================================================================================
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. [ ]
<TABLE>
Calculation of Registration Fee
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<CAPTION>
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
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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)
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(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.
</TABLE>
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.
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<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
CROSS-REFERENCE SHEET
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS
- ----------------------------------- ---------------------------------
<S> <C>
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
</TABLE>
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD.
CROSS-REFERENCE SHEET (Continued)
<TABLE>
<CAPTION>
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS
- ----------------------------------- ---------------------------------
<S> <C>
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
</TABLE>
<PAGE>
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY 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
<PAGE>
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.
<PAGE>
[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
<PAGE>
[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
<PAGE>
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
<PAGE>
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.
<TABLE>
The Offering
<CAPTION>
<S> <C>
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."
</TABLE>
2
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
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.
<CAPTION>
June 1, 1996 to March 31, 1997 3 Months ended June 30, 1997
------------------------------- ----------------------------
Historical Pro Forma Historical Pro Forma
--------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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)
=========== ========== ========== ==========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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:
<TABLE>
[Pie chart graphic of use of proceeds]
<CAPTION>
Approximate
Approximate Percentage
Dollar of Net
Application of Net Proceeds Amount Proceeds
- --------------------------------------------------------- ------------- ------------
<S> <C> <C>
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.
</TABLE>
15
<PAGE>
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.
<TABLE>
[Bar chart comparing actual and pro forma information]
<CAPTION>
June 30, 1997
----------------------------
Actual As Adjusted
------------- ------------
(Unaudited) (Unaudited)
<S> <C> <C>
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
========== ==========
</TABLE>
16
<PAGE>
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
<PAGE>
<TABLE>
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]
<CAPTION>
Total Consideration Average
Number Paid Price
of ------------------------- Per
Shares Percent Amount Percent Share
----------- --------- ------------- --------- --------
<S> <C> <C> <C> <C> <C>
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%
========== ======= ============ =======
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
June 1, 1996 to March 31, 1997 3 Months ended June 30, 1997
------------------------------- ----------------------------
Historical Pro Forma Historical Pro Forma
--------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
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)
=========== ========== ========== ==========
</TABLE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
49 91 120 227 389 559 596 629 647 671 707 745 1,550 2,615
</TABLE>
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
<PAGE>
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:
<TABLE>
<CAPTION>
Period From Inception For the 3 Month
June 1. 1996, Through Period Ended
March 31, 1997 June 30,1997
----------------------- ----------------
<S> <C> <C>
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)%
========= =========
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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):
<TABLE>
<CAPTION>
1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- --------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
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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
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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.
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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
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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
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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
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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
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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
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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.
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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.
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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,
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<PAGE>
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.
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<PAGE>
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.
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MANAGEMENT
Executive Officers and Directors
The executive officers and directors of PCI are as follows:
<TABLE>
<CAPTION>
Name Age Position
- ---------------------------- ----- --------------------------------------------------------
<S> <C> <C>
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
</TABLE>
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.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
<TABLE>
<CAPTION>
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 ($) ($) ($) SARs (#) ($) ($)
- ------------------------ ------ ------------ ----------- --------- ------------ ------------ --------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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.
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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
<TABLE>
<CAPTION>
Percent of Class
----------------------
Title of Name and Address of Amount and Nature of Before After
Class Beneficial Owner Beneficial Ownership Offering Offering
- ------------ ---------------------------------- ---------------------- ---------- ---------
<S> <C> <C> <C> <C>
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.
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<PAGE>
(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.
</TABLE>
Security Ownership of Management
<TABLE>
<CAPTION>
Percent of Class
-------------------------
Title of Name and Address of Amount and Nature of Before After
Class Beneficial Owner Beneficial Ownership Offering Offering
- ------------ ---------------------------- ------------------------- ---------- ------------
<S> <C> <C> <C> <C>
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%.
</TABLE>
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.
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<PAGE>
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:
<TABLE>
<CAPTION>
Number of Percent Percent
Common Shares Owned Owned
Loan Entitled to Prior to After
Name Amount Purchase Offering Offering
- ----------------------------------- ------------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
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%.
</TABLE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
GLOSSARY
<S> <C>
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
<PAGE>
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.
</TABLE>
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
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<PAGE>
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
<PAGE>
INDEPENDENT AUDITORS' REPORT
To The Board of Directors of
Premium Cigars International, Ltd.
