As filed with the Securities and Exchange Commission on June 25, 1997
Registration No. 33-________
Securities and Exchange Commission
Washington, D.C. 20549
Form SB-2
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 telephone (Name, address, and telephone number
number, including, area code, of of agent for service)
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. One Renaissance Square
7373 North Scottsdale Road, Suite B-252 Two North Central Avenue
Scottsdale Centre Phoenix, Arizona 85004-2391
Scottsdale, Arizona 85253 (602) 229-5200
(602) 483-9600
Approximate date of proposed sale to the public: As soon as practical on or
after the effective date of this Registration Statement. If any securities being
registered on this Form are to be offered on a delayed or continuous basis
pursuant to Rule 415 under the Securities Act, check the following box. [x]
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
Calculation of Registration Fee
=================================================================================================================
Proposed Proposed Amount
Title of each Number of Offering Maximum of
class of securities Securities to be Price Per Aggregate Registration
to be registered Registered Share(1) Offering Price(1) Fee
- -----------------------------------------------------------------------------------------------------------------
Common Stock, no par value 2,300,000(2) $5.01 $11,523,000 $ 3,491.82
Underwriter's Warrants 200,000(3) $ .01 $ 2,000 $ (4)
Common Stock, no par value 200,000(5) $6.00 $ 1,200,000 $ 363.64
Common Stock, no par value 400,000(6) $2.50 $ 1,000,000 $ 303.03
----------- ----------
TOTALS: $13,725,000 $ 4,158.49
=================================================================================================================
(1) Estimated solely for purposes of computing the registration fee
pursuant to Rule 457.
(2) Includes 300,000 additional shares of Common Stock which the
Underwriter has the right to purchase to cover over-allotments, if any.
(3) Underwriter's Warrants to purchase Shares equal to 10% of the Shares
sold pursuant to the offering, excluding over-allotments, if any.
(4) Pursuant to Rule 457(g) no fee is being paid.
(5) Issuable upon exercise of Underwriter's Warrants.
(6) Issuable upon exercise of outstanding warrants held by Selling
Shareholders.
ii
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.
iii
PREMIUM CIGARS INTERNATIONAL, LTD.
CROSS-REFERENCE SHEET
FORM SB-2 ITEM NUMBER AND CAPTION LOCATION OF CAPTION IN PROSPECTUS
1. Front of Registration Statement and Outside Front Cover Outside Front Cover Page
Page of Prospectus.......................................
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; Price Range of Common
Stock
6. Dilution................................................. Dilution
7. Selling Security Holders ................................ Interim Financing; Selling Shareholders
8. Plan of Distribution..................................... Outside Front Cover Page; Underwriting; Selling
Shareholders
9. Legal Proceedings........................................ Legal Matters
10. Directors, Executive Officers, Promoters and Control Management; Principal Shareholders
Persons..................................................
11. Security Ownership of Certain Beneficial Owners and Principal Shareholders; Certain Transactions
Management...............................................
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 Management
Securities Act Liabilities...............................
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 Management's Discussion and Analysis of Financial
Operations............................................... Conditions and Results of Operations
18. Description of Property.................................. Business
19. Certain Relationships and Related Transactions........... Certain Transactions
20. Market for Common Equity and Related Stockholder Outside Front Cover Page; Risk Factors; Price
Matters.................................................. Range of Common Stock
21. Executive Compensation................................... Management
22. Financial Statements..................................... Financial Statements
23. Engagement of Independent Accountants.................... Engagement of Independent Accountants
iv
PROSPECTUS
SUBJECT TO COMPLETION DATED JUNE 25, 1997
PREMIUM CIGARS INTERNATIONAL, LTD.
2,000,000 Shares
Premium Cigars International, Ltd. ("we" or "PCI"), distributes moderately
priced premium cigars and other cigars, which are sold from our humidors placed
primarily in convenience stores in the United States and Canada. By this
Prospectus, we are offering you shares of PCI Common Stock, no par value
("Shares").
This is our initial public offering, and no public market currently exists
for PCI's Shares. We estimate that the initial public offering price will be
$5.01 per Share. The Offering Price per Share will be determined by negotiations
between PCI and the Representative, and may not be indicative of the market
price of, Shares after the Offering. Factors used to determine the initial
public offering price are set forth under "Underwriting."
We will apply to have our Shares listed on The Nasdaq SmallCap System under
the symbol PCIG, on completion of the Offering.
---------------------------
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK AND IMMEDIATE AND
SUBSTANTIAL DILUTION. YOU SHOULD PURCHASE UNITS ONLY IF YOU CAN AFFORD A
COMPLETE LOSS. SEE "RISK FACTORS."
---------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES
AND EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
======================================================================================================
Price Underwriting Proceeds
to the Discounts and to the
Public Commissions (1) Company (2)
------ --------------- -----------
- ------------------------------------------------------------------------------------------------------
Per Share.................................. $5.01 $.50 $4.51
Total (3).................................. $10,020,000 $1,000,000 $9,018,000
======================================================================================================
The Shares are being offered by the Underwriters when, as and if delivered
to and accepted by the Underwriter and subject to various prior conditions,
including their right to reject orders in whole or in part. W.B. McKee
Securities, Inc. will act as representative of the Underwriters ("Underwriter's
Representative"). We expect that Share certificates will be delivered in
Phoenix, Arizona, on or about _________________, 1997.
W.B. McKEE SECURITIES, INC.
The date of this Prospectus is July __, 1997
(1) See "Underwriting" for indemnification arrangements with the
Underwriters.
(2) Before deducting expenses estimated at $675,600 which will be paid by
PCI.
(3) PCI has granted the Representative a 45-day option to purchase up to
300,000 additional Shares at the Price to the Public less Underwriting
Discounts and Commissions, solely to cover over-allotments, if any. If
the Representative's option is exercised in full, the total Price to
the Public, Underwriting Discounts and Commissions, and Proceeds to PCI
will be $11,523,000, $1,152,300 and $10,370,700, respectively. See
"Underwriting."
PCI will be subject to certain informational requirements of the Securities
Exchange Act of 1934, as amended, and will file reports and other information
with the Securities and Exchange Commission (the "Commission"). Reports and
other information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 Fifth Street, N.W., Washington, D.C. 20549
or at the regional offices of the Commission at Northwestern Atrium Center, 500
West Madison Street, Chicago, Illinois 60661 and Seven World Trade Center, New
York, New York 10048. You can obtain copies of these materials at prescribed
rates from the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Washington, D.C. 20549. The Commission maintains a World Wide Web site on
the Internet that contains reports, proxy and information statements and other
regarding registrants such as PCI, that file electronically with the Commission.
The address for the Commission's web site is http://www.sec.gov.
We intend to furnish our shareholders annual reports containing audited
financial statements and other appropriate reports. Our fiscal year ends on
March 31.
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.
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
Some of the statements contained in this Prospectus and supplements, 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 the actual results to differ include, without
limitation, the success or failure of our efforts to implement our business
strategy, our ability to raise sufficient capital to purchase cigars and
humidors to meet the aggressive "roll-out" schedules required by our contracts
and commitments with stores and distributors, the effect of a settlement
announced June 20, 1997 of litigation among 40 States and major U.S. tobacco
companies, the lack of any market study, the lack of complete business
projections, our ability to buy quality premium cigars at favorable prices, our
ability to negotiate and maintain favorable distribution arrangements with major
national convenience store chains, the effect of economic conditions, a decision
by major retail chains to remove all tobacco products from their shelves,
changes in governmental regulation, tax rates and similar matters, the ability
to attract and retain quality employees and other risks which will 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.
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 initial public offering ("Offering")
fully, you should read the entire Prospectus carefully, including the risk
factors and financial statements.
THE COMPANY
ORGANIZATION; Premium Cigars International, Ltd. ("PCI") is an
OFFICES: Arizona corporation organized in December, 1996.
Its executive offices are located at 15651 North
83rd Way, Suite 3, 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 have placed our cigar distribution
program, which includes supplying humidors,
cigars, service and information (the "PCI Cigar
Program") in over 1,400 stores. We are currently
expanding with national retail and distribution
accounts in both the United States and Canada. Our
mission is to place our PCI Cigar Program in every
convenience, gas and high traffic retail outlet.
THE PCI CIGAR Our complete PCI Cigar Program includes: imported,
PROGRAM: hand-rolled, short, medium and long-leaf filler
premium cigars from the Dominican Republic,
Honduras, Mexico, Nicaragua and the Philippines,
as well as domestic machine-made mass market
cigars; in-store, countertop, custom made,
hand-crafted wood and plexiglass humidors;
training materials and telemerchandising support
to individual stores; point-of-purchase
information cards and cigar magazine racks;
telemerchandising for order fulfillment; large,
"walk-in" humidors for distribution center cigar
inventory storage; and a 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 Southland USA and Canada (7-Eleven(TM)),
AM/PM(TM), Circle K(TM), Associated Grocers,
SuperValu(TM)1 and stores supplied by the McLane
Company.
--------------------------------------------------
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
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 and little cigars at around $1.
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. Based
on reports by the Cigar Association of America,
following several decades of declines in such
sales, premium cigar sales in the United States
increased by 10.7% in 1993, 14.5% in 1994, 30.5%
in 1995 and an estimated 67.0% in 1996.
OUR HISTORY: Because premium cigars require special care
(including humidified storage) and knowledgeable
sales personnel, they were traditionally sold in
tobacco specialty shops. In June 1996, Colin Jones
and Greg Lambrecht, our Vice Presidents of
International and National Sales, through their
wholly-owned companies J&M and Rose Hearts (see
below) developed their concept of selling premium
cigars out of in-store humidors through
convenience stores, grocery stores, and other
retail outlets. They introduced the concept first
in Canada and then in the northwest United States.
CAN-AM; In December 1996, PCI acquired all of the
ROSE HEARTS; outstanding stock of CAN-AM International
AND J&M: Investments Corp., a British Columbia (Canada)
corporation ("CAN-AM"). CAN-AM had previously
acquired the cigar distribution operations,
including cigar accounts, humidors and inventory,
of Rose Hearts, Inc. ("Rose Hearts"), a Washington
corporation wholly-owned by Greg Lambrecht and J&M
Wholesale, Ltd. ("J&M"), 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.
