U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No 1. to
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, 2004
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Commission file number 0-32137
Alec Bradley Cigar Corporation
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(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.)
3400 S.W. 26th Terrace, #A-1, Dania, Florida 33312
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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
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(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. [ ]
State issuer's revenues for its most recent fiscal year. $2,392,858
State the aggregate market value of the voting stock held by non-affiliates
(1,104,777) computed by reference to the price at which the stock was sold, or
the average bid and asked prices of such stock, as of a specified date within
the past 60 days ($.15 on March 25, 2005). $165,716.55.
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: March 25, 2005: 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
PART I
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Item 1 Description of Business............................................................ 3
Item 2 Description of Property............................................................ 7
Item 3 Legal Proceedings.................................................................. 7
Item 4 Submissions of Matters to a Vote of Security Holders............................... 7
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.......................... 8
Item 7 Financial Statements............................................................... 12
Item 8 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.............................................. 12
Item 8A Controls and Procedures............................................................ 13
Item 8B Other information.................................................................. 13
PART III
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Item 9 Directors and Executive Officers of Registrant
Compliance With Section 16(a) of the Exchange Act................................ 13
Item 10 Executive Compensation............................................................. 14
Item 11 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters....................................... 15
Item 12 Certain Relationships and Related Transactions..................................... 15
Item 13 Exhibits, Lists and Reports on Form 8-K............................................ 16
Item 14 Principal Accounting Fees and Services............................................. 16
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 3400 SW 26 Terrace # A-1, Dania,
Florida 33312 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 indicate 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:
Trilogy
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Trilogy is one of the most unique cigar in today's market 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.
3
Trilogy Ovation
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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 and comes in Connecticut Shade,
Habano, and Corojo wrappers. It is available in Churchill and Robusto sizes in
boxes of 25.
Occidental Reserve
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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 Republica and is finished with a US
Connecticut wrapper. We believe 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, a corona, robusto, toro, churchill
and torpedo, and is sold in bundles of 25. The Occidental Reserve is also
available in a Broadleaf Maduro wrapper.
Havana Sun Grown
----------------
Havana Sun Grown is a ultra premium cigar hand rolled in the Dominican
Republic. This cigar is a medium to full bodied cigar with complex flavor
profiles. It is unique in that the wrapper is a US Connecticut - Havana hybrid,
which is only available on this cigar. The Havana Sun Grown is available in the
same sizes as our Occidental Reserve. Packaged in wooden boxes of 20 cigars,
this cigar retails under $5.00 making it a very affordable super premium cigar.
Pryme Limited Edition Gold Series
---------------------------------
Pryme Gold Series is a limited edition release and is limited not by
choice but by necessity. The supply of wrapper in the construction of Pryme is
the dark Ecuador corona leaf and is very limited. Only 10 percent of the annual
yield can be classified as wrapper and only the top 20 percent was graded and
chosen for Pryme's production. Only 1,500 numbered boxes per size will be
produced. This cigar is available in 4 sizes and packaged in a wooden box of 20
cigars.
PURCHASING AND DISTRIBUTION
The Company purchases and imports the majority of its cigars from cigar
manufacturing plants in Honduras, Nicaragua and the Dominican Republic.
4
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.
Tabacalera Endemano, located in Danli, Honduras, is the Company's
supplier of the Company's Spirit of Cuba cigars.
Latin Cigars de Honduras, located in Danli, Honduras is the Company's
supplier of the Trilogy, 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 represented approximately 6% of total
sales revenue. Presently, the Company does not have any customers who account
for more than 6% of the Company's sales. In 2004, the Company's 5 largest
customers accounted for an aggregate of approximately 15% of total 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:
Mail Order Companies
--------------------
The Company's intent is to focus on dealing with catalog companies with
large sources of distribution. To date, the Company has 2 active mail order
customers. Mail order companies generally sell to the final consumers, which
will continue to 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 has approached wholesale
distributors and is 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.
5
Personalized and Customized Cigar Band Program
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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 is able to create house brands for retail tobacconists
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
and Swedish Match. 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, the tobacco buyout assessment, 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.
