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Product Express Com Ebusiness Services Inc – ‘424B1’ on 8/25/97

As of: Monday, 8/25/97 · Accession #: 950147-97-577 · File #: 333-29985

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 8/25/97  Prod Express Com Ebusiness S… Inc 424B1                  1:254K                                   Imperial Fin’l … Corp/FA

Prospectus — Rule 424(b)(1)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B1       Final Prospectus                                      79    396K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Additional Information Bridge Financing and Bridge Warrants Business Canadian Regulations Canadian Sales; CAN-AM Canadian Taxes Capitalization Certain Transactions Cigar Production Cigar Purchasing; Private Label and Custom Brands Common Stock Competition Consolidated Financial Statements Cost of sales Description of Securities Dilution Dividend Policy Executive Compensation Expanding Cigar Market, The Experts Glossary Humidors Intellectual Property Rights Interim Financing Legal Matters Loss per share Management Management's Discussion and Analysis of Results of Operations Master Agreements and Arrangements with National Chains Medical Studies on Smoking No Prior Market for Shares Notes to Consolidated Financial Statements Offering, The Our Cigars Our Largest Customer Pci Plan of Distribution Principal Shareholders Products Prospectus Summary Resolving Conflicts of Interest Results of Operations Risk Factors Rose Hearts Sales Selected Historical and Pro Forma Consolidated Financial Information Shares Eligible for Future Sale Stock based compensation The Expanding Cigar Market The Offering Tobacco Industry Litigation Transfer Agent Underwriting Use of Proceeds U.S. Sales Where You Can Get More Information 7-Eleven
1	1st Page - Filing Submission
5	Prospectus Summary
"	Pci
"	Our Cigars
6	The Offering
8	Where You Can Get More Information
9	Risk Factors
14	Competition
19	Use of Proceeds
20	Capitalization
21	Dilution
23	Selected Historical and Pro Forma Consolidated Financial Information
24	Management's Discussion and Analysis of Results of Operations
25	Results of Operations
"	Sales
"	Cost of sales
26	Stock based compensation
28	Business
"	The Expanding Cigar Market
30	Cigar Production
31	Cigar Purchasing; Private Label and Custom Brands
32	Our Largest Customer
"	Canadian Sales; CAN-AM
"	U.S. Sales
"	7-Eleven
33	Rose Hearts
"	Products
34	Humidors
36	Master Agreements and Arrangements with National Chains
38	Canadian Taxes
40	Canadian Regulations
41	Tobacco Industry Litigation
43	Medical Studies on Smoking
44	Intellectual Property Rights
45	Management
48	Executive Compensation
50	Certain Transactions
"	Resolving Conflicts of Interest
54	Principal Shareholders
56	Interim Financing
"	Bridge Financing and Bridge Warrants
58	Description of Securities
"	Common Stock
"	Shares Eligible for Future Sale
59	No Prior Market for Shares
"	Transfer Agent
"	Dividend Policy
60	Underwriting
61	Plan of Distribution
62	Legal Matters
"	Experts
"	Glossary
63	Additional Information
65	Consolidated Financial Statements
71	Notes to Consolidated Financial Statements
73	Loss per share

424B1 1st Page of 79 TOC ↑Top Previous Next ↓Bottom Just 1st
[***PCI logo***]

1,900,000 shares of Common Stock
$5.25 per share

Premium Cigars International, Ltd. We distribute moderately priced
15651 N. 83rd Way, Suite 3 premium cigars and other cigars,
Scottsdale, Arizona 85260 which are sold from our humidors
placed primarily in convenience
stores in the United States and
The Offering Canada.

Per Share Total
--------- ---------- This is our initial public offering,
Public Price ...... $ 5.25 $9,975,000 and no public market currently
Underwriting exists for our shares. The offering
discounts ...... $ .525 $ 997,500 price may not reflect the market
Proceeds to PCI ... $4.725 $8,977,500 price of our shares after the
offering.

Proposed Trading Symbols:
NASDAQ SmallCap Market(SM) -- PCIG
Boston Stock Exchange -- PCI

---------------------

This Investment Involves a High Degree of Risk. You Should Purchase Shares Only
If You Can Afford a Complete Loss. See "Risk Factors" Beginning on Page 5.

Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities, or determined if this
Prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.

---------------------

W.B. MCKEE SECURITIES, INC.
KASHNER DAVIDSON SECURITIES CORP.

August 21, 1997

424B1 2nd Page of 79 TOC 1st Previous Next ↓Bottom Just 2nd
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.

424B1 3rd Page of 79 TOC 1st Previous Next ↓Bottom Just 3rd
[INSIDE FRONT COVER]

[picture of typical PCI plexiglass humidor with magazine rack and magazine
typically sold from rack as used in convenience stores]

[caption:] Typical plexiglass humidor with magazine rack used in convenience
stores.

[lit cigar in background (no caption)]
ii

424B1 4th Page of 79 TOC 1st Previous Next ↓Bottom Just 4th
[INSIDE FRONT COVER FOLD OUT]

[pictures of five-SKU and three-SKU hand-crafted wood humidors with magazine
racks and typical cigar-related magazines sold from racks]

[caption:] Typical five-SKU and three-SKU wood humidors with magazine racks and
magazines.

[picture of clerk with on-counter humidor in convenience store]

[caption:] Typical location of humidor and magazine rack in convenience store.

[picture of 7-Eleven(TM) advertisement currently appearing in cigar
aficionado(tm) magazine featuring PCI cigar]

[caption:] Advertisement currently appearing in Cigar Aficionado(TM) magazine
featuring PCI cigar.

[PCI logo (no caption)]

[picture of lit cigar in background (no caption)]

[flat reproduction of six pci-designed cigar bands]

[caption:] PCI-designed cigar bands.
iii

424B1 5th Page of 79 TOC 1st Previous Next ↓Bottom Just 5th
PROSPECTUS SUMMARY

This summary highlights selected information contained elsewhere in this
prospectus. It is not complete and may not contain all of the information that
is important to you. To understand this offering fully, you should read the
entire prospectus carefully, including the risk factors and financial
statements.

PCI

Offices: Premium Cigars International, Ltd. ("PCI") , Suite 3,
15651 North 83rd Way, Scottsdale, Arizona 85260,
telephone (602) 922-8887, or toll-free at (888)
724-1001.

Our Business: We distribute cigars throughout the United States and
Canada. We had placed our PCI Cigar Program, which
includes supplying humidors, cigars, service and
information, in over 2,615 stores as of July 31, 1997.
We are currently expanding with national retail and
distribution accounts in both the United States and
Canada. Our goal is to place our PCI Cigar Program in
every convenience, gas and high-traffic retail outlet.

Our Concept: Premium cigars are a luxury item and are often
purchased on impulse. We seek to capitalize on the
recent growth of the premium cigar market by
introducing our PCI Cigar Program to additional
locations. Based on reports by the Cigar Association of
America, following several decades of decline, premium
cigar sales in the United States increased by 10.7% in
1993, 14.5% in 1994, 30.5% in 1995 and 67.0% in 1996.

The PCI Cigar Program: Our complete PCI Cigar Program includes:
o imported, hand-rolled short, medium and long-leaf
filler premium cigars from the Dominican Republic,
Honduras, Mexico, Nicaragua and the Philippines;
o domestic machine-made mass market cigars;
o in-store, countertop, custom made, hand-crafted
wood and plexiglass humidors;
o training materials and telemerchandising support
to individual stores;
o point-of-purchase information cards and cigar
magazine racks;
o telemerchandising for order fulfillment;
o large, "walk-in" humidors for distribution center
cigar inventory storage; and
o spokesman relationship with Arie Luyendyk, the
recent winner of the Indianapolis 500.

Our Customers: We sell virtually all of our cigars through convenience
stores, including stores affiliated with: The Southland
Corporation and Southland Canada, Inc. which do
business as 7-Eleven(TM); AM/PM(TM); Circle K(TM);
Associated Grocers; SuperValu(TM)(1); and stores
supplied by the McLane Company.

Our Cigars: We distribute name-brand and our own private-label
cigars from our humidors. Premium cigars generally
retail from $1 to more than $20. We distribute low to
medium-priced premium cigars, primarily in the $1 to $8
price range. We also distribute mass market cigars at
around $1.

Our History: Because premium cigars require special care (including
humidified storage) and knowledgeable sales personnel,
they were traditionally sold only in tobacco specialty
shops. In June 1996, Colin Jones and Greg Lambrecht,
our Vice Presidents of International and National
Sales, developed their concept of
--------------
(1) Believed to be trademarks of third parties. We have no ownership interest
in any of the intellectual property indicated by trademark or service mark
symbols in this prospectus.
1

424B1 6th Page of 79 TOC 1st Previous Next ↓Bottom Just 6th
selling premium cigars from in-store humidors through
convenience stores, grocery stores, and other retail
outlets. They introduced the concept through their
wholly-owned companies J&M and Rose Hearts (see below)
first in Canada and then in the northwest United
States.

CAN-AM; Rose Hearts; In December 1996, we acquired all of the outstanding
And J&M: stock of CAN-AM International Investments Corp., a
British Columbia (Canada) corporation. CAN-AM had
previously acquired the cigar distribution operations,
including cigar accounts, humidors and inventory, of
Rose Hearts, Inc., a Washington corporation
wholly-owned by Greg Lambrecht, and J&M Wholesale,
Ltd., a British Columbia (Canada) corporation
wholly-owned by Colin Jones. J&M began distributing
cigars in convenience stores in Vancouver, B.C., Canada
in June 1996. Rose Hearts began its cigar distribution
in Seattle, Washington in late summer 1996.

Current Operations: Currently, we distribute cigars to over 2,615
convenience stores and other retailers in:

Canada: British Columbia, Alberta, Saskatchewan,
Manitoba and Ontario.

United States: Washington, Oregon, California, Arizona,
Kansas, Missouri, Utah, Idaho, Alaska, Nevada,
Oklahoma, Texas, Maryland, Virginia, Colorado,
Illinois, Michigan, Wisconsin, Nebraska, Georgia,
Montana, Florida, Massachusetts, Connecticut, New York,
New Jersey, Rhode Island, New Mexico, Pennsylvania,
North Carolina, Louisiana, Alabama, Mississippi and
Arkansas.

We have established our PCI Cigar Program to supply
cigars and in-store humidors for direct shipments and
delivery and in-store merchandising in convenience
stores affiliated with certain national chains. In most
instances we have "master" agreements with, have
negotiated and approved standard form retailer
agreements with, or have other arrangements with, these
national accounts. We have developed relationships with
several cigar suppliers and are expanding our sources
for cigars and accessories.

[Enlarge/Download Table]
The Offering

Securities offered ........................... 1,900,000 shares
Shares outstanding at August 21, 1997 ........ 1,480,500 shares
Shares to be outstanding after the offering ... 3,380,500 shares
Warrants outstanding at August 21, 1997 .... 380,954 Common Stock purchase warrants
Total public price ........................... $9,975,000
Underwriters' discount ..................... $ 997,500
Net proceeds ................................. $8,977,500
Estimated offering expenses .................. $ 674,250
Over-allotment .............................. Up to 285,000 shares; if the full over-allotment is purchased
by the underwriters, the total public offering price,
underwriting discount, and net; proceeds will be $11,471,250;
$1,147,125; and $10,324,125; respectively.
Use of proceeds .............................. We intend to use offering proceeds to expand the PCI Cigar
Program by purchasing humidors, cigars and accessories;
repaying indebtedness; funding sales and marketing and
providing working capital.
Risk factors ................................. Investing in our shares is very risky, and you should be able
to bear a complete loss of your investment. See "Risk
Factors."

424B1 7th Page of 79 TOC 1st Previous Next ↓Bottom Just 7th
SUMMARY CONSOLIDATED FINANCIAL INFORMATION

The following financial information reflects the operations of PCI (and
its predecessor operations) for the period from June 1, 1996 to March 31, 1997
and for the three month period ended June 30, 1997 (unaudited). This summary
financial information has been derived from the consolidated financial
statements of PCI and subsidiary which appear later in this prospectus. This
data should be read in conjunction with those consolidated financial statements
and related notes.

[Enlarge/Download Table]

June 1, 1996 to March 31, 1997 3 Months ended June 30, 1997
------------------------------- ----------------------------
Historical Pro Forma Historical Pro Forma
--------------- ------------- ------------- ------------
(Unaudited) (Unaudited) (Unaudited)

Consolidated Statements of
Operations:
Sales .............................. $ 845,571 $ 845,571 $ 628,180 $ 628,180
Cost of sales ..................... 643,790 643,790 481,677 481,677
----------- ---------- ---------- ----------
Gross profit ........................ 201,781 201,781 146,503 146,503
Selling, general and administrative(1) 323,776 551,276 327,439 357,439
Stock based compensation ............ 207,625 207,625 110,000 110,000
----------- ---------- ---------- ----------
Loss from operations ............... (329,620) (557,120) (290,936) (320,936)
Interest expense and
miscellaneous(2) .................. 21,522 1,722 31,233 --
----------- ---------- ---------- ----------
Net loss ........................... $ (351,142) $ (558,842) $ (322,169) $(320,936)
=========== ========== ========== ==========
Weighted average shares
outstanding(3) ..................... 1,480,500 3,742,406 1,480,500 3,742,406
=========== ========== ========== ==========
Loss per share ..................... $ (.24) $ (.15) $ (.22) $ (.09)
=========== ========== ========== ==========

June 30, 1997
-----------------------------------
Historical Pro Forma(3)
-------------- ------------------
(unaudited) (unaudited)
Consolidated Balance Sheet Data:
Working capital .......................... $ 94,851 $ 8,708,557
Total assets ............................. $1,262,202 $ 9,582,955
Total liabilities ........................ $1,410,838 $ 410,838
Accumulated deficit ..................... $ (673,311) $ (755,811)(4)
Shareholders' equity (deficit) ........... $ (148,636) $ 9,172,117
Net tangible book value per share ........ $ (.32) $ 2.44

----------
(1) Pro Forma includes additional executive compensation and management fees
pursuant to executive compensation agreements. (See "Management --
Executive Compensation".)
(2) Pro Forma assumes repayment of indebtedness as specified in Use of
Proceeds.
(3) Pro Forma includes receipt of an additional capital contribution of
$150,000 on August 11, 1997, assumes issuance of 1,900,000 shares in the
offering and conversion of bridge warrants into 361,906 shares of Common
Stock, and assumes no exercise of 19,048 bridge warrants held by William B.
McKee.
(4) Includes an adjustment to expense the remaining $82,500 of deferred costs
of the bridge financing.
3

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WHERE YOU CAN GET MORE INFORMATION

At your request, we will provide you, without charge, a copy of any
exhibits to our registration statement incorporated by reference in this
prospectus. If you want more information, write or call us at:

Premium Cigars International, Ltd.
Suite 3
15651 North 83rd Way
Scottsdale, Arizona 85260
Telephone: (602) 922-8887
Toll Free: (888) 724-1001
Fax: (602) 922-8656

Our fiscal year ends on March 31. We intend to furnish our shareholders
annual reports containing audited financial statements and other appropriate
reports. In addition, we intend to become a reporting company and file annual,
quarterly and current reports, proxy statements and other information with the
SEC. You may read and copy any reports, statements or other information we file
at the SEC's public reference room in Washington D.C. You can request copies of
these documents, upon payment of a duplicating fee, by writing to the SEC.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the public reference rooms. Our SEC filings are also available to the public
on the SEC Internet site at http\\www.sec.gov.

Special Note Regarding Forward-looking Statements

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

Important factors that may cause actual results to differ from projections
include, for example,

o the success or failure of our efforts to implement our business
strategy;

o our ability to raise sufficient capital to purchase cigars and
humidors to meet any unanticipated increase in the aggressive
"roll-out" schedules required by our contracts and commitments with
stores and distributors;

o the effect of a settlement announced June 20, 1997 of litigation among
40 States and major U.S. tobacco companies;

o our ability to buy quality premium cigars at favorable prices;

o our ability to negotiate and maintain favorable distribution
arrangements with stores affiliated with major national convenience
store chains;

o the effect of changing economic conditions;

o any decision by major retail chains to remove all tobacco products
from their shelves or place our humidors in a disadvantageous location
within their stores;

o changes in government regulations, tax rates and similar matters;

o our ability to attract and retain quality employees;

o the decline in popularity of cigar smoking; and

o other risks which may be described in our future filings with the SEC.
We do not promise to update forward-looking information to reflect
actual results or changes in assumptions or other factors that could
affect those statements.
4

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RISK FACTORS

Investing in PCI's Shares is very risky. You should be able to bear a
complete loss of your investment. You should carefully consider the following
factors, among others.

Recently Organized PCI was organized in December 1996 and acquired a cigar
Business; Losses distribution business which began in June 1996. PCI,
During Start-up its subsidiary CAN-AM, and the predecessor cigar
Operations. distribution operations of J&M and Rose Hearts, incurred
losses of $351,142, or $.24 per share, on revenues of
$845,571, for the period from June 1, 1996 (inception)
We have incurred to March 31, 1997. We lost an additional $322,169, or
losses since we $.22 per share, on revenues of $628,180, for the quarter
began doing ended June 30, 1997. The rapid expansion in our accounts
business. since March has substantially increased our expenses,
and we have not yet realized increased revenues. Our
ability to operate profitably depends on increasing our
sales and distribution outlets, achieving sufficient
gross profit margins, and a continuing demand for
premium cigars. PCI is also subject to business risks
associated with new business enterprises. We cannot
assure you that PCI will operate profitably. See
"Selected Historical and Pro Forma Consolidated
Financial Information"; "Management's Discussion and
Analysis of Results of Operations."

We had a working At March 31, 1997, PCI had a net working capital deficit
capital deficit at of approximately $77,169. Our operations were financed to
our fiscal year that date through private placements of our shares in
end and a negative 1997, which generated net proceeds of approximately
shareholders' $212,050. From April to June 1997, we obtained debt
equity at financing by issuing bridge notes which generated net
June 30, 1997. proceeds of $810,000, virtually all of which was used to
We have met expand operations. We had a negative shareholders' equity
capital needs of $148,636 at June 30, 1997. On August 11, 1997, we
with private received an additional capital contribution of $150,000
sales of from certain shareholders. We have no plans to obtain
securities. additional outside capital after we complete this
offering. However, we cannot assure you that we will not
need additional funds or that any needed funds will be
available, if at all, on acceptable terms. If we need
additional funds, our inability to raise them will have a
very adverse effect on our operations. If we raise funds
by selling equity securities, sales may dilute your share
ownership. See "Management's Discussion and Analysis of
Results of Operations."

40-State Tobacco Over 40 States have filed lawsuits against the major
Litigation -- United States cigarette manufacturers to recover
Proposed Settlement. billions of dollars in damages, primarily to recover
costs of medical treatment for smokers on Medicaid. On
June 20, 1997 the Attorneys General of 40 States and the
The effect, if manufacturers announced a proposed settlement of
any, of this lawsuits filed by these States. The proposed settlement,
settlement on which will require that the United States Congress take
the cigar industry certain action, is complex and may change significantly
is uncertain. or be rejected. However, the proposal would
significantly change the way United States cigarette and
tobacco companies do business. Among other things: the
tobacco companies will pay hundreds of billions of
dollars; the FDA could regulate nicotine as a drug;
class action lawsuits and punitive damages would be
banned; cigarettes and smokeless tobacco could only be
sold behind store counters, with no self-service; and
tobacco billboards and sporting event sponsorships would
be prohibited. The potential impact, if any, of the
settlement and related legislation on the cigar industry
is uncertain. See "Business -- Government Regulation;
Tobacco Industry Litigation."
5

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Florida trial; On August 1, 1997 the first trial of a State lawsuit
Mississippi began in Florida. Pending approval of the 40-State
settlement. settlement, the State of Mississippi announced a
separate settlement agreement under which it will
receive nearly $4 billion even if the 40-State
Settlement is not approved. See "Business -- Government
Regulations; Tobacco Industry Litigation."

Extensive and The tobacco industry in general has been subject to
Increasing extensive federal, state and local regulation and
Regulation and taxation. Recent trends have increased regulation and
Taxation of taxation of the tobacco industry. Although regulation
Tobacco Products. initially focused on cigarette manufacturers, it has
begun to have a broader impact on the industry as a
whole, and may focus more directly on cigars in the
future. Cigars are subject to federal excise taxes which
vary according to the type and weight of the cigar. The
recent increase in popularity of cigars could lead to an
increase in regulation and taxation of cigars.

Federal legislation The "balanced budget" legislation recently approved by
has been approved Congress and signed by President Clinton on August 5,
and proposed to 1997, increases taxes on each pack of cigarettes by 10\c
regulate many in 2000 and by another 5\c in 2002. A variety of bills
aspects of the relating to tobacco issues have been introduced in the
tobacco industry. U.S. Congress, including bills that would:

o prohibit the advertising and promotion of all tobacco
products or restrict or eliminate the deductibility of
tobacco advertising expenses,

o increase labeling requirements on tobacco products to
include, among other things, addiction warnings and
lists of additives and toxins,

o shift regulatory control of tobacco products and
advertisements from the U.S. Federal Trade Commission
(the "FTC") to the U.S. Food and Drug Administration
(the "FDA"), and

o require tobacco companies to pay for health care costs
incurred by the federal government in connection with
tobacco related diseases.

Hearings have been held on certain of these proposals;
however, to date, none of these proposals has been
passed by Congress. If enacted, these or similar
proposals may adversely affect our results of operations
or financial condition. See "Business -- Government
Regulations."

State and local A majority of states restrict or prohibit smoking in
regulation and certain public places and restrict the sale of tobacco
taxation of products to minors. Local legislative and regulatory
smoking is bodies have increasingly moved to curtail smoking by
pervasive and prohibiting smoking in certain buildings or areas or by
increasing, and requiring designated "smoking" areas. Several states
public pressure currently prohibit self-service sales or restrict
for more point-of-sale placement of tobacco products. Further
regulation exists. restrictions of a similar nature could have a substantial
adverse effect on our sales or operations, such as
banning self-service sales, counter access to, or display
of, cigars. Numerous proposals also have been considered
at the state and local level restricting smoking in
certain public areas, regulating point-of-sale placement
and promotions and requiring warning labels. Forty-six
states currently tax cigars at rates ranging from 2% to
75%, and cigars are subject to local taxes as well. The
number of states taxing cigars and the rates of taxation
are likely to increase. In addition to governmental
restrictions, certain retailers may voluntarily stop
selling all tobacco products, including cigars, because
of public pressure.
6

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Warning labels; Although federal law has required health warnings on
Second-hand smoke. cigarette packs since 1965 and on smokeless tobacco
since 1986, there is no federal law requiring that
cigars or their containers carry those warnings.
California requires "clear and reasonable" warning to
consumers who are exposed to chemicals determined by the
state to cause cancer or reproductive toxicity,
including tobacco smoke and several of its constituent
chemicals. Similar legislation has been introduced in
other states, but did not pass. We cannot assure you
that other states will not enact similar legislation.
Federal and state legislatures have also considered the
consequences of tobacco smoke on others who do not smoke
(so called "second-hand" smoke). If regulations relating
to second-hand smoke are adopted, these regulations may
have a substantial adverse effect on our results of
operations or financial condition.

Canadian federal The Canadian government recently enacted substantial
and provincial restrictions on the promotion and retail display of
laws and tobacco products. The Canadian government may supplement
regulations. the new legislation with implementing regulations and
provincial governments may add other regulations and
restrictions on tobacco products. Each Canadian Province
taxes cigars at rates which vary from 45% to 95% of
retail selling prices. New laws and potential additional
regulations could adversely affect our Canadian business.
See "Business -- Government Regulations -- Canadian
Regulations -- Canadian Taxes."

Possible additional Increased cigar consumption and its publicity may
regulation. increase the risk of additional regulation. Recently an
anti-tobacco organizational and health panel asked the
FDA to regulate cigars in the same manner as cigarettes.
We cannot predict the ultimate content, timing or effect
of any additional regulation of tobacco products by any
federal, state, local or regulatory body. Future
legislation, regulation or tax policies may have a
significant adverse effect on the ability of cigar
manufacturers or distributors, including PCI, to
generate revenues and profits. See "Business --
Government Regulation; Tobacco Industry Litigation."

Dependence on One Corporate and franchise stores affiliated with The
Customer Store Group. Southland Corporation ("Southland USA") and Southland
Canada, Inc. ("Southland Canada") (collectively
"7-Eleven") accounted for over 82% of our sales in the
fiscal year ended March 31, 1997. Since then, we have
7-Eleven stores expanded our customer base, but sales to 7-Eleven stores
comprise 79% still accounted for over 79% of our sales for the
of our sales. quarter ended June 30, 1997. We expect that sales to
7-Eleven stores will continue to be a substantial
percentage of our sales. Our plans for the coming year
include rapidly expanding the number of 7-Eleven stores
participating in our PCI Cigar Program. PCI, Southland
USA, or any U.S. franchisee has the right to terminate
our agreement for any reason upon 60 days notice.
Southland Canada can terminate its arrangement with us
at any time without notice. Problems with 7-Eleven
stores, our major customer in Canada and the United
States, could have a serious adverse impact on our
business. A substantial reduction in our 7-Eleven
business could result in diminished revenues for several
quarters or more as we attempt to replace that business.
See "Business -- Our Largest Customer -- Canadian Sales;
CAN-AM -- U.S. Sales."
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Nature of Convenience We have "master" agreements and other arrangements with
Store Distribution corporate offices of several major convenience store
Relationships. chains to place the PCI Cigar Program in corporate and
participating franchise stores. However, the nature of
Our agreements with the convenience store distribution business is that
convenience stores supplier relationships are terminable on short notice
may be terminated (usually between 30 and 120 days). In addition, while
easily. "master" or approved form agreements may be
automatically acceptable for use, participation in the
PCI Cigar Program is usually at the discretion of each
local franchise store or each region of the country. As
long as demand for premium cigars remains strong, we
believe that individual stores and regions will
participate in our PCI Cigar Program. However, if demand
and sales decline, stores may terminate participation on
short notice, which could have a significant adverse
effect on our business. See "Business -- Master
Agreements and Arrangements with National Chains."