2
CURRENT Currently, we distribute cigars to over 1,400
OPERATIONS: convenience stores and other retailers throughout
Canada and in the states of Washington, Oregon,
California, Arizona, Kansas, Missouri, Utah,
Idaho, Alaska, Nevada, Oklahoma, Texas, Maryland,
Virginia, Colorado, Illinois, Michigan, Wisconsin,
Nebraska, Georgia, Montana and Florida. We have
"master" agreements with, have negotiated and
approved standard form retailer agreements with,
or have other arrangements with, national accounts
to supply cigars and in-store humidors for direct
shipments and delivery and in-store merchandising.
We have developed several relationships with cigar
suppliers and are expanding our commercial ties to
secure a variety of sources for cigars and
accessories. We believe we have the ability to
move quickly in a competitive industry. Over the
next three to five years, we believe that we have
the opportunity to place the PCI Cigar Program in
over 50,000 retail outlets.
THE OFFERING
Securities Offered . . . . . . . . 2,000,000 Shares.
Common Stock Outstanding
at June 24, 1997: . . . . . 1,480,500 shares
Warrants Outstanding
at June 24, 1997: . . . . . 400,000 Common Stock
Purchase Warrants (Bridge Warrants)
Securities to be outstanding
after the offering . . . . . . . . 3,480,500
Use of Proceeds . . . . . . . . . . PCI will use the proceeds to: expand the
PCI Cigar Program, including purchasing
humidors, cigars and accessories; repay
indebtedness; and fund sales and marketing
and working capital.
Risks . . . . . . . . . . . . . . . Investing in the Shares is very risky, and
you should be able to bear a complete loss
of your investment. See "Risks."
Proposed Nasdaq SmallCap Market(sm) Symbols
Common Stock . . . . . . . PCIG
3
SUMMARY FINANCIAL INFORMATION
The following financial information reflects the operations of PCI (and its
predecessor operations) for the period from June 1, 1996 to March 31, 1997. The
summary financial information has been derived from the financial statements
which appear elsewhere in this Prospectus, and this data should be read in
conjunction with the financial statements of PCI and related notes.
Operations
June 1, 1996
to
March 31, 1997 March 31, 1997
STATEMENT OF OPERATIONS DATA:
Sales............................................... $ 845,571
Net loss............................................ ($153,517)
Net loss per share (1).............................. ($ .10)
Weighted average of shares of Common Stock
outstanding (1)..................................... 1,480,500
BALANCE SHEET DATA:
Working capital..................................... ($82,169)
Total assets........................................ $ 523,461
Total liabilities................................... $ 459,928
Accumulated deficit................................. ($ 153,517)
Shareholders' equity................................ $ 63,533
Net tangible book value per share of
Common Stock........................................ ($ .02)
(1) Shares of Common Stock issued to founders at the time of PCI's organization
are treated as outstanding since inception.
4
RISKS
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 Business; Losses During Start-up Operations. PCI was
organized in December, 1996 and acquired a cigar distribution business which
began in June, 1996. PCI, its subsidiary CAN/AM, and the predecessor cigar
distribution operations of J&M and Rose Hearts incurred losses of $153,517, or
$.10 per share, on revenues of $845,571, for the period from June 1, 1996
(inception) to March 31, 1997. Our ability to operate profitably depends on
increasing our sales and distribution channels 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.
At March 31, 1997, PCI had a net working capital deficit of approximately
$82,169. Our operations were financed to that date through private placements of
Common Stock in 1997, which generated net proceeds of approximately $207,050.
From April to June 1997, we obtained Bridge Financing (as defined below) which
generated net proceeds of $810,000. We believe that net proceeds from this
Offering will be sufficient to fund our operations for the foreseeable future.
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 an adverse effect on the
operations. If we raise funds by selling equity securities, shareholders may be
diluted.
40-State Tobacco Litigation - Proposed Settlement. On June 20, 1997 the
Attorneys General of 40 States and the major United States Cigarette
manufacturers announced a proposed settlement of a lawsuit filed by the States.
The proposed settlement, which will require that the United States Congress take
certain action, is complex and may change significantly or be rejected. However,
the proposal would require significant changes in 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;
and tobacco billboards or sporting event sponsorships would be prohibited. The
potential impact, if any, of the settlement and related legislation on the cigar
industry is uncertain.
Extensive and Increasing Regulation of Tobacco Products. The tobacco
industry in general has been subject to extensive regulation at the federal,
state and local levels. Recent trends have increased regulation of the tobacco
industry. Although regulation 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. The recent increase in popularity of
cigars could lead to an increase in regulation of cigars. A variety of bills
relating to tobacco issues have been introduced in the U.S. Congress, including
bills that would have (i) prohibited the advertising and promotion of all
tobacco products or restricted or eliminated the deductibility of such
advertising expense, (ii) increased labeling requirements on tobacco products to
include,
5
among other things, addiction warnings and lists of additives and toxins, (iii)
shifted 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"), (iv) increased tobacco excise taxes and (v) required 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 such proposals have been passed by
Congress. Future enactment of such proposals or similar bills may have an
adverse effect on the results of operations or financial condition of PCI.
In addition, a majority of states restrict or prohibit smoking in certain
public places and restrict the sale of tobacco products to minors. Local
legislative and regulatory bodies also have increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. Further restrictions of a similar nature could have
an adverse effect on our sales or operations, such as banning counter access to
or display of cigars, or decisions by retailers because of public pressure to
stop selling all tobacco products. 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.
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. California, however, 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. Consideration at both the federal and state level also has
been given to consequences of tobacco smoke on others who are not currently
smoking (so called "second-hand" smoke). We cannot assure you that regulation
relating to second hand smoke will not be adopted or that such regulation or
related litigation would not have a material adverse effect on our results of
operations or financial condition.
Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation. We cannot predict the ultimate
content, timing or effect of any additional regulation of tobacco products by
any federal, state, local or regulatory body, and we cannot assure you that any
such legislation or regulation would not have a material adverse effect on PCI's
business. See "Business -- Government Regulation; Tobacco Industry Litigation."
Effects of Fluctuations in Cigar Costs and Availability. We seek to
purchase cigars which are manufactured by suppliers outside the United States.
The price and availability of these cigars are subject to numerous factors out
of our control, including weather conditions, foreign government policies,
potential trade restrictions and the overall demand for cigars.
6
Nature of Convenience Store Distribution Relationships. Although we have
"master" agreements and other arrangements with corporate offices of several
major convenience store chains to place the PCI Cigar Program in corporate and
franchise stores, 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). In addition, while "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 sales decline precipitously, stores may terminate
participation quickly.
PCI does not pay "slotting" fees or other inducements to retailers in order
to secure shelf space, which could affect our ability to place product. In
addition, other major manufacturers or distributors may have master agreements
with convenience stores which require "most favorable supplier" treatment of
their tobacco products. This may inhibit PCI's ability to obtain favorable
counter presentation of its humidors.
Historical Dependence on One Supplier. Through March 31, 1997 PCI's largest
supplier accounted for approximately 71% of our Canadian cigar purchases. We
have expanded our sources of supply, and PCI is no longer largely dependent on
one supplier. Nevertheless, problems with our major supplier could have a
significant adverse impact on our operations, particularly in Canada.
Historical Dependence on One Customer Store Group. Corporate and franchise
stores affiliated with one large convenience store chain have accounted for over
82% of our sales. We have expanded our customer base, but we expect that sales
to 7-Eleven stores will continue to account for a substantial percentage of our
sales. Our plans for the coming year include rapidly expanding the number of
7-Eleven stores with our PCI Cigar Program. Problems with 7-Eleven stores, our
major customer in Canada and the United States, could have a substantial adverse
impact on PCI.
Declining Market for Premium Cigars Through 1991. According to industry
sources, the cigar industry was in substantial decline from approximately 1973
to 1991. While premium cigar sales have increased since 1991, we cannot assure
you that recent positive trends will continue. The decrease in cigar sales as
well as the general decline in smoking followed the 1964 report of the United
States Surgeon General. Numerous other subsequent studies stressed the link
between smoking, and medical problems including secondary smoke 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. We believe that these factors may continue to have an
adverse effect upon the cigar industry in general and PCI's business in
particular. While the cigar industry has experienced significantly better trends
in unit sales since 1993, we cannot assure you that the recent positive trends
will continue. 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
7
increases in cigar sales are indicative of long-term trends or that these new
customers will continue to smoke cigars in the future.
Other Tobacco Industry Litigation. In addition to the 40-State litigation
referred to above, the tobacco industry has experienced and is experiencing
significant health-related litigation involving tobacco and health issues.
Plaintiffs in such litigation have sought and are seeking compensatory, and in
some cases punitive, damages for various injuries claimed to result from the use
of tobacco products or exposure to tobacco smoke. The proposed settlement of the
40-State litigation may have a material impact to 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. Costs of defending prolonged litigation
and any settlement or successful prosecution of any material health-related
litigation against manufacturers of cigars, cigarettes or smokeless tobacco or
suppliers to the tobacco industry could have a material adverse effect on our
results of operations or financial condition. The recent increase in the sales
of cigars and the publicity such increase has received may have the effect of
increasing the probability of legal claims. Also, a 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 also 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 "--Extensive and Increasing Regulation of Tobacco
Products; 40-State Tobacco Litigation - Proposed Settlement" and "Business --
Government Regulation, Tobacco Industry -- Litigation."
Risks Relating to Supply of Cigars. We primarily sell moderately-priced
cigars which are hand-rolled or machine-made and use tobacco aged six months to
two years. There is an abundant supply of tobacco available in a number of
countries for the types of cigars we primarily sell. We also, however, sell a
limited number of higher priced premium cigars which require longer-aged
tobacco. Our ability to acquire 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, we cannot assure
that increases in demand would not adversely affect our ability to acquire
higher priced premium cigars.
Demand for Cigars and Inventory. While the cigar industry has experienced
increasing demand for cigars during the last several years, there can be no
assurance that the trend will continue. If the industry does not continue as we
anticipate or if we experience a reduction in our demand for whatever reason, we
may temporarily accumulate excess inventory which could have an adverse effect
on PCI's business or results of operations.
Social, Political and Economic Risks Associated with Foreign Operations and
International Trade. We purchase virtually all of our premium cigars from
manufacturers located in countries outside of the U.S., including the Dominican
Republic, Mexico, Honduras, Nicaragua and the Philippines. Social, political and
economic conditions inherent in foreign
8
operations and 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 material adverse effect on our business.
