May 12, 1999
HAVANA REPUBLIC INC/FL (HVAR)
Quarterly Report (SEC form 10QSB)
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
NINE MONTHS ENDED MARCH 31, 1999 COMPARED TO NINE MONTHS ENDED MARCH 31, 1998
Net sales for the nine months ended March 31, 1999 were $901,000, an increase of 93% as compared to sales for the nine months ended March 31, 1998 which were $466,000. This increase of $435,000 is attributable primarily to the fact that for the nine months ended March 31, 1998, the Company only had one emporium operational. The Company's new Las Olas store accounted for $558,000 of sales for the nine months. Cost of sales was $449,000 or 50% of sales for the nine months ended March 31, 1999 as compared to $268,000 or 58% of sales for the nine months ended March 31, 1998. This decrease as a percentage of sales was primarily a result of a decrease in cigar costs in relation to the sales volume. The costs declined as more product became available and with the Company's increased buying power.
Gross profit was $453,000 or 50% of sales for the nine months ended March 31, 1999 as compared to gross profit of $198,000 or 42% of sales for the nine months ended March 31, 1998. The increase in the gross profit is due to the new emporium on Las Olas and maintaining premium prices at this new emporium and improved purchasing power.
Store expenses, which include marketing and advertising expenses, depreciation, rent and salary costs, were $382,000 or 43% of sales for the nine months ended March 31, 1999 as compared to $237,000 or 51% of sales for the nine months ended March 31, 1998. The percentage decrease in store expenses in relationship to sales is primarily attributed to the fact that the Company opened its second store during June 1998 and has implemented operating efficiencies in payroll and other costs reducing store operating costs to an average of $191,000 per store for the nine months as compared to the operation of one store in 1998 with costs of $237,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (continued)
General and administrative expenses, which includes administrative salaries, travel and entertainment, insurance and other expenses, were $234,000 or 26% of sales for the nine months ended March 31, 1999 as compared to $431,000 or 92% of sales for the nine months ended March 31, 1998. The decrease in relation to sales is primarily attributable to the reduction of promotional costs and implementing operational efficiencies.
Other income includes an increase in interest income on funds received in a private offering and proceeds of approximately $50,000 from the settlement of a dispute relating to delays in opening the Company's Las Olas emporium.
As a result of the foregoing factors, the Company incurred losses of approximately $216,000 or ($.01) per share for the nine months ended March 31, 1999 as compared to a loss of approximately $593,000 or ($.13) per share for the nine month period ended March 31, 1998. The per share less in 1998 includes $.07 attributable to preferred stock dividends on beneficial conversions.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THREE MONTHS ENDED
MARCH 31, 1998
Net sales for the three months ended March 31, 1999 were $318,000, an increase of 154% as compared to sales for the three months ended March 31, 1998 which were $125,000. This increase of $193,000 is attributable primarily to the fact that for the three months ended March 31, 1998, the Company only had one emporium operational. The Company's new store accounted for a $225,000 increase offset by a reduction of approximately $32,000 in the Company's Weston store.
Gross profit was $157,000 or 49% of sales for the three months ended March 31, 1999 as compared to gross profit of $64,000 or 51% of sales for the three months ended March 31, 1998.
Store expenses, which include marketing and advertising expenses, depreciation, rent and salary costs, were $131,000 or 41% of sales for the three months ended March 31, 1999 compared to $51,000 or 41% of sales in 1998.
General and administrative costs decreased by approximately $73,000 in 1999 compared to the previous quarter previously due to Company promotional costs incurred in developing the Company in the marketplace and operational efficiencies.
Other income includes an increase in interest income on funds received in a private offering and proceeds of approximately $50,000 from the settlement of a dispute relating to delays in opening the Company's Las Olas emporium.
As a result of the foregoing factors, the Company sustained losses of approximately $20,000 or ($.00) per share for the three months ended March 31, 1999 as compared to a loss of approximately $160,000 or ($.09) per share for the three month period ended March 31, 1998. The per share loss in 1998 includes $.07 attributable to preferred stock dividends.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had working capital of approximately $858,000. Since its inception, it has incurred losses of approximately $1,940,000. The Company's operations and growth has been funded by loans from third parties, the sale of common stock 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,
In April of 1996, the Company entered into an agreement with Tabanica, the 50% owned factory, for future purchases of premium cigars and has paid $617,000. The Company anticipated receiving the premium cigars in monthly shipments of 50,000 commencing in January 1998. As of March 31, 1999, the Company has not received many of these cigars. The initial reason for the delay was the Company's dispute with Banana Republic. The company is in the process of resolving this dispute and anticipates the costs will not be material and that shipments of cigars from Tabanica will commenced in March, 1999. The Company's future commitment of capital resources to the distribution of its brand name cigars will be largely dependent upon market acceptance of these cigars.
Around July 1, 1998, the Company opened its second emporium in the Las Olas Riverfront in Fort Lauderdale, Florida. The Company anticipates that it will open its third and largest emporium at the Shops of Sunset Place in the central business district of South Miami, Florida on June 1, 1999. Leasehold improvements for the Sunset Place emporium are expected to cost approximately $400,000 to $500,000. The Company is also constructing a fully interactive E commerce site which will be operational in June, 1999.
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 and grow its regional market share. 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.
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