SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 2000
Commission File Number: 333-40799
THE HAVANA REPUBLIC, INC.
(name of small business issuer as specified in its charter)
Florida 84-1346897
(State or Other Jurisdiction of (IRS Employer Identification No.)
Incorporation or Organization)
1360 WESTON ROAD, WESTON, FL 33326
(Address and Zip Code of Principal Executive Offices)
Issuer's Telephone Number: (954) 384-6333
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Securities Registered Under Section 12(b) of the Exchange Act: None
Securities Registered Under Section 12(g) of the Exchange Act: Common Stock, no
par value.
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [ ]
State issuer's revenues for its most recent fiscal year: $1,266,618
The aggregate market value of the registrant's common stock held by
non-affiliates of the registrant as of September 20, 2000 was approximately
$2,046,105. Solely for purposes of the foregoing calculation, all of the
registrant's directors and officers are deemed to be affiliates.
There were 34,901,073 shares of the registrant's common stock outstanding as of
September 20, 2000.
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PART I
Item 1. Description of Business
GENERAL
The Havana Republic, Inc., a Florida corporation (the "Company") was
formed on March 10, 1996. The Company is engaged in the business of owning and
operating upscale cigar emporiums devoted to the sale of premium cigars and
cigar related merchandise. The Company opened its first emporium in January 1997
in Weston, Florida, its second emporium opened in June 1998 in the Las Olas
Riverfront in Fort Lauderdale, Florida and its third emporium opened in May 1999
in downtown South Miami, Florida. The Company also sells its cigars and
accessories over the Internet through its fully interactive e-commerce cite,
Havana Republic.com.
Premium cigars are generally defined according to three criteria: (i)
the cigars are made completely by hand; (ii) the cigars consist of long-filler
tobacco; and (iii) the cigars retail at a price range from $1 to more than $20
each. Hand-rolled cigars consist of three different categories of tobacco: (1)
the filler is the tobacco in the cigar; (2) the binder is the leaf that binds
the filler together; or (3) the wrapper is the tobacco leaf that wraps around
the rolled tobacco and finishes the cigar. A premium cigar uses only long-filler
tobacco, binders and wrappers that are composed solely of tobacco leaf.
Long-filler tobacco consists of half tobacco leaves rolled up, whereas
short-filler tobacco consists of smaller pieces of tobacco, including the
portions of the long-filler tobacco which are cut and discarded in producing
premium cigars. The quality of a premium cigar is based on the quality of the
tobacco used for the filler, binder and wrapper. Cigars that are not premium
cigars typically use short-filler, and may be wholly or partially manufactured
by machine. The Company has developed and plans to market a full line of premium
cigars, which will be sold under the brand name of Havana Republic. The Company
currently sells over 100 brands from other manufacturers, at its emporiums.
The Company distributes 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. Tabanica is presently
adding a factory to roll cigars in Esteli, Nicaragua and it is anticipated that
this factory will be operational by October 2000. Tabanica will still maintain
its plantations and storage facilities in Jalapa. Even though the Company owns
50% of Tabanica, it does not control Tabanica's board of directors.
THE MARKET
The Company believes that the market for cigars has stabilized and does
not anticipate the market to grow. It is estimated that cigar sales in the
United States amount to more than $1 billion at the retail level.
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THE EMPORIUMS
Operating Emporiums
The Company currently operates three emporiums, seven days a week. The
Company's first emporium is located in Weston, Florida. The emporium consists of
an upscale retail cigar emporium and private club section covering a total of
2,000 square feet. The private club section is designed for leisurely smoking
complemented by satellite television, coffee, expresso and soft drinks.
Individual humidors (in excess of 100) are leased to patrons for storing their
cigars. Sales of cigars amount to approximately 70% of total sales and sales of
accessories, such as humidors, lighters, cigar cutters, etc., account for the
balance. The club's decor is luxurious and upscale with generous utilization of
mahogany and marble. A minimum of two to five employees are required on the
premises. The cost of the furniture, fixtures and equipment required to open a
single emporium/club is approximately $500,000. Initial inventory at an emporium
costs approximately $300,000.
The Company's second emporium was opened in June 1998 in the Las Olas
Riverfront in Ft. Lauderdale, Florida and the Company's third emporium opened in
downtown South Miami, Florida in May 1999. The Company intends to expand its
retail operations through the opening of additional emporiums in South Florida
and in other cities in the United States in which it believes there is a local
market for premium cigars. Additional openings will be dependent upon the
availability of financing. However, there can be no assurances that the Company
will be able to successfully obtain locations or financing.
Planned Future Emporiums
The Company has entered into letters of intent to open two new
emporiums which the Company expects to become operations in fiscal 2001. The
first new emporium will be located within the Desert Passage at the new the new
Aladdin Resort and Casino in Las Vegas, Nevada. The Aladdin Hotel and Desert
Passage are a $1.3 billion complex developed by Trizec-Hahn. The Company has
secured what it believes to be prime location in the Desert Passage next to
Commander's Palace which is a 12,000 square foot upscale restaurant which has
been highly rated by Zagat. The Company's emporium will be approximately 1,100
square feet and is opposite one of the main Aladdin casino entrances. The
Company secured this location because it expects to maintain a high volume of
visitors and in fact, the Desert Passage attracted over 1,000,000 visitors in
its first two weeks of operations.
The second new emporium is expected to be opened in a project named
"City Place" in West Palm Beach, Florida. City Place is a 600,000 square foot up
scale multi use facility being developed by the Palladium Group out of New York.
Expected tenants in City Place include Macys, 20 screen movie theater, 10
restaurants including Cheesecake Factory and Legal Seafoods and 8 other well
known restaurants. The Company will have approximately a 1,100 square foot
emporium in this location.
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The Company has negotiated leases for both locations but neither has
been executed. While the Company fully expects to open both emporiums, there is
no assurance that it will open either emporium.
THIRD-PARTY SUPPLIERS
Havana Republic is presently able to purchase premium cigars
directly from all major manufacturers such as La Gloria Cubana, Padron, General
Cigar, Altadis formerly Consolidated and Tobaccalera, Fuentes and Dunhill, and
is not dependent upon any one supplier for cigars. The Company intends to
continue to purchase directly from manufacturers and supplement its inventory
with cigars from the Tabanica factory.
COMPANY BRAND CIGARS
In 1997, the Company entered into a contract with Tabanica, a
cigar manufacturer in Nicaragua, for the purchase of 625,000 cigars. The
purchase price for the cigars was $616,000, all of which has been paid. The
Company owns a 50% equity interest in Tabanica. However, the Company does not
control its management or board of directors. Tabanica will manufacture the
cigars, and box them for the Company in Nicaragua and deliver the cigars, F.O.B
Miami, Florida. The Company sells and intends to will continue to sell cigars
manufactured by Tabanica in its emporiums and to distributors for resale.
The Company's 50% interest in Tabanica, gives the Company the
opportunity to purchase premium cigars at favorable prices and maintain
consistency in their blend and quality. Tabanica maintains warehouse and factory
facilities and leases approximately 170 acres to grow tobacco. Tabanica's other
shareholder is Merardo Padron, its president, who is in charge of its day to day
operations.
