HAVANA GROUP INC, 10KSB, 1999-04-14

HAVANA GROUP INC
10KSB, 1999-04-14
CATALOG & MAIL-ORDER HOUSES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)

For the fiscal year ended December 31, 1998

OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)

For the transition period from ________ to ________

Commission File Number: 0-24269

THE HAVANA GROUP, INC.
(Exact name of Registrant as specified in its charter)

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Delaware 34-1454529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization (Identification No.)
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4450 Belden Village St., N.W., Ste. 406
Canton, Ohio 44718
(Address of principal executive offices) (Zip Code)

Registrant's telephone number,
including area code: (330) 492-8090

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value, Class A Common Stock Purchase Warrants

(Title of Class)

Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 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 ___.

Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation S-B is not contained in this form, and no
disclosure will be contained, to the best of Registrant's knowledge, in
definitive proxy or information statements incorporated by reference in part III
of this Form 10-KSB or any amendment to this Form 10-KSB [ ].

As of March 29, 1999 at 4:00 P.M., the aggregate market value of the voting
stock held by non-affiliates, approximately 885,000 shares of Common Stock,
$.001 par value, was approximately $1,549,000 based on the last sale price of
$1.75 for one share of Common Stock on such date. The number of shares issued
and outstanding of the Registrant's Common Stock, as of March 29, 1999 was
1,860,000.

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Item 1. Description of Business

GENERAL

The Havana Group, Inc. (the "Company") is a Delaware corporation engaged in
the business of (i) operating a retail smokeshop in Canton, Ohio which primarily
sells pipes, cigars and smoking accessories; (ii) marketing pipes, tobaccos and
related accessories directly to consumers through its full color catalog (the
"Carey Smokeshop Catalog"); and (iii) providing a program of automatic periodic
shipments of tobacco directly to consumers (the "Carey Tobacco Club"). The
Company intends to create and develop a Cigar Club (the "Havana Group Direct")
pursuant to which the Company will charge certain membership fees and offer
certain cigar purchasing, warehousing and shipping services in return for
membership, purchasing and shipping fees. The Company does not sell cigarettes,
but it may choose to do so in the future.

The Company has one wholly-owned subsidiary namely, Monarch Pipe Company
("Monarch"). Monarch manufactures smoking pipes which are exclusively sold by
the Company. Monarch is located in Bristow Oklahoma. Monarch employs three
people and has the production capacity of 20,000 smoking pipes per year. The
wood used to produce the smoking pipes (i.e. briarwood) is purchased on a
semi-finished basis and Monarch completes the assembly and finishes the final
product. Products produced by Monarch are marketed as middle market pipes, with
retail prices ranging from approximately $20 to $40 and with factory costs of
$6.00 to $9.50 per unit.

The Company's predecessor, E.A. Carey of Ohio, Inc., an Ohio corporation
("Carey"), formed the Company as a Delaware subsidiary on November 26, 1997 and
merged Carey into the Company for the purpose of its reincorporation in
Delaware, which merger was effective December 5, 1997. In connection with this
reincorporation, the Company issued 1,000,000 shares of Common Stock to Duncan
Hill, Inc. ("Duncan Hill") and assumed all liabilities of Carey.

The Company through Carey has been in business for over 40 years. Carey was
formed to sell the patented Carey "Magic Inch" smoking pipe exclusively through
mail order during the 1960's and 1970's. In 1984, Duncan Hill purchased Carey.
Since then, Carey (and now the Company) has operated as a subsidiary under
Duncan Hill's control. Duncan, a publicly-held corporation, is controlled
approximately 68% by William L. Miller, the Company's Chief Executive Officer,
and his wife, Jeanne E. Miller. Unless otherwise indicated, all references in
this Form 10-KSB to the Company include the Company, Monarch and its
predecessor, Carey.

STRATEGIES

The Company believes that its expertise in the marketing and merchandising
of smoking products and the recent introduction of its smokeshop will provide
the basis for future growth by use of the following strategies:

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Development of the Havana Group Direct. The Company plans to develop the
Havana Group Direct, a direct marketing cigar club. The Company would obtain
membership inquiries through magazine and newspaper advertisements, and solicit
memberships by offering services in return for an annual membership fee.
Services would include providing individual humidor space for up to 50 boxes of
cigars, a personalized buying service for the member's cigar preference, and a
periodic newsletter of items of interest for cigar smokers. The Company would
also sell cigars to its members at cost plus a handling charge in return for the
member's annual fee.

The Smokeshop. The Company had operated a smokeshop named "Carey's
Smokeshop" from 1984 to 1996 to maintain a retail presence and provide the
Company with a factory outlet for its overstock products which have not been
sold through the Carey Smokeshop Catalog or the Carey Tobacco Club. In October
1996, the Company closed its retail store, leased an off-mall retail location in
Canton, Ohio, and reopened as "The Havana Group" (hereinafter referred to as the
"Smokeshop") on December 8,1997. The Smokeshop sells pipes, cigars, smoking
accessories, fine wines and imported beers. The Company may expand the number of
retail stores depending upon the success of its existing store and available
external financing, if any.

Maintain Carey's Smokeshop Catalog. The Company believes that Carey's
Smokeshop catalog provides a good initial revenue base. The Company believes
that it must maintain and expand its customer base. The Company plans to alter
the merchandise mix of products offered in the catalog, change the pricing to
reflect more lower price goods, and offer discounts to members joining a Carey
"Tobacco lovers" price club. Additionally, the Company plans to offer
"Make-Your-Own" and "Roll-Your-Own" cigarettes constructed of natural tobaccos.

Establish the Carey site on the World-Wide-Web for e-commerce purposes. The
Company believes that it can successfully sell its products and develop its
business through the world-wide-web and its web site, the havanagroup.com, which
is expected to be established in the second quarter of 1999. The Company would
offer a special department on its web site for Havana Group Direct members so
that special prices could be obtained and the member could access his individual
humidor. Non-member cigar purchases could be made through a second department
that has non-member sale offers and special cigar auctions. The Carey's
Smokeshop Catalog would be available for purchases of pipes, accessories,
tobaccos, and certain cigars selected for catalog use.

MERCHANDISING

The Company designs all of its Carey "Magic Inch" and Duncan Hill
"Aerosphere" smoking pipes and produces them at its Monarch Pipe facility in
Oklahoma. The current Carey catalog contains 18 design groups marketed as
various series, such as "The Executive Collection" or "Carey Classic Series."
Additionally, the Company offers other hand made imported smoking pipes in its
catalog, generally at retail prices from $19.95 to $79.95 each. The Company
sources these products from international suppliers and from domestic
distributors of imported pipes.

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The Company merchandises tobaccos and cigars from domestic sources, which
either import their products or manufacture in this country. Carey offers 28
tobacco blends in its current catalog, along with 23 different brands and sizes
of cigars. Because of the composition of the catalog customer base, cigar sales
are generally mid-range in the cigar market, with the most popular cigar the
Carey Honduran bundle, which retails from $1.15 to $1.60 per cigar. Because of
the upscale target market of the retail store, cigar sales range from $2.50 to
$7.50 per cigar, with an average price of $5.00 per cigar.

The Company intends to merchandise cigars for its Havana Group Direct
marketing cigar club by offering its own private label "Havana Group" cigar,
plus other well known and established brand names, such as "Arturo Fuente", "H.
Upmann", "Dunhill", "Montecruz", "Partagas", "Punch", "Ashton", "Macanudo" and
others. It is the Company's intent to price brand name cigars at full retail
markups and then offer the club member a discount for purchases in box
quantities for storage in their Havana Group personal humidor.

MARKETING

Currently, the Company markets its products directly to consumers through
its "Carey's Smokeshop" catalog, and through its "Carey Tobacco Club." For the
year ended December 31, 1998, Carey mailed 357,961 catalogs, which generated
average gross revenues of $2.54 per catalog mailed. The catalog consists of 48
full color pages, with approximately 80% offering pipes, tobaccos, and related
accessories, approximately 20% offering cigars and cigar related accessories and
the remaining balance of the catalog offering various men's products.

Carey Tobacco Club, in operation since 1975, is a program of automatic
periodic shipments of tobacco directly to consumers. Members are solicited in
the catalog, and in return for their membership agreement they are offered
products at a discounted price. The member selects the blend, the quantity of
tobacco per shipment and the frequency of the shipments. Billing is by credit
card or a Carey open account. Carey Tobacco Club relies upon brand loyalty, and
the Company estimates that 80% of the Club membership have been members in
excess of five years. At December 31, 1998, Carey Tobacco Club had 1,804 active
members who placed 12,355 orders during the year ended December 31, 1998, and
generated $271,942 in gross sales in 1998 for the Company.

The Company plans to create and develop the "Havana Group Direct," a direct
marketing cigar club. The Company would develop its member base using the same
marketing methods it has historically used in the smaller pipe and tobacco
business, namely using magazine and newspaper advertising to generate a Havana
Group inquiry and then converting the inquiry to a membership using direct
marketing techniques, including direct mail, CD Rom and telemarketing. The
Company has retained Simmons Market Research Bureau to identify advertising
media containing cigar smokers of similar demographic characteristics. The
Company believes that it can successfully generate Havana Group cigar club
members on the aforementioned basis.

