U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
Commission file number 0-32137
Alec Bradley Cigar Corporation
------------------------------
(Name of Small Business Issuer in its Charter)
Florida 65-0701352
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1750 N.W. 65th Avenue, Plantation, Florida 33313
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(Address of Principal Executive Offices) (Zip Code)
(954) 321-5991
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(Issuer's Telephone Number)
Securities registered under Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
------------------- -----------------------------------------
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, $.0001 par value
------------------------------
(Title of Class)
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 the 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. [X]
State issuer's revenues for its most recent fiscal year. $2,395,274.
State the aggregate market value of the voting stock held by non-affiliates
(1,104,777) computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days ($.10 on March 8, 2004). $110,477.
APPLICABLE ONLY TO CORPORATE REGISTRANTS
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: January 1, 2004: 4,499,777 Shares of
Common Stock.
Transitional Small Business Disclosure Format (Check One):
Yes [ ] No [X]
DOCUMENTS INCORPORATED BY REFERENCE
- None -
TABLE OF CONTENTS
Page
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PART I
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Item 1 Description of Business............................................................ 3
Item 2 Description of Property............................................................ 7
Item 3 Legal Proceedings.................................................................. 8
Item 4 Submissions of Matters to a Vote of Security Holders............................... 8
PART II
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Item 5 Market for Common Equity, Related Stockholder Matters And Small Business Issuer
Purchases of Equity Securities................................................... 8
Item 6 Management's Discussion and Analysis or Plan of Operation.......................... 9
Item 7 Financial Statements............................................................... 12
Item 8 Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure....................................................................... 13
Item 8A Controls and Procedures............................................................ 13
PART III
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Item 9 Directors, Executive Officers, Promoters and Control Persons; Compliance With
Section 16(a) of the Exchange Act................................................ 14
Item 10 Executive Compensation............................................................. 15
Item 11 Security Ownership of Certain Beneficial Owners and Management..................... 15
Item 12 Certain Relationships and Related Transactions..................................... 16
Item 13 Exhibits, Lists and Reports on Form 8-K............................................ 16
Item 14 Principal Accounting Fees and Services............................................. 17
2
PART I
Item 1. Description of Business.
General
Alec Bradley Cigars was organized under the laws of the State of
Florida on July 15, 1996. The Company is an importer and distributor of cigars.
The Company's executive offices are located at 1750 N.W. 65th Avenue,
Plantation, Florida and its telephone number is (954) 321-5991.
Description of Operations
The Company is a cigar importer and distributor. The Company initially
imported and distributed a line of cigars to golf pro shops and country clubs
nationwide under the name "Bogey's Stogies." The Company currently imports and
distributes several cigar lines.
The Company primarily sells to two types of customers:
1. Distributors, including wine and liquor wholesalers; and
2. Retailers, which includes tobacco shops, convenience stores, bars,
restaurants and country clubs.
Background of the Industry
In 1993 the cigar industry began to experience a dramatic increase in
demand from consumers. This created a sizable increase in the number of both
cigar manufacturers and retail tobacconists and distributors. Through the end of
1997, many of the cigar manufacturers were able to sell their entire production.
However, by early 1998, the supply of cigars from the larger manufacturers
exceeded demand from the retail tobacconists and distributors thereby causing
the market to be flooded with cigars. This had an adverse effect on
manufacturers, retailers and distributors. However, Bureau of Alcohol, Tobacco
and Firearms Monthly Statistical Releases show that the industry remains strong.
Recent statistical releases now indicated that cigars are being imported from
foreign manufacturers at increasing levels. These releases can be found at
www.atf.treas.gov.
Company Cigars
Cigars distributed by the Company include, but are not limited to, the
following:
Bogey's Stogies
---------------
Originally marketed towards the golfing industry, Bogey's Stogies are
now sold to both distributors and retailers. Blended to be full bodied, yet
mild, Bogey's Stogies are sold nationwide in tobacco shops, bars and
restaurants, as well as golf courses.
Bogey's Stogies is a premium long-filler, handmade cigar manufactured
in Honduras from a reserve of aged Cuban-seed Dominican Piloto with Mexican and
Nicaraguan ligero leaf. The cigars are made with a Sumatran binder and the cigar
is finished with a gold Ecuadorean Connecticut-shade wrapper.
3
Bogey's Stogies are available in Spanish Cedar hinge-top boxes in the
following sizes: Robusto (50x5), Corona (44x6-1/4), Double Corona (50x6),
Churchill (49x7), and Pyramid (36/54x7).
Trilogy
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Trilogy features the new triangular Trilogy press. Each of the three
blends, Cameroon- Corojo and Maduro, is specifically designed to enhance the
flavor characteristics of the wrapper. Trilogy is available in boxes of 20
cigars.
Trilogy Ovation
---------------
Like Trilogy, our Trilogy Ovation offers a choice of Cameroon, Corojo
and Maduro wrappers. Each blend is a bold version of our original Trilogy and is
available in 2 sizes, with a 54 ring in lengths of 5 1/4 and 6 1/2. Trilogy
Ovation is available in a lacquered humidor box of 20 cigars.
Special Blends
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Special Blends is a hand made cigar from the Dominican Republic.
Special Blends are packaged in bundles of 25 and wood bulk packages of 100
cigars. This cigar retails from $1.50 to $2.50 per cigar.
Spirit of Cuba
--------------
Spirit of Cuba is hand made in Honduras. This sandwich filler cigar is
priced at a retail level of under $35.00 a box. It is available in Churchill and
Robusto sizes in boxes of 25.
Criollo '98
-----------
Criollo '98 uses a first generation Criollo wrapper which was grown in
Jalapa, Nicaragua in 1999. The technique of tubular construction and a triple
capped head is used in the manufacture of this cigar. A filete style box of 25
and cedar sheet accompanies this traditional style selection.
Occidental Reserve
------------------
Occidental Reserve is a premium cigar manufactured by one of the top
producers of premium cigars in the Dominican Republic. The Occidental Reserve is
produced with filler from the Dominican Republic and is finished with a US
Connecticut wrapper. This Cigar directly competes in quality with cigars that
are priced higher than the retail cost of the Occidental Reserve. It is
available in 5 of the most popular sizes: (Corona, Robusto, Toro, Churchill and
Torpedo) and is sold in bundles of 25.
