held by the Contributing Shareholders' for resale, it will create a public market for PCI's shares of Common Stock in which Contributing Shareholders will eventually be able to trade their shares; WHEREAS, to complete the IPO, PCI's underwriter intends to register and sell shares in merit review states which impose requirements set forth in certain NASAA Statements of Policy; WHEREAS, the NASAA Statement of Policy Regarding Promoters' Equity Investment requires a certain minimum contribution of cash and tangible assets by promoters and certain states reviewing PCI's registration statement have required that PCI demonstrate compliance with the Statement of Policy; WHEREAS, the total of all cash and tangible assets contributed by promoters is less than the NASAA Statement of Policy requirement; WHEREAS, the Contributing Shareholders desire to contribute sufficient cash to PCI's paid-in capital to meet the requirements of the NASAA Statement of Policy; NOW THEREFORE, in consideration of the covenants, agreements, warranties and representations contained in this Agreement, the Parties agree as follows: 1. Status as a Promoter. Each Contributing Shareholder is a "Promoter" as that term is Defined in Section II.O. of the NASAA Statement of Policy Regarding Corporate Securities Definitions, because each Shareholder is either: a. a person, who alone or in conjunction with one or more other persons, directly or indirectly, took the initiative in founding or organizing PCI or who controls PCI; or b. a person who, directly or indirectly, received, as consideration for services and/or property rendered, five percent (5%) or more of PCI's outstanding shares of Common Stock; or 1 c. a person who is either an officer, director, the legal or beneficial direct or indirect owner of five percent (5%) or more of PCI's shares of Common Stock or a person who is an affiliate or associate of the persons in a., b. or c.; and d. is not a person who received shares of Common Stock solely for underwriting compensation and is not an unaffiliated institutional investor who purchased shares of PCI's common stock more than one year prior to this Agreement. 2. Additional Paid-In Capital. The Contributing Shareholders agree, upon the execution of this Agreement, to immediately deliver ONE HUNDRED FIFTY THOUSAND DOLLARS ($150,000) to PCI in immediately available funds. The funds shall be paid by the Contributing Shareholders out of the Contributing Shareholders' personal funds as set forth on Exhibit A. Each Contributing Shareholder warrants and represents that he has not made any pledge of, or otherwise encumbered his shares in the process of obtaining the funds for this contribution, nor created any expectation of any equity interest in PCI to any third party relating to this transaction. The Parties agree that the number of shares held by each Contributing Shareholder shall not change, that PCI shall have no obligation whatsoever to repay the capital contribution specified in this paragraph, nor to issue to the Contributing Shareholders any other consideration. 3. Counterparts. This Agreement may be executed in one or more counterparts and by delivery of a facsimile signature, each of which shall be considered part and valid acceptance of the agreement. 2 The parties have executed this Capital Contribution Agreement as of the date first set forth above. "Contributing Shareholders" "PCI" PREMIUM CIGARS INTERNATIONAL, INC. /s/ Steven A. Lambrecht By:/s/ Steven A. Lambrecht - ---------------------------- --------------------------------- Steven A. Lambrecht Steven A. Lambrecht, Chief Executive Officer /s/ Greg P. Lambrecht - ---------------------------- Greg P. Lambrecht /s/ Colin A. Jones - ---------------------------- Colin A. Jones /s/ Peter G. Charleston - ---------------------------- Peter G. Charleston /s/ James B. Stanley - ---------------------------- James B. Stanley /s/ Greg S. Barton - ---------------------------- Greg S. Barton /s/ Daniel C. Goldman - ---------------------------- Daniel C. Goldman 3 EXHIBIT A SCHEDULE OF CONTRIBUTING SHAREHOLDERS Contributing Shareholder Amount ------------------------ ------ Steven A. Lambrecht $ 47,333 Greg P. Lambrecht $ 39,371 Colin A. Jones $ 37,871 Peter G. Charleston $ 9,000 James B. Stanley $ 2,625 Greg S. Barton $ 7,500 Daniel C. Goldman $ 6,300 -------- TOTAL: $150,000 4 EX-10.30 10 PROMISSORY NOTE PROMISSORY NOTE
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials $200,000.00 07-25-1997 01-31-1998 201 96 0024653 07807