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The Company plans to offer its Havana Group Direct cigar club membership on
an annual fee basis, and to offer certain services in return for the membership
fee. The Havana Group Direct would construct its own climate-controlled
warehouse, and each member would receive their personal humidor capable of
storing up to 50 boxes of cigars within the Havana Group Direct humidified
warehouse. The Havana Group Direct would encourage purchase and collection of
fine cigars by each member, and distribute those cigars to the member in any
requested quantity by first and second day air shipment. Each member would be
invoiced for the purchase of the cigars and courier service. To encourage
collection of fine cigars, Havana Group Direct would offer a personal buying
service for any premium cigar desired by the individual member (however, the
Company will not sell products made in Cuba). The product would be supplied from
stock or, alternatively, would be sourced and purchased for the member's
account. Upon receipt, the cigars would be shipped to the member or placed in
the member's personal humidor for later distribution as requested. Havana Group
Direct would identify this as "Concierge Level" services.

Havana Group Direct anticipates that all cigars cannot be supplied from its
own inventory, and that many requested brands will be subject to deliveries from
the major manufacturers. In cases where the requested cigars are not in stock at
the time of the member's request, Havana Group Direct will place the cigars on
order for the member's account.

The Company had operated a retail outlet, "Carey's Smokeshop," since 1984.
In October 1996, the Company closed the outlet, redesigned the planning and
marketing strategies, and reopened the Smokeshop in Canton, Ohio, as The "Havana
Group" during December 1997.

The new retail outlets offer product groups proven historically in the
smokeshop industry, and has added other product lines, such as fine wines and
imported beers. At its current location, the Company has determined the mix of
product by taking proven product lines of smokeshops, and deleting certain
product lines inconsistent with The Havana Group image. Such product lines
dropped include domestic cigarettes, smokeless tobacco, candy, gum, snacks and
greeting cards. The Company would expand its retail efforts upon evaluation of
its Canton, Ohio store.

CUSTOMER SERVICE AND TELEMARKETING

During 1998, the Company derived approximately 66% of its revenues through
orders placed over the telephone and emphasizes superior customer service. The
Company's payment terms have been major credit cards, checks or open account.
The Company's return policy is unconditional, and provides that if a customer is
not satisfied with his or her purchase for any reason, it may be returned within
30 days for a full refund or exchange. If a shipping error has occurred the
Company will issue call tags to pick up merchandise shipped in error and will
send a corrected shipment. The Company's return rate is approximately 4.2% of
sales. The Company purchases telemarketing services from its affiliate, Kids
Stuff, Inc. ("Kids Stuff"), a publicly-held corporation controlled by Duncan

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Hill. During the past three fiscal years, Kids Stuff processed over 75,000
telephonic customer orders, catalog requests and service requirements on behalf
of the Company.

FULFILLMENT AND DELIVERY

The Company's fulfillment and delivery objective is to provide excellent
customer service within a low cost structure. The Company purchases its
fulfillment operations from its affiliate, Kids Stuff. Kids Stuff's facility
consist of 28,000 square feet of leased facilities in North Canton, Ohio. The
facility is designed to process incoming shipments on a palletized or boxed
basis, and to process outgoing shipments on an individualized cost effective
basis. Orders shipped are individually recorded and posted through the use of
barcode scanners, so that sales records and credit card deposits are
electronically posted. Kids Stuff's fulfillment center processed over 80,000
Havana Group shipments in the past three fiscal years.

INVENTORY/PURCHASING

The Company conducts its purchasing operations at its general offices in
Canton, Ohio. Each catalog contains approximately 336 products or stock keeping
units (SKU's). Each product is reviewed weekly through the use of computerized
reports that provide detailed information regarding inventory value, unit sales,
and purchasing delivery times. Products are ordered as required for the
Company's inventory.

PRODUCT SOURCING

The Company acquires products for resale in its catalogs from numerous
domestic and international vendors. All "Carey" and "Duncan Hill" pipes are
manufactured by the Company's wholly-owned subsidiary, Monarch. Monarch supplies
approximately 16% of the Company's catalog products. Other than Monarch, the
Company currently has three vendors that supply more than 10% of its catalog
products. These companies include Lane Limited (30%), Hollco-Rohr Co. (15%) and
Consolidated Cigar Inc. (10%). Any disruption of service from any of these
companies may have an adverse effect on the Company's future sales. Although
these suppliers provide a substantial portion of the Company's catalog product,
the Company believes that, with the exception of products made by Monarch, most
products can be sourced from alternative suppliers. The Company acquires
products for sale in the retail store from numerous domestic vendors.

SEASONALITY

The Company's revenues are not significantly impacted by seasonal
fluctuations, as compared to many other retail and catalog operations. The
Smokeshop customer is believed to be generally the end user of the product so
purchases are spread throughout the year, rather than being concentrated between
October and December, as are traditional gift purchases.

The Company's experience with the Smokeshop has been limited to one season

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and has not afforded the Company the opportunity to determine seasonality
fluctuations for that segment of its business. However, the Company estimates a
slight increase in fourth quarter sales due to traditional gift purchasing.
Otherwise, the Company estimates a steady revenue flow from month to month.

DATA PROCESSING

The Company currently does not have any data processing equipment. It
currently relies upon Kids Stuff to provide data processing services. The
Company is allocated its portion of data processing costs.

AGREEMENT WITH KIDS STUFF

Prior to January 1, 1997, all fulfillment and administrative services of
the Company were performed and paid for by Duncan Hill which also provided
similar services to its subsidiary, Kids Stuff. Fulfillment services included
order taking, order processing, customer service, warehouse packing and
delivery, telephone contracts and shipping contracts. Fulfillment services were
charged to the Company and Kids Stuff based on the actual cost. Administrative
services included wages and salaries of officers, accounting, purchasing,
executive and creative/marketing personnel. It also included, all leases,
contracts, equipment rentals and purchases, audit, legal, data processing,
insurance and building rent and maintenance. The administrative costs were
allocated by Duncan Hill to the Company and Kids Stuff based upon the percentage
of assets for each operating subsidiary to the total assets for all operating
subsidiaries. The percentages for 1996 were 31% to the Company and 69% to Kids
Stuff.

During 1997, all administrative and fulfillment services were performed or
paid by Kids Stuff on behalf of the Company. All fulfillment services were
contracted and paid by Kids Stuff and charged to the Company based on the actual
cost. All administrative costs were allocated between the Company and Kids Stuff
based upon the percentage of assets for each respective operating company to the
total assets for both operating companies with 33% charged to the Company for
the period January 1, 1997 through June 30, 1997 and 21% charged to the Company
for the period July 1, 1997 through December 31, 1997. Duncan Hill incurred
certain other costs which included legal and outside accounting/auditing
expenses. These costs were allocated to the Company and Kids Stuff based on the
same method and percentages as described above.

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services itself. The Company was also obligated to pay Kids Stuff an amount
equal to 5% of the Company's 1998 pre-tax profits, of which there were none, as
additional consideration for Kids Stuff providing the Company with
administrative and fulfillment services. This agreement has been extended by the
parties on a month-to-month basis. In addition to the above, the Company also
expects to incur additional administrative costs such as the salaries of the
Company's Chief Executive Officer, legal, accounting, depreciation and
amortization and tax expenses which costs will be incurred by and paid for
directly by the Company.

COMPETITION

The Company believes that there are currently approximately 1,000 to 1,500
full line smoke shops in the United States. While certain retail smoke shops
have adopted catalogs and mail order techniques as a method for creating
additional revenue, the Company believes that the number of retailers involved
in this area of distribution to be relatively small in number. The Company has
identified four companies that are involved in mail order as a primary method of
sales and distribution, and believes that this constitutes the Company's primary
current mail order competition. The four identified competitors, which include
800 JR Cigar, Thompson's Cigar, Fred Stoker & Sons, Inc., and Fink are all mail
order cigar businesses that are substantially larger than the Smokeshop.
Management believes that the largest competitor in the mail order cigar business
is 800 JR Cigar. Competition in all aspects of the Company's business is intense
with many competitors having more experience and greater financial resources
than the Company. No assurances can be given that the Company will be able to
successfully compete in all aspects of its business in the future.

TOBACCO INDUSTRY--GOVERNMENT REGULATIONS

The tobacco industry is subject to regulation in the United States at the
federal, state and local levels, and the recent trend is toward increasing
regulation. A variety of bills relating to tobacco issues have been recently
introduced in the United States Congress, including bills that, if passed,
would: (i) curtail the advertising and promotion of all tobacco products and
restrict or eliminate the deductibility of such advertising expenses; (ii)
increase labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; (iii) modify
federal preemption of state laws to allow state courts to hold tobacco
manufacturers liable under common law or state statutes; (iv) shift regulatory
control of tobacco products at the federal level from the United States Federal
Trade Commission (the "FTC") to the United States Food and Drug Administration
(the "FDA") and require the tobacco industry to fund the FDA's oversight; (v)
increase tobacco excise taxes; (vi) restrict the access to tobacco products by,
among other things, banning the distribution of tobacco products through the
mail, except for sales subject to proof of age; (vii) require licensing of
retail tobacco product sellers; (viii) regulate tobacco product development; and
(ix) require tobacco companies to pay for healthcare costs incurred by the
federal government in connection with tobacco related diseases. Although
hearings have been held on certain of these proposals, to date, none of such
proposals have been passed by Congress. Future enactment of such

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proposals or similar bills may have a material adverse effect on the Company's
business, results of operations and financial condition.