Product placement We do not pay "slotting" fees or other inducements to
competition. retailers in order to secure counter space, which could
affect our ability to place our humidors on store
counters. In addition, other major manufacturers or
distributors may have master agreements with convenience
stores which require the stores to locate that
manufacturer's or distributor's tobacco or other
products in a counter position that is preferential to,
or at least as favorable as, the location of our
humidors. This may inhibit our ability to obtain
favorable counter presentation of our humidors. See
"Business -- Products -- Humidors."

Declining Market for According to industry sources, the cigar industry was in
Cigars Through 1991. substantial decline from approximately 1973 to 1991.
Cigar sales, as well as smoking in general, steadily
decreased after a 1964 report of the United States
The effect of Surgeon General and numerous other subsequent studies
medical studies which stress the link between smoking, including
on smoking. secondary smoke, and medical problems such as cancer,
heart, respiratory and other diseases. "No smoking"
laws, ordinances and prohibitions on cigar smoking in
certain cases may have adversely affected the sale of
cigar products. These factors may continue to have an
adverse effect upon the cigar industry in general and
our business in particular. See "Business -- Medical
Studies on Smoking."

Demand for Cigars; Premium cigar sales have increased dramatically in
Inventory. recent years, but we cannot assure you that the trend
will continue. If cigar sales trends do not continue as
we anticipate or if we experience a reduction in our
demand, we may accumulate excess inventory which could
have an adverse effect on our business or results of
operations. See "Business -- The Expanding Cigar Market."

Current positive Premium cigar sales have increased since 1991, and the
sales trends cigar industry has experienced very positive trends in
may not continue. sales since 1993. We believe that a considerable
percentage of the recent increase in cigar sales,
especially with respect to premium cigars, is
attributable to new cigar smokers attracted by the
improving image of cigar smoking and the increased
visibility of cigar smoking by celebrities. We cannot
assure you that recent increases in cigar sales are
indicative of long-term trends or that these new
customers will continue to smoke cigars in the future.
See "Business -- The Expanding Cigar Market."
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Other Tobacco In addition to the 40-State litigation referred to
Industry above, the tobacco industry has experienced and is
Litigation. experiencing significant health-related litigation
involving tobacco and health issues. Plaintiffs have
sought and are seeking compensatory and punitive damages
Current litigation for various injuries claimed to result from the use of
focuses on tobacco products or exposure to tobacco smoke. One
cigarettes and class-action lawsuit filed by flight attendants and
smokeless tobacco. pending in Florida claims several billion dollars in
damages from second-hand smoke. The proposed settlement
of the 40-State litigation may substantially limit
litigation, but we cannot assure that there would not be
an increase in health related litigation against the
cigarette and smokeless tobacco industries or similar
litigation in the future against the cigar industry.
Neither PCI, nor to our knowledge any other cigar
distributor, is a party to tobacco industry litigation.
However, should litigation involving cigars be
initiated, the costs of defending prolonged litigation
and any settlement or successful prosecution of any
significant health-related litigation could have a
substantial adverse effect on our results of operations
or financial condition. See "Business -- Tobacco
Industry Litigation."

The potential for The recent increase in the sales of cigars and the
litigation publicity such increase has received may have the effect
targeting of increasing the probability of lawsuits. Also, a
cigars is growing. recent study published in the journal Science reported
that a chemical found in tobacco smoke has been found to
cause genetic damage in lung cells that is identical to
damage observed in many malignant tumors of the lung
and, thereby, directly links lung cancer to smoking. The
National Cancer Institute has announced that it will
issue a report in 1997 describing research into cigars
and health. This study and this report could affect
pending and future tobacco regulation or litigation
relating to cigar smoking. See "Business -- Government
Regulation, Tobacco Industry -- Litigation."

Dependence on a Few We do not directly manufacture or import any cigars, and
Suppliers. depend entirely on third party manufacturers, suppliers
and importers for our cigars. Typically, we do not have
supply agreements, but submit purchase orders for
cigars. We currently purchase cigars from over 19
suppliers.

We have relied on For the quarter ended June 30, 1997 our largest
two suppliers supplier, TSG Import, Export and Manufacturing
for over 75% Corporation, located in the Dominican Republic,
of our cigars. accounted for approximately 40% of our cigar purchases
for Canadian distributors and 38% of our total cigar
purchases. Our written agreement with TSG expired on
July 7, 1997, but we continue to purchase from TSG on
the same terms as in our agreement. We are negotiating
with TSG to reach a new agreement. Our second largest
supplier, House of Horvath, Inc., accounted for 37% of
our total purchases.

Currently, we We have executed supply contracts with a few minor
have no contracts suppliers but with none of our major suppliers. We are
with major currently negotiating with manufacturers in the
suppliers. Dominican Republic and elsewhere to secure multiple
sources of cigars. Although we believe that we could
quickly replace our main suppliers with alternative
sources at comparable prices and terms, a disruption in
the supply of cigars from either TSG or House of Horvath
would have a significant adverse impact on our
operations. See "Business -- Cigar Purchasing; Private
Label and Custom Brands."
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Risks Relating We primarily sell moderately-priced cigars which are
to Supply hand-rolled or machine-made from tobacco aged six months
of Cigars. to two years. At the present time, we believe there is
an adequate supply of tobacco available in a number of
countries for these types of cigars. However, we also
sell a limited number of higher priced premium cigars
which require longer-aged tobacco. Our ability to
acquire these cigars in the future may be constrained by
a shortage of premium cigars made with longer-aged
tobacco. At times, producers have suspended shipping
certain brands of cigars when excessive demand results
in a shortage of properly aged and blended tobacco.
Accordingly, increases in demand may adversely affect
our ability to acquire higher priced premium cigars. See
"Business -- Cigar Production -- Cigar Purchasing;
Private Label and Custom Brands."

Competition. As a distributor of premium cigars, we generally compete
with a smaller number of less well-known, primarily
Currently, we have regional, distributors including Southern Wine and
several smaller, Spirits, Specialty Cigars, Inc., Cohabico, Old
primarily regional Scottsdale Cigar Company, Inc. and many other small
competitors. cigar distributors.

Large potential The cigar industry in general is dominated by a small
competitors are number of companies which are well known to the public.
cigar manufacturers These larger cigar manufacturing and wholesale companies
and distribution such as 800 JR Cigar Company, Inc., Consolidated Cigar
companies. Company, Culbro Corporation, General Cigar Company,
Swisher, Caribbean Cigar Company and US Tobacco, have
not yet entered the retail distribution market, but may
do so in the future. Also, a number of large
distribution companies, such as McLane and Core*Mark,
which are currently in the convenience outlet
distribution business, have not yet entered the premium
cigar distribution business, but may do so in the
future. These cigar manufacturing and distribution
companies, along with major cigarette manufacturers,
have more resources than PCI. If they chose to enter the
cigar distribution market, they would constitute
formidable competition for our business. We cannot
assure you that we can compete successfully in any
market. See "Business -- Competition."

Dependence on Our business is largely dependent on our ability to hire
Management. and retain quality managers. Our president, Steven A.
Lambrecht, has no prior experience in the business of
distributing cigars or other tobacco products. We have
We have a few agreements with certain officers and directors,
key officers including written employment agreements with Steven A.
and directors. Lambrecht, Colin A. Jones and Greg P. Lambrecht, and a
business consulting agreement with David S. Hodges. We
also have a verbal consulting agreement with William L.
Anthony. The loss of Messrs. Steven or Greg Lambrecht,
Jones, Hodges or Anthony could have an adverse effect on
our business and prospects. See "Management -- Executive
Compensation."

Key officers and The employment agreements for each of Steven A.
directors may Lambrecht, Colin A. Jones and Greg P. Lambrecht allow
terminate their them to terminate their employment at any time on two
employment weeks' notice. After the completion of this offering,
agreements on either PCI or David S. Hodges may terminate his business
short notice. consulting agreement at any time. Mr. Hodges may
continue to serve as a consultant for up to six months
or until he accepts other employment. Either Mr. Anthony
or PCI may terminate his consulting agreement at
10

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any time, with or without cause. Because of the short
notice requirements, we may not be able to replace these
individuals before we suffer an adverse impact on our
business. See "Management -- Executive Compensation."

Key-man insurance. We do not currently maintain key-man life insurance on
any of our employees, but will be required to maintain
$1,000,000 in key-man life insurance on Steven A.
Lambrecht at least until March 31, 2002, according to
the terms of our Agreement with the underwriters. See
"Underwriting."

Control by Management. As of August 21, 1997, our officers and directors owned
approximately 75% of our outstanding shares. Upon
completion of this offering, and assuming full exercise
of the bridge warrants, our officers and directors will
own approximately 34% of the then issued and outstanding
shares, and they may be able to elect a majority of the
directors and continue to control PCI. However, Arizona
law allows shareholders to cumulate their votes for the
election of directors and affords minority shareholders
a greater opportunity to elect directors. See "Principal
Shareholders."

Conflicts of Interest. Certain relationships between PCI and some of our
officers, directors and affiliates involve inherent
conflicts of interest. In particular, Greg P. Lambrecht
and Colin A. Jones own Rose Hearts and J&M, two companies
that do business with us, but do not distribute cigars on
behalf of others. On a price point basis, neither of
these companies compete directly with PCI, although J&M
has sold and may in the future sell Cuban cigars in
Canada. Greg Lambrecht and Colin Jones are officers, and
together own more than 49% of our issued and outstanding
shares. After this offering, they will own approximately
22%. See "Certain Transactions."

Policy for We will not enter into any transaction or loan with a
resolving related party unless the transaction is on terms that are
conflicts of no less favorable to us than we could obtain from an
interest. unrelated third party. A majority of the disinterested,
independent members of our board of directors must review
and approve any transaction involving related parties or
conflicts of interest. We entered a number of
transactions before we adopted this policy and before we
had any disinterested, independent directors to ratify
the transactions. See "Certain Transactions -- Resolving
Conflicts of Interest."

Risks Relating to A portion of our proposed business involves supplying
Trademarks. exclusive "private label" cigars to certain customers.
The brand names used for such private labels will be
important, and we intend to apply for federal trademark
Currently we and tradename protection when appropriate, relying
own no trademarks. primarily on trademark law to protect brand names. We do
not currently own any federally registered trademarks or
tradenames, but we have filed federal trademark
applications for three private label names.

Trademark protection We cannot assure you that any pending trademark
is uncertain. application will result in a registered trademark, or
that any trademark granted will be effective in
thwarting competition or be held valid if subsequently
challenged. Our failure to obtain trademark protection,
or illegal use by others of any trademarks we may
obtain, may have an adverse effect on our business,
financial condition and operating results. In addition,
the laws of certain foreign countries do not protect
proprietary rights to the same extent as the laws of the
United States or Canada.
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Costs of We cannot assure you that claims for infringement or
prosecuting and claims for damages resulting from any such infringement
defending trademark will not be asserted or prosecuted against us. Even if
infringement claims we obtain trademark protection for our private label
are significant. names, the validity of any trademarks may be challenged.
Any such claims, with or without merit, could be time
consuming and costly to defend, diverting management's
attention and our resources. See "Business --
Intellectual Property Rights."

Effects of We purchase cigars manufactured by suppliers outside the
Fluctuations in United States. The price and availability of these
Cigar Costs and cigars are subject to numerous factors out of our
Availability. control, including weather conditions, foreign
government policies, potential trade restrictions and
the overall demand for cigars. While we have expanded
our base of suppliers, and our unit costs have been
improving, we have no written agreements with
significant suppliers, only ongoing relationships. Loss
of these relationships may make it difficult for us to
replace sources of cigars of equivalent quality, price
and quantities. We cannot assure that our current
suppliers of cigars will be able to supply us with
sufficient quantities or at reasonable prices. See
"Business -- Products -- Our Cigars."

Social, Political We purchase virtually all of our premium cigars from
and Economic Risks manufacturers located in countries outside of the U.S.,
Associated with including the Dominican Republic, Mexico, Honduras,
Foreign Operations Nicaragua and the Philippines. Social, political and
and International economic conditions inherent in foreign operations and
Trade. international trade may change, including changes in the
laws and policies that govern foreign investment and
international trade. To a lesser extent social,
political and economic conditions may cause changes in
U.S. or Canadian laws and regulations relating to
foreign investment and trade. Social, political or
economic changes could, among other things, interrupt
cigar supply or cause significant increases in cigar
prices. In particular, political or labor unrest in the
Dominican Republic, Mexico or Honduras could interrupt
the production of premium cigars, which would inhibit us
from buying inventory. Accordingly, we cannot assure you
that changes in social, political or economic conditions
will not have a substantial adverse effect on our
business. See "Business -- Cigar Purchasing; Private
Label and Custom Brands."

Possible Failure We intend to list our Common Stock on the Nasdaq
to Obtain or SmallCap Market(SM) and the Boston Stock Exchange, and
Maintain Exchange believe that we will be able to satisfy and maintain
Listings on the their current and proposed entry standards when we
Nasdaq SmallCap complete this offering. If we are unable to satisfy and
Market(SM) or the maintain the requirements for continued listing on the
Boston Stock Nasdaq SmallCap Market(SM) or the Boston Stock Exchange,
Exchange. our shares will not be traded in those markets.
See "Description of Securities."

Potential liquidity If our shares are not listed as intended, trading, if
problems. any, would be conducted in the over-the-counter market
in the so-called "pink sheets" or the OTC Bulletin
Board, which was established for securities that do not
meet the Nasdaq SmallCap Market(SM) listing requirements.
Consequently, selling PCI shares would be more difficult
because smaller quantities of shares could be bought and
sold, transactions could be delayed, and security
analysts' and news media's coverage of PCI may be
reduced. These factors could result in lower prices and
larger spreads in the bid and ask prices for our shares.
See "Description of Securities."
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Risks of Low-priced If our shares are not listed on The Nasdaq SmallCap
Shares. Market(SM) and/or the Boston Stock Exchange, they may
become subject to Rule 15g-9 under the Exchange Act. That
rule imposes additional sales practice requirements on
broker-dealers that sell low-priced securities to persons
other than established customers and institutional
accredited investors. For transactions covered by this
rule, a broker-dealer must make a special suitability
determination for the purchaser and have received the
purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of
broker-dealers to sell our shares and may affect the
ability of holders to sell PCI shares in the secondary
market. See "Description of Securities."

Penny stock The SEC's regulations define a "penny stock" to be any
regulations. equity security that has a market price less than $5.00
per share or with an exercise price of less than $5.00
per share, subject to certain exceptions. The penny stock
restrictions will not apply to our shares if they are
listed on The Nasdaq SmallCap Market(SM) or the Boston
Stock Exchange and we provide certain price and volume
information on a current and continuing basis, or meet
required minimum net tangible assets or average revenue
criteria. We cannot assure you that our shares will
qualify for exemption from these restrictions. If PCI
shares were subject to the penny stock rules, the market
liquidity for the shares could be adversely affected. See
"Description of Securities."

No Dividends We intend to retain any future earnings to fund the
Anticipated. operation and expansion of our business. We do not
anticipate paying cash dividends on our shares in the
foreseeable future. See "Description of Securities --
Common Stock"; "Dividend Policy."

Shares which may Currently, other than 380,954 of the bridge warrants and
be Acquired at or options held by directors William L. Anthony and Robert
Below the Offering H. Manschot to purchase 161,250 shares, there are no
Price. outstanding warrants or options to acquire PCI shares.
Mr. Anthony and Mr. Manschot may exercise their options
to purchase shares at the offering price. The bridge
warrants are exercisable at 50% of the price per share
in this offering or $2.625, except for the bridge
warrants held by William B. McKee, which are exercisable
at the offering price of $5.25 per share, and holders
are likely to exercise them, if at all, at a time when
we would otherwise be able to obtain capital on terms
more favorable than those provided in the bridge
warrants. See "Security Ownership of Certain Beneficial
Owners and Management"; "Interim Financing -- Bridge
Financing and Bridge Warrants."

Shares Eligible for All 1,480,500 of the currently issued and outstanding
Future Sale. PCI shares are "restricted securities," as that term is
defined under Rule 144. None of these shares will become
eligible for sale under Rule 144 prior to December 31,
1997. Thereafter, at various times through June 20,
1998, these 1,480,500 shares will become eligible for
sale under Rule 144. See "Description of Securities --
Shares Eligible for Future Sale."

Contractual sale Certain of our affiliates who hold 1,480,500 shares,
restrictions. 38,096 bridge warrants and 161,250 options have agreed
that they will not sell their shares, warrants and
options for 24 months from the date of this prospectus,
except that up to 10% of such securities may be sold in
increments after 12 months. See "Description of
Securities -- Shares Eligible for Future Sale."
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Warrant shares; Bridge warrant holders may purchase 380,954 shares
restrictions on during the five-year period commencing on completion of
resale. this offering. However, the bridge warrant holders have
agreed that if they exercise the bridge warrants, they
will not sell the underlying shares for 12 months from
the date of this prospectus without the prior approval of
the underwriter. This potential future sale may result in
the resale of bridge warrant shares at some date between
one and five years from the completion of this offering.
See "Interim Financing -- Delayed Offering By Warrant
Holders."

We cannot predict We are unable to predict the effect that sales made
the depressive under Rule 144, the delayed resale of warrant shares or
effect of resales. other sales may have on the then prevailing market price
of our shares. It is likely that market sales of large
amounts of these or other PCI shares after this offering
(or the potential for those sales even if they do not
actually occur), will have the effect of depressing the
market price of PCI shares. See "Description of
Securities -- Shares Eligible for Future Sale"; "Interim
Financing -- Delayed Offering By Warrant Holders."

Limited Insurance We carry general liability insurance with an aggregate
Coverage. limit of $10,000,000, and product liability and health
hazard insurance. These policies also cover our
suppliers, manufacturers and retail outlets. However, we
cannot assure you that we will not be subject to
liability which is beyond the limits of our general
liability, product liability and health hazard insurance
coverage, and which may have an adverse effect on our
business. See "Business -- Tobacco Industry
Litigations."

Dilution; Disparity Purchasers of shares will experience immediate and
in Share Purchase substantial dilution of $2.81 in net tangible book value
Price. per share, or approximately 54% of the offering price of
$5.25 per share. In contrast, existing shareholders paid
an average price of $0.24 per share. Some existing
shareholders acquired their shares from PCI or its
officers between March 10, 1997 and June 20, 1997 at
prices ranging from $1.25 to $2.50 per share. See
"Dilution."

No Prior Market Prior to this offering, there has been no public market
for Shares; for PCI shares. We cannot assure you that any trading
Determination market for our shares will exist following the offering,
of Public or that investors in the shares will be able to resell
Offering Price. their shares at or above the offering price. The
offering price for the shares will be determined through
negotiations between us and W.B. McKee Securities, Inc.,
and may not be indicative of the market price of the
shares after the offering. See "Description of
Securities -- No Prior Market for Shares."

Use Of Offering We will use up to $1,200,000 (approximately 14.5%) of net
Proceeds to Repay offering proceeds to repay the principal amount of
Debt. promissory notes issued in the bridge financing, and any
outstanding balance on our bank line of credit, rather
than purchase inventory or humidors to expand the PCI
Cigar Program. See "Use of Proceeds" and "Interim
Financing."

Dependence on We use independent contract carriers to ship our
Shippers humidors and cigars. We have not used United Parcel
Service, and have not yet been affected by the
Teamsters' strike against that company. We cannot assure
you that the UPS strike, or similar work stoppages, will
not impact our ability to receive and distribute cigars
and humidors.
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USE OF PROCEEDS

The net proceeds we receive from the sale of 1,900,000 shares, assuming an
offering price of $5.25 per share, and after deducting underwriting discounts
and commissions of $997,500 and offering expenses of approximately $674,250,
are estimated to be $8,303,250 ($9,604,988 if the underwriters' over-allotment
option is exercised in full). Offering expenses include $299,250 in
non-accountable underwriters' expenses, and an estimated $375,000 in expenses
such as legal, accounting, printing and various filing and registration fees
and miscellaneous expenses. We expect to use the net proceeds (assuming no
exercise of the underwriter's over-allotment option) as follows:

[Enlarge/Download Table]
[Pie chart graphic of use of proceeds]

Approximate
Approximate Percentage
Dollar of Net
Application of Net Proceeds Amount Proceeds
--------------------------------------------------------- ------------- ------------

Purchase of Humidors(1) ................................. $4,000,000 48.2%
Purchase of Cigars and Accessories(2) .................. 1,900,000 22.9
Repayment of Indebtedness(3) ........................... 1,200,000 14.5
Sales and Marketing(4) ................................. 700,000 8.4
Working Capital and general corporate purposes(5) ...... 503,250 6.0
----------- ------
Total ................................................ $8,303,250 100.0%
=========== ======
------------
(1) Represents the amount needed to purchase humidors to supply stores with
custom-designed countertop display humidors.
(2) Represents the amount needed to maintain adequate inventory levels to
support retail sales turnover. Stores will keep only enough stock to fill
their countertop humidors due to the care required to maintain cigar
freshness. In addition, deposits are required on some overseas cigar
purchase orders.

(3) Represents the repayment of the bridge notes issued in 1997 with a total
principal amount of $1,000,000, and the oustanding balance, if any, of a
$200,000 bank credit line. The bridge notes accrue interest at a rate of 8%
per year until completion of this offering and at 16% per year thereafter.
The bridge notes are due on the earlier of the consummation of this
offering, or six months after issuance, but may be paid up to two years from
their issuance. Proceeds from the bridge notes were used to purchase cigars,
humidors and related items, capital equipment and to pay salaries, business
expenses, office costs and professional and consulting fees. The
Consolidated Balance Sheet and the Consolidated Statement of Cash Flows in
the Financial Statements included in this prospectus do not include the
$200,000 bank credit line obtained on July 25, 1997.

(4) Represents sales and marketing expenditures spending for trade relations
events and support to further develop our relationships with major chain
accounts and national distributors.
(5) Represents a minimum level of working capital for general corporate
purposes such as advertising, customer education, deposits and other
prepaid assets.

424B1 20th Page of 79 TOC 1st Previous Next ↓Bottom Just 20th
We intend to use these net proceeds to continue, and further accelerate,
the rollout of the PCI Cigar Program with national chain accounts and others
throughout the United States and Canada. Our plan is to reach 10,000 retail
outlets by the end of this fiscal year, March 31, 1998, and add 10,000 stores
each year. Our aggressive growth plans require extensive working capital to
supply each store with a custom designed humidor, premium cigars and
accessories. In addition, we plan to use $1,000,000 to retire the bridge
financing indebtedness and an additional amount to retire the outstanding
balance, if any, of a $200,000 bank credit line. See "Interim Financing --
Bridge Financing and Bridge Warrants." The use of proceeds disclosed above is
subject to change. If our use of proceeds does change, we believe it would be to
reallocate more proceeds to purchase cigars and humidors and less proceeds to
sales and marketing.

Pending use, the net proceeds will be invested in bank certificates of
deposit and other fully-insured investment grade securities. Any funds we
receive from exercise of the over-allotment option or the representatives'
warrant will be added to working capital.

CAPITALIZATION

The following graph and table set forth the capitalization of PCI as of
June 30, 1997, and as adjusted to reflect: the additional capital contribution
of $150,000 received on August 11, 1997; the sale of 1,900,000 shares at $5.25
per share; the payment of the bridge notes; and the exercise of the bridge
warrants. It does not include the exercise of 19,048 bridge warrants issued to
William B. McKee or exercise of any of the 161,250 stock options.

[Enlarge/Download Table]
[Bar chart comparing actual and pro forma information]

June 30, 1997
----------------------------
Actual As Adjusted
------------- ------------
(Unaudited) (Unaudited)

Long-term liabilities ....................................... $1,000,000 $ 0
---------- ----------
Shareholders' equity:
Common Stock, no par value per share, 10,000,000 shares
authorized, 1,480,500 shares issued and outstanding and
3,742,406 shares issued and outstanding as adjusted ...... 524,675 9,927,928
Accumulated deficit ....................................... (673,311) (755,811)
---------- ----------
Total Shareholders' equity .................................... (148,636) 9,172,117
---------- ----------
Total Capitalization .................................... $ 851,364 $9,172,117
========== ==========

424B1 21st Page of 79 TOC 1st Previous Next ↓Bottom Just 21st
DILUTION

The difference between the public offering price per share of Common Stock
and the as adjusted pro forma net tangible book value per share of Common Stock
after this offering constitutes the dilution to investors in this offering. Net
tangible book value per share is determined by dividing the net tangible book
value (total assets less intangible assets and total liabilities) by the number
of outstanding shares of Common Stock.

At June 30, 1997, the net tangible book value of PCI was ($480,371) or
($.32) per share of Common Stock. At June 30, 1997, after giving effect to: the
additional capital contribution of $150,000 received on August 11, 1997; to the
sale of the Common Stock offered hereby at an initial offering price of $5.25
per share (less, underwriting discounts and commissions and estimated expenses
of this offering); and the exercise of 361,906 bridge warrants; the as adjusted
pro forma net tangible book value at that date would be $9,133,335 or $2.44 per
share. This represents an immediate increase in the adjusted pro forma net
tangible book value of $2.76 per share to existing shareholders and an immediate
dilution of $2.81 per share to new investors, or approximately 54% of the
offering price of $5.25 per share.

The following graph and table illustrate the per share dilution to new
investors without giving effect to the results of operations of PCI subsequent
to March 31, 1997:

[Bar chart of dilution and net tangible book value per share]

Public offering price .................................... $5.25
Pro forma net tangible book value at June 30, 1997 .... ($ .32)
Increase attributable to new investors ................ $2.76
Net tangible book value after offering ................... $2.44
------
Dilution to new investors ............................... $2.81
======
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The following graphs and table summarize the number and percentage of
shares of Common Stock purchased from PCI, the amount and percentage of
consideration paid, and the average price per share paid by existing
shareholders and by new investors in this offering.

