FORM 10-QSB
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: September 30, 1998
Commission file number: 333-40799
THE HAVANA REPUBLIC, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 84-1346897
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1360 WESTON ROAD
WESTON, FLORIDA 33326
----------------------------------------
(Address of principal executive offices)
(Zip code)
(954) 384-6333
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of October 30, 1998: 18,101,066 shares of common stock, no par
value per share.
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited)
September 30, 1998........................................ 3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30, 1998 and 1997.... 4
Consolidated Statement of Changes in Shareholders' Equity
For the Three Months Ended September 30, 1998............. 5
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended September 30, 1998 and 1997.... 6
Notes to Consolidated Financial Statements............................ 7
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 9
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................ 12
Item 4 - Submission of Matters to a Vote of Security Holders.......... 12
Item 6 - Exhibits and Reports on Form 8-K............................. 12
Signatures............................................................ 12
2
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1998
<TABLE>
<S> <C>
ASSETS
CURRENT ASSETS:
Cash $ 638,232
Accounts Receivable 10,234
Inventory 792,838
Prepaid Expenses and Other 23,168
Deposits on Inventory Purchases 308,350
-----------
Total Current Assets 1,772,822
-----------
PROPERTY AND EQUIPMENT, at Cost (Net of Accumulated Depreciation and
Amortization of $70,376) 482,298
-----------
OTHER ASSETS:
Other 12,226
Deposits on Inventory Purchases 308,350
Investments in 50% Owned Factory 50,000
-----------
Total Other Assets 370,576
-----------
Total Assets $ 2,625,696
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 128,670
Accrued Expenses 82,734
Note Payable 190,653
-----------
Total Current Liabilities 402,057
-----------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, No Par Value, Authorized 50,000,000 Shares;
Issued and Outstanding 18,101,066 Shares 2,871,510
Preferred Stock, No Par Value, Non-Voting, Authorized 5,000,000 Shares;
Convertible Preferred Stock-Series A, Authorized 2,500 Shares: 980 shares issued and
and outstanding (Aggregate Liquidation Preference of $1,323,000 at September 30, 1998) 1,205,610
Preferred Stock-Series B, Authorized 50,000 Shares: 50,000 shares issued and outstanding
(Aggregate Liquidation Preference of $25,000 at September 30, 1998) 25,000
Accumulated Deficit (1,775,851)
Subscription Receivables (102,630)
-----------
Total Shareholders' Equity 2,223,639
-----------
Total Liabilities and Shareholders' Equity $ 2,625,696
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
3
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
--------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- ------------
<S> <C> <C>
SALES
Retail Sales $ 260,698 $ 157,604
Memberships 4,784 4,786
------------ ------------
Net Sales 265,482 162,390
COST OF SALES 92,560 72,561
------------ ------------
GROSS PROFIT 172,922 89,829
------------ ------------
OPERATING EXPENSES:
Store Expenses 103,824 59,681
General and Administrative 76,164 81,978
Depreciation and Amortization 15,583 10,533
Professional Fees 33,653 16,756
------------ ------------
Total Operating Expenses 229,224 168,948
------------ ------------
LOSS FROM OPERATIONS (56,302) (79,119)
------------ ------------
OTHER INCOME (EXPENSE):
Interest Income 9,533 3,866
Interest Expense (5,000) (10,000)
------------ ------------
4,533 (6,134)
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (51,769) (85,253)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (51,769) $ (85,253)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.00) $ (0.01)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 18,101,066 9,139,812
============ ============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
4
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended September 30, 1998
<TABLE>
<CAPTION>
PREFERRED STOCK A & B COMMON STOCK
---------------------------- ----------------------------
SHARES AMOUNT SHARES AMOUNT
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE - June 30, 1998 50,980 $ 1,230,610 18,101,066 $ 2,906,510
Revaluation of common shares issued in exchange for
for future services -- -- -- (35,000)
Net loss for the three months ended September 30, 1998 -- -- -- --
