SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1998
Commission File Number: 333-40799
THE HAVANA REPUBLIC, INC.
(name of small business issuer as specified in its charter)
Florida 84-1346897
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1360 WESTON ROAD, WESTON, FL 33326
(Address and Zip Code of Principal Executive Offices)
Issuer's Telephone Number: (954) 384-6333
Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act: Common Stock, no
par value.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $595,290.
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of September 30, 1997 was approximately
$1,000,000. Solely for purposes of the foregoing calculation, all of the
registrant's directors and officers are deemed to be affiliates.
There were 18,101,066 shares of the registrant's common stock outstanding as of
September 30, 1998.
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PART I
Item 1. Description of Business
GENERAL
The Havana Republic, Inc., a Florida corporation (the "Company") was
formed on March 10, 1996. The Company is engaged in the business of owning and
operating upscale cigar emporiums devoted to the sale of premium cigars and
cigar related merchandise. The Company opened its first emporium in January 1997
in Weston, Florida and opened its second emporium in June 1998 in the Las Olas
Riverfront in Fort Lauderdale, Florida. The Company expects to open its third
emporium in January 1999 in downtown South Miami, Florida.
The Company plans to distribute premium cigars purchased from Tabanica,
S.A. ("Tabanica"), a Nicaraguan corporation of which it owns a 50% equity
interest. Tabanica operates a factory located in Jalapa, Nicaragua The factory
currently has the capacity to produce premium hand-rolled cigars at the rate of
approximately 3 million cigars per year, which capacity can be further expanded.
Premium cigars are generally defined according to three criteria: (i)
the cigars are made completely by hand; (ii) the cigars consist of long-filler
tobacco; and (iii) the cigars retail at a price range from $1 to more than $20
each. Hand-rolled cigars consist of three different categories of tobacco: (1)
the filler is the tobacco in the cigar; (2) the binder is the leaf that binds
the filler together; or (3) the wrapper is the tobacco leaf that wraps around
the rolled tobacco and finishes the cigar. A premium cigar uses only long-filler
tobacco, binders and wrappers that are composed solely of tobacco leaf.
Long-filler tobacco consists of half tobacco leaves rolled up, whereas
short-filler tobacco consists of smaller pieces of tobacco, including the
portions of the long-filler tobacco which are cut and discarded in producing
premium cigars. The quality of a premium cigar is based on the quality of the
tobacco used for the filler, binder and wrapper. Cigars that are not premium
cigars typically use short-filler, and may be wholly or partially manufactured
by machine. The Company has developed and plans to market a full line of premium
cigars, which will be sold under the brand name of Havana Republic. The Company
currently sells over 100 brands from other manufacturers, at its emporiums.
THE MARKET
The Company believes that there is an increasing market for cigars.
Although sales in the United States are still much lower than they were in the
1970s and 1980s (due, in significant part, to a well-developed anti-smoking
movement and smoking restrictions), sales in 1995 increased approximately 28%
from 1994 to nearly 2.6 billion cigars, and increased again in 1996 to 4.5
billion cigars. It is estimated that cigar sales in the United States amount to
more than $1 billion at the retail level. The Company believes, based on
estimates from the Cigar Association of America, that the market for premium
cigars is currently growing. The Company is seeking to take advantage of this
trend; however, no assurance can be given that the trend will continue in the
future or that the Company will benefit from any further growth in the premium
cigar market.
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THE EMPORIUMS
The Company's first emporium is located in Weston, Florida. The
emporium consists of an upscale retail cigar emporium and private club section
covering a total of 2,000 square feet. The private club section is designed for
leisurely smoking complemented by satellite television, coffee, expresso and
soft drinks. Individual humidors (in excess of 100) are leased to patrons for
storing their cigars. Sales of cigars amount to approximately 70% of total sales
and sales of accessories, such as humidors, lighters, cigar cutters, etc.,
account for the balance. The club's decor is luxurious and upscale with generous
utilization of mahogany and marble. A minimum of two to five employees are
required on the premises. The cost of the furniture, fixtures and equipment
required to open a single emporium/club is approximately $500,000. Initial
inventory at an emporium costs approximately $300,000.
The Company's second emporium was opened in June 1998 in the Las Olas
Riverfront in Ft. Lauderdale, Florida and the Company expects to open its third
emporium in downtown South Miami, Florida in January 1999. Thereafter, the
Company intends to expand its retail operations through the opening of
additional emporiums in South Florida and in other cities in the United States
in which it believes there is a local market for premium cigars. Additional
openings will be dependent upon the availability of financing. However, there
can be no assurances that the Company will be able to successfully obtain
locations or financing.
The emporiums presently operate seven days a week.
THIRD-PARTY SUPPLIERS
Havana Republic is presently able to purchase premium cigars directly
from almost all manufacturers such as La Gloria Cubana, Padron, General Cigar,
Consolidated, Fuentes and Dunhill, and is not dependent upon any one supplier
for cigars. However, there are no assurances that any or all of the suppliers
will continue to have available product. Since 1992, many name brand cigars have
been on back order. The Company intends to continue to purchase directly from
manufacturers in increasing quantities and supplement its inventory with cigars
from the Tabanica factory.
COMPANY BRAND CIGARS
In 1997, the Company entered into a contract with Tabanica, a cigar
manufacturer in Nicaragua, for the purchase of 625,000 cigars. The purchase
price for the cigars was $616,000, all of which has been paid. The Company owns
a 50% equity interest in Tabanica. Tabanica will manufacture the cigars, and box
them for the Company in Nicaragua and deliver the cigars, F.O.B Managua,
Nicaragua for transport to the U.S. in lots of 50,000 cigars per month,
commencing in January, 1998. The Company has yet to receive these shipments
because of a pending dispute with the Banana Republic with respect to the use of
the name of "Havana Republic" on its cigars. The Company is close to settling
this dispute. Upon resolving this dispute, the Company intends to take delivery
of the first shipment of cigars from Tabanica. The Company also has the right to
purchase additional cigars at cost plus 50%. The Company must provide, at its
own cost, all boxes, labels and
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binders. The Company intends to sell the cigars manufactured by Tabanica in its
emporiums and to distributors for resale. The number of additional cigars that
the Company will purchase from Tabanica and the extent of its further financial
commitment will depend upon the market acceptance of these cigars during 1998.
The Company's 50% interest in Tabanica, gives the Company the
opportunity to purchase premium cigars at favorable prices and maintain
consistency in their blend and quality. Tabanica's factory consists of two
buildings of approximately 27,000 square feet. Tabanica leases approximately 170
acres within five miles of the factory. Tabanica employs sixty people engaged
primarily in the manufacturing process which takes place in one of the two
factory buildings. Tabanica's other shareholder is Merardo Padron, its
president, who is in charge of its day to day operations. The manufacturing
capacity of the factory is presently 3 million cigars per year, which can be
expanded through the utilization of the factory's second building and the hiring
of additional employees.
