<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ______________________ to _______________________
Commission file number
THE HAVANA GROUP, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1454529
- -------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio 44718
---------------------------------------------------------------
(Address of principle executive offices)
(Zip Code)
(330) 492-8090
----------------------------------------------------
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15 (d) of the Securities Exchange Act of 1934 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 [ ]
As of August 10, 1998, there were 1,860,000 shares of the Registrant's Common
Stock $.001 par value issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
INDEX
Consolidated Balance Sheets June 30, 1998 (Unaudited) and
December 31, 1997.........................................................3
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 1998 and 1997 (Unaudited)..................................5
Consolidated Statements of Cash Flows - Three Months and Six Months
Ended June 30, 1998 and 1997 (Unaudited)..................................6
Notes to Financial Statements..................................................7
Item 2 - Management's Discussion and Analysis or Plan of Operation............13
Part II - Other Information...................................................16
-2-
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS December 31,
June 30, 1998 1977
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $2,033,017 $79,611
Accounts receivable - trade (less allowance for doubtful
accounts of $5,500) 35,214 37,574
Inventories 530,025 477,907
Deferred catalog expense 28,559 54,183
Prepaid expenses 8,772 3,587
----------- ----------
Total current assets 2,635,587 652,862
DEFERRED FEDERAL INCOME TAX 29,070 29,070
PROPERTY AND EQUIPMENT
Machinery and equipment 85,424 83,575
Furniture and fixtures 11,506 10,946
Data processing equipment 13,320 --
Leasehold improvements 89,024 83,945
----------- ----------
199,274 178,466
Less accumulated depreciation 89,773 84,649
----------- ----------
109,501 93,817
OTHER ASSETS, NET OF ACCUMULATED
AMORTIZATION
Customer lists 445,126 464,479
----------- ----------
$3,219,284 $1,240,228
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31,
June 30, 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Accounts payable $ 75,995 $ 177,893
Due to affiliates 201,602 130,392
Customer advances and other 1,532 8,830
---------- ----------
Total current liabilities 279,129 317,115
STOCKHOLDER'S EQUITY
Preferred stock - $.001 par value, 10,000,000 shares authorized:
Class A - 5,000,000 shares issued and outstanding 5,000 5,000
Class B - 1,100,000 shares issued and outstanding 1,100 1,100
Common stock, $.001 par value, 25,000,000 shares
authorized, 1,860,000 and 1,000,000 shares issued and outstanding 1,860 1,000
Additional paid in capital 6,605,794 1,092,900
Retained earnings (3,673,599) (176,887)
---------- ----------
Total Stockholders' Equity 2,940,155 923,113
---------- ----------
$3,219,284 $1,240,228
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------- -------------------------------
(Unaudited) (Unaudited)
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET REVENUES $ 341,382 $ 342,969 $ 661,983 $ 658,127
COST OF SALES 218,214 178,192 410,776 358,563
---------- ----------- ---------- ----------
GROSS PROFIT 123,168 164,777 251,207 299,564
SELLING EXPENSES 108,756 78,072 212,551 155,417
GENERAL AND ADMINISTRATIVE
EXPENSES 98,398 113,193 185,367 204,811
---------- ----------- ---------- ----------
NET LOSS BEFORE INTEREST
EXPENSE RELATING TO
CONVERTIBLE LOAN (83,396) (26,488) (146,711) (60,664)
INTEREST EXPENSE RELATING TO
CONVERTIBLE LOAN 3,350,000 -- 3,350,000 --
---------- ----------- ---------- ----------
NET LOSS $ (3,433,986) $ (26,488) $(3,496,711) $ (60,664)
============ =========== =========== ==========
BASIC LOSS PER SHARE (unaudited)
LOSS PER SHARE BEFORE
INTEREST EXPENSE ON
CONVERTIBLE LOAN $ (.06) $ (.03) $ (.12) $ (.06)
------------ ----------- ----------- ----------
NET LOSS PER SHARE $ (2.38) $ (.03) $ (2.86) $ (.06)
============ =========== =========== ==========
DILUTED LOSS PER SHARE (unaudited)
LOSS PER SHARE BEFORE
INTEREST EXPENSE ON
CONVERTIBLE LOAN $ (.04) $ (.03) $ (.08) $ (.06)
============ =========== =========== ==========
NET LOSS PER SHARE $ (1.71) $ (.03) $ (1.96) $ (.06)
============ =========== =========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
(Unaudited)
1998 1997