[3 groupings of 3 comparison bars: shares, consideration,
average price per share]

[Enlarge/Download Table]

Total Consideration Average
Number Paid Price
of ------------------------- Per
Shares Percent Amount Percent Share
----------- --------- ------------- --------- --------

Existing Shareholders ...... 1,480,500 39.56% $ 357,050 3.16% $ .24
Bridge Warrant Holders ...... 361,906 9.67% $ 950,000 8.42% $2.625
Public Investors ............ 1,900,000 50.77% $ 9,975,000 88.42% $ 5.25
---------- ------- ------------ -------
Total ..................... 3,742,406 100.00% $11,282,050 100.00%
========== ======= ============ =======

The above table includes receipt of an additional capital contribution of
$150,000 on August 11, 1997, and the repurchase of 15,000 shares of Common Stock
from Steven A. Lambrecht for $5,000. It assumes no exercise of (i) the
underwriters' over-allotment option, (ii) the Representative's Warrants, (iii)
161,250 options held by directors, or (iv) the 19,048 bridge warrants held by
William B. McKee that are exercisable at $5.25 per share. See "Risk Factors --
Immediate and Substantial Dilution," "Underwriting," and "Description of
Securities."
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SELECTED HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

Set forth below is selected consolidated financial information with respect
to PCI from June 1, 1996 (inception of cigar distribution activities) to March
31, 1997 and for the three months ended June 30, 1997 (unaudited). The selected
consolidated financial information has been derived from the consolidated
financial statements which appear elsewhere in this Prospectus. This data should
be read in conjunction with the consolidated financial statements of PCI and
their related notes.

[Enlarge/Download Table]

Consolidated Statements of
Operations:
Sales .................................. $ 845,571 $ 845,571 $ 628,180 $ 628,180
Cost of sales .......................... 643,790 643,790 481,677 481,677
----------- ---------- ---------- ----------
Gross profit ........................... 201,781 201,781 146,503 146,503
Selling, general and administrative(1) 323,776 551,276 327,439 357,439
Stock based compensation ............... 207,625 207,625 110,000 110,000
----------- ---------- ---------- ----------
Loss from operations ................... (329,620) (557,120) (290,936) (320,936)
Interest expense and
miscellaneous(2) ...................... 21,522 1,722 31,233 --
----------- ---------- ---------- ----------
Net loss ............................... $ (351,142) $ (558,842) $ (322,169) $(320,936)
=========== ========== ========== ==========
Weighted average shares
outstanding(3) ........................ 1,480,500 3,742,406 1,480,500 3,742,406
=========== ========== ========== ==========
Loss per share ......................... $ (.24) $ (.15) $ (.22) $ (.09)
=========== ========== ========== ==========

June 30, 1997
------------------------------
Historical Pro Forma
------------ ---------------
(Unaudited)(3)
Consolidated Balance Sheet Data:
Working capital .................. $ 94,851 $ 8,708,557
Total assets ..................... $1,262,202 $ 9,582,955
Total liabilities ................ $1,410,838 $ 410,838
Shareholders' equity (deficit) ... $ (148,636) $ 9,172,117

------------
(1) Pro Forma includes additional executive compensation and management fees
pursuant to executive compensation agreements. (See "Management --
Executive Compensation".)
(2) Pro Forma assumes repayment of indebtedness as specified in Use of
Proceeds.
(3) Pro Forma includes receipt of an additional capital contribution of
$150,000 on August 11, 1997, assumes issuance of 1,900,000 shares in the
offering and conversion of the bridge warrants into 361,906 shares of
Common Stock, and assumes no exercise of 19,048 bridge warrants held by
William B. McKee.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS

General

PCI was incorporated in Arizona on December 16, 1996, to be a national and
international distributor of premium cigars from humidors in high traffic retail
outlets.

As of July 31, 1997, we had placed the PCI Cigar Program, which includes
supplying humidors, cigars, service, and information in over 2,615 stores in the
United States and Canada. We are currently expanding with national retail and
distribution accounts in both countries. Our objective is to place the PCI Cigar
Program in 10,000 high volume convenience, gas, grocery and drug stores and
outlets by March 31, 1998 and in 30,000 to 50,000 outlets within three to five
years.

[Enlarge/Download Table]

Jun-96 Jul-96 Aug-96 Sep-96 Oct-96 Nov-96 Dec-96 Jan-97 Feb-97 Mar-97 Apr-97 May-97 Jun-97 Jul-97

49 91 120 227 389 559 596 629 647 671 707 745 1,550 2,615

PCI's primary focus is selling premium cigars priced at retail from $1 to
$8. We market a broad range of brands as well as in-house, private label brands.
PCI's founders, Colin Jones and Greg Lambrecht, have been supplying and
distributing premium cigars through convenience stores and other high volume
outlets since June 1996. Each has more than 12 years of experience supplying
various consumer products to retail outlets.

PCI has arrangements and agreements with national chain accounts to supply
cigars and in-store humidors for direct delivery distribution and in-store
merchandising in the United States and Canada. Customers include stores
affiliated with Southland USA and Southland Canada (7-Eleven), AM/PM, Circle K,
Associated Grocers, SuperValu, McLane Company, and numerous independent
accounts.

In addition, PCI has developed several relationships with cigar
manufacturers and suppliers of cigars from the Dominican Republic, Honduras,
Mexico, Nicaragua and the Philippines. We are expanding our sources for cigars
and accessories.

PCI has experienced rapid growth in a competitive industry, and we are
working to become an industry leader in distributing cigars to convenience
stores and other high traffic retail outlets. As of July 31, 1997, the PCI Cigar
Program was in over 2,615 outlets and we have facilities and staffing to roll
out their PCI Cigar Program in 250 to 500 outlets a week.
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Our objective is to reach 10,000 retail outlets by the end of our fiscal
year ending March 31, 1998, and add 10,000 stores per year over the next three
to five years. PCI's largest customer, Southland, has over 5,000 retail stores
in North America. We believe that we can reach our first year goal by further
penetrating stores affiliated with national chains represented by our current
customer list.

In addition, the convenience and gas station segment of PCI's target market
represents a significant number of retail outlets. The National Association of
Convenience Stores recently reported in its "'97 State of The Industry" report
that there are over 94,000 convenience stores in the United States. This
excludes Canada and other key outlets for our program: grocery, drug and mass
merchandising outlets. Based on our growth and size of the market for our
program, products and services, we believe that our business objectives are
reasonable.

You must read the following discussion of the results of the operations and
financial condition of PCI in conjunction with PCI's consolidated financial
statements, including the notes included elsewhere in this Prospectus.
Historical results and percentage relationships among accounts are not
necessarily an indication of trends in operating results for any future period.
The consolidated financial statements present the accounts of PCI and its
wholly-owned subsidiary, CAN-AM, as well as the predecessor cigar sales activity
of J&M and Rose Hearts. All significant intercompany balances and transactions
were eliminated in consolidation.

Results of Operations

The following table sets forth the percentage of revenue represented by
certain items reflected in PCI's consolidated statements of operations for the
period from the date of inception, June 1, 1996 through March 31, 1997 and for
the three month period ended June 30, 1997:

[Download Table]

Period From Inception For the 3 Month
June 1. 1996, Through Period Ended
March 31, 1997 June 30,1997
----------------------- ----------------

Sales ........................ 100.0% 100.0%
Cost of sales ............... 76.1 76.7
--------- ---------
Gross margin .................. 23.9 23.3
Selling, general, and
administrative expenses ... 38.3 52.1
Stock Based Compensation ...... 24.6 17.5
--------- ---------
Loss from operations ......... (39.0) (46.3)
Other income/expense ......... 2.5 5.0
--------- ---------
Net Loss ..................... (41.5)% (51.3)%
========= =========

Ten Month Period From Date of Inception (June 1, 1996) through March 31, 1997

Sales

Sales of cigars and cigar accessories for the ten month period ended March
31, 1997 were $845,571.

Cost of Sales

Cost of sales for the period from the date of inception, June 1, 1996
through March 31, 1997 was $643,790, with a gross profit of approximately 24%.
Our goal is to establish a consistent gross profit percentage in the range of
30% to 35%. Gross profit for the 10-month period ended March 31, 1997 was lower
due to the lack of volume purchase bargaining power during the initial start-up
phase.
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Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the period from the date
of inception (June 1, 1996) through March 31, 1997, were $323,776, or 38.3% of
sales. These costs were disproportionately high during the initial 10 months of
operations due to the addition of personnel to establish market positions with
various national chains. In addition, administrative costs increased
significantly as we prepared for our increased volume.

Stock Based Compensation

During January and March of 1997 certain employees purchased Common Stock
at a per share price that has been determined to have a market value in excess
of the amount paid by the employees. Additional compensation was recorded in the
amount of the excess market value, or $207,625.

Other Income/Expense

Other income and expense for the period from the date of inception, June
1, 1996 through March 31, 1997, was an expense of $21,522. This expense is made
up of $21,292 in interest, $1,193 foreign currency transaction loss, and an
offset of $963 in miscellaneous income.

Three Month Period Ended June 30, 1996

The following discussion and analysis does not include a comparative
analysis with the prior year's quarter. There was no material activity during
June, 1996.

Sales

Sales for the ten months ended March 31, 1997 totaled $845,571. Sales for
the quarter ended June 30, 1997 were $628,180. Our growth in revenue is a result
of rapid store rollouts during June supported by bridge financing obtained
during the quarter to expand operations in the United States from PCI's new
headquarters and warehouse/distribution center in Scottsdale, Arizona.

Cost of Sales

Cost of sales for the quarter ended June 30, 1997 was $481,677 with a gross
profit of approximately 23.3%. Our goal is to establish a consistent gross
profit percentage in the range of 30% to 35%. Gross profit for the quarter ended
June 30, 1997 continued to be lower due to the lack of volume purchase
bargaining power during the continuing start-up phase of operations.

Selling, General, and Administrative Expenses

Selling, general, and administrative expenses for the quarter ended June
30, 1997 were $327,439, or 52.1% of sales. These costs were disproportionately
high during the quarter due to the startup of operations in Scottsdale, Arizona
and the addition of personnel to establish market positions with various
national chains. Our Scottsdale, Arizona facility began shipping to stores in
June 1997. In addition, administrative costs increased significantly as we
continued to prepare for our increased volume and this offering.

Stock Based Compensation

During the quarter ended June 30, 1997 certain individuals purchased Common
Stock at a per share price that has been determined to have a market value in
excess of the amount paid. In addition, Common Stock valued at $37,500 was given
to Arie Luyendyck to provide certain services related to the endorsement of PCI
and its program. Total stock based compensation of $110,000 was recorded.

Other Income/Expense

Other income and expense for the quarter ended June 30, 1997 was an expense
of $31,233. This expense primarily consists of interest expense on bridge
financing and a note payable as well as amortization of underwriter fees on the
bridge financing.
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Seasonality

We have experienced consistent growth in monthly sales volume throughout
our first year of operations, hampered only by inadequate capital to fund
expansion. However, as we increase our market penetration, we may experience
some seasonality in revenues that is not currently discernable. Our operational
history and the new nature of distributing cigars to convenience outlets does
not yet permit us to identify clear seasonal trends, but we believe that some
variation in convenience store impulse cigar purchases may be tied to outdoor
weather conditions. In the northern U.S. and Canada, sales appear to improve in
the warmer months and in the southern U.S. sales appear to improve in the cooler
months. Because we distribute across the U.S. and Canada, we anticipate that any
seasonal variances in the northern and southern regions will be offsetting and
not have a material impact on our financial condition or operations.

Liquidity and Capital Resources

We require capital to market our PCI Cigar Program, obtain additional
inventory and humidors to supply our increasing distribution network, and
develop the personnel, facilities, assets and organization infrastructure
necessary to support our expanding business. During the period from the date of
inception, June 1, 1996, through March 31, 1997, we financed our operating and
business development activities by issuing notes payable of approximately
$180,000, and shares of Common Stock for approximately $212,050. These funds
were used to acquire equipment in the approximate amount of $23,000, humidors in
the approximate amount of $71,000, pay organizational and deferred offering
costs in the approximate amount of $86,000, and advance funds to affiliates to
pay their prior commitments, in the approximate amount of $86,000.

After March 31, 1997, we obtained additional bridge financing in the amount
of $1,000,000 (including existing debt of $100,000) which has been used
primarily to fund additional expansion of operations. During the quarter ended
June 30, 1997, we used the net proceeds from the bridge financing of $810,000 to
accelerate the expansion of the PCI Cigar Program throughout the United States
and cover costs associated with this offering. Humidor purchases for the quarter
were approximately $175,000, and we purchased equipment costing approximately
$81,000. Deferred costs incurred with this public offering were approximately
$157,000. In addition, $343,000 was used for working capital to fund sales
growth and the related trade receivables and deposits for cigar purchases. In
addition, on July 25, 1997 we obtained a $200,000 line of credit with a bank to
assist with working capital requirements until the completion of this initial
public offering. On August 11, 1997 we received an additional capital
contribution of $150,000 from certain existing shareholders.

We believe that the net proceeds of this offering, together with cash flows
from operations, will be sufficient to meet our anticipated expansion and
working capital needs for the foreseeable future. We have no plans to perform
any significant product research and development, to purchase or sell any
significant plant or equipment, to significantly change our number of employees
or to obtain additional outside capital. However, if additional funding is
required, we may raise capital through the issuance of long-term or short-term
debt or the issuance of securities in private or public transactions. We cannot
assure you that we can generate revenues or obtain acceptable financing for
planned future expansion.
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BUSINESS

Introduction

Historically, premium cigars and cigar-related accessories have been sold
through traditional specialty tobacco retail stores. Our PCI Cigar Program
distributes moderately-priced premium and other cigars through convenience
stores, grocery and drug stores, gas stations and other high-traffic retail
locations that traditionally have not sold premium cigars, which require special
care. We have designed, and have manufactured for us, humidors which we deliver
to each store. Our humidors maintain premium cigars in an appropriately
humidified environment, and we periodically re-stock the humidors. We buy cigars
both from importers and directly from manufacturers. We have certain of our own
brands manufactured for us, but we do not directly manufacture any of our own
cigars. PCI currently distributes premium cigars in 34 of the United States, and
in five Canadian provinces through CAN-AM, a wholly-owned subsidiary. We are
expanding our business with existing and new accounts throughout the United
States and Canada.

We are capitalizing on the increase in demand for premium cigars in the
United States and Canada. Using direct delivery, as well as large and small
distributors, we supply and distribute name brands, as well as our own private
label brands of premium and other cigars, at various moderate price levels,
primarily from $1 to $8. We use independent contract carriers to ship our
humidors and cigars, but we have not used United Parcel Service, and have not
yet been affected by the Teamsters' strike against that company.

Traditionally, convenience stores, grocery and drug stores, gas stations
and other locations sold cigarettes, little cigars, and non-humidified (dry)
mass market cigars such as White Owls(TM), Tipparillos(TM), and Swisher
Sweets(TM). Those stores lacked both access to a supply of fresh (humidified)
premium and other cigars and the expertise to effectively maintain and service
premium cigars. As a result, cigar smokers could buy premium cigars only at
specialty tobacco shops. Our two sales Vice Presidents, Colin Jones and Greg
Lambrecht, have each been in the business of supplying and distributing premium
cigars through convenience stores since June 1996, and each has 12 or more years
experience supplying various other products to convenience store chains and
other retail outlets in Canada or the northwest U.S., respectively.

We have developed and will continue to develop relationships with tobacco
suppliers, and are expanding our commercial and technical support systems to
secure a variety of sources for products, ensure product quality, and maximize
cost savings. We currently depend heavily on two suppliers, TSG Import, Export
and Manufacturing Corporation and House of Horvath, Inc., but we are broadening
our sources of supply. We believe we will be able to contract with a number of
additional suppliers to obtain cigars on terms comparable or more favorable to
our existing sources of supply, primarily because of the high quantity of cigars
we purchase.

We have negotiated and have entered into agreements to supply premium and
other cigars and in-store humidors for direct delivery distribution and in-store
merchandising. As of July 31, 1997 we were servicing 2,615 convenience stores in
the States of: Washington, Oregon, California, Arizona, Texas, Kansas, Missouri,
Utah, Idaho, Alaska, Nevada, Oklahoma, Maryland, Virginia, Colorado, Illinois,
Michigan, Wisconsin, Nebraska, Georgia, Montana, Florida, Massachusetts,
Connecticut, New York, New Jersey, Rhode Island, New Mexico, Pennsylvania, North
Carolina, Louisiana, Alabama, Mississippi and Arkansas; and in the Canadian
Provinces of: British Columbia, Alberta, Saskatchewan, Manitoba and Ontario. We
have identified more than 10,000 retail outlets as potential PCI accounts in
these States and Provinces. Our current customers include stores affiliated with
Southland Canada (7-Eleven), Southland USA (7-Eleven), AM/PM, Circle K,
SuperValu and Associated Grocers. Our goal is to place a high quality humidor
selling premium cigars and accessories in every convenience store and high
traffic retail outlet.

The Expanding Cigar Market

In recent years, cigar smoking has regained popularity in the United
States. Consumption and sales of cigars, particularly premium cigars, have
increased significantly since 1993. After declining
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from its peak in 1964, sales of cigars in the U.S. increased to 4.4 billion
units in 1996 from 3.4 billion units in 1993. Sales of premium cigars, which
had remained essentially flat since 1981 despite continued declines in mass
market cigar sales, increased at a compound annual unit growth rate ("CAGR")
of: 2.4% from 1976 to 1991; 13.9% from 1991 to 1995; and 67.0% from 1995 to
1996. We cannot assure you that this growth rate will continue. Led by growth
in premium cigars, the U.S. cigar market grew at an annual rate of 8.7% from
1993 to 1996.

Premium Cigar Consumption
(Cigars in Millions)

[bar chart of U.S. premium cigar consumption 1991 to 1996]

The following table illustrates the trends in unit consumption and retail
sales for the premium and mass market segments of the U.S. cigar industry from
1991 to 1996(a):

[Enlarge/Download Table]

1991 1992 1993 1994 1995 1996
---------- ---------- ---------- ---------- ---------- --------
(in millions)

Unit Sales:
Premium ............ 97.2 98.9 109.5 125.5 163.9 274.3
Mass Market ......... 3,433.3 3,419.2 3,313.8 3,592.6 3,806.4 4,122.3
--------- --------- --------- --------- --------- --------
Total ............ 3,530.5 3,518.1 3,423.3 3,718.1 3,970.3 4,396.6
========= ========= ========= ========= ========= ========
Retail Sales ...... $ 705.0 $ 715.0 $ 730.0 $ 860.0 $1,005.0 --

------------
(a) Source -- Cigar Association of America, Inc. ("CAA"). CAA's premium cigar
data includes cigars imported from seven leading supplier countries,
including the United States. U.S. premium cigar production was
approximately 5.0 million units in 1995.

The growth rate in premium cigar imports continued to accelerate in 1996
and thus far in 1997. Premium cigar imports in January 1997 more than doubled
compared to January 1996, with almost 24 million cigars imported in January
1997 compared to 11 million cigars in January 1996. (Source: The Cigar
Insider). Sales of premium cigars have more than doubled in the span of three
years. Sales of mass market cigars grew at a CAGR of 7.2% from 3.3 billion
units in 1993 to 4.1 billion units in 1996. Overall growth in retail sales of
cigars was primarily a combination of a shift in the sales mix to more
expensive cigars as well as the increased number of cigars being sold.
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We believe that the increase in cigar consumption and retail sales is the
result of a number of factors, including:

(i) the improving image of cigar smoking resulting from increased
publicity, including the success of Cigar Aficionado(TM), Cigar Lover(TM),
Smoke(TM) and The Cigar Smoker(TM) magazines and the increased visibility of
cigar smoking by celebrities (such as Arnold Schwarzenegger, Mel Gibson, Demi
Moore, Michael Jordan, Wayne Gretzky and Jack Nicholson);

(ii) the emergence of an expanding base of younger, highly educated,
affluent adults age 25 to 40 with an interest in luxury goods, including
premium cigars;

(iii) the increase in the number of "baby boomer" adults over the age of
40 (a demographic group believed to smoke more cigars than any other
demographic group);

(iv) an increased number of women smoking cigars; and

(v) the proliferation of establishments, such as restaurants and clubs,
where cigar smoking is encouraged, as well as "cigar smokers" dinners and
other special events for cigar smokers.

"Cigars have recaptured their traditional image as a symbol of success,
celebration and achievement. It is now seen as an item of quality in keeping
with such other quality items as gourmet coffees, fine wines, beer from
micro-breweries, single malt scotches and single barrel bourbons." (Norman F.
Sharp President, Cigar Association of America).

Categories of Cigars

Cigars are divided into three principal categories: premium cigars, mass
market cigars and little cigars.

Premium Cigars. Most premium cigars are imported, hand-rolled cigars made
with long filler and all natural tobacco leaf wrappers. Other moderately-priced
premium cigars use a combination of short and medium filler, are hand-rolled
with all natural wrappers and are kept humidified. The Dominican Republic,
Honduras and Jamaica collectively accounted for approximately 87.0% of premium
cigars imported into the U.S. in 1996. Many of the finest premium cigars sold in
the U.S. trace their roots to pre-Castro Cuba and the Cuban emigres who
continued making premium cigars in Jamaica, Honduras, the Dominican Republic and
Florida. PCI distributes primarily moderately-priced premium cigars, but also
distributes a limited number of higher-priced premium cigars.

Mass Market Cigars. Mass market cigars generally are domestic, machine-made
cigars that use less-expensive short filler tobacco and are made with tobacco
binders and either homogenized sheet wrappers or natural leaf wrappers. Sales of
mass market cigars, using natural leaf wrappers, grew by 8.6% in 1995 and 9.8%
in 1996, as consumers appear to have shifted to more expensive, higher quality
mass market cigars. We distribute a significant number of high quality, natural
leaf wrapper, mass market cigars, including smaller-sized, humidified, natural
leaf cigars.

Little Cigars. Little cigars are the lowest priced cigars. Little cigars
weigh less than three pounds per 1,000, and may have filters. Little cigars are
not made with binders, are dry (not humidified) and are manufactured and
packaged similarly to cigarettes. PCI does not distribute any little cigars.

Currently, all segments of the premium cigar industry are growing rapidly,
from the low and moderately-priced premium cigars which we market to the "high
priced" cigar brands sold by established cigar/tobacco retail specialty shops.
We believe that large importers and manufacturers of premium cigars will
continue to distribute their nationally advertised, leading brands primarily
through local cigar/tobacco stores because sales through other locations require
supplying humidors and care instructions. As and if our market demands, we
intend to sell a larger number of higher quality premium cigars.

Cigar Production

According to statistics compiled by The Cigar Insider, the Dominican
Republic produces and exports more premium cigars into the United States than
any other country in the world. It has a
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strong lead over all other cigar exporting nations, with nearly 50% of the
market. Industry experts rate cigars manufactured in the Dominican Republic
third in the world in quality, trailing only those from Cuba and Jamaica.

Cuban cigars cannot be exported into the United States as a result of the
1962 trade embargo. Neither PCI nor our wholly-owned subsidiary CAN-AM currently
distributes or engages in any transactions involving Cuban cigars or any
products of Cuban origin in any of our operations, whether in the United States,
Canada or elsewhere. Our standard form supplier agreement strictly prohibits our
suppliers from providing any product containing any component of Cuban origin.

Cigar Purchasing; Private Label and Custom Brands

We do not directly manufacture or import any cigars and rely entirely upon
third party manufacturers and importers to supply us with cigars. Some of our
suppliers and importers also directly manufacture some or all of the cigars they
sell to us. All of our suppliers deliver the cigars to us in the U.S. after
cigars have passed through customs and after all of the shipping and other
import costs have been paid.

We currently do not have written contracts with our two largest suppliers,
but are relying upon the strength of our relationships and ongoing negotiations
with them and a number of alternative suppliers to meet our current and future
supply requirements. Although our current relationships with our two largest
suppliers are good, if problems develop, without written contracts the
relationships could end abruptly.

We have developed a standard form supplier agreement that is similar to all
common buyer/seller agreements for consumer products. In general terms, the
agreement sets our negotiated minimum purchase requirements, and establishes
delivery to us at Phoenix Sky Harbor International Airport after the cigars have
passed through customs and shipping is paid. The agreement allows for
termination upon 120 days notice, includes a warranty that no illegal substances
accompany the products, prohibits disclosure or contact with each party's
business relationships, and contains a covenant by the seller not to compete
with us for a negotiated period. We have entered variations of our form supply
agreement with two newer suppliers who currently supply only a small portion of
our total needs.

House of Horvath, Inc., accounted for approximately 71% of our cigar
purchases from inception to March 31, 1997 (and a higher percentage in Canada).
However, our purchases from House of Horvath decreased to approximately 37% of
our total sales for the quarter ended June 30, 1997. We have no written contract
with House of Horvath and purchase by purchase order only. We currently purchase
cigars and accessories from over 19 different sources. As we have increased the
volume of our cigar purchases, vendors have offered more favorable terms.

TSG Import, Export and Manufacturing Corporation, a company located in the
Dominican Republic, is currently our largest supplier and importer, and
accounted for 38% of our total sales for the quarter ended June 30, 1997. We are
operating under a verbal exclusive supply arrangement with TSG. TSG currently
can manufacture 60,000 cigars a month and potentially source up to an additional
240,000 premium cigars per month. We had a written contract with TSG, which
expired in July 1997. We are currently negotiating with TSG to renew our
contract, but we continue to purchase cigars from TSG on the same terms as our
previous agreement.

We currently purchase cigars manufactured in the Dominican Republic,
Mexico, Honduras, Nicaragua and the Philippines, and are working to establish
relationships with additional cigar manufacturers in the Dominican Republic.

In addition to brands distributed by our suppliers, we also sell cigars
manufactured to our specifications by TSG and other suppliers which we
distribute and sell under our own "private" label. We are negotiating with
additional suppliers and customers to expand our private label operations, but
we cannot assure that we will be successful. We will continue to purchase cigars
manufactured by others from time to time as they become available on the open
market. We purchase our cigars from 19 various suppliers to meet demands at our
sales price points.
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The recently publicized shortage of premium cigars has focused on the large
importers and manufacturers that distribute well known "high priced" premium
cigars to the local cigar/tobacco stores. We believe that the shelves of local
cigar/tobacco stores have been, and will continue to be, low on stock due to
brand name manufacturers not being able to meet the demand for their high
priced, premium cigars. Supplies of the moderately-priced premium cigars we sell
have remained more than adequate. Social, political or economic changes could,
among other things, interrupt cigar supply or cause significant increases in
cigar prices. In particular, political or labor unrest in the Dominican
Republic, Mexico or Honduras could interrupt the production of premium cigars,
which would inhibit us from buying inventory.