Havana Sun Grown
----------------
Havana Sun Grown is an ultra premium cigar hand rolled in the Dominican
Republic. This cigar is a medium to full bodied cigar with complex flavor
profiles. Its wrapper is a US Connecticut - Havana hybrid. The Havana Sun Grown
is available in the 5 popular sizes and is sold in boxes of 20.
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Gourmet Dessert Cigars
----------------------
Management of the Company maintains that today's cigar market continues
its trend toward the popularity of flavored cigars. The Gourmet Dessert flavored
cigars, which contain high-end, sandwich filler product, are enhanced with
natural and artificial FDA approved flavorings. The flavoring is processed into
the tobacco before it is hand-rolled. Flavors include Chocolate, Vanilla, Rum,
Cherry and Amaretto. Marketing efforts focus on the new generation of cigars
smokers, which includes female cigar enthusiasts.
Purchasing and Distribution
The Company purchases and imports the majority of its cigars from cigar
manufacturing plants in Honduras and the Dominican Republic.
Occidental Cigar Corporation, the Company's supplier from the Dominican
Republic, is a leading manufacturer of premium cigars. They produce the
Company's Occidental Reserve, Special Blends and Havana Sun Grown cigar lines.
Located in Santiago, Dominican Republic, Occidental Cigar Corporation occupies a
20,000 square foot building and produces 15,000,000 cigars annually. Occidental
Cigar Corporation stocks over 3 years of raw material that includes wrapper,
filler and binder. This stock of raw material assures consistent quality and
sufficient production supply for several years.
GR Tabacaleras Unidas, located in Danli, Honduras, is the Company's
supplier of gourmet cigars, Criollo '98, Spirit of Cuba, and the Trilogy
Authentic Corojo.
Latin Cigars de Honduras, located in Danli, Honduras is the Company's
supplier of the Trilogy Exotic Maduro, Ovation Maduro and Cameroon lines.
The Company does not have any agreements with cigar manufacturers.
Purchases are made on a per order basis. The Company pays all shipping costs.
Customers
The Company has increased its customer base to approximately 1,000
customers. The Company's biggest customer is Thompsons Cigar Company, located in
Tampa, Florida. Over the previous years, Thompsons Cigar Company accounted for
approximately 25% of the Company's sales and was the only company for which the
Company depended on for a large portion of its revenues. In 2003, Thompsons
Cigar Company accounted for approximately 6% of the Company's sales. Presently,
the Company does not have any customers who account for more than 6% of the
Company's sales.
Other Projects
As the Company continues to expand and improve on its current wholesale
and retail programs, it maintains its focus on creating ways of supplying cigars
to the public. These include:
5
Mail Order Companies
--------------------
Alec Bradley has established a relationship with Thompsons Cigar
Company, a mail order catalog company in the United States. Alec Bradley
presently supplies Thompsons Cigar Company with two of its cigar lines.
Thompsons mails over 17,000,000 catalogues a year.
The Company's intent is to focus on dealing with catalog companies with
large sources of distribution. To date, the Company has not had any material
negotiations and has not entered into any definitive agreements. Mail order
companies generally sell to the final consumers which should help bring public
awareness to the Company's product lines. Payment received when selling to a
catalog company has not been significantly less than payments received from
traditional customers.
Alec Bradley Direct
-------------------
The Company has created a direct sales approach which includes
bi-monthly marketing via fax and daily in-house telemarketing. In order to
increase distribution and product exposure, the Company will be approaching
wholesale distributors and hiring additional independent brokers to help support
the retailers and introduce the Company's products to new customers. However, by
marketing via broadcast fax and an in-house telemarketing staff the Company will
continue to create and nurture relationships directly with the customers.
Personalized and Customized Cigar Band Program
----------------------------------------------
Alec Bradley, in conjunction with an outside consultant, has developed
a computer system for creating high quality, metallic ink cigar label bands.
This technology allows the Company to produce small run (25 to 3,000) high
quality personalized and customized private labeled cigars for a corporation,
bar, restaurant or event. The Company receives additional revenues from this
technology by selling personalized and customized bands to corporations, bars,
restaurants and special events on a per order basis.
The Company has also recently developed a program for the retail
tobacconists. The Company is able to create house brands utilizing the
Occidental Reserve cigar and attaching customized private label cigar rings. The
Company, on a per order basis, can provide a customer with a personally labeled
cigar. Customers are under no contractual obligations, as they purchase
personalized cigars on an order per order basis. These retail tobacconists who
normally cannot order large enough quantities to entice a manufacturer to make a
personalized product, can benefit by being able to order small quantities from
the Company as needed from this program. Management believes the Company will
gain additional revenues by selling small quantities of personalized and custom
cigars at slightly higher profit margins. No contracts are required for this
program.
The Company has produced custom bands for the Gulfstream Race Track,
the Carquest Bowl, Tyson Foods, and many restaurants.
Competition
The Company experiences competition with respect to its cigar
distribution. The cigar distribution industry is highly competitive. The Company
believes that as a distributor of premium cigars, it competes with a smaller
number of domestic and foreign companies that specialize in premium cigars, and
certain larger companies that maintain premium cigar lines, including Altadis
6
and General Cigar Company. The Company competes effectively within this industry
by consistently purchasing high quality cigars and distributing them at an
affordable price to its customers. The Company believes that it can grow by
following this fundamental principle. The Company is continually seeking
manufacturers that can provide the highest quality cigars at the lowest possible
prices.
Government Regulation
The Company as an importer of cigars is required to have an importer
permit from the Department of the Treasury, Bureau of Alcohol, Tobacco and
Firearms. The Company applied for and has been granted Permit Number FL-TI-127.
Management believes any future regulations including affixing warning labels on
products, regulations on tobacco advertising, and limits on public smoking areas
will be met with full compliance and will not affect the Company's potential for
continued growth. We believe the material costs to comply with governmental
regulation will be negligible. Furthermore, management anticipates that there
are no additional existing or probable governmental regulation to effect its
business. The Company complies with all environmental laws. The costs of
compliance with such laws are not material to the Company.
Research and Development
Currently, the Company is not involved in any research and development
projects. Over the past two years, the Company has not spent any capital on
research and development. The Company does not plan on incurring any research
and development costs in the near future.