In August 1996, the FDA determined that nicotine is a drug. Accordingly,
the FDA determined that it had jurisdiction over cigarettes and smokeless
tobacco products, pursuant to the FDA determination that cigarette and smokeless
tobacco products are drug delivery devices used for the delivery of nicotine.
Although certain legal challenges to the FDA's determination are pending, there
can be no assurance that such determination will not be upheld, nor that in the
future, the FDA will not prevail in an attempt to extend such jurisdiction to
cigars. In addition, a majority of states restrict or prohibit smoking in
certain public places and restrict sale of tobacco products (including cigars)
to minors. Local legislative and regulatory bodies have increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. Individual establishments such as bars and
restaurants have further prohibited pipe and cigar smoking even though other
tobacco products are permitted in such establishments. Further restrictions of a
similar nature could have a material adverse effect on the business, results of
operations and financial condition of the Company. Numerous proposals have also
been considered at the state and local level restricting smoking in certain
public areas. Federal law has required health warnings on cigarettes since 1965
and on smokeless tobacco since 1986. Although no federal law currently requires
that cigars carry such warnings, California has enacted laws requiring that
"clear and reasonable" warnings be given to consumers who are exposed to
chemicals determined by the state to cause cancer or reproductive toxicity,
including tobacco smoke and several of its constituent chemicals. Similar
legislation has been introduced in other states. In addition, effective January
1, 1998, smoking, including cigar smoking, has been banned by the State of
California in all bars, taverns and clubs where food and alcohol is served.
Other legislation recently introduced in a state would, if enacted, require
warning labels on cigar boxes. Certain states have enacted legislation which
require cigar manufacturers to provide information on the levels of certain
substances in their cigars to these states on an annual basis. There can be no
assurance that such legislation or more restrictive legislation will not be
passed by one or more states in the future. Consideration at both the federal
and state level also has been given to consequences of second hand smoke. There
can be no assurance that regulations relating to second hand smoke will not be
adopted or that such regulations or related litigation would not have a material
adverse effect on the Company's business, results of operations and financial
condition.

Increased cigar consumption and the publicity such increase has received
may increase the risk of additional regulation of cigars. Increased publicity
may prompt research studies by various agencies such as the National Cancer
Institute, the American Cancer Society, and others. Such research can, by its
ultimate content, influence additional regulation of cigars by federal, state,
and local regulatory bodies. There can be no assurance that any such legislation
or regulation would not have a material adverse effect on the Company's
business, results of operations and financial condition.

On a national level, Senate Bill 1415 had been introduced by Senator John
McCain. During 1998, this Bill proposed the comprehensive regulation of tobacco
products, but at

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the time of its introduction, it specifically excluded the regulation of cigars
and pipe tobacco. However, the Bill did contain a provision requiring the
Secretary of Health and Human Services to monitor the use of cigars and pipe
tobacco by underage individuals. The Secretary would have been required to
notify Congress "if the Secretary determines that a decrease in underage use of
tobacco products resulting from the enactment of Senate Bill 1415 has produced
an increase in underage use of pipe tobacco and cigars." Presumably, at that
time, Congress would have to consider expanding the definition of regulated
products to include cigars and pipe tobacco. While this Bill was not passed by
the Senate during 1998, there is no assurance that similar bills will not be
passed by the current or future Congress.

Beyond Congressional action, federal regulators have also been examining
whether the cigar industry merits tougher rules, as well. In early 1998, the
Federal Trade Commission ordered cigar manufacturers to report how they market
cigars, how much they spend on advertising, and who is buying their products.
The FTC Chairman indicated that warning labels might be justified in the future.

TOBACCO INDUSTRY LITIGATION

The tobacco industry has experienced and is experiencing significant
health-related litigation. Private plaintiffs in such litigation are seeking
compensatory and, in some cases, punitive damages, for various injuries claimed
to result from the use of tobacco products or exposure to tobacco smoke, and
some of these actions have named cigarette distributors as well as manufacturers
as defendants. Over 40 states have filed lawsuits against the major United
States cigarette manufacturers to recover billions of dollars in damages,
primarily costs of medical treatment of smokers. On June 20, 1997, the Attorney
General of 40 states and several major cigarette manufacturers announced a
proposed settlement of the lawsuits filed by these states (the "Proposed
Settlement"). The Proposed Settlement, which would have required Federal
legislation to implement was rejected by Congress. The Proposed Settlement would
have significantly changed the way in which cigarette companies and tobacco
companies do business. Among other things, the tobacco companies would have been
required to pay hundreds of billions of dollars to the various states; the FDA
could have regulated nicotine as a "drug" and tobacco products as "drug delivery
devices;" all outdoor advertising, sports event advertising and advertising on
non-tobacco products would have to be banned and certain class action lawsuits
and punitive damage claims against tobacco companies would have been prohibited.
There can be no assurance that similar litigation will not be brought against
cigar manufacturers and distributors. The potential costs to the Company of
defending prolonged litigation and any settlement or successful prosecution of
any health-related litigation could have a material adverse effect on the
Company's business, results of operations and financial condition.

The State of Florida has entered into a settlement agreement with major
United States cigarette manufacturers with respect to tobacco products,
including roll-your-own and little cigars. This settlement agreement provides,
in part, for a ban on billboard and transit advertising, significant document
disclosure by the settling cigarette companies and

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billions of dollars in settlement payments. The State of Mississippi announced a
separate settlement agreement with major cigarette manufacturers which provides
for a payment of $4.0 billion. The recent increase in the sales of cigars and
the publicity of such increases may increase the probability of legal claims.

During 1998, five major cigarette manufacturers and one smokeless tobacco
manufacturer entered into a separate agreement (the "Master Settlement
Agreement") with 46 states to settle Medicaid claims. The manufacturers pledged
$205 billion over a 25- year period and agreed to eliminate outdoor billboard
advertising of tobacco products and certain other minor advertising
restrictions. A "Model Law" was proposed as part of the agreement but it is up
to each individual state legislature to enact legislation to codify the
agreement on a state-by-state basis. There is no guarantee that the states will
enact legislation similar to, or if at all like, the Model Law. As the agreement
is between the major manufacturers and the various states, there is no Provision
for FDA regulation of cigarette and smokeless tobacco manufacturing or
marketing. However, there is no guarantee that the U.S. Congress will not enact
legislation granting the FDA, or other governmental agencies, additional
regulatory authority over the manufacturing and marketing of tobacco products,
including cigars and pipe tobaccos.

PRODUCT LIABILITY INSURANCE

There is a possibility that someone could claim personal injury or property
damage resulting from the use of products purchased from the Company. As a
seller of tobacco products, the Company is exposed to potential liability. Since
1990, the Company's parent, Duncan Hill, has maintained, for itself and its
subsidiaries, product liability insurance. Currently, the amount of coverage is
$1 million per occurrence and $2 million in the aggregate. The policies are for
a period of one year and are currently in effect through September 17, 1999.
Although the Company believes that its present insurance coverage is sufficient
for its current level of business operations, there is no assurance that such
insurance will be sufficient to cover potential claims, or that adequate,
affordable insurance coverage will be available to the Company in the future. A
partially or completely uninsured successful claim against the Company or a
successful claim in excess of the liability limits or relating to an injury
excluded under the policy could have a material adverse effect on the Company.

OTHER REGULATORY MATTERS

The Company's business, and the catalog industry in general, is subject to
regulation by a variety of state and federal laws relating to, among other
things, advertising and sales taxes. The sale of beer and wine is regulated in
Ohio by the Ohio Department of Liquor Control which requires the Company to be
licensed in order to sell such products. The Federal Trade Commission regulates
the Company's advertising and trade practices and the Consumer Product Safety
Commission has issued regulations governing the safety of the products which the
Company sells in its catalogs. Under current law, catalog retailers are
permitted to make sales in states where they do not have a physical presence
without collecting sales tax. The Company believes that it collects sales in
states where

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it is required to do so. The Company has no claims or regulatory matters in
process or pending as of the date of this Form 10-KSB.

PATENTS, TRADEMARKS AND TRADE NAMES

The Company owns two patents: one for the Aerosphere Smoking system; and
one for the Carey Magic Inch Smoking System. The Company also owns the
registered trademarks of the Duncan Hill smoking pipe, "EA Carey" the registered
trade name for the Carey smoking pipe, and "Magic Inch," the registered trade
name of the Carey smoking system. All trademarks and patents are currently
maintained in effect, with the exception of the U.S. patent for the Carey Magic
Inch Smoking System which has expired.

EMPLOYEES

As of February 28, 1999, the Company has four full-time salaried management
employees, six hourly full-time employees, and two hourly part-time employees in
its order entry and customer service departments, retail store, and its Monarch
pipe manufacturing facility.

Item 2. Description of Property.

The Company's principal offices are located in Canton, Ohio, and are shared
with the Company's parent and Kids Stuff. The facility consists of 5,600 square
feet and is leased by Duncan Hill through September 30, 1999 with options to
renew for a period of one year. The Company's warehouse and distribution center
is currently operated by Kids Stuff. It is located in North Canton, Ohio and
consists of approximately 28,000 square feet, which is leased for a one year
term expiring September 30, 1999. The Company utilizes approximately 5,000
square feet of this building. Currently, all leases are in the name of Duncan
Hill, and the rent is paid by Kids Stuff. The Company currently pays $32,200 per
annum to Kids Stuff for the use of the aforementioned facilities and for use of
certain equipment.

Kids Stuff intends to establish and lease a new operations center of
approximately 34,000 square feet in 1999. This operation center, which is
expected to be located in or about Canton, Ohio, would include customer
relations, order entry and warehouse and distribution operations and would
replace its existing warehouse facility. The Company intends to sublease these
planned facilities from Kids Stuff at market value.