The manufacturing process for premium cigars includes the
selection, purchase and aging of the tobacco and the hand rolling of the cigars.
The tobacco will be selected by Tabanica upon consultation with the Company
based upon its flavor and quality. The availability and quality of tobacco
varies from season to season as a result of such factors as weather conditions
and the demand for the tobacco. As a result of the difference in taste between
different lots, Tabinica, in conjunction with the Company, will be required to
continuously reformulate the tobaccos in its premium cigars in order to maintain
a consistent taste.
The particular tobacco blend for each of the Company's cigars
is formulated from different tobaccos. The Company's premium cigars use
long-filler tobacco primarily from Nicaragua. The Company also obtains some
tobacco from the Dominican Republic for its blend.
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Competition
Competition affecting the Company's emporiums comes from other
retail tobacco, cigar stores, liquor stores, convenience stores and mail order.
The Company believes that in fiscal 2000, the number of companies operating
emporiums in the South Florida market has decreased and that this is a nation
wide trend. Therefore, the Company believes it has a higher profile and is in a
position to capture a greater percentage of the South Florida marker. 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.
GOVERNMENT REGULATION; TOBACCO INDUSTRY LITIGATION; TAXES
The tobacco industry is subject to regulation by Federal,
state and local governments, and the recent trend has been toward increased
regulation. Such regulations include labeling requirements, limitations on
advertising and prohibition of sales to minors, laws restricting smoking in
public places including offices, office buildings, restaurants and other eating
establishments. Due to health concerns, the cigar industry could become subject
to increased regulation under Federal and state health and safety regulations.
In addition, cigars have been subject to excise taxation at the Federal, state
and local level, and such taxation may increase in the future. Tobacco products
are especially likely to be subject to increases in excise taxation because of
the detrimental effects of tobacco on the health of both smokers and others who
inhale secondary smoke.
Over the years, the federal excise tax rate on large cigars
(weighing more than three pounds per thousand cigars) was increased. Currently,
the federal tax is $33.25 per thousand cigars. The Company does not believe that
the current level of excise taxes will have a material adverse effect on the
Company's business, but there are no assurances that additional increases will
not have a material adverse effect on the Company's business.
Cigars and pipe tobacco are also subject to certain state and
local taxes. Since 1964, the number of states that tax cigars has risen from six
to forty-one. State excise taxes generally range from 2% to 75% of the wholesale
purchase price.
Cigar manufacturers, like other producers of tobacco products,
are subject to regulation in the U.S. at the federal, state and local levels.
Together with changing public attitudes toward smoking, a constant expansion of
smoking regulations since the early 1970s has been a major cause for the decline
in consumption. Moreover, the trend is toward increased regulation of the
tobacco industry.
In recent years, a variety of bills relating to tobacco issues
have been introduced in the Congress of the United States, including bills that
would have prohibited the advertising and promotion of all tobacco products
and/or restricted or eliminated the deductibility of such advertising expenses;
set a federal minimum age of 18 years for use of tobacco products; increased
labeling requirements on tobacco products to include, among other things,
addiction warnings and lists of additives and toxins; modified federal
preemption of state laws to allow state courts to hold tobacco manufacturers
liable under common law or state statutes; and shifted regulatory control of
tobacco products and advertisements from the Federal Trade Commission to the
U.S. Food and Drug Administration (the "FDA"). In addition, in recent years,
there have been proposals to increase tobacco excise taxes. In some cases,
hearings were held, but only one of these proposals was enacted, namely, that
states, in order to receive full funding for federal substance abuse block
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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. However, since
1988, most cigars sold in the United States carry cancer warning labels.
The FDA has proposed rules to regulate cigarettes and
smokeless tobacco in order to protect minors. Although the FDA has defined
cigarettes in such a way as to include little cigars, the ruling does not
directly impact large cigars. However, once the FDA has successfully exerted
authority over any one tobacco product, the practical impact would be felt by
manufacturers of any tobacco product. If the FDA is successful, this may have
long-term repercussions on the large cigar industry.
The federal Occupational Safety and Health Administration
(OSHA) has proposed an indoor 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,
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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 seven full-time and seven part-time employees,
none of which are parties to a collective bargaining agreement. The Company
believes its relationship with its employees is good. Five full-time employees
are engaged in management and administrative activities and the remaining
employees are engaged in sales and related activities.
Item 2. Description of Property
The Company maintains its corporate offices at its emporium
located in Weston, Florida pursuant to a lease covering approximately 2,000
square feet which expires in 2001. This lease is subject to two five year
renewal options. The present annual rent inclusive of taxes, insurance and
common area charges, is approximately $60,000. The Company's Ft. Lauderdale
emporium consists of approximately 1,780 square feet and is subject to a lease
expiring in 2004, with a five year renewal option. The annual rent, including
pass throughs is approximately $106,000. The Company's South Miami emporium
occupies approximately 2,100 square feet in the Shops of Sunset and it subject
to a lease expiring in 2009. Through negotiations with the landlord, Management
was successful in reducing the annual rent, including pass throughs, from
approximately $132,000 per year to $3,000 per month for the period of March 2000
through December 2000. The rent reduction was a result of the overall poor
performance of the project called the Shops at Sunset and Management and the
landlord have an oral understanding that the issues of rent and rent concessions
will be revisited at the end of this calender year.
The Company believes that additional space will be available
at commercially reasonable rents. The Company's facilities, at this time, are
adequate; however, expansion of the Company's business may require additional
administrative offices.
Item 3. Legal Proceedings
The Company is not involved in any material litigation.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders of
the Company during the fourth quarter of the Company's fiscal year. Item 5.
Market of Common Equity and Related Stockholder Matters
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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 June 1998 for the
period indicated. Such prices are inter-dealer prices without retail mark-ups,
mark-downs or commissions and may not represent actual transactions.
QUARTER ENDED HIGH LOW
June 30, 1998 $0.61 $0.1875
September 30, 1998 $0.22 $0.09
December 31, 1998 $0.11 $0.02
March 31, 1999 $0.11 $0.01
June 30, 1999 $0.36 $.05
September 30, 1999 $0.14 $0.09
December 31, 1999 $0.06 $0.04
March 31, 2000 $0.15 $0.06
June 30, 20000 $0.09 $0.06
Records of the Company's stock transfer agent indicate that as of
September 15, 2000 the Company had 108 record holders of its Common Stock.
The Company has not paid any cash dividends to date, and does not
anticipate or contemplate paying cash dividends in the foreseeable future. It is
the present intention of management to utilize all available funds for working
capital of the Company.
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
This Management's Discussion and Analysis should be read in conjunction
with the Company's Consolidated Financial Statements, including the notes
thereto. This report contains certain forward-looking information which involves
risks and uncertainties. The actual could differ from the results anticipated
herein.