Risks Relating to Trademarks. A portion of PCI's proposed business involves
supplying 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 and tradename protection, relying primarily on trademark law
to protect brand names. We do not currently own any federally registered
trademarks or tradenames, and our failure to obtain trademark protection, or
illegal use of any trademarks we may obtain, may have an adverse effect on our
business, financial condition and operating results.
We intend to register our trademarks in the U.S. and Canada. The laws of
countries outside of the U.S. and Canada may afford us little or no effective
protection of trademarks. We do not currently hold the right to use any
trademarks or brand names.
We cannot assure that claims for infringement or invalidity, or claims for
indemnification resulting from infringement claims, will not be asserted or
prosecuted against PCI. Any such claims, with or without merit, could be
time-consuming to defend, result in costly litigation and divert management's
attention and resources.
Competition. The cigar industry in general is dominated by a small number
of companies which are well known to the public. As a distributor of premium
cigars, PCI generally competes with a smaller number of less well-known,
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 larger cigar manufacturing and wholesale
companies such as 800 JR Cigar Company, Inc., Consolidated Cigar 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. These cigar manufacturing and wholesale companies, along with major
cigarette manufacturers, have larger resources than PCI and would, if they enter
the cigar distribution market, constitute formidable competition of our
business. We cannot assure you that PCI can compete successfully in any market.
See "Business -- Competition."
Shares Issuable Pursuant to Warrants and Options. Currently, other than the
400,000 Bridge Warrants and options to purchase 20,000 shares of Common Stock
held by a director, there are no outstanding warrants or options. The options
held by Mr. Anthony and exercisable at the Offering Price. The Bridge Warrants
are exercisable at 50% of the Share price in this Offering, and Bridge Warrant
holders are likely to exercise them, if at all, at a time when PCI would
otherwise be able to obtain capital on terms more favorable than those provided
in the Bridge Warrants.
9
Dependence on Management. PCI's business is largely dependent on its
ability to hire and retain quality managers. PCI has employment agreements with
officers and directors Steven A. Lambrecht, Colin Jones and Greg P. Lambrecht
and a Business Consulting Agreement with David S. Hodges. The loss of Messrs.
Steven or Greg Lambrecht, Jones or Hodges could have a material adverse effect
upon our business and prospects. PCI does not currently maintain key-man life
insurance on any of its employees, but is 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 PCI's Underwriting Agreement with the Underwriter.
Limited Insurance Coverage. 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 PCI will not be subject to liability
which is not covered beyond the limits of its general liability, product
liability and health hazard insurance coverage, and which may have a material
adverse effect upon its business. See "Business -- Government Regulation;
Tobacco Industry Litigations."
Control by Management. As of June 24, 1997, approximately 76% of the
outstanding Shares were owned by PCI's officers and directors, and they may be
able to elect all of the directors and continue to control PCI. Upon completion
of this offering, and assuming full exercise of the Bridge Warrants, PCI's
officers and directors will own approximately 33% of the then issued and
outstanding shares.
Possible Failure to Obtain Listing on The Nasdaq SmallCap Market(sm) and
Market Illiquidity. We intend to list our Common Stock in The Nasdaq SmallCap
Market. If PCI is unable to satisfy Nasdaq's requirements for continued listing,
the Common Stock will not be listed on The Nasdaq SmallCap Market. In that
event, 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 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 for PCI's securities.
Risks of Low-priced Stocks; Penny Stock Regulations. If our securities are
not listed on The Nasdaq SmallCap Market, 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 PCI Shares in
the secondary market.
The Commission'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 PCI Shares
10
if the Shares are listed on The Nasdaq SmallCap Market and PCI provides certain
price and volume information provided on a current and continuing basis or meet
certain minimum net tangible assets or average revenue criteria. We cannot
assure you that PCI's securities will qualify for exemption from these
restrictions. If PCI's Shares were subject to the penny stock rules, the market
liquidity for the Shares could be severely adversely affected.
No Common Stock Dividends Anticipated. We intend to retain any future
earnings to fund the operation and expansion of our business. We do not
anticipate paying cash dividends on our Common Stock in the foreseeable future.
Shares Eligible for Future Sale. All of the currently issued and
outstanding PCI Shares are "restricted securities" as that term is defined under
Rule 144 promulgated under the Securities Act. Of the 1,480,500 presently
outstanding Shares, none will become eligible for sale pursuant to Rule 144
prior to December 31, 1997. Thereafter, at various times through June 20, 1998,
1,480,500 Shares will become eligible for sale pursuant to Rule 144. However,
the holders of all 1,480,500 Shares have agreed that they will not sell their
shares for eighteen (18) months, respectively, from the date of this Prospectus,
without the prior approval of the Underwriter. We are unable to predict the
effect that sales made under Rule 144 or other sales may have on the then
prevailing market price of the Shares.
Dilution. Purchasers of Shares will experience immediate and substantial
dilution of $2.62 in net tangible book value per Share from the assumed Offering
Price of $5.01. See "Dilution."
No Prior Market for Shares; Determination of Public Offering Price. Prior
to the Offering, there has been no public market for the Shares. We cannot
assure you that any trading market for the Shares will exist following the
Offering or that investors in the Shares will be able to resell their Shares at
or above the Offering Price. The Offering Price for the Shares will be
determined through negotiations between PCI and the Underwriter's
Representative, and may not be indicative of the market price of the Shares
after the Offering. See "Underwriting."
11
USE OF PROCEEDS
The net proceeds we receive from the sale of 2,000,000 Shares, assuming an
Offering Price of $5.01 per Share, and after deducting underwriting discounts
and commissions and estimated Offering expenses, are estimated to be $8,342,400
($9,650,000 if the Underwriter's over-allotment option is exercised in full). We
expect to use the proceeds (assuming no exercise of the Underwriter's
over-allotment option) as follows:
Application of Approximate Approximate
Net Proceeds Dollar Percentage
-------------- Amount of Net
----------- Proceeds
--------
Repayment of Indebtedness(1)............... $1,000,000 12.0%
Purchase of Cigars and Accessories(2)...... 1,900,000 22.8
Purchase of Humidors(3).................... 4,287,400 51.4
Sales and Marketing (4).................... 700,000 8.4
Working Capital and general corporate
purposes(5)................................ 455,000 5.4
------- ----
Total................................ $8,342,400 100.0%
========== =====
(1) Represents the repayment of the Bridge Notes issued in 1997 with a total
principal amount of $1,000,000. The principal of the Bridge Notes accrues
interest at a rate of 8% per annum until the Offering and at 16% per annum
thereafter. The Bridge Notes are due on the earlier of the consummation of
this Offering or two years from this issuance.
(2) We will need to maintain adequate inventory levels to support high sales
turnover at retail. Stores will keep only enough stock to fill their
countertop humidor due to the care required to maintain cigar freshness. In
addition, deposits are required on some overseas production orders.
(3) Humidors represent a major use of proceeds from PCI to supply thousands of
stores with custom-designed countertop display humidors.
(4) Sales and marketing expendiures represent spending for trade relations
events and support to further develop our relationships with major charge
accounts and national distributors.
(5) We intend to maintain a minimum level of working capital for general
corporate purposes such as advertising, customer education, deposits and
other prepaid assets.
We intend to use these net proceeds to continue, and further accelerate,
the rollout of PCI Cigar Program with national chain accounts throughout the
United States and Canada. Our goal 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 over $1,000,000 to retire the Bridge Financing
indebtedness and accrued interest. See "INTERIM FINANCING -- Bridge Financing
and Bridge Warrants."
12
CAPITALIZATION
The following table sets forth the capitalization of PCI as of March 31,
1997, and as adjusted to reflect the sale in April to June 1997 of Bridge
Warrants to purchase 400,000 Common Shares, and giving effect to the sale of
2,000,000 Shares at $5.01 per Share, and exercise of the Bridge Warrants.
MARCH 31, 1997
ACTUAL AS ADJUSTED
------ -----------
(Unaudited)
Long-term liabilities due to Stockholder: $ 110,000 $ 0
Stockholders' equity:
Common Stock, no par value per share,
10,000,000 shares authorized, 1,480,500
shares issued and outstanding and
3,880,500 shares issued and outstanding as
adjusted......................................... 217,050 9,459,450
Accumulated deficit.............................. (153,517) (153,517)
--------- -----------
Total Stockholders' equity......................... 63,533 9,305,933
--------- -----------
Total Capitalization.......................... $ 173,533 $ 9,305,933
========= ===========
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 March 31, 1997, the net tangible book value of the Company was ($22,403)
or ($.02) per share of Common Stock. At March 31, 1997, after giving effect to
the sale of the Common Stock offered hereby at an assumed initial Offering price
of $5.01 per share (less underwriting discounts and commissions and estimated
expenses of this Offering) and the exercise of the Bridge Warrants, the as
adjusted pro forma net tangible book value at that date would be $9,273,547 or
$2.39 per share. This represents an immediate increase in the adjusted pro forma
net tangible book value of $2.41 per share to existing stockholders and an
immediate dilution of $2.62 per share to new investors, or approximately 52% of
the assumed Offering price of $5.01 per share.
13
The following table illustrates the per share dilution to new investors
without giving effect to the results of operations of PCI subsequent to March
31, 1997:
Assumed public offering price................................. $5.01
Pro forma net tangible book value at March 31, 1997........ ($ .02)
Increase attributable to new investors..................... $2.41
Net tangible book value after Offering........................ $2.39
-----
Dilution to new investors..................................... $2.62
=====
The following table summarizes 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 stockholders and by new
investors in this Offering.
Total Consideration
Shares ------------------- Average
Number Percent Amount Percent Price
------ ------- ------ ------- Per
Share
-----
Existing Shareholders 1,480,500 33.15% $ 217,050 1.94% $ .15
Bridge Warrants 400,000 10.31% $ 1,000,000 8.91% $2.50
Public Investors 2,000,000 51.54% $10,020,000 89.15% $5.01
--------- ----- ----------- -----
Total 3,880,500 100.00% $11,237,050 100.00%
========= ====== =========== ======
The above table assumes no exercise of (i) the Underwriters' over-allotment
option, (ii) the Representative's Warrants. "Risk Factors - Immediate and
Substantial Dilution," "Underwriting," and "Description of Securities."
