<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 14, 1998
REGISTRATION NO. 333-40799
================================================================================
U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------------
THE HAVANA REPUBLIC, INC.
(Name of small business issuer in its charter)
---------------------
<TABLE>
<S> <C> <C>
FLORIDA 5995 84-1346897
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer Identification
incorporation or organization) Classification Code Number) No.)
</TABLE>
1360 WESTON ROAD,
WESTON, FLORIDA, 33326
(954) 384-6333
(Address and telephone number of principal executive office and principal place
of business)
STEPHEN SCHATZMAN, PRESIDENT,
THE HAVANA REPUBLIC, INC.,
1360 WESTON ROAD,
WESTON, FLORIDA 33326
(954) 384-6333
(Name, address and telephone number of agent for service)
---------------------
WITH A COPY TO:
SHAPO, FREEDMAN & BLOOM, P.A.,
200 SOUTH BISCAYNE BLVD.,
SUITE 4750,
MIAMI, FLORIDA 33131
ATTENTION: LEONARD H. BLOOM
(305) 358-4440
---------------------
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after registration statement becomes effective.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] -- [Added in Release
No. 33-7168 (para.85,620), effective June 7, 1995, 60 F.R. 26604.]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] -- [Added in Release No. 33-7168 (para.85,620),
effective June 7, 1995, 60 F.R. 26604.]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box [ ] -- [Added in Release No. 33-7168
(para.85,620), effective June 7, 1995, 60 F.R. 26604.]
---------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
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=====================================================================================================================
PROPOSED PROPOSED
MAXIMUM MAXIMUM
TITLE OF EACH CLASS AMOUNT TO BE OFFERING PRICE AGGREGATE OFFERING AMOUNT OF
OF SECURITIES TO BE REGISTERED REGISTERED PER SHARE PRICE REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock(1).................... 4,800,000 $1.25 $6,000,000 $1,980(2)
Common Stock....................... 490,000 $1.25 $ 612,500 $ 202
=====================================================================================================================
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(1) Shares of Common Stock issuable in connection with conversion of the
Preferred Stock.
(2) This fee was previously paid with the initial filing on November 21, 1997.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
================================================================================
<PAGE> 2
THE HAVANA REPUBLIC
CROSS-REFERENCE SHEET SHOWING LOCATION OR
CAPTION IN PROSPECTUS OF INFORMATION
REQUIRED BY ITEMS OF FORM SB-2
<TABLE>
<CAPTION>
REGISTRATION STATEMENT ITEM NUMBER AND HEADING LOCATION OR CAPTION IN PROSPECTUS
- ---------------------------------------------- ---------------------------------
<C> <S> <C>
1. Front of Registration Statement and Outside
Front Cover Page of Prospectus........... Outside Front Cover of Prospectus
2. Inside Front and Outside Back Cover Pages
of Prospectus............................ Inside Front and Outside Back Cover Pages
of Prospectus
3. Summary Information and Risk Factors....... Prospectus Summary; the Company; Risk
Factors
4. Use of Proceeds............................ Not Applicable
5. Determination of Offering Price............ The Offering
6. Dilution................................... Dilution
7. Selling Security Holders................... Selling Security Holders
8. Plan of Distribution....................... Outside Front Cover Page; Plan of
Distribution
9. Legal Proceedings.......................... Business
10. Directors, Executive Officers Promoters and
Control Persons.......................... Management
11. Security Ownership of Certain Beneficial
Owners and Management.................... Principal Stockholders
12. Description of Securities.................. Description of Securities
13. Interest of Named Experts and Counsel...... Legal Matters; Experts
14. Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.............................. Not Applicable
15. Organization Within Last Five Years........ Not Applicable
16. Description of Business.................... The Company; Business
17. Management's Discussion and Analysis or
Plan of Operation........................ Management's Discussions and Analysis
18. Description of Property.................... Business
19. Certain Relationships and Related
Transactions............................. Not Applicable
20. Market for Common Equity and Related
Stockholder Matters...................... Market Price of the Common Stock
21. Executive Compensation..................... Management
22. Financial Statements....................... Report of Independent Certified Public
Accountants
</TABLE>
ii
<PAGE> 3
PROSPECTUS
THE HAVANA REPUBLIC, INC.
---------------------
________ SHARES OF COMMON STOCK
OFFERED BY CERTAIN SELLING SECURITY HOLDERS UPON EXERCISE OF
OUTSTANDING SHARES OF SERIES A CONVERTIBLE PREFERRED STOCK
---------------------
490,000 SHARES OF COMMON STOCK OFFERED
BY CERTAIN SELLING SECURITY HOLDERS
This Prospectus relates to the sale of shares of common stock, no
par value (the "Common Stock"), of The Havana Republic, Inc. (the "Company")
following the conversion of 2,100 outstanding shares of Series A Convertible
Preferred Stock, par value $1,000 per share (the "Preferred Stock"), all of
which are offered by the holders thereof identified as "Selling Security
Holders" in this Prospectus. See "SELLING SECURITY HOLDERS."
Each Share of Preferred Stock entitles the holder to that number of shares
of Common Stock equal to $1,000 divided by the lesser of (i) seventy percent of
the average market price of the Common Stock for the five trading days
immediately prior to conversion or (ii) $1.46. See "DESCRIPTION OF SECURITIES."
This Prospectus also relates to the sale of 490,000 shares of Common Stock
offered by the holders thereof also identified as "Selling Security Holders" in
this Prospectus. See "SELLING SECURITY HOLDERS."
The Company will not receive any proceeds from the sale of shares of Common
Stock by the Selling Security Holders. Sales of shares of Common Stock may be
made from time to time (in transactions which may include block transactions) by
or for the account of the Selling Security Holders in the over-the-counter
market or in negotiated transactions, or otherwise, at market prices prevailing
at the time of sale or at negotiated prices. The Company has informed the
Selling Security Holders that the anti-manipulative rules under the Securities
Exchange Act of 1934, Regulation M, may apply to their sales and has furnished
each of the Selling Stockholders with a copy of these Rules. The Company has
also informed the Selling Security Holders of the need for delivery of copies of
this Prospectus. See "SELLING SECURITY HOLDERS" and "PLAN OF DISTRIBUTION."
---------------------
THE SECURITIES OFFERED INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" AND "DILUTION."
---------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE COMMISSION OR
ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
================================================================================================================
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO THE SELLING
CLASS OF SECURITY SECURITY HOLDERS DISCOUNTS THE COMPANY SECURITY HOLDERS
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Shares of Common Stock(1)(3).. N/A N/A $0 $ (4)
- ----------------------------------------------------------------------------------------------------------------
Shares of Common Stock(2)(3).. N/A N/A $0 $ (4)
================================================================================================================
</TABLE>
(1) Represents the anticipated sale by the Selling Security Holders of shares of
Common Stock issuable upon conversion of the Preferred Stock, at
$ , the high bid price on .
(2) Represents the anticipated sale by the Selling Security Holders at
$ , the high bid price on .
(3) There can be no assurances, however, that the Selling Security Holders will
be able to sell their shares of Common Stock at this price, or that a liquid
market will exist for the Company's Common Stock.
(4) Does not give effect to ordinary brokerage commissions or other costs of
sale that will be borne solely by the Selling Security Holders.
The Common Stock is traded in the over-the-counter market and is quoted on
The OTC Bulletin Board under the symbol "HVAR".
---------------------
The date of this Prospectus is , 1998
<PAGE> 4
AVAILABLE INFORMATION
The Company is not subject to the information requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, upon
effectiveness of the Registration Statement, of which this Prospectus forms a
part, the Company will be subject to the informational requirements of the
Exchange Act pursuant to Section 15(d) thereof.
The Company will provide a report to stockholders, at least annually, which
will include audited financial statements of the Company.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form SB-2 (hereinafter, together with
all amendments and exhibits, referred to as the "Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"). This Prospectus
does not contain all of the information set forth in the Registration Statement,
certain parts of which have been omitted in accordance with the rules and
regulations of the Commission. For further information, reference is made to the
Registration Statement.
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus.
THE COMPANY
The Havana Republic, Inc., a Florida corporation (the "Company") was formed
on March 10, 1996. In June 1996 it was acquired by and became the wholly owned
subsidiary of The Havana Republic, Inc., a Colorado corporation ("Havana
Colorado"). On November 25, 1997, Havana Colorado merged with and into the
Company (the "Merger"). Unless the context otherwise requires, references to the
"Company" throughout this Prospectus refer to the operations of the Company as a
wholly owned subsidiary of Havana Colorado before the Merger, and the Company
thereafter. 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 intends to open an additional emporium in early 1998 in Fort
Lauderdale, Florida and is in negotiations for two other stores in 1998 in high
profile projects in South Florida.
The Company also intends 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
modeled after a traditional Cuban cigar factory, utilizing a hand-made
manufacturing process, which affects the manner in which tobacco leaves are
processed, aged and made into cigars. 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. The Company sells cigars that are hand produced, using fine aged tobacco
and traditional rolling techniques.
The Company is seeking to capitalize on the recent growth of the premium
cigar market. In the United States, based on reports by the Cigar Association of
America, following several decades of declines in such sales, premium cigar
sales increased by 14% in 1994, 28% in 1995, and 61% in 1996. The Company's
strategy involves the establishment and operation of emporiums in selected
markets across the United States, through Company owned and franchised stores,
and the distribution of its private labeled cigars in the United States.
The corporate offices of the Company are located at 1360 Weston Road,
Weston, Florida 33326 and its telephone number is (954) 384-6333.
THE OFFERING
Securities Being Offered: This Prospectus relates to the sale of
shares of Common Stock following the conversion of
the outstanding shares of Preferred Stock, by the
holders thereof, identified as "Selling Security
Holders" in this Prospectus. This Prospectus also
relates to the sale of 490,000 shares of Common
Stock by the holders thereof, also identified as
"Selling Security Holders" in this Prospectus. See
"SELLING SECURITY HOLDERS."
The shares of Common Stock offered by the Selling
Security Holders may be offered for sale from time
to time by the holders in regular brokerage
transactions, either directly or through brokers or
to dealers, in private sales or negotiated
transactions, or otherwise, at prices related to
then prevailing market prices.
3
<PAGE> 6
The Company will not receive any proceeds from the
sale of shares of Common Stock by the Selling
Security Holders. All expenses of the registration
of such securities are, however, being borne by the
Company.
