FORM 10-QSB
Securities and Exchange Commission
Washington D.C. 20549
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal quarter ended: September 30, 1999
Commission file number: 333-40799
THE HAVANA REPUBLIC, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
FLORIDA 84-1346897
- ------------------------------- ------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1360 WESTON ROAD
WESTON, FLORIDA 33326
---------------------------------------
(Address of principal executive offices)
(Zip code)
(954) 384-6333
----------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
Indicate the number of shares outstanding of each of the registrant's classes of
common stock, as of November 2, 1999: 31,876,693 shares of common stock, no par
value per share.
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
INDEX
Page
----
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Consolidated Balance Sheet (Unaudited)
September 30, 1999................................................ 3
Consolidated Statements of Operations (Unaudited)
For the Three Months Ended September 30, 1999 and 1998............ 4
Consolidated Statement of Changes in Shareholders' Equity
For the Three Months Ended September 30, 1999..................... 5
Consolidated Statements of Cash Flows (Unaudited)
For the Three Months Ended September 30, 1999 and 1998............ 6
Notes to Consolidated Financial Statements............................. 7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations..................... 10
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings............................................. 13
Item 4 - Submission of Matters to a Vote of Security Holders........... 13
Item 6 - Exhibits and Reports on Form 8-K.............................. 13
Signatures............................................................. 13
<PAGE>
PART I: FINANCIAL INFORMATION
ITEM I: FINANCIAL STATEMENTS
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1999
<TABLE>
<CAPTION>
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ 441,581
Accounts Receivable 10,941
Inventory 784,764
Deposits on Inventory Purchases 300,000
-----------
Total Current Assets 1,537,286
-----------
PROPERTY AND EQUIPMENT, at Cost (Net of Accumulated Depreciation and
Amortization of $161,010) 812,375
-----------
OTHER ASSETS:
Other 9,896
Deposits on Inventory Purchases 216,600
Investments in 50% Owned Factory 50,000
-----------
Total Other Assets 276,496
-----------
Total Assets $ 2,626,157
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable $ 186,858
Accrued Expenses 122,900
Deferred Membership Revenue 10,391
-----------
Total Current Liabilities 320,149
-----------
Debentures Payable 241,281
-----------
COMMITMENTS
SHAREHOLDERS' EQUITY:
Preferred Stock, No Par Value, Non-Voting,
Authorized 5,000,000 Shares;
Convertible Preferred Stock-Series A,
Authorized 2,500 Shares: 586 shares issued and
and outstanding (Aggregate Liquidation
Preference of $ 791,100 at September 30, 1999) 720,906
Preferred Stock-Series B, Authorized 200,000 Shares:
200,000 shares issued and outstanding
(Aggregate Liquidation Preference of
$100,000 at September 30, 1999) 40,000
Common Stock, No Par Value, Authorized 50,000,000 Shares;
Issued and Outstanding 30,076,693 Shares 4,084,015
Accumulated Deficit (2,643,319)
Subscriptions Receivable (136,875)
-----------
Total Shareholders' Equity 2,064,727
-----------
Total Liabilities and Shareholders' Equity $ 2,626,157
===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-3-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Three Months Ended
------------------------------
September 30, September 30,
1999 1998
------------------------------
SALES
<S> <C> <C>
Retail Sales $ 288,755 $ 260,698
Memberships 1,304 4,784
------------ ------------
Net Sales 290,059 265,482
COST OF SALES 140,351 92,560
------------ ------------
GROSS PROFIT 149,708 172,922
------------ ------------
OPERATING EXPENSES:
Store Expenses 147,799 103,824
General and Administrative 144,149 76,164
Depreciation and Amortization 31,583 15,583
Professional Fees 8,862 33,653
------------ ------------
Total Operating Expenses 332,393 229,224
------------ ------------
LOSS FROM OPERATIONS (182,685) (56,302)
------------ ------------
OTHER INCOME (EXPENSE):
Interest Income 4,439 9,533
Interest Expense (223,593) (5,000)
------------ ------------
(219,154) 4,533
------------ ------------
LOSS BEFORE PROVISION FOR INCOME TAXES (401,839) (51,769)
PROVISION FOR INCOME TAXES -- --
------------ ------------
NET LOSS $ (401,839) $ (51,769)
============ ============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.01) $ (0.00)
============ ============
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING 28,305,789 18,101,066
============ ============
</TABLE>
The accompanying notes are an integrap part of these
consolidated financial statements.