The manufacturing process for premium cigars includes the selection,
purchase and aging of the tobacco and the hand rolling of the cigars. The
tobacco will be selected by Tabanica upon consultation with the Company 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. As a result of the difference in taste between different
lots, the Company will be required to continuously reformulate the tobaccos in
its premium cigars in order to maintain a consistent taste.
The particular tobacco blend for each of the Company's cigars is
formulated from different tobaccos. The Company's premium cigars will use
long-filler tobacco primarily from Nicaragua. The Company will also obtain
tobacco from the Dominican Republic, Indonesia, Ecuador and Mexico, to be used
as binders, fillers and as wrappers for the cigars.
COMPETITION
Competition affecting the Company's emporiums comes from other retail
tobacco and cigar stores, liquor stores, convenience stores and mail order. In
South Florida, the largest retailer of premium cigars is Mikes' Cigars in Bal
Harbour . Many other retailers also sell premium cigars and as competition has
increased. Competition is based upon diversity of brands and price. The location
of the Company's emporiums is also a major factor. Accordingly, the Company
intends to locate its emporiums in high-profile, high traffic sites in populated
areas.
The Company believes that as a distributor of premium cigars it will
compete with a smaller number of domestic and foreign companies that specialize
in premium cigars and certain larger companies that maintain premium cigar
lines, including Consolidated Cigar, General Cigar Corporation, Caribbean Cigar,
Lane Ltd., and General Cigar Company. The market for premium cigars constitutes
a small portion of the cigar market in general. The Company believes that
smokers of premium cigars purchase cigars based on the perceived quality of the
tobacco and the taste profile of the cigar.
GOVERNMENT REGULATION; TOBACCO INDUSTRY LITIGATION; TAXES
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The tobacco industry is subject to regulation by Federal, state and
local governments, and the recent trend has been toward increased regulation.
Such regulations include labeling requirements, limitations on advertising and
prohibition of sales to minors, laws restricting smoking in public places
including offices, office buildings, restaurants and other eating
establishments. Due to health concerns, the cigar industry could become subject
to increased regulation under Federal and state health and safety regulations.
In addition, cigars have been subject to excise taxation at the Federal, state
and local level, and such taxation may increase in the future. Tobacco products
are especially likely to be subject to increases in excise taxation because of
the detrimental effects of tobacco on the health of both smokers and others who
inhale secondary smoke.
Over the years, the federal excise tax rate on large cigars (weighing
more than three pounds per thousand cigars) was increased. Currently, the
federal tax is $33.25 per thousand cigars. The Company does not believe that the
current level of excise taxes will have a material adverse effect on the
Company's business, but there are no assurances that additional increases will
not have a material adverse effect on the Company's business.
Cigars and pipe tobacco are also subject to certain state and local
taxes. Since 1964, the number of states that tax cigars has risen from six to
forty-one. State excise taxes generally range from 2% to 75% of the wholesale
purchase price.
Cigar manufacturers, like other producers of tobacco products, are
subject to regulation in the U.S. at the federal, state and local levels.
Together with changing public attitudes toward smoking, a constant expansion of
smoking regulations since the early 1970s has been a major cause for the decline
in consumption. Moreover, the trend is toward increased regulation of the
tobacco industry.
In recent years, a variety of bills relating to tobacco issues have
been introduced in the Congress of the United States, including bills that would
have prohibited the advertising and promotion of all tobacco products and/or
restricted or eliminated the deductibility of such advertising expenses; set a
federal minimum age of 18 years for use of tobacco products; increased labeling
requirements on tobacco products to include, among other things, addiction
warnings and lists of additives and toxins; modified federal preemption of state
laws to allow state courts to hold tobacco manufacturers liable under common law
or state statutes; and shifted regulatory control of tobacco products and
advertisements from the Federal Trade Commission to the U.S. Food and Drug
Administration (the "FDA"). In addition, in recent years, there have been
proposals to increase tobacco excise taxes. In some cases, hearings were held,
but only one of these proposals was enacted, namely, that states, in order to
receive full funding for federal substance abuse block grants, establish a
minimum 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 the Company.
In addition, the majority of states restrict or prohibit smoking in
certain public places and restrict the sale of tobacco products to minors. Such
places where the majority of states have prohibited smoking include: any public
building designated as non-smoking; elevators; public transportation;
educational facilities; health care facilities; restaurants and workplaces.
Local
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legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. In a few states, legislation has been introduced,
but has not passed, which would require all little cigars sold in those states
to be "fire-safe" little cigars, i.e., cigars which extinguish themselves if not
continuously smoked. Passage of this type of legislation and any other related
legislation could have a materially adverse effect on the Company's cigar
business because of the technological difficulties in complying with such
legislation. There is currently an effort by the federal Consumer Product Safety
Commission 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.
Although federal law has required health warnings on cigarettes since
1965, 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.
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 cigars sold in the United States carry cancer
warning labels.
The U.S. Environmental Protection Agency (the "EPA") has recently
published a report with respect to the respiratory health effects of passive
smoking, which report concluded that widespread exposure to environmental
tobacco smoke presents a serious and substantial public health impact. In June
1993, Philip Morris and five other representatives of the tobacco manufacturing
and distribution industries filed suit against the EPA seeking a declaration
that the EPA does not have the statutory authority to regulate environmental
tobacco smoke, and that, in view of the available scientific evidence and the
EPA's failure to follow its own guidelines in making the determination, the
EPA's final risk assessment was arbitrary and capricious. This litigation is
still pending.
The FDA has proposed rules to regulate cigarettes and smokeless tobacco
in order to protect minors. Although the FDA has defined cigarettes in such a
way as to include little cigars, the ruling does not directly impact large
cigars. However, once the FDA has successfully exerted authority over any one
tobacco product, the practical impact would be felt by manufacturers of any
tobacco product. If the FDA is successful, this may have long-term repercussions
on the large cigar industry.
The federal Occupational Safety and Health Administration (OSHA) has
proposed an indoor
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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 the
Company does not believe that the proposed OSHA regulation would have a material
adverse effect on the cigar industry or the Company, there are no assurances
that such regulation would not adversely impact the Company, particularly the
"club" sections of the Company's emporiums.
EMPLOYEES
The Company has five 5 full-time employees and seven part-time employees,
none of which are parties to a collective bargaining agreement. The Company
believes its relationship with its employees is good.
Five full-time employees are engaged in management and administrative
activities and the remaining seven full and part-time employees are engaged in
sales and related activities.