The Selling Security Holders, and not the Company,
will pay or assume such brokerage commissions as
may be incurred in the sale of their securities.
The Common Stock is traded on The OTC Bulletin
Board under the symbol "HVAR". On the
high bid price was $ .
Total number of shares of
Common Stock
outstanding.............. 10,028,485
Total number of shares of
Common Stock outstanding
upon conversion of the
outstanding shares of
Preferred Stock..........
Total number of shares of
Common Stock being
offered by Selling
Security Holders.........
Risk Factors:.............. The Common Stock offered hereby involves a high
degree of risk and prospective investors should
consider carefully the factors specified under
"Risk Factors" before electing to invest. See "RISK
FACTORS."
Trading Symbol:............ Common Stock -- "HVAR"
SELECTED FINANCIAL INFORMATION
Set forth below is the historical selected financial information with
respect to the Company for the period from inception (March 10, 1996) through
June 30, 1996, and for the fiscal year ended June 30, 1997 and for the three
month period ended September 30, 1997.
<TABLE>
<CAPTION>
THREE MONTHS ENDED FISCAL YEAR ENDED PERIOD ENDED
SEPTEMBER 30, 1997 JUNE 30, 1997 JUNE 30, 1996
------------------ ----------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
INCOME STATEMENT INFORMATION
Revenue.......................................... $ 162,390 $ 357,138 $ --
Net Loss......................................... (85,253) (266,062) (500)
Net Loss per Share............................... (.01) (.03) --
Weighted Average Shares Outstanding.............. 9,139,812 8,835,586 2,968,554
BALANCE SHEET INFORMATION (SEPTEMBER 30, 1997)
Working Capital.................................. $1,940,774
Total Assets..................................... 2,810,450
Total Liabilities................................ 360,745
Accumulated Deficit.............................. (951,815)
Stockholders' Equity............................. 2,409,705
Net Tangible Book Value.......................... 10,180
</TABLE>
4
<PAGE> 7
RISK FACTORS
Prospective investors should consider carefully the following risk factors,
together with the other information contained in this Prospectus, in evaluating
an investment in the shares of common stock offered hereby.
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's operations to date have been directed to (i) establishing and
operating its first emporium, which opened in January, 1997, (ii) building a
cigar supply base in Nicaragua, and (iii) formulating plans to open three
additional emporiums in South Florida. Through September 30, 1997, the Company
has suffered a cumulative operating loss of $351,815. 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. See "Financial Statements".
ADDITIONAL FINANCING REQUIREMENTS OF THE COMPANY
At September 30, 1997, the Company had working capital of approximately
$1,940,774. The Company requires significant additional capital for the
continued expansion of its retail operations and to develop and distribute its
private label brand name cigars.
The Company anticipates that it will have sufficient funds to open a second
and a third emporium by the end of 1998. However, thereafter the Company will
require significant funds to open additional emporiums and to continue to
develop its brand name cigars, and may also require additional funds to cover
operating deficits if the new emporiums' revenues do not meet expectations. No
assurance can be given that additional funds will not be required prior to the
expiration of 1998, or that any funds which may be required will be available,
if at all, on acceptable terms. If additional funds are required, the inability
of the Company to raise such funds will have an adverse effect upon its
operations. To the extent that additional funds are obtained by the sale of
equity securities, the stockholders may sustain significant dilution. If
adequate capital is not available, the Company will be required to reduce or
eliminate its planned expansion activities.
Finally, the Company has agreed with certain of the holders of the
Preferred Stock that without their prior written consent it will not raise more
than $2.5 million in equity until August 14, 1998. The Company believes that in
view of its present cash resources, this limitation will not adversely impact
its plan for capital expenditures and expansion in the applicable period.
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. In June 1997 the tobacco industry
entered into a settlement with most of the states and class action plaintiffs.
The settlement, which is subject to approval by Congress and the President, will
impose significant limits on the tobacco industry. Further, the settlement will
be subject to additional modifications which could further impact the tobacco
industry. The
5
<PAGE> 8
effects of any settlement, if one were to occur, on the tobacco industry, are
impossible to predict. See "BUSINESS -- GOVERNMENT REGULATION; TOBACCO INDUSTRY
LITIGATION"
EFFECTS OF FLUCTUATIONS IN TOBACCO COSTS AND AVAILABILITY
One of the principal costs of the Company's cigars is the tobacco used in
both the cigars and the cigar wrappers. The Company seeks to purchase name brand
cigars made from only premium grade tobacco. Such name brands include Padron,
Macanudo, Partagas, H. Upman, A. Fuente, and many others. However, numerous
factors not within the Company's control, including weather conditions, foreign
government policies, potential trade restrictions and the overall demand for the
tobacco will affect its availability and price and therefore the availability
and price of premium cigars. In addition, larger tobacco companies, with greater
resources and buying power than the Company, have the resources to purchase
large quantities of tobacco which could both increase the cost and decrease the
availability of the premium cigars to the Company. The inability of the Company
to purchase cigars in sufficient quantities for its emporiums would have a
material adverse affect on the Company's operations and financial condition. See
"BUSINESS -- THIRD PARTY SUPPLIERS."
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.
Historically, the cigar industry has not experienced material
health-related litigation. However, recent proposed settlements with the tobacco
industry may also have an effect upon the cigar industry in that it may
encourage parties to bring suits against cigar industry participants. On June
20, 1997 forty states, seventeen class-action plaintiffs and the tobacco
industry entered into a settlement, which requires the tobacco industry to pay
$368.5 billion into a fund over 25 years, and $15 million a year into the fund
thereafter, which funds would be used for health care, smoker education,
Medicaid reimbursement for states and state stings on retailers. The settlements
requires the tobacco industry, as well as the states, to take additional steps
to reduce sales to minors. The settlement is subject to approval by, and will
likely be modified by, both Congress and the President before it becomes law. It
is unclear what effect, if any, this settlement and future regulations could
have upon the future growth and financial condition of the cigar industry.
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 as labeling requirements including cancer warning
labels; limitations on advertising and prohibition of sales to minors; and laws
restricting smoking in public places including offices, office buildings,
restaurants and other eating establishments, as well as proposed regulation by
such governmental agencies as the Federal Occupational Safety and Health
Administration. In addition, cigars have been subject to excise taxation at the
Federal, state and local level, and such taxation may increase in the future.
There are no assurances that further legislation and regulation as well as
increases in excise taxation would not have a material adverse effect on the
Company's business. See "BUSINESS -- GOVERNMENT REGULATION; TOBACCO INDUSTRY
LIGITATION."
DECLINING MARKET FOR CIGARS THROUGH 1993
The cigar industry has, until recent years, been in substantial decline.
From the 1963 level of industry sales of approximately 9 billion cigars, the
estimated domestic market for cigars declined at a compound average rate of 5%
per year. According to a domestic industry source, the estimated domestic market
for cigars declined from approximately 4 billion cigars in 1980 to approximately
2.1 billion cigars in 1993. The decrease in cigar sales as well as the general
decline in smoking followed the 1964 report of the United States Surgeon
General, which study was followed by numerous other studies stressing the link
between smoking, including
6
<PAGE> 9
secondary smoke and cancer, heart, respiratory and other diseases and medical
problems. Furthermore, "no smoking" laws, ordinances and prohibitions on cigar
smoking in certain cases have adversely affected the sale of cigar products.
Although premium cigar sales have increased during the past three years, this
increase may be temporary, and it is possible that declines may resume. See
"BUSINESS -- THE MARKET."
COMPETITION
The tobacco industry in general, including the cigar industry, is dominated
by a few companies which are well known to the public. The Company believes
that, as a retailer and distributor of premium cigars, it will compete 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. The
Company believes that smokers of premium cigars purchase cigars based on the
perceived quality of the tobacco. The process of producing premium cigars is not
patented, but is based on the know-how and experience of master craftsmen who
can identify, purchase, and roll the tobacco into premium cigars. The principal
characteristics that differentiate one premium cigar from another are the
quality of the tobacco in the cigar, the quality of the tobacco used as a cigar
wrapper, the blend of tobacco and the quality of the rolling. 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. See
"BUSINESS -- COMPETITION."
TRADE NAME PROTECTION
The trademark Havana Republic, owned by the Company, has been registered in
the State of Florida. The Company filed to register the trademark with the U.S.
Patent and Trademark Office. However, in September, 1997, the Patent and
Trademark Office refused registration on the basis that the trademark is
primarily geographic and therefore is misdescriptive, because the Company's
products do not come from Havana. In December 1997, the Company requested
reconsideration of this position. However, no assurance can be given that the
Company will be successful in obtaining such federal trademark registration. In
the event that such federal registration is not obtained, the Company's
expansion strategy outside the State of Florida could be adversely affected.
Further, the Company has been notified by Gap, Inc., that in its view, the
Company's tradename infringes its trademark "Banana Republic"(TM). The Company
believes its tradename does not infringe, primarily because of the
dissimilarities of the products. Settlement negotiations are currently in
progress and the Company believes a solution will be reached allowing for the
continued use of its tradename. However, no assurances can be given that this
issue will be resolved without litigation, or that the Company would be
successful in any such litigation.
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.
The ability of the Nicaraguan factory to operate is dependent upon its
ability to hire and retain trained hand rollers, and process tobacco. The
Company is totally dependent upon the managing principal of Tabanica, Merardo
Padron, for the hiring of employees and the operation of the factory. Mr.
Padron, who is 62, has been engaged in the tobacco business for over 40 years.
However, no assurances can be given that he
7
<PAGE> 10
will continue to operate the factory. The loss of Mr. Padron could have a
material adverse effect on the Company's plan to develop a brand name cigar. See
"MANAGEMENT."
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 purchased 625,000 cigars from Tabanica for delivery beginning in
January, 1998 for $616,000. The Company also has the right to purchase
additional 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.
Further, although the Company intends to establish business relationships with
national distributors, no assurances can be given that it will be successful.
See "BUSINESS -- COMPANY BRAND 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. See "BUSINESS -- GOVERNMENT REGULATION; TOBACCO
INDUSTRY LITIGATIONS."
POSSIBLE VOLATILITY OF STOCK PRICES
As of December 31, 1997, the Company had outstanding 10,028,485 shares of
Common Stock, of which approximately 3,824,085, are eligible for public trading.