-4-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Months Ended September 30, 1999
<TABLE>
<CAPTION>
Preferred Stock A & B Common Stock Accumulated Subscription
--------------------- -------------------- ----------- ------------
Shares Amount Shares Amount Deficit Receivables Total
------ ------ ------ ------ ------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE - June 30, 1999 200,586 $ 760,906 28,276,693 $ 3,771,386 $(2,241,480) $ (214,375) $ 2,076,437
Issuance of Common Stock for
Payment of Note Payable
and Interest -- -- 1,800,000 106,218 -- 77,500 183,718
Amortization of Beneficial
Conversion Feature -- -- -- 206,411 -- -- 206,411
Net loss for the three months
ended September 30, 1999 -- -- -- -- (401,839) -- (401,839)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE - September 30, 1999 200,586 $ 760,906 30,076,693 $ 4,084,015 $(2,643,319) $ (136,875) $ 2,064,727
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-5-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Three Months Ended
---------------------------
September 30, September 30,
1999 1998
---------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(401,839) $ (51,769)
Adjustments to Reconcile Net Loss to Net Cash Used in
Operating Activities:
Depreciation and Amortization 31,583 15,583
Amortization of Beneficial Conversion Feature on Debentures and Notes 223,593 --
(Increase) Decrease in:
Accounts Receivable (4,981) (8,653)
Inventory (9,402) (19,425)
Prepaid Expenses and Other -- 17,089
Increase (Decrease) in:
Accounts Payable (86,400) (24,166)
Accrued Expenses (49,637) (22,318)
Deferred Membership Revenue (1,304) (4,784)
Due to Related Party -- --
--------- ---------
Net Cash Used in Operating Activities (298,387) (98,443)
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Refund on Leasehold Improvements 73,640 --
Acquisition of Property and Equipment (8,822) (56,101)
--------- ---------
Net Cash Provided by (Used in) Investing Activities 64,818 (56,101)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of Note Borrowings (30,000) --
--------- ---------
Net Cash Used in Financing Activities (30,000) --
--------- ---------
Net Decrease in Cash (263,569) (154,544)
Cash - Beginning of Year 705,150 792,776
--------- ---------
Cash - End of Year $ 441,581 $ 638,232
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Year for Interest $ -- $ --
========= =========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Recognition of Preferred Stock Dividend on Beneficial Conversion $ -- $ 600,000
========= =========
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
-6-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Basis of Presentation
---------------------
The accompanying financial statements for the interim periods are unaudited and
reflect all adjustments (consisting only of normal recurring adjustments) which
are, in the opinion of management, necessary for a fair presentation of the
financial position and operating results for the periods presented. These
financial statements should be read in conjunction with the financial statements
and notes thereto, together with Management's Discussion and Analysis of
Financial Condition and Results of Operations, contained in the Annual Report on
Form 10-KSB for the year ended June 30, 1999, of The Havana Republic, Inc. (the
"Company") as filed with the Securities and Exchange Commission. The results of
operations for the three months ended September 30, 1999 are not necessarily
indicative of the results for the full fiscal year ending June 30, 2000.
Note 2. Loss per Share
--------------
The Company has adopted Statement of Financial Accounting Standards No. 128 -
"Earnings Per Share" ("FAS 128") which requires the dual presentation of basic
and diluted earnings per share for the periods ending after December 15, 1997.
Basic earnings per share is computed by dividing net income, after deducting
preferred stock dividends accumulated during the period, by the weighted average
number of shares of common stock outstanding during each period. Diluted
earnings per share is computed by dividing net income by the weighted average
number of shares of common stock, common stock equivalents and other potentially
dilutive securities outstanding during each period. In accordance with the
provisions of FAS 128, the Company has retroactively restated earnings per
share.
Note 3. Inventories
-----------
The major classes of inventories are as follows:
September 30, 1999
------------------
Cigars ............................................ $398,636
Accessories.......................................... 386,128
-------------------
$784,764
7
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 4. Convertible Debentures
----------------------
On June 22, 1999, the Company placed $500,000 face amount of 8% convertible
debentures due with accrued interest on or before June 21, 2002. The Company
also issued 4,000,000 warrants to the debenture holders to purchase 4,000,000
shares of the Company's common shares between June 22, 1999 and June 21, 2002 at
the following prices per share:
2,000,000 shares at $.10 per share
1,000,000 shares at $.13 per share
1,000,000 shares at $.16 per share
The Company has valued the warrants and allocated $228,000 of the proceeds to
the debt and $277,223 to the warrants. The $277,223 discount is being amortized
as interest over the three-year life of the debentures. $17,123 has been
amortized during the three months ended September 30, 1999.