Item 2. Description of Property
The Company maintains its corporate offices at its emporium located in
Weston, Florida pursuant to a lease covering approximately 2,000 square feet
which expires in 2001. This lease is subject to two five year renewal options.
The present annual rent exclusive of taxes, insurance and common area charges,
is approximately $54,000. The Company's Ft. Lauderdale emporium consists of
approximately 1,780 square feet and is subject to a lease expiring in 2004, with
a five year renewal option. The annual rent, including pass-throughs, is
approximately $91,000. The Company has recently entered into a 10-year lease for
an emporium to be built in the Shops of Sunset in South Miami, covering 2,100 P
square feet. The lease is not subject to any renewal options. The annual rent,
including pass throughs, is approximately $117,000. The Company believes that
additional space will be available at commercially reasonable rents. The
Company's facilities, at this time, are adequate; however, expansion of the
Company's business may require additional administrative offices.
Item 3. Legal Proceedings
The Company is not involved in any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of the Company
during the fourth quarter of the Company's fiscal year.
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PART II
Item 5. Market of Common Equity and Related Stockholder Matters
MARKET PRICE OF THE COMMON STOCK
The Company's Common Stock has been traded in the over-the-counter market
through the NASD OTC Electronic Bulletin Board under the symbol "HVAR" since
March 14, 1997. The table set forth below reflects the reported high and low bid
prices of the Common Stock for each quarter since March 1997, for the period
indicated. Such prices are inter-dealer prices without retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
QUARTER ENDED HIGH LOW
- ------------- ---- ---
March 31, 1997 $ 5.50 $2.0625
June 30, 1997 $5.375 $3.00
September 30, 1997 $ 3.25 $0.96
December 31, 1997 $ 1.38 $0.20
March 31, 1998 $ 0.75 $0.28
June 30, 1998 $ 0.61 $0.1875
September 30, 1998 $ 0.22 $0.09
Records of the Company's stock transfer agent indicate that as of
September 30, 1998 the Company had 108 record holders of its Common Stock.
The Company has not paid any cash dividends to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for working
capital of the Company.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis should be read in conjunction
with the Company's Consolidated Financial Statements, including the notes
thereto. This report contains certain forward-looking information which involves
risks and uncertainties. The actual could differ from the results anticipated
herein.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 1998 COMPARED TO YEAR ENDED JUNE 30, 1997.
Sales for the year ended June 30, 1998 ("1998") increased 66.6% to
$595,290 from sales for the year ending June 30, 1997 ("1997") of $357,000. This
increase is attributable solely to the fact that in 1997, the Company's only
emporium was operational for only six months. On an annualized basis, the
Company's sales decreased due to increased competition in the premium retail
cigar market.
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Cost of sales in 1998 was $359,111 (61.7%) as compared to $164,667
(47.7%) in 1997. The increase as a percentage of sales was primarily due to
discounting the sales price of some cigars and a general decline in the premium
cigar market.
Gross profit for 1988 was $236,179 which was equivalent to 39.7% of
sales, as compared to $192,471, which was equivalent to 53.9% of sales in 1997.
General and administrative expenses for 1998 were approximately
$500,000 (83.9% of sales) as compared to approximately $148,000 (41.5% of sales)
in 1997. The increase in primarily attributable to increases in salaries and
wages, travel and entertainment, advertising and telephone expenses.
Overall, in 1998, the Company sustained a loss of $757,502 or $0.04 per
share as compared to a loss of $266,062, or $.03 per share for 1997.
YEAR ENDED JUNE 30, 1997 COMPARED TO YEAR ENDED JUNE 30, 1996.
The Company was founded in March 1996. The results of operations for
the year ended June 30, 1997 are not readily comparable with the results of
operations for the period from inception to ended June 30, 1996 because during
this period, the Company did not have nay emporiums in operation.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had working capital of approximately
$1,770,000. Since its inception, the Company has sustained losses of
approximately $1,725,000. The Company's operations and growth has been funded by
loans from third parties, the sale of common stock through December 1997 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. These funds have been used for working capital,
capital expenditures, information systems development and other corporate
purposes.
In April 1996, the Company entered into an agreement with Tabanica for
future purchases of premium cigars and has paid Tabanica $617,000. The Company
had anticipated receiving the premium cigars in monthly shipments of 50,000
commencing in January, 1998. As of June 30, 1998, no shipments had been
received. The reason for the delay was the Company's dispute with the 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 dependant upon market
acceptance of these cigars.
On July 1, 1998, the Company opened its second emporium in the Las Olas
Riverfront area in Ft. Lauderdale, Florida. The Company anticipates that it will
open its third emporium at the Shops
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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 will 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.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, the Company may publish
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," or variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward looking
statements. The Company undertakes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.
For a further description of some of these factors that could cause
actual results to differ materially from such forward-looking statements, see
"Risk Factors" below.
RISK FACTORS
LIMITED OPERATING HISTORY; OPERATING LOSSES
The Company has a limited operating history upon which an evaluation of
its performance and prospects can be made. The Company's prospects must be
considered in light of the numerous risks, expenses, delays, problems and
difficulties frequently encountered in the establishment of a new enterprise.
The Company has never been profitable and the ability of the Company to operate
profitability is dependent upon the opening and profitability of additional
emporiums, and its ability to develop and distribute private label brand cigars.
No assurance can be given that these goals can be attained and that the Company
can become profitable.
ADDITIONAL FINANCING REQUIREMENTS OF THE COMPANY
To open additional emporiums and to continue to develop its brand name
cigars, the Company will require additional funding. No assurance can be given
that additional funds will be available to open additional emporiums.
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GOVERNMENT REGULATION
The tobacco industry in general has been subject to regulation by
Federal, state and local governments, and recent trends have been toward
increased regulation. Such regulations include labeling requirements,
limitations on advertising and prohibition of sales to minors, laws restricting
smoking from both public places and in offices, office buildings and restaurants
and other eating establishments. Certain states have required cigar vendors to
label cigars with health warnings. In addition, cigars have been subject to
excise taxation at the Federal, state and local level, and such taxation may
increase in the future. Tobacco products are especially likely to be subject to
increases in excise taxation because of the detrimental effects of tobacco on
the health of both smokers and others who inhale secondary smoke. No assurance
can be given that future regulations, tax policies or tobacco litigation will
not have a material adverse affect upon the ability of cigar companies,
including the Company, to generate revenue and profits.
TOBACCO INDUSTRY RISKS
During the past decades the tobacco industry has been the subject of
advertising and public service campaigns against smoking in general.