Employees
The Company currently employs five individuals and has eleven
independent sales representatives. Of its employees, two are engaged in sales
and marketing; two in executive and administrative roles; and the remaining
employee is engaged in shipping and receiving. None of the Company's employees
are covered by any labor union. The Company believes its relationships with its
employees are generally good. The Company does not have an employment contracts
or agreements with any of its employees.
Trademarks
The Company has trademarked the name Bogey's Stogies. The Company has
applied for other trademarks for the cigars it distributes, but these
applications are pending.
Item 2. Description of Property.
The Company has occupied office and warehouse facilities pursuant to a
month-to-month operating lease agreement. Rent expense for the years ended
December 31, 2003 and 2002 was $16,200 and $12,000, respectively. During 2003,
the Company's monthly rent payments for the premises increased from $1,400 to
$1,600 per month. In March 2004, the Company agreed to occupy new office and
warehouse facilities under the terms of a three-year non-cancelable operating
lease agreement. This new lease agreement shall commence during the second
fiscal quarter of year ended December 31, 2004. Future minimum payments under
the new lease agreement are currently as follows:
7
Year Amount
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2004 $27,000
2005 $36,000
2006 $36,000
2007 $ 9,000
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Total: $108,000
========
Item 3. Legal Proceedings.
As of the date of this report, the Company is not a party to any
pending legal proceeding and is not aware of any threatened legal proceeding.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders, through the solicitation
of proxies or otherwise.
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities
Market for Common Equity
The Company's Common Stock currently trades on the OTC Bulletin Board
under the symbol ABDC. The stock is thinly traded and transactions (if any) in
the stock are sporadic and infrequent. On March 8, 2004, the Closing bid and
asked price of our Common Stock was $.10. The following table sets forth the
high and low bid quotations for the Common Stock for the periods indicated.
These quotations, as reported by Bloomberg, reflect prices between dealers, do
not include retail mark-ups, markdowns, commissions and may not necessarily
represent actual transactions.
Period High Low
------ ------ -----
1st quarter 2002 $0.22 $0.03
2nd quarter 2002 $0.45 $0.06
3rd quarter 2002 $0.40 $0.13
4th quarter 2002 $0.13 $0.04
1st quarter 2003 $0.03 $0.03
2nd quarter 2003 $0.04 $0.02
3rd quarter 2003 $0.08 $0.02
4th quarter 2003 $0.08 $0.04
As of the date of this report, there were approximately 50 holders of
record of the Company's Common Stock.
The Company has never paid a cash dividend on its Common Stock nor does
the Company anticipate paying cash dividends on its Common Stock in the near
future. It is the present policy of the Company not to pay cash dividends on the
8
Common Stock but to retain earnings, if any, to fund growth and expansion. Any
payment of cash dividends on the Common Stock in the future will be dependent
upon the Company's financial condition, results of operations, current and
anticipated cash requirements, plan for expansion, as well as other factors the
Board of Directors deems relevant.
Recent Sales of Unregistered Securities and Other Matters
None.
Item 6. Management's Discussion and Analysis or Plan of Operation.
Introduction
The following discussion is based upon, and should be read in
conjunction with, the audited consolidated financial statements of the Company
as of and for the years ended December 31, 2003 and 2002, together with the
notes to the financial statements.
Results of Operations
Year ended December 31, 2003 as compared to year ended December 31, 2002
Revenues
Revenues for the year ended December 31, 2003 were approximately
$2,395,300, an increase of $774,800, or 47.8%, from approximately $1,620,500 for
the year ended December 31, 2002. This increase was attributable to an increase
in sales (number of units) resulting from the Company's successful introduction
of new cigar lines during 2002 (Trilogy and Criollo 98) and 2001 (Havana Sun
Grown Cigars) and the continued success of the Occidental Reserve line. During
the fourth quarter of this year the Company began selling to distributors in
Canada. The Company's gross profit was approximately $916,500, an increase of
$287,300, or 45.7%, from $629,200, due to the increase in sales. The increase in
gross profit is directly attributable to the increase in sales.
Selling Expenses
Selling expenses for 2003 were $359,300, an increase of $175,500, or
95.5%, from $183,800 in 2002. Selling expenses include all compensation and
related benefits for the sales personnel and advertising and promotional costs.
The increase in selling expenses was attributable to the increase in sales
commissions of $112,000, freight expense of $35,100 and trade show costs and
advertising costs of $28,400 in 2003 as compared to 2002. Sales commissions
increased due to an increase in the number of salespersons, as the Company has
expanded its selling territory. This expansion also had a direct effect and
increase on freight expenses and advertising costs. Selling expenses represented
15.0% of revenues in 2003, compared to 11.3% in 2002.
General and administrative expenses
General and administrative expenses for 2003 were $423,900, an increase
of $23,600, or 5.9%, from $400,300 in 2002. General and administrative expenses
primarily include salaries, supplies, and general operating expenses. The
increase in general and administrative expenses is attributable to the increases
of $28,700 in payroll and related taxes, travel and entertainment of $16,200,
and $11,800 in office, rent and occupancy costs less reductions of $37,300 in
9
professional fees. General and administrative expenses represented 17.7% of
revenues in 2003, compared to 29.9% in 2002.
Liquidity and Capital Resources
The Company's working capital was approximately $227,000 at December
31, 2003, compared to approximately $125,600 at December 31, 2002. The increase
in working capital was primarily attributable to the company net income of
approximately $94,600 plus the effect of net of non-cash items (depreciation
expense) of $9,300.
During 2003, cash provided by operations was approximately $62,600 and
primarily resulted from increases in accounts payable of $41,500, taxes payable
of $31,500 and income from operations plus the effect of non-cash items
(depreciation expense). The cash provided was utilized to fund the increases in
accounts receivables of $41,300 inventory of $19,700 and prepaid expenses of
$48,800. The Company's cash balance as of December 31, 2003 increased by $62,400
from December 31, 2002 to $108,400.