----------- ----------- ----------- -----------
BALANCE - September 30, 1998 50,980 $ 1,230,610 18,101,066 $ 2,871,510
=========== =========== =========== ===========
ACCUMULATED SUBSCRIPTION
DEFICIT RECEIVABLES TOTAL
----------- ------------- -----------
<S> <C> <C> <C>
BALANCE - June 30, 1998 $(1,724,082) $ (137,630) $ 2,275,408
Revaluation of common shares issued in exchange for
for future services -- 35,000 --
Net loss for the three months ended September 30, 1998 (51,769) -- (51,769)
----------- ----------- -----------
BALANCE - September 30, 1998 $(1,775,851) $ (102,630) $ 2,223,639
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
5
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED
-------------------------------
SEPTEMBER 30, SEPTEMBER 30,
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (51,769) $ (85,253)
Adjustments to Reconcile NeT Loss To Net Cash Used In
Operating Activities:
Depreciation and Amortization 15,583 10,533
(Increase) Decrease in:
Accounts Receivable (8,653) --
Inventory (19,425) (187,744)
Prepaid Expenses and Other 17,089 (10,000)
Deposits on Inventory Purchases -- (175,000)
Other -- 20,000
Increase (Decrease) in:
Accounts Payable (24,166) 472
Accrued Expenses (22,318) 6,679
Deferred Membership Revenue (4,784) (4,786)
Due to Related Party -- (750)
----------- -----------
Net Cash Used in Operating Activities (98,443) (425,849)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (56,101) (82,642)
----------- -----------
Net Cash Used in Investing Activities (56,101) (82,642)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock -- 50,000
Proceeds from Issuance of Preferred Stock Series A -- 1,613,450
Repayment of Note Borrowings -- (200,000)
----------- -----------
Net Cash Provided by Financing Activities -- 1,463,450
----------- -----------
Net Increase (Decrease) in Cash (154,544) 954,959
Cash - Beginning of Year 792,776 219,294
----------- -----------
Cash - End of Year $ 638,232 $ 1,174,253
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Year for Interest $ -- $ --
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Recognition of Preferred Stock Dividend on Beneficial Conversion $ -- $ 600,000
=========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
6
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. BASIS OF PRESENTATION
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in the Annual Report on
Form 10-KSB for the year ended June 30, 1998, of The Havana Republic, Inc. (the
"Company") as filed with the Securities and Exchange Commission. The results of
operations for the three months ended September 30, 1998 are not necessarily
indicative of the results for the full fiscal year ending June 30, 1999.
Note 2. LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standards No. 128 -
"Earnings Per Share" ("FAS 128") which requires the dual presentation of basic
and diluted earnings per share for the periods ending after December 15, 1997.
Basic earnings per share is computed by dividing net income, after deducting
preferred stock dividends accumulated during the period, by the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and other potentially
dilutive securities outstanding during each period. In accordance with the
provisions of FAS 128, the Company has retroactively restated earnings per
share.
Note 3. INVENTORIES
The major classes of inventories are as follows:
SEPTEMBER 30, 1998
------------------
Cigars .................................... $ 418,887
Accessories.................................. 373,951
--------------
$ 792,838
==============
7
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Shareholders' Equity
COMMON STOCK
In November 1997, the Company issued 644,026 and 90,000 common shares valued at
a fair market value of $1.17 per share for future construction services rendered
in connection with the construction of leased premises housing the Company's
future stores and printing services, respectively. Accordingly, as of November
1997 the Company had recorded a subscription receivable and had a related charge
to property and equipment amounting to $855,299. As of June 30, 1998, the
Company had not received any services related to these shares. The Company
adjusted the value of these shares and the subscription receivable to reflect
the fair market value of $.1875 per share. As of June 30, 1998, subscription
receivables amounted to $137,630. For the three months ended September 30, 1998,
the Company adjusted the value of these shares and the subscription receivable
to reflect the fair market value of $.14 per share.