Furthermore, most states and many individuals have brought lawsuits against
tobacco and cigarette companies for damages resulting from cancer caused by
smoking. Although the Company was organized in 1996 and all of its cigars have
been sold after both the risks of smoking and the addictive nature of nicotine
are generally known, no assurance can be given that the Company will not be
adversely affected by such factors.
COMPETITION
The tobacco industry very competitive and is generally dominated by a
few companies which are well known to the public. In addition, the Company
competes with certain domestic and foreign companies that specialize in premium
cigars and certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Company, Davidoff, Lane Ltd., and General Cigar Company.
Further, the Company's emporiums compete with other retail cigar stores in the
South Florida area, as well as liquor stores, supermarkets and convenience
stores. The Company's success depends upon the size and quality of its
emporiums' inventory, the maintenance of such inventory, the size and quality of
the inventory of cigar accessories, such as humidors, cigar cutters, cigar
cases, lighters, ashtrays, etc., and the quality of its employees, particularly
their knowledge of the inventory and attitude. No assurance can be given as to
the ability of the Company to compete successfully in any market in which it
conducts, or may conduct, operations. The Company's ability to compete as a
distributor of its brand name cigars depends upon the efficiency and continued
operation of its Nicaraguan factory, the quality of the cigars manufactured,
advertising and marketing strategies, and price. No assurances can be given that
the Company can successfully compete with major manufacturers and distributors.
LACK OF TRADE NAME PROTECTION
The Company's name "Havana Republic" has been registered in the State
of Florida . The
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U.S. Patent and Trademark Office has approved the Company's application for the
trademark "Havana Republic" for its products. This approval has been published
and will become final if no opposition is filed within the objection time
period. The Gap has filed for two extensions of this opposition time period. If
the Company resolves the issues with the Gap, the approval will become final. If
the issues are not resolved, the Gap will oppose the approval.
DEPENDENCE ON MANAGEMENT AND OTHERS
The Company's business is largely dependent upon its president, Mr.
Schatzman, and Mr. Gimelstein its vice president. The Company has five year
employment agreements with Mr. Schatzman and Mr. Gimelstein terminating in 2002.
The loss of the services of Mr. Schatzman or Mr. Gimelstein would have a
material adverse effect upon the Company's business and prospects.
NICARAGUAN FACTORY AND DISTRIBUTION
The Company purchased for $50,000 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 cigars. 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 controls and exchange regulations,
and import and export regulations, any of which could have a material adverse
effect upon the Company's cigar supply. Therefore it is not possible to predict
whether the Company's investment in and agreement with Tabanica will result in a
stable and long-term supply of premium cigars.
LIMITED INSURANCE COVERAGE
Although the Company carries general liability insurance with an
aggregate limit of $2,000,000, it has no health hazard policy. There can be no
assurance that the Company will not be subject to liability which is not covered
by its general liability insurance, and such liability could have a material
adverse effect upon its business.
Item 7. Financial Statements
See the Financial Statements of the Company which are attached hereto.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Not applicable.
Item 9. Directors, Executive Officers, Promoters, Control Persons; Compliance
with Section 16(a) of the Exchange Act
12
<PAGE>
The present members of the Board of Directors, all executive officers,
their ages and positions with the Company are set forth below:
NAMES AGE POSITION
- ----- --- --------
Stephen Schatzman 46 President, Secretary and Director
Alex Gimelstein 46 Vice President, Treasurer and
Director
Stephen Schatzman has been President, Secretary and Director of the Company
since inception. From 1972 to 1990, he was the General Manager of Superior
Stores, a six-store chain of 30,000 square foot, high volume discount drug
stores. From 1990 to 1996, he was President of Villa Deli, a 160-seat restaurant
on Miami Beach. Mr. Schatzman devotes his full time to the Company. He is
responsible for purchasing for all locations, inventory, warehousing, and
developing and implementing merchandising and other Company policies, and for
all day to day operations.
Alex Gimelstein has been Vice President, Treasurer and Director of the
Company since inception. He is also Vice President of Zelick's Tobacco Corp. on
Miami Beach for over 25 years. Zelick's is a retail and wholesale tobacco and
sundries operation owned by Mr. Gimelstein's family. Mr. Gimelstein has also had
extensive experience in the tobacco industry, having owned and operated several
cigar factories in foreign countries. Mr. Gimelstein devotes approximately half
of his working time to the Company. He is responsible for the procurement of
cigars, the development of a distribution network and the Company's relationship
with Tabanica.
The officers of the Company are elected by the Board of Directors to serve
until their successors are elected and qualified. The directors of the Company
are elected at the annual meeting of the stockholders. The By-laws provide for a
Board of Directors to be comprised of between two and seven persons.
The Company's Certificate of Incorporation and Bylaws provide for the
indemnification of, and advancement of expenses to, directors and officers of
the Company. The Company has also entered into agreements to provide
indemnification for its directors and executive officers.
In May 1997, the Company entered into employment agreements with Stephen
Schatzman, the President and Secretary of the Company and Alex Gimelstein, the
Vice President and Treasurer of the Company. The terms of the two employment
agreements, except for the position held with the Company, are identical. The
agreements, which expire on December 31, 2001, provide for initial annual base
salaries of $80,000 with additional increases, bonuses and compensation to be
decided by the Board of Directors. The employment agreements also provide that,
upon mutual agreement between the Company and the employee, all or any part of
the salary due the employee may be deferred for an indefinite period of the time
and/or paid in shares of the Common Stock of the Company.
Director Compensation
13
<PAGE>
The Company does not provide additional compensation for employee
directors. In the event non-employees are appointed as directors, compensation
may be paid on an annual or per meeting basis to be determined.
ITEM 10. Executive Compensation
The following table shows, for the two year period ended June 30, 1998,
the cash and other compensation paid to each of the executive officers of the
Company.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
NAME AND ------------------- OTHER AWARDS OTHER
POSITION HELD YEAR SALARY BONUS COMPENSATION RESTRICTED STOCK AWARDS
- ------------- ---- ------ ----- ------------ ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Steven Schatzman 1998 $80,000 -0- -0- 500,000(1) -0-
President, Secretary
Alex Gimelstein 1998 $80,000 -0- -0- 500,000(1) -0-
Vice President,
Treasurer
</TABLE>
- ---------------------
(1) On October8, 1998, the Company granted Mr. Schatzman and Alex
Gimelstein each the option to purchase up to 500,000 shares of the
Company's restricted common stock at the then market price of $0.07 per
share. As of this date, no options have been exercised.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information relating to the beneficial
ownership of Company Common Stock as of October 1, 1998 by (i) each person known
by the Company to be the beneficial owner of more than 5% of the outstanding
shares of Common Stock (ii) each of the Company's directors, and (iii) all of
the Company's directors and executive officers as a group.