Item 3. Legal Proceedings

In the normal course of business, the Company may be involved in various
legal proceedings from time to time. Presently, however, the Company is not a
party to any litigation, whether routine or incidental to its business, or
otherwise.

Item 4. Submission of Matters to a Vote of Security Holders.

Not applicable.

<PAGE>
PART II

Item 5. Market for Common Equity and Related Stockholder Matters.

In May 1998, the Company sold 460,000 Units to the public, each Unit
consisted of one share of Common Stock, $.001 par value, and two Redeemable
Class A Common Stock Purchase Warrants. Each Class A Warrant entitles the holder
to purchase one share of Common Stock at a price of $5.25 and is exercisable at
any time until the close of business on May 14, 2003. The Common Stock and Class
A Warrants are quoted on the OTC Electronic Bulletin Board of the National
Association of Securities Dealers, Inc. ("NASD") under the symbols "HVGP" and
"HVGPW", respectively. As of March 29, 1999 at 4:00 P.M. Eastern Standard Time,
the last sale price of the Common Stock and Class A Warrants in the
over-the-counter market were $1.75 and $.53, respectively. The following table
reflects the high and low sales prices for the Company's Common Stock and Class
A Warrants for the periods indicated as reported by the NASD.
<TABLE>
<CAPTION>

Common Stock
Fiscal Year Ended December 31, 1998: HIGH LOW
<S> <C> <C>
May 15 - June 30 $12.50.............................$ 5.75
Third Quarter 7.50...............................3.125
Fourth Quarter 5.125..............................3.375

Class A Warrants
Fiscal Year Ended December 31, 1998:
May 15 - June 30 $ 2.125.............................$0.75
Third Quarter 2.625..............................0.50
Fourth Quarter 2.125..............................0.25

</TABLE>

The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.

The Company had 6 record holders as of March 29, 1999 as reported by its
transfer agent (Harris Trust Company of New York). The foregoing does not
include beneficial holders of the Company's Common Stock which are held in
"street name" (i.e. nominee accounts such as Depository Trust Company).

No cash dividends have been paid by the Company on its Common Stock and no
such payment is anticipated in the foreseeable future.

<PAGE>
Item 6. Managements' 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 in
this Form 10-KSB.

The Company is a consumer catalog business specializing in smoking pipes,
tobaccos, cigars and related accessories. The Company manufactures and
distributes the "Magic Inch" and "Aerosphere" smoking pipe systems, and the
"Carey Honduran" lines of proprietary hand made cigars The Company's products
are presently offered through the "Carey's Smokeshop" catalog. The Carey Tobacco
Club is also offered through the catalog, which is a monthly program of tobacco
shipments to Club members. During December 1997 the Company opened The Havana
Group retail store.

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR
ENDED DECEMBER 31, 1997.

Total net sales for the year ended December 31, 1998 were $1,354,164, a
decrease of 5.1% from 1997 sales of $1,427,574. Net sales include sales from
merchandise, shipping and handling charges and mailing list rental. Tobacco Club
sales decreased $96,957, a decline of 26.3% from 1997 sales of $368,009. This
decline was largely offset by the revenue increase of the retail store, which
increased to $122,480 in 1998 compared with $8,781 in 1997. Sales of the "Carey
Smokeshop" catalog segment declined 3.6% to $1,013,336 in 1998, compared to
$1,050,784 in 1997.

Cost of sales as a percentage of net sales increased from 54.2% for 1997 to
66.5% for 1998. The largest factor for this was the increase in merchandise
costs, as a percentage of net sales. Merchandise costs increased from 34.3% of
net sales in 1997 to 42.6% of net sales in 1998. The Company attributes this
increase to product tests and promotions of premium cigars, especially in the
fourth quarter of 1998. Premium cigars typically carry lower gross margins and
higher costs of sales that the Company's proprietary pipes and tobaccos.

Selling expenses, as a percentage of net sales, increased from 22.2% for
1997 to 32.1% for 1998. This reflects slightly higher catalog advertising costs
from 18.5% of sales in 1997 to 20.0% of sales in 1998, and also increased
marketing expense due to retail store operations. The expense of sales personnel
in the retail store is reflected in the Company's selling expenses. General and
administrative expenses during 1998 were $473,598, or 35.0% of net sales,
compared with $398,952, or 27.9% of net sales, for the year ended December 31,
1997. The increase is attributable to increased direct costs of operations, such
as executive wages, professional fees, and travel expense that are in excess of
those provided for in the Company's operating agreement with Kids Stuff.
Effective January 1, 1998, the Company has an agreement with Kids Stuff whereby
Kids Stuff provides administrative functions to the Company at an annual cost of
$206,100. Kids Stuff is also providing fulfillment services to the Company at a
cost of $2.40 per order

<PAGE>
processed. The aforesaid $206,100 and $2.40 per order processed is based upon
actual costs incurred by Kid Stuff in 1997.

Net loss for the year ended December 31, 1998 was $3,829,372, compared with
a net loss of $61,772 for the year 1997. Non-cash interest expense associated
with a note conversion contributed $3,350,000 of the loss incurred in 1998, and
is described more fully in the Company's financial statement footnotes. The
Company's operating loss of $454,603 was due to reduced gross profit margins and
higher selling expenses due to premium cigar promotional activity and the
promotion of the Company's retail store.

LIQUIDITY AND CAPITAL RESOURCES

In May 1998, the Company sold its securities in an initial public offering
("IPO") as described under "Item 5." Net proceeds of the offering amounted to
approximately $1,917,282.

At December 31, 1998, the Company had a deficit in retained earnings of
$4,006,259, compared to a deficit in retained earnings of $176,887 at December
31, 1997. This resulted from an operating loss of $454,603 for the year ended
December 31, 1998 and a $3,374,769 charge to earnings as interest expense, which
includes $3,350,000 non-cash portion relating to a note conversion. For the year
ended December 31, 1998, the impact of the operating loss on the Company's cash
position was decreased by changes in working capital which effected operating
activities. The operating activities consumed $79,270 in cash through increases
in accounts receivable, inventories and other assets and decreases in accounts
payable, but provided $24,998 from a decrease in deferred catalog expenses and
prepaid expenses. The net effect of these changes and non-cash charges of
$54,608 relating to depreciation and amortization, when added to the Company's
net loss, resulted in net cash used by operating activities of $479,036. For the
year ended December 31, 1998, the Company purchased property and equipment in
the amount in the amount of $53,791. Financing activities during 1998 provided
cash of $2,087,492 as a result of net proceeds from the sale of Common Stock of
$1,917,282, proceeds from the sale of a convertible note of $100,000 and an
increase in amounts due to affiliates of $70,210. The Company's ending cash
balance increased to $1,634,276 at December 31, 1998.

At December 31, 1997, the Company had a deficit in retained earnings of
$176,887, compared to retained earnings of $684,885 at December 31, 1996. This
resulted from a net loss of $61,772 for the year ended December 31, 1997 and an
$800,000 adjustment to estimated fair value of 1,100,000 shares of Series B
Preferred stock issued to Duncan Hill. For the year ended December 31, 1997, the
impact of the operating loss on the Company's cash position was increased by
changes in working capital which effected operating activities. The operating
activities consumed $224,327 in cash through increases in accounts receivable,
inventories, deferred catalog expenses and prepaid expenses, but provided
$37,104 from an increase in accounts payable, customer advances and other
accrued expenses. The net effect of these changes and non-cash charges of
$39,780 relating to depreciation and amortization, when added to the Company's
net loss, resulted

<PAGE>
in net cash used by operating activities of $209,215. For the year ended
December 31, 1997, the Company's financing activities provided $378,322 in cash,
from changes in current obligations to/from affiliates, and used $500 for the
return of additional capital contribution to Duncan Hill for net cash used by
financing activities of $377,822. The Company's investing activities used
$94,891 in investments in fixed assets during 1997. For the year ended December
31, 1997, the combined effect of net cash used by operating activities of
$209,215, net cash provided by financing activities of $377,822, and cash used
by investing activities of $94,891 resulted in an increase in cash of $73,716
from $5,895 at December 31, 1996 to $79,611 at December 31, 1997.

The Company has no credit facility at the current time. However, the assets
of the Company are pledged as collateral along with the assets of Duncan Hill to
guarantee an $800,000 bank line of credit in the name of Kids Stuff. Kid Stuff's
bank line of credit had a balance of $762,000 at February 28, 1999. The
repayment of the facility is guaranteed by Miller and the Company. Interest is
charged at the rate of 1% over prime. It is the policy of the bank to review the
credit facility annually, and to require that the Company maintain a zero
balance on the credit line for a period of thirty consecutive days sometime
during the course of each year. The bank agreed to waive the "zero balance"
required for fiscal 1997 and 1998. The amount outstanding under the line of
credit is payable upon demand. The line of credit agreement expired June 30,
1998 and Kids Stuff is in the process of renegotiating the line of credit with
the bank.

In December 1997, the Company's predecessor, Carey, effected a
reincorporation in Delaware and recapitalized the Company by replacing the 100
shares of no par value Carey common stock owned by the Company's parent, Duncan
Hill with 1,000,000 shares of the Company's $.001 par value Common Stock and
5,000,000 shares of Series A Preferred Stock (and 138,000 warrants which
converted into Class A Warrants identical to those sold in the IPO) through a
stock split and stock dividend.