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss before interest expense on conversion of loan $(146,711) $(60,664)
Adjustments to reconcile net loss to net cash
(used) provided by operating activities:
Depreciation and amortization 24,477 19,030
Decrease in accounts receivables - trade 2,360 6,436
(Increase) in inventories (52,118) (2,979)
Decrease (increase) in deferred catalog expense 25,624 (2,069)
(Increase) decrease in prepaid expenses (5,186) 1,338
(Decrease) in accounts payable, customer
advances and other (109,196) (38,497)
---------- --------
Net cash (used) by operating activities (260,750) (77,405)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in fixed assets (20,808) --
CASH FLOWS FROM FINANCING ACTIVITIES
Borrowings on notes payable - related party 200,000 --
Payments on notes payable - related parties (200,000)
Sale of common stock 2,163,754
Increase in due to affiliates 71,210 76,187
---------- --------
Net cash provided by financing activities 2,234,964 76,187
NET INCREASE (DECREASE) IN CASH 1,953,406 (1,218)
CASH - BEGINNING 79,611 5,895
---------- --------
CASH - ENDING $2,033,017 $ 4,677
========== ========
SUPPLEMENTAL DISCLOSURE OF NONCASH
FINANCING ACTIVITY
Interest expense on conversion of loan $3,350,000 $ --
========== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
A. Business Description and Principles of Consolidation - The Havana Group,
Inc. (Company) is in the mail order business and sells to customers
throughout the United States. The Company sells tobacco, cigars, smoking
pipes and accessories. Products are purchased from a variety of
manufacturers. The consolidated financial statements include the accounts
of The Havana Group, Inc., and its wholly-owned subsidiary, Monarch Pipe
Company (Monarch). Monarch manufactures smoking pipes and sells them
exclusively to the Company. All significant inter-company accounts and
transactions have been eliminated in consolidation
B. Reorganization - The Company was formed as a wholly-owned subsidiary of
Duncan Hill, Inc. in December 1997. The operations included in the
accompanying unaudited financial statements prior to December 1997 are
those of E. A. Carey of Ohio, Inc. (Carey), which was dissolved as part
of the reorganization, and Monarch. Carey and Monarch were both
wholly-owned subsidiaries of Duncan Hill, Inc. prior to the
reorganization. The Company acquired the assets and liabilities of Carey
and the common stock of Monarch Pipe in the reorganization, which was
accounted for at historical cost as a reorganization of companies under
common control.
Note 2. Basis of Presentation
A. The accompanying unaudited financial statements have been prepared by the
Company. Certain information and footnote disclosures normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. In the opinion of
the Company's management, the disclosures made are adequate to make the
information presented not misleading, and the consolidated financial
statements contain all adjustments necessary to present fairly the
financial position as of June 30, 1998, results of operations for the
three months and six months ended June 30, 1998 and 1997, and cash flows
for the six months ended June 30, 1998 and 1997.
The results of operations for the three months and six months ended June
30, 1998 are not necessarily indicative of the results to be expected for
the full year.
Per Share Amounts - Net income per share is calculated using the weighted
average number of shares outstanding during the period and additional
shares assumed to be outstanding to reflect the dilutive effect of common
stock equivalents. The only common stock equivalents outstanding were the
2,658,000 Class A Warrants. The number of shares outstanding in computing
basic and diluted earnings per shares for the three months and six months
ended June 30, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------- -----------------------------------
1998 1997 1998 1997
--------------- -------------- --------------- ----------------
<S> <C> <C> <C> <C>
Actual weighted average
number of common
shares outstanding 1,444,176 1,000,000 1,223,315 1,000,000
Effect of dilutive warrants 558,316 -- 558,316 --
------------ ----------- ---------- ----------
Weighted average assuming
conversion used for diluted
earnings per share 2,002,492 1,000,000 1,781,631 1,000,000
============ =========== ========== ==========
</TABLE>
7
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 2. Basis of Presentation (continued)
B. Recently Issued Accounting Pronouncements
In June 1997, SFAS 130, "Reporting Comprehensive Income," was issued.