<TABLE>
<CAPTION>
SHARES OF PERCENTAGE
NAME COMMON STOCK OWNED
- ---- ------------ ----------
<S> <C> <C>
Stephen Schatzman 2,835,500(1)(2) 15.66%
2101 N.E. 212th Street
Miami, Florida 33179
</TABLE>
14
<PAGE>
<TABLE>
<S> <C> <C>
Alex Gimelstein 2,835,500(1)(3) 15.66%
21160 N.E. 22nd Court
Miami, Florida 33179
All Directors and Executive Officers
as a Group (2 persons) 5,671,000 31.32%
</TABLE>
- ----------
(1) Does not include 25,000 shares of the Company's Series B Preferred Stock
each owned by Messrs. Schatzman and Gimelstein. Each share of Series B Preferred
Stock is entitled to 400 votes per share.
(2) Includes 200,000 shares of Common Stock held by Mr. Schatzman as custodian
for his minor children, as to which shares he disclaims any beneficial interest;
includes options to purchase 135,000 shares.
(3) Includes 100,000 shares of Common Stock held by Mr. Gimelstein's adult son
and 150,000 shares of Common Stock held by Mr. Gimelstein as custodian for his
three minor children, as to all of which shares Mr. Gimelstein disclaims any
beneficial interest; includes options to purchase 135,000 shares.
Item 12. Certain Relationships and Related Transactions
Not Applicable.
Item 13. Exhibits and Reports on Form 8-K.
2.1 Plan of Merger dated November 6, 1997*
2.2 Articles of Merger*
3.1 Amended and Restated Articles of Incorporation*
3.2 By-Laws*
4.1 Certificate of Designation/Class A Convertible Preferred
Stock*
10.1 Employment Agreement with Stephen Schatzman*
10.2 Employment Agreement with Alex Gimelstein*
10.3 Lease/Weston*
10.4 Lease/Fort Lauderdale*
10.5 Amended and Restated Contract for Sale of Tobacco and
Cigars*
10.8 Form of Indemnification Agreement with directors*
10.9 Lease by and between Bakery Associates, Ltd., a Florida
limited partnership and Havana Republic Sunsetplace, Inc.
December 8, 1997*
23.2 Consent of Millward & Co., P.A., independent certified
15
<PAGE>
public accountants.
27 Financial Data Schedule
* Incorporated herein by reference to Form SB-2 under the Securities Act of 1933
filed with the Commission under file number 333-40799
Subsidiaries of the Company:
Havana Republic W.H., Inc. (Florida)
Havana Republic Brickell Station, Inc. (Florida)
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE HAVANA REPUBLIC, INC.
(Registrant)
By: /S/ STEVEN SCHATZMAN
-------------------------------------
Steven Schatzman,. President
Date: October 12, 1998
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and the capacities on the dates
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/S/ STEVEN SCHATZMAN
- ------------------------- Director, President 10/12/98
Steven Schatzman Chief Executive Officer
/S/ALEX GIMELSTEIN
- ------------------------- Director, Vice President, 10/12/98
</TABLE>
17
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
PAGE
----
Report of Independent Certified Public Accountants....................2
Financial Statements:
Consolidated Balance Sheet..........................................3
Consolidated Statements of Operations...............................4
Consolidated Statements of Changes in Shareholders' Equity..........5
Consolidated Statements of Cash Flows...............................6
Notes to Consolidated Financial Statements.......................7-15
-1-
<PAGE>
To the Board of Directors
The Havana Republic, Inc. and Subsidiaries
Weston, Florida
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of The Havana
Republic, Inc. (a Colorado corporation) and Subsidiaries as of June 30, 1998 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for each of the two years in the period ended June 30,
1998. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of The
Havana Republic, Inc. and Subsidiaries as of June 30, 1998, and the consolidated
results of their operations and their cash flows for each of the two years in
the period ended June 30, 1998, in conformity with generally accepted accounting
principles.
Millward & Co., CPA's
Fort Lauderdale, Florida
September 22, 1998
-2-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS:
Cash $ 792,776
Accounts Receivable 1,581
Inventory 773,413
Prepaid Expenses and Other 40,257
Deposits on Inventory Purchases 308,350
-------------
Total Current Assets 1,916,377
-------------
PROPERTY AND EQUIPMENT, at Cost (Net of Accumulated Depreciation and
Amortization of $55,376) 441,198
-------------
OTHER ASSETS:
Other 12,809
Deposits on Inventory Purchases 308,350
Investments in 50% Owned Factory 50,000
-------------
Total Other Assets 371,159
-------------
Total Assets $ 2,728,734
=============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 152,836
Accrued Expenses 105,053
Deferred Membership Revenue 4,784
Note Payable 190,653
-------------
Total Current Liabilities 453,326
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, No Par Value, Authorized 50,000,000 Shares;
Issued and Outstanding 18,101,066 Shares 2,906,510
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 outsanding (Aggregate Liquidation Preference of $1,323,000 at June 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 June 30, 1998) 25,000
Accumulated Deficit (1,724,082)
Subscription Receivables (137,630)
-------------
Total Shareholders' Equity 2,275,408
-------------
Total Liabilities and Shareholders' Equity $ 2,728,734
=============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-3-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
SALES
Retail Sales $ 581,113 $ 345,330
Memberships 14,177 11,808
------------- -------------
Net Sales 595,290 357,138
COST OF SALES 359,111 164,667
------------- -------------
GROSS PROFIT 236,179 192,471
OPERATING EXPENSES:
Store Expenses 249,014 187,559
General and Administrative 499,268 148,061
Depreciation and Amortization 43,800 15,505
Professional Fees 202,538 100,492
------------- -------------
Total Operating Expenses 994,620 451,617
------------- -------------
LOSS FROM OPERATIONS (758,441) (259,146)
------------- -------------
OTHER INCOME (EXPENSE):
Interest Income 24,352 9,467
Interest Expense (23,431) (16,383)
------------- -------------
921 (6,916)
------------- -------------
LOSS BEFORE PROVISION FOR INCOME TAXES (757,520) (266,062)
PROVISION FOR INCOME TAXES - -
------------- -------------
NET LOSS $ (757,520) $ (266,062)
============= =============
BASIC NET LOSS PER COMMON SHARE $ (0.14) $ (0.03)
============= =============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 10,101,541 8,835,586
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-4-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended June 30, 1998 and 1997
<TABLE>
<CAPTION>
PREFERRED STOCK A & B COMMON STOCK
--------------------- -------------------
SHARES AMOUNT SHARES AMOUNT
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE - June 30, 1996 - $ - 7,074,000 $ 1,000
Shares issued in connection with offering - - 1,900,000 950,000
Issuance of common stock for services - - 147,000 147,070
Recognition of officers compensation on donated services - - - 40,000
Net loss for the year ended June 30, 1997 - - - -
------ --------- ---------- -----------
BALANCE - June 30, 1997 - - 9,121,000 1,138,070
Shares issued in connection with offering - - 38,460 50,000