6
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 nine 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 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 including Occidental
Reserve, Trilogy, Spirit of Cuba, Special Blends, Double Broadleaf, Pryme, and
Havana Sun Grown, but these applications are pending.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company previously occupied office and warehouse facilities
pursuant to a month-to-month operating lease agreement. Rent expense for the
years ended December 31, 2004 and 2003 was approximately $30,000 and $16,200,
respectively. During 2004, the Company's monthly rent payments for the premises
increased from $1,400 to $1,600 per month. During the second fiscal quarter 2004
the Company entered into a new lease agreement for office and warehouse
facilities. Future minimum payments under the new lease agreement are currently
as follows:
Year Amount
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2005 $ 36,000
2006 $ 36,000
2007 $ 9,000
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.
7
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 in the stock
are sporadic and infrequent. On March 25, 2005, the Closing bid and asked price
of our Common Stock was $.15. 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 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
1st quarter 2004 $0.18 $0.04
2nd quarter 2004 $0.20 $0.10
3rd quarter 2004 $0.20 $0.05
4th quarter 2004 $0.25 $0.10
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
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, 2004 and 2003, together with the
notes to the financial statements.
8
RESULTS OF OPERATIONS
Year ended December 31, 2004 as compared to year ended December 31, 2003
Revenues
Revenues for 2004 were $2,392,858, a decrease of $2,416 from $2,395,274
for 2003. The Company's sales of its Trilogy line of cigars decreased by
approximately $275,000 from 2003 to 2004 and the Company eliminated two lines
(Criollo 98 and gourmet flavored cigars), which accounted for an additional
$108,000 decrease in sales in 2004 as compared to 2003. To offset these losses
in sales, the Company introduced its Pryme line during the 4th quarter of 2004.
Sales were over $100,000 during the limited sales period. The Company's Spirit
of Cuba line introduced in late 2003 increased over $140,000 in sales in 2004 as
compared to 2003. While gross volume remained relatively flat, the Company had
an increase in sales of the number of units resulting from the sale of lower
cost cigars. The Company's gross profit was $941,883, an increase of $25,406, or
2.8%, from $916,477. The increase in gross profit is attributable to the change
in the product sales mix.
As a result of increasing the number of sales representatives the
Company has increased its number of customers to over 1,000. This caused a
reduction in sales concentration from 2003 when the largest customer accounted
for approximately 25% of sale as compared to 2004 when the three largest
customers account for less than 18% as a group. As such, the Company does not
currently rely on any of its customers for a material amount of its revenues.
Selling Expenses
Selling expenses for 2004 were $402,595, an increase of $43,343, or
12.1%, from $359,252 in 2003. Selling expenses include all compensation and
related benefits for the sales personnel and advertising and promotional costs.
The increase in selling expenses was primarily attributable to the increase in
advertising costs of approximately $38,000 in 2004 as compared to 2003. Selling
expenses represented 16.9% of revenues in 2004, compared to 15.0% in 2003.
General and administrative expenses
General and administrative expenses for 2004 were $441,316, an increase
of $17,404, or 4.1%, from $423,912 in 2003. General and administrative expenses
primarily include salaries, supplies, and general operating expenses. The
increase in general and administrative expenses is attributable to the increases
in rent and occupancy costs of $21,000 and local travel of $11,000 partially
offset by reductions in payroll and related taxes $21,500. General and
administrative expenses represented 18.4% of revenues in 2004, compared to 17.7%
in 2003.
Liquidity and Capital Resources
During 2004, cash utilized by operations was approximately $92,600 and
primarily resulted from decreases in accounts payable of $286,405, taxes payable
of $20,055 and an increase supplies inventories of $32,300. This was offset by
income from operations plus the effect of non-cash items (depreciation expense).
The Company's cash balance as of December 31, 2004 increased by approximately
$5,300 from December 31, 2003 to $113,617.
9
The Company's working capital was approximately $282,100 at December
31, 2004, compared to approximately $227,000 at December 31, 2003. The increase
in working capital was primarily attributable to Company profits of
approximately $73,700 plus the effect of net of non-cash items (depreciation
expense) of approximately $4,100. This increase was partially offset by
purchases of other non-current assets (trademarks, equipment and security
deposits).
The Company has negotiated with major suppliers extended credit terms
for new products being developed through these suppliers. The Company has
established a $100,000 line of credit with its bank, which renews in March 2005.
Additionally, the Company has received a term loan from its officer and director
in the amount of $150,474. This loan is repayable in monthly installments of
$10,000 plus interest payable at 5% per month and matures in December 2005.
In late 2004, the Company launched its "Pryme Limited Edition Gold
Series" line of cigar targeted at the upper mid-range customer, which has been
well received by the cigar smoking community. During mid-year 2005, the Company
plans to launch an "Alec Bradley Medalist Label" targeted at the mid-range
retail customer. The Company is continuing its development of new product blends
to expand its sales.