The Company also issued to Duncan Hill 1,100,000 shares of Series B
Convertible Preferred Stock in exchange for Duncan Hill's assumption of a
$300,000 liability due to Kids Stuff. The Series B Convertible Preferred shares
are convertible at the option of the holder into the Company's Common Stock at
any time after the Company's pre-tax earnings reach $500,000 in any given
calendar year on a one to one conversion basis.

On January 23, 1998, the Company borrowed $200,000 in bridge financing from
a bridge lender. The Company issued a non-convertible note in the principal
amount of $100,000, which was repaid in May 1998 upon the completion of the
Company's IPO and a convertible note in the principal amount of $100,000. Each
note bore interest at the rate of eight (8%) percent per annum. The convertible
note automatically converted into a total of 400,000 shares of the Company's
Common Stock and 1,400,000 Class A Warrants on May 14, 1998 as a result of the
Company's completion of its IPO. As a result of this financing, the Company
recognized a one-time non-cash interest charge to earnings of approximately
$3,350,000 in 1998. See "Notes to Consolidated Financial Statements."

<PAGE>
In October 1995, Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation, was issued which establishes accounting
and reporting standards for stock-based compensation plans. This standard
encourages the adoption of the fair value-based method of accounting for
employee stock options or similar equity instruments, but continues to allow the
Company to measure compensation cost for those equity instruments using the
intrinsic value-based method of accounting prescribed by Accounting Principles
Board Opinion No. 25, Accounting for Stock Issued to Employees. Under the fair
value-based method, compensation cost is measured at the grant date based on the
value of the award. Under the intrinsic value-based method, compensation cost is
the excess, if any, of the quoted market price of the stock at the grant date or
other measurement date over the amount the employee must pay to acquire the
stock. The Company uses the intrinsic value-based method for stock-based
compensation to employees. As a result, there will be no effect to the Company
other than to require a pro forma footnote disclosure. See "Notes to
Consolidated Financial Statements."

The Company has in the past granted its directors options to purchase an
aggregate of 260,000 shares of the Company's Common Stock at an exercise price
of $6.00 per share. These options contain provisions pursuant to which the
exercise price will decrease based upon the Company's operating performance. The
Company does not anticipate that these options will have any material impact on
its future operations.

In March 1998, Statement of Position 98-1, Accounting for Costs of Computer
Software Developed or Obtained for Internal Use, was issued. The SOP provides
guidance on accounting for costs of computer software based on the project stage
and other criteria and is effective for financial statements for fiscal years
beginning after December 15, 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. The Company does not anticipate engaging in such transactions, but will
comply with requirements of SFAS 133 when adopted. This statement is effective
for all fiscal quarters beginning after June 15, 1999. The effect of adopting
SFAS 133 is not expected to be material.

Item 7. Financial Statements

The information required by Item 7, and an index thereto commences on page
F-1, which pages follow this page.

Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.

Not applicable.

<PAGE>
THE HAVANA GROUP, INC.
AND SUBSIDIARY

FINANCIAL REPORT

F-1

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

CONTENTS

Page

<S> <C>
INDEPENDENT AUDITORS' REPORT F-3

FINANCIAL STATEMENTS

Consolidated balance sheet F-4 through F-5

Consolidated statements of operations F-6

Consolidated statements of stockholders' equity F-7

Consolidated statements of cash flows F-8

Notes to consolidated financial statements F-9 through F-20

</TABLE>

F-2

<PAGE>
Independent Auditors' Report

To the Stockholders and Board of Directors
The Havana Group, Inc.
Canton, Ohio

We have audited the accompanying consolidated balance sheet of The Havana
Group, Inc. and Subsidiary as of December 31, 1998, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1998 and 1997. 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 audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of The Havana
Group, Inc. and Subsidiary as of December 31, 1998, and the results of their
operations and their cash flows for the years ended December 31, 1998 and 1997,
in conformity with generally accepted accounting principles.

As discussed in Note B to the financial statements, The Havana Group, Inc.
was formed in December 1997 and prior to then had no operations. The results of
operations and cash flows prior to December 1997 included in the accompanying
financial statements are those of the predecessor companies, E. A. Carey of
Ohio, Inc. and Monarch Pipe Company.

HAUSSER + TAYLOR LLP

Canton, Ohio
April 5, 1999

F-3
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 1998

ASSETS

CURRENT ASSETS
<S> <C>
Cash 1,634,276
Accounts receivable, net of allowance
for doubtful accounts of $5,000 46,460
Inventories 500,765
Deferred catalog expenses 32,772
---------
Total current assets 2,214,273

DEFERRED FEDERAL INCOME TAX 29,070

PROPERTY AND EQUIPMENT

Leasehold improvements 89,244
Furniture and fixtures 16,863
Data processing equipment 28,607
Machinery and equipment 15,781
---------
150,495
Less accumulated depreciation 18,511
---------
131,984
OTHER ASSETS, net of accumulated amortization
Customer lists 425,773
Other 2,222
---------
427,995
---------

$2,803,322
=========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-4

<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 1998

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
<S> <C>
Accounts payable $ 90,112
Accrued expenses 49,190
Due to affiliates 200,602
Customer advances 2,395
----------
Total current liabilities 342,299

COMMITMENTS AND CONTINGENCIES -

STOCKHOLDERS' EQUITY
Preferred stock - $.001 par
value,10,000,000 shares
authorized:
Series A - 5,000,000 shares
issued and outstanding 5,000
Series B -1,100,000 shares
issued and outstanding 1,100
Common stock - $.001 par value,
25,000,000 shares authorized,
1,860,000 shares issued and
outstanding 1,860
Additional paid-in capital
(including warrants) 6,459,322
Retained earnings (deficit) (4,006,259)
----------
Total stockholders' equity 2,461,023
----------

$2,803,322
==========

</TABLE>

The accompanying notes are an integral part of these financial statements.

F-5

<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 1998 and 1997

1998 1997

<S> <C> <C>
NET SALES $1,354,164 $1,427,574

COST OF SALES 900,272 773,695
--------- ---------
GROSS PROFIT 453,892 653,879

SELLING EXPENSES 434,897 316,699

GENERAL AND ADMINISTRATIVE
EXPENSES 473,598 398,952
--------- --------
LOSS FROM OPERATIONS (454,603) (61,772)

INTEREST EXPENSE 3,374,769 -
--------- ---------
NET LOSS (3,829,372) (61,772)
=========== =========
BASIC AND DILUTED LOSS
PER SHARE (2.61) (0.06)
=========== =========

</TABLE>

The accompanying notes are an integral part of these financial statements.

F-6

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIAKY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>

Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total

<S> <C> <C> <C> <C> <C> <C>
BALANCE-JANUARY 1, 1997 $ 500 $ - $ - $684,885 $685,385

RETURN OF CAPITAL CONTRIBUTION
TO DUNCAN HILL, INC. (500) - - - (500)

ISSUANCE OF 1,000,000 SHARE OF
COMMON STOCK TO DUNCAN
HILL,INC. 1,000 - (1,000) - -

ISSUANCE OF 5,000,000 SHARES OF
CLASS A PREFERRED STOCK TO
DUNCAN HILL, INC. - 5,000 (5,000) - -

ISSUANCE OF 1,100,000 SHARES OF
CLASS B PREFERRED STOCK TO
DUNCAN HILL, INC. - 1,100 1,098,900 (800,000) 300,000

NET LOSS - - - (61,772) (61,772)
------- ----- --------- -------- ----------
BALANCE- DECEMBER 31, 1997 1,000 6,100 1,092,900 (176,887) 923,113

NET PROCEEDS FROM THE ISSUANCE
OF 460,000 COMMON SHARES IN
PUBLIC OFFERING 460 - 1,916,822 - 1,917,282

ISSUANCE OE 400,000 COMMON
SHARES AND 1,400,000
WARRANTS FOR CONVERSION 400 - 3,449,600 - 3,450,000
OF NOTE PAYABLE

NET LOSS - - - (3,829,372) (3,829,372)
------- ----- --------- ------------ -----------
BALANCE-DECEMBER 31, 1998 $1,860 $ 6,100 $ 6,459,322 $(4,006,259) $2,461,023
======= ===== ========= ============ ===========
</TABLE>

The accompanying notes are an integral part of these financial statements.

F-7

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 1998 and 1997

1998 1997
CASH FL0WS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (3,829,372) $ (61,772)
Adjustments to reconcile net loss to net cash
(used) by operating activities:
Non-cash interest expense incurred on note conversion 3,350,000 -
Depreciation and amortization 54,608 39,780
(Increase)in accounts receivable (8,886) (3,294)
(Increase) in inventories (22,858) (206,569)
Decrease (increase) in deferred catalog expenses 21,411 (12,215)
Decrease (increase) in prepaid expenses 3,587 (2,249)
(Increase) in other assets (2,500) -
(Decrease) increase in accounts payable, customer advances
and accrued expenses (45,026) 37,104
----------- ------------
Net cash (used) by operating activities (479,036) (209,215)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (53,791) (94,891)

CASH FL0WS FROM FINANCING ACTIVITIES
Increase in due to affiliates 70,210 378,322
Net proceeds from sale of common stock 1,917,282 -
Return of capital contribution to Duncan Hill, Inc. - (500)
Proceeds from convertible note 100,000 -
----------- ------------
Net cash provided by financing activitics 2,087,492 377,822
----------- ------------
NET INCREASE IN CASH 1,554,665 73,716

CASH - BEGINNING 79,611 5,895
----------- ------------
CASH - ENDING $ 1,634,276 $ 79,611
=========== ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 24,769 $ -
=========== ============
Non-cash investing and tinancing activity disclosures are includcd in
the notes to the financial statements.