RESULTS OF OPERATIONS
YEAR ENDED JUNE 30, 2000 COMPARED TO YEAR ENDED JUNE 30, 1999.
Net sales for the year ended June 30, 2000 ("2000") increased 8% or
approximately $89,000 from the sales for the year ending June 30, 1999 ("1999").
The entire increase was due to net sales from the Company's Sunset Emporium
which was in its first full year of operations. The Sunset store did $380,000 in
net sales. However, combined net sales for the other two emporiums decreased by
approximately 266,000. The Company believes the decline in net sales for these
two emporiums was reflective of the nationwide trend and the slow down in cigar
retail sales. However, the Company expects sales to increase to their past
performances in Fiscal 2001. However, there can be no assurance that these
expectations will be met.
The cost of sales in 2000, were approximately $792,00 or 63% of sales,
as compared to $623,000, or 53% of sales in 1999.
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Gross profit for 2000, was approximately $475,000 which was equivalent
to approximately 37% of sales as compared to $554,000 which was equivalent to
47% of sales in 1999. This 10% differential in gross margins was due primarily
to the Company's decision to sell cigars which due to internal changes in the
cigar industry, the Company believed no longer had a presence in the market
place. These cigars were sold at or below cost which contributed to the decline
in gross profits. By successfully eliminated this portion of its inventory, the
Company believes that it accomplished two goals. First, it freed up cash to
purchase new inventory which the Company belives to be of better quality and to
be more profitable. Second, the Company maintained its policy of offering only
the finest products with name brand recognition. By making this decision the
Company expects that in the coming fiscal year, it should be able to return to
its past level of gross margins which was in the 45% - 47% range. However, there
is no guarantee that these past levels of gross margins will be met.
Total operating costs in 2000, increased by approximately $334,000 to
approximately $1,394,000 from $1,060,000 for 1999. The major increases were
incurred by the Company were in (1) new store expenses attributable to its new
emporium in the Shops at Sunset ($102,000); (2) general and administrative
expenses ($162,000); (3) depreciation ($52,000) and professional fees ($19,000).
Operating expenses increased by 32% even though the Company had 50%
more stores open in 2000. The increase in general and administrative expenses
(44%) was due to the Company's agressive expansion philosophy in studying
possible new locations, some of which have been announced.
Another significant factor in the increase in total operating expenses
was the depreciation and amortization which was increased by 68%. This was
attributable to the opening of the Sunset store and the capital investment
therein. In 2000, the Company incurred interest expense of approximately
$313,000 as opposed to $38,000 in 1999. This dramatic increase was a non-cash
expense which was due to the amorization of the beneficial interest expense of
the conversion feature of the Company's debentures which were exchanged
subsequently exchanged for preferred stock.
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Additionally, the Company incurred an extraordinary item which was a
loss on the settlement of debt in the amount of $430,000. This one time charge
was another, non-cash item which was as a result of the exchange of the
Company's previously issued debentures for the Company's Series D convertible
preferred stock. At the time of the exchange, the net carrying value of the
debenture was $285,000. However, the value of the preferred stock based upon the
conversion features, was $715,000. The Company has accounted for the transaction
as a settlement of debt and recorded an extraordinary loss of $430,000.
Additionally, the Company reported a beneficial conversion feature of
its preferred stock, in the amount of $386,000. Once again, this was a non-cash
transaction and represents the fact that the preferred shares may be converted
by the holders into common stock at a price which is less than the fair market
price of at the time of issuance.
All of these transactions are significant because the Company's loss
from operations, excluding depreciation and amortization, was approximately
$790,000 in 2000 as opposed to $430,000 in 1999. This is opposed to a net loss
attributable to common stock for 2000 in the amount of $2,031,000 compared to
$517,000 in 1999, which loss includes $1,238,000 of non cash expenses.
YEAR ENDED JUNE 30, 1999 COMPARED TO YEAR ENDED JUNE 30, 1998.
Sales for the year ended June 30, 1999 ("1999") increased 100%
to approximately $1,163,000 from sales for the year ending June 30, 1998
("1998") of approximately $581,000. This increase is attributable mainly the
fact that in 1999, the Company's had two fully operational emporiums.
Cost of sales in 1999 approximately was $625,00 (53%) as
compared to $359,000 (60%) in 1998. The decrease as a percentage of sales was
primarily due to increased promotions in the industry and higher profit margins
resulting from the sale of individual cigars.
Gross profit for 1999 was approximately $554,000 which was
equivalent to 47% of sales, as compared to approximately $236,000 which was
equivalent to 41% of sales in 1998.
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General and administrative expenses for 1999 were
approximately $367,000 (32% of sales) as compared to approximately $499,000 (86%
of sales) in 1998. The decrease in primarily attributable to the reduction of
overhead by the amortization of these costs over the three operating emporiums.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2000, the Company had working capital of
approximately $1,360,000. Since its inception, the Company has continued to
sustain losses. The Company's operations and growth has been funded by the sale
of common stock, Preferred Stock and Convertible Debentures. In fiscal 2000, the
Company raised approximately $900,000 from the sale of Convertible Series C
Preferred Stock. These funds have been used for working capital, capital
expenditures, information systems development and other corporate purposes.
In addition, the Company exchanged debentures for preferred stock.
While this transaction resulted in an extraordinary loss, equity increased by
$285,000.
The Company believes that it has sufficient liquidity to meet
all of its cash requirements for the next 12 months and that subsequent store
and distribution sales will provide sufficient cash flows to meet their
operating needs. The Company believes, however, that additional funding will be
necessary to expand its markets.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time to time, including herein, the Company may publish
"forward-looking" statements within the meaning of Section 27A of the Securities
Act of 1933, as amended and Section 21E of the Securities Exchange Act of 1934,
as amended. Words such as "expects," "anticipates," "intends," "plans,"
"believes," "seeks," "estimates," or variations of such words and similar
expressions are intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve certain risks,
uncertainties and assumptions. Therefore, actual outcomes and results may differ
materially from what is expressed or forecasted in such forward looking
statements. The Company undertakes no obligation to update publicly any forward
looking statements, whether as a result of new information, future events or
otherwise.
For a further description of some of these factors that could
cause actual results to differ materially from such forward-looking statements,
see "Risk Factors" below.
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RISK FACTORS
OPERATING LOSSES
The Company has never been profitable and the ability of the Company to
operate profitability depends on the success of its current emporiums. There can
be no assurance, however, that the Company can become profitable.
ADDITIONAL FINANCING REQUIREMENTS OF THE COMPANY
To open additional emporiums and to continue to develop its brand name
cigars, the Company will require additional funding. No assurance can be given
that additional funds will be available to open additional emporiums.
GOVERNMENT REGULATION
The tobacco industry in general has been subject to regulation by
Federal, state and local governments, and recent trends have been toward
increased regulation. Such regulations include labeling requirements,
limitations on advertising and prohibition of sales to minors, laws restricting
smoking from both public places and in offices, office buildings and restaurants
and other eating establishments. Certain states have required cigar vendors to
label cigars with health warnings. In addition, cigars have been subject to
excise taxation at the Federal, state and local level, and such taxation may
increase in the future. Tobacco products are especially likely to be subject to
increases in excise taxation because of the detrimental effects of tobacco on
the health of both smokers and others who inhale secondary smoke. No assurance
can be given that future regulations, tax policies or tobacco litigation will
not have a material adverse affect upon the ability of cigar companies,
including the Company, to generate revenue and profits.