SFAS 130 established new standards for reporting comprehensive income and
its components and is effective for fiscal years beginning after December
15, 1997. The Company expects that comprehensive income will not differ
materially from net income.
In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Disclosure About Segments of an Enterprise and Related Information."
SFAS 131 changes the standards for reporting financial results by
operating segments, related products and services, geographical areas and
major customers. The Company must adopt SFAS 131 no later than December
31, 1998. The Company believes that the effect of adoption will not be
material.
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This
statement established accounting and reporting standards for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities. It requires recognition of all
derivatives as either assets or liabilities on the balance sheet and
measurement of those instruments at fair value. If certain conditions are
met, a derivative may be designated specifically as (a) a hedge of the
exposure to changes in fair value of a recognized asset or liability or
an unrecognized firm commitment (fair hedge), (b) a hedge of the exposure
to variable cash flows of a forecasted transaction (a cash hedge), or (c)
a hedge of the foreign currency exposure of a net investment in a foreign
operation, an unrecognized firm commitment, an available-for-sale
security, or a foreign-currency-denominated forecasted transaction. The
Company does not anticipate having each of these types of hedges, but
will comply with requirements of SFAS 133 when adopted.
This statement is effective for all fiscal quarters or fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 beginning
January 1, 2000. The effect of adopting SFAS 133 is not expected to be
material.
8
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 3. Parent Corporation
Effective January 1, 1997, the Company contracted with Kids Stuff, Inc.
("Kids"), a subsidiary of Duncan Hill, Inc., to provide telemarketing, order
fulfillment, data processing and certain administrative functions. The Company
is charged for its portion of the expenses on a direct cost basis, as
applicable, or on a pro rata basis. Actual costs are those direct costs that
can be charged on a per order or per hour basis, fixed costs are allocated on
a pro rata basis by dividing the total assets of the Company by the sum of the
total assets of the Company and Kids. Effective January 1, 1998, the Company
renewed this contract with Kids at an annual cost of approximately $206,100
for the administrative, executive and accounting services, as outlined below,
and $2.40 per order processed. The Company is also obligated to pay 5% of its
1998 pre-tax profit to Kids in connection with these administrative and
fulfillment services. Management believes that this is substantially the same
cost that it would incur should it procure these services itself.
Accounting and Payroll Services $34,000
Administration and Human Resource Management 51,600
Data Processing 34,900
Office Equipment and Facilities Use 32,200
Merchandising and Marketing Services 38,100
Purchasing Services 15,300
--------
Total $206,100
========
The Company's accounts receivable and inventories are pledged as collateral on
Kids line of credit. The Company is also a guarantor which is irrevocable. At
July 23, 1998, the balance on the line of credit was $732,000.
Note 4. Stockholders' Equity
A. Common Stock
The Company issued 1,000,000 shares of Common stock to its parent, Duncan
Hill, Inc., in connection with the reorganization (Note 1). The holders
of Common shares are entitled to one vote on all stockholder matters.
The Company is not currently subject to any contractual arrangements
which restricts its ability to pay cash dividends. However, the Company's
Certificate of Incorporation prohibits the payment of cash dividends in
excess of $.05 per common share per year so long as any Serial Preferred
Stock remains outstanding unless all accrued and unpaid dividends on
Serial Preferred Stock has been set apart and there are no arrearages for
the redemption of any Series Preferred Stock.
9
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 4. Stockholder's Equity (continued)
B. Series A Preferred Stock
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix all rights,
preferences, privileges, and restrictions.
On December 8, 1997, the Company issued, as a dividend to Duncan Hill,
Inc., 5,000,000 shares of Series A Preferred Stock (Series A) to Duncan
Hill, Inc. The Series A holders are entitled to one vote for each share
held on all matters submitted to a vote of the stockholders.
The Series A stock is not subject to redemption and has no conversion
rights or rights to participate in dividend payments. In the event of any
voluntary or involuntary liquidation of the Company, each share of Series
A stock has a liquidation preference of $.001 per share.