The remaining shares are subject to sale pursuant to Rule 144. Taking into
account the sale of shares held by Selling Security Holders, assuming all of the
Preferred Stock is converted at $ per share, the Company will have
shares of Common Stock outstanding of which will be eligible
for public trading through Rule 144 or otherwise. Although it is impossible to
predict market influences and prospective values for securities, it is possible
that, in and of itself, the substantial increase in the number of shares
available for sale could have a depressive effect upon the market value of the
Company's Common Stock.
Furthermore, although the Company's Common Stock trades in the
over-the-counter market, there can be no assurances that a regular trading
market will develop, or, if developed, will continue, or that the prices of the
Common Stock will continue to exceed the conversion price of the Preferred
Stock. There has been a history of significant volatility in the market prices
for shares of companies in a similar stage of development. Because of the
factors described above and elsewhere in this Prospectus, the market prices of
the Company's Common Stock following the date of this Prospectus may be highly
volatile.
POSSIBLE LIMITATIONS UPON TRADING ACTIVITIES; RESTRICTIONS IMPOSED UPON
BROKER-DEALERS EFFECTING TRANSACTIONS IN CERTAIN SECURITIES
Trading of the Company's securities may be subject to material limitations
as a consequence of certain provisions of the Securities Exchange Act of 1934
(the "Exchange Act") which limit the activities of broker-dealers effecting
transactions in "penny stocks".
"Penny stocks" are defined as any equity securities other than a security
that is registered on a national exchange; included for quotation in the NASDAQ
system; or whose issuer has net tangible assets of more than $2,000,000 and has
been in continuous operation for greater than three (3) years. Issuers who have
been in operation less than three (3) years must have net tangible assets of at
least $5,000,000.
8
<PAGE> 11
Rules promulgated by the Commission under Section 15(g) of the Exchange Act
require broker-dealers engaging in transactions in low-priced over-the-counter
securities defined as "penny stocks," to first provide to their customers a
series of disclosures and documents, including: (i) a standardized risk
disclosure document identifying the risks inherent in investing in "penny
stocks"; (ii) all compensation received by the broker-dealer in connection with
the transaction; (iii) current quotation prices and other relevant market data;
and (iv) monthly account statements reflecting the fair market value of the
securities. In addition, these rules require a broker-dealer obtain financial
and other information from a customer, determine that transactions in penny
stocks are suitable for such customer and deliver a written statement to such
customer setting forth the basis for such determination.
The Company's Common Stock presently constitutes a "penny stock."
Accordingly, trading activities for the Company's Common Stock will be made more
difficult for broker-dealers than in the case of securities not defined as
"penny stock." This may have the result of depressing the market for the
Company's securities and an investor may find it difficult to dispose of such
securities.
Further, under the Exchange Act, and the regulations thereunder, any person
engaged in a distribution of the shares of Common Stock of the Company offered
by this Prospectus may not simultaneously engage in market making activities
with respect to the Common Stock of the Company during the applicable "cooling
off" periods prior to the commencement of such distribution. In addition, and
without limiting the foregoing, each Selling Security Holder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation Regulation M, which provisions may
limit the timing of purchases and sales of Common Stock by the Selling Security
Holder.
CONVERSION PRICE
The conversion price of the Preferred Stock does not bear any relationship
to the assets, book value, operating results or net worth of the Company.
POSSIBLE STATE AND FEDERAL RESTRICTIONS ON CONVERSION OF PREFERRED STOCK
Holders of Preferred Stock will be able to sell the underlying Common Stock
issuable upon exercise thereof only if a current registration statement relating
to such underlying Common Stock is then in effect and on file with the
Securities and Exchange Commission and only if such Common Stock is qualified
for sale or exempt from qualification under the applicable state securities
laws. The Company has agreed to file for, and endeavor to secure, current and
effective registration of the shares of Common Stock issuable upon conversion of
the Preferred Stock. Although the Company has undertaken to use its best efforts
to maintain the effectiveness of this Prospectus covering the securities
underlying the Preferred Stock, there can be no assurances that the Company will
be able to do so. The value of the Preferred Stock may be greatly reduced if a
current prospectus covering the securities issuable upon the conversion of
Preferred Stock is not kept effective or if such securities are not qualified or
exempt from qualification in the applicable states. See "DESCRIPTION OF
SECURITIES."
EFFECT OF OUTSTANDING PREFERRED STOCK
As of December 31 1997 the Company had outstanding 2,100 Shares of
Preferred Stock convertible into shares of Common Stock. To the extent
that these shares enter the market, the price of the Common Stock in the market
may be substantially reduced. Moreover, the holders of the Preferred Stock were
given an opportunity to profit from a rise in the market price of the Company's
Common Stock, with resulting dilution in the interest of the other stockholders.
Further, the terms on which the Company may obtain additional financing during
that period may be adversely affected by the existence of such Preferred Stock.
The holders of such Preferred Stock may exercise them at a time when the Company
might be able to obtain additional capital through a new offering of securities
on terms more favorable than those provided by therein. The Company has
undertaken to file this Prospectus with the Securities and Exchange Commission
pursuant to certain registration rights enjoyed by holders of Preferred Stock.
The expense of registration of this Prospectus shall be borne by the Company,
which expense may be significant.
9
<PAGE> 12
CONTINUED CONTROL BY MANAGEMENT
The present officers and directors of the Company own approximately 59% of
the issued and outstanding shares of Common Stock. Assuming the conversion of
the Preferred Stock at $ , the officers and directors would still own
% of the issued and outstanding shares of Common Stock, thereby maintaining
effective control over the Company.
DIVIDENDS NOT LIKELY
The Company does not intend to declare or pay cash dividends in the
foreseeable future. Earnings, if any, are expected to be retained to finance and
develop its business. See "DESCRIPTION OF SECURITIES."
DILUTION
As of September 30, 1997, the Company had 9,159,460 shares of Common Stock
outstanding. As of that date, the Company had a net tangible book value per
common share of $10,180 or $.03 per share. Net tangible book value per common
share represents the Company's tangible assets, minus its liabilities and
aggregate liquidation preference of outstanding Preferred Stock, divided by the
number of shares of Common Stock outstanding.
In accordance with the table provided below, purchasers of the shares of
Common Stock through conversion of the Preferred Stock may incur an immediate
dilution in net tangible book value from the noted conversion prices.
The comparison of net tangible book value to conversion price will,
however, provide no useful information to purchasers of the Company's Common
Stock in the secondary market.
The following table illustrates the number of shares of Common Stock that
would be outstanding, and the corresponding pro forma net tangible book value
and pro forma net tangible book value per common share, assuming all of the
Preferred Stock is converted at $ per share.
<TABLE>
<S> <C>
Shares of Common Stock outstanding before conversion of the
Preferred Stock........................................... 9,159,460(1)(2)
Shares of Common Stock outstanding after conversion of the
Preferred Stock........................................... (1)(2)
Pro forma of net tangible book value after conversion....... $
Net tangible book value after conversion.................... $
Pro forma net tangible book value per common share after
conversion................................................ $
Dilution to Preferred Stockholders..........................
</TABLE>
Officers and directors paid less than $.001 per share for the Common Stock
as compared to a conversion price of $ .
- ---------------
(1) Does not include shares of Common Stock or 300 shares of Preferred Stock
issued after September 30, 1997.
(2) Does not include an aggregate of 200,000 shares of Common Stock subject to
outstanding options exercisable at $1.92 per share, or an aggregate of
200,000 shares of common stock subject to outstanding options exercisable at
$2.88 per share.
USE OF PROCEEDS
The Company will not realize any proceeds from the sale of shares of Common
Stock by the Selling Security Holders. See "SELLING SECURITY HOLDERS."
10
<PAGE> 13
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.
<TABLE>
<CAPTION>
QUARTER ENDED HIGH LOW
- ------------- ------ -------
<S> <C> <C>
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 $ .20
</TABLE>
Records of the Company's stock transfer agent indicate that as of December
31, 1997 the Company had 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.
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<PAGE> 14
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 Prospectus contains certain forward-looking information which
involves risks and uncertainties. The actual could differ from the results
anticipated herein.
RESULTS OF OPERATIONS
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 (March 10, 1996) to June 30, 1996.
During the period from inception to June 30, 1996, the Company did not have any
emporiums in operation. Commencing in January 1997, the Company's sole business
was the operation of one emporium in Weston, Florida.
The Company's sales for fiscal 1997 were approximately $357,000
attributable solely to sales from its first emporium beginning in January 1997.
There were no sales in 1996.
Gross profit amounted to $192,000 or approximately 54% of sales in fiscal
1997.
Store expenses for the year ended June 30, 1997 were approximately
$188,000. This amount is due to the expanded retail operations of the Company
and increase in marketing efforts to promote the Company's products. These
expenses consist primarily of advertising and promotional expenses of $60,000,
rents for its emporium of $19,000, salary and salary related expenses of $58,000
and other related expenses of operation.
General and administrative expenses for the year ended June 30, 1997 were
approximately $148,000. This amount reflects the expanded nature of the
Company's business, including $67,000 for salaries and related costs, $10,000
for consulting fees, $22,000 for travel and entertainment costs and $49,000 for
other general and administrative costs.
Professional fees for the year ended June 30, 1997 were approximately
$100,000.
The Company incurred interest expense in 1997 of approximately $16,000.
As a result of the foregoing factors, the Company sustained losses of
approximately $266,062, or $.03 per share for the fiscal year ended June 30,
1997, as compared to a loss of approximately $500 or $0 per share in fiscal
1996.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had working capital of approximately
$1,941,000. Since its inception, it has sustained losses of approximately
$352,000. The Company's operations and growth has been funded by loans from
third parties, the sale of common stock through September 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
$2,213,000 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 for
future purchases of premium cigars and has paid $617,000. The Company
anticipates receiving the premium cigars in monthly shipments of 50,000
commencing in January, 1998. The market acceptance of these premium cigars will
determine whether and to what extent the Company's financial resources will be
committed to the distribution of its brand name cigars.
The Company also anticipates opening two additional emporiums within the
next 12 months. The first, in Ft. Lauderdale, Florida, is scheduled to open in
January, 1998, and the second, in South Miami, Florida is expected to open in
late 1998. Leasehold improvements in both emporiums are expected to cost
approximately $600,000.
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. The Company believes, however, that
additional funding will be necessary to expand into markets outside of South
Florida.