Note 5. COMPREHENSIVE INCOME
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represent certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheets, including foreign currency
translation adjustments. For the three months ended September 30, 1998 and 1997,
the Company had no comprehensive income.
Note 6. FUTURE EFFECTS OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131") was issued in June 1997. This statement changes
the way public companies report information about segments of their business in
their annual financial statements. This statement is effective for the Company's
fiscal year ending June 30, 1999. However, information is not to be presented
for interim financial statements in the first year of implementation. Adoption
of SFAS No. 131 is not expected to have a material effect on the Company's
financial statement disclosures.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-QSB contains forward-looking statements which are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995 and which are subject to risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. Among the risks and
uncertainties which could cause such a difference are those relating to the
Company's reliance upon suppliers for the purchase of finished products which
are then resold by it, the Company's dependence upon certain key personnel, its
ability to manage its growth, and the risk of economic and market factors
affecting the Company or its customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1998 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1997
Net sales for the three months ended September 31, 1998 were $260,698, an
increase of 65.4% as compared to sales for the three months ended September 30,
1997 which were $157,604. This increase is attributable solely to the fact that
for the three months ended September 30, 1997, the Company only had one emporium
operational. On an annualized basis, the Company's sales may decrease due to
increased competition in the premium cigar market.
Cost of sales was $92,560 or 34.9% of sales for the three months ended September
30, 1998 as compared to $72,561 or 46% of sales for the three months ended
September 30, 1997. This decrease as a percentage of sales was primarily a
result of decreased costs of cigars and a decrease in cigar costs in relation to
the sales value.
Gross profit was $172,922 or 65.1% of sales for the three months ended September
30, 1998 as compared to gross profit of $89,829 or 55.3% of sales for the three
months ended September 30, 1997.
Store expenses, which include marketing and advertising expenses, rent and
salary costs, were $103,824 or 39.1% of sales for the three months ended
September 30, 1998 as compared to $59,681 or 36.7% of sales for the three months
ended September 30, 1997. The percentage increase in store expenses in
relationship to sales is primarily attributed to the fact that the Company
opened its second store during June 1998 and incurred operational costs,
additional set-up, promotional, payroll and other expenses during the
three-month period ended September 30, 1998.
General and administrative expenses, which includes administrative salaries,
travel and entertainment, insurance and other expenses, were $76,164 or 28.7% of
sales for the three months ended September 30, 1998 as compared to $81,978 or
50.5% of sales for the three months ended September 30, 1997. The percentage
decrease in relation to sales is primarily attributable to the opening of its
second emporium.
The Company incurred interest expense for the three months ended September 30,
1998 of $5,000 as compared to interest expense of $10,000 for the three months
ended September 30, 1997. The decrease is due to the fact that the Company
repaid a portion of its note payable during fiscal 1997.
As a result of the foregoing factors, the Company sustained losses of
approximately $51,769 or ($.0) per share for the three months ended September
30, 1998 as compared to a loss of approximately $85,253 or ($.01) per share for
the three month period ended September 30, 1997.
9
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company had working capital of approximately
$1,370,800. Since its inception, it has sustained losses of approximately
$1,776,000. The Company's operations and growth has been funded by loans from
third parties, the sale of common stock through September 30, 1998 with gross
proceeds of approximately $1,000,000 and the issuance of Series A Convertible
Preferred Stock which resulted in net proceeds to the Company of approximately
$1,883,000 after expenses. These funds have been used for working capital,
capital expenditures, information systems development and other corporate
purposes.