C. Series B Preferred Stock
On December 8, 1997, the Company issued 1,100,000 shares of its Series B
Convertible Preferred Stock (Series B) to Duncan Hill. In return, Duncan
Hill assumed a $300,000 liability due to an affiliate. Series B has the
same voting privileges as the Common Stock. Each share of Series B stock
is convertible into one share of the Company's Common Stock at the option
of either the holder or the Company upon reaching net pre-tax earnings of
at least $500,000. If declared by the Board of Directors, Series B
shareholders are entitled to receive quarterly dividends of no more than
$.025 per share, payable out of surplus or net profits of the Company. As
of July 23, 1998, the Board of Directors have not declared any dividends.
As the Series B Preferred pays a $.10 dividend per share, the Company has
recorded the Series B stock at $1.00 per share to reflect its estimated
fair value.
The Series B stock is not subject to redemption. In the event
of a voluntary or involuntary liquidation of the Company, each share of
Series B stock has a liquidation preference of $.001, which is
subordinated to the liquidation preference of the Series A stock.
D. In December 1997, the Company issued 138,000 warrants as a dividend to
Duncan Hill, Inc. Upon completion of the Company's initial public
offering, these warrants automatically convert into Class A Warrants
identical to those sold to the public.
E. Sale of Unregistered Securities
In January 1998, the Company borrowed $100,000 from a private investor in
exchange for a convertible promissory note (Convertible Note). The
Convertible Note bore interest at 8% per annum and was converted into
400,000 shares of Common Stock and 1,400,000 warrants. In accordance with
APB 14 and EITF Topic No. D-60, the beneficial conversion feature (in the
amount of $3,350,000) of the note was recognized as additional paid-in
capital and charged to interest expense during 1998.
10
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 5. Bridge Loan
In January 1998, the Company borrowed $100,000 from one private
investor evidenced by a promissory note of $100,000. This is the same private
investor mentioned in Note 4E, "Sale of Unregistered Securities." The note
bore interest at 8% per annum and was paid on May 22, 1998 out of proceeds of
the Company's initial public offering.
Note 6. Employment Agreement
In December 1997, the Company and its CEO entered into an employment
agreement, which among other terms, granted the CEO 200,000 Common Stock
Purchase Warrants at $6.00 per share. The warrants were converted into Class A
warrants upon the effectiveness of the Company's registration statement. The
CEO was also granted an option to purchase 200,000 shares of the Company's
Common Stock, which will vest 20% on each of the following dates: December 1,
1997; January 1, 1998; January 1, 1999; January 1, 2000; and January 1, 2001,
regardless of whether the executive is employed on such dates by the Company.
The vested options will be immediately exercisable and will expire 10 years
from the date of the agreement. The exercise price of the options will be
$6.00 per share, subject to downward adjustments in the exercise price if the
Company meets certain performance goals.
Note 7. Fair Value of Stock Based Compensation
The Company has granted options to purchase 60,000 shares of Common
Stock to certain directors with the same terms as the options granted to the
CEO (Note 6).
The Company accounts for employee stock options in accordance with the
intrinsic value method and, accordingly, no compensation cost has been
recognized. If the Company had elected to recognize compensation using the
fair value nethod, the Company's net loss would have been increased by
approximately $58,600, or $0.05 per share, for the six months ended June 30,
1998.
For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted using the Black-Scholes option
pricing model assuming no dividends, 45% volatility, an expected life of 50%
of the ten-year option terms, and a risk-free interest rate of 6.3%.
11
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Note 8. Public Offering
On May 22, 1998, the Company completed its initial public offering
which was declared effective by the Securities and Exchange Commission on May
14, 1998, whereby the Company sold 460,000 units, each unit consisting of one
share of Common Stock, $.001 par value, and two Class A Warrants. The Company
realized net proceeds of approximately $2,163,754 after payment of offering
expenses of approximately $596,246.
During June 1998, an additional 69,000 units were sold by Duncan Hill
as the overallotment of the Company's public offering.
12
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the information in
the financial statements of the Company and notes thereto appearing elsewhere.