</TABLE>

The accompanying notes are an integral part of these financial statements.

F-8

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

A. Business Description and Principles of Consolidation - The Havana Group,
Inc. 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 (collectively, "the Company").
Monarch Pipe Company (Monarch) manufactures smoking pipes and sells them
exclusively to the Company. All significant intercompany accounts and
transactions have been eliminated in consolidation. The Company grants credit to
E. A. Carey Tobacco Club members.

B. Reorganization - The Havana Group, Inc. was formed as a wholly-owned
subsidiary of Duncan Hill, Inc. in December 1997. The operations included in the
accompanying financial statements prior to December 1997 are those of E. A.
Carey of Ohio, Inc. (Carey), which was dissolved as part of a 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 in the reorganization,
which was accounted for at historical cost as a reorganization of companies
under common control.

C. 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
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

D. Fair Value of Financial Instruments - The fair value of cash, accounts
receivable, accounts payable and other short-term obligations approximate their
carrying values because of the short maturities of those financial instruments.

E. Trade Receivables - It is the Company's policy to record accounts
receivable net of an allowance for doubtful accounts. The allowance was $5,000
as of December 31, 1998. Bad debt expense was $13,965 and $14,041 for the years
ended December 31, 1998 and 1997, respectively.

F-9

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary of Significant Accounting Policies (continued)

F. Inventories are stated at the lower of cost or market with cost being
determined by the first-in, first-out (FIFO) method.

G. Deferred catalog expenses are costs of catalogs mailed to customers
which are deferred and amortized over periods ranging from four weeks to six
months, the estimated length of time customers utilize catalogs and other mail
order mailings. Catalog expense was $271,158 and $263,675 for the years ended
December 31, 1998 and 1997, respectively.

H. Property and equipment are carried at cost and depreciated using the
straight-line and accelerated methods over their estimated useful lives ranging
from five to ten years. Depreciation expense amounted to $15,624 and $1,074 for
the years ended December 31, 1998 and 1997, respectively.

Maintenance, repairs, and minor renewals are charged against earnings when
incurred. Additions and major renewals are capitalized.

I. A customer list was obtained in the acquisition of Carey in 1984 for
$889,000. The acquisition was consummated primarily to obtain Carey's mailing
list. The list is being amortized on a straight-line basis through 2008. At
December 31, 1998, accumulated amortization was $463,227.

J. Deferred taxes have been recognized to reflect temporary differences
between financial reporting and income tax purposes. The principal differences
are due to net operating losses and the treatment of deferred catalog expense.

K. The Company maintains its cash at a financial institution. The bank
balance is $1,615,999 as of December 31, 1998 and at times throughout the year
exceeds federally insured amounts.

L. Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the year. Duncan Hill,
Inc., the Company's parent, holds 1,000,000 shares of common stock which were
assumed to be outstanding during 1997 for purposes of the basic earnings per
share calculation. There were no securities outstanding or granted as of
December 31, 1998 that would have a dilutive effect on per share amounts.
Additionally, the Company

F-10

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary of Significant Accounting Policies (continued)

experienced a net loss in 1997 and 1998. Therefore, no potential common
shares shall be included in the computation of diluted per share amounts in
accordance with Statement of Financial Accounting Standard (SFAS) No. 128,
"Earnings per Share." The weighted average number of common shares outstanding
for both basic and diluted earnings per share was 1,511,287 and 1,000,000 for
1998 and 1997, respectively. The 1998 earnings per share calculation includes a
charge of $110,000 relative to the cumulative dividends on the Series B
Preferred Stock.

M. New Authoritative 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 adopted this new standard during 1998. The effect of adoption was
not material.

In June 1997, the Financial Accounting Standards Board issued SFAS 131,
"Dis-closure 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 adopted this new standard during 1998. The effect of adoption was not
material.

F-11

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary of Significant Accounting Policies (continued)

In March 1998, Statement of Position 98-1, "Accounting for Costs of
Computer Software Developed or Obtained for Internal Use," was used. The SOP
provides guidance on accounting for costs of computer software based on the
project stage and other criteria and is effective for financial statements for
fiscal years beginning after December 15, 1998. The Company believes that the
effect of adoption will not be material.

Note 1. Inventories

Inventories consist of the following at December 31, 1998:
<TABLE>
<CAPTION>

<S> <C>
Raw materials $ 141,569
Tobacco, cigars, and pipes 317,711
Supplies and catalogs 41,485
--------
$ 500,765
</TABLE>

Note 2. Income Taxes

The Company accounts for income taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. The Company files its Federal income tax return as
part of a consolidated group.

Deferred income taxes reflect the effects of temporary differences between
the carrying amount of assets and liabilities for financial reporting purposes.
Deferred tax assets (liabilities) consisted of the following at December 31,
1998 and 1997:
<TABLE>
<CAPTION>

1998 1997
---- ----

Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward $ 261,256 $ 124,270
Depreciation 368 -
Valuation allowance (221,412) (76,613)
------- --------
Total deferred tax assets 40,212 47,657
-------- --------

</TABLE>

F-12

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2. Income Taxes (continued)
<TABLE>
<CAPTION>

1998 1997
---- ----

Deferred tax liabilities:
<S> <C> <C>
Deferred catalog expense $ (11,142) $ (18,422)
Depreciation - (165)
------------- ----------
Total deferred tax liabilities (11,142) (18,587)
-------- --------
Net deferred tax asset $ 29,070 $ 29,070
======== ========
</TABLE>

The Company's ability to recognize deferred tax assets is dependent on
generating future regular taxable income. In accordance with the provisions of
SFAS 109, management has provided a valuation allowance. The significant
difference between 1998 book and tax income was $3,350,000 non-cash interest
expense incurred on the note conversion (see Note 4E).

The Company has net operating loss carryforwards which will expire as
follows:
<TABLE>
<CAPTION>

Year Amount

Note 3. Agreement with Affiliated Company

Duncan Hill, Inc. owns 85% of the outstanding voting capital stock of Kids
Stuff, Inc. (Kids Stuff). In January 1998, the Company contracted with Kids
Stuff whereby Kids Stuff would provide administrative, executive, and accounting
services at an annual cost of approximately $206,100 and $2.40 per order
processed. Havana is also obligated to pay 5% of its 1998 pre-tax profits to
Kids Stuff in connection with these administrative and fulfillment services.
However, Havana had no pre-tax profits in 1998. Total costs charged to Havana in
1998 amounted to $293,432. This agreement has been extended on a month-to-month
basis. Management believes that this is substantially the same cost that it
would incur should it procure these services itself.

F-13

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 3. Agreement with Affiliated Company (continued)

<TABLE>
<CAPTION>
<S> <C>
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
=======
</TABLE>

Kids Stuff, Inc. had provided these services to Havana during 1997 on an
actual cost basis. Actual costs are those direct costs that can be charged on a
per order or per hour basis, plus general and administrative costs allocated on
a pro rata basis by dividing the total assets of the operating entity requesting
services by the sum of the total assets of all operating entities of Duncan Hill
and the operating entity requesting services. Costs charged to Havana in 1997
amounted to $450,443.

The accounts receivable and inventory of Havana and Kids Stuff are pledged
as collateral which guarantees an $800,000 line of credit reflected on the
financial statements of Kids Stuff. The Company's guarantee relative to the line
of credit is irrevocable. The balance on the line of credit was $762,000 at
December 31, 1998.

Note 4. Stockholder's Equity

A. Common Stock

The Havana Group, Inc. has 25,000,000 shares of $.001 par value common
stock authorized. In connection with the reorganization discussed in Note B, the
Company issued 1,000,000 common shares to its parent, Duncan Hill, Inc. 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. The Company's Certificate of
Incorporation prohibits the payment of cash dividends on the Company's Common
Stock in excess of $.05 per 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 with respect to the
redemption of any Serial Preferred Stock.

F-14

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4. Stockholder's Equity (continued)

In May 1998, the Company completed an initial public offering (see Note 9)
in which 460,000 units were sold. Each unit consisted of one common share and
two Class A warrants

In May 1998, the Company issued 400,000 common shares and 1,400,000 Class A
warrants relative to a bridge loan conversion (see Note 4E).

B. Series A Preferred Stock

The Board of Directors has the authority, without further action by the
stockholders, to issue up to 10,000,000 shares of Preferred Stock in one or more
series and to fix the rights, preferences, privileges, and restrictions thereof,
including dividend rights, conversion rights, voting rights, terms of
redemption, liquidating preferences, and the number of shares constituting any
series or the designation of such series.

On December 24, 1997, the Company issued 5,000,000 shares of Series A
Preferred Stock (Series A), $.001 par value to Duncan Hill, Inc. The holders of
the Series A stock are entitled to one vote for each share held of record 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, dissolution or winding up of the affairs
of the Company, each share of Series A stock has a liquidation preference of
$.001 per share.