Company History

PCI was incorporated in Arizona in December, 1996, and shortly thereafter
acquired CAN-AM International Investments Inc., a Canadian corporation
("CAN-AM") which owned all cigar accounts, inventory and humidors formerly owned
by Rose Hearts Inc. ("Rose Hearts") of Seattle, Washington, and J&M Wholesale,
Inc. ("J&M") located near Vancouver, British Columbia.

PCI's National and International Sales Managers, Colin Jones and Greg
Lambrecht, through J&M and Rose Hearts, respectively, developed their concept of
selling premium cigars using in-store countertop humidors in convenience stores,
grocery stores and other retail outlet markets in June of 1996. Colin Jones owns
and operates J&M, a 12-year-old regional supplier and distributor of impulse
purchase products to the convenience store market in British Columbia, Canada.
Greg Lambrecht owns and operates Rose Hearts, a 14-year-old supplier and
distributor of impulse purchase products to convenience stores and grocery
stores in the northwestern United States including Washington, Oregon, Northern
California, and Montana.

Our Largest Customer. Corporate and franchise stores affiliated with
Southland USA and Southland Canada (7-Eleven) accounted for over 82% of our
sales in the fiscal year ended March 31, 1997. We have expanded our customer
base, but sales to 7-Eleven stores still accounted for over 79% of our sales for
the quarter ended June 30, 1997. We expect that sales to 7-Eleven stores will
continue to account for a substantial percentage of our sales.

Canadian Sales; CAN-AM. With an average of over 12 years of distribution
experience in the convenience store industry, Colin Jones and Greg Lambrecht
created a new company, CAN-AM, to establish a premium cigar program with
7-Eleven in five Canadian Provinces. They believe that CAN-AM was the first
company to market premium cigars sold out of in-store humidors to a Canadian
national convenience store chain.

The first major presentation of what is now the PCI Cigar Program was to
Southland Canada (7-Eleven). An initial test was conducted in 45 stores in
Vancouver, B.C. and 15 stores in Edmonton, Alberta, with a possibility of
expansion in 60 days if the test market was successful. After three weeks, the
premium cigar program was so successful that 7-Eleven began a national program,
and the PCI Cigar Program is currently in virtually all of 464 7-Eleven stores
across Canada. With a warehouse near Vancouver B.C., a national distribution
system, and a telemarketing service, current CAN-AM sales to 625 stores in the
quarter ended June 30, 1997 were approximately $400,000 (unaudited).

CAN-AM secured a strong foothold in the convenience industry with 7-Eleven
stores, and is pursuing expansion through chains such as Mac's and Petro-Canada,
as well as other independent retail outlets. Numerous retail outlets have
approached CAN-AM to supply them with the PCI Cigar Program. Through July 31,
1997, CAN-AM has secured over 630 retail outlets in Canada and is expanding to
large chain stores and through distributors.

U.S. Sales. As of June 30, 1997 our United States operations distribute to
1,985 stores in 34 states. PCI U.S. sales in the quarter ending June 30, 1997
were approximately $200,000 (unaudited).

7-Eleven. Largely because of the success of the PCI Cigar Program with
Southland Canada, PCI and Southland USA have negotiated and signed a master
agreement to establish the PCI Cigar Program in 7-Eleven corporate stores and in
all franchise stores that request the PCI Cigar Program.
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There are over 5,300 7-Eleven stores across the United States. Under this
agreement, we added approximately 500 stores a month through June, at which
time we increased to 1,000 new stores a month and hope to continue at that rate
until our 7-Eleven rollout is complete.

Rose Hearts. The PCI Cigar Program was established in the northwest United
States by Rose Hearts and Greg Lambrecht. Rose Hearts sold these accounts to
CAN-AM, PCI's wholly owned subsidiary, but continues, as PCI's distributor, to
service the PCI Cigar Program accounts in stores affiliated with 7-Eleven,
Circle K, AM/PM and other chains in Washington, Oregon, Idaho, northern
California and Alaska. Rose Hearts' owner, Greg P. Lambrecht, intends to sell or
liquidate Rose Hearts in the future, at which time we expect to assume the
direct service of all of the stores that Rose Hearts currently serves. Greg
Lambrecht has turned over operational control of Rose Hearts to other management
so that he can honor his full-time obligations to us.

McLane. McLane distributes products to over 35,000 retail outlets
nationwide. We believe that currently PCI is the largest supplier of premium
cigars to McLane, but we are not its sole supplier of humidors or premium
cigars. We now distribute to two of McLane's 16 divisions, and are negotiating
with other divisions. In addition to placing the PCI Cigar Program in Circle K
stores serviced by McLane in Las Vegas and one McLane account in Arizona, we
have placed a large distributor humidor in a McLane facility in Goodyear,
Arizona, through which McLane services its Sun West Division (Arizona and
Nevada).

AM/PM. We have executed an agreement with AM/PM to place the PCI Cigar
Program in AM/PM convenience stores in Washington and Oregon. We have placed
humidors in 106 stores, and will roll out to over 100 stores, with the potential
of nearly 200 stores. If initial results are successful, we intend to present
the PCI Cigar Program to AM/PM nationwide.

Associated Grocers. We have executed an agency contract with Associated
Grocers to distribute the PCI Cigar Program to Associated Grocers' retail
outlets (421 stores) in the Northwest. We have placed humidors in over 45
Associated Grocers stores.

Texaco Star Mart. We service 27 Texaco Star Mart convenience stores in the
Northwest, and are negotiating to expand the PCI Cigar Program with Texaco.

Growth Plans; Additional Capital Needs. We intend to grow rapidly by
expanding the PCI Cigar Program distributing moderately-priced name brand and
private label premium cigars and other cigars, in-store humidors, direct
marketing, in-store merchandising, telemarketing, and education and training to
retail outlets in the US and Canada. We have grown quickly with investor capital
and bridge financing, but we have reached a point where substantial outside
capital is needed to further expand the PCI Cigar Program.

Overall Marketing. Colin Jones and Greg Lambrecht each have been in the
impulse item distribution business for over 12 years and have established
relationships with many accounts across the United States that represent
additional retail outlets not yet selling premium cigars. PCI officers attended
the National Association of Convenience Stores ("NACS") convention in Las Vegas
and displayed our premium cigars and in-store humidors. Our humidors advertise
the PCI logo, name, and toll free number. We recently entered an endorsement
agreement with a celebrity spokesman, Arie Luyendyk, to help promote the PCI
Cigar Program.

Products

The PCI Cigar Program. We offer a "full service" program to convenience
stores and gas station outlets, grocery stores, and other high volume retail
stores. To effectively place premium cigars and in-store humidors, we primarily
distribute directly to outlets, but to a smaller degree distribute through
independent local/regional and national distributors. Direct sales accounted for
approximately 88% of our total sales and third-party distribution accounted for
less than 12% of our total sales for the quarter ended June 30, 1997. We offer
and recommend that a PCI sales representative visit each local area to educate
store managers and regional supervisors about the
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PCI Cigar Program. This presentation is accompanied by the PCI "Guide to
Premium Cigars" that reviews the types of premium cigars by taste, smell,
country of origin, and, most importantly, how to effectively sell premium
cigars.

The on-going success of our "full service" PCI Cigar Program depends, in
part, on tele-merchandising. Our representatives call store managers at retail
outlet locations periodically to ask specific questions relating to sales
volume, humidity levels, and placement of humidors. We analyze customer feedback
and make recommendations on cigar brands and price points based upon the
customer profile and experience of a retail location. This system has been
working effectively in Canada for several months, and is being implemented in
the U.S.

Humidors. We provide, and retain ownership of, all countertop humidors
shipped to retail outlets. Our humidors provide an attractive product display
and increase counter space available for PCI's products. In addition, we have
designed and attached a magazine rack, which can be used to display and sell
trade magazines such as Cigar Aficionado and Smoke. The celebrity covers used by
such magazines, when displayed in the magazine rack, provide high impact, point
of purchase signage.

Each PCI in-store humidor is a sealed case or box that displays premium
cigars in an optimal environment of humidity. Our in-store humidors come in
varying sizes that can store and display 50 to 400 cigars. The most popular
humidor is a stained, hand-made wood case with a clear plexiglass lid, which
holds 75 to 125 cigars.

PCI's in-store humidors are designed to be placed on store countertops next
to the cash register for maximum exposure. Each in-store humidor is equipped
with a humidifier unit and a humidity gauge to indicate when to soak the
humidifier in purified water. We designed a long-lasting Spanish cedar
humidifier to maintain constant humidity. Point of purchase signs which describe
the characteristics of the cigars, such as the name of the cigar, country origin
of the tobacco, size, flavor, and price are placed on the front of each stock
keeping unit ("SKU") in the in-store humidors.

PCI does not pay "slotting" fees or other inducements to retailers in order
to secure counter space, which could affect our ability to place our humidors in
prime locations. In addition, other major manufacturers or distributors may have
agreements with convenience stores which require the stores to locate the
manufacturers' or distributors' tobacco products in a counter position that is
preferential to, or at least as favorable as, the location of other suppliers'
products, including our humidors. This may inhibit our ability to obtain
favorable counter presentation of our humidors.

We currently have four suppliers of humidors which are based in Arizona,
Oregon, California and Canada, our largest supplier being The Wildwood
Collection of Scottsdale, Arizona. Although we have specially designed our
humidors to meet our business needs, we believe any reputable cabinet making
company could meet our production specifications. For this reason, we do not
believe we are dependent upon any humidor supplier and we have not entered any
written contracts with our humidor suppliers.

Our Cigars. We distribute moderately-priced imported premium cigars, a
limited number of higher-priced finest quality premium cigars, a significant
number of mass-market cigars and certain accessories. We currently distribute
over 60 brands of cigars.

Premium Cigars. Our premium cigars are generally hand-rolled and sell at
retail price points above $1.00/cigar. Through the PCI Cigar Program we
distribute primarily large premium cigars with long-filler, long/medium, and
medium/short filler tobacco and high quality, natural leaf wrappers and binders.
In order to make hand-made cigars, binder tobacco is hand-wrapped around filler
to create the "bunch" which is placed into a mold. Then, "wrapper" tobacco is
hand-wrapped around the bunch, creating a premium cigar.
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The manufacturing process for premium cigars includes the selection,
purchase and aging of the tobacco and hand rolling of the cigars. Tobacco is
selected based upon its flavor and quality. The availability and quality of
tobacco varies from season to season as a result of such factors as weather
conditions and the demand for the tobacco.

The taste of the cigar is based on the quality and/or blend of the tobacco.
We do our best to select premium cigars with a blend of imported fine aged
tobaccos. After tobacco is grown, it is typically aged for periods of between
three months to three years. The time period for aging cigar tobacco has been
substantially reduced in recent months due to the high demand for leaf tobacco
used for cigar manufacturing worldwide.

The cigar industry in general has recently experienced shortages in
high-priced premium cigars because of shortages of certain types of the longest
aged and highest priced natural wrapper and long filler. Currently, there is an
abundant supply from a number of countries of the moderately-priced premium
cigars of the types distributed by PCI. Although the shortages have not
materially impacted cigar production to date, we cannot assure that future
shortages will not have an adverse effect on the PCI Cigar Program.

Mass Market Cigars. Mass market cigars are machine-made and generally have
a retail price point of $1.00/cigar or less. Mass market cigars use less
expensive tobacco than premium cigars. Manufacturers use a variety of techniques
and grades of tobacco to produce mass market cigars that sell at PCI's low price
points. Mass market cigars include large cigars (weighing three pounds/1,000
cigars) and smaller, natural leaf cigars (weighing less than three pounds/1,000
cigars). We purchase significant quantities of mass market cigars from several
sources for sale at our lowest price point.

Mass market large cigars combine natural leaf wrapper and man-made binder
made from tobacco ingredients instead of natural binder, with filler threshed
into short, tobacco ingredients replacing natural tobacco leaf. Flavoring and/or
plastic tips are often added to popularly priced mass market large cigars.

Price Point Supplies. Our PCI Cigar Program currently provides each
customer with a number of cigars at each price point established between PCI and
the specific store or distributor. This strategy allows us to substitute various
premium cigar brands in each price group, depending upon supplies available from
time to time. Our typical humidor displays premium cigars in three or five
different price point SKUs. In addition, we maintain large custom-designed
display case humidors with eight or more price point SKUs for selected
high-volume locations.

No Returns of Unsold Product to Date. We are generally obligated to accept
returns of unsold products, but because of the nature of our PCI Cigar Program,
we have had no returns to date. Our program tends to eliminate returns because
properly humidified premium cigars improve with age, and our program properly
maintains cigars in humidifiers. In addition, we do not supply more inventory
than is required, but focus on filling price points as inventory depletes. Our
telemerchandisers currently maintain frequent contact with the stores we
service. We cannot assure that this record will continue.

Our Expansion Plans

Our strategy for continuing growth and achieving profits involves filling a
market niche by providing affordable, premium cigars that are conveniently
accessible to the cigar smoking public. The PCI Cigar Program includes several
components, including:

Cigar Purchasing and Supply. Most of the cigars we sell are high quality,
low to medium priced, premium cigars that are currently available in large
quantities and are affordable.

We do business with, and are negotiating relationships and agreements with,
cigar importers and manufacturers which have relationships with tobacco
plantations in the Dominican Republic and Mexico. The Dominican plantations with
which we deal are located in the same valley that produces tobacco used in high
priced premium cigars, and we believe that our suppliers produce cigars of
similar high quality. However, we believe we can purchase and distribute these
cigars at significantly
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lower prices than those made by the brand name manufacturers. We intend to
maintain the manufacturers' labels which they use in their country's local
markets, and have begun to create our own private labels which may be banded on
these premium cigars.

We believe that we have built satisfactory supply relationships and are
currently working with various cigar importers to assure that PCI will have an
adequate supply of cigars at each key retail price point. We anticipate rapid
expansion during the next few years, and we expect to add new suppliers to
broaden our access to quality cigar and cigar accessories. We are also securing
rights to distribute and place several different in-store humidors.

Master Agreements and Arrangements with National Chains. A "master
agreement" is a form retailer or regional distribution agreement that PCI
negotiated with a major convenience store chain, which is approved for use by
retail stores or regional distribution centers within the chain, but which must
be accepted by each individual store or distribution region which wishes to
participate in the PCI Cigar Program. We have "master" agreements and other
arrangements with several major convenience store chains to place the PCI Cigar
Program in corporate and franchise stores, the largest of which is Southland USA
(7-Eleven). However, the nature of the convenience store distribution business
is that all supplier relationships are terminable on short notice (usually on
between 30 and 120 days notice). Participation in the PCI Cigar Program is
usually at the discretion of each local franchise store or each region of the
country. As long as demand for premium cigars remains strong, we believe that
individual stores and regions will participate in our PCI Cigar Program.

Regional Direct Distribution and Sales Companies. We have entered into
arrangements or agreements with two regional direct distribution and sales
companies to supply them with premium cigars and in-store humidors in mass
quantities. These regional direct distribution and sales companies, Rose Hearts
and McLane Company, will, in turn, sell, deliver direct to the stores, service,
and merchandise the PCI Cigar Program. Third-party distribution accounted for
less than 12% of our total sales for the quarter ended June 30, 1997. We have
provided distributors with large humidors for quantity storage of cigars at
distribution warehouses. Our distribution relationship with Rose Hearts is
ongoing, but we anticipate that Rose Hearts' cigar distribution operations may
be phased out. In that event, we would assume direct servicing of our accounts.
We believe that our relationship with McLane Company and with other distribution
companies with which we may contract in the future will allow us to expand the
PCI Cigar Program rapidly throughout the western United States. We intend to
continue to utilize and expand this sales, distribution and merchandising
strategy with similar regional direct distribution and sales companies
throughout the rest of the U.S. and possibly Canada.

PCI entered a Distributorship Agreement on June 13, 1997 with Rose Hearts
for the non-exclusive distribution to Associated Grocers, SuperValu and other
accounts in the states of Alaska, Idaho, Oregon, Washington and Northern
California. The agreement provides that any master agreement with a national PCI
account or national distributor will supersede the Rose Hearts agreement. We pay
Rose Hearts a commission equal to 10% of the wholesale cost to the store of
products PCI ships to third-party stores where Rose Hearts provides only
in-store merchandising support services. We pay Rose Hearts a commission equal
to 22% of the wholesale cost to the store of PCI products that Rose Hearts
delivers to the stores directly. We provide Rose Hearts, at our expense, with a
warehouse humidor to store PCI products shipped to Rose Hearts. The agreement is
terminable by either party upon 30 days written notice. Greg P. Lambrecht is the
President and sole shareholder of Rose Hearts and the Secretary, Treasurer, Vice
President of National Sales and a substantial shareholder of PCI.

Price Point Supply Systems. We have developed a price-point-based ordering
system to eliminate complications of brand-specific product ordering, minimize
stock shortages, and more effectively meet demand. We group our cigars by retail
price point. Store personnel simply select the
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amount of cigars needed at each price point and phone or fax in the order. We
then fill the order with cigars in stock which fall within the price point
grouping. It is possible to order cigars by name, but the PCI Cigar Program
provides that if a particular brand is not in stock when the order is taken,
then a comparable cigar within the price point will be substituted.

Extensive Education and Training Program. We believe that proper education,
training, and support of store personnel can enhance the PCI Cigar Program by
providing knowledge and awareness of brand popularity, cigar characteristics,
care of humidors, and proven selling techniques. We have developed the "Premium
Cigars International Comprehensive Guide to Premium Cigars" for distribution to
store managers and employees, and a separate comprehensive package for
distributors that introduces and explains the PCI Cigar Program in detail.

State of the Art Management/Accounting Information Systems. Customer
service and support are key factors in the success of the PCI Cigar Program. We
have acquired and are implementing a modern, mid-sized integrated information
system throughout PCI to support a business strategy which includes call
management, order entry, credit and collection, inventory management, accounting
and reporting, and decision management tools.

Utilizing Distribution Companies And Telemarketing. We directly distribute
the majority of our products to our customers. McLane Company and Rose Hearts
are our only third party distributors and their combined distributions represent
less than 12% of our total sales. Athough our relationship with Rose Hearts is
ongoing, we anticipate that Rose Hearts' cigar distribution operations may be
phased out. In that event, we will take over servicing of the accounts. We are
expanding the PCI Cigar Program through McLane Company and other third party
distributors that currently deliver items to convenience stores, grocery stores,
gas stations and restaurants throughout the United States and Canada. We believe
we can use established national distributors to enable us to expand rapidly to
thousands of stores that they already service. By using large distributors, we
can consolidate the invoicing of thousands of stores and drop ship large
quantities of cigars and humidors to the distributors' regional warehouses or
distribution centers for delivery directly to retail stores. We plan to increase
the number of telemerchandiser we use so that stores being serviced by
distributors will be called regularly to check on supply, chart sales, give tips
on selling and placement of the humidors, and ensure that the store managers
know how to care for the humidors.

Most distributors purchase the products directly from us and then resell
the products to the outlet accounts they serve. The compensation for these
distributors is built into their pricing from us. Because we own the accounts
that Rose Hearts previously served, we retain ownership of the products Rose
Hearts distributes and pay Rose Hearts a percentage commission of the wholesale
cost to the store, but Rose Hearts' compensation is no more favorable than any
non-related-party distributor who is compensated in the pricing structure.

Advertising and Promotions; Spokesperson. We intend to support the
distribution of our cigars through advertising in numerous publications,
including Cigar Aficionado, Smoke, Cigar Lovers, The Cigar Smoker and other
publications oriented to the type of person whom, we believe, smokes premium
cigars. We also intend to expand our advertising and marketing through
promotions distributed at our points of sale and through direct mail, and
participation in trade shows. Recently we signed an agreement with Arie
Luyendyk, winner of this year's Indianapolis 500, to be a spokesperson for PCI.
Our logo is displayed on his helmet, and he will support us through personal
appearances.

Competition

We believe that, as a distributor of premium cigars to convenience outlets,
PCI competes with a smaller number of primarily regional distributors including
Southern Wine and Spirits, Specialty Cigars, Inc., Cohabico, Old Scottsdale
Cigar Company, Inc. and many other small tobacco distributors and jobbers.

The broader cigar distribution industry is dominated by a small number of
companies which are well known to the public. These well-known cigar
manufacturing and wholesale companies, along with major cigarette manufacturers,
have not yet entered the retail distribution market. These
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companies include 800 JR Cigar Company, Inc., Consolidated Cigar Company,
Culbro Corporation, General Cigar Company, Swisher, Caribbean Cigar Company, US
Tobacco and others. These companies may do so in the future. Also a number of
large distribution companies, such as McLane Company and Core*Mark, who are
currently in the convenience outlet distribution business, but who have not
entered the cigar distribution business, may do so in the future. These cigar
manufacturing and wholesale companies have larger resources than PCI and would,
if they enter the cigar distribution market, constitute formidable competition
for our business.

We compete by offering our PCI Cigar Program as a total package of service,
convenience and quality. Our cigars are not the cheapest in the market nor the
highest-end quality cigars, but we believe they represent excellent value as
high quality products at fair prices and in convenient purchasing locations.

Government Regulation

General. The tobacco industry in general has been subject to regulation by
federal, state and local governments, and recent trends have been toward
increased regulation. Although regulation initially focused on cigarette
manufacturers, it has begun to have a broader impact on the tobacco industry as
a whole. Regulation may focus more directly on cigars in the future because of
the recent increase in popularity of cigars. Regulations include labeling
requirements, limitations on advertising and prohibition of sales to minors, and
laws restricting smoking from public places including offices, office buildings,
restaurants and other eating establishments. In addition, cigars have been
subject to substantial excise taxation at the federal, state and local level,
and those taxes may increase in the future. Future regulations and tax policies
may have a material adverse affect upon the ability of cigar companies,
including PCI, to generate revenue and profits.

Excise Taxes.

U.S. Federal Taxes. Effective January 1, 1991, the federal excise tax rate
on large cigars (weighing more than three pounds per thousand cigars) was
increased to 10.625%, capped at $25.00 per 1,000 cigars, and again increased to
12.75%, capped at $30.00 per 1,000 cigars, effective January 1, 1993. The
federal excise tax is calculated based on the manufacturer's selling price, net
of the federal excise tax and certain other exclusions. The federal excise tax
on little cigars (weighing less than three pounds per thousand cigars) increased
from $0.75 per thousand cigars to $0.9375 per 1,000 cigars effective January 1,
1991. The excise tax on little cigars increased to $1.125 per 1,000 cigars
effective January 1, 1993. We do not believe that the current level of excise
taxes will have a material adverse effect on our business, but we cannot assure
that additional increases will not have a material adverse effect on our
business.

U.S. State and Local Taxes. Cigars and pipe tobacco are also subject to
certain state and local taxes. Deficit concerns at the state level continue to
exert pressure to increase tobacco taxes. Since 1964, the number of states that
tax cigars has risen from six to 42. State excise taxes generally range from 2%
to 75% of the wholesale purchase price, and are not subject to caps similar to
the federal cigar excise tax. In addition, seven states have increased existing
taxes on large cigars since 1988. Five states tax little cigars at the same
rates as cigarettes, and four of these states have increased their cigarette
taxes since 1988.

State cigar excise taxes are not subject to caps similar to the federal
cigar excise tax. Increases in such state excise taxes or new state excise taxes
may in the future have a material adverse effect on our business.

Canadian Taxes. Each Canadian province has approved CAN-AM to collect
provincial taxes under the applicable province's tobacco tax act. The tax rates
vary from province to province, but range from 45% of the retail selling price
in Manitoba and Alberta to 95% of the retail selling price in Saskatchewan.

Health Regulations.

General. Cigars, like other tobacco products, are subject to regulation in
the U.S. at the federal, state and local levels. Together with changing public
attitudes toward smoking, a constant
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expansion of smoking regulations since the early 1970s has been a major cause
for a substantial decline in consumption. Moreover, the trend is toward
increasing regulation of the tobacco industry.

Federal Regulation. In recent years, a variety of bills relating to tobacco
issues has been introduced in the Congress of the United States, including
bills that would have: prohibited the advertising and promotion of all tobacco
products and/or restricted or eliminated the deductibility of such advertising
expenses; set a federal minimum age of 18 years for use of tobacco products;
increased labelling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; modified federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; required tobacco companies to pay for
health care costs incurred by the federal government in connection with tobacco
related diseases; and shifted regulatory control of tobacco products and
advertisements from the Federal Trade Commission to the U.S. Food and Drug
Administration (the "FDA"). In some cases, hearings were held, but only one of
these proposals was enacted. That law requires states, in order to receive full
funding for federal substance abuse block grants, to establish a maximum age of
18 years for the sale of tobacco products along with an appropriate enforcement
program. The law requires that states report on their enforcement efforts.
Future enactment of the other bills may have an adverse effect on the sales or
operations of PCI. Currently, the federal Consumer Product Safety Commission is
working to establish such standards for cigarettes. The enabling legislation, as
originally proposed, included little cigars. However, little cigars were deleted
due to the lack of information on fires caused by these products.

Excise Taxes; Budget Law. In recent years, many increases in cigarette
excise taxes have been proposed. The "balanced budget" legislation signed into
law by President Clinton on August 5, 1997 increases federal excise taxes on
each pack of cigarettes by 10 cents in 2000 and an additional 5 cents in 2002.

EPA Regulation. The U.S. Environmental Protection Agency (the "EPA") has
recently published a report with respect to the respiratory health effects of
passive smoking. The report concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health impact. In June
1993, Philip Morris and five other representatives of the tobacco manufacturing
and distribution industries filed suit against the EPA seeking a declaration
that the EPA does not have the statutory authority to regulate environmental
tobacco smoke, and that, in view of the available scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's final risk assessment was arbitrary and capricious. The litigation is
still pending.