14
SELECTED HISTORICAL AND PROFORMA CONSOLIDATED FINANCIAL INFORMATION
Set forth below is selected Historical and proforma Consolidated financial
information with respect to PCI from June 1, 1996 (inception of cigar
distribution activities) to March 31, 1997. The selected consolidated financial
information has been derived from the consolidated financial statements which
appear elsewhere in this Prospectus. This data should be read in conjunction
with the consolidated financial statements of PCI and their related notes.
JUNE 1, 1996
TO
MARCH 31, 1997
HISTORICAL PRO FORMA(1)
---------- (Unaudited)
-------------
Consolidated Statement of Operations:
Sales $ 845,571 $ 845,571
Cost of sales 643,790 643,790
--------- ---------
Gross Profit 201,781 201,781
Selling, General and Administrative 333,776 333,776
--------- ---------
Loss from operations (131,995) (131,995)
Interest expense and Miscellaneous 21,522 1,722
Net loss (153,517) (133,717)
========= =========
Weighted average shares outstanding 1,480,500 3,880,500(2)
========= =========
Loss per share $(.10) $(.03)
========= =========
CONSOLIDATED BALANCE SHEET DATA:
Working capital (deficiency) (82,169) 9,103,781
Total assets 523,461 9,655,861
Total liabilities 459,928 349,928
Stockholders' equity $ 63,533 $ 9,305,933
(1) Assumes issuance of the Offering receipt conversion of the Bridge
Financing, and conversion of the Warrants.
(2) Assumes issuance of 2,000,000 shares in the Offering and conversion of the
Bridge Warrants into 400,000 shares of common stock.
15
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 fresh, premium cigars in high traffic retail
outlets.
To date, we have placed the PCI Cigar Program, which includes supplying
humidors, cigars, service, and information in over 1,400 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 as many high volume convenience, gas, grocery and drug stores and
outlets as possible.
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.
The original founders, Colin Jones and Greg Lambrecht, have been supplying and
distributing premium cigars through convenience stores and other high volume
outlets since June, 1996, and 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 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, Mexico and
the Philippines. The Company is expanding its 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. Over the next five years, we
believe that we have the opportunity to place the PCI Cigar Program in over
50,000 retail stores.
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 their 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
have been eliminated in consolidation.
16
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:
Sales 100.0%
Cost of sales 76.1
-----
Gross margin 23.9
Selling, general, and
administrative expenses 39.5
-----
Loss from operations (15.6)
Interest and miscellaneous 2.5
-----
Net Loss (18.1)%
=====
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.
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 $333,776, or 39.5% 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 and the anticipated
Initial Public Offering.
Seasonality
PCI has experienced consistent growth in monthly sales volume throughout
its first year of operations, hampered only by inadequate capital to fund
expansion. However, as PCI increases its market penetration, it may experience
some seasonality in revenues that is not currently discernable.
17
Liquidity and Capital Resources
PCI requires capital to market its PCI Cigar Program, obtain additional
inventory and humidors to supply its increased distribution network, and develop
the infrastructure necessary to support PCI's expanding business. During the
period from the date of inception, June 1, 1996, through March 31, 1997, PCI
financed its operating and business development activities through Notes Payable
of approximately $180,000, and sales of Common Stock of approximately $207,000.
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.
Subsequent to March 31, 1997, PCI obtained additional bridge financing in
the amount of $1,000,000 (inclusive of conversion of existing debt of $100,000)
which has been used primarily to fund additional expansion of operations. PCI
currently has no other credit facilities available.
We believe that the net proceeds of this Offering, together with cash flows
from operations and a business credit line, will be sufficient to meet our
anticipated expansion and working capital needs for the next 24 months. However,
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 either before or after the end of the 24-month period.
There can be no assurance that acceptable financing for future transactions can
be obtained.
18
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. PCI currently
distributes premium cigars in 22 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.
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.
We have developed and will continue to develop relationships with tobacco
suppliers, and are expanding our commercial and technical support systems to (i)
secure a variety of sources for products, (ii) ensure product quality, and (iii)
maximize cost savings.
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 and are currently servicing over 1,400 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 and Florida; 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
19
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 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. Led by growth in premium cigars, the
U.S. cigar market grew at an annual rate of 8.7% from 1993 to 1996.
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. Sale
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.
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 Insider(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 and the growing interest of this group 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.
20
"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. 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. Unit
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.
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
domestic, machine made cigars that use short filler tobacco and homogenized
sheet wrapper. Little cigars are not made with binders. Although little cigars
are traditionally not humidified, we sell little cigars in our custom display
humidors. PCI distributes a significant number of unfiltered little cigars.
The following table illustrates the trends in unit consumption and retail
sales for the premium and mass market segments of the U.S. cigar industry from
1991 to 1996(a):
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
(in millions)
UNIT SALES:
PREMIUM 97.2 98.9 109.5 125.5 163.9 274.3
MASS MARKET 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4 4,122.3
------- ------- ------- ------- ------- -------
TOTAL 3,530.5 3,518.1 3,423.3 3,718.1 3,970.3 4,396.3
======= ======= ======= ======= ======= =======
RETAIL SALES $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0 --
21
(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.
Currently, all segments of the premium cigar industry are growing rapidly,
from the low and moderately-priced premium cigars which we market to the large
"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. 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 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 its wholly-owned subsidiary CAN-AM currently
distributes or engages in any transactions involving Cuban cigars or any
products of Cuban origin in any of their operations, whether in the United
States, Canada or elsewhere. PCI's standard form supplier agreement strictly
prohibits its suppliers from providing any product containing any component of
Cuban origin.
Cigar Purchasing; Private Label and Custom Brands
Although historically PCI's largest supplier accounted for approximately
71% of our cigar purchases (and a higher percentage in Canada), 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.
We have an exclusive supply contract with a company in the Dominican
Republic which currently can manufacture 60,000 cigars a month and potentially
source up to an additional 240,000 premium cigars per month. This contract
expires in July 1997, and is currently being renegotiated. 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 private
label cigars manufactured to our specifications by various suppliers.
22
We are negotiating with additional suppliers and customers to expand our private
label operations, although we cannot assure that we will be successful. We will
continue to purchase cigars manufactured by others as they become available on
the open market, from time to time. Our cigars are generally purchased from
various suppliers to meet demands at our sales price points.
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.
Our Expansion Plans
Our strategy for continuing growth and achieving earnings 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 continually negotiating 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 which 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 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.
Regional Direct Distribution and Sales Companies. We have entered into
arrangements or agreements with three 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 will, in
turn, sell, deliver direct to the stores, service, and merchandise the PCI Cigar
Program. We have provided distributors with large humidors for quantity storage
of cigars at distribution warehouses. We believe that these relationships will
23
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.
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 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 are expanding the
PCI Cigar Program through the McLane Company and other distributors that
currently deliver items every day 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 who are already serviced by these large distributors. By
using 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 telemarketers 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.
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 Insider 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
24
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.
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.
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 Corporation of 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 all 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 are
approximately $400,000 (unaudited) per quarter or $1,600,000 (unaudited) per
year.
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. Over the past
several months, CAN-AM has secured over 625 retail outlets in Canada and is
rapidly expanding to large chain stores and through distributors.
U.S. Sales. Our United States operations distribute to 802 stores in 18
states. PCI U.S. sales in the month of June will be approximately $150,000
(unaudited), or $1,800,000 (unaudited) per year.
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Rose Hearts. The PCI Cigar Program has been established in the northwest
United States by Rose Hearts and Greg Lambrecht. Rose Hearts, as a distributor,
services 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. We intend to expand into other stores across the region.
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 all 7-Eleven corporate stores
and in all franchise stores that request the PCI Cigar Program. There are over
5,300 7-Eleven stores across the United States. Under this agreement, we intend
to add 500 stores a month through June, at which time we hope to increase to
1,000 new stores a month until our 7-Eleven rollout is complete. We currently
have a list of over 2,000 7-Eleven stores that are currently approved for
delivery of humidors and cigars in June and July. We expect to be in the
majority of those stores by the end of 1997.
McLane. We have been negotiating with the McLane Company ("McLane") for a
master agreement to place and service the PCI Cigar Program in Circle K and
other retail accounts which McLane services in the United States. Our
competitors are vying for that agreement. McLane distributes products to over
35,000 retail outlets nationwide. We believe that currently PCIis 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 in Las Vegas and one McLane account in Arizona, we
have placed a large distributor humidor 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 21 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 20
Associated Grocers stores.
TexacoStar Mart. We service 22 Texaco Star Mart convenience stores in the
Northwest, and are negotiating to expand the PCI Cigar Program with Texaco.
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") in Las Vegas and
displayed our premium cigars and in-store humidors. Our humidors advertise the
PCI
26
logo, name, and toll free number. We recently hired a celebrity spokesman, Arie
Luyendyk, to help promote the PCI Cigar Program.
We intend to grow rapidly by expanding the PCI Cigar Program distributing
moderately-priced name brand and private label quality 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. PCI has grown quickly with investor capital and bridge financing, but we
have reached a point where substantial outside capital is needed to maintain
expansion of 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 use direct
distribution, and distribution through independent local/regional and national
distributors. We offer and recommend that a PCI sales representative visit each
local area to educate store managers and regional supervisors about the 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 employees 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 shelf 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 humidor
to maintain constant humidity. Point of purchase signs which
27
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.
Our Cigars. We distribute moderately-priced imported premium cigars, a
limited number of higher-priced finest quality premium cigars, and a significant
number of mass-market and little cigars, as well as 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.
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 little 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
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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.
Competition
The cigar distribution industry is dominated by a small number of companies
which are well known to the public. We believe that, as a distributor of premium
cigars, 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. A number of larger, well-known cigar manufacturing and wholesale
companies, along with major cigarette manufacturers, have not yet entered the
retail distribution market, including 800 JR Cigar Company, Inc., Consolidated
Cigar Company, Culbro Corporation, General Cigar Company, Swisher, Caribbean
Cigar Company, US Tobacco and others. Those companies may do so in the future.
Many existing and potential competitors have larger resources than PCI and
would, if they enter the Cigar distribution market, constitute formidable
competition of our business. We cannot assure you that PCI can compete
successfully in any market.
Government Regulation; Tobacco Industry Litigation
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. Regulations include labeling requirements, limitations on
advertising and prohibition of sales to minors, laws restricting smoking from
public places including offices, office buildings, restaurants and other eating
establishments. In addition, cigars have been subject to excise taxation at the
Federal, state and local level, and those taxes may increase in the future.