C. Series B Preferred Stock

On December 24, 1997, the Company issued 1,100,000 shares of its Series B
Convertible Preferred Stock (Series B) $.001 par value to Duncan Hill. In
return, Duncan Hill assumed a $300,000 liability due to an affiliate. The Series
B stock 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 the Company's net pre-tax profit
reaching $500,000 in any given calendar year. The holder of each share of Series
B Preferred Stock will be entitled to receive, when, as, and if declared by the
Board of Directors of the Company, out of funds legally available therefor,
cumulative

F-15

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4. Stockholder's Equity (continued)

quarterly cash dividends at the rate of $.025 per share, quarterly on March
31, June 30, September 30, and December 31 commencing with March 31, 1998 before
any dividend shall be declared, set apart for, or paid upon the Common Stock for
such year, and the remainder of the surplus or net earnings applicable to the
payment of dividends shall be distributed as dividends among the holders of
Common Stock as and when the Board of Directors determines. There were no
dividends declared or paid during 1997 or 1998 on the Series B Preferred Stock.

The Series B stock is not subject to redemption. In the event of a
voluntary or involuntary liquidation, dissolution or winding up of the affairs
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. Class A Warrants

As of December 31, 1998, the Company has 2,658,000 Class A warrants
outstanding, which is comprised of 920,000 warrants included in the units sold
in the initial public offering (see Note 9); 1,400,000 warrants issued in
conjunction with the conversion of a note payable (see Note 4E); 138,000
warrants issued to Duncan Hill in replacement of warrants issued in conjunction
with the reorganization; and 200,000 warrants issued to Mr. William Miller, the
Company's CEO.

Each Class A warrant entitles the holder to purchase one share of common
stock at a price of $5.25 and expires May 2003. The Company may redeem the Class
A warrants at a price of $.10 per warrant effective May 1999, upon not less than
30 days' prior written notice, if the closing bid price of the common stock has
been at least $10.50 per share for 20 consecutive trading days ending no more
than the 15th day prior to the date on which the notice of redemption is given.

E. Issuance of Securities in Note Conversion

In January 1998, the Company borrowed $100,000 from one private investor in
exchange for a convertible promissory note (Convertible Note). The Convertible
Note bore interest at 8% per annum and was due on December 31, 1998. However, as
the Company completed its initial public offering, in accordance with the note
agreement, the note was converted into an aggregate of 400,000 shares of

F-16

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4. Stockholder's Equity (continued)

common stock and 1,400,000 Class A 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.

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 off with proceeds from the Company's initial public
offering.

Note 6. Stock Incentive Plan

During 1997, the Company adopted a Stock Incentive Plan. Under the Stock
Incentive Plan, the Compensation Committee of the Board of Directors may grant
stock incentives to key employees and the directors of the Company pursuant to
which a total of 400,000 shares of common stock may be issued; provided,
however, that the maximum amount of common stock with respect to which stock
incentives may be granted to any person during any calendar year shall be 20,000
shares, except for a grant made to a recipient upon the recipient's initial
hiring by the Company, in which case the number shall be a maximum of 40,000
shares. These numbers are subject to adjustment in the event of a stock split
and similar events. Stock incentive grants may be in the form of option, stock
appreciation rights, stock awards, or a combination thereof. No stock incentives
were granted under the Stock Incentive Plan in 1998 and 1997.

Note 7. Employment Agreements

A. The Company has entered into a five-year employment agreement with
William L. Miller effective December 1, 1997, pursuant to which Mr. Miller is to
serve as Chief Executive Officer and President of the Company. The employment
agreement provides for an annual base salary of $50,000, increasing to at least
$100,000 for the remainder of the contract if the Company's revenues for any
fiscal year exceed $5,000,000.

F-17

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7. Employment Agreement (continued)

Mr. Miller was granted under his employment agreement 200,000 Common Stock
Purchase warrants at $6.00 per share. The warrants were converted into Class A
warrants upon the completion of the Companies' initial public offering, bearing
the same terms and conditions as those Class A warrants issued by the Company
being registered.

Mr. Miller was also granted under his employment agreement 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
adjustment. The exercise price for vested options may be decreased if (a) the
Company meets certain performance goals, and (b) Mr. Miller timely elects to
"lock-in" a lower exercise price with respect to his vested options. The
exercise price for vested options may be reduced by $1.00 per share for each
$200,000 of pre-tax income of the Company for the prior fiscal year. The Company
shall report to Mr. Miller, promptly upon audited financial statements for the
prior fiscal year becoming available, the pre-tax income of the Company for that
year. Mr. Miller shall have thirty days in which to decide, with respect to his
vested options for which an alternative exercise price has not previously been
locked-in, whether to adjust the exercise price of such vested options based
upon the pre-tax income of the Company for the prior year.

Mr. Miller's contract allows for termination by the Company for cause. If
the agreement is terminated by the Company without cause, or by Mr. Miller due
to a material change in his responsibilities, functions, or duties, the Company
shall pay Mr. Miller a lump sum on the date of termination as severance pay an
amount equal to 2.99 times the sum of Mr. Miller's salary and bonus paid in the
year prior to the year of termination.

F-18

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7. Employment Agreement (continued)

B. The Company has entered into an employment agreement effective February
1, 1999 through December 31, 2002 with Gary J. Corbett whereby Mr. Corbett will
serve as the Company's President at an annual base salary of $80,000 plus bonus
to be determined by the Board of Directors. He was also granted options to
purchase 80,000 shares of the Company's common stock at an exercise price of
$3.50 per share subject to downward adjustments in the exercise price if the
Company meets certain performance goals. The options vest 25% on March 1, 1999
and 25% on each of the first, second, and third anniversary dates of the
employment agreement.

Note 8. Fair Value of Stock Based Compensation

In addition to the options to purchase 200,000 shares of common stock and
Common Stock Purchase Warrants to purchase 200,000 shares of common stock issued
to Mr. Miller (both described in Note 7), the Company has granted options to
purchase 60,000 shares of common stock to certain directors (see Note 10).

The Company accounts for employee stock options under APB 25 and,
accordingly, no compensation cost has been recognized. If the Company had
elected to recognize compensation cost consistent with the method prescribed by
SFAS 123, the Company's net loss would have been increased by approximately
$744,000 or $.74 per share for the year ended December 31, 1997 and by $172,700
or $.11 per share for the year ended December 31, 1998.

For purposes of the pro forma disclosures presented above, the Company
computed the fair values of options granted during 1998 using the Black-Scholes
option pricing model assuming no dividends, 72% volatility, an expected life of
50% of the ten-year option terms, and a risk-free interest rate of 5.0%. The
fair value of options granted during 1998 was $226,800. No options or warrants
have been exercised as of December 31, 1998.

The Company computed the fair values of options granted during 1997 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%. The fair value of options granted during 1997 was $1,208,000.

F-19

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 9. Public Offering

In May 1998, the Company completed an initial public offering in which
460,000 units were sold for $2,760,000. In connection with the initial public
offering, the Company incurred issuance costs of $842,718. Each unit consisted
of one common share and two Class A warrants and sold for $6.00 per unit. The
common stock and warrants are separately transferable. During June 1998, an
additional 69,000 units were sold by Duncan Hill as the overallotment of the
Company's initial public offering.

A portion of the proceeds of the public offering were used to pay off the
bridge loan and increase inventory levels and working capital.

Note 10. Non-Qualified Stock Option Agreement

During 1998, the Company entered into a non-qualified stock option
agreement with John Cobb, Jr. and Peter Stokkebye, directors of the Company.
Each of Mr. Cobb and Mr. Stokkebye were granted the option to purchase 30,000
shares of the Company's common stock, which will vest 25% on January 29, 1998
and 25% on each January 29, 1999, January 29, 2000, and January 29, 2001. The
vested options will be immediately exercisable and will expire 10 years from the
date of the agreement. The exercise price of the options shall be $6.00 per
share of common stock, subject to downward adjustment.

The exercise price for vested options may be decreased if (a) the Company
meets certain performance goals, and (b) the director timely elects to "lock-in"
a lower exercise price with respect to his vested options. The exercise price
for vested options may be reduced by $1.00 per share for each $200,000 of
pre-tax income of the Company for the prior fiscal year. The Company shall
report to the director, promptly upon audited financial statements for the prior
fiscal year becoming available, the pre-tax income of the Company for that year.
The director shall have thirty days in which to decide, with respect to his
vested options for which an alternative exercise price has not previously been
locked-in, whether to adjust the exercise price of such vested options based
upon the pre-tax income of the Company for the prior year.

The pro forma effect on the net loss of the Company of the fair value of
the options is included in the disclosure in Note 8.

F-20

<PAGE>
PART III

Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act.

(a) Identification of Directors

The names, ages and principal occupations of the Company's present
directors, and the date on which their term of office commenced and expires, are
as follows: First Term of Became Principal Name Age Office Director Occupation
<TABLE>
<CAPTION>

<S> <C> <C> <C> <C>
William L. Miller 62 (1) 1997 Chairman of the
Board, Chief
Executive Officer,
and Principal
Financial Officer of
the Company

John W. Cobb, Jr. 57 (1) 1997 Senior Vice President
of Marketing at
McGraw-Hill
Continuing Education

Peter Stokkebye VI 68 (1) 1997 Retired
</TABLE>

- -----------
(1) Directors are elected at the annual meeting of stockholders and hold
office until the following annual meeting.

(b) Identification of Executive Officers.

William L. Miller is Chairman of the Board, Chief Executive Officer,
Principal Financial Officer and Treasurer of the Company. Gary J. Corbett is
President.

The terms of all officers expire at the annual meeting of directors
following the annual stockholders meeting. Subject to their contract rights to
compensation, if any, officers may be removed, either with or without cause, by
the Board of Directors, and a successor elected by a majority vote of the Board
of Directors, at any time.