FDA Regulation. The FDA has proposed rules to regulate cigarettes and
smokeless tobacco in order to protect minors. Although the FDA has defined
cigarettes in such a way as to include little cigars, the ruling does not
directly impact large or mass market cigars. However, once the FDA has
successfully exerted authority over any one tobacco product, the practical
impact may be felt by distributors and manufacturers of any tobacco product. If
the FDA is successful, this may have long-term repercussions on the larger cigar
industry. The major tobacco companies and advertising companies recently brought
an action in federal court in North Carolina challenging FDA regulation of
tobacco products. The trial court ruled, on April 25, 1997, that the FDA may
regulate tobacco products under the Federal Food, Drug and Cosmetic Act. The
court certified its order for immediate appeal and the ultimate resolution of
the litigation is still pending.

In June, 1997, the Action on Smoking and Health (ASH), an anti-tobacco
organization, submitted a petition to the FDA asking it to assert jurisdiction
over cigars the same way it has done over cigarettes. ASH wants the FDA to adopt
rules to regulate the sale, advertising, and promotion of cigars. Its petition
cites various studies on the use and dangers of cigars. A health panel, headed
by C. Everett Koop, has also asked the FDA to regulate cigars.

State Regulation. In addition, the majority of states restrict or prohibit
smoking in certain public places and restrict the sale of tobacco products to
minors. A majority of states have prohibited smoking in places such as: any
public building designated as non-smoking; elevators; public
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transportation; educational facilities; health care facilities; restaurants and
workplaces. Local legislative and regulatory bodies have also increasingly
moved to curtail smoking by prohibiting smoking in certain buildings or areas
or by requiring designated "smoking" areas. In a few states, legislation has
been introduced, but has not passed, which would require all little cigars sold
in those states to be "fire-safe" little cigars, i.e., cigars which extinguish
themselves if not continuously smoked. Passage of similar restrictions or
regulation restricting smoking in certain places, regulating point of sale
placement and promotions, requiring warning labels or relating to so-called
"second-hand" smoke could have an adverse effect on our sales or operations.
Certain retailers may decide to stop selling all tobacco products because of
public pressure.

Massachusetts lawmakers have introduced several bills to require warning
labels on cigars, but none has yet passed. On June 16, 1997, Texas passed a law
which prohibits offering cigarettes or tobacco products (including cigars) in a
manner that permits a customer direct access to the products, but the law
specifically does not apply to "that part of a business that is a humidor or
other enclosure designed to store cigars in a climate-controlled environment."

California Regulation -- Proposition 65. Although federal law has required
health warnings on cigarettes since 1965 and on smokeless tobacco since 1986,
there is no federal law requiring that cigars carry such warnings. However,
California requires "clear and reasonable" warnings to consumers who are exposed
to chemicals known to the state to cause cancer or reproductive toxicity,
including tobacco smoke and several of its constituent chemicals. Violations of
this law, Proposition 65, can result in a civil penalty not to exceed $2,500 per
day for each violation. Although similar legislation has been introduced in
other states, no action has been taken. We cannot assure you that other states
will not enact similar requirements.

During 1988, 26 manufacturers of tobacco products, including the largest
mass-marketers of cigars, entered into a settlement of legal proceedings filed
against them pursuant to Proposition 65. Under the terms of the settlement, the
defendants agreed to label retail packages or containers of cigars, pipe
tobaccos and other smoking tobaccos other than cigarettes manufactured or
imported for sale in California with the following specified warning label:
"This Product Contains/Produces Chemicals Known To The State of California To
Cause Cancer, And Birth Defects or Other Reproductive Harm." Although the
settlement of the Proposition 65 litigation by its terms only impacts
California, it is not practical for national cigar manufacturers to confine
their warning labels to cigars earmarked for sale in California. Consequently,
since 1988, most boxes of mass market cigars manufactured in the United States
carry cancer warning labels.

Canadian Regulations. Bill C-71, The Tobacco Act, became effective in
Canada on April 25, 1997. The purpose of the Act is to protect the health of
Canadians, especially young people. The new tobacco legislation affects all
persons who promote or sell tobacco products. The Act builds on many of the
measures formerly set out in the Tobacco Sales to Young Persons Act, under
which the tobacco industry in Canada was previously operating. Health Canada,
an agency of the Government of Canada advises that the Canadian government may
issue additional regulations to complement the new Act and that provinces may
issue their own supplemental regulations. We provide you the following summary
of what we believe is the current status of Canadian tobacco regulations after
the effectiveness of the Act and Health Canada's stated enforcement policy. We
caution you that the Act and such regulations are subject to change or
supplement and Health Canada's enforcement policies may change:

The Act requires promoters or retailers of tobacco products to:

o refuse to sell their products to persons younger than 18 years (under
19 years in the Atlantic provinces, British Columbia and Ontario).
Health Canada strongly advises retailers to require valid proof of age
identification;

o ensure the visibility of signs that inform the public that furnishing
tobacco products to minors is prohibited by law;

o refuse to sell cigarettes in a number less than 20; and

o not display tobacco products in a way that lets customers handle them
before purchase.
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The Act prohibits:

o the sale of tobacco products through vending machines without a
security device;

o mailing tobacco products directly to consumers;

o delivering tobacco products across a provincial boundary except between
manufacturers and retailers; and

o giving promotional incentives and free gifts displaying a tobacco brand
name or logo; giving rewards or incentives for buying tobacco products
or for buying another product or service.

Retailers may display:

o signs indicating the price and availability of tobacco products, but no
tobacco brand name or logo may appear on these signs;

o tobacco products and smoking accessories that display a tobacco brand
name or logo.

After October 1, 1998, retailers may not display:

o tobacco sponsorship promotions of activities, events or facilities in
conjunction with the display of a tobacco product or packaging, except
in places where children are prohibited by law.

Advertisements must:

o contain factual and brand information only (e.g.: size, number, tar
content, sales data, technical specifications, etc.);

o not contain images that suggest a way of life or that appeal to youth;

o not be misleading or likely to create a false impression about a
tobacco product or its emissions; and

o only appear in publications mailed to a named adult, publications with
an adult readership of not less than 85% or in signs in a place where
young persons are not permitted by law.

Health Canada has informed retailers that it will enforce the Act using a
multi-staged approach. It will first notify affected parties of their
obligations and give them an opportunity to comply. It will then monitor
compliance and warn non-complying persons. It will pursue further enforcement
only against persons who consistently fail to comply after warning.

Tobacco Industry Litigation.

General. Historically, the cigar industry has not experienced material
health-related litigation. However, litigation against leading United States
cigarette manufacturers seeking compensatory and, in some cases, punitive
damages for cancer and other health effects alleged to have resulted from
cigarette smoking is pending. We carry general liability insurance with an
aggregate limit of $10,000,000, and product liability and health hazard
insurance. These policies also cover our suppliers, manufacturers and retail
outlets, however, we cannot assure you that we will not be subject to liability
which is not covered beyond the limits of our general liability, product
liability and health hazard insurance coverage, and which may have a material
adverse effect upon our business.

Proposed Settlement with States. Several states have sued tobacco companies
seeking to recover the monetary benefits paid under Medicaid to treat residents
allegedly suffering from tobacco-related illnesses. On June 20, 1997 the
Attorneys General of 40 States and the major United States tobacco companies
announced a proposed settlement of the litigation, which, if approved by the
United States Congress, would require significant changes in the way United
States cigarette and tobacco companies do business. The potential impact, if
any, on the cigar industry is uncertain.
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As announced, the proposed settlement would include, among other things:

o U.S. tobacco companies will pay $360 billion in the first 25 years, and
then $15 billion a year.

o The Food and Drug Administration could regulate nicotine as a drug but
could not ban it until 2009.

o Sick smokers can still sue the industry. Any money they won would come
out of an annual $5 billion tobacco company fund. Smokers also could
receive punitive damages for any future wrongdoing by tobacco companies
out of that fund.

o All class-action lawsuits against the industry are banned.

o No tobacco billboards or other outdoor ads.

o No humans or cartoons in ads or on cigarette packs.

o No brand-name sponsorship of sporting events.

o Text-only ads in magazines with significant youth readership.

o No Internet advertising.

o No "product placement" in movies and on TV.

o Black labels covering the top fourth of cigarette packs, including
"Cigarettes are addictive" and "Smoking can kill you."

o A cigarette vending machine ban; no self-service displays; cigarettes
and smokeless tobacco sold only behind store counters.

o Industry will pay fines if smoking by youths fails to drop by 30
percent in five years, 50 percent in seven years and 60 percent in 10
years. The penalty is $80 million per percentage point by which the
target is missed.

o No smoking in public places and most workplaces unless there are
separately ventilated smoking areas.

On July 2, 1997, the State of Mississippi announced a separate settlement
with the tobacco industry. The State agreed to drop its current suit against the
U.S. tobacco companies for health care expenses and agreed not to file a similar
suit in the future. The agreement guarantees the State nearly $4 billion, even
if the 40-State settlement is not approved by the Congress or the President.
However, the proposed 40-State settlement, if approved, will supersede
Mississippi's settlement.

Other State Actions. Florida and Massachusetts have enacted statutes
permitting suit against the tobacco companies to recoup such Medicaid costs, and
recently, one defendant has entered into a settlement with such plaintiff
states, which provides that the settling defendant will, among other things, pay
a portion of its profits in the future to the plaintiff. Under the Florida
statute, many of the tobacco companies' traditional defenses, such as assumption
of risk, are vitiated. The statute also permits the state to establish causation
(that smoking causes cancer, heart disease and other ailments) through the use
of purely statistical evidence. The tobacco companies have filed suit
challenging the Florida law as unconstitutional, but the Florida Supreme Court
upheld the statute, and agreed that the defendants cannot use assumption of the
risk as a defense against the State.

Florida is the first state to commence a trial in a suit against U.S.
tobacco companies. Jury selection in that case began August 1, 1997. The State
is seeking to recover $1 billion that it claims taxpayers have spent through
Florida's Medicaid program to treat poor people who contracted smoking related
diseases, as well as seeking additional penalties through racketeering
allegations. Florida's highest court has held that the State may sue a cigarette
maker for costs to treat diseases linked to smoking. Also, a Florida appeals
court upheld a lower court's order that requires the release of sensitive
tobacco industry documents for use by the State in its suit.

Class Actions. A class action suit, Castano v. American Tobacco, et al. has
been filed in federal district court in New Orleans against the entire cigarette
industry. On February 17, 1995, the district court granted plaintiffs' motion
for class certification with regard to the liability issues of fraud,
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breach of warranty (express or implied), intentional tort, negligence and
strict liability as well as the issues of consumer protection and punitive
damages. The court defined the class as "all nicotine-dependent persons in the
United States," "the estates, representatives, and administrators of these
nicotine-dependent cigarette smokers," and "the spouses, children, relatives
and 'significant others' of these nicotine-dependent cigarette smokers as their
heirs or survivors." The court defined "nicotine-dependent" to mean "all
cigarette smokers who have been diagnosed by a medical practitioner as
nicotine-dependent; and/or all regular cigarette smokers who were or have been
advised by a medical practitioner that smoking has had or will have adverse
health consequences who thereafter do not or have not quit smoking." In May
1996, the Fifth Circuit Court of Appeals reversed a Louisiana district court's
certification of a nationwide class consisting essentially of nicotine
dependent cigarette smokers. Notwithstanding the dismissal, new class actions
asserting claims similar to those in Castano have recently been filed in
certain states.

To date, two pending class actions against major cigarette manufacturers
have been certified. The first case is limited to Florida citizens allegedly
injured by their addiction to cigarettes; the other is limited to flight
attendants allegedly injured through exposure to secondhand smoke.

A class-action suit is proceeding in Miami, Florida where 60,000 flight
attendants are seeking billions of dollars for alleged injuries from exposure to
secondhand smoke on airplanes. The plaintiffs claim that exposure to secondhand
smoke in airplane cabins caused cancer and other diseases. The plaintiff's
attorneys have cited a 1993 EPA report on the dangers of secondhand smoke. The
attorneys have also asked the court to declare that the case will proceed,
regardless of any decisions made in other settlements. We believe that this case
is the first tobacco class action suit to go to trial.

In another decision, Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608
(1992), the United States Supreme Court held that certain federal legislation
applicable specifically to cigarette manufacturers preempts claims based on
failure to warn consumers about the health hazards of smoking, but does not
preempt claims based on express warranty, misrepresentation and fraud, or
conspiracy. Although we believe that the effect of the Cipollone decision, which
involved cigarette smoking, will not have a material adverse effect on PCI
operations, there can be no assurance of what the ultimate effect, if any, of
the Cipollone decision or the pending cigarette industry litigation, or
cigarette and tobacco regulation, will be on the cigar industry. Although there
are numerous differences between the cigar industry and the cigarette industry,
the outcome of pending and future cigarette litigation may encourage various
parties to bring suits on various grounds against cigar industry participants.
While it is impossible to quantify what effect, if any, any such litigation may
have on our operations, we cannot assure you that such litigation would not have
a material adverse effect on our operations.

OSHA Regulations. The federal Occupational Safety and Health Administration
(OSHA) has proposed an indoor air quality regulation covering the workplace that
seeks to eliminate nonsmoker exposure to environmental tobacco smoke. Under the
proposed regulation, smoking must be banned entirely from the workplace or
restricted to designated areas of the workplace that meet certain criteria. The
proposed regulation covers all indoor workplaces under OSHA jurisdiction,
including, for example, private residences used as workplaces, hotels and
motels, private offices, restaurants, bars and vehicles used as workplaces. The
tobacco industry is challenging the proposed OSHA regulation on legal,
scientific and practical grounds. It also contends that the proposed regulation
ignores reasonable alternatives. There is no guaranty, however, that this
challenge will be successful. Although we do not believe that the proposed OSHA
regulation would have a material adverse effect on the cigar industry or PCI,
there are no assurances that such regulation would not materially adversely
impact PCI.

Medical Studies on Smoking

Cigar sales, as well as smoking in general, decreased after a 1964 report
of the United States Surgeon General. That and numerous other subsequent studies
have stressed the link between smoking, including secondary smoke and medical
problems, including cancer, heart, respiratory and other diseases. "No smoking"
laws, ordinances and prohibitions on cigar smoking in certain cases may have
adversely affected the sale of cigar products. We believe that these factors may
continue to have a material adverse effect upon the cigar industry in general
and our business in particular.
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Intellectual Property Rights

We intend to assert our rights under trademark, trade dress, trade secret,
unfair competition and copyright laws to protect our intellectual property,
including trademarks and product designs. We will protect certain of these
rights through the acquisition of trademark registrations, the development of
trade dress, and where appropriate, litigation against those who are, in our
opinion, infringing rights which we may have.

We have obtained Arizona state trademark registrations from the Arizona
Secretary of State's office for the trademarks PREMIUM CIGARS INTERNATIONAL and
PCI. We cannot assure that these registrations cannot be successfully challenged
or invalidated. These registrations do not provide us with any trademark rights
outside the borders of the State of Arizona.

We do not own any United States federal trademark registrations. We have
has filed three trademark applications in the United States Patent and Trademark
Office for the trademarks BIG STAR, THOROUGHBRED and PURITOS BELLEZA. We intend
to use these marks in interstate commerce. In addition, we intend to file
federal trademark applications with the United States Patent and Trademark
Office for registration of the trademarks PREMIUM CIGARS INTERNATIONAL and PCI.
We have researched and are developing other trademarks and tradenames, and
intend to file additional applications when appropriate. We can give no
assurance that any of these applications will mature to registration or that we
will be granted the right to use any trademarks or tradenames by the United
States Patent and Trademark Office. Further, we cannot assure that others will
not assert rights to and ownership of, the trademarks. Use of these marks may
infringe the rights of others. Currently, we do not own any patents. See "Risk
Factors -- Risks Relating to Trademarks."

We intend to assert our intellectual property rights against infringers. In
addition, although asserting our rights can result in a substantial cost to and
diversion of our efforts, we believe that protecting PCI's intellectual property
rights is a key component of our operating strategy.

Facilities

We sublease, from an independent third party, approximately 8,500 square
feet for our corporate offices, warehouse, humidor storage and distribution
facilities located in the Scottsdale Airpark area of Scottsdale, Arizona. Our
sublease agreement expires on May 31, 1999. The annual rent for the first year
is approximately $83,571 and the annual rent for the second year is
approximately $85,609.

PCI is currently negotiating to lease approximately 3,064 square feet of an
office/warehouse facility in Burnaby, British Columbia (a suburb of Vancouver).
The proposed written lease would expire July 14, 2000. The rent is approximately
$1,660, $1,915 and $2,170 per month for the first, second and third years,
respectively.

Distribution of products in the northwest United States is handled through
the Rose Hearts facility near Seattle, Washington. We neither own nor lease a
facility in that area.

We believe that our distribution facilities are adequate for our present
needs. However, we intend to lease additional space for distribution facilities
within and outside the United States and believe that additional space will be
available at commercially reasonable rents.

Employees

As of August 21, 1997, we had 17 full time employees, of which five were
executive and administrative, five were sales and marketing, and seven were
warehouse and distribution personnel. None of our employees are represented by a
labor union and we believe that employee relations are good.

Legal Proceedings

PCI is not a party to any pending lawsuits, nor do we know of any potential
claims which, in the aggregate, could have a material adverse effect on PCI's
financial position.
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MANAGEMENT

Executive Officers and Directors

The executive officers and directors of PCI are as follows:

[Enlarge/Download Table]

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

William L. Anthony ...... 54 Chairman of the Board of Directors and Consultant
Steven A. Lambrecht ...... 46 Director, President and Chief Executive Officer
David S. Hodges ......... 41 Director and Consultant
Colin A. Jones ............ 31 Director, Vice President of International Sales
Greg P. Lambrecht ......... 35 Director, Vice President of National Sales, Secretary and
Treasurer
Karissa B. Nisted ......... 41 Chief Financial Officer and Controller
Robert H. Manschot ...... 54 Director
James B. Stanley ......... 34 Vice President of Purchasing
Scott I. Lambrecht ...... 26 Vice President of Operations and Assistant Secretary

William L. Anthony has been Chairman of the Board since June 20, 1997 and a
consultant to PCI since April 1, 1997. He has agreed to serve as PCI's Chairman
for a period of up to five years. He has 30 years of business and management
experience and a "Big Six" accounting background with the New York office of
KPMG Peat Marwick, LLP. Mr. Anthony worked for The Dial Corp. from 1984 until
August, 1996 culminating his position as Executive Vice President for the
Consumer Products Division with annual revenue in excess of $1,000,000,000. He
has held key management positions with Bechtel, the U.S. Chamber of Commerce,
MAPCO and The Dial Corp. He is the owner, President and sole shareholder of
Quality Computer Services, Inc. He received both a B.B.A. and an M.A. in
Accounting from the University of Mississippi in 1965 and 1966 respectively. Mr.
Anthony was certified as a public accountant in Louisiana in 1969.

Steven A. Lambrecht has been a director and PCI's Chief Executive Officer
since December 31, 1996. He has also served as PCI's President since May 3, 1997
and as Chairman of the Board from December 31, 1996 to June 20, 1997. He has 23
years of marketing and sales experience and 17 years of management experience;
most of his business experience has been in real estate development and
construction. He is the owner of Forum Import/Export Company, a sole
proprietorship, and was co-owner of Forum Development and Construction Company,
Inc., a Washington corporation. He also owns SDCC, Inc., an Arizona development
and construction corporation that he founded in 1992. He has developed and sold
over 20 million dollars worth of real estate since 1974. Steven A. Lambrecht is
the brother of Greg P. Lambrecht and the father of Scott I. Lambrecht.

David S. Hodges has been a director since June 20, 1997 and has been a
consultant to PCI since June 2, 1997. From April 1, 1997 to May 31, 1997, Mr.
Hodges served PCI in a financial management capacity. From February, 1997 to
April, 1997, Mr. Hodges served as Chief Financial Officer of Pro-Innovative
Concepts, Inc., a Phoenix, Arizona premium promotion company. From January 1994
to September 1996 he was the Controller of The Dial Corp's Household Consumer
Products Division. From 1984 to 1992 he served the R.J. Reynolds Tobacco Company
in various financial and management positions. From 1980 to 1984, he served as a
Senior Auditor and Consultant for public and private clients of Price Waterhouse
LLP, a "Big Six" independent public accounting firm. Mr. Hodges received a
B.S.B.A. in accounting from John Carroll University of Cleveland, Ohio in 1978
and an M.B.A. in Finance from the University of North Carolina at Greensboro,
North Carolina in 1980. He is a Certified Public Accountant in the State of
North Carolina and a member of both the American Institute of Certified Public
Accountants and the North Carolina Association of Certified Public Accountants.
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Colin A. Jones has been a director and Vice President of International
Sales for PCI since May 3, 1997. He is a founder, the Co-Chairman and the
President of PCI's wholly-owned subsidiary CAN-AM. He has 12 years of experience
managing, marketing and selling in the convenience store and grocery store
market sectors. In 1985, he founded J&M Wholesale, Ltd., a British Columbia
corporation which delivers various wholesale products primarily to convenience
store accounts in Canada. He continues to be the President and Chief Executive
Officer of J&M. Under his employment agreement, Mr. Jones is obligated to devote
his full time to PCI. Mr. Jones attended Douglas College of New Westminster,
British Columbia, Canada.

Greg P. Lambrecht has been the Secretary, Treasurer and Vice President of
National Sales of PCI since May 31, 1997, and a director since August 7, 1997.
He is the Co-Chairman and the President, National Sales, of PCI's wholly-owned
subsidiary CAN-AM. He has 14 years of experience managing, marketing and selling
to the convenience store and grocery store market. In 1984, he founded Rose
Hearts, Inc., a Washington company which delivers various impulse purchase
products to over 1,200 individual accounts in Washington, Oregon and California.
He graduated with a B.A. in Communications from Western Washington University in
1984. Under his employment agreement, Mr. Lambrecht is obligated to devote his
full working time to PCI. Greg P. Lambrecht is the brother of Steven A.
Lambrecht and the uncle of Scott I. Lambrecht.

Robert H. Manschot has been a director since July 25, 1997. He has been the
President and Chief Executive Officer of the NVD and Seceurop Security Services
Group, an emergency services corporation in the Netherlands and the United
Kingdom, since 1995. He is also the Chairman of RHEM International Enterprises,
Inc., an investment, consulting and venture capital company. He was the
President and Chief Executive Officer of Rural/Metro Corporation, a
Nasdaq-listed emergency services corporation, from 1987 to 1995. He has served
in senior management positions with KLM's hotel management company, Sheraton,
and Inter Continental Hotels in the U.S., Europe, Middle East and Africa. He has
served and continues to serve on numerous public and private company and
institution boards, including Nasdaq-listed Action Performance Industries, Inc.,
and Toronto Stock Exchange-listed Samouth Capital Corporation. He holds a
bachelors degree in hotel management from the School for Hospitality Management
in the Hague, Netherlands, an MBA from Boston University and is a graduate of
Stanford Business School's Financial Management Program.

Karissa B. Nisted has been the Chief Financial Officer since June 20, 1997
and has been the Controller of PCI since May 1, 1997. She served as Controller
of Parkway Manufacturing, Inc. of Phoenix, Arizona from May 1995 to April 1997.
From January 1994 to March 1995 she was the Controller of Guzman, a Tempe,
Arizona construction firm. From July 1991 to October 1993 she was the Controller
of Coxreels, a Tempe, Arizona manufacturing company. In 1990 and 1991 she
performed accounting management for Arizona Precision Sheet Metal, a Phoenix,
Arizona manufacturing company. Ms. Nisted has over 19 years' experience in
accounting and financial management, including audit and tax experience with
Arthur Andersen & Company of Phoenix, Arizona. Ms. Nisted received a B.B.A. in
Accounting from Texas A&M University in 1978.

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

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

All directors hold office until the next election of directors at the
annual shareholders meeting or until their successors have been elected and
qualified. The Board of Directors currently consists of six members. Upon
completion of the offering, and for five years thereafter, the underwriter's
representative, W.B. McKee Securities, Inc., has the right to select one member
of the Board of Directors to serve the standard term of a director. The
Underwriter's Representative has not yet chosen the person that it may select
for director. The Bylaws permit the Board of Directors to determine the size of
the Board within a range that the shareholders have set which is currently one
to nine members. The Board has set its current size at seven, and has agreed to
fill the vacant seat with an additional independent director within 90 days
after completion of this offering. The Bylaws also require that we maintain at
least two "independent directors" who are not employees or officers and who do
not have a material business or professional relationship with PCI. See "Certain
Transactions -- Resolving Conflicts of Interest."

Indemnification of Directors and Officers

Under our Articles of Incorporation, directors and former directors are
generally not liable to PCI or its shareholders for the directors' actions or
failures to take action. Our Articles limit director liability to the full
extent that the law allows. Generally, Arizona law permits corporations to
indemnify their officers and directors if the individual officer or director
acted in good faith and in a manner he or she reasonably believed to be in the
best interests of the corporation. A corporation may not indemnify any director
that a court finds liable to the corporation or that the director received an
improper personal benefit. Corporations generally must indemnify a director or
officer who win a lawsuit related to being a director or officer of the
corporation.

PCI has not entered any indemnification agreements with its current
directors and executive officers to indemnify them against liability as
directors or officers. PCI is not aware of any pending or threatened litigation
or proceeding involving our directors, officers, employees or agents which would
require or permit indemnification. We have obtained quotes and intend to
purchase comprehensive directors and officers liability coverage with an
aggregate policy limit of $5,000,000 to insure our officers and directors
against certain liabilities, including securities law liabilities and
liabilities relating to this initial public offering.

Section 8 of the Underwriting Agreement included at Exhibit 1.1 to our
Registration Statement on file with the SEC, contains indemnification provisions
relating to us, our officers and directors and the Underwriter's Representative
and certain of its affiliates. Under that agreement, we indemnity the
Underwriter's Representative and certain of its affiliates and the Underwriter's
Representative indemnifies us and our directors, officers and affiliates under
certain circumstances. Among other things, the indemnification includes claims
under the Securities Act and untrue or alleged untrue statements or omissions in
the Registration Statement or prospectus. We encourage you to obtain a copy of
the Underwriting Agreement. A fuller discussion of indemnification provisions is
included under "Indemnification of Officers and Directors," in our Registration
Statement on file with the SEC.