We have audited the accompanying consolidated balance sheet of Premium Cigars
International, Ltd. and Subsidiary as of 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
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
1997 1997
----------- ------------
(Unaudited)
<S> <C> <C>
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
</TABLE>
F-3
<PAGE>
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)
<TABLE>
<CAPTION>
Inception Three Month
Through Period Ended
March 31, June 30,
1997 1997
--------------- -------------
(Unaudited)
<S> <C> <C>
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
</TABLE>
F-4
<PAGE>
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)
<TABLE>
<CAPTION>
Common Stock Total
------------------------ Accumulated Treasury Stockholders'
Shares Amount Deficit Stock Equity
----------- ---------- ------------- ---------- --------------
<S> <C> <C> <C> <C> <C>
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
</TABLE>
F-5
<PAGE>
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)
<TABLE>
<CAPTION>
Inception Three Month
Through Period Ended
March 31, June 30,
1997 1997
-------------- -------------
(Unaudited)
<S> <C> <C>
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
</TABLE>
F-6
<PAGE>
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies, Nature of Operations and Use of
Estimates:
Nature of Operations:
Premium Cigars International, Ltd. (the "Company") is a Corporation
organized under the laws of the State of Arizona on December 16, 1996.
CAN-AM International Investments Corp. (CAN-AM), a British Columbia
Canadian corporation, was incorporated on June 20, 1996. The Company
acquired all of the outstanding stock of CAN-AM on December 31, 1996. The
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
[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
<PAGE>
=========================================== ==================================
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.
=========================================== ==================================
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<PAGE>
(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
<PAGE>
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
<TABLE>
<CAPTION>
(A) EXHIBITS
<S> <C>
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
<PAGE>
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
<PAGE>
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.
</TABLE>
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
<PAGE>
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
<PAGE>
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.
<TABLE>
<CAPTION>
Date Signature Capacity in Which Signed
- ----------------- ---------------------------------- -------------------------------------------
<S> <C> <C>
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
</TABLE>
II-9
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:
<PAGE>
(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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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
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<PAGE>
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.
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<PAGE>
(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
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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.
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<PAGE>
(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
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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
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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).
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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.
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(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.
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<PAGE>
(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
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
(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
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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.
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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
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<PAGE>
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]
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<PAGE>
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-
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
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.
<PAGE>
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.
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.
<PAGE>
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.
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<PAGE>
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
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<PAGE>
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.
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<PAGE>
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-
<PAGE>
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.
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<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
<PAGE>
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-
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
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
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
<PAGE>
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
<PAGE>
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
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
<PAGE>
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
<PAGE>
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
<PAGE>
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
PROMISSORY NOTE
<TABLE>
<CAPTION>
Principal Loan Date Maturity Loan No. Call Collateral Account Officer Initials
<C> <C> <C> <C> <C> <C> <C> <C>
$200,000.00 07-25-1997 01-31-1998 201 96 0024653 07807
</TABLE>
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.
<TABLE>
<S> <C>
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
</TABLE>
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.
<PAGE>
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
<PAGE>
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
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.
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
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S. Dollars
<S> <C> <C>
<PERIOD-TYPE> 3-MOS YEAR
<FISCAL-YEAR-END> MAR-31-1998 MAR-31-1997
<PERIOD-START> APR-01-1997 JUN-01-1996
<PERIOD-END> JUN-30-1997 MAR-31-1997
<EXCHANGE-RATE> 1 1
<CASH> 26,424 58,018
<SECURITIES> 0 0
<RECEIVABLES> 430,694 222,797
<ALLOWANCES> 0 0
<INVENTORY> 94,853 126,337
<CURRENT-ASSETS> 655,689 422,759
<PP&E> 102,317 23,055
<DEPRECIATION> (2,059) (247)
<TOTAL-ASSETS> 1,412,202 678,461
<CURRENT-LIABILITIES> 410,838 349,928
<BONDS> 0 0
0 0
0 0
<COMMON> 524,675 419,675
<OTHER-SE> (523,311) (201,142)
<TOTAL-LIABILITY-AND-EQUITY> 1,412,202 218,533
<SALES> 628,180 845,571
<TOTAL-REVENUES> 628,180 845,571
<CGS> 481,677 643,790
<TOTAL-COSTS> 1,065,619 1,226,972
<OTHER-EXPENSES> 31,233 21,522
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 32,508 21,292
<INCOME-PRETAX> (322,169) (201,142)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (322,169) (201,142)
<EPS-PRIMARY> (.22) (.14)
<EPS-DILUTED> 0 0
</TABLE>