Issuance of preferred stock series A 2,100 1,883,450 - -
Issuance of preferred stock series B 50,000 25,000 - -
Recognition of preferred stock dividend for
beneficial conversion feature - 700,000 - -
Conversion of preferred stock series A (1,120) (1,377,840) 7,922,581 1,377,840
Issuance of common shares in exchange for services - - 285,000 202,970
Issuance of common shares in exchange for future services - - 734,025 137,630
Net loss for the year ended June 30, 1998 - - - -
------ ---------- ---------- -----------
BALANCE - June 30, 1998 50,980 $1,230,610 18,101,066 $ 2,906,510
====== ========== ========== ===========
ACCUMULATED SUBSCRIPTION
DEFICIT RECEIVABLES TOTAL
------- ----------- -----
<S> <C> <C> <C>
BALANCE - June 30, 1996 $ (500) $ - $ 500
Shares issued in connection with offering - 950,000
Issuance of common stock for services - 147,070
Recognition of officers compensation on donated services - - 40,000
Net loss for the year ended June 30, 1997 (266,062) - (266,062)
---------- --------- -----------
BALANCE - June 30, 1997 (266,562) - 871,508
Shares issued in connection with offering - - 50,000
Issuance of preferred stock series A - - 1,883,450
Issuance of preferred stock series B - - 25,000
Recognition of preferred stock dividend for
beneficial conversion feature (700,000) - -
Conversion of preferred stock series A - - -
Issuance of common shares in exchange for services - - 202,970
Issuance of common shares in exchange for future services (137,630) -
Net loss for the year ended June 30, 1998 (757,520) - (757,520)
----------- --------- ----------
BALANCE - June 30, 1998 $(1,724,082) $(137,630) $2,275,408
=========== ========= ==========
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-5-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED
---------------------------------
JUNE 30, 1998 JUNE 30, 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (757,520) $ (266,062)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and Amortization 43,800 15,505
Recognition of Officers Compensation on Donated Services - 40,000
Common Stock Issued in Exchange for Services 157,970 10,000
Preferred Stock Issued in Exchange for Services 25,000 -
(Increase) Decrease in:
Accounts Receivable 87 (1,668)
Inventory (295,559) (477,854)
Prepaid Expenses and Other 4,743 -
Deposits on Inventory Purchases (175,000) (441,700)
Other 20,170 (25,253)
Increase (Decrease) in:
Accounts Payable 55,039 97,797
Accrued Expenses 63,614 41,441
Deferred Membership Revenue (14,358) 19,142
Due to Related Party (750) 750
------------- -------------
Net Cash Used in Operating Activities (872,764) (987,902)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment (277,857) (81,648)
Increase in Intangible Assets - (11,656)
Investments in 50% Owned Factory - (50,000)
------------- -------------
Net Cash Used in Investing Activities (277,857) (143,304)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock 50,000 950,000
Proceeds from Issuance of Preferred Stock Series A 1,883,450 -
Repayment of Note Borrowings (209,347) (250,000)
Proceeds from Note Borrowings - 400,000
------------- -------------
Net Cash Provided by Financing Activities 1,724,103 1,100,000
------------- -------------
Net Increase (Decrease) in Cash 573,482 (31,206)
Cash - Beginning of Year 219,294 250,500
------------- -------------
Cash - End of Year $ 792,776 $ 219,294
============= =============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Year for Interest $ 26,653 $ 9,161
============= =============
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for Services $ 182,630 $ 137,070
============= =============
Recognition of Preferred Stock Dividend on Beneficial Conversion $ 700,000 $ -
============= =============
Issuance of Preferred Stock-Series B for Services $ 25,000 $ -
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
-6-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, CAPITALIZATION AND REVERSE ACQUISITION
The Havana Republic, Inc. (Colorado) (The "Colorado Company") was organized
under the laws of the State of Colorado on May 31, 1996. The Colorado Company is
authorized to issue 50,000,000 shares of its no par common stock and 5,000,000
shares of its no par value preferred stock.
The Havana Republic, Inc. (Florida) (The "Florida Company") was organized under
the law of the State of Florida on March 10, 1996. The Florida Company's
articles of incorporation provide for the issuance of 1,000 shares of its no par
value common stock.
On June 17, 1996 all of the issued and outstanding stock of the Florida Company
was exchanged for 5,500,000 shares of common stock of the Colorado Company. The
Colorado Company and the Florida Company are hereinafter referred to
collectively as the Company. As a result of the exchange of stock, the former
stockholders of the Florida Company owned approximately 79% of the common stock
of the Company. Accordingly, this transaction had been treated, for financial
reporting purposes, as a reverse acquisition in which the Florida Company was
recapitalized by providing 5,500,000 shares of the Colorado Company to its
existing shareholders. The 1,574,000 shares held by the Colorado Company
shareholders before the acquisition were issued in June 1996 pursuant to an
offering in accordance with Rule 504 of Regulation D pursuant to Securities Act
of 1933, the proceeds of such offering were approximately $3,000. At the time of
the recapitalization, the Colorado Company had no assets and no value was
attributable to such shares.
BUSINESS
The Company is engaged in the business of owning and operating upscale cigar
emporiums devoted to the sale of premium cigars and cigar related merchandise.
In addition, the Company intends to engage as a distributor of premium cigars.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of The Havana
Republic, Inc. and its wholly owned Subsidiaries. All significant intercompany
transactions and balances have been eliminated from these consolidated financial
statements.
FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS
The carrying amount reported in the consolidated balance sheet for cash and cash
equivalents, note payable, accounts payable and accrued liabilities approximates
fair market value due to the immediate or short-term maturity of these financial
instruments.
-7-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting period to prepare these consolidated financial statements in
conformity with generally accepted accounting principles. Actual results could
differ from those estimates and assumptions.
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents. The Company
places its cash in money market funds with high credit quality institutions. As
of June 30, 1998, the Company had $775,975 in one financial institution with the
excess over $100,000 not covered by FDIC insurance and which, therefore, did not
limit the Company's amount of credit risk. The Company has not experienced any
losses in such account and believes that it is not exposed to any significant
credit risk on the account.
INVENTORY
Inventory consisting principally of cigars and accessories, is valued at the
lower of cost (first-in, first-out) or market.