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or controlling persons of PCI, pursuant
to the foregoing provisions, or otherwise, we have been advised that, in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Securities Act, and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities (other than the payment by PCI of expenses incurred or paid by a
director, officer or controlling person of PCI in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered hereunder, PCI will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
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Executive Compensation

PCI was incorporated in December 1996 and commenced operations after
December 31, 1996. Neither PCI nor its wholly-owned subsidiary, CAN-AM, paid any
compensation to any of its executive officers prior to January 1, 1997. The
following table sets forth the annual and long-term compensation for PCI's Chief
Executive Officer from January 1, 1997 through the completion of the fiscal year
ended March 31, 1997. No other officers received reportable remuneration.

SUMMARY COMPENSATION TABLE

[Enlarge/Download Table]

Long Term Compensation
-------------------------------------------------
Annual Compensation Awards Payouts
-------------------------------------- --------------------------- -------------------
(a) (b) (c) (d) (e)(1) (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 -- $65,000 -- -- -- --
President,
Chief Executive Officer

(1) Represents compensation expense for stock issued on March 10, 1997 for
consideration below fair market value.

Steven A. Lambrecht has an at-will Employment Agreement with PCI as Chief
Executive Officer dated June 13, 1997 under which, effective May 1, 1997, he is
to receive an annual salary of $60,000. He will be entitled to additional
benefits, such as stock options and bonuses which may be offered in the future
to comparable executives. The Employment Agreement allows Mr. Lambrecht to
terminate his employment at any time by delivering a written notice of
termination to PCI at least two weeks prior to the termination date. PCI may
terminate his employment at any time, with or without cause. If PCI terminates
his employment for any reason other than for cause, as defined in the agreement,
PCI must continue paying him his then-current compensation on a regular basis
and premiums for continued health insurance coverage for nine months, unless he
is disqualified from receiving continued compensation and benefits based on
certain conduct or breaches of the Employment Agreement.

Mr. Lambrecht's Employment Agreement provides that he will devote his full
time to PCI activities. Forum Import/Export Company and Forum Development
Company, Inc. have conducted no operations since Mr. Lambrecht began working
with PCI. Members of Mr. Lambrecht's family manage SDCC, Inc.'s only remaining
project and the company is not currently contemplating any other major projects.
Mr. Lambrecht is available to SDCC, Inc. for questions, but otherwise devotes no
material time to that company.

Colin A. Jones has an at-will Employment Agreement with PCI as Vice
President of International Sales dated June 13, 1997 under which, effective May
1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a
one-time management fee of $80,000, payable over a 16-month period commencing
July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales,
marketing, operations, management and existing contacts with major retail
distributors. He has agreed to devote his full time to PCI activities and has
turned over operational control of J&M to other members of J&M's management and
plans to sell or liquidate J&M in the near future. He will be entitled to
additional benefits, such as stock options and bonuses which may be offered in
the future to comparable PCI executives. The Employment Agreement allows Mr.
Jones to terminate his employment at any time by delivering a written notice of
termination to PCI at least two weeks prior to the termination date. PCI may
terminate his employment at any time, with or without cause. If PCI terminates
his employment for any reason other than for cause, as defined in the agreement,
PCI must continue paying him his then-current compensation on a regular basis
and premiums for continued health insurance coverage for nine months, unless he
is disqualified from receiving continued compensation and benefits based on
certain conduct or breaches of the Employment Agreement.
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Greg P. Lambrecht has an at-will Employment Agreement with PCI as Vice
President of International Sales dated June 13, 1997 under which, effective May
1, 1997, he is to receive an annual salary of $60,000. He is also entitled to a
one-time management fee of $80,000, payable over a 16-month period commencing
July 1, 1997 at $5,000 per month, to compensate him for his expertise in sales,
marketing, operations, management and existing contacts with major retail
distributors. He has agreed to devote his full time to PCI activities and has
turned over operational control of Rose Hearts to Mike Rocha. Greg Lambrecht
plans to sell or liquidate Rose Hearts. He will be entitled to additional
benefits, such as stock options and bonuses which may be offered in the future
to comparable PCI executives. The Employment Agreement allows Mr. Lambrecht to
terminate his employment at any time by delivering a written notice of
termination to PCI at least two weeks prior to the termination date. PCI may
terminate his employment at any time, with or without cause. If PCI terminates
his employment for any reason other than for cause, as defined in the agreement,
PCI must continue paying him his then-current compensation on a regular basis
and premiums for continued health insurance coverage for nine months, unless he
is disqualified from receiving continued compensation and benefits based on
certain conduct or breaches of the Employment Agreement.

We also have arrangements with the following consultants, each of whom is
also a director.

David S. Hodges is a director and has a Business Consulting Agreement with
PCI dated June 2, 1997 under which Mr. Hodges is to assist PCI with this
Offering and additional projects related to strategic planning, budgeting,
accounting and reporting, business analysis, information systems and operations
as requested by PCI's management. Mr. Hodges receives $60 per hour and
reimbursement for business expenses and health care coverage during the term of
the agreement. Upon completion of this offering, PCI or Mr. Hodges can elect to
terminate the hourly payment agreement and PCI will instead pay Mr. Hodges
biweekly payments of $4,800 each for a maximum six month period or until Mr.
Hodges finds other employment, at which time the payments will cease.

William L. Anthony, the Chairman of PCI's Board, entered a verbal agreement
with PCI, on April 1, 1997, to act as a consultant to PCI's management to assist
PCI with this offering and advise them regarding certain aspects of strategic
planning, business analysis and operations, including merchandising, marketing
and supply chain issues as requested by PCI's management. Mr. Anthony's services
have included representing PCI in certain meetings arranged by the Underwriter's
Representative with prospective underwriters and institutional investors in
preparation for this offering. He has not yet been compensated for his
consulting services, but PCI has agreed to pay him $2,000 per month and to
reimburse certain related expenses. Either Mr. Anthony or PCI may terminate his
consulting agreement at any time, with or without cause.

PCI reimbursed David S. Hodges for $1,200 in attorney's fees related to the
negotiation of his consulting relationship and has agreed to reimburse Greg P.
Lambrecht and Colin A. Jones for approximately $6,000 in attorneys fees related
to the negotiation of various personal agreements or agreements of J&M or Rose
Hearts with PCI. Neither of the law firms involved have any affiliation with
PCI.

PCI has no standing arrangements to compensate directors. After PCI
completes this offering, PCI will determine appropriate director compensation,
which may include an annual retainer fee and/or a fee for each meeting attended,
plus reasonable out-of-pocket expenses.
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CERTAIN TRANSACTIONS

Resolving Conflicts of Interest

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

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

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

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

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

We currently have two independent directors, William L. Anthony and Robert
H. Manschot. The Board of Directors has agreed to appoint an additional
independent director within 90 days of completion of the offering. Our
independent directors have had access, at our expense, to our counsel or to
independent counsel, and have ratified all related-party transactions that are
ongoing. However, we entered into a number of transactions described below
before we adopted our current conflicts of interest policy and before we had
sufficient disinterested, independent directors to ratify the transactions. We
believe that each of those transactions was on terms that were no less favorable
to us than are generally available from unaffiliated third parties. Other than
the transactions described below, we do not now anticipate entering into other
related-party transactions or loans.

CAN-AM Acquisition of J&M and Rose Hearts. On December 31, 1996, CAN-AM
issued shares of its stock in exchange for the assets and liabilities of the
cigar operations of J&M and Rose Hearts, including the cigar distribution
accounts of each entity. PCI director and Vice President of International Sales
Colin A. Jones is the President and sole shareholder of J&M. PCI director,
Secretary, Treasurer and Vice President of National Sales Greg P. Lambrecht is
the President and sole shareholder of Rose Hearts. Messrs. Jones and Greg
Lambrecht owned 100% of CAN-AM voting stock, and three others held non-voting
shares. As set forth in PCI's consolidated financial statements for the fiscal
year ended March 31, 1997, the cost of the net assets to J&M and Rose Hearts and
the amount at which CAN-AM acquired the net assets was the same as its
historical net cost in J&M and Rose Hearts. The combined cost, net of
liabilities assumed, was approximately $1,000. The asset purchases are closed
transactions and we entered the asset purchase agreements before we had
sufficient disinterested, independent directors to ratify the transactions.

PCI Acquisition of CAN-AM. Subsequent to the asset purchase transactions,
but also on December 31, 1996, PCI acquired all of the issued and outstanding
shares of CAN-AM in exchange of PCI shares. No written agreement was entered
between PCI and CAN-AM's shareholders to formalize the acquisition or share
exchange. As adjusted by the May 31, 1997 3:1 stock split, and including shares
issued on December 31, 1996 and January 9, 1997, CAN-AM's five shareholders
received 817,500 shares of PCI Common Stock, representing all of the then-issued
and outstanding shares of Common Stock of PCI. Mr. Jones received 371,250 or
45.4% and Greg Lambrecht received 363,750 or 44.5%. At the time PCI acquired
CAN-AM's shares, neither Greg P. Lambrecht nor Colin A. Jones had any formal
relationship as an incorporator, officer, director or shareholder of PCI. PCI
was formed with a view to purchasing the cigar operations of the entities they
owned and controlled, however, and both Greg P. Lambrecht and Colin A. Jones
were affiliated with PCI as
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promoters at the time PCI acquired CAN-AM's shares. PCI incorporator and
initial director Scott I. Lambrecht is the nephew of Greg P. Lambrecht. Colin
A. Jones was elected a director of PCI on January 9, 1997, shortly after PCI
acquired CAN-AM's shares. The CAN-AM acquisition is a closed transaction and we
acquired CAN-AM before we had sufficient disinterested, independent directors
to ratify the transaction.

Jones/Lambrecht Notes Receivable. Colin A. Jones and Greg P. Lambrecht each
delivered to PCI long term promissory notes to PCI for $43,112.50. The notes are
dated December 31, 1996, accrue interest at eight percent, and all interest and
principal are due on March 31, 1999. The notes relate to CAN-AM receivables
which accrued prior to PCI's acquisition of all of CAN-AM's outstanding stock on
December 31, 1996. We negotiated these notes receivable before we had sufficient
disinterested, independent directors to ratify the transaction, but Messrs.
Jones' and Lambrecht's repayment of the notes is ongoing, and our independent
directors have ratified the transactions.

J&M Management Agreement. On January 1, 1997, CAN-AM entered a Management
Agreement with J&M to enable CAN-AM to reimburse J&M for any services provided
to CAN-AM or on CAN-AM's behalf during the transition of J&M's Canadian
operations to CAN-AM. J&M is to receive no additional sum, fee or commission
other than reimbursement for J&M's expenses which are directly incurred in
providing services to or on behalf of CAN-AM. At CAN-AM's sole discretion,
CAN-AM may offset the reimbursement due under the Management Agreement against
any related-party receivable that CAN-AM may owe to J&M. We entered this
Management Agreement before we had sufficient disinterested, independent
directors to ratify the agreement, but our relationship with J&M under the
agreement is ongoing, and our independent directors have ratified the agreement.

J&M, as a Canadian corporation wholly-owned by Colin A. Jones, continues to
distribute certain wholesale and impulse purchase items to convenience stores
and other accounts entirely located in Canada. J&M has, in the past, distributed
certain cigars of Cuban origin to its convenience store accounts and may do so
in the future. Neither PCI nor its wholly-owned Canadian subsidiary CAN-AM
currently distributes any cigars or other products of Cuban origin either in the
United States or Canada. PCI's standard form supplier agreement strictly
prohibits its suppliers from providing any product containing any component of
Cuban origin. PCI believes that any continued distribution of Cuban cigars by
J&M is not competitive with, nor would represent a conflict of interest with,
PCI's operations because U.S. law prohibits PCI and CAN-AM from engaging in such
distribution and because J&M is not distributing on behalf of any competing
cigar distribution company, PCI believes the distribution would not materially
or incrementally impact PCI's operations, because Cuban cigars are already in
the Canadian market.

Luyendyk Endorsement Agreement. On May 1, 1997, PCI entered an Endorsement
Agreement with Arie Luyendyk under which PCI issued 15,000 shares of Common
Stock (as adjusted for the 3:1 Stock Split) to Mr. Luyendyk subject to a
six-month vesting schedule. In order to meet its obligations under the
Endorsement Agreement without diluting the relative security positions of other
shareholders prior to the Offering, PCI repurchased 15,000 (as adjusted by the
3:1 Stock Split) shares of its Common Stock from its Chief Executive Officer and
Chairman, Steven A. Lambrecht, at $0.33 per share. We entered the Endorsement
Agreement before we had sufficient disinterested, independent directors to
ratify the agreement, but our relationship with Mr. Luyendyk under the agreement
is ongoing, and our independent directors have ratified the agreement.

Rose Hearts Distributorship Agreement. On June 13, 1997, PCI entered a
Distributorship Agreement with Rose Hearts for the non-exclusive distribution to
Associated Grocers, SuperValu and other accounts in the states of Alaska, Idaho,
Oregon, Washington and Northern California. The agreement provides that any
master agreement with a national PCI account or national distributor supersedes
the Rose Hearts agreement. We pay Rose Hearts a commission equal to 10% of the
wholesale cost of products PCI ships to third-party stores where Rose Hearts
provides only in-store merchandising support services. We pay Rose Hearts a
commission equal to 22% of the wholesale cost of PCI products that Rose Hearts
delivers to the stores directly. Greg P. Lambrecht is the
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President and sole shareholder of Rose Hearts and a director and the Secretary,
Treasurer, Vice President of National Sales and a substantial shareholder of
PCI. We entered this Distributorship Agreement before we had sufficient
disinterested, independent directors to ratify the agreement, but our
relationship with Rose Hearts under the agreement is ongoing, and our
independent directors have ratified the agreement.

Barton Financing Settlement. On June 13, 1997, PCI entered a Full
Settlement and Full Release of Equity Interest agreement among CAN-AM, Rose
Hearts, J&M, Greg P. Lambrecht, Colin A. Jones, Greg S. Barton and two of Mr.
Barton's lenders. The agreement settled potential equity claims by Mr. Barton
and his lenders regarding a September 5, 1996 loan for $110,000 at an annual
interest rate of 36% to Rose Hearts, J&M, Greg P. Lambrecht, Colin A. Jones and
CAN-AM. CAN-AM had expressly accepted liability for the loan under the terms of
each of the Asset Purchase Agreements with J&M and Rose Hearts on December 31,
1996. After PCI purchased all of CAN-AM's shares, PCI desired to extinguish the
loan obligation primarily to eliminate the burden on CAN-AM's cash requirements,
but also to avoid any potential, but unasserted equity claims against PCI from
Mr. Barton's lenders related to the loan obligation. As a result of the
settlement, PCI repaid $10,000 to one of Mr. Barton's lenders, the loan was
reduced to $100,000 and Mr. Barton converted the loan to bridge financing (See
"Interim Financing -- Bridge Financing"). Mr. Barton's forgiveness of the
reduced $100,000 loan is the consideration he gave in exchange for an 8% bridge
note for $100,000 and bridge warrants to purchase 38,095 shares of PCI Common
Stock at 50% of the offering price or $2.625 per share. Greg P. Barton is a
7.45% beneficial owner of PCI's Common Stock. Greg P. Lambrecht and Colin A.
Jones own and control Rose Hearts and J&M, respectively, are officers and
directors of CAN-AM and are controlling shareholders, officers and directors of
PCI. The settlement transaction is a closed transaction and we entered the
settlement before we had sufficient disinterested, independent directors to
ratify the transaction.

Barton and Mullavey Loans. On or about June 18, 1996, Greg S. Barton loaned
Greg P. Lambrecht and Rose Hearts $50,000 in a transaction which included an
option for Mr. Barton to convert the debt to equity of Rose Hearts. Between
approximately May and September 1996, Ben P. Mullavey, a prior Rose Hearts
consultant, loaned $50,000 to Rose Hearts in an undocumented transaction and
provided consulting services to Rose Hearts. PCI, Rose Hearts and Greg P.
Lambrecht agree that the Barton and Mullavey loans are solely Rose Hearts' debt
obligations which CAN-AM did not assume as a part of the December 31, 1996 Asset
Purchase Agreement for Rose Hearts' cigar operations. Ben P. Mullavey
communicated to PCI on April 23, 1997, that he believes he has rights to convert
his debt to shares of PCI Common Stock. Mr. Mullavey did not specify any number
of shares that he believes he is entitled to, but instead demanded payment of
$55,000, representing the principal from his undocumented loan and $5,000 for
consulting services he provided to Rose Hearts. Greg P. Lambrecht and Rose
Hearts are negotiating with Messrs. Barton and Mullavey regarding a settlement
of their claims, but PCI will not be a party to any settlement and will not
directly issue any Common Stock to Barton or Mullavey. Because PCI is not a
party to these Barton and Mullavey loans, our independent directors did not, and
are not required to, review or approve the transactions.

Lambrecht-LBIC Stock Sale. On June 17, 1997, Steven A. Lambrecht sold
20,000 shares of PCI Common Stock to Life of Boston Insurance Company, an
Oklahoma corporation ("LBIC"). The Lambrecht-LBIC transaction was to provide
additional incentive to LBIC to invest the final $250,000 to complete the Bridge
Financing (See "Interim Financing -- Bridge Financing"). Steven A. Lambrecht is
PCI's President and Chief Executive Officer and the beneficial owner of 17.33%
of PCI's Common Stock. Lincoln Heritage Life Insurance Company, an Illinois
corporation ("Lincoln"), owns 79% of the stock of LBIC. The Londen Insurance
Group, an Arizona holding corporation, is the sole shareholder of Lincoln and
the beneficial owner of the Shares of Common Stock held by LBIC and the bridge
warrants held by Boston and Lincoln.

Anthony Stock Purchase and Option Agreement. On June 20, 1997, William L.
Anthony entered an Agreement to purchase 66,000 shares of PCI Common Stock for
$22,000 from Steven A. Lambrecht (60,000), Colin A. Jones (3,000) and Greg P.
Lambrecht (3,000). PCI, also a party to the
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Agreement, granted Anthony a non-qualified stock option to purchase 20,000
shares at the offering price from the effective date of the offering and for one
year thereafter. PCI also agreed to obtain, within 30 days after completion of
this offering, officer and director insurance at coverage levels which are
standard for distribution companies comparable to PCI. Anthony agreed to serve
as Chairman of the Board for up to five years, subject to appropriate approvals
and the provisions of PCI's Bylaws.

The agreement is a closed transaction that occurred before we had
sufficient disinterested, independent directors to ratify the transaction. Mr.
Anthony's ongoing relationship to the Board as its Chairman is subject to
ongoing Board approval, and Mr. Anthony's continued service as a director
generally is subject to annual shareholder reelection.

On August 7, 1997, to remove certain potentially compensatory aspects of
the June 20, 1997 Agreement and to maintain Mr. Anthony's status as an
independent director, the parties entered a Modification Agreement which
rescinded and modified certain aspects of the June 20, 1997 Agreement. The
August 7, 1997 Modification Agreement rescinded the private stock purchase for
all but 1,000 of the 66,000 shares and restructured the transaction so that Mr.
Anthony purchased the 1,000 shares at a settlement price of $2.50 per share, and
received options to acquire an additional 136,250 shares at $5.25 per share from
one to five years after completion of the offering.

Lambrecht-Stanley Stock Sale. On June 20, 1997, Steven A. Lambrecht sold
15,000 shares of PCI Common Stock to James B. Stanley for $5,000. James B.
Stanley is PCI's Vice President of Purchasing. PCI was not a party to the
transaction.

Credit Line Guarantees. On July 25, 1997 PCI obtained a $200,000 credit
line from Biltmore Investor Bank, N.A., an independent third-party lender. The
credit line is at 1% above the prime rate and terminates upon completion of this
offering. Greg P. Lambrecht and Colin A. Jones personally guaranteed the credit
line. The Board of Directors ratified the entry into the credit line and
ratified Messrs. Lambrecht and Jones' entry into personal guarantees on our
behalf.

Manschot Stock Option Grant. On July 30, 1997 PCI's Board of Directors
granted Robert H. Manschot a non-qualified stock option to purchase 5,000 shares
at the offering price from the effective date of the offering and for one year
thereafter. The option will be issued and held in the name of RHEM Enterprises,
Inc., a Company that Mr. Manschot beneficially owns and controls. The stock
option grant was approved by the other disinterested directors, and the other
independent director approved the stock option grant.

Capital Contribution Agreement. On August 8, 1997, certain holders of PCI's
shares who are classified as "promoters" under applicable state securities laws
and regulations, contributed a total of $150,000 as additional capital to PCI.
Contributors included Steven A. Lambrecht, Greg P. Lambrecht, Colin A. Jones,
Peter G. Charleston, James B. Stanley, Greg S. Barton and Daniel C. Goldman.
This contribution was made to comply with promoters' equity requirements set
forth in the North American Securities Administrators Association, Inc.
("NASAA") Statement of Policy Regarding Promoters' Equity Investment. No shares
were issued as a result of this equity contribution and the number of
outstanding shares did not change. All monies contributed came from
contributors' personal funds. All of PCI's directors, including the independent
directors, ratified the Capital Contribution Agreement.
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PRINCIPAL SHAREHOLDERS

Security Ownership of Certain Beneficial Owners, Management

The following tables set forth certain information regarding shares of
common stock beneficially owned as of August 21, 1997 by (i) each person or
group known to PCI, which beneficially owns more than 5% of the common stock;
(ii) each of PCI's officers and directors; and (iii) all officers and directors
as a group. The percentage of beneficial ownership is based on 1,480,500 shares
outstanding on August 21, 1997 as adjusted for the May 31, 1994 3:1 stock split
plus, for each person or group, any securities that person or group has the
right to acquire within 60 days pursuant to options, warrants, conversion
privileges or other rights. Unless otherwise indicated, the following persons
have sole voting and investment power with respect to the number of shares set
forth opposite their names:

Security Ownership of Certain Beneficial Owners

[Enlarge/Download Table]

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

Common Colin A. Jones 371,208 25.07% 10.98%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Greg P. Lambrecht 363,708(2) 24.57 10.76
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Steven A. Lambrecht 256,584(2) 17.33 7.59
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Lincoln Heritage Life 210,476(1)(3) 12.60 5.89
Insurance Company
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Londen Insurance Group 210,476(1)(3) 12.60 5.89
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Life of Boston Insurance Company 115,238(1)(3) 7.31 3.32
4343 E. Camelback Rd. #400
Phoenix, Arizona 85018
Common Greg S. Barton 113,095(1) 7.45 3.31
17403 NE 45th Street
Redmond, WA 98036
Common Peter G. Charleston 90,000(2) 6.08 2.66
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Scott I. Lambrecht 86,250(2) 5.83 2.55
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Corey A. Lambrecht 75,000(2) 5.07 2.22
15651 N. 83rd Way #3
Scottsdale, AZ 85260
------------
(1) Includes shares which may be beneficially acquired by the exercise of stock
warrants within 60 days as follows: Greg S. Barton, 38,095 shares, Lincoln
Heritage Life Insurance Company, 190,476 shares, Life of Boston Insurance
Company 95,238 shares.

(2) Steven A. Lambrecht is the brother of Greg P. Lambrecht, the father of
Corey A. Lambrecht and Scott I. Lambrecht and the uncle of Peter G.
Charleston. Each of the Lambrechts and Mr. Charleston disclaims any
beneficial interest in the shares held by the others.
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(3) The Londen Insurance Group is the sole shareholder of the Lincoln Heritage
Life Insurance Company. Lincoln Heritage Life Insurance Company owns 79%
of the shares of Life of Boston Insurance Company.

Security Ownership of Management

[Enlarge/Download Table]

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

Common Colin A. Jones 371,208 25.07% 10.98%
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Greg P. Lambrecht 363,708(2) 24.57 10.76
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Steven A. Lambrecht 256,584(2) 17.33 7.59
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common Scott I. Lambrecht 86,250(2) 5.83 2.55
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common James B. Stanley 26,250 1.77 (3)
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common William L. Anthony 20,048(1) 1.34 (3)
15651 N. 83rd Way #3
Scottsdale, AZ 85260
Common David S. Hodges 19,048(1) 1.27 (3)
15651 N. 83rd Way #3
Scottsdale, AZ 85260
-------------------------------------------------------------------------------------------------
Common All Officers and Directors 1,143,096(1)(2) 75.27% 33.44%
as a group (8 persons)
------------
(1) Includes shares which may be acquired by the exercise of warrants within 60
days as follows: William L. Anthony, 19,048 shares, David S. Hodges,
19,048 shares. Excludes options held by William L. Anthony and Robert H.
Manschot to purchase 156,250 shares and 5,000 shares, respectively, which
are not exercisable until 1 year after the date of this prospectus.
(2) Steven A. Lambrecht is the brother of Greg P. Lambrecht and the father of
Corey A. Lambrecht and Scott I. Lambrecht. Each of the Lambrechts
disclaims any beneficial interest in the shares held by the others.
(3) Less than 1%.

Shareholders and Voting Agreement. On January 1, 1997, PCI and the
following shareholders entered a Shareholders and Voting Agreement: Greg P.
Lambrecht, Colin A. Jones, Greg S. Barton, Dan C. Goldman and Pat Quadrelli.
Between January 9 and 11, 1997, the following persons also agreed to be bound by
the agreement: Scott I. Lambrecht, Peter G. Charleston, Mike Rocha, Murphy
Pierson, Lorraine Shelley, Steven A. Lambrecht, Corey A. Lambrecht and James B.
Stanley. On May 31, 1997, the agreement was terminated by a majority vote of the
board of directors and a majority vote of the total outstanding shares of PCI
according to a provision of the agreement which allowed for voluntary
termination by that means. Among other terms, the agreement (i) required the
offer of the parties' shares to the other parties to the agreement or PCI prior
to offering such shares to a third party, (ii) required parties to maintain
confidentiality of PCI confidential information, (iii) restricted any party from
competing with PCI at any time the party held PCI shares, and (iv) contained a
voting agreement to break a deadlock between an even number of directors by
electing (an) additional director(s). Although the agreement stated that it
would not apply to publicly registered shares, the agreement was terminated to
avoid any potential restriction on PCI, as a party to the agreement, in this
offering and to simplify legal and transfer agent procedures regarding future
transfers of restricted shares.
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INTERIM FINANCING

Bridge Financing and Bridge Warrants. Between March and June 1997, 10
accredited investors loaned PCI a total amount of $1,000,000 bridge financing in
cash or conversion of prior debt of CAN-AM. The Underwriter's Representative,
W.B. McKee Securities, Inc., was PCI's consultant for the bridge financing. In
return for their loans, the bridge investors received promissory notes from PCI
and bridge warrants to purchase 361,906 shares of PCI Common Stock at 50% of the
offering price or $2.625. The bridge warrants held by William B. McKee entitle
him to purchase 19,048 shares at the offering price.