For income tax purposes, the Company terminated its S corporation
election on January 1, 2001. Accordingly, net losses and related timing
differences for periods prior to January 1, 2001 were included in the individual
tax returns of the S corporation shareholders and are not available to offset
taxable income of the Company in subsequent periods. During 2003, the Company
made the appropriate accounting adjustment to reduce additional paid-in capital
by an amount of $405,585, equal to its remaining accumulated deficit as of
December 31, 2000. The net effect of this adjustment to shareholders' equity is
zero and the Company has retained earnings of $156,782 as of December 31, 2003.
The Company has negotiated with major suppliers extended credit terms
for new products being developed through these suppliers. In addition, The
Company has established a line of credit with Transatlantic Bank in the amount
of $100,000 to provide for additional cash flow needs.
Management believes that the cash generated from the Company's
operations and the existing credit terms along with the line of credit will be
adequate to support its short-term cash requirements for capital expenditures
and maintenance of working capital.
Accounting Policies
Basis of Accounting
The financial statements are prepared using the accrual basis of
accounting where revenues are recognized upon shipment of merchandise to the
customer and expenses are recognized in the period in which they are incurred.
This basis of accounting conforms to accounting principles generally accepted in
the United States of America.
Income Taxes
The Company uses the asset and liability method of accounting for
income taxes as required by Statement of Financial Accounting Standards ("SFAS")
No. 109, Accounting for Income Taxes. SFAS No. 109 requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax basis of certain
assets and liabilities. Deferred income taxes are measured by the current
10
enacted tax rates. Deferred tax expense (benefit) is the result of changes in
the deferred tax asset and liability. Valuation allowances are used to reduce
deferred tax assets to the amount considered likely to be realized.
Inventory
Inventory consists primarily of cigars, humidors, displays, boxes and
labels and is stated at the lower of cost (first-in, first-out) or market.
Furniture and Equipment
Furniture and equipment are recorded at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of the assets
ranging from five to seven years.
Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect certain reported
amounts and disclosures. Accordingly, actual results could differ from those
estimates.
Comprehensive Income or Loss
The Company has no components of other comprehensive income or loss.
Accordingly, net income or loss equals comprehensive income or loss for all
periods presented.
Critical Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has recently issued
several new accounting pronouncements which may apply to the Company.
In April 2002, the FASB issued Statement No. 145 Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical
Corrections. This statement rescinds FASB Statement No. 4, Reporting Gains and
Losses from Extinguishment of Debt, and FASB Statement No. 64, Extinguishments
of Debt Made to Satisfy Sinking-Fund Requirements. Any gain or loss on the
extinguishment of debt that was classified as an extraordinary item in prior
periods has been reclassified into continuing operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires that a liability for a
cost associated with an exit or disposal activity be recognized when the
liability is incurred. Prior to this statement, a liability was recognized when
the entity committed to an exit plan. Management believes that this statement
will not have a material impact on the Company's financial statements; however,
the statement will result in a change in accounting policy associated with the
recognition of liabilities in connection with future restructuring charges.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees Including Indirect
Guarantees of Indebtedness of Others. This interpretation elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
11
statements about its obligations under certain guarantees that it has issued. It
also clarifies that a guarantor is required to recognize, at the inception of a
guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. This interpretation does not prescribe a specific
approach for subsequently measuring the guarantor's recognized liability over
the term of the related guarantee. This interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, Disclosure of
Indirect Guarantees of Indebtedness of Others, which is being superseded.
In December 2002, the FASB issued Statement No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement amends FASB
Statement No. 123, Accounting for Stock-Based Compensation, to provide
alternative methods of transition for a voluntary change to the fair value based
method of accounting for stock-based employee compensation. In addition, this
statement amends the disclosure requirements of FASB Statement No. 123 to
require prominent disclosures in both annual and interim financial statements
about the method of accounting for stock-based employee compensation and the
effect of the method used on reported results.
In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities. The interpretation defines a variable interest
entity as corporation, partnership, trust or any other legal structure used for
business purposes that either (a) does not have equity investors with voting
rights nor (b) has equity investors that do not provide sufficient financial
resources for the equity to support its activities. A variable interest entity
often holds financial assets, including loans or receivables, real estate or
other property. A variable interest entity may be essentially passive or it may
engage in research and development or other activities on behalf of another
company. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the risk
of loss from the variable interest entity's activities or entitled to receive a
majority of the entity's residual returns or both. The Company would have to
consolidate any of its variable interest entities that meet the above criteria
as of July 1, 2003. The interpretation also requires disclosures about variable
interest entities that the company is not required to consolidate but in which
it has a significant variable interest. Management is in the process of
determining if its interests in unconsolidated entities qualify as variable
interest entities and, if so, whether the assets, liabilities, non-controlling
interest, and results of activities are required to be included in the Company's
consolidated financial statements.
In May 2003, the FASB issued Statement No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity. This
Statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. The Statement requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances).
Many of those instruments were previously classified as equity. The Company is
currently classifying financial instruments within the scope of this Statement
in accordance with this Statement. This Statement is effective for financial
instruments entered into or modified after May 31, 2003, and otherwise is
effective at the beginning of the first interim period beginning after June 15,
2003. Management does not believe that this Statement will have a material
impact on the Company's financial statements.
Item 7. Financial Statements.
The information required by Item 310 (a) of Regulation S-B is included
herein elsewhere in this report.
12
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
Effective March 17, 2003, the Company dismissed Jaffe, Kaufman &
Sarbey, LLC ("JKS") to audit Company's financial statements. The reports of JKS
on the financial statements of the Company for the past fiscal year contained no
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principle. The decision to dismiss JKS
was recommended by management and approved by the Company's Board of Directors
(the Company currently has no formal audit committee).
In connection with its audit for the most recent fiscal year and
including the interim period up to and including the date of dismissal, there
have been no disagreements with JKS on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure, which
disagreements if not resolved to the satisfaction of JKS would have caused them
to make reference thereto in their report on the financial statements for such
years.
Effective March 17, 2003, the Company engaged the accounting firm of
Jewett, Schwartz & Associates as the Company's new independent certified public
accountants to audit the Company's financial statements for the fiscal year
ending December 31, 2002.
On March 11, 2002, the Board of Directors of the Company approved the
engagement of Jaffe, Kaufman, & Sarbey, LLC as independent auditors of the
Company for the fiscal year ended December 31, 2001, to replace the firm of
Spear, Safer, Harmon & Co., P.A., who were dismissed as the Company's auditors,
effective March 11, 2002.