TOBACCO INDUSTRY RISKS
During the past decades the tobacco industry has been the subject of
advertising and public service campaigns against smoking in general.
Furthermore, most states and many individuals have brought lawsuits against
tobacco and cigarette companies for damages resulting from cancer caused by
smoking. Although the Company was organized in 1996 and all of its cigars have
been sold after both the risks of smoking and the addictive nature of nicotine
are generally known, no assurance can be given that the Company will not be
adversely affected by such factors.
COMPETITION
The tobacco industry very competitive and is generally dominated by a
few companies which are well known to the public. In addition, the Company
competes with certain domestic and foreign companies that specialize in premium
cigars and certain larger companies that maintain premium cigar lines, including
Consolidated Cigar Company, Davidoff, Lane Ltd., and General Cigar Company.
Further, the Company's emporiums compete with other retail cigar stores in the
South Florida area, as well as liquor stores, supermarkets and convenience
stores. The Company's success depends upon the size and quality of its
emporiums' inventory, the maintenance of such inventory, the size and quality of
the inventory of cigar accessories, such as humidors, cigar cutters, cigar
cases, lighters, ashtrays, etc., and the quality of its employees, particularly
their knowledge of the inventory and attitude. No assurance can be given as to
the ability of the Company to compete successfully in any market in which it
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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 the Tabinica 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.
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 three year
employment agreements with Mr. Schatzman and Mr. Gimelstein terminating in 2003.
The loss of the services of Mr. Schatzman or Mr. Gimelstein would have a
material adverse effect upon the Company's business and prospects.
NICARAGUAN FACTORY AND DISTRIBUTION
The Company purchased for $50,000 a 50% interest in Tabanica, a
Nicaraguan corporation, which owns a manufacturing facility in Jalapa,
Nicaragua. The Company has the right to purchase cigars from Tabanica at cost
plus 50% (after being fully credited for its deposit for inventory purchases)
through October 31, 2001. The Company believes that this arrangement will
provide it with a continuous source of premium cigars and an ability to develop
its own private label brand cigars. However, the operation of manufacturing
facilities outside of the United States, especially in less developed countries
such as Nicaragua, is subject to numerous risks, including political and
currency instability, currency controls and exchange regulations, and import and
export regulations, any of which could have a material adverse effect upon the
Company's cigar supply. Therefore it is not possible to predict whether the
Company's investment in and agreement with Tabanica will result in a stable and
long-term supply of premium cigars.
LIMITED INSURANCE COVERAGE
Although the Company carries general liability insurance with an
aggregate limit of $2,000,000, it has no health hazard policy. There can be no
assurance that the Company will not be subject to liability which is not covered
by its general liability insurance, and such liability could have a material
adverse effect upon its business.
Item 7. Financial Statements
See the Financial Statements of the Company which are attached hereto.
14
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Effective June 20, 2000, the Registrant's dismissed Butner and Kahle,
CPA, PA as its certifying accountants. Immediately thereafter, the Company's
Board of Directors recommended and approved the retaining of Goldstein, Golub
Kessler, LLP as the Company's new certifying accountants. The former principal
account's statements of the past two years did not contain an adverse opinion or
disclaimer of opinion, nor was it modified as to uncertainty, audit scope, or
accounting principles. There were no disagreements with the former accountant on
any matters of accounting principles or practices, financial statement
disclosure, or auditing scope or procedures.
Item 9. Directors, Executive Officers, Promoters, Control Persons;
Compliance with Section 16(a) of the Exchange Act
The present members of the Board of Directors, all executive
officers, their ages and positions with the Company are set forth below:
NAMES AGE POSITION
----- --- --------
Stephen Schatzman 48 President, Secretary and Director
Alex Gimelstein 48 Vice President, Treasurer and Director
Stephen Schatzman has been President, Secretary and Director of the Company
since inception. From 1972 to 1990, he was the General Manager of Superior
Stores, a six-store chain of 30,000 square foot, high volume discount drug
stores. From 1990 to 1996, he was President of Villa Deli, a 160-seat restaurant
on Miami Beach. Mr. Schatzman devotes his full time to the Company. He is
responsible for purchasing for all locations, inventory, warehousing, and
developing and implementing merchandising and other Company policies, and for
all day to day operations.
Alex Gimelstein has been Vice President, Treasurer and Director of the
Company since inception. He is also Vice President of Zelick's Tobacco Corp. on
Miami Beach for over 25 years. Zelick's is a retail and wholesale tobacco and
sundries operation owned by Mr. Gimelstein's family. Mr. Gimelstein has also had
extensive experience in the tobacco industry, having owned and operated several
cigar factories in foreign countries. Mr. Gimelstein devotes approximately half
of his working time to the Company. He is responsible for the procurement of
cigars, the development of a distribution network and the Company's relationship
with Tabanica.
The officers of the Company are elected by the Board of Directors to serve
until their successors are elected and qualified. The directors of the Company
are elected at the annual meeting of the stockholders. The By-laws provide for a
Board of Directors to be comprised of between two and seven persons.
15
<PAGE>
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.
Effective January 1, 2000, 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, 2003, provide for
initial annual base salaries of $150,000 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.
ITEM 10. Executive Compensation
The following table shows, for the period ended June 30, 2000, the cash
and other compensation paid to each of the executive officers of the Company.
ANNUAL COMPENSATION
NAME AND OTHER
POSITION HELD YEAR SALARY BONUS COMPENSATION RESTRICTED
Steven Schatzman 2000 $115,000 -0- -0- 1,750,000(1)
President, Secretary
Alex Gimelstein 2000 $115,000 -0- -0- 1,750,000(1)
Vice President,
Treasurer
(1) Mr. Schatzman and Alex Gimelstein each have the option to purchase up to
1,750,000 shares of the Company's restricted common stock at the then market
price of $0.06 per share. As of this date, no options have been exercised.
16
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information relating to the beneficial
ownership of Company Common Stock as of September 20, 2000 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.
SHARES OF PERCENTAGE
NAME COMMON STOCK OWNED
Stephen Schatzman 2,835,500(1)(2) 10%
2101 N.E. 212th Street
Miami, Florida 33179
Alex Gimelstein 2,835,500(1)(3) 10%
21160 N.E. 22nd Court
Miami, Florida 33179
All Directors and Executive Officers
as a Group (2 persons) 5,671,000 20%
(1) Does not include 100,000 shares of the Company's Series B Preferred Stock
each owned by Messrs. Schatzman and Gimelstein. Each share of Series B Preferred
Stock is entitled to 400 votes per share. As a result of this issuance, Messrs.
Schatzman and Gimelstein have the right to vote what is equivalent to an
additional 80,000,000 shares of common stock.