Management believes that the cash generated from the Company's
operations and the existing credit terms 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
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.
10
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
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
11
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.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
12
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.
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.
ITEM 8B. OTHER INFORMATION
None.
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 43 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;
13
(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
required by SEC regulation to furnish the Company with copies of these reports
they file.
To the Company's knowledge, based 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
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
$2,000 as economic conditions permit the Company to do so. When the payment of
his salary is not feasible, no accrual will be made on the Company's financial
records, rather the expense will be accrued as a capital contribution.
The following table sets forth compensation awarded to, earned by or
paid to our sole officer and director for the past 3 years. We have not granted
any stock options, restricted stock awards or stock appreciation rights or made
any long term incentive plan payments.
Summary Compensation Table
--------------------------
Other Annual
Name Year Salary($) Bonus($) Compensation
---- ---- --------- -------- ------------
Alan Rubin 2004 $104,000 $ 2,000 $15,912(3)
2003 $104,000 $10,000 $12,300(1)
2002 $104,000 $10,000 $23,550(2)
(1) Mr. Rubin 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.
(3) Mr. Rubin received approximately $826 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.
14
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.
Beneficial Ownership
--------------------
Name and Address Shares % of Shares
---------------- ------ -----------
Alan V. Rubin
3400 S.W. 26th Terrace, #A-1
Dania, FL 33312 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 pursuant to an equity plan.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 13, 2004, the Company entered into an unsecured financing
agreement with its sole officer. Under the agreement, the Company borrowed
$150,474 and will repay the loan over a period of not more than 15 months
beginning September 2004, at a rate of at least $10,000 per month plus interest
payable at 5% per annum. As of December 31, 2004, the remaining principal
balance on the loan was $120,474. Interest expense paid on this loan was $2,232
for 2004. The officer and the Company agreed to defer one month's payment until
December 31, 2004 with the final payment due by December 31, 2005.
15
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(3)
16.2 Letter from Former Independent Auditor(2)
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 27, 2003.
(3) Previously filed on the Annual Report on Form 10-KSB for fiscal year
ended December 31, 2004
(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.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Fees to Auditors.
Year ended December 31, 2004
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, 2004
was $15,630.
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, 2004 were $-0-.
Tax Fees: The aggregate fees, including expenses, billed by the
Company's principal accountant for tax services 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
2004 was $-0-.
16
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.
Year ended December 31, 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-.
Tax Fees: The aggregate fees, including expenses, billed by the
Company's principal accountant for tax services 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-.
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 29, 2005 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 Registered Public Accounting Firm 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
Report of Independent Registered Public Accounting Firm
To the board of directors and shareholders of
Alec Bradley Cigar Corporation
Dania, Florida
We have audited the accompanying balance sheet of Alec Bradley Cigar Corporation
as of December 31, 2004 and the related statements of operations, shareholders'
equity, and cash flows for the years ended December 31, 2004 and 2003. 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 of Public Company
Accounting Oversight Board (United States). 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 provide 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 Corporation
as of December 31, 2004, and the results of its operations and its cash flows
for the years ended December 31, 2004 and 2003 in conformity with accounting
principles generally accepted in the United States.