The following sets forth the names of the bridge investors, the amount of
their cash investment or the value of other consideration given, the number of
shares of Common Stock that they are entitled to purchase under the bridge
warrants, and the percentage of their beneficial ownership before and after the
offering:

[Enlarge/Download Table]

Number of Percent Percent
Common Shares Owned Owned
Loan Entitled to Prior to After
Name Amount Purchase Offering Offering
----------------------------------- ------------------- --------------- -------------- --------------

Walter Adrushenko ............... $ 50,000 19,048 1.27 (6)
William L. Anthony(1) ............ $ 50,000 19,048 1.34(5) (6)
Greg S. Barton .................. $ 100,000(4) 38,095 7.45(5) 3.31(5)
Mary A. Davis .................. $ 100,000 38,095 2.51 1.11
David S. Hodges(1) ............... $ 50,000 19,048 1.27 (6)
Anthony Holden .................. $ 50,000 19,048 1.27 (6)
William B. McKee(2) ............ $ 50,000 19,048 1.27 (6)
Life of Boston Insurance Company(3) $ 250,000 95,238 7.31(5) 3.32(5)
Lincoln Heritage Life Insurance
Company(3) ..................... $ 250,000 95,238 12.60(5) 5.89(5)
Martin B. Perlman ............... $ 50,000 19,048 1.27 (6)
-------------- --------
Totals: ..................... $ 1,000,000 380,954

------------
(1) Messrs. Anthony and Hodges are directors and consultants to PCI. See
"Management."
(2) Principal of W.B. McKee Securities, Inc., the Underwriter's Representative.
(3) Beneficially owned and controlled by the Londen Insurance Group.
(4) Conversion of $100,000 debt of CAN-AM, valued by PCI as a $100,000
investment. See "Certain Transactions."
(5) Includes other beneficial holdings of such persons as follows: William L.
Anthony, 1,000, Greg S. Barton, 75,000, Life of Boston Insurance Company,
20,000, Lincoln Heritage Life Insurance Company, 115,238.
(6) Less than 1%.

The bridge notes accrue 8% annual interest until the closing of the
offering under this prospectus. After the offering closes, the bridge notes bear
interest at 16%. The bridge notes are due on the earlier of the closing of this
offering or six months from issuance. If not paid within one year from issuance,
the bridge notes convert into new one year notes amortized over four quaterly
payments. PCI intends to repay the bridge notes using proceeds from the
offering.

Proceeds from the bridge financing were used to purchase cigars, humidors
and related items and capital equipment and pay salaries, business expenses and
office costs, and professional and consulting fees.

Sales By Warrant Holders. The holders of the bridge warrants, have the
right to exercise those warrants on or after the first day that our shares are
traded. However, the holders of the warrants to purchase all 380,954 shares have
agreed that if they exercise the warrants they will not sell the underlying
shares for 12 months from the date of this prospectus, subject to regulatory or
exchange modification or approval, without the prior approval of the
Underwriter's Representative. From the end of the 12-month period and for the
remainder of the exercise period of the warrants,
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we must include the shares underlying the warrants in any subsequent
registration statement we file for any sale of our Common Stock or the warrant
holders may demand that we register the shares underlying the warrants. This
potential resale of the shares underlying the warrants would occur at some date
between one and five years from the completion of this offering.

PCI will not receive any proceeds from the resale of the shares underlying
the bridge warrants. Shares could be sold from time to time in transactions
(which may include block transactions by or for the account of the bridge
warrant holders) in the over-the-counter market, on any market in which PCI
shares are traded, including the Nasdaq SmallCap Market, the Boston Stock
Exchange or in negotiated transactions, a combination of such methods or
otherwise. Sales may be made at fixed prices which may be changed, at market
prices or in negotiated transactions, a combination of such methods or
otherwise, and shares may be transferred by gift.

Under applicable SEC rules and regulations, namely Rule 102 of Regulation
M, any person engaged in the distribution of shares may not simultaneously
engage in market-making activities in our securities during the applicable
"cooling-off" period (which runs from at least one and possibly five business
days before the beginning of the distribution and continues until the
distribution is over). This means that if we offer more shares of our Common
Stock to the public at some future date, and the underwriters of the subsequent
offering are also distributing the shares underlying the bridge warrants, the
underwriters will not be able to make a market in our shares during the
applicable restrictive period. For two years following the completion of this
offering, the Underwriter's Representative in this offering has a right of first
refusal to participate as underwriter, co-underwriter or placement agent for any
public or private offering of our securities. However, the underwriters in this
offering have not agreed to and are not obligated to act as broker-dealer in
resales of the shares underlying the warrants and the selling shareholders may
be required, and in the event the underwriter in the delayed offering is a
market-maker, will likely be required, to sell such securities through another
broker-dealer. In addition, each selling shareholder will be subject to the
applicable provisions of the Exchange Act and the rules and regulations
thereunder, including Rule 102 of Regulation M, which may limit the timing of
the purchases and sales of shares of PCI's securities by such persons.

The selling shareholders and broker-dealers, if any, acting in connection
with any sale of shares underlying warrants might be deemed to be "underwriters"
within the meaning of Section 2(11) of the Securities Act and any commission
received by them and any profit on the resale of the securities might be deemed
to be underwriting discount and commissions under the Securities Act.

We have informed the holders of the bridge warrants that the
anti-manipulative rules under the Securities Exchange Act of 1934, including
Regulation M, may apply to their sales in the market in any offering of shares
underlying warrants. PCI has also informed the holders of the bridge warrants of
the need for delivery of copies of a current prospectus prior to any sale of
their underlying shares. PCI is unable to predict what effect the sale of
underlying shares may have on the then prevailing market price of PCI Common
Stock.
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DESCRIPTION OF SECURITIES

General. PCI is authorized to issue 10,000,000 shares of Common Stock, no
par value.

Stock Split. On May 31, 1997, PCI's shareholders unanimously approved a
three-for-one forward stock split ("3:1 Stock Split"). Each issued and
outstanding share of PCI's Common Stock was reclassified as three shares of
Common Stock, no par value. The 3:1 Stock Split did not affect the number of
shares of Common Stock which may be acquired by the holders of the bridge
warrants, because the anti-dilution provisions of the bridge warrants are only
affected by reclassifications which occur after the date of this prospectus.

Common Stock. Holders of Common Stock are entitled to one vote for each
share on all matters submitted to a shareholder vote. Holders of Common Stock
are entitled to share in all dividends that the Board of Directors, in its
discretion, declares from legally available funds. In any liquidation, each
outstanding share entitles its holder to participate pro rata in the assets that
remain after PCI pays liabilities. 1,480,500 shares of Common Stock are
currently issued and outstanding, and upon completion of this offering, assuming
the underwriters do not exercise their over-allotment option, 3,380,500 shares
of Common Stock will be outstanding.

Shareholders have no preemptive or other rights to subscribe for or
purchase additional shares of any class of stock or of any other securities of
PCI, nor are there any redemption or sinking fund provisions that relate to the
Common Stock. All outstanding shares of Common Stock are, and the shares
underlying all warrants and options will be validly issued, fully paid, and
nonassessable have at the time PCI issues them.

Arizona law allows shareholders to cumulate their votes for the election of
directors. This means that shareholders may multiply the total number of shares
they are entitled to vote by the total number of directors for whom they are
entitled to vote, and may apply that product to elect a single director or
distribute that product among two or more candidates. For example, at a meeting
to elect three directors, a stockholder holding 100 voting shares could cast 300
votes for a single candidate, or could cast any combination totalling 300 votes
for two or more candidates. Arizona's cumulative voting rights may allow
shareholders holding a minority of PCI's shares a greater opportunity to elect a
director even though management or larger shareholders control a substantial
percentage of PCI's shares.

Shares Eligible for Future Sale. Other than the outstanding shares of
Common Stock issued in this offering, all of the presently issued and
outstanding shares of Common Stock are "restricted securities" as that term is
defined in SEC Rule 144. Rule 144 governs resales of restricted securities for
the account of any person (other than an issuer), and restricted and
unrestricted securities for the account of an "affiliate" of the issuer.
Restricted securities generally include any securities acquired directly or
indirectly from an issuer or its affiliates which were not issued or sold in a
public offering registered under the Securities Act. An affiliate of the issuer
is any person who directly or indirectly controls, is controlled by, or is under
common control with, the issuer. PCI's affiliates may include our directors,
executive officers and persons directly or indirectly owning 10% or more of our
outstanding Common Stock. Under Rule 144, unregistered resales of restricted
Common Stock cannot be made until the restricted shares have been held for one
year from the later of when the shares were acquired from PCI or an affiliate of
PCI. Thereafter, shares of Common Stock may be resold without registration
subject to Rule 144's volume limitation, aggregation, broker transaction, notice
filing requirements, and requirements concerning publicly available information
about PCI (the "Applicable Requirements"). Resales by PCI's affiliates of
restricted and unrestricted Common Stock are subject to the Applicable
Requirements. The volume limitations provide that a person (or persons who must
aggregate their sales) cannot, within any three-month period, sell more than the
greater of (i) one percent of the then outstanding shares, or (ii) the average
weekly reported trading volume during the four calendar weeks preceding each
sale. A person who is not deemed an "affiliate" of PCI and who has beneficially
owned shares for at least two years would be entitled to sell such shares under
Rule 144 without regard to the Applicable Requirements.

If a public market develops for PCI's Common Stock, PCI is unable to
predict the effect that sales made under Rule 144 or other sales may have on the
then prevailing market price of the
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Common Stock. None of the 1,480,500 presently outstanding shares of Common
Stock will become eligible for sale under Rule 144 prior to December 31, 1997.
Thereafter, at various times through March 10, 1998, all 1,480,500 shares of
Common Stock will become eligible for sale pursuant to Rule 144.

In addition, certain of our affiliates who hold 1,480,500 presently
outstanding shares of Common Stock, 57,144 bridge warrants and 161,250 options
have agreed that they will not sell their shares, warrants and options for 24
months from the date of this prospectus except for 10% of the shares, warrants
and options which the agreement releases at 2.5% per quarter in the second year.

No Prior Market for Shares. Prior to the offering, there has been no public
market for PCI shares. The offering price for the shares was determined through
negotiations between us and the W.B. McKee Securities, Inc., and may not be
indicative of the market price of the shares after the offering. The Nasdaq
SmallCap Market(SM) and the Boston Stock Exchange are considering our
applications to list our Common Stock with them and we believe that we will be
able to satisfy and maintain their current and proposed entry and maintenance
standards when we complete this offering. If we are unable to satisfy the
requirements for continued listing on Nasdaq or the Boston Stock Exchange, our
shares will not be traded in those markets.

In the event our shares are not listed as contemplated, trading, if any,
would be conducted in the over-the-counter market in the so-called "pink sheets"
or the OTC Bulletin Board, established for securities that do not meet the
Nasdaq SmallCap Market(SM) listing requirements. Consequently, the liquidity of
our securities could be impaired, not only in the number of securities which
could be bought and sold, but also through delays in the timing of transactions,
reduction in security analysts' and the news media's coverage of PCI, and lower
prices and larger differences in bid and ask prices for our securities.

If our securities are not listed on the Nasdaq SmallCap Market(SM) and/or
the Boston Stock Exchange, they may become subject to Rule 15g-9 under the 1934
Act, which imposes additional sales practice requirements on broker-dealers
which sell such securities to persons other than established customers and
institutional accredited investors. For transactions covered by this rule, a
broker-dealer must make a special suitability determination for the purchaser
and have received the purchaser's written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers to sell
our shares and may affect the ability of holders to sell our shares in the
secondary market.

The SEC's regulations define a "penny stock" to be any equity security that
has a market price less than $5.00 per share or with an exercise price of less
than $5.00 per share, subject to certain exceptions. The penny stock
restrictions will not apply to our shares if they are listed on The Nasdaq
SmallCap Market(SM) or the Boston Stock Exchange and we provide certain price
and volume information on a current and continuing basis or meet required
minimum net tangible assets or average revenue criteria. We cannot assure you
that our shares will qualify for exemption from these restrictions. If PCI
shares were subject to the penny stock rules, the market liquidity for the
shares could be severely adversely affected.

Transfer Agent

The transfer agent ("Transfer Agent") for the Common Stock and warrant
agent for the underwriter warrants is American Securities Transfer & Trust,
Inc., 1825 Lawrence Street, Suite 444, Denver, Colorado 80202-1817, (303)
298-5370.

DIVIDEND POLICY

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

CERTAIN PERSONS WHO PARTICIPATE IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE SHARES, INCLUDING
PURCHASES OF SHARES TO MAINTAIN THEIR MARKET PRICE, PURCHASES TO COVER SOME OR
ALL OF THE UNDERWRITERS' SHORT POSITION IN THE SHARES AND THE IMPOSITION OF
PENALTY BIDS. See "Plan of Distribution."

Subject to the terms and conditions of the Underwriting Agreement, the
underwriters named below have severally agreed to purchase from PCI the
following number of shares set forth opposite their names at the public offering
price, less the underwriting discounts and commissions set forth on the cover
page of this prospectus:

Underwriter Number of Shares
------------------------------------------ -----------------
W.B. McKee Securities, Inc. .............. 850,000
Kashner Davidson Securities Corp. ........ 750,000
Paulson Investment Company, Inc. ......... 200,000
M.S. Farrell & Co., Inc. ................. 100,000
----------
Total ............................. 1,900,000
==========

The Underwriting Agreement provides that the obligations of the
underwriters are subject to certain conditions precedent and that the
underwriters will purchase all shares offered in this offering if any of the
shares are purchased.

W.B. McKee Securities, Inc. as underwriter's representative advised PCI
that the underwriters will offer the shares they purchase directly to the public
at the offering price on the cover page of this prospectus and to certain
dealers at a price that represents a concession of $.2625 per Share, or 5.0% per
Share. The underwriter's representative also advised PCI that it will not sell
any of the shares to accounts over which it exercises discretionary authority,
but that certain dealers may do so. After the initial public offering of the
shares, the underwriters may change the offering price and the selling terms.

We granted the underwriter's representative an over-allotment option,
exercisable not later than 45 days after the date of this prospectus, to
purchase up to 285,000 shares (equal to 15% of the number of shares sold in the
offering), at the public offering price, less the underwriting discounts and
commissions listed on the cover page of this prospectus, solely for the purpose
of covering any over-allotments.

We agreed to pay the underwriter's representative a non-accountable expense
allowance of 3% of the offering proceeds from the sale of the shares. We
estimated the expense allowance at $299,250, $25,000 of which has already been
paid, or $344,138 if the underwriter's representative exercises the
over-allotment option.

At the closing of this offering, PCI will sell to the underwriter's
representative, at a price of $.01 each, representative's warrants to purchase
up to 170,952 shares. Each representative's warrant will be exercisable for a
four-year period, commencing one year from the date of this prospectus, at an
exercise price equal to $8.40 per share (160% of the public offering price of
the shares). We will issue one share of Common Stock upon exercise of each
representative's warrant. The representative's warrants will contain
anti-dilution provisions providing for appropriate adjustments in any
recapitalization, reclassification, stock dividend, stock split or similar
transaction by PCI. The representative's warrants do not entitle the
representative to any rights as a shareholder of PCI until the underwriter's
representative exercises them. The representative's warrants may only be
transferred to officers and directors of the underwriter's representative who
are also shareholders of the underwriter's representative.

For the exercise period of the representative's warrant, the holder(s) will
have the opportunity to profit from a rise in the market value of the Common
Stock, which will dilute the interest of the other PCI shareholders. We expect
that the holder(s) of the representative's warrants will exercise them at
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a time when PCI would, in all likelihood, be able to obtain any capital it
needs from an offering of its unissued Common Stock on terms more favorable to
PCI than the terms in the representative's warrant, which may adversely affect
the terms on which PCI can obtain additional financing.

We have granted certain demand and piggyback registration rights for the
Common Stock underlying the representative's warrants. On one occasion, at the
underwriter's representative's request, at any time during the five-year period
commencing one year after the date of this prospectus, PCI will prepare and file
a post-effective amendment or new registration statement permitting the sale of
the representative's warrants and/or underlying securities and use its best
efforts to keep the registration statement effective under the Securities Act
for a nine-month period following the effective date. We will bear the cost of
that amendment or registration statement. Also, if PCI files an equity offering
registration statement under the Securities Act at any time during the five-year
period following the date of this prospectus, the holders of the
representative's warrants or underlying securities will include in such
registration statement all or part of the underlying securities at the request
of the holders.

PCI, any selling security holders and the underwriter's representative have
agreed to indemnify each other against certain liabilities in connection with
the registration statement, including liabilities under the Securities Act. The
indemnification is limited or unavailable in certain circumstances, including
where legally unavailable.

All of the present shareholders of PCI have agreed not to offer, sell or
otherwise dispose of all of their outstanding Common Stock or Common Stock
issuable upon exercise of options for a period of 18 months after completion of
this offering without prior consent of the underwriter's representative. See
"Principal Shareholders."

Upon closing of the Offering, the Representative will have the right to
select one member of the Board of Directors to serve for a five year term. PCI
does not currently maintain key-man life insurance on any of its employees, but
the terms of our agreement with the underwriters require us to maintain
$1,000,000 in key-man life insurance on Steven A. Lambrecht at least until March
31, 2002.

The previous paragraphs are a brief summary of the terms of the
Underwriting Agreement and is not complete. A copy of the Underwriting Agreement
is on file with the SEC as an exhibit to the registration statement. See
"Additional Information."

PLAN OF DISTRIBUTION

In connection with this offering certain underwriters may engage in passive
market making transactions in the shares on NASDAQ in accordance with Rule 103
of Regulation M.

In connection with this offering, the underwriters' selling group members
(if any) and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of our shares. These
transactions may include stabilization transactions permitted by Rule 104 of
Regulation M, under which persons may bid for or purchase shares to stabilize
its market price. The underwriters may also create a "short position" for their
own account by selling more shares in the offering than they are committed to
purchase, and in that case they may purchase shares in the open market after
this offering is completed to cover all or a part of their short position. The
underwriters' representative may also cover all or a portion of their short
position, up to 285,000 shares, by exercising their over-allotment option
described above and on the cover of this prospectus. Also, W.B. McKee
Securities, Inc., on behalf of the underwriters, may impose "penalty bids,"
under contractual arrangements with the underwriters, that allow it to reclaim
from an underwriter (or dealer participating in this offering) for the account
of the other underwriters, the selling concession on the shares that the
underwriters distribute in the offering but later purchase for their account in
the open market. Any of these transactions may maintain the price of the shares
at a higher level than the level which the shares might otherwise bear in the
open market. None of these transactions is required, and if the underwriters,
selling agents or others engage in the transactions, they may also stop at any
time.
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LEGAL MATTERS

Titus, Brueckner & Berry, P.C., 7373 North Scottsdale Road, Scottsdale
Centre, Suite B-252, Scottsdale, Arizona 85253, counsel for PCI, have given
their opinion that the shares of Common Stock offered in this prospectus will,
when sold, be legally issued, fully paid and nonassessable. Streich Lang, P.A.,
Renaissance One, Two North Central Avenue, Phoenix, Arizona 85004, has
represented the underwriter's representative in connection with this offering.

EXPERTS

The financial statements of PCI included in this prospectus have been
audited by Semple & Cooper, LLP, independent certified public accountants, as
stated in their report which immediately precedes the financial statements. We
include the financial statements in reliance on Semple & Cooper, LLP's report,
which was given on that firm's authority as experts in accounting and auditing.

[Enlarge/Download Table]
GLOSSARY

Bridge warrants Warrants to purchase shares of PCI's Common Stock at 50% of the
offering price, except that the exercise price for William B. McKee's
warrants is $5.25.

Bridge financing Interim financing of $1,000,000 from nine investors between March
and June 1997; Investors received promissory notes for the amount
of their investment and warrants to purchase shares of PCI's
Common Stock.

CAN-AM CAN-AM International Investments Corp., a British Columbia
(Canada) corporation and wholly-owned subsidiary of PCI. All of
PCI's Canadian cigar operations are conducted through CAN-AM.

EPA The U.S. Environmental Protection Agency.

Exchange Act The Securities Exchange Act of 1934, as amended.

FDA The U.S. Food and Drug Administration.

FTC The Federal Trade Commission.

J&M J&M Wholesale, Ltd., a British Columbia (Canada) corporation
wholly-owned and controlled by Colin A. Jones. Mr. Jones is an
officer and director of CAN-AM and an officer, director and controlling
shareholder of PCI.

Master agreement A form retailer or regional distribution agreement that we negotiated
with a major convenience store chain, which is approved for use by
retail stores or regional distribution centers within the chain, but
which must be accepted by each individual store or distribution
region which wishes to participate in the PCI Cigar Program.

Merchandising Full-service, in-store support of a retail location including cleaning,
supplying and maintaining the humidor, rotating stock and providing
training to store management and personnel.

NACS National Association of Convenience Stores.

Nasdaq SmallCap Market(SM) An interdealer quotation system for smaller companies operated by
Nasdaq.

Nasdaq The National Automated Dealer Quotation System operated by The
Nasdaq Stock Market, Inc.
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Offering price The price per share printed on the cover of this prospectus.

Offering Our initial public offering of shares under this prospectus and
registered under its registration statement.

Over-allotment option Options that we have granted to the underwriter, exercisable for 45
days from the date of this prospectus, to purchase up to an
additional 285,000 shares to cover excess allotments to participants.

PCI Premium Cigars International, Ltd.

PCI Cigar Program Our cigar distribution program, including premium and mass market
cigars, humidors, service, training and sales.

Prospectus This document.

Registration statement Our registration statement on Form SB-2 filed with the SEC as of the
date of this prospectus, which includes exhibits and other information
that is not included in this prospectus.

Representative's warrants Warrants to purchase 170,952 shares exercisable at 160% of the
offering price; issued to the underwriters as additional compensation.

Rose Hearts Rose Hearts, Inc, a Washington corporation that is wholly-owned and
controlled by Greg P. Lambrecht, who is an officer and director of
CAN-AM and an officer and controlling shareholder of PCI.

SEC The Securities and Exchange Commission.

Securities Act The Securities Act of 1933, as amended.

Shares Shares of PCI's Common Stock, no par value.

3:1 stock split A 3:1 forward split of PCI's shares approved by PCI's shareholders
on May 31, 1997.

Transfer agent and warrant American Securities Transfer & Trust, Inc.
agent

Underwriters W.B. McKee Securities, Inc., Kashner Davidson Securities Corp. and
others who may be named in a syndicate of co-underwriters.

Underwriters' representative W.B. McKee Securities, Inc.

Underwriting discount Compensation to the underwriters' representative in the form of a
10% discount of underwriters' representative's purchase price from
the offering price.

"We" Premium Cigars International, Ltd.

ADDITIONAL INFORMATION

We filed a registration statement with the SEC on Form SB-2 relating to the
shares offered in this prospectus. This prospectus does not contain all of the
information included in the registration statement. For further information
about PCI and the shares we are offering in this prospectus, refer to the
registration statement and its exhibits. The statements we make in this
prospectus regarding the content of any contract or other document are
necessarily not complete, and you may examine the copy of the contract or other
document that we filed as an exhibit to the registration statement. All our
statements about those contracts or other documents are qualified in their
entirety by referring you to the exhibits to the registration statement. See
"Where You Can Get More Information."
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424B1 65th Page of 79 TOC 1st Previous Next ↓Bottom Just 65th
CONSOLIDATED FINANCIAL STATEMENTS

Index to Consolidated Financial Statements

Independent Auditor's Report .................................... F-2
Consolidated Balance Sheets .................................... F-3
Consolidated Statements of Operations ........................... F-4
Consolidated Statements of Changes in Stockholders' Equity ...... F-5
Consolidated Statements of Cash Flows ........................... F-6
Notes to Consolidated Financial Statements ..................... F-7
F-1

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INDEPENDENT AUDITORS' REPORT

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

We have audited the accompanying consolidated balance sheet of Premium Cigars
International, Ltd. and Subsidiary as of March 31, 1997, and the related
consolidated statements of operations, changes in stockholders' equity, and
cash flows for the period from the date of inception, June 1, 1996 through
March 31, 1997. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audit.

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

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Premium Cigars
International, Ltd. and Subsidiary as of March 31, 1997, and the results of its
operations, changes in stockholders' equity, and its cash flows for the period
from the date of inception, June 1, 1996 through March 31, 1997, in conformity
with generally accepted accounting principles.

Semple & Cooper, L.L.P.