DEPOSITS ON INVENTORY PURCHASES
Deposits on inventory purchases consist of payments to the Company's 50% owned
affiliate to secure the purchase of cigar inventory. Shipments were scheduled to
commence January 1998 at a rate of approximately $50,000 worth of cigars per
month. All transactions are in U.S. dollars. As of June 30, 1998, the Company
had not received any cigars from the 50% owned affiliate. The postponement in
delivery of the cigars was due to the delay in the opening of the Company's Fort
Lauderdale store and issues regarding the Company's cigar label. The Company
anticipates that shipments will commence in November 1998 and has reduced the
schedule of cigar shipments. Accordingly, $308,350 of such deposits has been
accounted for as a non-current asset.
CASH AND CASH EQUIVALENTS
For the purpose of the consolidated statements of cash flows, the Company
considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
-8-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is provided over the
estimated useful lives of the respective assets using the straight-line method
for financial reporting purposes and the accelerated method for income tax
purposes. Maintenance, repairs, and minor renewals are charged to expense as
incurred while expenditures that materially increase values, change capacities,
or extend useful lives are capitalized. Upon sale or retirement of property and
equipment, the cost and the related accumulated depreciation are eliminated from
the respective accounts and the resulting gain or loss is included in
operations.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities or a
change in tax rate is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced to estimated amounts to be
realized by use of a valuation allowance.
The principal types of temporary differences between assets and liabilities for
financial statement and tax return purposes are net operating loss
carryforwards.
LOSS PER COMMON SHARE
The Company has adopted Statement of Financial Accounting Standard 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 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 potentially
dilutive securities outstanding during each period. In accordance with the
provisions of FAS 128, the Company has retroactively restated earnings per
share. Diluted loss per common share is not presented because it is
anti-dilutive. For the year ended June 30, 1998, net loss has been adjusted for
deemed dividends on the convertible preferred stock amounting to $700,000 to
arrive at net loss available to common shareholders.
-9-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
REVENUE RECOGNITION
Revenues from product sales are recognized when the customer purchases the
product. The Company also sells three types of annual smoking club memberships
ranging in price from $250 to $1,000. Revenue from membership is recognized over
a 12-month period from purchase date. The Company has deferred membership
revenue amounting to $4,784 and $19,142 as of June 30, 1998 and 1997,
respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement of Financial Accounting Standard No.
130, "Reporting Comprehensive Income" (" SFAS No. 130 "). SFAS No. 130 is
effective for financial statements of periods beginning subsequent to December
15, 1997. Under SFAS No. 130, the Company reports comprehensive income, which in
addition to net income, includes all changes in equity during the period except
those resulting from investments by and distributions to owners. For the year
ended June 30, 1998, there were no material differences between net income and
comprehensive income.
In June 1997, FASB issued Statement of Financial Accounting Standard No. 131,
"Disclosure About Segments of an Enterprise and Related Information" ( " SFAS
131 " ). The statement establishes standards for the way that public business
enterprises report selected information about reportable operating segments,
products and services, geographic areas and major customers, for which discrete
financial information is available, in annual and interim financial statements.
This statement shall be effective for fiscal years beginning after December 15,
1997.
In June 1998, FASB issued SFAS No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument be recorded in the balance
sheet as either an asset or liability measured at its fair value. SFAS No. 133
is effective for years beginning after June 15, 1999 and may be implemented as
of the beginning of any fiscal quarter after June 15, 1998.
The effect of adopting SFAS 130, SFAS 131 and SFAS 133 is not expected to be
material to the Company's consolidated financial statements or notes to
consolidated financial statements.
-10-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 2 - NOTES PAYABLE
The Company entered into a financing agreement with a third party. This
agreement consists of two term loans with principal balances of $200,000 and
$200,000, respectively at June 30, 1997. Interest shall accrue at a rate equal
to ten percent (10%) simple interest per annum. The total unpaid balance of
principal and accrued interest was due and payable on April 1, 1998 and May 20,
1998, respectively. In August 1997, the Company repaid $200,000. As of June 30,
1998, the Company owed the third party $190,653. The notes due date has been
extended and is payable on demand.
NOTE 3 - INVESTMENT IN 50% OWNED FACTORY
The Company invested $50,000 in January 1997 for a 50% interest in a company
owning a factory located in Jalapa, Nicaragua. The investment is being carried
at cost, which based on the limited information available, the Company believes
that the financial statements would not be materially different than if carried
on the equity method.
NOTE 4 - PROPERTY AND EQUIPMENT
The major classifications of property and equipment at June 30, 1998 are as
follows:
<TABLE>
<S> <C>
Computers and software $ 11,287
Furniture and fixtures 99,310
Office equipment 25,356
Leasehold improvements 360,621
-------------------
496,574
Accumulated depreciation (55,376)
$ 441,198
===================
</TABLE>
Depreciation expense amounted to $41,469 and $13,907 for the years ended June
30, 1998 and 1997, respectively.
-11-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 5 - INVENTORY
The major classes of inventory at June 30, 1998 are as follows:
<TABLE>
<S> <C>
Cigars $ 426,104
Accessories 347,309
------------------
$ 773,413
==================
</TABLE>
NOTE 6 - INCOME TAXES
To date, the Company has incurred tax operating losses and therefore, has
generated no income tax liabilities. As of June 30, 1998, the Company has
generated net operating loss carryforwards totaling approximately $1,000,000,
which are available to offset future taxable income, if any, through 2013. As
utilization of such an operating loss for tax purposes is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance.
As of June 30, 1998, the components of the net deferred tax asset are as
follows:
<TABLE>
<S> <C>
Deferred Tax Assets:
Net operating loss carryforward $ 380,000
Valuation allowance (380,000)
------------------
Net deferred tax $ -
==================
</TABLE>
-12-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 7 - COMMITMENTS
OPERATING LEASES
The Company has operating leases for store facilities expiring through 2002 to
2004. The lease agreements require the Company to pay real estate taxes,
maintenance and other operating expenses associated with the space leased. The
store leases also provide for additional contingent rentals based upon a
percentage of sales in excess of certain minimum amounts, as well as increases
in the consumer price index. Total rent expense for the year ended June 30, 1998
and 1997 amounted to $57,545 and $18,564, respectively.
Future minimum rental commitments as of June 30, 1998 are as follows:
<TABLE>
<S> <C> <C>
1999 $ 112,628
2000 113,627
2001 114,625
2002 104,391
2003 71,440
Thereafter 95,253
------------------
$ 611,964
==================
</TABLE>
EMPLOYMENT AGREEMENTS
In May 1997, the Company entered into employment agreements with officers of the
Company. The terms of the two employment, which expire on December 31, 2001,
provide for initial annual base salary of $80,000 with additional increases,
bonuses and compensation to be decided by the Board of Directors.