JEWETT, SCHWARTZ & ASSOCIATES
Hollywood, Florida
March 18, 2005
F-2
ALEC BRADLEY CIGAR CORPORATION
BALANCE SHEET
As of December 31, 2004
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 113,617
Accounts receivable, net of allowance for doubtful accounts of $4,155 134,037
Inventory 170,590
Prepaid expenses and other current assets 101,328
------------------
TOTAL CURRENT ASSETS 519,572
------------------
FURNITURE AND EQUIPMENT, NET 14,888
INTANGIBLE ASSETS 7,412
------------------
TOTAL ASSETS $ 541,872
==================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 105,475
Note payable - related party 120,474
Income taxes payable 11,495
------------------
TOTAL CURRENT LIABILITIES 237,444
------------------
SHAREHOLDERS' EQUITY:
Common stock, $0.0001 par value, 30,000,000 shares
authorized, 4,499,777 shares issued and outstanding 450
Additional paid-in capital 73,510
Retained earnings 230,468
------------------
TOTAL SHAREHOLDERS' EQUITY 304,428
------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 541,872
==================
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,
2004 2003
---------------- -----------------
NET SALES $ 2,392,858 $ 2,395,274
Cost of goods sold 1,450,975 1,478,797
---------------- -----------------
GROSS PROFIT 941,883 916,477
---------------- -----------------
Operating expenses
Selling expenses 402,595 359,252
General and administrative expenses 441,316 423,912
---------------- -----------------
Total operating expenses 843,911 783,164
---------------- -----------------
INCOME BEFORE PROVISION FOR INCOME TAXES 97,972 133,313
Provision for income taxes 24,286 38,712
---------------- -----------------
NET INCOME $ 73,686 $ 94,601
================ =================
Weighted average common shares outstanding - basic and diluted 4,499,777 4,639,800
================ =================
Earnings per share - basic and diluted $ 0.02 $ 0.02
================ =================
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, 2004 and 2003
Retained
Common Stock Additional Earnings
---------------------------------- Paid-in (Accumulated
Shares Amount Capital Deficit) Total
----------------- ------------ --------------- ----------------- ----------------
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
Net Income - - - 73,686 73,686
----------------- ------------ --------------- ----------------- ----------------
BALANCE AT DECEMBER 31, 2004 4,499,777 $ 450 $ 73,510 $ 230,468 $ 304,428
================= ============ =============== ================= ================
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,
2004 2003
---------------- -----------------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 73,686 $ 94,601
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 4,080 4,467
Changes in current assets and liabilities:
Accounts receivable 10,909 (41,322)
Inventory 157,478 (19,618)
Prepaid expenses (32,323) (48,793)
Accounts payable (286,405) 41,512
Increase (decrease) in income taxes payable (20,055) 31,502
---------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES (92,630) 62,349
---------------- -----------------
CASH FLOW FROM INVESTING ACTIVITIES:
Payment of security deposits (1,015) -
Purchase of trademarks (5,600) -
Purchase of furniture and equipment (15,973) -
---------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (22,588) -
---------------- -----------------
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from line of credit 100,000 -
Repayment on line of credit (100,000) -
Advances from shareholder 150,474 -
Repayment of note from shareholder (30,000) -
---------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 120,474 -
---------------- -----------------
Net Increase in Cash and Cash Equivalents 5,256 62,349
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 108,361 46,012
---------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 113,617 $ 108,361
================ =================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 5,258 $ 2,740
================ =================
Cash paid for income taxes $ 24,286 $ 36,493
================ =================
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, 2004 and 2003
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 Dania, 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.
Impairment of Long Lived Assets and Long Lived Assets to be Disposed Of
- In August 2001, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 144
"Accounting for the Impairment or Disposal of Long-Lived Assets" which
supersedes both SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" and the
accounting and reporting provisions of Accounting Practice Bulletin
("APB") Opinion No. 30, "Reporting the Results of Operations --
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a segment of a business (as
previously defined in that opinion).
This statement establishes the accounting model for long-lived assets
to be disposed of by sale and applies to all long-lived assets,
including discontinued operations. This statement requires those
long-lived assets be measured at the lower of carrying amount or fair
value less cost to sell, whether reported in continuing operations or
discontinued operations. Therefore, discontinued operations will no
longer be measured at net realizable value or include amounts for
operating losses that have not yet occurred. The Company adopted SFAS
No. 144 in the fiscal year ending October 31, 2002.
SFAS No. 144 retains the fundamental provisions of SFAS No. 121 for
recognizing and measuring impairment losses on long-lived assets held
for use and long-lived assets to be disposed of by sale, while also
resolving significant implementation issues associated with SFAS No.
121.
F-7
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
Intangible Assets, net - The Company accounts for intangible assets in
accordance with SFAS 142. Generally, intangible assets with indefinite
lives, and goodwill, are no longer amortized; they are carried at lower
of cost or market and subject to annual impairment evaluation, or
interim impairment evaluation if an interim triggering event occurs,
using a new fair market value method. Intangible assets with finite
lives are amortized over those lives, with no stipulated maximum, and
an impairment test is performed only when a triggering event occurs.
Such assets are amortized on a straight-line basis over the estimated
useful life of the asset. Intangible assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying
amount may not be recoverable. If the fair value is less than the
carrying amount of the asset, an impairment loss is then recognized.
Intangible assets consists primarily of trademarks, whereby the Company
incurred registration and legal fees of approximately $15,000 to
license the trademark.
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 ("SAB")
No. 104. 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, 2004 and 2003 approximated $61,000 and $23,300,
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
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.