Tobacco products are especially likely to be subject to increases in excise
taxation. 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.
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 thousand cigars, and again increased to 12.75%,
capped at $30.00 per thousand
29
cigars, effective January 1, 1993. However, the base on which the federal excise
tax is calculated was lowered effective January 1, 1991 to the manufacturer's
selling price, net of the federal excise tax and certain other exclusions. The
excise tax on pipe tobacco increased effective January 1, 1993 to $0.675 per
pound. 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
thousand cigars effective January 1, 1991. The excise tax on little cigars
increased to $1.125 per thousand 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.
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.
Health Regulations. 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 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 have 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; 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 addition, in recent years,
there have been proposals to increase excise taxes on cigarettes. 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.
30
EPA Litigation. The U.S. Environmental Protection Agency (the "EPA") has
recently published a report with respect to the respiratory health effects of
passive smoking, which 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 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.
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. Places where the majority of states have prohibited smoking include: any
public building designated as non-smoking; elevators; public 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 this type of legislation and any other related
legislation could have a materially adverse effect on PCI's cigar business.
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.
California-Proposition 65. Although federal law has required health
warnings on cigarettes since 1965, there is no federal law requiring that cigars
or pipe tobacco 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.
31
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.
Tobacco Industry Litigation. 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.
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.
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.
32
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.
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.
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, 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
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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.
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 adversely impact PCI.
Intellectual Property Rights
We have obtained trademark registrations from the Arizona Secretary of
State's office for the name "Premium Cigars International" and the initials
"PCI." PCI has not yet filed any tradename or trademark registration
applications with the United States Patent and Trademark Office. No assurance
can be given that PCI will be granted the right to use any trademarks or
tradenames. PCI owns no patents.
34
Facilities
PCI subleases, from an independent third party, approximately 8,500 square
feet for its corporate offices, warehouse, humidor storage and distribution
facilities located in the Scottsdale Airpark area of Scottsdale, Arizona. The
written 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.
CAN-AM occupies approximately 1,900 square feet of an office/warehouse
facility in Burnaby, British Columbia (a suburb of Vancouver). CAN-AM's
corporate offices, a walk-in humidor and warehouse space are leased on a
month-to-month basis for approximately $1,000 per month.
Distribution of products in the Northwest United States is handled through
the Rose Hearts facility near Seattle, Washington.
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 June 24, 1997, PCI 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 PCI's employees are represented by
a labor union and PCI believes 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.
35
MANAGEMENT
Executive Officers and Directors
The executive officers and directors of PCI are as follows:
NAME AGE POSITION
William L. Anthony 54 Chairman of the Board of
Directors and Consultant
Steven A. Lambrecht 46 Director, President and Chief
Executive Officer
David S. Hodges 41 Director and Consultant
Colin A. Jones 31 Director, Vice President of
International Sales
Greg P. Lambrecht 35 Secretary, Treasurer, Vice
President of National Sales
Karissa B. Nisted 41 Chief Financial Officer and
Controller
Scott I. Lambrecht 26 Assistant Secretary
Jim Stanley 34 Vice President of Purchasing
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
36
Company, a sole proprietorship, and was co-owner of Forum Development and
Construction Company, Inc., a Washington corporation. He also founded Scottsdale
Development and Construction Company, Inc., an Arizona corporation, 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.
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 International Sales, 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 working time to PCI. Mr. Jones studied Business
Administration at 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. 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.
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
37
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.
Scott I. Lambrecht has been the Assistant Secretary of PCI since May 31,
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 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.
Jim 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 over five years
additional experience in the restaurant industry. Mr. Stanley received a B.A. in
Business Administration from Washington State University in 1985.
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 four (4) members. Upon
completion of the Offering, and for five years thereafter, the Representative,
W.B. McKee Securities, Inc., has the right to nominate one (1) member of the
Board of Directors to serve the standard term of a 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 (1) to nine (9) members.
Executive Compensation
PCI was incorporated in December 1996 and did not commence operations until
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.
38
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other Securities All
Annual Restricted Under- Other
Compen- Stock lying LTIP Compen-
Name and sation Award(s) Options/ Payouts sation
Principal Position Year Salary($) Bonus($) ($) ($) SARs(#) ($) ($)
Steven A. Lambrecht, 1997 $7,500 -- -- -- -- -- --
Chairman of the
Board, Chief
Executive Officer
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 will be entitled to additional
benefits, such as stock options and bonuses which may be offered in the future
to comparable executives. 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.
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 will
be entitled to additional benefits, such as stock options and bonuses which may
be offered in the future to comparable executives. 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.
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 will
be entitled to additional benefits, such as stock options and bonuses which may
be offered in the future to comparable executives. 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.
39
We also have arrangements with the following consultants, each of whom is
also a director.
David S. Hodges is a director. He 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.
William L. Anthony, the Chairman of PCI's Board, has also acted as a
consultant to PCI since April 1, 1997. 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 expenses.
PCI has 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.
CERTAIN TRANSACTIONS
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 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 one hundred percent (100%) of its voting stock of CAN-AM, and three others
held non-voting shares. As set forth in PCI's consolidated financial statements
for the fiscal year ended March 31, 1997, the cost of the net assets to J&M and
Rose Hearts and the amount at which CAN-AM acquired the net assets was the same
as its historical net cost in J&M and Rose Hearts. The combined cost, net of
liabilities assumed, was approximately $1,000.
40
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. As adjusted by the May 31, 1997 3:1
stock split (as defined below "3:1 Stock Split"), and including shares issued on
December 31, 1996 and January 9, 1997, CAN-AM's five shareholders received
817,500 shares of PCI Common Stock, representing all of the then-issued and
outstanding shares of Common Stock of PCI. Mr. Jones received 371,250 or 45.4%
and Greg Lambrecht received 363,750 or 44.5%.
Jones/Lambrecht Notes Receivable. On December 31, 1996, Colin A. Jones and
Greg P. Lambrecht each made long term promissory notes to PCI for $43,112.50.
The notes accrue interest at six percent (6%) 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.
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.
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. Neither PCI
nor its wholly-owned Canadian subsidiary CAN-AM currently distributes any cigars
or other products of Cuban origin either in the United States or Canada. PCI's
standard form supplier agreement strictly prohibits its suppliers from providing
any product containing any component of Cuban origin.
Luyendyk Endorsement Agreement. On May 1, 1997, PCI entered an Endorsement
Agreement with Arie Luyendyk under which PCI would issue 15,000 shares of Common
Stock (as adjusted for the 3:1 Stock Split) to Mr. Luyendyk subject to a
six-month vesting schedule. In order to meet its obligations under the
Endorsement Agreement without diluting the relative security positions of other
shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by the
3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer and
Chairman, Steven A. Lambrecht, at $0.33 per share.
Rose Hearts Distributorship Agreement. On June 13, 1997, PCI entered a
Distributorship Agreement with Rose Hearts for the non-exclusive distribution to
Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho,
Oregon, Washington and Northern California. The agreement provides that any
master agreement with a national PCI account or national distributor shall
supersede the Rose Hearts agreement. The commission payable to Rose Hearts,
under the agreement will be no greater than that paid to national
distributorship accounts. 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.
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.
41
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. As a
result of the settlement, PCI will repay $10,000 to one of Mr. Barton's lenders,
the loan was reduced to $100,000 and Mr. Barton converted the loan into Bridge
Financing (See "INTERIM FINANCING - Bridge Financing"), which includes an 8%
Note and warrants to purchase 40,000 shares of PCI Common Stock at fifty percent
(50%) of the Offering Price. Greg P. Barton is a 7.56% beneficial owner of PCI's
Common Stock. Greg P. Lambrecht and Colin A. Jones own and control Rose Hearts
and J&M, respectively, are officers and directors of CAN-AM and are controlling
shareholders, officers and/or a director of PCI.
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 has
communicated to PCI that he believes he has rights to convert his debt to Common
Stock of PCI. 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.
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 13.34%
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 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 (1) year thereafter. PCI also
agreed to obtain, within 30 days after completion of this Offering to
42
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 (5) years, subject to appropriate approvals
and the provisions of PCI's Bylaws.
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.
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 June 24, 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 June 24, 1997 as adjusted for the 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:
43
Security Ownership of Certain Beneficial Owners
(1) (2) (3) (4)
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
Common Colin Jones 368,250 24.87%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Greg P. Lambrecht 360,750(2) 24.37
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Steven A. Lambrecht 197,500(2) 13.34
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Lincoln Heritage Life [220,000](1)(3) 13.09
Insurance Company
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Londen Insurance Group [220,000](1)(3) 13.09
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Life of Boston [120,000](1)(3) 7.59
Insurance Company
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Greg S. Barton [115,000](1) 7.56
17403 NE 45th Street
Redmond, WA 98036
Common William L. Anthony [106,000](1) 6.54
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Peter G. Charleston 90,000(2) 6.08
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Scott I. Lambrecht 86,250(2) 5.83
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Corey A. Lambrecht 75,000(2) 5.07%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
44
(1) Includes shares which may be beneficially acquired by the exercise of stock
warrants within 60 days as follows: Greg S. Barton, [40,000] @@________,
William L. Anthony [40,000] @@_________, Lincoln Heritage Life Insurance
Company, [200,000] @@________, Life of Boston Insurance Company [100,000]
@@_________.
(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.
(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.
45
Security Ownership of Management
(1) (2) (3) (4)
Title of Name and Address of Amount and Nature of Percent
Class Beneficial Owner Beneficial Ownership of Class
- ----- ---------------- -------------------- --------
Common Colin Jones 368,250 24.87%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Greg P. Lambrecht 360,750(2) 24.37
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Steven A. Lambrecht 197,500(2) 13.34
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common William L. Anthony [106,000](1) 6.54
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Scott I. Lambrecht 86,250(2) 5.83
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common David S. Hodges [20,000](1) 1.33
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common James B. Stanley 26,250 1.77
15651 N. 83rd Way #3
Scottsdale, AZ 85260
------------------------------------------------------------------------------
Common All Officers and Directors 1,165,000(1)(2) 75.62%
as a group (7 persons)
(1) Includes shares which may be acquired by the exercise of options or
warrants within 60 days as follows: William L. Anthony, [40,000] @@_______
shares, David S. Hodges, [20,000] @@ _________ shares.
46
(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.