The reports of Spear, Safer, Harmon & Co. on the Company's financial
statements for the fiscal year ended December 31, 1999 and fiscal year ended
December 31, 2000, did not contain an adverse opinion or disclaimer of opinion,
and were not qualified as to uncertainty, audit scope, or accounting principles.
In connection with the audits of the Company's financial statements for
the fiscal year ended December 31, 1999, fiscal year ended December 31, 2000,
and in the subsequent unaudited interim period through March 11, 2002 (date of
dismissal), there were no disagreements with Spear, Safer, Harmon & Co. on any
matters of accounting principles or practices, financial statement disclosure,
or auditing scope and procedures which, if not resolved to the satisfaction of
Spear, Safer, Harmon & Co., would have caused Spear, Safer, Harmon & Co. to make
reference to the subject matter in their report.
Item 8A. Controls and Procedures.
Evaluation of disclosure controls and procedures
As of the end of the period covered by this report, the Company carried
out an evaluation of the effectiveness of the design and operation of its
disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. This
evaluation was done under the supervision and with the participation of the
Company's Principal Executive Officer and Principal Financial Officer. Based
upon that evaluation, the Principal Executive Officer and Principal Financial
Officer concluded that the Company's disclosure controls and procedures are
effective in gathering, analyzing and disclosing information needed to satisfy
the Company's disclosure obligations under the Exchange Act.
13
Changes in internal controls
There were no significant changes in the Company's internal controls or
in other factors that could significantly affect those controls since the most
recent evaluation of such controls.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.
The Directors and Executive Officers of the Company are as follows:
Name Age Positions Held
---- --- --------------
Alan V. Rubin 42 Director, Chief Executive Officer,
President and Principal Financial Officer
Alan Rubin has served as a director and officer of the Company since
its inception. Alan Rubin served as vice president of All Point Screw Bolt &
Specialty Co., a distributor and direct importer of fasteners and building
products from 1984 to 1996. Mr. Rubin attended the University of Florida.
The Company's directors are elected at the annual meeting of
stockholders and hold office for one year and until their successors are elected
and qualified. The Company's officers are appointed by the Board of Directors
and serve at the pleasure of the Board. The Directors do not currently receive
fees for their services as directors.
Code of Ethics
During the year ended December 31, 2003, the Company adopted a Code of
Ethics. The code applies to the Company's officers and directors. The code
provides written standards that are designed to deter wrongdoing and promote:
(1) honest and ethical conduct; (2) full, fair, accurate, timely and
understandable disclosure; (3) compliance with applicable laws and regulations;
(4) prompt reporting of internal violations of the code; and (5) accountability
for the adherence to the code.
Committees
To date, the Company has not established a compensation or audit
committee. The board of directors, solely consisting of Alan Rubin, reviews the
professional services provided by the Company's independent auditors, the
independence of the Company's auditors from its management, the Company's annual
financial statements and its system of internal accounting controls. Alan Rubin
does not qualify as a "financial expert" as defined under Item 401 of Regulation
S-B.
Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's directors and executive officers, and persons who own more than ten
percent of its outstanding common stock to file with the SEC initial reports of
ownership and reports of changes in ownership of common stock. These persons are
14
required by SEC regulation to furnish the Company with copies of these reports
they file.
To the Company's knowledge, based solely on a review of the copies of
reports furnished to it, Section 16(a) filing requirements applicable to the
Company's officers, directors and greater than ten percent beneficial owners
were not complied with on a timely basis for the period which this report
relates.
Item 10. Executive Compensation
Executive Compensation
Commencing January 2001, Mr. Rubin has been paid a weekly salary of
$2,000 as economic conditions permit the Company to do so. When the payment of
his salary is not feasible, no accrual will be made on the Company's financial
records, rather the expense will be accrued as a capital contribution.
The following table sets forth compensation awarded to, earned by or
paid to our sole officer and director for the past 3 years. We have not granted
any stock options, restricted stock awards or stock appreciation rights or make
any long term incentive plan payments.
Summary Compensation Table
--------------------------
Other Annual
Name Year Salary($) Bonus($) Compensation(1)
--------------------------------------------------------------------------------
Alan Rubin 2003 $104,000 $10,000 $12,300
2002 $104,000 $10,000 $23,550(2)
2001 $109,000 -0- $12,300
(1) Mr. Rubin has received approximately $525 per month for automobile
lease expenses and approximately $500 per month for automobile expense
reimbursement. In addition, the Company has paid Mr. Rubin's health
insurance.
(2) Includes 250,000 shares of common stock issued in June 2002 valued at
$11,250.
Stock Options and SARs
Since inception, the Company has issued no stock options nor SARs.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
As of the date of this report, there were 4,499,777 shares of the
Company's Common Stock issued and outstanding. The following table sets forth
information with respect to the beneficial ownership of each class of voting
securities of the Company by: (1) each person known by the Company to be the
owner of more than 5% of the outstanding shares of any class of voting
securities; (2) each officer and director; and (3) all officers and directors as
a group.
15
Beneficial Ownership
--------------------
Name and Address Shares % of Shares
---------------- ------ -----------
Alan V. Rubin
1750 N.W. 65th Avenue
Plantation, FL 33313 2,895,000 64.3%
Bruce A. Ginsberg
2523 Monterey Court
Weston, FL 33327 500,000 11.1%
All Executive Officers
and Directors as a Group (1 person) 2,895,000 64.3%
Securities Authorized for Issuance Under Compensation Plans
The Company has not authorized any equity compensation plan, nor has
the Company issued any securities to its officer as compensation.
Item 12. Certain Relationships and Related Transactions
None.
Item 13. Exhibits, Lists and Reports on Form 8-K.
(A) Exhibits
Exhibit
Number Description
------ -----------
3.0 Articles of Incorporation(1)
3.1 Amendment to Articles of Incorporation(1)
3.2 Bylaws(1)
14.0 Code of Ethics
16.1 Letter from Former Independent Auditor(2)
16.2 Letter from Former Independent Auditor(3)
21 Subsidiaries(1)
31.1 Rule 13a-14(a)/15d-4(a) Certification of Principal
Executive Officer
31.2 Rule 13a-14(a)/15d-4(a) Certification of Principal
Financial Officer
32.1 Section 1350 Certification of Principal Executive Officer
32.2 Section 1350 Certification of Principal Financial Officer
(1) Previously filed on Form 10-SB Registration Statement dated December
19, 2000.