(2) Includes 200,000 shares of Common Stock held by Mr. Schatzman as custodian
for his minor children, as to which shares he disclaims any beneficial interest;
includes options to purchase 135,000 shares.
(3) Includes 100,000 shares of Common Stock held by Mr. Gimelstein's adult son
and 150,000 shares of Common Stock held by Mr. Gimelstein as custodian for his
three minor children, as to all of which shares Mr. Gimelstein disclaims any
beneficial interest; includes options to purchase 135,000 shares.
Item 12. Certain Relationships and Related Transactions
Not Applicable.
17
<PAGE>
Item 13. Exhibits and Reports on Form 8-K.
2.1 Plan of Merger dated November 6, 1997*
2.2 Articles of Merger*
3.1 Amended and Restated Articles of Incorporation*
3.2 By-Laws*
4.1 Certificate of Designation/Class A Convertible Preferred Stock*
10.1 Employment Agreement with Stephen Schatzman*
10.2 Employment Agreement with Alex Gimelstein*
10.3 Lease/Weston*
10.4 Lease/Fort Lauderdale*
10.5 Amended and Restated Contract for Sale of Tobacco and Cigars*
10.8 Form of Indemnification Agreement with directors*
10.9 Lease by and between Bakery Associates, Ltd., a Florida
limited partnership and Havana Republic Sunsetplace, Inc.
December 8, 1997*
27 Financial Data Schedule
8-K filed with the Securities and Exchange Commission on Jul 7, 2000**
* Incorporated herein by reference to Form SB-2 under the Securities Act of 1933
filed with the Commission under file number 333-40799
**Incorporated herein by reference
**
Subsidiaries of the Company:
Havana Republic W.H., Inc. (Florida)
Havana Republic Brickell Station, Inc. (Florida)
Havana Republic Sunset Place, Inc.
18
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
THE HAVANA REPUBLIC, INC.
(Registrant)
By: /S/ STEVEN SCHATZMAN
-------------------------------------
Steven Schatzman, President
Date: September 20, 2000
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant and the capacities on the dates
indicated:
SIGNATURE TITLE DATE
/S/ STEVEN SCHATZMAN Director, President 9/20/00
-------------------- Chief Executive Officer
Steven Schatzman
/S/ALEX GIMELSTEIN Director, Vice President 9/20/00
------------------
Alex Gimelstein
19
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended June 30, 2000
CONTENTS
Page
Reports of Independent Certified Public Accountants ........................ 2-3
Financial Statements:
Consolidated Balance Sheet ................................................. 4
Consolidated Statements of Operations ...................................... 5
Consolidated Statements of Changes in Shareholders' Equity ................. 6
Consolidated Statements of Cash Flows ...................................... 7
Notes to Consolidated Financial Statements .................................8-17
-1-
<PAGE>
To the Board of Directors
The Havana Republic, Inc. and Subsidiaries
Weston, Florida
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated balance sheet of The Havana
Republic, Inc. (a Colorado corporation) and Subsidiaries as of June 30, 2000 and
the related consolidated statements of operations, changes in shareholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Havana Republic, Inc. and
Subsidiaries as of June 30, 2000, and the results of their operations and their
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
GOLDSTEIN GOLUB KESSLER LLP
New York, New York
August 14, 2000
-2-
<PAGE>
To the Board of Directors
The Havana Republic, Inc. and Subsidiaries
Weston, Florida
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We have audited the accompanying consolidated statements of operations, changes
in shareholders' equity, and cash flows of The Havana Republic, Inc. (a Colorado
corporation) for the year ended June 30, 1999. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the 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 audit provides a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated results of operations and
cash flows of The Havana Republic, Inc. and Subsidiaries for the year ended June
30, 1999, in conformity with generally accepted accounting principles.
Butner & Kahle, CPAs, P.A.
West Palm Beach, Florida
September 22, 1999
-3-
<PAGE>
<TABLE>
<CAPTION>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
CURRENT ASSETS:
<S> <C>
Cash $ 995,017
Accounts Receivable 15,680
Inventory 635,209
Deposits on Inventory Purchases 150,000
-----------
Total Current Assets 1,795,906
-----------
PROPERTY AND EQUIPMENT, at Cost (Net of Accumulated
Depreciation and
Amortization of $256,537) 716,728
-----------
OTHER ASSETS:
Other 8,117
Deposits on Inventory Purchases 347,675
Deferred Income Tax Asset, Net of Valuation
Allowance of $867,000 --
Investments in 50% Owned Factory 50,000
-----------
Total Other Assets 405,792
-----------
Total Assets $2,918,426
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts Payable and Accrued Expenses $435,440
-----------
Total Current Liabilities 435,440
-----------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Preferred Stock, No Par Value,
Authorized 5,000,000 Shares;
Convertible Preferred Stock-Series A,
Authorized 2,500 Shares: 349 shares issued
and outstanding (Aggregate Liquidation
Preference of $471,150) 483,906
Preferred Stock-Series B, Authorized 500,000 Shares:
200,000 shares issued and outstanding
(Aggregate Liquidation Preference of $100,000) 40,000
Convertible Preferred Stock-Series C,
Authorized 100 Shares: 90 shares issued
and outstanding (Aggregate Liquidation
Preference $900,000) 900,000
Convertible Preferred Stock-Series D,
Authorized 50 Shares: 50 shares issued
and outstanding (Aggregate Liquidation
Preference $500,000) 500,000
Common Stock, No Par Value, Authorized
200,000,000 Shares; issued and outstanding
34,901,073 shares and Additional Paid-in Capital 4,968,173
Accumulated Deficit (4,272,218)
Subscriptions Receivable (136,875)
-----------
Total Shareholders' Equity 2,482,986
-----------
Total Liabilities and Shareholders' Equity $ 2,918,426
===========
</TABLE>
See notes to financial statements.
-4-
<PAGE>
<TABLE>
<CAPTION>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Year Ended
June 30, 2000 June 30, 1999
------------------ --------------
<S> <C> <C>
NET SALES $ 1,266,618 $ 1,177,674
COST OF SALES 792,118 623,458
------------ ------------
GROSS PROFIT 474,500 554,216
------------ ------------
OPERATING EXPENSES:
Store Expenses 614,008 512,123
General and Administrative 527,752 366,780
Depreciation and Amortization 128,858 76,965
Professional Fees 123,046 104,547
------------ ------------
Total Operating Expenses 1,393,664 1,060,415
------------ ------------
LOSS FROM OPERATIONS (919,164) (506,199)
------------ ------------
OTHER INCOME (EXPENSE):
Interest Income 16,336 27,136
Interest Expense (312,683) (38,335)
------------ ------------
(296,347) (11,199)
------------ ------------
LOSS BEFORE EXTRAORDINARY ITEM (1,215,511) (517,398)
EXTRAORDINARY ITEM -
LOSS ON SETTLEMENT OF DEBT (429,513) --
------------ ------------
NET LOSS (1,645,024) (517,398)
BENEFICIAL CONVERSION FEATURE OF PREFERRED
STOCK (385,714) --
------------ ------------
NET LOSS APPLICABLE TO COMMON STOCK $ (2,030,738) $ (517,398)
============ ============
LOSS PER COMMON SHARE - BASIC AND DILUTED:
LOSS BEFORE EXTRAORDINARY ITEM $ (0.05) $ (0.02)
EXTRAORDINARY LOSS $ (0.01) $ --
NET LOSS PER COMMON SHARE $ (0.06) $ (0.02)
WEIGHTED-AVERAGE NUMBER OF SHARES OUTSTANDING-
BASIC AND DILUTED 32,085,011 20,931,505
</TABLE>
See notes to financial statements.