Shareholders and Voting Agreement. On January 1, 1997, certain shareholders
entered a Shareholders and Voting Agreement. 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. 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 withPCI 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).
INTERIM FINANCING AND SELLING SHAREHOLDERS
Bridge Financing and Bridge Warrants. Between March and June 1997, ten (10)
accredited investors ("Bridge Investors") loaned PCI a total amount of
$1,000,000 (the "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. Inreturn for their loans, Bridge Investors
received promissory notes from PCI ("Bridge Notes") and warrants to purchase
shares of PCI Common Stock at fifty percent (50%) of the Offering Price ("Bridge
Warrants").
47
The following sets forth the names of the Bridge Investors, who are also
selling shareholders ("Selling Shareholders") in this Offering, the amount of
their investment, the number of shares of Common Stock that they are entitled to
purchase under the Bridge Warrants, and the percentage of their beneficial
ownership before and after the Offering:
Number of
Common Shares Percent Percent
Entitled to Owned Owned
Loan Purchase/Shares Prior to After
Name Amount Being Offered Offering Offering
- ---- ------ ------------- -------- --------
Walter Adrushenko $ 50,000 [20,000]_________ 1.33 (6)
William L. Anthony(1) $ 50,000 [20,000]_________ 6.54(5) 5.73
Greg S. Barton $ 100,000(4) [40,000]_________ 7.56(5) 5.07
Mary A. Davis $ 100,000 [40,000]_________ 2.63 (6)
David S. Hodges(1) $ 50,000 [20,000]_________ 1.33 (6)
Anthony Holden $ 50,000 [20,000]_________ 1.33 (6)
William B. McKee(2) $ 50,000 [20,000]_________ 1.33 (6)
Life of Boston Insurance $ 250,000 [100,000]________ 7.59(5) 1.35
Company(3)
Lincoln Heritage Life $ 250,000 [100,000]________ 13.09(5) 1.35
Insurance Company(3)
Martin B. Perlman $ 50,000 [20,000]_________ 1.33 (6)
----------
Totals: $1,000,000 400,000
(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
of the securities issued under this Prospectus.
(3) Beneficially owned and controlled by the Londen Insurance Group.
(4) Conversion of debt of CAN-AM. See "Certain Transactions."
(5) Includes other beneficial holdings of such persons as follows: William L.
Anthony, 86,000, Greg S. Barton, 75,000, Life of Boston Insurance Company,
20,000, Lincoln Heritage Life Insurance Company, 120,000.
(6) Less than 1%.
The Bridge Notes accrue eight percent (8%) annual interest until the
closing of the Offering under this Prospectus. After the Offering closes, the
Bridge Notes bear interest at sixteen percent (16%). PCI intends to repay the
Bridge Notes using proceeds from the Offering.
48
Holders may exercise Bridge Warrants during the five-year period commencing
on the completion date of the Offering. It is possible that federal or state
regulators, the NASD, marketofficials or the Underwriter may require contractual
restrictions for a period following the date of this Prospectus. The Bridge
Warrants contain anti-dilution provisions.
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 Selling Shareholders. PCI will not receive any proceeds from the
sale by the Selling Shareholders of the shares of Common Stock being sold by
them. Shares being sold pursuant to this Prospectus may be sold from time to
time in transactions (which may include block transactions by or for the account
of the Selling Shareholders) in the over-the-counter market, on the Nasdaq
SmallCap Market 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 securities may be transferred by gift.
Selling Shareholders may sell their shares directly to purchasers, through
broker-dealers acting as agents for the Selling Shareholders, or to
broker-dealers who may purchase shares as principals and thereafter sell the
securities from time to time in the over-the-counter market, in negotiated
transactions or otherwise. The broker-dealers, if any, may receive compensation
in the form of discounts, concessions or commissions from the Selling
Shareholders and/or the purchasers from whom such broker-dealer may act as
agents or to whom they may sell as principals or otherwise (which compensation
as to a particular broker-dealer may exceed customary commissions).
Under applicable rules and regulations under the Exchange Act, any person
engaged in the distribution of the Selling Shareholder's securities may not
simultaneously engage in market-making activities with respect to any securities
of PCI during the applicable "cooling-off" period (at least two and possibly
nine business days) prior to the commencement of such distribution. Accordingly,
in the event Underwriters of PCI's initial public offering is engaged in a
distribution of a Selling Shareholder's securities, it will not be able to make
a market in PCI's securities during the applicable restrictive period. However,
the Underwriters have not agreed to and are not obligated to act as
broker-dealer in the sale of any Selling Shareholder's securities and the
Selling Shareholders may be required, and in the event the Underwriter is a
market-maker, will likely be required, to sell such securities through another
broker-dealer. In addition, each Selling Shareholder desiring to sell securities
will be subject to the applicable provisions of the Exchange Act and the rules
and regulations thereunder, including without limitation Rules 10b-6 and 10b-7,
which provisions may limit the timing of the purchases and sales of shares of
PCI's securities by such Selling Shareholders.
The Selling Shareholders and broker-dealers, if any, acting in connection
with such sales might be deemed to be "underwriters" within the meaning of
Section 2(11) of the Securities Act
49
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 Selling Shareholders that the anti-manipulative rules
under the Securities Exchange Act of 1934, Rules 10b-2, 10b-6 and 10b-7, may
apply to their sales in the market and has furnished each of the Selling
Shareholders with a copy of these rules. PCI has also informed the Selling
Shareholders of the need for delivery of copies of this Prospectus.
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"), whereby each issued and
outstanding share of PCI's Common Stock was reclassified as three (3) 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 holdersof 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 held of record on all matters submitted to a vote of stockholders. Holders
of Common Stock are entitled to share in such dividends as the Board of
Directors, in its discretion, may declare from funds legally available. In the
event of liquidation, each outstanding share entitles its holder to participate
ratably in the assets remaining after payment of liabilities. Presently
1,480,500 shares of Common Stock are issued and outstanding, and upon completion
of this Offering, assuming the Underwriters do not exercise their over-allotment
option, 3,480,500 shares of Common Stock will be outstanding.
Stockholders 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, and there are no redemption or sinking fund provisions with regard to the
Common Stock. All outstanding shares of Common Stock are, and those issuable
upon exercise of the outstanding Warrants will be when issued, validly issued,
fully paid, and nonassessable. Stockholders have cumulative voting rights as
provided by Arizona law.
Shares Eligible for Future Sale. Other than the outstanding shares of
Common Stock issued pursuant to this Offering, all of the presently issued and
outstanding shares of Common Stock are "restricted securities" as that term is
defined under Rule 144 promulgated under the
50
Securities Act. 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 connection with 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. Affiliates of PCI may include its directors,
executive officers and persons directly or indirectly owning 10% or more of the
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 its acquisition 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 such 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 Common Stock. Of the 1,480,500 presently
outstanding shares of Common Stock, other than those issued in this Offering, no
shares of Common Stock will become eligible for sale pursuant to Rule 144 prior
to December 31, 1997. Thereafter, at various times through March 10, 1998,
1,480,500 shares of Common Stock will become eligible for sale pursuant to Rule
144.
In addition, the holders of all 1,480,500 shares of Common Stock currently
issued have agreed that they will not sell their shares for 18 months from the
date of this Prospectus, without the prior approval of the Underwriter.
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.
The payment of cash dividends will be
51
considered by PCI's Board of Directors based upon its results of operations,
cash flows, financial condition and liquidity.
UNDERWRITING
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. ________________
_____________________________________ ________________
_____________________________________ ________________
Total
================
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 hereby if any of the Shares are
purchased.
W.B. McKee Securities, Inc. (the "Representative") as representative of the
Underwriters, has advised PCI that the Underwriters propose to offer the shares
purchased by them directly to the public at the offering price set forth on the
cover page of this Prospectus and to certain dealers at a price that represents
a concession of $________ per Share, or ______% per Share. After the initial
public offering of the Shares, the offering price and the selling terms may be
changed by the Underwriters.
We have granted the Representative, as an Over-Allotment Option exercisable
not later than 45 days after the date of this Prospectus, the option to purchase
up to _______ Shares (equal to 15% of the number of Shares sold in the
offering), at the public offering price, less the underwriting discounts and
commissions set forth on the cover page of this Prospectus, solely for the
purpose of covering any over-allotments.
We have agreed to pay the Representative a non-accountable expense
allowance in the amount of 3% of the Offering proceeds received from the sale of
the Shares, which is estimated at $__________, $25,000 of which has already been
paid, or $_____________ if the Over-Allotment Option is exercised.
52
At the closing of this Offering, PCI will sell to the Representative, at a
price of $.01 each, Representative's Warrants to purchase up to ______ shares
(one share for every ten shares sold in this Offering, exclusive of Warrants
sold under the Over-Allotment Option). 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 $________ per share (120% of the
public offering price of the shares). Upon exercise of cash Representative's
Warrant we will issue one share of Common Stock The Representative's Warrants
will contain anti-dilution provisions providing for appropriate adjustments in
the event of 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 they are exercised.
The Representative's Warrants may not be transferred for one year from the date
of this Prospectus, except to officers of the Representative. After one year
from the date of this Prospectus, if a transfer of a Representative's Warrant
occurs to a party not an officer of the Representative, then the
Representative's Warrant transferred must be immediately exercised.
For the period during which the Representative's Warrant is exercisable,
the holder(s) will have the opportunity to profit from a rise in the market
value of the Common Stock, with a resulting dilution in the interest of the
other stockholders of PCI. The holder(s) of the Representative's Warrants can be
expected to exercise them at a time when PCI would, in all likelihood, be able
to obtain any needed capital from an offering of its unissued Common Stock on
terms more favorable to PCI than those provided for in the Representative's
Warrant. Such facts may adversely affect the terms on which PCI can obtain
additional financing.
We have granted certain demand and piggyback registration rights with
respect to the securities issuable upon exercise of the Representative's
Warrants under the Securities Act. PCI will register the shares underlying the
Representative's Warrants and Representative's Stock Warrants. The
Representative's Unit Warrants provide that on one occasion, upon the request of
the Representative, 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
53
Warrants and/or underlying securities and use its best efforts to keep the
registration statement under the Securities Act effective for a nine-month
period following the effective date. We will bear the cost of such amendment or
registration statement. If PCI files a registration statement under the
Securities Act relating to an equity offering at any time during the five-year
period following the date of this Prospectus, the holders of the
Representative's Unit Warrants or underlying securities will have the right,
subject to certain conditions, to 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 Representative have agreed to
indemnify each other against certain liabilities in connection with the
Registration Statement, including liabilities under the Securities Act. Such
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 any such outstanding Common Stock or Common Stock issuable
upon exercisable of options for a period of eighteen months after completion of
this Offering without prior consent of the Representative. See "PRINCIPAL
STOCKHOLDERS."