Phoenix, Arizona
June 18, 1997
F-2

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS

[Enlarge/Download Table]

ASSETS

March 31, June 30,
1997 1997
----------- ------------
(Unaudited)

Current Assets:
Cash and cash equivalents (Note 1) .................. $ 58,018 $ 26,424
Accounts receivable (Notes 1 and 2)
-- trade ........................................... 64,300 267,575
-- related parties ................................. 8,497 13,119
Inventory (Notes 1 and 3) ........................... 126,337 94,853
Other current assets ................................ 15,607 103,718
---------- -----------
Total Current Assets ............................. 272,759 505,689
---------- -----------
Property and Equipment, Net (Notes 1 and 4) ............ 23,055 102,317
---------- -----------
Other Assets:
Humidors, net (Note 1) .............................. 60,486 223,882
Notes receivable -- related parties (Note 2) ........ 86,225 98,579
Organizational costs, net (Note 1) .................. 32,386 38,782
Deferred costs (Notes 1 and 5) ...................... 53,550 292,953
---------- -----------
232,647 654,196
---------- -----------
$ 528,461 $1,262,202
========== ===========

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

Current Liabilities:
Notes payable (Note 5) ............................. $ 50,000 $ 0
Notes payable -- related parties, current portion
(Note 2) .......................................... 19,641 19,641
Accounts payable -- trade .......................... 109,254 179,260
Accrued expenses
-- tobacco taxes .................................. 100,333 114,670
-- other .......................................... 70,700 97,267
---------- ----------
Total Current Liabilities ....................... 349,928 410,838
---------- ----------
Long-Term Liabilities:
Notes payable, long-term portion (Note 5) .......... -- 1,000,000
Notes payable -- related parties, long-term portion
(Note 2) .......................................... 110,000 --
---------- ----------
110,000 1,000,000
---------- ----------
Commitments: (Notes 2 and 7) .......................... -- --
---------- ----------
Stockholders' Equity: (Note 8)
Common stock -- no par value, 10,000,000 shares
authorized, 1,480,500 shares issued and outstanding
as of March 31, 1997 and June 30, 1997 (unaudited),
respectively ...................................... 419,675 524,675
Accumulated deficit ................................ (351,142) (673,311)
---------- ----------
Total Stockholders' Equity (Deficit) .................. 68,533 (148,636)
---------- ----------
Total Liabilities and Stockholders' Equity (Deficit). $ 528,461 $1,262,202
========== ==========

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

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997 and
For The Three Month Period Ended June 30, 1997 (Unaudited)

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Inception Three Month
Through Period Ended
March 31, June 30,
1997 1997
--------------- -------------
(Unaudited)

Net Sales ............................................ $ 845,571 $ 628,180
Cost of Sales ........................................ 643,790 481,677
----------- ----------
Gross Profit ......................................... 201,781 146,503
Selling, General and Administrative .................. 323,776 327,439
Stock Based Compensation (Note 8) .................... 207,625 110,000
----------- ----------
Loss from Operations ................................. (329,620) (290,936)
----------- ----------
Other Income (Expense):
Interest Expense .................................. (21,292) (32,508)
Other ............................................. 963 1,080
Foreign currency transaction gain (loss) ......... (1,193) 195
----------- ----------
(21,522) (31,233)
----------- ----------
Net Loss ............................................. $ (351,142) $ (322,169)
=========== ==========
Loss per Share (Note 1) .............................. $ (.24) $ (.22)
=========== ==========
Weighted Average Number of Shares Outstanding ........ 1,480,500 1,480,500
=========== ==========

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

F-4

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997 and
For the Three Month Period Ended June 30, 1997 (Unaudited)

[Enlarge/Download Table]

Common Stock Total
------------------------ Accumulated Treasury Stockholders'
Shares Amount Deficit Stock Equity (Deficit)
----------- ---------- ------------- ---------- ----------------

Balance, June 1, 1996 ............ -- $ -- $ -- $ -- $ --
Shares issued for cash ........... 1,433,400 212,050 -- -- 212,050
Shares issued for services ....... 47,100 207,625 -- -- 207,625
Net loss ......................... -- -- (351,142) -- (351,142)
--------- --------- ---------- -------- ----------
Balance, March 31, 1997 .......... 1,480,500 419,675 (351,142) -- 68,533
--------- --------- ---------- -------- ----------
Purchase of treasury stock ....... (15,000) -- -- (5,000) (5,000)
Shares issued for services ....... 15,000 32,500 -- 5,000 37,500
Additional compensation recorded
on private transactions ......... -- 72,500 -- -- 72,500
Net loss for the three month
period ended June 30, 1997
(unaudited) ..................... -- -- (322,169) -- (322,169)
--------- --------- ---------- -------- ----------
Balance, June 30, 1997 ........... 1,480,500 $524,675 $ (673,311) $ -- $ (148,636)
========= ========= ========== ======== ==========

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

F-5

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
For The Period From The Date of Inception,
June 1, 1996 Through March 31, 1997 and
For the Three Month Period Ended June 30, 1997 (Unaudited)

[Enlarge/Download Table]

Inception Three Month
Through Period Ended
March 31, June 30,
1997 1997
-------------- -------------
(Unaudited)

Increase (Decrease) in Cash and Cash Equivalents:
Cash flows from operating activities:
Cash received from customers ................................. $ 782,234 $ 425,985
Cash paid to suppliers and employees ......................... (827,701) (744,129)
Interest paid ................................................ (21,292) (25,008)
---------- ----------
Net cash used for operating activities ..................... (66,759) (343,152)
---------- ----------
Cash flows from investing activities:
Purchase of property and equipment ........................... (23,302) (81,074)
Purchase of humidors ......................................... (71,451) (174,960)
Disbursements for notes receivable -- related parties ........ (86,225) (12,354)
Organizational costs ......................................... (32,386) (8,151)
Deferred offering costs ...................................... (53,550) (156,903)
---------- ----------
Net cash used by investing activities ...................... (266,914) (433,442)
---------- ----------
Cash flows from financing activities:
Proceeds from notes payable .................................. 50,000 810,000
Repayment of notes payable ................................... -- (50,000)
Proceeds from note payable -- related party .................. 129,641 --
Repayment of notes payable -- related party .................. -- (10,000)
Proceeds from issuance of common stock ....................... 212,050 --
Purchase of treasury stock ................................... -- (5,000)
---------- ----------
Net cash provided by financing activities .................. 391,691 745,000
---------- ----------
Net increase (decrease) in cash and cash equivalents ............ 58,018 (31,594)
Cash and cash equivalents at beginning of period -- 58,018
---------- ----------
Cash and cash equivalents at end of period ...................... $ 58,018 $ 26,424
========== ==========
Reconciliation of Net Loss to Net Cash used for Operating
Activities:
Net Loss ........................................................ $ (351,142) $ (322,169)
---------- ----------
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization ................................ 11,212 15,131
Stock issued for services and compensation ................... 207,625 110,000
Amortization of deferred loan fees ........................... -- 7,500

Changes in Assets and Liabilities:
Accounts receivable
-- trade ................................................... (64,300) (203,275)
-- related parties ......................................... (8,497) (4,622)
Inventory .................................................... (126,337) 31,484
Other current assets ......................................... (15,607) (88,111)
Accounts payable -- trade .................................... 109,254 70,006
Accrued expenses
-- tobacco taxes ........................................... 100,333 14,337
-- other ................................................... 70,700 26,567
---------- ----------
284,383 (20,983)
---------- ----------
Net cash used for operating activities ....................... $ (66,759) $ (343,152)
========== ==========

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

F-6

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

Nature of Operations:

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

Significant Transactions:

Prior to January 1, 1997, CAN-AM acquired all existing cigar accounts,
cigar related inventory, humidors, other assets and the related trade
accounts payable and tobacco tax liabilities from J&M Wholesale, Ltd. and
Rose Hearts, Inc. These corporations were owned by the principal
stockholders of Premium Cigars International, Ltd. As all acquisitions and
account purchases were consummated within a controlled group, the cigar
operations of J&M Wholesale, Ltd. and Rose Hearts, Inc. are included in the
accompanying financial statements from the date of commencement of cigar
sales, June 1, 1996.

Principles of Consolidation:

The consolidated financial statements include the activity of Premium
Cigars International, Ltd., together with its wholly-owned subsidiary,
CAN-AM, and its predecessors cigar related activity of J&M Wholesale, Ltd.
and Rose Hearts, Inc. The activity of CAN-AM and its predecessors is
included in the consolidated financial statements from the date of
commencement of cigar operations, June 1, 1996. All significant
intercompany accounts and transactions have been eliminated.

Pervasiveness of Estimates:

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

Interim Financial Statements:

The interim financial statement for the three month period ended June 30,
1997 is unaudited. In the opinion of management, such statement reflects
all adjustments (consisting only of normal recurring adjustments) necessary
for a fair representation of the results of the interim periods. The
results of operations for the three month period ended June 30, 1997 are
not necessarily indicative of the results for the entire year. The interim
financial statement for the period from the date of inception, June 1,
1996, through June 30, 1996 is not presented as there was no significant
activity in that period.

Cash and Cash Equivalents:

Cash equivalents are considered to be all highly liquid investments
purchased with a maturity of three (3) months or less.
F-7

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Accounts Receivable -- Trade:

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

The Company follows the allowance method of recognizing uncollectible
accounts receivable. The allowance method recognizes bad debt expense as a
percentage of accounts receivable based on a review of individual accounts
outstanding. In the opinion of the management, all accounts receivable
outstanding at March 31, 1997 and June 30, 1997, are considered fully
collectible and therefore, no allowance has been provided for potentially
uncollectible accounts receivable.

Inventory:

Inventory quantities and valuation were determined based upon a physical
count, and pricing of same at March 31, 1997 and June 30, 1997. Inventory
is stated at the lower of cost, first-in, first-out method, or market.
Inventory quantities are reviewed for obsolescence periodically.

Property and Equipment:

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

Equipment .................. 5-7 years
Furniture and fixtures ...... 5-7 years

Maintenance and repairs that neither materially add to the value of the
property nor appreciably prolong its life are charged to expense as
incurred. Betterments or renewals are capitalized when incurred.

Humidors:

Humidors are used primarily to display cigars available for sale at retail
outlets. The humidors are being amortized ratably over a two (2) year
period. For the period from the date of inception, June 1, 1996 through
March 31, 1997, amortization expense was $10,965, and $11,564 (unaudited)
for the three month period ended June 30, 1997.

Organization Costs:

Organization costs consist of costs incurred in relation to the formation
of the Corporation and its wholly-owned subsidiary. These costs are being
amortized ratably over five (5) years.

Deferred Costs:

Deferred costs primarily represent costs incurred in connection with the
Company's proposed Initial Public Offering of its common stock and will be
offset against the proceeds of the offering, or expensed if not successful.

Income Taxes:

Deferred income taxes are provided on an asset and liability method,
whereby deferred tax assets are recognized for deductible temporary
differences and operating loss carryforwards. Deferred tax liabilities are
recognized for taxable temporary differences. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is
more likely than not that some portion or all of the deferred tax assets
will not be realized. Deferred tax assets and liabilities are adjusted for
the effects of changes in tax laws and rates on the date of enactment.
F-8

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Translation of Foreign Currencies:

Account balances and transactions denominated in foreign currencies and the
accounts of the Corporation's foreign operations have been translated into
United States funds, as follows: (i) assets and liabilities at the rates of
exchange prevailing at the balance sheet date; (ii) revenue and expenses at
average exchange rates for the period in which the transaction occurred;
(iii) exchange gains and losses arising from foreign currency transactions
are included in the determination of net earnings for the period; and (iv)
exchange gains and losses arising from the translation of the Corporation's
foreign operations are deferred and included as a separate component of
stockholders' equity.

Loss Per Share:

During the period ended March 31, 1997, the Company's Board of Directors
approved an Initial Public Offering of its common stock. The Initial Public
Offering price to the public is $5.25 per share. Pursuant to the Securities
and Exchange Commission rules, common stock issued for consideration below
the $5.25 per share Initial Public Offering price during the twelve (12)
months prior to filing the Registration Statement, have been included in
the weighted average number of shares outstanding for all periods
presented.

New Accounting Pronouncements:

Statement of Financial Accounting Standards No. 128, Earnings per Share
(SFAS No. 128). This pronouncement provides a different method of
calculating earnings per share than is currently required by APB 15,
Earnings per Share. SFAS 128 provides for the calculation of Basic and
Diluted earnings per share. Basic earnings per share includes no dilution
and is computed by dividing income available to common shareholders by the
weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities
that could share in the earnings of an entity similar to fully diluted
earnings per share. This pronouncement is effective for fiscal years and
interim periods after December 15, 1997; early adoption is not permitted.
The Company has not determined the effect, if any, of adoption on its EPS
computation(s).

Statement of Financial Accounting Standards No. 129 "Disclosure of
Information about Capital Structure" (SFAS No. 129) issued by the FASB is
effective for financial statements ending after December 15, 1997. The new
standard reinstates various securities disclosure requirements previously
in effect under Accounting Principles Board Opinion No. 15, which has been
superseded by SFAS No. 128. The Company does not expect adoption of SFAS
No. 129 to have a material effect, if any, on its financial position or
results of operations.

Statement of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income" (SFAS No. 130) issued by the FASB is effective for
financial statements with fiscal years beginning after December 15, 1997.
Earlier application is permitted. SFAS No. 130 establishes standards for
reporting and display of comprehensive income and its components in a full
set of general-purpose financial statements. The Company does not expect
adoption of SFAS No. 130 to have a material effect, if any, on its
financial position or results of operations.
F-9

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

2. Related Party Transactions:

Accounts Receivable -- Related Parties:

Accounts receivable -- related parties as of March 31, 1997 and June 30,
1997 are, in the opinion of management, short-term in nature and are
non-interest bearing.

Notes Receivable -- Related Parties:

As of March 31, 1997 and June 30, 1997, notes receivable -- related parties
are comprised of 8% interest bearing notes from the principal stockholders
in the amount of $86,225 and $98,579 (unaudited), respectively. The notes
receivable are due on March 31, 1999.

Notes Payable -- Related Parties:

At March 31, 1997 and June 30, 1997, notes payable related parties consist
of the following:

March 31, June 30,
1997 1997
----------- ------------
(Unaudited)
Non-interest bearing note to a stockholder,
due on demand; unsecured ............................ $ 19,641 $ 19,641
36% interest bearing note to a stockholder,
with monthly interest-only payments, due May,
1998; unsecured; converted to bridge financing
during the three month period ending June 30, 1997
(see Note 5) .................. 110,000 --
--------- ---------
129,641 19,641
Less: current portion ................................ (19,641) (19,641)
--------- ---------
$ 110,000 $ --
========= =========

For the period from the date of inception, June 1, 1996 through March 31,
1997 and for the three month period ended June 30, 1997, the Company
incurred interest expense in relation to the above notes payable from
related parties in the approximate amounts of $19,800 and $9,900
(unaudited), respectively.

Commitments:

During the three month period ended June 30, 1997, the Company entered into
a distributorship agreement with Rose Hearts which provides for commission
payments of ten percent (10%) to twenty-two percent (22%) of the product
cost to the stores. Although the Company has no other written distributor
agreements at this time, it is management's belief that the distribution
fee represents a reasonable cost if the services were to be performed by an
independent party. During the quarter ended June 30, 1997, the Company paid
approximately $5,000 (unaudited) in commissions under this agreement.

3. Inventory:

As of March 31, 1997 and June 30, 1997, inventory consists of the
following:

March 31, June 30,
1997 1997
----------- ------------
(Unaudited)
Cigars .................. $124,684 $93,478
Cigar accessories ...... 1,653 1,375
--------- --------
$126,337 $94,853
========= ========
F-10

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

4. Property and Equipment:

At March 31, 1997 and June 30, 1997, property and equipment consists of the
following:

March 31, June 30,
1997 1997
----------- ------------
(Unaudited)
Equipment ............................. $ 3,090 $ 92,716
Furniture and fixtures ................ 10,212 11,660
-------- --------
13,302 104,376
Less: accumulated depreciation ........ (247) (2,059)
-------- --------
13,055 102,317
Equipment held for sale ............... 10,000 --
-------- --------
$ 23,055 $102,317
======== ========
5. Notes Payable:

As of March 31, 1997, the notes payable consists of a $50,000 operating
line of credit with Biltmore Investors Bank, with interest at two percent
(2%) above the lender's index rate. The note is due December 18, 1997, and
is secured by various assets. The note was paid in full during the three
month period ending June 30, 1997.

As of June 30, 1997 (unaudited), notes payable consists of $1,000,000 in
bridge notes with various investors. The net proceeds on $900,000 of the
debt was $810,000 with an additional $100,000 of related party debt
converted to bridge notes. The bridge notes are payable the earlier of the
date of the closing of an initial public offering, or six (6) months after
the issue date. However, if they are not paid within 12 months from
issuance, the bridge notes convert into new one-year notes payable in four
quarterly payments. Interest is at 8% until the offering date and 16% after
the offering if not paid in full. In addition, the $90,000 in loan fees was
recorded in deferred costs and is being amortized over the estimated term
of the notes. For the quarter ending June 30, 1997, interest expense on the
notes was approximately $14,000 and amortization of the loan fees was
$7,500.

The investors of the bridge financing were also issued common stock
purchase warrants. (see Note 8)

6. Income Taxes:

As of June 30, 1997, the Company has available approximately $475,000
(unaudited) of U.S. operating loss carryforwards that may be applied
against future taxable income and will expire primarily in 2012. In
addition, the Company has a Canadian net operating loss carryforward in the
approximate amount of $25,000 (unaudited), expiring primarily through 2004.

The Company has established a valuation allowance equal to the full amount
of the deferred tax asset of approximately $190,000 (unaudited), resulting
from the loss carryforwards. The Company established an allowance because
the utilization of the loss carryforwards is uncertain.

7. Commitments:

Employment Agreements:

The Company has entered into employment agreements with three (3) officers
of the Corporation. The agreements are cancellable at any time by either
party. The Company has agreed to pay two (2) of the officers a management
fee in the amount of $80,000. The fee is to be paid over a sixteen (16)
month period. In addition, the Company has retained a consultant to assist
with the Initial Public Offering, for a maximum fee of $62,400.
F-11

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

Operating Lease:

The Company is leasing office and warehouse space in Scottsdale, Arizona,
under a non-cancellable operating lease agreement, expiring May 31, 1999.
The terms of the lease provide for monthly payments ranging from $5,878 to
$7,134. The lease terms also require the Company to pay common area
maintenance, taxes, and certain other incidental costs.

A schedule of future minimum lease payments due under the non-cancellable
operating lease agreement for each of the next two (2) years, is as
follows:

Year Ending
June 30, Amount
----------- ---------
(unaudited)
1998 .............................. $ 83,741
1999 .............................. 85,609
---------
$169,350
=========

As this lease was executed during the three month period ended June 30,
1997, there was no rent expense under the aforementioned operating lease
agreement for the period from the date of inception, June 1, 1996 through
March 31, 1997. Rent expense for the three month period ended June 30, 1997
was $14,736 (unaudited).

8. Stockholders' Equity:

Common Stock Options and Warrants:

During the quarter ended June 30, 1997 (unaudited), the Company, in
connection with the bridge financing, issued warrants to purchase 380,954
shares of common stock with 361,906 exercisable at $2.625 per share and
19,048 exercisable at $5.25 per share. The warrants expire five years from
the date of issuance. As of June 30, 1997, none of the warrants have been
exercised.

In June 1997 (unaudited), the Company issued 156,250 options to the
Chairman of the Board of Directors exercisable at $5.25 per share expiring
five years from the date of issuance. As of June 30, 1997, none of the
options have been exercised.

Stock Based Compensation:

During the period ended March 31, 1997, the Company sold 175,500 common
shares for $16,750. The stock was valued at $1.25 per share resulting in
compensation of $202,625. In addition, 150,000 shares were issued for
services valued at $5,000.

During the quarter ended June 30, 1997 the Company's Chief Executive
Officer sold common stock at a price below fair market value. As such, an
additional $110,000 was recorded as compensation.

Common Stock Split:

In May, 1997, the Company declared a three for one split of its common
stock. The accompanying consolidated financial statements give retroactive
effect to the stock split.

Proposed Offering:

The Company is currently in the process of filing a Form SB-2 Registration
Statement with the Securities and Exchange Commission to register its
common stock for sale to the public. The offering is intended to issue
1,900,000 common shares at $5.25 per share.

9. Foreign Currency:

Foreign currency transactions resulted in an aggregate exchange loss of
$1,193 for the period from the date of inception, June 1, 1996 through
March 31, 1997 and an aggregate exchange gain of $195 (unaudited) for the
three month period ending June 30, 1997. Foreign currency translation gains
or losses were immaterial for the periods.
F-12

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PREMIUM CIGARS INTERNATIONAL, LTD. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)

10. Statements of Cash Flows:

Non-Cash Financing and Investing Activities:

During the period from the date of inception, June 1, 1996 through March
31, 1997, the Company recognized financing activities that affected its
assets, liabilities and equity, but did not result in cash receipts or
payments. These non-cash activities are as follows:

Common stock was issued for services and compensation valued at
$207,625. This was based upon 175,500 shares sold on March 5, 1997, for
$16,750, which was valued at $1.25 per share.

During the three month period ended June 30, 1997 (unaudited), the Company
recognized investing and financing activities that affected its assets,
liabilities and equity, but did not result in cash receipts or payments.
These non-cash activities are as follows:

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

A related party note payable in the amount of $100,000 was converted
into a bridge financing loan. (see Note 5)

11. Economic Dependency:

For the period from the date of inception, June 1, 1996 through March 31,
1997, the Company's largest supplier accounted for approximately
seventy-one percent (71%) of the Company's cigar purchases. As of March 31,
1997, this supplier had an account payable balance of approximately
$15,000.

For the period from the date of inception, June 1, 1996 through March 31,
1997, the Company's largest customer accounted for approximately eighty-two
percent (82%) of the Company's sales. As of March 31, 1997, there are
accounts receivable of approximately $50,000 due from this customer.

For the three month period ended June 30, 1997 (unaudited), the Company's
two largest suppliers accounted for approximately thirty-eight percent
(38%), and thirty-seven percent (37%) of the Company's cigar purchases,
respectively. As of June 30, 1997, these suppliers had an aggregate account
payable balance of approximately $15,800.

For the three month period ended June 30, 1997 (unaudited), the Company's
largest customer accounted for approximately seventy-nine percent (79%) of
the Company's sales. As of June 30, 1997, there are accounts receivable of
approximately $160,000 due from this customer.

12. Subsequent Events:

On August 11, 1997, a $150,000 additional capital contribution was paid to
the Company.

In July 1997, the Company obtained a $200,000 note from Biltmore Investors
Bank in Phoenix, Arizona. Interest is at the prime rate plus 1%. The note
is due the earlier of the completion of an initial public offering or
January 31, 1998.
F-13

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[INSIDE BACK COVER]

[picture of race car driver Arie Luyendyk in Indy 500 winner's circle with
helmet bearing PCI logo]

[caption] Arie Luyendyk, winner of 1997 Indy 500, in winner's circle with PCI
logo on helmet.

[picture of Luyendyk's helmet with PCI logo (no caption)]

[picture of Luyendyk driving Indy 500 race car (no caption)]

[PCI logo (no caption)]

[background picture of lit cigar (no caption)]
II-14

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=========================================== ==================================
We have not authorized any dealer,
salesperson or other person to give any
information or represent anything not
contained in this Prospectus. You must
not rely on any unauthorized
information. This Prospectus does not
offer to sell or buy any shares in any 1,900,000 Shares
jurisdiction where it is unlawful. The
information in this Prospectus is
current as of August 21, 1997.

-------------------

TABLE OF CONTENTS

-------------------
[LOGO]

Page
-----
Prospectus Summary ..................... 1
Summary Consolidated Financial Common Stock
Information ........................... 3
Where You Can Get More Information ...... 4
Risk Factors ........................... 5
Use of Proceeds ........................ 15
Capitalization ........................ 16 ---------------
Dilution ................................. 17
Selected Historical and Pro Forma PROSPECTUS
Consolidated Financial Information ... 19
Management's Discussion and Analysis of ---------------
Results of Operations ............... 20
Business .............................. 24
Management .............................. 41
Certain Transactions ..................... 46
Principal Shareholders .................. 50
Interim Financing ..................... 52
Description of Securities ............... 54
Dividend Policy ........................ 55
Underwriting ........................... 56 W.B. MCKEE SECURITIES, INC.
Plan of Distribution .................. 57
Legal Matters ........................... 58
Experts ................................. 58 KASHNER DAVIDSON SECURITIES
Glossary ................................. 58 CORP.
Additional Information .................. 59
Consolidated Financial Statements ...... F-1

Until September 15, 1997 (25 days August 21, 1997
after the date of this Prospectus) all
dealers that buy, sell or trade these
securities, whether or not participating
in this offering, may be required to
deliver a prospectus. This is in
addition to the dealers' obligation to
deliver a prospectus when acting as
underwriters and with respect to their
unsold allotments or subscriptions.
=========================================== ==================================

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B1’ Filing	Date	First	Last	Other Filings

	3/31/02	15	61
	7/14/00	44
	5/31/99	44	76
	3/31/99	51	74	10-Q, 10KSB
	10/1/98	41
	6/20/98	17
	3/31/98	20	25	10KSB, 10QSB
	3/10/98	59
	1/31/98	77
	12/31/97	17	59	10KSB
	12/18/97	75
	12/15/97	73
	9/15/97	79
Filed on:	8/25/97
	8/21/97	1	79	8-A12B, 8-A12G
	8/11/97	7	77
	8/8/97	53
	8/7/97	46	53
	8/5/97	39
	8/1/97	10	42
	7/31/97	5	32
	7/30/97	53
	7/25/97	19	53
	7/7/97	13
	7/2/97	42
	7/1/97	48	49
	6/30/97	7	77
	6/20/97	8	53
	6/18/97	66
	6/17/97	52
	6/16/97	40
	6/13/97	36	52
	6/2/97	45	49
	5/31/97	45	63
	5/3/97	45	46
	5/1/97	46	51
	4/25/97	39	40
	4/23/97	52
	4/1/97	45	49
	3/31/97	7	77
	3/10/97	18	48
	3/5/97	77
	2/17/97	46
	1/9/97	50	51
	1/1/97	48	71
	12/31/96	45	71
	12/16/96	24	71
	9/5/96	52
	6/30/96	26	71
	6/20/96	71
	6/18/96	52
	6/1/96	7	77
	2/17/95	42
	1/1/93	38
				List all Filings

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Filing Submission 0000950147-97-000577 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Product Express Com Ebusiness Services Inc – ‘424B1’ on 8/25/97

As of: Monday, 8/25/97 · Accession #: 950147-97-577 · File #: 333-29985

Prospectus — Rule 424(b)(1)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(1)
Filing Table of Contents