In April of 1996, the Company entered into an agreement with Tabanica, the 50%
owned factory, for future purchases of premium cigars and has paid $617,000. The
Company anticipated receiving the premium cigars in monthly shipments of 50,000
commencing in January 1998. As a result of a recent hurricane in Nicaragua many
of the roads have been damaged and the Company can expect delays in meeting the
time schedule for the delivery of cigars. As of September 30, 1998, the Company
has not received any of these cigars. The reason for the delay was the Company's
dispute with Banana Republic. The company anticipates that this dispute will be
resolved in the very near future and that shipments of cigars from Tabanica will
commence shortly thereafter. The Company's future commitment of capital
resources to the distribution of its brand name cigars will be largely dependent
upon market acceptance of these cigars.
Around July 1, 1998, the Company opened its second emporium in the Las Olas
Riverfront in Fort Lauderdale, Florida. The Company anticipates that it will
open its third emporium at the Shops of Sunset Place in the central business
district of South Miami, Florida in January 1999. Leasehold improvements for the
Sunset Place emporium are expected to cost approximately $400,000.
The Company has no other material commitments for capital expenditures. The
Company believes that it has sufficient liquidity to meet all of its cash
requirements for the next 12 months and that subsequent store and distribution
sales would provide sufficient cash flows to meet their operating needs. The
Company believes, however, that additional funding will be necessary to expand
into markets outside of South Florida.
RISK OF YEAR 2000 ISSUES
The Company believes it does not utilize software within its business processes
that may be impacted by the year 2000 issue. The year 2000 issue exists because
many computer systems and applications currently use two digit date fields to
designate a year. Data sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to properly treat the year 2000 could cause systems
to process critical financial and operational information incorrectly.
10
<PAGE>
NICARAGUAN FACTORY AND DISTRIBUTION
The Company invested $50,000 in January 1997 for a 50% interest in Tabanica, a
Nicaraguan corporation, which owns a manufacturing facility in Jalapa,
Nicaragua. The Company has the right to purchase cigars from Tabanica at cost
plus 50% through October 31, 2001. The Company believes that this arrangement
will provide it with a continuous source of premium cigars and an ability to
develop its own private label brand cigar. However, the operation of
manufacturing facilities outside of the United States, especially in less
developed countries such as Nicaragua, is subject to numerous risks, including
political and currency instability, currency control and exchange regulations,
and import and export regulations, any of which could have a material adverse
effect upon the Company's cigar supply. In addition the recent hurricane in
Nicaragua may affect the timely delivery of cigars. Therefore it is not possible
to predict whether the Company's investment in and agremment with Tabanica will
result in a stable and long-term supply of premium cigars.
11
<PAGE>
PART II - OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
The Company is not involved in any material litigation
Item 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
27.1 Financial Data Schedule
None
(b) REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed by the Company during
its fiscal quarter ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HAVANA REPUBLIC, INC.
Dated: November 10, 1998 By: /s/ STEVEN SCHATZMAN
------------------------------
Steven Schatzman, President
12
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
- ------- ----------- --------
27.1 Financial Data Schedule *1
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAVANA
REPUBLIC, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE THREE MONTHS ENDED SEPTEMBER
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 638,232
<SECURITIES> 0
<RECEIVABLES> 10,234
<ALLOWANCES> 0
<INVENTORY> 792,838
<CURRENT-ASSETS> 1,772,822
<PP&E> 552,674
<DEPRECIATION> 70,376
<TOTAL-ASSETS> 2,625,696
<CURRENT-LIABILITIES> 402,057
<BONDS> 0
0
1,230,610
<COMMON> 2,871,510
<OTHER-SE> (1,878,481)
<TOTAL-LIABILITY-AND-EQUITY> 2,625,696
<SALES> 265,482
<TOTAL-REVENUES> 265,482
<CGS> 92,560
<TOTAL-COSTS> 92,560
<OTHER-EXPENSES> 229,224
<LOSS-PROVISION> (56,302)
<INTEREST-EXPENSE> 5,000
<INCOME-PRETAX> (51,769)
<INCOME-TAX> 0
<INCOME-CONTINUING> (51,769)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (51,769)
<EPS-PRIMARY> 0.00
<EPS-DILUTED> 0.00
</TABLE>