Overview
The Havana Group, Inc. is a consumer catalog business specializing in smoking
pipes, tobaccos, cigars and related accessories. We are the manufacturer and
sole distributor of the "Magic Inch" and "Aerosphere" smoking pipe systems,
and the sole distributor of "Carey Honduran" lines of proprietary hand made
cigars. Our products are offered through our Carey's Smokeshop catalog. Carey
Tobacco Club is also offered through the catalog, which is a monthly program
of tobacco shipments to Club members. During December 1997 we opened, and have
since been developing, our Havana Group retail store.
On May 14, 1998, the Securities and Exchange Commission declared our initial
public offering effective, and it was subsequently completed on May 22, 1998.
Proceeds from that offering amounted to $2,087,071, net of operating expenses
of $672,929.
During the six months ended June 30, 1998, catalog sales provided about 71% of
gross revenues, Club member sales comprised another 20%, and the balance was
provided by the developing retail store.
RESULTS OF OPERATIONS
Three months ended June 30, 1998 compared to the three months ended June 30,
1997.
Net revenues for the quarter ended June 30, 1998 were $341,382, about the same
as that reported for the same quarter last year of $342,969. Tobacco Club
sales declined from $92,949 to $65,392. Sales from the retail store during
this quarter of $26,150 offset that decline producing the minimal change
between quarters.
Cost of sales increased from 52% of net revenues in 1997 to 63.9% in 1998
primarily due to a one-time charge of $23,000 to cigar inventory.
Selling expenses increased from 22.8% of net revenues in 1997 to 31.9% in 1998
because of higher printing costs for the catalog and the build up of sales
staff for the retail store.
For the second quarter 1998, general and administrative expenses amounted to
$98,398, or 28.8% of net revenues, as compared to $113,193, or 33.0% of net
revenues, for the same period last year. This decrease in costs of $14,795 is
due to a decrease in administrative charges from Kids Stuff, Inc., an
affiliated company, which provides support services to Havana. During 1997,
support service costs were allocated to Havana based on the percentage of our
total assets to that of the combined companies. Beginning January 1, 1998, a
contract was established detailing specific fees for support services, as well
13
<PAGE>
as order fulfillment services, provided to us by Kids Stuff. Management
believes these fees are substantially the same as the Company's cost to staff
these functions itself. During this quarter, we were charged approximately
$72,000 as compared to $110,000 allocated during the same quarter last year.
Those costs include fulfillment services.
The operating loss before interest expense for the second quarter of 1998 was
$83,396, or 24.4% of net revenues, as compared to an operating loss of
$26,488, or 7.7% of net revenues, for the same quarter last year. The higher
operating loss was due primarily to the one-time inventory charge, higher
printing costs and costs associated with the start-up of the retail store.
During this quarter, we incurred a one-time interest charge of $3,350,000
because of the accounting for the beneficial conversion feature of a $100,000
convertible promissory note. On May 14, 1998, the note was converted into
400,000 Common Stock shares and 1,400,000 Class A warrants of the Company. See
Note 4E, "Sale of Unregistered Securities", in the NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS.
As a result of the accounting for the beneficial conversion feature, the net
loss for the second quarter of 1998 amounted to $3,433,986, as compared to a
net loss of $26,488 for the same quarter last year.
Six months ended June 30, 1998 compared to six months ended June 30, 1997.
Net revenues for the six months ended June 30, 1998 were $661,983, about the
same as that reported for the same period last year of $658,127. Tobacco Club
sales declined from $192,400 to $136,014. Sales from the retail store during
the current six months of $60,904 offset that decline producing the minimal
change between quarters. We plan to increase marketing and market tests to
improve Tobacco Club membership and related sales, and to more fully develop
the new retail store.
Cost of sales increased from 54.5% of net revenues in 1997 to 62.1% in 1998
primarily due to a one-time charge of $23,000 to cigar inventory as well as
initial, lower margins in the retail store.
Selling expenses increased from 23.6% of net revenues in 1997 to 32.1% in 1998
because of higher printing costs for the catalog and the sales staff build up
and other start-up costs for the retail store.
For the six months ended June 30,1998, general and administrative expenses
amounted to $185,367, or 28.0% of net revenues, as compared to $204,811, or
31.1% of net revenues, for the same period last year. This decrease in costs
of $19,444 is due to a decrease in administrative charges from Kids Stuff,
Inc., an affiliated company, which provides support services to Havana. During
the first six months of 1998, we were charged approximately $146,000 as
compared to $205,000 allocated during the same quarter last year. Those costs
include fulfillment services.