-5-
<PAGE>
<TABLE>
<CAPTION>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
For the Year Ended June 30, 2000 and 1999
Preferred Stock A Preferred Stock B Preferred Stock C
--------------------------------------------------------------------------------
Shares Amount Shares Amount Shares Amount
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE - July 1, 1999 980 $ 1,205,610 50,000 $ 25,000 -- $ --
Conversion of preferred
stock series A (394) (484,704) -- -- -- --
Revaluation of common
stock issued in exchange for
for future services -- -- -- -- -- --
Construction services
rendered for subscriptions
receivable -- -- -- -- -- --
Preferred stock series B
issued to pay accrued salaries -- -- 150,000 15,000 -- --
Common stock issued for
future services -- -- -- -- -- --
Beneficial interest relating
to warrants and convertible
debentures -- -- -- -- -- --
Net loss for the year
ended June 30, 1999 -- -- -- -- -- --
-----------------------------------------------------------------------------------------------
BALANCE - June 30, 1999 586 720,906 200,000 40,000 0 0
Issuance of common stock
for payment of note
payable and interest -- -- -- -- -- --
Cancellation of
subscription receivable -- -- -- -- -- --
Amortization of beneficial
conversion feature of
debenture -- -- -- -- -- --
Issuance of common
stock for services -- -- -- -- -- --
Conversion of preferred stock
to common stock (237) (237,000) -- -- -- --
Issuance of Series C
preferred stock for cash -- -- -- -- 90 900,000
Beneficial conversion feature
of Series C preferred stock -- -- -- -- -- --
Issuance of Series D preferred
stock for settlement of debt -- -- -- -- -- --
Net loss for the year
ended June 30, 2000 -- -- -- -- -- --
-------------------------------------------------------------------------------
BALANCE - June 30, 2000 349 $ 483,906 200,000 $ 40,000 90 $ 900,000
===============================================================================
See notes to financial statements.
Common Stock
and
Additional Paid-in
Preferred Stock D Capital
----------------------------------------------------- Accumulated Subscriptions
Shares Amount Shares Amount Deficit Receivable Total
----------------------------------------------------------------------------------------------------
BALANCE - July 1, 1999 -- $ -- 18,101,066 $ 2,906,510 $(1,724,082) $ (137,630) $ 2,275,408
Conversion of preferred
stock series A -- -- 9,425,627 484,704 -- -- --
Revaluation of common
stock issued in exchange for
for future services -- -- -- (35,000) -- 35,000 --
Construction services
rendered for subscriptions
receivable -- -- -- -- -- 8,255 8,255
Preferred stock series B
issued to pay accrued salaries -- -- -- -- -- -- 15,000
Common stock issued for
future services -- -- 750,000 120,000 -- (120,000) --
Beneficial interest relating
to warrants and convertible
debentures -- -- -- 295,172 -- -- 295,172
Net loss for the year
ended June 30, 1999 -- -- -- -- (517,398) -- (517,398)
-----------------------------------------------------------------------------------------------
BALANCE - June 30, 1999 0 0 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 -- -- 2,400,000 106,218 -- -- 106,218
Cancellation of
subscription receivable -- -- (600,000) -- -- 77,500 77,500
Amortization of beneficial
conversion feature of
debenture -- -- -- 251,283 -- -- 251,283
Issuance of common
stock for services -- -- 273,360 46,572 -- -- 46,572
Conversion of preferred stock
to common stock -- -- 4,551,020 237,000 -- -- --
Issuance of Series C
preferred stock for cash -- -- -- (45,000) -- -- 855,000
Beneficial conversion feature
of Series C preferred stock -- -- -- 385,714 (385,714) -- --
Issuance of Series D preferred
stock for settlement of debt 50 500,000 -- 215,000 -- -- 715,000
Net loss for the year
ended June 30, 2000 -- -- -- -- (1,645,024) -- (1,645,024)
-----------------------------------------------------------------------------------------------
BALANCE - June 30, 2000 50 $ 500,000 34,901,073 $ 4,968,173 $(4,272,218) $ (136,875) $ 2,482,986
================================================================================================
</TABLE>
See notes to financial statements.
-6-
<PAGE>
<TABLE>
<CAPTION>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Year Ended
June 30, 2000 June 30, 1999
------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C>
Net Loss $(1,645,024) $ (517,398)
Adjustments to Reconcile Net Loss to
Net Cash Used in Operating Activities:
Depreciation and Amortization 128,858 74,634
Common Stock Issued in Exchange for Services 46,572 --
Amortization of Beneficial Conversion
Feature on Debentures and Notes 312,671 19,270
Loss on Settlement of Debt 429,513 --
(Increase) Decrease in:
Accounts Receivable (9,720) (4,379)
Inventory 140,153 (1,949)
Prepaid Expenses and Other -- 40,257
Deposits on Inventory Purchases 18,925 100,100
Other 30 2,331
Increase (Decrease) in:
Accounts Payable and Accrued Expenses (22,049) 232,882
----------- -----------
Net Cash (Used in) Operating Activities (600,071) (54,252)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Refund on Leasehold Improvements Expenditures 73,640 --
Acquisition of Property and Equipment (8,702) (533,374)
----------- -----------
Net Cash Provided by (Used in)
Investing Activities 64,938 (533,374)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Proceeds from Issuance of Preferred Stock 855,000 --
Repayment of Note Borrowings (30,000) --
Proceeds from Issuance of Debentures -- 500,000
----------- -----------
Net Cash Provided by Financing Activities 825,000 500,000
----------- -----------
Net Increase (Decrease) in Cash 289,867 (87,626)
Cash - Beginning of Year 705,150 792,776
----------- -----------
Cash - End of Year $ 995,017 $ 705,150
=========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid during the Year for Interest $- $-
=========== ===========
NONCASH INVESTING AND FINANCING ACTIVITIES:
Issuance of Common Stock for Services $- $ 85,000
=========== ===========
Issuance of Common Stock in Repayment of Debt $ 106,218 $-
=========== ===========
Issuance of Preferred Stock-Series B for Services $- $ 15,000
=========== ===========
Costs Related to Preferred Stock $ 45,000 $-
=========== ===========
Amortization of Beneficial Conversion Feature
of Debentures $ 385,714 $ 295,172
=========== ===========
Conversion of Preferred Stock
to Common Stock $ 237,000 $ 484,704
=========== ===========
Construction Services Rendered for
Subscription Receivable $- $ 8,255
=========== ===========
Issuance of Preferred Stock Series D upon
Settlement of Debt $ 500,000 $-
=========== ===========
Cancellation of Subscriptions Receivable $ 77,500 $-
=========== ===========
</TABLE>
See notes to financial statements.