References in the shaded area are for Lender's use only and do not limit the applicability of this document to any particular loan or item. Borrower: PREMIUM CIGARS INTERNATIONAL, LTD. Lender: BILTMORE INVESTORS BANK, N.A. 15651 N. 83RD WAY, SUITE 3 PHOENIX DIVISION SCOTTSDALE, AZ 85260 2425 E. CAMELBACK ROAD PHOENIX, AZ 85016 Principal Amount: $200,000.00 Initial Rate: 9.500% Date of Note: July 25, 1997
PROMISES TO PAY. PREMIUM CIGARS INTERNATIONAL, LTD. ("Borrower") promises to pay to BILTMORE INVESTORS BANK, N.A. ("Lender") or order, in lawful money of the United States of American, the principal amount of Two Hundred Thousand & 00/100 Dollars ($200,000.00) or so much as may be outstanding, together with interest on the unpaid outstanding principal balance of each advance. Interest shall be calculated from the date of each advance until repayment of each advance. PAYMENT. Borrower will pay this loan in one payment of all outstanding principal plus all accrued unpaid interest on January 31, 1998. In addition, Borrower will pay regular monthly payments of accrued unpaid interest beginning August 31, 1997, and all subsequent interest payments are due on the last day of each month after that. The annual interest rate for this Note is computed on a 365/360 basis: that is, by applying the ratio of the annual interest rate over a year of 360 days, multiplied by the outstanding principal balance, multiplied by the actual number of days the principal balance is outstanding. Borrower will pay Lender at Lender's address shown above or at such other place as Lender may designate in writing. Unless otherwise agreed or required by applicable law, payments will be applied first to accrued unpaid interest, then to principal, and any remaining amount to any unpaid collection costs and late charges. VARIABLE INTEREST RATE. The interest rate on this Note is subject to changes from time to time based on charges in an independent index which is the Prime rate as published in the Wall Street Journal. When a range of rates has been published, the higher of the rates will be used (the "Index"). The Index is not necessarily the lowest rate charged by Lender on its loans. If the Index becomes unavailable during the term of this loan, Lender may designate a substitute index after notice to Borrower. Lender will tell Borrower the current Index rate upon Borrower's request. Borrower understands that Lender may make loans based on other rates as well. The interest rate change will not occur more often that each DAY. The Index currently is 8.500% per annum. The Interest rate to be applied to the unpaid principal balance of this Note will be at a rate of 1.00 percentage point over the Index, resulting in an initial rate of 9.500% per annum. NOTICE: Under no circumstances will the interest rate on this Note be more than the maximum rate allowed by applicable law. PREPAYMENT; MINIMUM INTEREST CHARGE. In any event, even upon full prepayment of this Note, Borrower understands that Lender is entitled to a minimum interest charge of $25.00. Other than Borrower's obligation to pay any minimum interest charge, Borrower may pay without penalty all or a portion of the amount owed earlier than it is due. Early payments will not, unless agreed to by Lender in writing, relieve Borrower of Borrower's obligation to continue to make payments of accrued unpaid interest. Rather, they will reduce the principal balance due. LATE CHARGE. If a payment is 10 days or more late, Borrower will be charged 6.000% of the unpaid portion of the regularly scheduled payment. DEFAULT. Borrower will be in default if any of the following happens: (a) Borrower fails to make any payment when due. (b) Borrower breaks any promise Borrower has made to Lender, or Borrower fails to comply with or to perform when due any other term, obligation, covenant, or condition contained in this Note or any agreement related to this Note, or in any other agreement or loan Borrower has with Lender. (c) Borrower defaults under any loan, extension of credit, security agreement, purchase or sales agreement, or any other agreement, in favor of any other creditor or person that may materially affect any of borrower's property or Borrower's ability to repay this Note or perform Borrower's obligation under this Note or any of the Related Documents. (f) any representation or statement made or furnished to Lender by Borrower or on Borrower's behalf is false or misleading in any material respect either now or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is appointed for any part of Borrower's property, Borrower makes an assignment for the benefit of creditors, or any proceeding is commenced