Uponclosing of the Offering, the Representative will have the right to
nominate one member of the Board of Directors to serve for a five (5) year term.
The foregoing is a brief summary of certain provisions of the Underwriting
Agreement and does not purport to be a complete statement of its terms and
conditions. A copy of the Underwriting Agreement is on file with the Commission
as an exhibit to the Registration Statement of which this Prospectus is a part.
See "AVAILABLE INFORMATION."
LEGAL MATTERS
Titus, Brueckner & Berry, P.C., 7373 North Scottsdale Road, Scottsdale
Centre, Suite B-252, Scottsdale, Arizona 85253, counsel for PCI, will give their
opinion that the shares of Common Stock offered in this Prospectus are validly
authorized and issued. Streich Lang, P.A. has represented the 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 the authority of that firm as experts in accounting and
auditing.
54
Engagement of Independent Accountants
Semple & Cooper, LLP ("Semple & Cooper") was engaged in 1997 to audit the
consolidated financial statements of PCI for the period beginning June 1, 1996
and ending March 31, 1997. Neither PCI nor CAN-AM had previously engaged
independent accountants to audit their financial statements. General due
diligence disclosures were made to Semple & Cooper in the normal course of
Semple & Cooper's decision regarding whether to undertake the audit. The Company
was not provided with either written or oral advice as to accounting, auditing
or financial reporting issues arising from any discussion with Semple & Cooper
concerning the application of accounting principles to a specific or completed
transaction, the type of audit opinion, or any disagreement, which was an
important factor in the decision to engage Semple & Cooper. The Company is aware
of no disagreements or reportable events with respect to its relationship with
Semple & Cooper.
GLOSSARY
Applicable Requirements Resale restrictions required by SEC
Regulation ss. 230.144 ("Rule 144"), including
holding period, volume limitation, aggregation,
broker transaction, notice filing and availability
of public information requirements.
Bridge Warrants Warrants to purchase shares of PCI's Common Stock
at 50% of the Offering Price.
Bridge Financing Interim financing of $1,000,000 from nine
investors between March and June 1997; Investors
received a promissory note ("Bridge Note") for the
amount of their investment and a warrant ("Bridge
Warrant") to purchase shares of PCI's Common Stock
at 50% of the Offering Price.
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.
55
J&M J&M Wholesale, Ltd., a British Columbia (Canada)
corporation wholly-owned and controlled by Colin
A. Jones, who 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 PCI negotiated with a major convenience store
chain, which 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 An interdealer quotation system for smaller
companies operated by Nasdaq.
Nasdaq The National Automated Dealer Quotation System
operated by The Nasdaq Stock Market, Inc.
Offering Price The price per share printed on the cover of this
Prospectus.
Offering PCI's initial public offering of its Shares under
this Prospectus and registered under its
Registration Statement on Form SB-2.
Over-Allotment-Option Options that PCI has granted to the Underwriter,
exercisable for 45 days from the date of this
Prospectus, to purchase up to an additional
300,000 Shares to cover excess allotments for the
Shares Offered.
PCI Premium Cigars International, Ltd.
PCI Cigar Program PCI's cigar distribution program, including
premium and mass market cigars, humidors, service,
training and sales.
Prospectus This document.
Registration Statement PCI's 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.
56
Representative W.B. McKee Securities, Inc.
Representative Warrants Warrants to purchase 200,000 Shares exercisable at
120% of the Offering Price; issued to the
Underwriter 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.
Share One of the shares of PCI's Common Stock, no par
value.
3:1 Stock Split A 3:1 forward split of PCI's shares of Common
Stock, approved by PCI's shareholders on May 31,
1997.
Transfer Agent and Warrant American Securities Transfer & Trust, Inc.
Agent
Underwriter W.B. McKee Securities, Inc. and others who may be
named in a syndicate of co-underwriters.
Underwriting Discount Compensation to the Underwriter in the form of a
10% discount of Underwriter's purchase price from
the Offering Price at which the Underwriter will
sell the Shares.
"We" Premium Cigars International, Ltd.
ADDITIONAL INFORMATION
PCI filed a Registration Statement on Form SB-2 with the SEC relating to
the securities 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 securities 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 all such contracts or other
57
documents are qualified in their entirety by referring you to the exhibits to
the Registration Statement.
FINANCIAL STATEMENTS
Index to Financial Statements
Independent Auditor's Report ............................................. F-2
Consolidated Balance Sheet ............................................... F-3
Consolidated Statement of Operations ..................................... F-4
Consolidated Statement of Changes in Stockholders' Equity ................ F-5
Consolidated Statement of Cash Flows ..................................... F-6
Notes to Consolidated Financial Statements ............................... F-7
58
PREMIUM CIGARS INTERNATIONAL, LTD.
AND SUBSIDIARY
CONSOLIDATED FINANCIAL STATEMENTS
For The Period From The Date of
Inception, June 1, 1996
Through March 31, 1997
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
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEET
March 31, 1997
ASSETS
Current Assets:
Cash and cash equivalents (Note 1) $ 53,018
Accounts receivable (Notes 1 and 2)
- trade 64,300
- related parties 8,497
Inventory (Notes 1 and 3) 126,337
Prepaid expenses 15,607
---------
Total Current Assets 267,759
---------
Property and Equipment, Net (Notes 1 and 4) 23,055
---------
Other Assets:
Humidors, net (Note 1) 60,486
Notes receivable - related parties (Note 2) 86,225
Organizational costs, net (Note 1) 32,386
Deferred costs (Note 1) 53,550
---------
232,647
---------
$ 523,461
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Note payable (Note 5) $ 50,000
Notes payable - related parties, current portion (Note 2) 19,641
Accounts payable - trade 109,254
Accrued expenses
- tobacco taxes 100,333
- other 70,700
---------
Total Current Liabilities 349,928
---------
Long-Term Liabilities:
Notes payable - related parties, long-term portion (Note 2) 110,000
---------
Commitments: (Note 7) --
---------
Stockholders' Equity:(Note 8)
Common stock - no par value, 10,000,000 shares authorized,
1,480,500 shares issued and outstanding 217,050
Accumulated deficit (153,517)
---------
Total Stockholders' Equity 63,533
---------
Total Liabilities and Stockholders' Equity $ 523,461
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-2
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF OPERATIONS
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997
Net Sales $ 845,571
Cost of Sales 643,790
-----------
Gross Profit 201,781
-----------
Selling, General and Administrative 333,776
-----------
Loss from Operations (131,995)
-----------
Other Income (Expense):
Interest Expense (21,292)
Other 963
Foreign currency transaction loss (1,193)
-----------
(21,522)
-----------
Net Loss $ (153,517)
===========
Loss per Share (Note 1) $ (.10)
===========
Weighted Average Number of Shares Outstanding 1,480,500
===========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-3
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997
Common Stock Total
--------------------- Accumulated Stockholders'
Shares Amount Deficit Equity
------ ------ ------- ------
Balance, June 1, 1996 -- $ -- $ -- $ --
Shares issued for
cash 1,450,500 207,050 -- 207,050
Shares issued for
services 30,000 10,000 -- 10,000
Net loss -- -- (153,517) (153,517)
--------- --------- --------- ---------
Balance, March 31,
1997 1,480,500 $ 217,050 $(153,517) $ 63,533
========= ========= ========= =========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-4
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENT OF CASH FLOWS
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997
Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers $ 782,234
Cash paid to suppliers and employees (827,701)
Interest paid (21,292)
---------
Net cash used for operating activities 66,759
---------
Cash flows from investing activities:
Purchase of property and equipment (23,302)
Purchase of humidors (71,451)
Disbursements for notes receivable - related parties (86,225)
Organizational costs (32,386)
Deferred offering costs (53,550)
---------
Net cash used by investing activities (266,914)
---------
Cash flows from financing activities:
Proceeds from notes payable 50,000
Proceeds from note payable - related party 129,641
Proceeds from issuance of common stock 207,050
---------
Net cash provided by financing activities 386,691
---------
Net increase in cash and cash equivalents 53,018
Cash and cash equivalents at beginning of period --
---------
Cash and cash equivalents at end of period $ 53,018
=========
Reconciliation of Net Loss to Net Cash used for
Operating Activities:
Net Loss $(153,517)
---------
Adjustments to reconcile net loss to net cash
used for operating activities:
Depreciation and amortization 11,212
Stock issued for services 10,000
Changes in Assets and Liabilities:
Accounts receivable
- trade (64,300)
- related parties (8,497)
Inventory (126,337)
Prepaid expenses (15,607)
Accounts payable
- trade 109,254
Accrued expenses
- tobacco taxes 100,333
- other 70,700
---------
86,758
---------
Net cash used for operating activities $ (66,759)
=========
The Accompanying Notes are an Integral Part
of the Consolidated Financial Statements
F-5
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 throughout greater Canada.
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.
Cash and Cash Equivalents:
Cash equivalents are considered to be all highly liquid investments
purchased with a maturity of three (3) months or less.
Accounts Receivable - Trade:
Accounts receivable - trade represents amounts earned but not collected
in connection with the sale of cigars and cigar accessories.
The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as
a percentage of accounts receivable based on a review of individual
accounts outstanding. In the opinion of the management, all accounts
receivable outstanding at March 31, 1997, are considered fully
collectible and therefore, no allowance has been provided for
potentially uncollectible accounts receivable.
F-6
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Inventory:
Inventory quantities and valuation were determined based upon a physical
count, and pricing of same at March 31, 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.
Depreciation expense was $247 for the period from the date of inception,
June 1, 1996 through March 31, 1997.
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.
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-7
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of Significant Accounting Policies, Nature of Operations and Use
of Estimates: (Continued)
Translation of Foreign Currencies:
Account balances and transactions denominated in foreign currencies and
the accounts of the Corporation's foreign operations have been
translated into United States funds, as follows:
Assets and liabilities at the rates of exchange prevailing at
the balance sheet date;
Revenue and expenses at average exchange rates for the period in
which the transaction occurred;
Exchange gains and losses arising from foreign currency
transactions are included in the determination of net earnings
for the period;
Exchange gains and losses arising from the translation of the
Corporation's foreign operations are deferred and included as a
separate component of stockholders' equity.