(2) Previously filed on Form 8-K Current Report dated March 11, 2002.
(3) Previously filed on Form 8-K Current Report dated March 27, 2003.
(B) Reports on Form 8-K
No reports on Form 8-K were filed during the last quarter of the period
covered by this report.
16
Item 14. Principal Accountant Fees and Services
Fees to Auditors.
Year ended December 13, 2003
Audit Fees: The aggregate fees, including expenses, billed by the
Company's principal accountant in connection with the audit of our consolidated
financial statements for the most recent fiscal year and for the review of our
financial information included in our Annual Report on Form 10-KSB; and our
quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2003
was $11,102.00.
Audit Related Fees: The aggregate fees, including expenses, billed by
the Company's principal accountant for services reasonably related to the audit
for the year ended December 31, 2003 were $-0-.
All Other Fees: The aggregate fees, including expenses, billed for all
other services rendered to the Company by its principal accountant during year
2003 was $-0-.
Year ended December 13, 2002
Audit Fees: The aggregate fees, including expenses, billed by the
Company's principal accountant in connection with the audit of our consolidated
financial statements for the most recent fiscal year and for the review of our
financial information included in our Annual Report on Form 10-KSB; and our
quarterly reports on Form 10-QSB during the fiscal year ending December 31, 2002
was $7,500.00.
Audit Related Fees: The aggregate fees, including expenses, billed by
the Company's principal accountant for services reasonably related to the audit
for the year ended December 31, 2002 were $-0-.
All Other Fees: The aggregate fees, including expenses, billed for all
other services rendered to the Company by its principal accountant during year
2002 was $-0-.
The Board of Directors has considered whether the provisions of the
services covered above under the captions "Financial Information Systems Design
and Implementation Fees" and "All Other Fees" is compatible with maintaining the
auditor's independence.
17
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ALEC BRADLEY CIGAR CORPORATION
Date: March 30, 2004 By: /s/ Alan Rubin
---------------------------------------
Alan Rubin, Principal Executive
Officer and Principal Financial Officer
18
ALEC BRADLEY CIGAR CORPORATION
FINANCIAL STATEMENTS
CONTENTS
--------
Page
------------
Report of Independent Certified Public Accountants F-2
Balance Sheet F-3
Statements of Operations F-4
Statements of Changes in Shareholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7-12
F-1
INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS' REPORT
------------------------------------------------
To the Board of Directors and Shareholders
Alec Bradley Cigar Corporation
Plantation, Florida
We have audited the accompanying balance sheet of Alec Bradley Cigar Corp. as of
December 31, 2003 and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 2003 and 2002. 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 auditing standards generally accepted
in the United States of America. 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 Alec Bradley Cigar Corp. as of
December 31, 2003, and 2002 and the results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally
accepted in the United States of America.
JEWETT, SCHWARTZ & ASSOCIATES
Hollywood, Florida
March 22, 2004
F-2
ALEC BRADLEY CIGAR CORPORATION
BALANCE SHEET
As of December 31, 2003
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 108,361
Accounts receivable, net of allowance for
doubtful accounts of $4,586 144,946
Inventories 328,068
Prepaid expenses and other current assets 69,005
------------------
TOTAL CURRENT ASSETS 650,380
FURNITURE AND EQUIPMENT, NET 1,215
INTANGIBLE ASSETS 2,577
------------------
TOTAL ASSETS $ 654,172
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 391,880
Income taxes payable 31,550
------------------
TOTAL CURRENT LIABILITIES: 423,430
------------------
SHAREHOLDERS' EQUITY:
Common stock, $0.0001 par value, 30,000,000 shares
authorized, 4,499,799 shares issued and outstanding 450
Additional paid-in capital 73,510
Retained earnings 156,782
------------------
TOTAL SHAREHOLDERS' EQUITY 230,742
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 654,172
==================
The accompanying notes are an integral part of these financial statements.
F-3
ALEC BRADLEY CIGAR CORPORATION
STATEMENTS OF INCOME
For the Years Ended December 31,
2003 2002
--------------- ----------------
NET SALES $ 2,395,274 $ 1,620,485
Cost of goods sold 1,478,797 991,325
--------------- ----------------
GROSS PROFIT 916,477 629,160
--------------- ----------------
Operating expenses
Selling expenses 359,252 183,808
General and administrative expenses 423,912 400,262
--------------- ----------------
Total operating expenses 783,164 584,070
--------------- ----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 133,313 45,090
Provision for income taxes 38,712 6,978
--------------- ----------------
NET INCOME $ 94,601 $ 38,112
=============== ================
Weighted average common shares outstanding - basic and diluted 4,639,800 4,693,400
=============== ================
Earnings per share - basic and diluted $ 0.02 $ 0.01
=============== ================
The accompanying notes are an integral part of these financial statements.
F-4
ALEC BRADLEY CIGAR CORPORATION
STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Years Ended December 31, 2003 and 2002
Retained
Common Stock Additional Earnings
-------------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
-------------- ------------ -------------- ----------------- ----------------
BALANCE AT DECEMBER 31, 2001 4,484,777 $ 448 $ 459,597 $ (381,516) $ 78,529
Common stock issued for services 415,000 42 19,458 - 19,500
Net Income - - - 38,112 38,112
-------------- ------------ -------------- ----------------- ----------------
BALANCE AT DECEMBER 31, 2002 4,899,777 490 479,055 (343,404) 136,141
Cancellation of common stock (400,000) (40) 40 - -
Adjustment for termination of
Subchapter S election (Note 5) - - (405,585) 405,585 -
Net Income - - - 94,601 94,601
-------------- ------------ -------------- ----------------- ----------------
BALANCE AT DECEMBER 31, 2003 4,499,777 $ 450 $ 73,510 $ 156,782 $ 230,742
============== ============ ============== ================= ================
The accompanying notes are an integral part of these financial statements.