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<PAGE> 15
BUSINESS
INTRODUCTION
The Havana Republic, Inc., a Florida corporation (the "Company") was formed
on March 10, 1996. In June 1996 it was acquired by and became the wholly owned
subsidiary of The Havana Republic, Inc., a Colorado corporation ("Havana
Colorado") which had been formed in May 1996. Havana Colorado never conducted
any business. On November 25, 1997, Havana Colorado merged with and into the
Company (the "Merger"). Unless the context otherwise requires, references to the
"Company" throughout this Prospectus refer to the operations of the Company as a
wholly owned subsidiary of Havana Colorado before the Merger, and the Company
thereafter. 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 intends to open an additional emporium in early 1998 in Fort
Lauderdale, Florida and is in negotiations for two other stores in 1998 in high
profile projects in South Florida.
The Company also intends 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
modeled after a traditional Cuban cigar factory, utilizing a hand-made
manufacturing process, which affects the manner in which tobacco leaves are
processed, aged and made into cigars. 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 -- the
filler is the tobacco in the cigar, the binder is the leaf that binds the filler
together and 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 markets a full line of premium cigars, which are sold
under the brand name of Havana Republic, at prices ranging from $5.00 to $8.00
per cigar, and in addition sells over 100 brands from other manufacturers, at
its emporiums.
THE MARKET
The Company believes that there is an increasing market for cigars.
Industry reports show that worldwide cigar sales increased in 1994 for the first
time since 1970. Cigar sales in 1970 amounted to just under 8 billion cigars.
The number of cigars sold decreased significantly and, in 1994, cigar sales were
approximately 2.3 billion 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. According to industry
statistics, sales of premium cigars account for approximately 6.5% of the United
States cigar market. The number of premium cigars sold has increased each year
since 1991, and sales of premium cigars in 1996 represented a 62% increase over
the number sold in 1995. Further, statistics for the current year reflect that
the volume of premium cigars will again increase when compared to last year. 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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<PAGE> 16
THE EMPORIUMS
The Company's first emporium is located in Weston, Florida. Since January
1997, it has generated revenues of approximately $519,000 for nine months. Cost
of sales were approximately $237,000. 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 emporium
is open seven days per week, (from 10:00 A.M. to 9:00 P.M. on weekdays and until
11:00 P.M. on weekends, with the exception of Sunday). 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 $300,000. Initial inventory at an emporium costs approximately
$200,000.
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. In particular,
the Company intends to open one store in early 1998 in Fort Lauderdale, Florida
and two additional stores by the end of 1998 in Dade County, Florida.
Thereafter, depending upon the availability of financing, the Company intends to
open additional emporiums in other markets throughout the United States. This
expansion could also include the use of franchising. However, there can be no
assurances that the Company will be able to successfully obtain locations or
financing.
THIRD-PARTY SUPPLIERS
Havana Republic is presently able to purchase premium cigars directly from
almost all manufacturers such as La Gloria Cubana, Padron, Mike's 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, 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 was $616,000, all of which has been paid. 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 also has the right to purchase
additional cigars at cost plus 50%. The Company must provide, at its own cost,
all boxes, labels and binders. The Company also owns a 50% equity interest in
Tabanica. 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 acquisition of a 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 also 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
14
<PAGE> 17
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 will be
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 will arise 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. 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. The process of producing premium
cigars is not patented, but is based on the know-how and experience of master
craftsmen who can identify and purchase the tobacco and roll the tobacco into
premium cigars. The principal characteristics that differentiate one premium
cigar from another are the quality of the tobacco in the cigar, the quality of
the tobacco used as a cigar wrapper, the quality of the rolling and the blending
of all the tobacco. Cigars are a natural product, therefore the taste profile of
cigars is not uniform and tastes are subject to change. No assurance can be
given as to the market for the Company's cigars in the future or the ability of
the Company to compete successfully or market its cigars successfully.
GOVERNMENT REGULATION; TOBACCO INDUSTRY LITIGATION
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 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.
Excise Taxes. Effective January 1, 1991, the federal excise tax rate on
large cigars (weighing more than three pounds per thousand cigars) was increased
to 10.625%, capped at $25.00 per thousand cigars, and again increased to 12.75%,
capped at $30.00 per thousand cigars, effective January 1, 1993. However, the
base on which the federal excise tax is calculated was lowered effective January
1, 1991 to the manufacturer's selling price, net of the federal excise tax and
certain other exclusions. The federal excise tax on little cigars (weighing less
than three pounds per thousand cigars) increased from $0.75 per thousand cigars
to $0.9375 per thousand cigars effective January 1, 1991. The excise tax on
little cigars increased to $1.125 per thousand cigars effective January 1, 1993.
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.
Deficit concerns at the state level continue to exert pressure to increase
tobacco taxes. Since 1964, the number of states that tax cigars has risen from
six to forty-one. Since 1988, the following eleven states have enacted excise
taxes on cigars, where no
15
<PAGE> 18
prior tax had been in effect: California, Connecticut, New Jersey, New York,
North Carolina, Ohio, Rhode Island, Illinois, Missouri, Michigan and South
Dakota. State excise taxes generally range from 2% to 75% of the wholesale
purchase price. In addition, the following seven states have increased existing
taxes on large cigars since 1988: Arkansas, Idaho, Iowa, Maine, New York, North
Dakota and Washington. The following five states tax little cigars at the same
rates as cigarettes: California, Connecticut, Iowa, Oregon and Tennessee. Except
for Tennessee, all of these states have increased their cigarette taxes since
1988.
State cigar excise taxes are not subject to caps similar to the federal
cigar excise tax. Therefore, there are no assurances that increases in such
state excise taxes or new state excise taxes will not in the future have a
material adverse effect on the Company's business.
Health Regulations. 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 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
16
<PAGE> 19
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.
Tobacco Industry Litigation. Historically, the cigar industry has not
experienced material health-related litigation, and, to date, the Company has
not been the subject of any material health-related litigation. However,
litigation against leading United States cigarette manufacturers seeking
compensatory and, in some cases, punitive damages for cancer and other health
effects alleged to have resulted from cigarette smoking is pending.
Forty states have become plaintiffs in lawsuits against tobacco companies
seeking to recover the monetary benefits paid under Medicaid to treat residents
allegedly suffering from tobacco-related illnesses. Florida and Massachusetts
have enacted statutes permitting suit against the tobacco companies to recoup
such Medicaid costs, and recently, one defendant has entered into a settlement
with such plaintiff states, which provides that the settling defendant will,
among other things, pay a portion of its profits in the future to the plaintiff.
Under the Florida statute, many of the tobacco companies' traditional defenses,
such as assumption of risk, are vitiated. The statute also permits the state to
establish causation (that smoking causes cancer, heart disease and other
ailments) through the use of purely statistical evidence. The tobacco companies
have filed suit challenging the Florida law as unconstitutional. The states and
the tobacco companies have recently entered into a settlement. See "Recent
Settlement" below.
A class action suit, Castano v. American Tobacco, et al. has been filed in
federal district court in New Orleans against the entire cigarette industry. On
February 17, 1995, the district court granted plaintiffs' motion for class
certification with regard to the liability issues of fraud, breach of warranty
(express or implied), intentional tort, negligence and strict liability as well
as the issues of consumer protection and punitive damages. The court defined the
class as "all nicotine-dependent persons in the United States," "the estates,
representatives, and administrators of these nicotine-dependent cigarette
smokers," and "the spouses, children, relatives and 'significant others' of
these nicotine-dependent cigarette smokers as their heirs or survivors." The
court defined "nicotine-dependent" to mean "all cigarette smokers who have been
diagnosed by a medical practitioner as nicotine-dependent; and/or all regular
cigarette smokers who were or have been advised by a medical practitioner that
smoking has had or will have adverse health consequences who thereafter do not
or have not quit smoking." In May 1996, the Fifth Circuit Court of Appeals
reversed a Louisiana district court's certification of a nationwide class
consisting essentially of nicotine dependent cigarette smokers. Notwithstanding
the dismissal, new class actions asserting claims similar to those in Castano
have recently been filed in certain states. To date, two pending class actions
in Florida against major cigarette manufacturers have been certified and
settled. The first case was limited to Florida citizens allegedly injured by
their addiction to cigarettes; the other is limited to flight attendants
allegedly injured through exposure to secondhand smoke.
In another decision, Cipollone v. Liggett Group, Inc., 112 S. Ct. 2608
(1992), the United States Supreme Court held that certain federal legislation
applicable specifically to cigarette manufacturers preempts
17
<PAGE> 20
claims based on failure to warn consumers about the health hazards of smoking,
but does not preempt claims based on express warranty, misrepresentation and
fraud, or conspiracy. Although the Company believes that the effect of the
Cipollone decision, which involved cigarette smoking, will not have a material
adverse effect on the operations of the Company, there can be no assurance of
what the ultimate effect, if any, of the Cipollone decision or the pending
cigarette industry litigation, or cigarette and tobacco regulation, will be on
the cigar industry or the Company. Although there are numerous differences
between the cigar industry and the cigarette industry, the outcome of pending
and future cigarette litigation may encourage various parties to bring suits on
various grounds against cigar industry participants. While it is impossible to
quantify what effect, if any, any such litigation may have on the Company, the
Company can give no assurance that such litigation would not have a material
adverse effect on its operations.
RECENT SETTLEMENT. ON JUNE 20, 1997 FORTY STATES, SEVENTEEN CLASS-ACTION
PLAINTIFFS AND THE TOBACCO INDUSTRY ENTERED INTO A SETTLEMENT, SUBJECT TO THE
APPROVAL OF CONGRESS. THE SETTLEMENT REQUIRES THE TOBACCO INDUSTRY TO PAY $368.5
BILLION INTO A FUND OVER 25 YEARS, AND $15 MILLION A YEAR INTO THE FUND
THEREAFTER. THESE FUNDS WOULD BE USED FOR HEALTH CARE, SMOKER EDUCATION,
MEDICAID REIMBURSEMENT FOR STATES AND STATE STINGS ON RETAILERS. THE FDA WOULD
HAVE THE AUTHORITY TO REGULATE TOBACCO ADDITIVES AND TO BAN NICOTINE AFTER 2009.