The debentures are convertible 120 days from June 22, 1999 into common shares at
a price equal to the lesser of 65% of the average closing bid price for the five
trading days preceding conversion or $.078 per share. The Company, at its
option, may elect to pay on the maturity date all accrued interest in shares of
its common stock pursuant to the conversion formula. The Company has allocated
$269,230 to the beneficial conversion feature based on that feature's intrinsic
value assuming the conversion terms most beneficial to the debenture holder and
is being amortized as interest expense over a 120-day period commencing June 22,
1999. Amounts allocated to the warrants and the beneficial conversion feature
aggregating $531,000 have been credited to capital stock. As of June 30, 1999,
the Company has reserved 4,000,000 shares for the exercise of warrants and
approximately 6,400,000 shares for the conversion of debentures. Interest has
been charged for $206,410 which represents the beneficial conversion feature.
Note 5. Shareholders' Equity
--------------------
COMMON STOCK
In August 1999, the Company repaid a note payable by payment of $30,000 in cash
as well as the issuance of an aggregate of 2,400,000 shares of the Company's
common stock, 600,000 shares which were reissued from previously outstanding
common shares and freely tradable and the remaining 1,800,000 common shares
restricted pursuant standard Rule 144 legend.
8
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note 6. Comprehensive Income
--------------------
During the first quarter of fiscal 1999, the Company adopted Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income."
This pronouncement sets forth requirements for disclosure of the Company's
comprehensive income and accumulated other comprehensive items. In general,
comprehensive income combines net income and "other comprehensive items," which
represent certain amounts that are reported as components of shareholders'
investment in the accompanying balance sheets, including foreign currency
translation adjustments. For the three months ended September 30, 1999 and 1998,
the Company had no comprehensive income.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This report on Form 10-QSB contains forward-looking statements which are made
pursuant to the safe harbor provisions of the Securities Litigation Reform Act
of 1995 and which are subject to risks and uncertainties which could cause
actual results to differ materially from those discussed in the forward-looking
statements and from historical results of operations. Among the risks and
uncertainties which could cause such a difference are those relating to the
Company's reliance upon suppliers for the purchase of finished products which
are then resold by it, the Company's dependence upon certain key personnel, its
ability to manage its growth, and the risk of economic and market factors
affecting the Company or its customers.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998
Net sales for the three months ended September 31, 1999 were $290,059, an
increase of 10.0% as compared to sales for the three months ended September 30,
1998 which were $265,482. This increase is attributable to the opening of a
third emporium so actually, sales decreased in the stores that were opened in
both periods presented. The reason for the decrease was the weather in south
Florida during the quarter ended September 30, 1999 resulted in the stores being
closed nine days which accounted for 10% of the operating days due to two
hurricane warnings (Irene and Floyd).
Cost of sales was $140,351 or 48.4% of sales for the three months ended
September 30, 1999 as compared to $92,560 or 34.9% of sales for the three months
ended September 30, 1998. This increase as a percentage of sales was primarily a
result of stabilization of the market and achieving our standard gross profit.
During the three months ended September 30, 1998, the Company was purchasing
close outs as manufacturers were depleting their inventories.
Gross profit was $149,708 or 51.6% of sales for the three months ended September
30, 1999 as compared to gross profit of $172,922 or 65.1% of sales for the three
months ended September 30, 1998.
Store expenses, which include marketing and advertising expenses, rent and
salary costs, were $147,799 or 51% of sales for the three months ended September
30, 1999 as compared to $103,824 or 39.1% of sales for the three months ended
September 30, 1998. The percentage increase in store expenses in relationship to
sales is primarily attributed to the fact that the Company opened its third
store during June 1999 and incurred operational costs, additional set-up,
promotional, payroll and other expenses during the three-month period ended
September 30, 1999.
General and administrative expenses, which includes administrative salaries,
travel and entertainment, insurance and other expenses, were $144,149 or 50% of
sales for the three months ended September 30, 1999 as compared to $76,164 or
28.7% of sales for the three months ended September 30, 1998. The percentage
increase in relation to sales is primarily attributable to a large trade show
that company representatives attended during the quarter ended September 30,
1999.
10
<PAGE>
RESULTS OF OPERATIONS (CONTINUED)
THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED
SEPTEMBER 30, 1998 (CONTINUED)
The Company incurred interest expense for the three months ended September 30,
1999 of $233,593 as compared to interest expense of $5,000 for the three months
ended September 30, 1998. The increase is due to the amortization of the
beneficial conversion feature on the debentures payable of $206,410 and the
amortization of the discount on the warrants of $17,182.