F-5
ALEC BRADLEY CIGAR CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31,
2003 2002
--------------- ----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 94,601 $ 38,112
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,467 9,339
Issuance of common stock for services - 19,500
Changes in current assets and liabilities:
Increase in accounts receivable (41,322) (52,131)
Increase in inventory (19,618) (231,462)
Increase in prepaid expenses (48,793) (15,813)
Increase in accounts payable 41,512 251,956
Increase (decrease) in income taxes payable 31,502 (7,855)
--------------- ----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 62,349 11,646
--------------- ----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Cash payment for trademarks and other assets - (490)
Purchase of furniture and equipment - (3,652)
--------------- ----------------
NET CASH USED IN INVESTING ACTIVITIES - (4,142)
--------------- ----------------
CASH FLOW FROM FINANCING ACTIVITIES:
NET CASH PROVIDED BY FINANCING ACTIVITIES - -
--------------- ----------------
Net Increase in Cash and Cash Equivalents 62,349 7,504
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 46,012 38,508
--------------- ----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 108,361 $ 46,012
=============== ================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 2,740 $ -
=============== ================
Cash paid for income taxes $ 36,493 $ 7,903
=============== ================
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Common stock issued for services $ - $ 19,500
=============== ================
The accompanying notes are an integral part of these financial statements.
F-6
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
NOTE 1 - SUMMARY OF ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization - Alec Bradley Cigar Corp. (the "Company"), a Florida
corporation, was incorporated in July 1996. The Company imports and
distributes cigars throughout the Unites States and Canada, with
corporate offices located in Plantation, Florida.
Basis of Accounting - The financial statements are prepared using the
accrual basis of accounting where revenues are recognized upon shipment
of merchandise to customers and expenses are recognized in the period
in which they are incurred. This basis of accounting conforms to
accounting principles generally accepted in the United States of
America.
Cash and Cash Equivalents - The Company considers all highly liquid
debt securities purchased with original or remaining maturities of
three months or less to be cash equivalents. The carrying value of cash
equivalents approximates fair value.
Inventories - Inventories consists primarily of cigars, humidors,
displays, boxes and labels and is stated at the lower of cost or market
value using the first in, first out (FIFO) method of accounting.
Furniture and Equipment, net - Furniture and equipment are recorded at
cost, net of accumulated depreciation. Depreciation expense is computed
using the straight-line method of accounting over the estimated useful
lives of the assets ranging from five to seven years.
Intangible Assets, net - Intangible assets consists primarily of
trademarks, whereby the Company incurred registration and legal fees of
approximately $10,000 to license the trade name "Bogey's Stogies" for
premium cigars. Amortization expense is computed using the
straight-line method of accounting over the life of the trademark, 15
years.
Revenue Recognition - Sales and the related cost of sales are
recognized upon shipment of products in accordance with the US
Securities and Exchange Commission Staff Accounting Bulletin No. 101.
The Company generally accepts returns of cigars that are stale or
damaged in transit. Sales revenue is recorded net of anticipated
returns based on historical experience. Sales returns are not material
to the financial statements.
Advertising Costs - Advertising costs are charged to expense during the
period in which they are incurred. Advertising expenses for the years
ended December 31, 2003 and 2002 approximated $23,300 and $13,900,
respectively.
Income Taxes - The Company uses the asset and liability method of
accounting for income taxes as required by Statement of Financial
Accounting Standards ("SFAS") No. 109, Accounting for Income Taxes.
SFAS No. 109 requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of temporary
differences between the carrying amounts and the tax basis of certain
assets and liabilities. Deferred income taxes are measured by the
current enacted tax rates. Deferred tax expense (benefit) is the result
of changes in the deferred tax asset and liability. Valuation
F-7
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
allowances are used to reduce deferred tax assets to the amount
considered likely to be realized.
Credit Risk - Financial instruments, which potentially subject the
Company to concentration of credit risk, consist principally of cash
and trade accounts receivable. The Company places its cash with high
credit financial institutions. However, the Company occasionally
maintains cash balances in excess of the F.D.I.C. insurance limits,
thereby failing to limit the amount of credit exposure to any one
financial institution. Concentrations of credit risk with respect to
trade accounts receivable are reduced due to the Company's large number
of customers. The Company conducts ongoing credit evaluations of its
customers and generally does not require collateral or other security
from these customers.
The Company's sales revenue included sales to one customer, which
accounted for approximately 6% and 23% of total sales revenue in 2003
and 2002, respectively.
The Company purchases and imports the majority of its cigars from cigar
manufacturing plants in Honduras and the Dominican Republic. The
Company does not have any agreements with cigar manufacturers.
Purchases are made on a per order basis. Although the Company believes
there are alternative sources for its products, a change in suppliers
could cause delays in the Company's operations, which could adversely
affect its operating results.
Stock Issued For Services - The value of stock issued for services is
based on management's estimate of the fair value of the Company's stock
at the date of issue or the fair value of the services received,
whichever is more reliably measurable.
Earnings per Share - Basic and diluted earnings per common share are
based on the weighted average number of shares outstanding of 4,639,800
and 4,693,400 for the years ended December 31, 2003 and 2002,
respectively. There are no common stock equivalents or other dilutive
items in the aforementioned periods presented.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, and disclosure of contingent assets
and liabilities, at the date of these financial statements, and the
reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications - Certain amounts in the prior years' financial
statements have been reclassified to conform to the current year's
presentation.
Recent Authoritative Pronouncements - The Financial Accounting
Standards Board ("FASB") has recently issued several new accounting
pronouncements which may apply to the Company.
In April 2002, the FASB issued Statement No. 145 Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and
F-8
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
Technical Corrections. This statement rescinds FASB Statement No. 4,
Reporting Gains and Losses from Extinguishment of Debt, and FASB
Statement No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund
Requirements. Any gain or loss on the extinguishment of debt that was
classified as an extraordinary item in prior periods has been
reclassified into continuing operations.
In June 2002, the FASB issued Statement No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires
that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Prior to this
statement, a liability was recognized when the entity committed to an
exit plan. Management believes that this statement will not have a
material impact on the Company's financial statements; however, the
statement will result in a change in accounting policy associated with
the recognition of liabilities in connection with future restructuring
charges.