INDIVIDUAL LAWSUITS AGAINST TOBACCO COMPANIES WOULD BE LIMITED AND PUNITIVE
DAMAGES FOR PAST MISCONDUCT WOULD BE WAIVED, WITH A SPECIAL FUND OF $5 MILLION
PER YEAR TO COVER DAMAGES FOR LOST WAGES, MEDICAL BILLS OR OTHER ACTUAL DAMAGES
ESTABLISHED BY PLAINTIFFS. FINALLY, STATES WILL BE REQUIRED TO REDUCE ILLEGAL
SALES TO MINORS BY 75% IN FIVE YEARS AND 85% IN SEVEN YEARS, AND THE TOBACCO
INDUSTRY WOULD BE REQUIRED TO PAY FINES IF YOUTH SMOKING FAILS TO DROP BY 30% IN
FIVE YEARS, 50% IN SEVEN YEARS AND 60% IN TEN YEARS. THE SETTLEMENT IS SUBJECT
TO APPROVAL BY, AND WILL LIKELY BE MODIFIED BY, BOTH CONGRESS, AND THE PRESIDENT
BEFORE IT BECOMES LAW. IT IS UNCLEAR WHAT EFFECT THE SETTLEMENT AND FUTURE
REGULATIONS COULD HAVE UPON THE FUTURE GROWTH AND FINANCIAL CONDITION OF THE
COMPANY.
OSHA Regulations. The federal Occupational Safety and Health
Administration (OSHA) has proposed an indoor air quality regulation covering the
workplace that seeks to eliminate nonsmoker exposure to environmental tobacco
smoke. Under the proposed regulation, smoking must be banned entirely from the
workplace or restricted to designated areas of the workplace that meet certain
criteria. The proposed regulation covers all indoor workplaces under OSHA
jurisdiction, including, for example, private residences used as workplaces,
hotels and motels, private offices, restaurants, bars and vehicles used as
workplaces. The tobacco industry is challenging the proposed OSHA regulation on
legal, scientific and practical grounds. It also contends that the proposed
regulation ignores reasonable alternatives. There is no guaranty, however, that
this challenge will be successful. Although 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 six full-time employees and three part-time employees, none
of which are parties to a collective bargaining agreement. The Company believes
its relationship with its employees is good.
Three full-time employees are engaged in management and administrative
activities and the remaining six full and part-time employees are engaged in
sales and related activities.
18
<PAGE> 21
FACILITIES
The Company maintains its corporate offices at its emporium located in
Weston, Florida pursuant to a lease covering 2,000P 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
1780+ 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 intends to establish additional retail stores through lease
arrangements. 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.
LITIGATION
The Company is not involved in any litigation.
19
<PAGE> 22
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The present members of the Board of Directors, all executive officers,
their ages and positions with the Company are set forth below:
<TABLE>
<CAPTION>
NAMES AGE POSITION
- ----- --- --------
<S> <C> <C>
Stephen Schatzman................................ 45 President, Secretary and Director
Alex Gimelstein.................................. 45 Vice President, Treasurer and
Director
</TABLE>
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
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.
In addition, all directors will receive on an annual basis mandatory stock
option grants under the Stock Option Plan for serving on the Board. Five-year
options to purchase 5,000 shares of Common Stock will be automatically granted
to each director on December 31 of each year, starting December 31, 1998, at an
option exercise price equal to the closing bid or sales price of the Common
Stock on such date. Additionally, directors appointed to the Board in the future
will be granted option to purchase 10,000 shares of Common Stock at an option
exercise price equal to the closing bid or sales price of the Common Stock on
the date of their appointment to the Board.
20
<PAGE> 23
STOCK OPTION PLAN
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 have been granted to Mr. Schatzman and 135,000 options have been granted
to Mr. Gimelstein 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.
PRINCIPAL STOCKHOLDERS
The following table sets forth information relating to the beneficial
ownership of Company Common Stock as of December 31, 1997 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. The
"Percentage After Offering" assumes the conversion of all the outstanding shares
of Preferred Stock into Common Stock at the rate of $ per share.
<TABLE>
<CAPTION>
PERCENTAGE PERCENTAGE
NAME COMMON STOCK BEFORE OFFERING(1) AFTER OFFERING(1)
- ---- ------------ ------------------ -----------------
<S> <C> <C> <C>
Stephen Schatzman........................... 2,835,500(2) 27.9% %
2101 N.E. 212th Street
Miami, Florida 33179
Alex Gimelstein............................. 2,835,500(3) 27.9% %
21160 N.E. 22nd Court
Miami, Florida 33179
All Directors and Executive Officers as a
Group (2 persons)......................... 5,671,000 55.1% %
</TABLE>
- ---------------
(1) Based on the conversion of the Preferred Stock at $ 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.
21
<PAGE> 24
DESCRIPTION OF SECURITIES
COMMON STOCK
The Company's Articles of Incorporation authorizes the issuance of
50,000,000 shares of Common Stock, no par value per share, of which 10,028,485
shares were outstanding as of December 31, 1997. Holders of shares of Common
Stock are entitled to one vote for each share on all matters to be voted on by
the stockholders. Holders of Common Stock have no cumulative voting rights.
Holders of shares of Common Stock are entitled to share ratably in dividends, if
any, as may be declared, from time to time by the Board of Directors in its
discretion, from funds legally available therefor. In the event of a
liquidation, dissolution or winding up of the Company, the holders of shares of
Common Stock are entitled to share pro rata in all assets remaining after
payment in full of all liabilities. Holders of Common Stock have no preemptive
rights to purchase the Company's Common Stock. All of the outstanding shares of
Common Stock are, and the shares of Common Stock will be, when issued and
delivered upon conversion of the Preferred Stock, fully paid and non-assessable.
PREFERRED STOCK
The Company's Articles of Incorporation authorize the issuance of 5,000,000
shares of preferred stock, of which 2,100 shares of Series A Convertible
Preferred Stock are outstanding. The Series A Preferred Stock is convertible, at
the option of the holder, 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
split and decreased proportionally for any forward stock split or stock
dividend. Market Price shall be the closing bid price of the Common Stock on
such date, as reported by the National Association of Securities Dealers
Automated Quotation System ("NASDAQ"), or the closing bid price in the
over-the-counter market, if other than Nasdaq. The Series A Preferred Stock is
mandatorily convertible into Common Stock beginning August 14, 1998, provided
that the Company is a reporting issuer under the Exchange Act and is then
current in its filings. 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.
The Company's Board of Directors has authority, without action by the
shareholders, to issue all or any portion of the remaining 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.
The Company considers it desirable to have preferred stock available to
provide increased flexibility in structuring possible future acquisitions and
financings and in meeting corporate needs which may arise. If opportunities
arise that would make desirable the issuance of preferred stock through either
public offering or private placements, the provisions for preferred stock in the
Company's Articles of Incorporation would avoid the possible delay and expense
of a shareholder's meeting, except as may be required by law or regulatory
authorities. Issuance of the preferred stock could result, however, in a series
of securities outstanding that will have certain preferences with respect to
dividends and liquidation over the Common Stock which would result in dilution
of the income per share and net book value of the Common Stock. Issuance of
additional Common Stock pursuant to any conversion right which may be attached
to the terms of any series of preferred stock may also result in dilution of the
net income per share and the net book value of the Common Stock. The specific
terms of any series of preferred stock will depend primarily on market
conditions, terms of a proposed acquisition or financing, and other factors
existing at the time of issuance. Therefore, it is not possible at this time to
determine in what respect a particular series of preferred stock will be
superior to the Company's Common Stock or any other series of preferred stock
which the Company may issue. The Board of Directors may issue additional
preferred stock in future financings.
The issuance of preferred stock could have the effect of making it more
difficult for a third party to acquire a majority of the outstanding voting
stock of the Company.
22
<PAGE> 25
TRANSFER AGENT
The Company's transfer agent is Liberty Transfer Co., 191 New York Avenue,
Huntington, N.Y., 11743-2711, telephone number (516) 385-1616.
SELLING SECURITY HOLDERS
The shares of Common Stock of the Company offered by this Prospectus are
being sold for the account of the selling security holders identified in the
following table (the "Selling Security Holders").
The Selling Security Holders are offering for sale an aggregate of
shares of Common Stock, including shares issuable upon conversion of the
Preferred Stock.
The following table sets forth the number of Shares being held of record or
beneficially (to the extent known by the Company) by such Selling Security
Holders and provides (by footnote reference) any material relationship between
the Company and such Selling Security Holder, all of which is based upon
information currently available to the Company.
<TABLE>
<CAPTION>
NUMBER OF
NUMBER OF SHARES OF NUMBER OF
SHARES OF PERCENTAGE COMMON STOCK SHARES OF PERCENTAGE
COMMON STOCK BEFORE TO BE SOLD IN COMMON STOCK AFTER
NAME BEFORE OFFERING(1) OFFERING OFFERING(1) AFTER OFFERING(1) OFFERING
- ---- ------------------ ---------- ------------- ----------------- ----------
<S> <C> <C> <C> <C> <C>
Balmore Funds, S.A.(2)...... 200,000(3)
Austos Anstalt Schaar(4).... 200,000(3)
Dora Fried(5)............... --
Lampton, Inc.(6)............ --
Skarco Press, Inc.(7)....... --
RCC Associates, Inc.(8)..... --
</TABLE>
- ---------------
(1) Includes shares issued upon conversion of the Preferred Stock, based upon
the conversion price of $ .
(2) A British Virgin Islands corporation; its address is Trident Chambers, P.O.
Box 146 Roadtown, Tortola, British Virgin Islands and its director is
Francois Morax.
(3) Shares subject to outstanding options.
(4) A Liechtenstein corporation; its address is 7440 Fuerstentum, Landstrasse
163, Liechtenstein and its director is Tomas Hackl.
(5) Ms. Fried is an individual who resides at Stiegengasse 4, 1060 Vienna,
Austria.
(6) A British Virgin Islands corporation; its address is 12A Elkunu Street,
Jerusalem, Israel and its director is Sholom Steinberg.
(7) A Florida corporation; its address is 1701 W. Hillsboro Boulevard, Suite
305, Deerfield Beach, FL 33442 and its President is Sanford G. Lechner.
(8) A Florida corporation; its address is 422 S.W. 12 Avenue, Deerfield Beach,
FL 33442 and its President is Richard Raphael.
PLAN OF DISTRIBUTION
SELLING SECURITY HOLDERS
The Selling Security Holders are offering shares of Common Stock for their
own account and not for the account of the Company. The Company will not receive
any proceeds from the sale of the shares of Common Stock by the Selling Security
Holders.