NOTE 8 - STOCKHOLDERS' EQUITY
STOCK ISSUANCE
In August 1996, the Company sold 1,900,000 shares at $.50 per share pursuant to
an offering in accordance with Rule 504 of Regulation D pursuant to Securities
Act of 1933.
In May 1997, the Company issued 137,070 shares valued at a fair market value of
$1 per share for construction services rendered in connection with the
construction of leased premises housing the Company's Weston, Florida store and
had a related charge to property and equipment.
See Note 1 for initial stock issuances.
For the period ended June 30, 1997, the Company recorded officers' compensation
expense of $40,000 relating to services donated to the Company.
-13-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
STOCK ISSUANCE (CONTINUED)
In May 1997, the Company issued 10,000 shares valued at a fair market value of
$1 per share to employees of the Company in consideration for services rendered
to the Company and had a related charge to operations.
In August 1997, the Company sold 38,460 shares at $1.30 per share pursuant to an
offering in accordance with Rule 504 of Regulation D pursuant to Securities Act
of 1933.
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.
In November 1997, the Company issued 135,000 common shares valued at a fair
market value of $1.17 per share for professional services rendered.
On November 7, 1997, the Board of Directors adopted a Stock Option Plan (the
"Plan"). This Plan provides for the grant of Incentive Stock Options and
Non-qualified Stock Options to employees selected by the Board of Directors or
Compensation Committee. The Plan also sets forth applicable rules and
regulations for Stock Options granted to non-employee directors. To date,
135,000 options each have been granted to the Company's two chief operating
officers at the market price on the date of grant. The Plan is subject to
stockholder approval and will be submitted to the stockholders at the Company's
annual meeting in 1998.
On April 2, 1998, the Board of Directors issued to each of Stephen Schatzman and
Alex Gimelstein stock options to purchase up to 500,000 shares of the Company's
common stock at a price of $.30 per share, the quoted market price at that date.
On June 30, 1998, the Company rescinded these options. The Company intends to
reissue these options in the future.
In consideration of the Company's attorney accepting a reduced fee, the Board of
Directors issued Mr. Littman 150,000 shares of common stock. The value of the
consideration, $45,000 based on the quoted market value, is being amortized over
a twelve-month period beginning April 1998. As of June 30, 1998, the Company had
deferred costs amounting to $33,750 included in prepaid expenses and other on
the accompanying balance sheet.
-14-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 8 - STOCKHOLDERS' EQUITY (CONTINUED)
PREFERRED STOCK
The Company's articles of incorporation authorize the issuance of 5,000,000
shares of preferred stock. The Company's Board of Directors has authority,
without action by the shareholders, to issue all or any portion of the
authorized but unissued preferred stock in one or more series and to determine
the voting rights, preferences as to dividends and liquidation, conversion
rights, and other rights of such series.
On August 1, 1997, the Board of Directors of the Company created a series of
preferred stock consisting of 2,500 shares and designated it as the Series A
Convertible Preferred Stock - no par value. The Series A Preferred Stock is
convertible, at the holders option, into that number of shares of common stock
equal to $1,000 divided by the lower of (i) seventy percent (70%) of the average
market price of the common stock for the five trading days immediately prior to
the conversion date or (ii) $1.46, increased proportionally for any reverse
stock splits and decreased proportionally for any forward stock split or stock
dividend. The holders of Series A Preferred Stock have no voting rights, the
shares are redeemable at a price of $1,350 per share upon notice of conversion,
and have a liquidation preference of $1,350 per share.
Prior to June 30, 1998, the Company had issued 2,100 shares of the Series A
Convertible Preferred Stock for a net amount of $1,883,450. For the year ended
June 30, 1998, the Company recognized a preferred stock dividend amounting to
$700,000 calculated as the difference between the conversion price ($1.47 per
share) and the fair value of the common stock into which the shares are
convertible, multiplied by the number of common shares into which the preferred
stock is convertible. Certain holders of the Series A Convertible Preferred
Stock were issued (i) an option to purchase an aggregate of 200,000 shares of
common stock for two years at an exercise price of $1.92 per common share and
(ii) an option to purchase an aggregate of 200,000 shares of common stock for
two years an exercise price of $2.88 per common share. As of June 30, 1998,
these options are still outstanding. During the three-month period ended June
30, 1998, certain holders of the Series A Preferred Stock converted 1,120
preferred shares into 7,922,581 shares of the Company's common stock. As of June
30, 1998, the remaining 980 shares of Series A Preferred Stock may be converted,
at the holders option, into approximately 7,800,000 shares of common stock.
On April 2, 1998, the Board of Directors of the Company created a series of
preferred stock consisting of 50,000 shares and designated it as the Series B
Convertible Preferred Stock - no par value. The Series B Preferred Stock shall
be entitled to 400 votes per share, is not redeemable, and has no conversion
rights. The holders of Series B Preferred have a liquidation preference of $.50
per share. In consideration of two officers of the Company forgiving an
aggregate of $25,000 due them in back salary, the Company issues 50,000 shares
of Series B Preferred Stock.
NOTE 9 - YEAR 2000
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.
-15-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
23.2 Consent of Millward & Co., P.A., independent certified
public accountants.
27 Financial Data Schedule
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this annual report on Form 10-KSB of our
report dated September 22, 1998, on our audit of the consolidated financial
statements of The Havana Republic, Inc. and Subsidiaries. We also consent to the
reference to our firm under the caption "Experts."
/s/ MILLWARD & CO.
- ---------------------------
Millward & Co. CPAs
Fort Lauderdale, Florida
September 22, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM HAVANA
REPUBLIC, INC. AND SUBSIDIARIES FORM 10-KSB FOR THE YEAR ENDED JUNE 30, 1998 AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<CASH> 792,776
<SECURITIES> 0
<RECEIVABLES> 1,581
<ALLOWANCES> 0
<INVENTORY> 773,413
<CURRENT-ASSETS> 1,916,377
<PP&E> 496,574
<DEPRECIATION> 55,376
<TOTAL-ASSETS> 2,728,734
<CURRENT-LIABILITIES> 453,326
<BONDS> 0
0
1,230,610
<COMMON> 2,906,510
<OTHER-SE> (1,861,712)
<TOTAL-LIABILITY-AND-EQUITY> 2,728,734
<SALES> 595,290
<TOTAL-REVENUES> 595,290
<CGS> 359,111
<TOTAL-COSTS> 359,111
<OTHER-EXPENSES> 994,620
<LOSS-PROVISION> (758,441)
<INTEREST-EXPENSE> 23,431
<INCOME-PRETAX> (757,520)
<INCOME-TAX> 0
<INCOME-CONTINUING> (757,520)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (757,520)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