In November 2002, the FASB issued Interpretation No. 45, Guarantor's
Accounting and Disclosure Requirements for Guarantees Including
Indirect Guarantees of Indebtedness of Others. This interpretation
elaborates on the disclosures to be made by a guarantor in its interim
and annual financial statements about its obligations under certain
guarantees that it has issued. It also clarifies that a guarantor is
required to recognize, at the inception of a guarantee, a liability for
the fair value of the obligation undertaken in issuing the guarantee.
This interpretation does not prescribe a specific approach for
subsequently measuring the guarantor's recognized liability over the
term of the related guarantee. This interpretation also incorporates,
without change, the guidance in FASB Interpretation No. 34, Disclosure
of Indirect Guarantees of Indebtedness of Others, which is being
superseded.
In December 2002, the FASB issued Statement No. 148 Accounting for
Stock-Based Compensation - Transition and Disclosure. This statement
amends FASB Statement No. 123, Accounting for Stock-Based Compensation,
to provide alternative methods of transition for a voluntary change to
the fair value based method of accounting for stock-based employee
compensation. In addition, this statement amends the disclosure
requirements of FASB Statement No. 123 to require prominent disclosures
in both annual and interim financial statements about the method of
accounting for stock-based employee compensation and the effect of the
method used on reported results.
In January 2003, the FASB issued Interpretation No. 46 Consolidation of
Variable Interest Entities. The interpretation defines a variable
interest entity as corporation, partnership, trust or any other legal
structure used for business purposes that either (a) does not have
equity investors with voting rights nor (b) has equity investors that
do not provide sufficient financial resources for the equity to support
its activities. A variable interest entity often holds financial
assets, including loans or receivables, real estate or other property.
A variable interest entity may be essentially passive or it may engage
in research and development or other activities on behalf of another
company. This interpretation requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of
the risk of loss from the variable interest entity's activities or
F-9
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
entitled to receive a majority of the entity's residual returns or
both. The Company would have to consolidate any of its variable
interest entities that meet the above criteria as of July 1, 2003. The
interpretation also requires disclosures about variable interest
entities that the company is not required to consolidate but in which
it has a significant variable interest. Management is in the process of
determining if its interests in unconsolidated entities qualify as
variable interest entities and, if so, whether the assets, liabilities,
non-controlling interest, and results of activities are required to be
included in the Company's consolidated financial statements.
In May 2003, the FASB issued Statement No. 150 Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity. This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with
characteristics of both liabilities and equity. The Statement requires
that an issuer classify a financial instrument that is within its scope
as a liability (or an asset in some circumstances). Many of those
instruments were previously classified as equity. The Company is
currently classifying financial instruments within the scope of this
Statement in accordance with this Statement. This Statement is
effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first
interim period beginning after June 15, 2003. Management does not
believe that this Statement will have a material impact on the
Company's financial statements.
NOTE 2- FURNITURE AND EQUIPMENT, NET
Furniture and equipment, net consist of the following as of
December 31,
2003 2002
------------- -------------
Computer and office equipment $ 7,123 $ 7,123
Furniture and fixtures 11,107 11,107
------------- -------------
18,230 18,230
Less accumulated depreciation 17,015 14,047
------------- -------------
$ 1,215 $ 4,183
============= =============
Depreciation expense approximated $3,000 and $9,200, for the years
ended December 31, 2003 and 2002, respectively.
NOTE 3- INCOME TAXES
Deferred tax assets and liabilities are determined based on the
estimated future tax effects of temporary differences between the
financial statement and tax bases of assets and liabilities, as
measured by the current enacted tax rates. There are no deferred taxes
as of December 31, 2003.
F-10
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
The provision for income taxes is comprised of the following:
2003 2002
----------- ----------
Current federal tax provision $ 35,706 $ 4,882
Current state and local tax provision 3,006 2,096
----------- ----------
Total provision for income taxes $ 38,712 $ 6,978
=========== ==========
The difference between income tax expense computed by applying the
federal statutory corporate tax rate and actual income tax expense is
as follows:
2003 2002
---------- ----------
Statutory federal income tax rate 34 % 15 %
Non-deductible permanent items (6) % - %
State income taxes, net of federal benefit 1 % - %
---------- ----------
Effective income tax rate 29 % 15 %
========== ==========
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Lease - The Company currently occupies office and warehouse facilities
pursuant to a month-to-month operating lease agreement. Rent expense
for the years ended December 31, 2003 and 2002 was $16,200 and $12,000,
respectively. During 2003, the Company's monthly rent payments for the
premises increased from $1,400 to $1,600 per month.
NOTE 5 - SHAREHOLDERS' EQUITY
Retained earnings - For income tax purposes, the Company terminated its
S corporation election on January 1, 2001. Accordingly, net losses and
related timing differences for periods prior to January 1, 2001 were
included in the individual tax returns of the S corporation
shareholders and are not available to offset taxable income of the
Company in subsequent periods. During 2003, the Company made the
appropriate accounting adjustment to reduce additional paid-in capital
by an amount of $405,585, equal to its remaining accumulated deficit as
of December 31, 2000. The net effect of this adjustment to
shareholders' equity is zero and the Company has retained earnings of
$156,782 as of December 31, 2003.
Common Stock Issuance - In June 2002, the Company issued an aggregate
of 415,000 shares of its common stock to certain employees and
consultants in exchange for services provided to the Company. The
Company valued these common shares at their fair market value of
$19,500 on the date of issuance.
F-11
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2003 and 2002
Cancellation of Common Stock - In September 2003, the Company redeemed
400,000 shares of its common stock. All such shares were cancelled.
NOTE 6 - SUBSEQUENT EVENTS
Credit Facility - In March 2004, the Company established a revolving
credit facility with a financial institution in the amount of $100,000.
The credit facility bears interest on funds outstanding at a daily rate
of 2.0% above Prime, as defined, not to exceed 7.5%. The credit
facility matures and is due and payable in full in March 2005.
Lease - In March 2004, the Company agreed to occupy new office and
warehouse facilities under the terms of a three year non-cancelable
operating lease agreement. Future minimum payments under this
non-cancelable lease are as follows as of December 31, 2003:
Year Amount
----- -------------
2004 $ 27,000
2005 $ 36,000
2006 $ 36,000
2007 $ 9,000
-------------
Total minimum lease payments $ 108,000
=============
F-12