Each Selling Security Holder will, prior to any sales, agree (a) not to
effect any offers or sales of the Common Stock in any manner other than as
specified in this Prospectus, (b) to inform the Company of any
23
<PAGE> 26
sale of Common Stock at least one business day prior to such sale and (c) not to
purchase or induce others to purchase Common Stock in violation of Regulation M
under the Exchange Act.
The shares of Common Stock may be sold from time to time to purchasers
directly by any of the Selling Security Holders acting as principals for their
own accounts in one or more transactions in the over-the-counter market or in
negotiated transactions at market prices prevailing at the time of sale or at
prices otherwise negotiated. Alternatively, the shares of Common Stock may be
offered from time to time through agents, brokers, dealers or underwriters
designated from time to time, and such agents, brokers, dealers or underwriters
may receive compensation in the form of commissions or concessions from the
Selling Security Holders or the purchasers of the Common Stock.
Under the Exchange Act, and the regulations thereunder, any person engaged
in a distribution of the shares of Common Stock of the Company offered by this
Prospectus may not simultaneously engage in market making activities with
respect to the Common Stock of the Company during the applicable "cooling off"
periods prior to the commencement of such distribution. In addition, and without
limiting the foregoing, each Selling Security Holder will be subject to
applicable provisions of the Exchange Act and the rules and regulations
thereunder including, without limitation, Regulation M, which provisions may
limit the timing of purchases and sales of Common Stock by the Selling Security
Holder. There are possible limitations upon trading activities and restrictions
upon broker-dealers effecting transactions in certain securities which may also
materially affect the value of, and an investor's ability to dispose of, the
Company's securities. See "RISK FACTORS."
The Company will use its best efforts to file, during any period in which
offers or sales are being made, one or more post-effective amendments to the
Registration Statement, of which this Prospectus is a part, to describe any
material information with respect to the plan of distribution not previously
disclosed in this Prospectus or any material change to such information in this
Prospectus.
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Shapo, Freedman & Bloom, P.A., 200 South Biscayne Blvd., Suite 4750,
Miami, Florida 33131.
EXPERTS
The financial statements of the Company for the fiscal year ended June 30,
1996 and 1997 included in this Prospectus have been audited by Millward & Co.,
P.A., certified public accountants, and are included herein in reliance upon the
authority of said firm as experts on accounting and auditing.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission, a
Registration Statement on Form SB-2 with respect to the Common Stock being
registered hereby. This Prospectus does not contain all the information
contained in such Registration Statement, as permitted by the Rules and
Regulations of the Securities and Exchange Commission. The Registration
Statement, including exhibits thereto, may be inspected without charge and
copies of all or any part thereof may be obtained from the Commission's
principal office in Washington, D.C. at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549, and at the Commission's regional offices at 75 Park
Place, 14th Floor, New York, New York 10007 and at Northwest Atrium Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such
materials can be obtained upon written request addressed to the Commission,
Public Reference Section 450 Fifth Street, N.W., Washington, D.C. 20549, at
prescribed rates. For further information with respect to the Company, the
Common Stock being registered hereby and the contents of any contract or
document referred to herein, reference is made to the Registration Statement and
the exhibits filed as a part thereof.
24
<PAGE> 27
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Certified Public Accountants.......... F-2
Financial Statements:
Consolidated Balance Sheets............................... F-3
Consolidated Statements of Operations..................... F-4
Consolidated Statements of Changes in Shareholders'
Equity................................................. F-5
Consolidated Statements of Cash Flows..................... F-6
Notes to Consolidated Financial Statements................ F-7
</TABLE>
F-1
<PAGE> 28
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
The Havana Republic, Inc. and Subsidiaries
Weston, Florida
We have audited the accompanying consolidated balance sheet of The Havana
Republic, Inc. (a Colorado corporation) and Subsidiaries as of June 30, 1997 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the period from inception (March 10, 1996) to June
30, 1996 and for the year ended June 30, 1997. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our 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, 1997, and the
consolidated results of their operations and their cash flows for the period
from inception (March 10, 1996) to June 30, 1996 and for the year ended June 30,
1997, in conformity with generally accepted accounting principles.
Millward & Co. CPAs
Fort Lauderdale, Florida
August 8, 1997 (October 18, 1997 as to Note 9)
F-2
<PAGE> 29
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
---------- -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 219,294 1,174,253
Accounts Receivable....................................... 1,668 1,668
Inventory................................................. 477,854 665,598
Prepaid Expenses.......................................... -- 10,000
Deposits on Inventory Purchases........................... 300,000 450,000
---------- ----------
Total Current Assets.............................. 998,816 2,301,519
---------- ----------
PROPERTY AND EQUIPMENT, at Cost
(Net of Accumulated Depreciation and Amortization of
$13,907 and $23,907 at June 30, 1997 and September 30,
1997, respectively).................................... 204,811 277,453
---------- ----------
OTHER ASSETS:
Intangible Assets (Net of Accumulated Amortization of
$1,598 and $2,131 at June 30, 1997 and September 30,
1997, respectively).................................... 10,058 9,525
Deposits.................................................. 25,253 5,253
Deposits on Inventory Purchases........................... 141,700 166,700
Investment in 50% Owned Factory........................... 50,000 50,000
---------- ----------
Total Other Assets................................ 227,011 231,478
---------- ----------
Total Assets...................................... $1,430,638 $2,810,450
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable.......................................... $ 97,797 $ 98,269
Accrued Expenses.......................................... 41,441 48,120
Due to Related Party...................................... 750 --
Deferred Membership Revenue............................... 19,142 14,356
Note Payable.............................................. 400,000 200,000
---------- ----------
Total Current Liabilities......................... 559,130 360,745
---------- ----------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Common Stock, No Par Value, Authorized 50,000,000 Shares;
Issued and Outstanding 9,121,000 and 9,159,460 Shares
at June 30, 1997 and September 30, 1997,
respectively).......................................... 1,138,070 1,148,070
Preferred Stock, No Par Value, Non-Voting, Authorized
5,000,000 Shares; Convertible Preferred Stock -- Series
A, Authorized 2,500 Shares:
Issued and Outstanding 1,800 Shares at September 30,
1997 (Aggregate Liquidation Preference of $2,430,000
at September 30, 1997)................................ -- 2,213,450
Accumulated Deficit....................................... (266,562) (951,815)
---------- ----------
Total Shareholders' Equity........................ 871,508 2,449,705
---------- ----------
Total Liabilities and Shareholders' Equity........ $1,430,638 $2,810,450
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
<PAGE> 30
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD FROM FOR THE THREE FOR THE THREE
FOR THE INCEPTION MONTHS ENDED MONTHS ENDED
YEAR ENDED (MARCH 10, 1996) SEPTEMBER 30, SEPTEMBER 30,
JUNE 30, 1997 TO JUNE 30, 1996 1997 1996
------------- ---------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
SALES
Retail Sales........................... $ 345,330 $ -- $ 157,604 $ --
Memberships............................ 11,808 -- 4,786 --
---------- ---------- ---------- ----------
Net Sales...................... 357,138 162,390 --
COST OF SALES............................ 164,667 -- 72,561 --
---------- ---------- ---------- ----------
GROSS PROFIT............................. 192,471 -- 89,829 --
---------- ---------- ---------- ----------
OPERATING EXPENSES:
Store Expenses......................... 187,559 -- 59,681 --
General and Administrative............. 148,061 500 81,978 25,747
Depreciation and Amortization.......... 15,505 -- 10,533 --
Professional Fees...................... 100,492 -- 16,756 10,301
---------- ---------- ---------- ----------
Total Operating Expenses....... 451,617 500 168,948 36,048
---------- ---------- ---------- ----------
LOSS FROM OPERATIONS..................... (259,146) (500) (79,119) (36,048)
---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest Income........................ 9,467 -- 3,866 3,014
Interest Expense....................... (16,383) -- (10,000) (9,161)
---------- ---------- ---------- ----------
(6,916) -- (6,134) (6,147)
---------- ---------- ---------- ----------
LOSS BEFORE PROVISION FOR INCOME TAXES... (266,062) (500) (85,253) (42,195)
PROVISION FOR INCOME TAXES............... -- -- -- --
---------- ---------- ---------- ----------
NET LOSS................................. $ (266,062) $ (500) $ (85,253) $ (42,195)
========== ========== ========== ==========
NET LOSS PER COMMON SHARE................ $ (0.03) $ -- $ (0.07) $ --
========== ========== ========== ==========
NUMBER OF WEIGHTED COMMON SHARES
OUTSTANDING............................ 8,835,586 2,968,554 9,139,812 8,333,783
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
<PAGE> 31
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ----------------------- ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
------ ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- March 10, 1996
(Date of inception)........ -- $ -- -- $ -- -- $ --
Shares issued in connection
with initial
capitalization............. -- -- 5,500,000 1,000 -- 1,000
Shares issued in connection
with private offering...... -- -- 1,574,000 -- -- --
Net loss for the period from
inception (March 10, 1996)
to June 30, 1996........... -- -- -- -- (500) (500)
------ ---------- ---------- ---------- --------- ----------
BALANCE -- June 30, 1996..... -- -- 7,074,000 1,000 (500) 500
Shares issued in connection
with private offering...... -- -- 1,900,000 950,000 -- 950,000
Issuance of common stock for
services................... -- -- 147,000 147,070 -- 147,070
Recognition of officers
compensation on donated
services................... -- -- -- 40,000 -- 40,000
Net loss for the year ended
June 30, 1997.............. -- -- -- -- (266,062) (266,062)
------ ---------- ---------- ---------- --------- ----------
BALANCE -- June 30, 1997..... -- -- 9,121,000 1,138,070 (266,562) 871,508
Issuance of preferred stock
series A................... 1,800 1,613,450 -- -- -- 1,613,450
Shares issued in connection
with private offering...... -- -- 38,460 50,000 -- 50,000
Recognition of preferred
stock dividend on
beneficial conversion...... 600,000 (600,000) --
Net loss for the three months
ended September 30, 1997... -- -- -- -- (85,253) (85,253)
------ ---------- ---------- ---------- --------- ----------
BALANCE -- September 30, 1997
(Unaudited)................ 1,800 $2,213,450 9,159,460 $1,188,070 $(951,815) $2,449,705
====== ========== ========== ========== ========= ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
<PAGE> 32
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE PERIOD FROM FOR THE THREE FOR THE THREE
YEAR ENDED INCEPTION MONTHS ENDED MONTHS ENDED
JUNE 30, (MARCH 10, 1996) SEPTEMBER 30, SEPTEMBER 30,
1997 TO JUNE 30, 1996 1997 1996
---------- ---------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss..................................... $ (266,062) $ (500) $ (85,253) $ (42,195)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization.............. 15,505 -- 10,533 --
Recognition of Officers Compensation on
Donated Services......................... 40,000 -- -- 11,000
Common Stock Issued in Exchange for
Services................................. 10,000 -- -- --
(Increase) Decrease in:
Accounts Receivable...................... (1,668) -- -- --
Inventory................................ (477,854) -- (187,744) (54,067)
Prepaid Expenses......................... -- -- (10,000) --
Deposits on Inventory Purchases.......... (441,700) -- (175,000) --
Deposits................................. (25,253) -- 20,000 (20,000)
Increase (Decrease) in:
Accounts Payable......................... 97,797 -- 472 --
Accrued Expenses......................... 41,441 -- 6,679 4,904
Deferred Membership Revenue.............. 19,142 -- (4,786) --
Due to Related Party..................... 750 -- (750) --
---------- -------- ---------- ---------
Net Cash (Used in) Provided by Operating
Activities................................... (987,902) (500) (425,849) (100,358)
---------- -------- ---------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of Property and Equipment........ (81,648) -- (82,642) (20,335)
Increase in Intangible Assets................ (11,656) -- -- (7,681)
Investment in 50% Owned Factory.............. (50,000) -- -- --
---------- -------- ---------- ---------
Net Cash Used in Investing Activities.......... (143,304) -- (82,642) (28,016)
---------- -------- ---------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Issuance of Common Stock....... 950,000 1,000 50,000 950,000
Proceeds from Issuance of Preferred Stock
Series A................................... -- -- 1,613,450 --
Repayment of Note Borrowings................. (250,000) -- (200,000) (250,000)
Proceeds from Note Borrowings................ 400,000 250,000 -- --
---------- -------- ---------- ---------
Net Cash Provided by Financing Activities...... 1,100,000 251,000 1,463,450 700,000
---------- -------- ---------- ---------
Net (Decrease) Increase in Cash................ (31,206) 250,500 954,959 571,626
Cash and Cash Equivalents -- Beginning of
Period....................................... 250,500 -- 219,294 250,500
---------- -------- ---------- ---------
Cash and Cash Equivalents -- End of Period..... $ 219,294 $250,500 $1,174,253 $ 822,126
========== ======== ========== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash Paid During the Year for Interest..... $ 9,161 $ -- $ -- $ 9,161
========== ======== ========== =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for Services........ $ 137,070 $ -- $ -- $ --
========== ======== ========== =========
Recognition of Preferred Stock Dividend on
Beneficial Conversion...................... $ -- $ -- $ 600,000 $ --
========== ======== ========== =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
<PAGE> 33
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 has 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.