either by Borrower or against Borrower under any bankruptcy or insolvency laws. (f) any creditor tries to take any of Borrower's property on or in which Lender has a lien or security interest. This includes a garnishment of any of Borrower's accounts with Lender. (g) Any guarantor dies or any of the other event described in this default section occurs with respect to any guarantor of this Note. (h) A material adverse change occurs in Borrower's financial condition, or Lender believes the prospect of payment or performance of the indebtedness is impaired. (i) Lender in good faith deems itself insecure. If any default, other than a default in payment, is curable and if Borrower has not been given a notice of a breach of the same provision on this Note within the preceding twelve (12) months, it may be cured (and no event of default will have occurred) if Borrower, after receiving written notice from Lender demanding cure of such default: (a) cures the default within fifteen (15) days; or (b) if the cure requires more than fifteen (15) days; immediately initiates steps which Lender deems in Lender's sole discretion to be sufficient to cure the default and thereafter continues and completes any reasonable and necessary steps sufficient to produce compliance as soon as reasonably practical. LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal on this Note and all accrued unpaid interest immediately due, without notice, and then Borrower will pay that amount. Upon default, including failure to pay upon final maturity, Lender, at its option, may also, permitted under applicable law, do one or both of the following: (a) increase the variable interest rate on this Note to 7.000 percentage points over the Index, and (b) add any unpaid accrued interest to principal and such sum will bear interest therefrom until paid at the rate provided in this Note (including any increased rate). The interest rate will not exceed the maximum rate permitted by applicable law. Lender may hire or pay someone else to help collect this Note if Borrower does not pay. Borrower also will pay Lender that amount. This includes, subject to any limits under applicable law, Lender's attorneys' fees and Lender's legal expenses whether or not there is a lawsuit, including attorneys' fees and legal expenses for bankruptcy proceedings (including efforts to modify or vacate any automatic stay or injunction) appeals, and any anticipated post-judgment collection services. Not prohibited by applicable law, Borrower also will pay any court costs, in addition to all other sums provided by law. This Note has been delivered to Lender and accepted by Lender in the State of Arizona. If there is a lawsuit, Borrower agrees upon Lender's request to submit to the jurisdiction of the courts of MARICOPA County, the State of Arizona. This Note shall be governed by and construed in accordance with the laws of the State of Arizona. DISHONORED ITEM FEE. Borrower will pay a fee to Lender of $20.00 if Borrower makes a payment on Borrower's loan and the check or preauthorized charge with which Borrower pays is later dishonored. RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security interest in, and hereby assigns, conveys, delivers, pledges, and transfers to Lender all Borrower's right, title and interest in and to, Borrower's accounts with Lender (whether checking, savings, or some other account), including without limitation all accounts held jointly with someone else and all accounts Borrower may open in the future, excluding however, all IRA and Keogh accounts, and all trust accounts for which the grant of a security interest would be prohibited by law. Borrower authorizes Lender, the extent permitted by applicable law, to charge or setoff all sums owing on this Note against any and all such accounts. LINE OF CREDIT. This Note evidences a revolving line of credit. Advances under this Note may be requested either orally or in writing by Borrower or by an authorized person. Lender may, but need not, require that all oral requests be confirmed in writing. All communications, instructions, or directions by telephone or otherwise to Lender are to be directed to Lender's office shown above. The following party or parties are authorized to request advances under the line of credit until Lender receives from Borrower at Lender's address shown above written notice of revocation of their authority: STEVEN A. LAMBRECHT, PRESIDENT; and GREG P. LAMBRECHT, SECRETARY. Borrower agrees to be liable for all sums either: (a) advanced in accordance with the instructions of an authorized person or (b) credited to any of Borrower's accounts with Lender. The unpaid principal balance owing on this Note at any time may be evidenced by endorsements on this Note or by Lender's internal records, including daily computer print-outs. Lender will have no obligation to advance funds under this Note if: (a) Borrower or any guarantor is in default under the terms of this Note or any agreement that Borrower or any guarantor has with Lender, including any agreement made in connection with the signing of this Note; (b) Borrower or any guarantor ceases doing business or is insolvent; (c) any guarantor seeks, claims or otherwise attempts to limit, modify or revoke such guarantor's guarantee of this Note or any other loan with Lender; (d) Borrower has applied funds provided pursuant to this Note for purposes other than those authorized by Lender; or (e) Lender in good faith deems itself insecure under this Note or any other agreement between Lender and Borrower. ADDITIONAL PROVISIONS. Line to extinguish upon completion of Premium Cigars International, Ltd. public offering. GENERAL PROVISIONS. Lender may delay or forgo enforcing any of its rights or remedies under this Note without losing them. Borrower and any other person who signs, guarantees or endorses this Note, to the extent allowed by law, waive presentment, demand for payment, protest and notice of dishonor. Upon any change in the terms of this Note, and unless otherwise expressly slated in writing, no party who signs this Note, whether as maker, guarantor, accommodation maker or endorser, shall be released from liability. All such parties agree that Lender may renew or extend (repeatedly and for any length of time) this loan, or release any party or guarantor or collateral; or impair, fail to realize upon or perfect Lender's security interest in the collateral; and take any other action deemed necessary by Lender without the consent of or notice to anyone. All such parties also agree that Lender may modify this loan without the consent of or notice to anyone other than the party with whom the modification is made. EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the rate specified in this Note plus any additional rate resulting from any other charges in the nature of interest paid or to be paid in connection with this Note. PRIOR TO SIGNING THIS NOTE, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS OF THIS NOTE, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER AGREED TO THE TERMS OF THE NOTE AND ACKNOWLEDGES RECEIPT OF A COMPLETED COPY OF THE NOTE. BORROWER PREMIUM CIGARS INTERNATIONAL, LTD. By: /s/ Steven A. Lambrecht, President/CEO ----------------------------------------------- STEVEN A. LAMBRECHT, PRESIDENT EX-11.1 11 COMPUTATION OF EARNINGS PER SHARE EXHIBIT 11.1 Premium Cigars International, Ltd. Computation of Earnings Per Share Three Month ----------- Years Ended Period Ended ----------- ------------ March 31, June 30, --------- -------- 1997 1997 --------- --------- Net Loss (202,142) (322,169) ========= ========= Loss per Share (.14) (.22) ========= ========= Weighted average shares outstanding 1,480,500 1,480,500 ========= ========= (1) Earnings per share are based upon the weighted average number of shares outstanding for each of the respective years. EX-23.1 12 CONSENT OF INDEPENDENT CERTIFIED ACCOUNTANTS SEMPLE & COOPER, LLP |BDO CERTIFIED PUBLIC ACCOUNTANTS AND CONSULTANTS |SEIDMAN ========================================================================-------- 2700 NORTH CENTRAL AVENUE, ELEVENTH FLOOR, PHOENIX, ARIZONA 85004 ALLIANCE * TEL 602-241-1500 * FAX 602-234-1867 INDEPENDENT AUDITORS' CONSENT ----------------------------- We consent to the use in this Amendment No. 3 to the Registration Statement of Premium Cigars International, Ltd. and Subsidiary of our report dated June 18, 1997 appearing in the Prospectus, which is part of such Registration Statement, and to the reference to us under the heading "Experts" in the Prospectus. /s/ Semple & Cooper, LLP Semple & Cooper, LLP Phoenix, Arizona August 14, 1997 EX-27 13 FDS --
5 1 U.S. Dollars 3-MOS YEAR MAR-31-1998 MAR-31-1997 APR-01-1997 JUN-01-1996 JUN-30-1997 MAR-31-1997 1 1 26,424 58,018 0 0 430,694 222,797 0 0 94,853 126,337 655,689 422,759 102,317 23,055 (2,059) (247) 1,412,202 678,461 410,838 349,928 0 0 0 0 0 0 524,675 419,675 (523,311) (201,142) 1,412,202 218,533 628,180 845,571 628,180 845,571 481,677 643,790 1,065,619 1,226,972 31,233 21,522 0 0 32,508 21,292 (322,169) (201,142) 0 0 0 0 0 0 0 0 0 0 (322,169) (201,142) (.22) (.14) 0 0
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