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 expected to be $5.01 per share.
Pursuant to the Securities and Exchange Commission rules, common stock
issued for consideration below the $5.01 per share Initial Public
Offering price during the twelve (12) months prior to filing the
Registration Statement, have been included in the weighted average
number of shares outstanding from the beginning of the period.
2. Related Party Transactions:
Accounts Receivable - Related Parties:
Accounts receivable - related parties as of March 31, 1997 are, in the
opinion of management, short-term in nature and are non-interest
bearing.
Notes Receivable - Related Parties:
As of March 31, 1997, notes receivable - related parties are comprised
of 6% interest bearing notes from the principal stockholders in the
amount of $86,225. The notes receivable are due on March 31, 1999.
Notes Payable - Related Parties:
At March 31, 1997, notes payable related parties consist of the
following:
Non-interest bearing note to a stockholder, due on demand;
unsecured $ 19,641
36% interest bearing note to a stockholder, with monthly
interest-only payments, due May, 1998; unsecured 110,000
---------
129,641
Less: current portion (19,641)
---------
$ 110,000
=========
F-8
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2. Related Party Transactions: (Continued)
Notes Payable - Related Parties: (Continued)
For the period from the date of inception, June 1, 1996 through March
31, 1997, the Company incurred interest expense in relation to the above
notes payable from related parties in the approximate amount of $19,800.
Subsequent Related Party Transactions:
Subsequent to the balance sheet date, the following related party
transactions occurred:
The Company paid $10,000 of principal on the $110,000 note payable to a
stockholder, and converted the remaining balance into additional bridge
financing, with terms in accordance therewith (See Note 12).
The Company entered into a distributorship agreement with a related
entity allowing for payments of ten percent (10%) to twenty-two percent
(22%) of the sales price as an account servicing fee.
3. Inventory:
As of March 31, 1997, inventory consists of the following:
Cigars $124,684
Cigar accessories 1,653
--------
$126,337
========
4. Property and Equipment:
At March 31, 1997, property and equipment consists of the following:
Equipment $ 3,090
Furniture and fixtures 10,212
--------
13,302
Less: accumulated depreciation (247)
--------
13,055
Equipment held for sale 10,000
--------
$ 23,055
========
5. Note Payable:
As of March 31, 1997, the note 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.
F-9
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Income Taxes:
At March 31, 1997, the Company has available approximately $150,000 of
U.S operating loss carryforwards that may be applied against future
taxable income and will expire in 2012. In addition, the Company has a
Canadian net operating loss carryforward in the approximate amount of
$25,000, expiring through 2004.
The Company has established a valuation allowance equal to the full
amount of the deferred tax asset of approximately $70,000, 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 minimum fee
of $62,400.
Operating Leases:
The Company leased office and warehouse space in Scottsdale, Arizona in
May, 1997, 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 agreements for each of the next three
(3) years, is as follows:
Year Ending
March 31, Amount
--------- ------
1998 $ 75,521
1999 85,270
2000 14,268
--------
$175,059
========
As this lease was executed subsequent to the year end, 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.
8. Stockholders' Equity:
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 2,000,000 common shares at $5.01 per share.
F-10
PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
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. Foreign currency translation gains or losses were
immaterial for the period.
10. Statements of Cash Flows:
Non-Cash Financing and Investing Activities:
During the period ended March 31, 1997, the Company recognized a
financing activity that affected its assets, liabilities and equity, but
did not result in cash receipts or payments. This non-cash activity is
as follows:
Issuance of 30,000 shares of common stock valued at $10,000 for
services rendered.
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.
12. Subsequent Events:
In April 1997, the Company obtained a $650,000 bridge financing loan,
with interest at 8% per annum, and net proceeds of $585,000 due the
earlier of the date of the closing of an Initial Public Offering, or six
(6) months after the offering date, with interest at 16% per annum after
this period if not paid in full. In addition, $100,000 of related party
debt was converted to the same terms as the bridge financing. In June,
1997, an additional $250,000 of bridge financing loans were made, with
net proceeds of $225,000, under the same terms. The bridge financing
also allows the debt holder to exercise a warrant to buy common stock at
fifty percent (50%) of the proposed Initial Public Offering price, with
the number of shares equal to the financing amount divided by the
exercise price.
In April, 1997, the Company paid its line of credit in full and
terminated the agreement.
F-11
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS, AND, IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED ON AS HAVING
BEEN AUTHORIZED BY PCI OR BY THE UNDERWRITER. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY SECURITIES
OFFERED HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION WAS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANYONE TO WHOM IT IS UNLAWFUL TO
MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF PCI OF THE FACTS HEREIN SET
FORTH SINCE THE DATE OF THIS PROSPECTUS.
-------------------
TABLE OF CONTENTS
PAGE
----
Prospectus Summary........................................................... 1
Summary Financial Information................................................ 4
Risks........................................................................ 5
Use of Proceeds.............................................................. 12
Capitalization............................................................... 13
Dilution..................................................................... 13
Selected Historical and Pro Forma Financial Information...................... 15
Management's Discussion and Analysis of Results of Operations................ 16
Business..................................................................... 19
Management................................................................... 36
Certain Transactions......................................................... 40
Principal Shareholders....................................................... 43
Interim Financing and Selling Shareholders................................... 47
Description of Securities.................................................... 50
Dividend Policy.............................................................. 52
Underwriting................................................................. 53
Legal Matters................................................................ 55
Experts...................................................................... 55
Glossary..................................................................... 56
Additional Information....................................................... 58
Financial Statements......................................................... 59
-------------------
UNTIL ______________, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS) ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THE DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
59
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. 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 heor 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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, offices or controlling persons of the registrant,
pursuant to the foregoing provisions, orotherwise, 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 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.
II 1
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
SEC registration fee........................................ $ 9,075.76
NASD corporate finance filing fee........................... $____________*
Nasdaq SmallCap Market listing fee.......................... $____________*
Legal fees.................................................. $175,000**
Miscellaneous............................................... $____________*
Total.................................................. $_____________
- -----------------------
* To be supplied by amendment.
** 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.
(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 for the same consideration 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 shares of CAN-AM:
Name Shares Consideration
---- ------ -------------
Greg P. Lambrecht 363,750 95 CAN-AM "A" Shares (non-voting)
1 CAN-AM "B" Share (voting)
Colin A. Jones 371,250 95 CAN-AM "A" Shares (non-voting)
1 CAN-AM "B" Share (voting)
Greg S. Barton 22,500 6 CAN-AM "A" Shares (non-voting)
Daniel C. Goldman 52,500 4 CAN-AM "A" Shares (non-voting)
Pat Quadrelli 7,500 2 CAN-AM "A" Shares (non-voting)
-------
Total: 817,500 Shares
The issuance of the Common Stock was exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereof.
II 2
(b) On January 9, 1997, PCI issued 15,000 shares of Common Stock to Mike
Rocha as compensation for past services provided to PCI. The issuance of the
Common Stock was exempt from the registration requirements of the Securities Act
pursuant to Section 4(2) thereof.
(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
Jim 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.
(d) On March 5, 1997, PCI's Board of Directors authorized a private
placement of a maximum of 120,000 Shares of PCI Common Stock to its existing
shareholders and 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.
(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, in cash or conversion of
prior debt of CAN-AM. In return for their loan, the Bridge Investors received a
Bridge Note from PCI in the amount of their loan and Bridge Warrants to purchase
shares of PCI Common Stock at fifty percent (50%) of the Offering Price printed
in this Prospectus. The names of the Bridge Investors, the amount of their
investment and the number of shares of Common Stock that they are entitled to
purchase
II 3
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 Section 4(2) thereof
and Rule 506 of the SEC.
(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 would issue 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) shares of its Common Stock from its Chief Executive Officer
and Chairman, Steven A. Lambrecht at $0.33 per share. 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.
ITEM 27. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
1.1 Form of Underwriting Agreement.
1.2 Form of Lock-Up Agreement.
1.3 Form of Master Agreement Among Underwriters
1.4 Form of Selected Dealer's Agreement
3.1 Articles of Incorporation of PCI.
3.2 By-Laws, as amended of PCI.
3.3 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 Underwriter's Common Stock Purchase Warrant
II 4
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 Opinion of Titus, Brueckner & Berry, P.C. (To be filed by
Amendment)
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
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.
II 5
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(1) Distributorship Agreement, dated June 13, 1997, 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.
10.23 Stock Purchase Agreement, dated June 20, 1997 between Steven
A. Lambrecht and James. B. Stanley. (To be filed by
Amendment)
II 6
11.1 Statement Regarding Computation of Per Share Earnings.
16.1 Response Letter from Semple & Cooper, LLP Regarding the
Disclosure under "CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE"
21.1 Subsidiary List.
23.1 Consent of Semple & Cooper, LLP. See "CONSENT OF INDEPENDENT
CERTIFIED ACCOUNTANTS."
23.2 Consent of Titus, Brueckner & Berry, P.C. (included in
Exhibit 5.1).
27.1 Financial Data Schedule.
(1) Omitted and filed separately with the Commission pursuant to the
Confidential Treatment provisions of Regulationss.230.406.
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.
II 7
(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 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.
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SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the Registrant has duly caused this 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 23rd day of June, 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
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement has been signed by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Date Signature Title
- ---- --------- -----
June 23, 1997 /s/ William L. Anthony Chairman of the Board
-----------------------------
William L. Anthony
June 23, 1997 /s/ Steven A. Lambrecht Director
-----------------------------
Steven A. Lambrecht
June 23, 1997 /s/ Colin A. Jones Director
-----------------------------
Colin A. Jones
June 23, 1997 /s/ David S. Hodges Director
-----------------------------
David S. Hodges
June 24, 1997 /s/ Karissa B. Nisted Chief Financial Officer
-----------------------------
Karissa B. Nisted
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CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the inclusion
of our report dated June 18, 1997, on the consolidated financial statements of
Premium Cigars International, Ltd. and subsidiary for the year ended March 31,
1997 in the Company's Form SB-2 Registration Statement for the year then ended
and to the reference to us under the caption "Experts" contained in the
Prospectus
SEMPLE & COOPER, LLP
Phoenix, Arizona
June 24, 1997
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