-7-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Year Ended June 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION, CAPITALIZATION AND REVERSE ACQUISITION
On June 17, 1996 all of the issued and outstanding stock of The Havana Republic,
Inc. ("Florida") was exchanged for 5,500,000 shares of common stock of The
Havana Republic, Inc., ("Colorado"), (hereinafter referred to collectively as
the "Company"). As a result of the exchange of stock, the former stockholders of
Florida owned approximately 79% of the outstanding common stock of the Company.
Accordingly, this transaction had been treated, for financial reporting
purposes, as a reverse acquisition in which Florida was recapitalized by
providing 5,500,000 shares of Colorado to its existing stockholders. The
1,574,000 shares held by Colorado 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, Colorado 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 has developed its own brand name cigar for sale to the
wholesale and retail markets.
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.
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.
-8-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
CONCENTRATIONS OF CREDIT RISK
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash. The Company places its cash in money
market funds with high credit quality institutions. As of June 30, 2000, the
Company had $976,156 in one financial institution with the excess over $100,000
not covered by FDIC insurance and which, therefore, did not limit the Company's
amount of credit risk. The Company has not experienced any losses in such
account and believes that it is not exposed to any significant credit risk on
the account.
INVENTORY
Inventory consisting principally of cigars and accessories, is valued at the
lower of cost (first-in, first-out) or market.
DEPOSITS ON INVENTORY PURCHASES
Deposits on inventory purchases consist of payments to the Company's 50% owned
affiliate in Nicaragua to secure the purchase of cigar inventory. All
transactions are in U.S. dollars. During the year ended June 30, 2000, the
Company received approximately 18,925 cigars for $18,925. As of June 30, 2000,
the Company has deposits on inventory purchases amounting to $497,675. The
Company expects shipments of cigars to significantly increase in fiscal 2001 and
expects to recover some of this amount through the sale of tobacco. Due to the
uncertainty in the timing of the recovery, the Company has estimated that
$150,000 will be recovered in the succeeding fiscal year. However, a deposit on
inventory purchases 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 deposit.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization is
provided for 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.
-9-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities or a
change in tax rate is recognized in income in the period that includes the
enactment date. Deferred tax assets are reduced to estimated amounts to be
realized by use of a valuation allowance.
The principal types of temporary differences between assets and liabilities for
financial statement and tax return purposes are net operating loss
carryforwards.
LOSS PER COMMON SHARE
Basic loss per share is computed by dividing net loss, 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 loss by the weighted average number of shares
of common stock and potentially dilutive securities outstanding during each
period. Potentially dilutive securities have not been included in the
computation of diluted loss per share because it would be antidilutive. For the
year ended June 30, 2000, net loss has been adjusted for deemed dividends on the
convertible preferred stock and the effect of beneficial conversion features of
preferred stock amounting to $385,714 to arrive at net loss available to common
shareholders.
REVENUE RECOGNITION
Revenues from product sales are recognized when the customer purchases the
product at the retail location or when products are shipped.
RECENT ACCOUNTING PRONOUNCEMENTS
Management does not believe that any recently issued, but not yet effective,
accounting standards if currently adopted would have a material effect on the
accompanying financial statements.
NOTE 2 - 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 Company has the right to
purchase cigars from the factory at cost plus 50% through October 31, 2001.
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. 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.
-10-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment at June 30, 2000 consists of the following:
Depreciation/
Amortization
Period
------------
Computers and software $ 13,921 5 years
Furniture and fixtures 169,323 5-7 years
Office equipment 61,690 5-7 years
Leasehold improvements 728,331 Term of Lease
---------
973,265
Accumulated depreciation (256,537)
---------
$ 716,728
=========
Depreciation and amortization expense amounted to $126,527 and $74,634 for the
years ended June 30, 2000 and 1999, respectively.
NOTE 4 - INVENTORY
Inventory at June 30, 2000 consists of the following:
Cigars $ 320,626
Accessories 314,583
---------
$ 635,209
=========
NOTE 5 - INCOME TAXES
As of June 30, 2000, the Company had deferred tax assets of approximately
$867,000 resulting from net operating loss carryforwards of approximately
$2,500,000 which are available to offset future taxable income, if any, through
2021. As utilization of the net operating loss carryforwards is not assured, the
deferred tax asset has been fully reserved through the recording of a 100%
valuation allowance.
As of June 30, 2000, the components of the net deferred tax asset are as
follows:
Deferred Tax Assets:
Net operating loss carryforward $ 867,000
Valuation allowance (867,000)
---------
Net deferred tax $ --
=========
The reconciliation of the effective income tax rate to the federal statutory
rate for the year ended June 30, 2000 is as follows:
Federal income tax rate (34.0)%
Valuation allowance on net operating carryforwards 34.0 %
-----
Effective income tax rate 0 %
=====
-11-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 6 - COMMITMENTS
OPERATING LEASES
The Company has operating leases for store facilities expiring through 2002 to
2009. The lease agreements require the Company to pay real estate taxes,
maintenance and other operating expenses associated with the space leased and
are personally guaranteed by the officers of the Company. 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, 2000 and 1999 amounted to
$279,901 and $185,242, respectively.
Approximate future minimum rental commitments as of June 30, 2000 are as
follows:
2001 $ 154,000
2002 182,000
2003 156,000
2004 84,000
2005 84,000
Thereafter 356,000
----------
$1,016,000
==========
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with two officers of the
Company. The terms of the two employment agreements, which expire on December
31, 2003, provide for initial annual base salary of $150,000 plus annual
increases of 10% of the previous year's compensation with additional increases,
bonuses and compensation to be decided by the Board of Directors. Included in
accounts payable and accrued expenses at June 30, 2000 is $70,000 due these
officers and under these agreements.
NOTE 7 - STOCKHOLDERS' EQUITY
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 stockholders, 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.
(a) 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 by the Company at a price of $1,350
per share upon notice of conversion, and have a liquidation preference
of $1,350 per share.
-12-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
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 at an exercise price of $2.88 per common
share. As of June 30, 2000, these options are still outstanding. For
the years ended June 30, 1999 and 2000, Series A Preferred
Shareholders converted 394 preferred shares into 9,425,627 shares of
common stock and 237 preferred shares into 4,551,020 shares of common
stock. As of June 30, 2000, the remaining 349 shares of Series A
Preferred Stock may be converted, at the holder's option, into shares
of common stock.