As a result of the foregoing factors, the Company incurred losses of
approximately $401,839 or ($.01) per share for the three months ended September
30, 1999 as compared to a loss of approximately $51,769 or ($.00) per share for
the three month period ended September 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had working capital of approximately
$1,200,000. Since its inception, it has incurred losses of approximately
$2,600,000. The Company's operations and growth has been funded by loans from
third parties, the sale of common stock through September 30, 1999 with gross
proceeds of approximately $1,000,000 and the issuance of Series A Convertible
Preferred Stock which resulted in net proceeds to the Company of approximately
$1,883,000 after expenses. These funds have been used for working capital,
capital expenditures, \information systems development and other corporate
purposes.
The Company has no other material commitments for capital expenditures. The
Company believes that it has sufficient liquidity to meet all of its cash
requirements for the next 12 months and that subsequent store and distribution
sales would provide sufficient cash flows to meet their operating needs. The
Company believes, however, that additional funding will be necessary to expand
into markets outside of South Florida.
RISK OF YEAR 2000 ISSUES
The Company believes it does not utilize software within its business processes
that may be impacted by the year 2000 issue. The year 2000 issue exists because
many computer systems and applications currently use two digit date fields to
designate a year. Data sensitive systems may recognize the year 2000 as 1900, or
not at all. This inability to properly treat the year 2000 could cause systems
to process critical financial and operational information incorrectly.
11
<PAGE>
NICARAGUAN FACTORY AND DISTRIBUTION
The Company invested $50,000 in January 1997 for a 50% interest in Tabanica, a
Nicaraguan corporation, which owns a manufacturing facility in Jalapa,
Nicaragua. The Company has the right to purchase cigars from Tabanica at cost
plus 50% through October 31, 2001. The Company believes that this arrangement
will provide it with a continuous source of premium cigars and an ability to
develop its own private label brand cigar. However, the operation of
manufacturing facilities outside of the United States, especially in less
developed countries such as Nicaragua, is subject to numerous risks, including
political and currency instability, currency control and exchange regulations,
and import and export regulations, any of which could have a material adverse
effect upon the Company's cigar supply. In addition the recent hurricane in
Nicaragua may affect the timely delivery of cigars. Therefore it is not possible
to predict whether the Company's investment in and agremment with Tabanica will
result in a stable and long-term supply of premium cigars.
12
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
-----------------
The Company is not involved in any material litigation
Item 4. Submission of Matters to Vote of Security Holders
-------------------------------------------------
None
Item 6. Exhibits and Reports on Form 8-K
---------------------------------
None
(b) REPORTS ON FORM 8-K
There were no Current Reports on Form 8-K filed by the Company during
its fiscal quarter ended September 30, 1999.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
THE HAVANA REPUBLIC, INC.
Dated: November 2, 1999 By: /s/
----------------------------
Steven Schatzman, President
13
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION LOCATION
1 Financial Data Schedule *1
- ------------------
*1 Filed electronically pursuant to Item 401 of Regulation S-T.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
HAVANA REPUBLIC, INC. AND SUBSIDIARIES FORM 10-QSB FOR THE THREE MONTHS ENDED
SEPTEMBER 30, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-1-1999
<PERIOD-END> SEP-30-1999
<CASH> 441,581
<SECURITIES> 0
<RECEIVABLES> 10,941
<ALLOWANCES> 0
<INVENTORY> 784,764
<CURRENT-ASSETS> 1,537,286
<PP&E> 812,375
<DEPRECIATION> 161,010
<TOTAL-ASSETS> 2,626,157
<CURRENT-LIABILITIES> 320,149
<BONDS> 0
0
760,906
<COMMON> 4,084,015
<OTHER-SE> (2,780,194)
<TOTAL-LIABILITY-AND-EQUITY> 2,626,157
<SALES> 290,059
<TOTAL-REVENUES> 290,059
<CGS> 140,351
<TOTAL-COSTS> 140,351
<OTHER-EXPENSES> 332,393
<LOSS-PROVISION> (182,685)
<INTEREST-EXPENSE> 223,593
<INCOME-PRETAX> (401,839)
<INCOME-TAX> 0
<INCOME-CONTINUING> (401,839)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (401,839)
<EPS-BASIC> (0.01)
<EPS-DILUTED> (0.01)
</TABLE>