INTERIM FINANCIAL STATEMENTS
Information in the accompanying consolidated financial statements and notes
to the consolidated financial statements for the interim period as of September
30, 1997 and for the three month period ended September 30, 1997 and 1996, is
unaudited. The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles and
Regulation S-B. Accordingly, they do not include all the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three-month period ended September 30,
1997 and 1996 are not necessarily indicative of the results that may be expected
for the years ending June 30, 1998 and 1997.
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.
F-7
<PAGE> 34
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (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, consists principally of cash and cash equivalents.
The Company places its cash in money market funds with high credit quality
institutions. As of June 30, 1997, the Company had $196,815 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 consists of payments to the Company's 50%
owned affiliate to secure the purchase of cigar inventory. Shipments are
scheduled to commence January 1998 at a rate of approximately $50,000 worth of
cigars per month. All transactions are in U.S. dollars.
INTANGIBLE ASSETS
Intangible assets, which consist of organization and trademark costs, are
amortized over a 5 to 15 year period, respectively. Amortization expense for the
period ended June 30, 1997 and 1996 amounted to $1,598 and $0, respectively.
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
Income taxes are accounted for under the asset and liability method of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"). 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. Under SFAS 109, the effect on deferred tax
assets and liabilities or a change in tax rate is recognized
F-8
<PAGE> 35
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
LOSS PER COMMON SHARE
Primary loss per common share is calculated by dividing net loss by the
weighted average number of common shares outstanding during each period
presented. For the three months ended September 30, 1997, net loss has been
adjusted for dividends on the convertible preferred stock (see note 14). Fully
diluted loss per common share is not presented because they are anti-dilutive.
The Company does not have any common stock equivalents.
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 $19,142 and $14,356 as of June 30, 1997 and September 30,
1997, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued Statement No. 128 "Earnings Per Share"
("SFAS 128"). FAS 128 is effective for financial statements for periods ending
after December 31, 1997 and early adoption is not permitted. This statement
establishes standards for computing and presenting earnings per share (EPS) and
applies to entities with publicly held common stock or potential common stock.
The adoption of FAS 128 is not expected to have a material impact on the
Company's financial statements.
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information About Capital Structure" ("FAS 129"). Since the Company has only one
class of shares, which is adequately disclosed on the face of the balance sheet,
the adoption of FAS 129 will have no impact on the Company's financial
statements.
In June 1997, the FASB issued Statement of Financial Accounting Standard
No. 130, "Reporting Comprehensive Income" ("FAS 130"). FAS 130 is effective for
financial statements of periods beginning subsequent to December 15, 1997, but
early adoption is permitted. The Company presents adequately all components of
comprehensive income in the statement of shareholders' equity.
In June 1997, FASB issued Statement of Financial Accounting Standard No.
131, "Disclosure About Segments of an Enterprise and Related Information" ("FAS
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.
F-9
<PAGE> 36
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- RELATED PARTY
A related party sold cigars to the Company aggregating $750 for which the
related party was not reimbursed during the period.
NOTE 3 -- 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 shall be due and payable on April 1, 1998 and May
20, 1998, respectively. In August 1997, the Company repaid $200,000.
NOTE 4 -- 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 5 -- PROPERTY AND EQUIPMENT
The major classifications of property and equipment at June 30, 1997 and
September 30, 1997 are as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
-------- -------------
(UNAUDITED)
<S> <C> <C>
Computers................................................... $ 11,287 $ 11,287
Furniture and fixtures...................................... 53,194 60,186
Office equipment............................................ 2,120 2,120
Leasehold improvements...................................... 152,117 227,767
-------- --------
218,718 301,360
Accumulated depreciation.................................... (13,907) (23,907)
-------- --------
$204,811 $277,453
======== ========
</TABLE>
Depreciation expense amounted to $13,907, $0, $10,000 and $0 for the period
ended June 30, 1997 and 1996 and for the three months ended September 30, 1997
and 1996, respectively.
NOTE 6 -- INVENTORY
The major classes of inventory at June 30, 1997 and September 30, 1997 are
as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
-------- -------------
(UNAUDITED)
<S> <C> <C>
Cigars...................................................... $305,840 $372,589
Accessories................................................. 172,014 293,009
-------- --------
$477,854 $665,598
======== ========
</TABLE>
F-10
<PAGE> 37
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- INCOME TAXES
To date, the Company has incurred tax operating losses and therefore, has
generated no income tax liabilities. As of June 30, 1997 and September 30, 1997,
the Company has generated net operating loss carryforwards totaling $266,562 and
$352,000, respectively, which are available to offset future taxable income, if
any, through 2011. 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, 1997 and September 30, 1997, the components of the net
deferred tax asset are as follows:
<TABLE>
<CAPTION>
JUNE 30, SEPTEMBER 30,
1997 1997
--------- -------------
(UNAUDITED)
<S> <C> <C>
Deferred Tax Assets:
Net operating loss carryforward........................... $ 101,000 $ 133,700
Valuation allowance......................................... (101,000) (133,700)
--------- ---------
Net deferred tax............................................ $ -- $ --
========= =========
</TABLE>
NOTE 8 -- 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, 1997
and for the period March 10, 1996 (date of inception) to June 30, 1996 amounted
to $18,564 and $0, respectively.
Future minimum rental commitments as of June 30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 87,816
1999........................................................ 112,628
2000........................................................ 113,627
2001........................................................ 114,625
2002........................................................ 104,391
Thereafter.................................................. 166,693
--------
$699,780
========
</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 9 -- 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.
For the period ended June 30, 1997, the Company recorded officers'
compensation expense of $40,000 relating to services donated to the Company.
F-11
<PAGE> 38
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
See Note 1 for initial stock issuances.
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.
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. As of September 30, 1997,
the Company has issued 1,800 shares of the Series A Convertible Preferred Stock
for a net amount of $1,613,450. Subsequent to September 30, 1997, the Company
issued 300 additional shares of the Series A Convertible Preferred Stock for an
aggregate amount of $300,000. For the three months ended September 30, 1997, the
Company recognized a preferred stock dividend amounting to $600,000 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.
F-12
<PAGE> 39
======================================================
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED IN CONNECTION
WITH THIS OFFERING TO GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER
THAN THOSE CONTAINED IN THIS PROSPECTUS. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER OR A SOLICITATION IN ANY JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH AN OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE CIRCUMSTANCES OF THE COMPANY OR
THE FACTS HEREIN SET FORTH SINCE THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
The Company........................... 3
The Offering.......................... 3
Selected Financial Information........ 4
Risk Factors.......................... 5
Dilution.............................. 10
Use of Proceeds....................... 10
Market Price of the Common Stock...... 11
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 12
Business.............................. 13
Management............................ 20
Principal Stockholders................ 21
Description of Securities............. 22
Selling Security Holders.............. 23
Plan of Distribution.................. 23
Legal Matters......................... 24
Experts............................... 24
Additional Information................ 24
Financial Statements.................. F-1
</TABLE>
---------------------
UNTIL , 1998 (90 DAYS AFTER THE DATE OF THE PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
======================================================
======================================================
SHARES OF COMMON STOCK
OFFERED BY CERTAIN
SELLING SECURITY HOLDERS UPON
CONVERSION OF OUTSTANDING SHARES OF
SERIES A CONVERTIBLE PREFERRED STOCK
---------------------
490,000 SHARES OF COMMON STOCK OFFERED
BY CERTAIN SELLING SECURITY HOLDERS
---------------------
THE HAVANA
REPUBLIC, INC.