(b) On April 2, 1998, the Board of Directors of the Company created a
series of preferred stock consisting of 500,000 shares, as amended in
May 2000, and designated it as the Series B Convertible Preferred
Stock - no par value. The Series B Preferred Stock shall be entitled
to 400 votes per share, is not redeemable, and has no conversion
rights. The holders of Series B Preferred stock have a liquidation
preference of $.50 per share. In consideration of two officers of the
Company forgiving an aggregate of $40,000 due them, the Company issued
100,000 shares of Series B Preferred Stock during 1998 and 1999.
(c) In May 2000 the Board of Directors of the Company created a series of
preferred stock consisting of 100 shares and designated as the Series
C Convertible Preferred Stock - no par value. The holders of the
Series C Convertible Preferred Stock shall be entitled to receive, out
of funds legally available for such purpose, cash dividends at the
rate of $400 per share per annum. In the event of any liquidation,
dissolution, or winding up of the Company, whether voluntary or
involuntary, the Series C Convertible Preferred Stock shall be
entitled to receive an amount equal to $10,000 per share.
Each share of Series C Convertible Preferred Stock shall be
convertible, at the option of its holder, at any time, into a number
of shares of common stock of the Company, subject to the number of
shares of common stock equal to $10,000, divided by the lower of (i)
Seventy Percent (70%) of the average Bid Price of the Common Stock for
the five trading days immediately prior to the Conversion Date or (ii)
$0.07, increased proportionally for any reverse stock split and
decreased proportionally for any forward stock split or stock
dividend.
In May 2000, the Company issued 90 shares in exchange for $900,000 in
cash less costs of $45,000.
At the time of issuance, the Series C Convertible Preferred Stock was
convertible at prices below the market value of the underlying common
stock. The beneficial conversion feature represented by the intrinsic
value is calculated as the difference between the conversion price and
the market price of the underlying common stock multiplied by the
number of shares to be issued from the conversion. The beneficial
conversion feature is recognized as a return to the preferred
stockholders. At June 30, 2000, the beneficial conversion feature
amounted to $385,714.
-13-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
(d) 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 had valued the warrants and allocated $228,000 of the
proceeds to the debt and approximately $272,000 to the warrants. The
$272,000 discount on the debt was being amortized as interest over the
three-year term of the debentures.
The debentures were 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 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 was
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 were credited to capital
stock.
In May 2000, the Company exchanged these debentures into a newly
created Series D Convertible Preferred Stock consisting of 50 shares.
The holders of the Series D Convertible Preferred Stock shall be
entitled to receive, out of funds legally available for such purpose,
cash dividends at the rate of $800 per share per annum. Such dividends
shall be cumulative and shall accrue, whether or not earned or
declared, from and after the date of issue of the shares. In the event
of any liquidation, dissolution or winding up of the Company, whether
voluntary or involuntary, the Series D Convertible Preferred Stock
shall be entitled to receive an amount equal to $10,000 per share or
an aggregate of $500,000.
Each share of Series D Convertible Preferred Stock shall be
convertible, at the option of its holder, at any time, into a number
of shares of common stock of the Company. The initial Conversion Rate
shall be a number of shares of Common Stock equal to $10,000, divided
by Seventy Percent (70%) of the average Bid Price of the Common Stock
for the five trading days immediately prior to the Conversion Date.
Accordingly, there is a beneficial conversion feature of this security
of $215,000.
As a result of the exchange of the debentures for the Series D
Convertible Preferred Stock, the net carrying value of the debentures
at the time of the exchange inthe amount of $285,487 ($500,000 face
value of the debentures less the unamortized discount at exchange of
$214,513) was deemed to be settled for the fair value of the Series D
Convertible Preferred Stock. The fair value of this Preferred Stock is
based on the conversion feature which will provide upon conversion
shares having an aggregate quoted market value of $715,000.
Accordingly, the Company has accounted for the transaction as a
settlement of debt and recorded an extraordinary loss of $429,513.
-14-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
COMMON STOCK
In May 2000, the Company increased its authorized shares to 200,000,000 shares
of common stock, no par value.
In August 1999, the Company settled a note payable of approximately $200,000 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. The fair value of the shares and cash
approximated the note payable, accordingly, no gain or loss was recognized.
On April 14, 1999, two officers were granted options to acquire 1,000,000 shares
of the Company's common stock at an exercise price of $.06 per share. These
options were cancelled.
On January 6, 2000, two officers were granted options to acquire 3,500,000
shares of the Company's common stock at an exercise price of $.06 per share. The
options are exercisable commencing January 6, 2000 for a period of five years.
A summary of the status of the Company's stock options as of June 30, 2000 and
1999, and changes during the years then ended is presented below:
June 30 2000 1999
--------------------------------------------------------------------------------
Weighted- Weighted-
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
--------------------------------------------------------------------------------
Outstanding at beginning of year 1,000,000 $.06 1,000,000 .06
Granted 3,500,000 .06
Canceled (1,000,000) .06
--------------------------------------------------------------------------------
Outstanding at end of year 3,500,000 $.06 1,000,000 $ .06
================================================================================
Options exercisable ay year-end 3,500,000 $.06 1,000,000 $ .06
================================================================================
Weighted-average fair
value of options granted
during the year $ 188,650 --
================================================================================
-15-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
The following table summarizes information about fixed stock options outstanding
at June 30, 2000:
Options Outstanding Options Exercisable
--------------------------------------------------------------------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------
$.06 3,500,000 5 years $.06 3,500,000 $.06
================================================================================
Had compensation expense for the Company's stock option plans been determined
based on the fair value of the underlying common stock at the grant dates,
consistent with Statement of Financial Accounting Standards No. 123, Accounting
for Stock Based Compensation, the Company's net loss applicable to common
shareholders and the loss per common share would have been as follows:
Fiscal Year Ended Fiscal Year Ended
June 30,2000 June 30, 1999
------------ -------------
Net loss applicable to common stock:
As reported $ (2,030,738) $ (517,398)
Pro forma $ (2,219,388) $ (575,698)
Loss per common share:
As reported $ (.06) $ (.02)
Pro forma $ (.07) $ (.03)
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for the years ended June 30, 1999 and 2000. For the year ended
June 30, 1999 the assumptions were risk-free interest rate of 4.5%, dividend
yield of 0%, volatility factor of the expected market price of the Company's
common stock of 197%, and an expected life of the option of five years. For the
year ended June 30, 2000 the assumptions were risk-free interest rate of
7.0%, dividend yield of 0%, volatility factor of the expected market price of
the Company's common stock of 138%, and an expected life of the option of five
years.
-16-
<PAGE>
THE HAVANA REPUBLIC, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Year Ended June 30, 2000
NOTE 7 - STOCKHOLDERS' EQUITY (Continued)
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option pricing models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's employee stock options have characteristics significantly
different from those of traded options and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion the existing models do not necessarily provide a reliable single measure
of the fair value of its employee stock options.
In November 1999 and December 1999, the Company issued 195,360 shares and 78,000
shares, respectively, for consulting and public relations services.
Approximately $46,000 was charged to operations based on the respective fair
values on the dates of these transactions.
NOTE 8 - RISK AND UNCERTAINTY
Although the Company carries general liability insurance, 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.
-17-
<PAGE>