The operating loss before interest expense for the first six months of 1998
was $146,711, or 22.2% of net revenues, as compared to an operating loss of
$60,664, or 9.2% of net revenues, for the same period last year. The higher
operating loss was due primarily to the one-time inventory charge, higher
printing costs and costs associated with the start-up of the retail store.
As a result of the accounting for the beneficial conversion feature previously
discussed, the net loss for the six months ended June 30, 1998 amounted to
$3,496,711, as compared to a net loss of $60,664 for the same period last
year.
14
<PAGE>
Liquidity and Capital Resources
At June 30, 1998, our accumulated deficit increased $3,496,712 from December
31, 1997 because of the net loss.
In addition to the net loss, cash was used by operating activities primarily
to reduce accounts payable and to increase inventories. Cash uses were
marginally offset by non-cash charges of $24,477 for depreciation and
amortization as well as a decrease in deferred catalog costs of $25,624.
Cash was provided by financing activities primarily as a result of our initial
public offering completed May 22,1998. In addition, amounts due affiliates
increased $71,210 representing the net amount due under the support services
agreement with Kids Stuff.
Currently, the Company has no credit facility. However, we have pledged our
assets as guarantee on Kids Stuff's bank line of credit. This is a credit line
of $800,000 with an outstanding balance of $732,000 at June 30, 1998. Interest
is accrued at the bank's prime lending rate plus 1.0%. Under the terms of the
lending agreement, a zero balance should be maintained for 30 consecutive days
during the loan year ending June 30. The bank has waived this requirement for
the loan year ended June 30, 1998.
The Company expects to meet current cash requirements from the working capital
provided by the IPO and ongoing operations.
Forward Looking Statements and Associated Risks
Management's discussion and analysis contains forward looking
statements which reflect Management's current views and estimates of future
economic circumstances, industry conditions, company performance and financial
results. These forward looking statements are based largely on the Company's
expectations and are subject to a number of risks and uncertainties, many of
which are beyond the Company's control. Actual results could differ materially
from these forward looking statements as a result of changes in the trends in
the tobacco or cigar retail and mail order industry, government regulations
imposed on the tobacco industry, competition, availability and price of goods,
credit availability, printers' schedules and availability, and other factors.
Any changes in such assumptions or factors could produce significantly
different results.
15
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this report:
27. Financial Data Schedule
(b) No report on form 8-K was filed during the second quarter of 1998.
16
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
The Havana Group, Inc.
Date: 8/13/98 /s/ William Miller
----------------------
William Miller, CEO
Date: 8/13/98 /s/ William Evans
----------------------
William Evans, VP of Finance
17
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS AND RELATED FOOTNOTES THERETO, OF THE HAVANA GROUP, INC.
</LEGEND>
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> DEC-31-1998 DEC-31-1998
<PERIOD-END> JUN-30-1998 JUN-30-1998
<CASH> 2,033,017 2,033,017
<SECURITIES> 0 0
<RECEIVABLES> 40,714 40,714
<ALLOWANCES> 5,500 5,500
<INVENTORY> 530,025 530,025
<CURRENT-ASSETS> 2,635,587 2,635,587
<PP&E> 199,274 199,274
<DEPRECIATION> 89,773 89,773
<TOTAL-ASSETS> 3,219,284 3,219,284
<CURRENT-LIABILITIES> 279,129 279,129
<BONDS> 0 0
0 0
6,100 6,100
<COMMON> 1,860 1,860
<OTHER-SE> 2,932,195 2,932,195
<TOTAL-LIABILITY-AND-EQUITY> 3,219,284 3,219,284
<SALES> 293,969 572,237
<TOTAL-REVENUES> 341,382 661,983
<CGS> 218,214 410,776
<TOTAL-COSTS> 326,970 623,327
<OTHER-EXPENSES> 93,066 180,034
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,355,333 3,355,333
<INCOME-PRETAX> (3,433,986) (3,496,711)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,433,986) (3,496,711)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,433,986) (3,496,711)
<EPS-PRIMARY> (2.38) (2.86)
<EPS-DILUTED> (2.38) (2.86)
</TABLE>