---------------------------
PROSPECTUS
---------------------------
, 1997
======================================================
<PAGE> 40
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Pursuant to Section 607.0850 of the Florida Business Corporations Act, the
Company has the power to indemnify directors, officers, employees or agents. The
Company's Articles of Incorporation and Bylaws provide for indemnification of
officers and directors. In addition, the Company's officers and directors have
entered into agreements which also indemnify them from certain acts and
omissions.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance of the securities
being registered are as follows:
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 1,980
Printing Expenses........................................... 15,000
Accounting Fees and Expenses................................ 10,000
Legal Fees and Expenses..................................... 25,000
Blue Sky Fees and Expenses.................................. 5,000
Transfer Agent and Registrar Fees and Expenses.............. 5,000
Miscellaneous............................................... 10,000
-------
Total....................................................... $71,980
</TABLE>
- ---------------
All amounts, except the SEC registration fee are estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES
The following table sets forth the Company's sales of unregistered
securities.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK DATE SOLD PURCHASER CONSIDERATION
- ------------------- --------- --------- -----------------------------------------------
<C> <C> <S> <C>
2,700,500 3/10/96 Gimelstein, Alex(1) $491.00
2,700,500 3/10/96 Schatzman, Stephen(1) 491.00
99,000 3/10/96 LaTorre, Roseanna(1) 18.00
================================================================================================================
60,000 6/10/96 Borer, Debora J.(3) 30.00
55,000 6/10/96 Burch, Clark(3) 27.50
65,000 6/10/96 Clark, Gary(3) 32.50
65,000 6/10/96 Conley, Walter(3) 32.50
50,000 6/10/96 Crumm, Michael(3) 25.00
64,000 6/10/96 EDR Financial, Inc.(3) 32.00
100,000 6/10/96 EDR Financial, Inc.(3) exchange of 300,000 shares of Preferred Stock
65,000 6/10/96 Hawkins, Edward H.(3) 32.50
60,000 6/10/96 Hawkins, Edward H. As Trustee
for Jeffrey Dean(3) 30.00
60,000 6/10/96 Hawkins, Edward H. As Trustee
for Cody Hawkins(3) 30.00
60,000 6/10/96 Hawkins, Edward H. Trustee
for Molly Hawkins(3) 30.00
55,000 6/10/96 Lawrence, Susan(3) 27.50
55,000 6/10/96 Reitsema, David R.(3) 27.50
60,000 6/10/96 Reitsema, David R. As Trustee
For Joshua Reitsema(3) 30.00
55,000 6/10/96 Reitsema, James D.(3) 27.50
</TABLE>
II-1
<PAGE> 41
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
COMMON STOCK DATE SOLD PURCHASER CONSIDERATION
- ------------------- --------- --------- -----------------------------------------------
<C> <C> <S> <C>
60,000 6/10/96 Reitsema, Jeremy(3) $30.00
60,000 6/10/96 Reitsema, Matthew(3) 30.00
65,000 6/10/96 Rennekamp, Daniel T.(3) 32.50
65,000 6/10/96 Sicola, Michael V.(3) 32.50
50,000 6/10/96 Sliva, Linda(3) 25.00
55,000 6/10/96 Spykstra, Carol(3) 27.50
60,000 6/10/96 Swickard, Don L.(3) 30.00
60,000 6/10/96 Swickard, Sharon(3) 30.00
65,000 6/10/96 Tudor Trading Limited(3) 32.50
55,000 6/10/96 Turner, Robert R.(3) 27.50
50,000 6/10/96 Vanderryst, Derek(3) 25.00
================================================================================================================
20,000 8/30/96 Aronoff, Len(3) 10,000.00
100,000 8/30/96 Azucar, Ltd.(3) 50,000.00
20,000 8/30/96 Baby Shoes, Inc.(3) 10,000.00
330,000 8/30/96 C.A. Oportunidad, S.A.(3) 165,000.00
100,000 8/30/96 Cile Investments Ltd.(3) 50,000.00
20,000 8/30/96 CJL Corp. Money Purchase
Pension Plan(3) 10,000.00
20,000 8/30/96 Dog in a Manger Productions,
Inc./G. Patrick Charuhas,
President(3) 10,000.00
40,000 8/30/96 Dowda, Jimmy Dean(3) 20,000.00
600,000 8/30/96 Fondo de Acquisiciones E
Inversiones
Internacionales(3) 300,000.00
200,000 8/30/96 King, Bryan(3) 100,000.00
100,000 8/30/96 Klarious Capital Ltd.(3) 50,000.00
40,000 8/30/96 Knox, Bruce R.(3) 20,000.00
40,000 8/30/96 Lenz, Frederick(3) 20,000.00
20,000 8/30/96 Pow Wow, Inc.(3) 10,000.00
250,000 8/30/96 Seidman, Barry(3) 125,000.00
38,460 8/30/97 USH Endowment Ltd.(3) 50,000.00
================================================================================================================
137,070 5/01/97 RCC Associates Inc.(2) general contracting services valued at $137,070
10,000 5/01/97 Two Employees(2) employment services valued at $10,000
================================================================================================================
36,000 11/13/97 Broad and Cassel(3) legal services valued at $42,120
200,000 11/13/97 RCC Associates Inc.(3) general contracting services valued at $234,000
44,025 11/20/97 Richard L. Jacobs(3) millwork services valued at $47,999
================================================================================================================
400,000 11/13/97 RCC Associates Inc.(2) general contracting services valued at $468,000
99,000 11/13/97 Daniel C. Marino, Jr.(2) public relations services valued at $115,830
90,000 11/20/97 Skarco Press, Inc.(2) printing services valued at $105,300
</TABLE>
II-2
<PAGE> 42
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A CONVERTIBLE
PREFERRED STOCK DATE SOLD PURCHASER CONSIDERATION
- ------------------- --------- --------- -------------
<C> <C> <S> <C>
700 8/14/97 Austost Anstalt Schaar(2) $700,000.00
800 8/14/97 Balmore Funds, S.A.(2) 800,000.00
300 8/25/97 Lampton, Inc.(2) 300,000.00
300 10/22/97 Fried, Dora(2) 300,000.00
</TABLE>
- ---------------
(1) Founder Shares
(2) Sold in reliance upon Section 4(2) of the Act. All investors represented
that they were either "accredited" or sophisticated and all had access to
information about the Company.
(3) Sold in reliance upon Rule 504/Regulation D
II-3
<PAGE> 43
ITEM 27. EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
------- -----------------------
<C> <C> <S>
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*
5.1 -- Opinion of Shapo, Freedman & Bloom, P.A.**
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*
10.6 -- Stock Option Plan*
10.8 -- Form of Indemnification Agreement with directors*
23.1 -- Consent of Shapo, Freedman & Bloom, P.A. (included in 5.1)**
23.2 -- Consent of Millward & Co., P.A., independent certified
public accountants, contained in Part II of the registration
statement.**
</TABLE>
Subsidiaries -- Havana Republic W.H., Inc. (Florida)
Havana Republic Brickell Station, Inc. (Florida)
- ---------------
* previously filed
** filed herewith
ITEM 28. UNDERTAKINGS
The undersigned registrant hereby undertakes that it will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and notwithstanding the
foregoing, any increase or decrease in volume of securities offered (if
the total dollar value of securities offered would not exceed that which
was registered) and any deviation form the low or high end of the
estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b), if, in the
aggregate, the changes in the volume and price represent no more than a
20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration
statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial
bona fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers
and controlling person of the Company pursuant to the foregoing provisions,
or otherwise, the Company has been advised that in the opinion of the
Securities and
II-4
<PAGE> 44
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by the undersigned of expenses incurred or paid by a director, officer or
controlling person of the undersigned in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
undersigned will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
II-5
<PAGE> 45
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Amendment No. 1 to the Registration Statement on Form SB-2
to be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Weston, State of Florida, on the 13th day of January, 1998.
THE HAVANA REPUBLIC, INC.
By: /s/ STEPHEN SCHATZMAN
------------------------------------
Stephen Schatzman
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the capacity
and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ STEPHEN SCHATZMAN President and Chief January 13, 1998
- ----------------------------------------------------- Executive Officer,
Stephen Schatzman Director
/s/ ALEX GIMELSTEIN Vice President and Chief January 13, 1998
- ----------------------------------------------------- Financial Officer,
Alex Gimelstein Director
</TABLE>
II-6
<PAGE> 1
EXHIBIT 5.1
SHAPO, FREEDMAN & BLOOM, P.A.
FIRST UNION FINANCIAL CENTER
SUITE 4750
200 SOUTH BISCAYNE BOULEVARD
MIAMI, FLORIDA 33131
---------------
(305)358-4440
LEONARD H. BLOOM FACSIMILE NO.
(305)358-0521
January 12, 1998
The Havana Republic, Inc.
1360 Weston Road
Weston, Florida 33326
Re: The Havana Republic, Inc. (the "Company") Registration Statement on Form
SB-2 (the "Registration Statement") Covering the Proposed Offering of an
Aggregate of 5,290,000 Shares of Common Stock, No Par Value by Certain
Selling Security Holders
Gentlemen:
We have acted as counsel for the Company in connection with the preparation
of the Registration Statement relating to the proposed offering of the Common
Stock by certain selling security holders.
As such, we are familiar with the Registration Statement relating to the
offering and the preliminary prospectus included therein (the "Prospectus"). We
have examined a copy of the Certificate of Incorporation (as amended) and
By-Laws of the Company (as amended) and such other documents and corporate
records as we deem necessary or appropriate for the purpose of this opinion.
On the basis of the foregoing, we are of the opinion that:
(i) The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the State of Florida and has
authorized and issued capital stock as set forth in the Prospectus.
(ii) All of the Common Stock to be sold by the Selling Security Holders
in the offering have been duly and validly authorized and are fully paid and
nonassessable.
<PAGE> 2
The Havana Republic, Inc.
January 12, 1998
Page 2
The undersigned consents to being named in the above referenced
Registration Statement as counsel for the Company and in the Prospectus as
acting for such Company as to legal matters in connection with the sale of the
Common Stock covered by the Registration Statement and further consents to the
filing of this opinion as an exhibit to the Registration Statement.
SHAPO, FREEDMAN & BLOOM, P.A.
By: /s/ LEONARD H. BLOOM
------------------------------------
Leonard H. Bloom
LHB:ssc
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the inclusion in this registration statement (Amendment No.
1) on Form SB-2 of our report dated August 8, 1997 (October 18, 1997 as to Note
9), 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
January 9, 1998