F-8
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
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 4,499,777
and 4,693,800 for the years ended December 31, 2004 and 2003,
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 has recently issued several new accounting
pronouncements which may apply to the Company.
In May 2003, the FASB issued Statement No. 149; "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". This Statement
establishes standards for certain changes in the accounting treatment
of derivative contracts. SFAS 149 is effective for contracts entered
into or modified after June 30, 2003, except for certain provisions
that relate to Statement No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003, which
should continue to be applied in accordance with their respective
effective dates. The guidance should be applied prospectively. The
adoption of Statement No. 149 is not expected to have a material impact
on the Company's financial position, results of operations, or
liquidity.
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
F-9
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
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.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities". This interpretation
represents an interpretation of Accounting Research Bulletin No. 51.
The accounting research bulletin requires that a Company's financial
statements include subsidiaries in which the Company has a controlling
financial interest. Financial statement interpretation No. 46 gives
guidance on identifying variable interest entities and on assessing
whether a Company's investment in a variable interest entity requires
consolidation thereof. This interpretation is effective immediately for
investments made in variable interest entities after January 31, 2003
and it is effective in the first fiscal year or interim period
beginning after June 15, 2003 for investments in variable interest
entities made prior to February 1, 2003. The adoption of FASB
Interpretation No. 46 is not expected to have a material impact on the
Company's financial position, results of operations or liquidity.
NOTE 2- FURNITURE AND EQUIPMENT, NET
Furniture and equipment, net consist of the following as of December
31,
2004
-------------
Computer and office equipment $ 23,095
Furniture and fixtures 11,107
-------------
34,202
Less accumulated depreciation 19,314
-------------
$ 14,888
=============
Depreciation expense approximated $2,300 and $3,000, for the years
ended December 31, 2004 and 2003, respectively.
NOTE 3- LINE OF CREDIT
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
F-10
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
Prime, as defined, not to exceed 7.5%. The credit facility matures and
is due and payable in full in March 2005. The Company paid down the
line of credit in full. Upon maturity using funds from its note payable
to a related party, see note 4.
NOTE 4- NOTE PAYABLE TO RELATED PARTY
On August 13, 2004 the Company entered into an unsecured financing
agreement with a shareholder and officer of the company. Under the
agreement, the Company borrowed $150,474 from the officer and will
repay the loan over a period of not more than 15 months beginning
September 2004 at a rate of at least $10,000 per month plus interest
payable at 5% per annum. As of December 31, 2004 the remaining
principle balance on the loan was $120,474. Interest expense paid on
this loan was $2,232 for 2004. The lender and the Company agreed to
defer one month's payment until December 31, 2004 with the final
payment due by December 31, 2005.
NOTE 5- INCOME TAXES
Deferred income taxes arise from timing differences resulting from
income and expense items reported for financial accounting and tax
purposes in different periods. A deferred tax asset valuation allowance
is recorded when it is more likely than not that deferred tax assets
will not be realized. There are no deferred taxes as of December 31,
2004.
The provision for income taxes is comprised of the following:
2004 2003
------------- -------------
Current federal tax provision $ 22,077 $ 35,706
Current state and local tax provision 2,209 3,006
------------- -------------
Total provision for income taxes $ 24,286 $ 38,712
============= =============
The difference between income tax expense computed by applying the
federal statutory corporate tax rate and actual income tax expense is
as follows:
2004 2003
------------- ------------
Statutory federal income tax rate 22 % 34 %
Non-deductible permanent items - % (6) %
State income taxes, net of federal benefit 2 % 1 %
------------- ------------
Effective income tax rate 24 % 29 %
============= ============
F-11
ALEC BRADLEY CIGAR CORPORATION
NOTES TO FINANCIAL STATEMENTS
For the Years Ended December 31, 2004 and 2003
NOTE 6 - COMMITMENTS AND CONTINGENCIES
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. During 2004, the Company's monthly rent
payments for the premises increased from $1,600 to $3,000 per month.
Future minimum payments under this non-cancelable lease are as follows
as of December 31, 2004:
Year Amount
----- ----------
2005 $ 36,000
2006 36,000
2007 9,000
2008 and thereafter -
----------
Total minimum lease payments $ 81,000
==========
Rent expense for the years ended December 31, 2004 and 2003 was $30,134
and $16,200, respectively.
NOTE 7- 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.
Cancellation of Common Stock - In September 2003, the Company redeemed
400,000 shares of its common stock. All such shares were cancelled.
F-12