William L. Miller, has been Chairman of the Board of Directors of the
Company and Chief Executive Officer since December 1997. He previously served as
President of the Company from December 1997 - March 1999. Previously, he was the
sole director and executive officer of Carey from 1984 to December 1997. Mr.
Miller has held identical

<PAGE>
positions at Kids Stuff, Inc. from its formation in July 1996 to the
present time. Mr. Miller had been a director of Perfectly Safe, Inc. and its
Vice President since it was formed by Duncan Hill in 1990 until July 1996. Mr.
Miller is President, Founder and a director of Duncan Hill. He holds a Bachelors
Degree in Mechanical Engineering from Purdue University and a Masters Degree in
Business Administration from Indiana University.

Gary J. Corbett has been President of the Company since February 1999. Mr.
Corbett has over 25 years of management experience in the tobacco industry and
has served the industry as a retail owner, franchise merchandiser, tobacco
manufacturer, and direct marketing executive. Mr. Corbett was Vice President,
Fred Stoker & Sons, Dresden, Tennessee, a manufacturer and direct marketer of
tobacco products from 1992 to 1998, and Vice President and General Manager,
World Tobacco, Ltd., Louisville, Kentucky from 1980 to 1992. Mr. Corbett's
merchandising ability permits the Company to strengthen its direction in premium
cigars and extend its marketing reach to other tobacco areas in the lower and
mid-price range. Mr. Corbett attended California State University.

John W. Cobb, Jr., has been a Director of the Company since December 1997.
Mr. Cobb is a Senior Vice President of Marketing at McGraw-Hill Continuing
Education center in Washington, DC. He has been with McGraw-Hill since 1981.
Previously, he was the Vice President of Marketing and Syndication Sales for
C.B.S., Inc., Columbia House Division in New York (1979-1981) and Vice
President, Direct Mail Marketing/Special Markets for Bell & Howell Consumer
Products Group in Chicago (1969-1979). As a result of his experience, he has a
comprehensive understanding of the direct mail business. Mr. Cobb has serves as
a director of Duncan Hill from 1993 to the present time. Mr. Cobb holds a
Bachelors Degree in Economics, with a Minor in Marketing from Central College of
Iowa and a Masters Degree in Marketing with a Minor in Management from the
University of Iowa Graduate School of Business.

Peter Stokkebye VI, has been a Director of the Company since December 1997.
From 1962 to 1992, he served as the Managing Director (retired) of Peter
Stokkebye International a/s, Denmark. He currently holds the position of
Honorary Chairman. Established in Odense, Denmark, in 1882, Peter Stokkebye
International a/s manufactures fine quality smoking tobaccos and sells premium
cigars. This company developed and supplied the British Prime Minister, Sir
Winston Churchill, with his preferred cigar brand, Santa Maria. Mr. Stokkebye
began his career by serving in the Royal Guard of the late King Fredrick the
Ninth of Denmark, and with employment by various tobacco manufacturers in
Denmark, Switzerland and the U.S.A. In 1962, Mr. Stokkebye became Managing
Director of Peter Stokkebye International a/s.

Peter Stokkebye VI is considered by Management to be the only current
outside (independent) director of the Company. The Company is attempting to
identify and appoint one other individual who is not affiliated with the Company
or its affiliates as a director. Since this person has not yet been identified,
there can be no assurance given that the Company will be able to attract a
suitable candidate to serve as a director. If successful, this presently
unidentified person combined with Peter Stokkebye VI, would provide the Company
with two independent directors.

<PAGE>
Fairchild Financial Group, Inc. has been granted by the Company the right
to designate one director to serve on the Company's Board of Directors for a
period of three years until May 2001. As of the date hereof, no such person has
been designated. Upon the appointment of one additional unaffiliated and outside
director, the Board of Directors intends to establish a Compensation Committee
and an Audit Committee. The Audit Committee, which will consist of at least a
majority of outside directors who are not affiliated with the Company, will
among other things, make recommendations to the Board of Directors regarding the
independent auditors for the Company, approve the scope of the annual audit
activities of the independent auditors and review audit results and have general
responsibility for all auditing related matters. The Compensation Committee will
consist entirely of outside directors who are not affiliated with the Company,
Kids Stuff or Duncan Hill. The Compensation Committee will review and recommend
to the Board of Directors the compensation structure for the Company's officers
and other management personnel, including salary rates, participation in
incentive compensation and benefit plans, fringe benefits, non-cash perquisites
and other forms of compensation.

Compliance with Section 16(a) of the Securities Exchange Act of 1934

Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than ten percent of a registered class of the Company's equity
securities, to file reports of ownership and changes in ownership with the
Securities and Exchange Commission (the "Commission"). Officers, directors and
greater than ten percent stockholders are required by the Commission's
regulations to furnish the Company with copies of all Section 16(a) forms they
file. To Management's knowledge, no officer, director or person owning more than
10% of the Company's Common Stock filed any reports late during its fiscal year
ended December 31, 1998, except ARO Trust No. 1, 1960 Trust filed a Form 5 late
in lieu of a Form 3 which was not filed.

<PAGE>
Item 10. Executive Compensation

The following table provides a summary compensation table with respect to
the compensation of W. Miller, the Company's Chief Executive Officer (CEO) for
the past three years.
<TABLE>
<CAPTION>

SUMMARY COMPENSATION TABLE

Long Term Compensation
Annual Compensation Awards Payouts
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Other All
Name Annual Restricted Other
and Compen- Stock LTIP Compen-
Principal sation Award(s) Number of Payouts sation
Position Year Salary ($) Bonus ($) ($) ($)(3) Options(4) ($) ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Miller, .... 1998 46,400 -0- 3,600 -0- -0- -0- -0-
Chief Executive
Officer (2)
1997 28,167(1) -0- 4,000 -0-(3) 400,000 -0- -0-
1996 31,000(1) -0- -0- -0- -0- -0- -0-
</TABLE>

(1) Compensation was paid by Kids Stuff or Duncan Hill, which provided
management and general and administrative services to the Company (and its
predecessor, Carey), and which after Carey's reincorporation in Delaware,
continued to maintain the named Executive Officer on its payroll.
Approximately 20% and 31% of Miller's compensation paid by Duncan Hill or
Kids Stuff to Miller were expensed to the Company in 1997 and 1996,
respectively. The table reflects the amount of Mr. Miller's compensation
allocated to the Company.

(2) Mr. Miller served as the President of Carey Inc. until its reincorporation
in Delaware after which time he became Chief Executive Officer of the
Company. Since December 1, 1997, Mr. Miller is being paid by the Company
for services rendered to it under his employment contract with the
Company. Mr. Miller also has an employment contract with Duncan Hill and
an employment contract with Kids Stuff for services rendered by him to
those companies.

3) Does not include securities issued to Duncan Hill, a public company
controlled by Mr. Miller. See Item 12 for a description of these
transactions, which transactions include 1,000,000 shares of the Company's
Common Stock in connection with the reincorporation of the Company in
Delaware, 5,000,000 shares of Series A Preferred Stock issued as a
dividend to Duncan Hill, 1,100,000 shares of Series B Preferred Stock
issued to Duncan Hill in connection with Duncan Hill's assumption of
$300,000 of the Company's indebtedness to Kids Stuff and a dividend to
Duncan Hill of Warrants to purchase 138,000 shares of the Company's Common
Stock, which Warrants on May 14, 1998 automatically converted into 138,000
Class A Warrants identical to those sold in the Company's initial public
offering.

(4) Includes warrants to purchase 200,000 shares of the Company's Common
Stock, which warrants automatically converted into 200,000 Class A
warrants identical to those sold in the Company's initial public offering
and options to purchase 200,000 shares of the Company's Common Stock as
described herein.

<PAGE>
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION VALUES

The information provided in the table below provides information with
respect to each exercise of the Company's stock option during fiscal 1998 by the
Company's Chief Executive Officer and the fiscal year end value of the Company's
unexercised options.

(a) (b) (c) (d) (e)

Number of Value of
Securities Unexercised
Shares Underlying In-the-Money
Acquired Unexercised Options/Warrants
on Value at Fy-End($)
Exercise Realized Options/Warrants Exercisable/
Name (#) ($)(1) Unexercisable(1)
at FY-End (#)
Exercisable/
Unexercisable
<S> <C> <C> <C> <C>
William L. -0- -0- 320,000/80,000 -0-/-0-
Miller
</TABLE>

(1) The aggregate dollar values in column (c) and (e) are calculated by
determining the difference between the fair market value of the Common
Stock underlying the options/warrants and the exercise price of the
options/warrants at exercise or fiscal year end, respectively. Column
(e) is based upon a year end value of Common Stock of approximately
$3.88 per share. It does not reflect the value of the Warrants which
could be sold in the open market.

INCENTIVE COMPENSATION PLAN

1997 LONG-TERM STOCK INCENTIVE PLAN. In November, 1997, the Company's
majority stockholder approved the adoption of the Company's 1997 Long-term
Incentive Plan (the "Incentive Plan"). Under the Incentive Plan, the Board of
Directors or a Compensation Committee of the Board of Directors consisting of
not less than three members may grant stock incentives to employees of the
Company pursuant to which a total of 400,000 shares of common stock may be
issued: provided, however, that the maximum amount of Common Stock with respect
to which stock incentives may be granted to any person during any calendar year
shall be 20,000 shares, except for a grant made to a recipient upon the
recipient's initial hiring by the Company, in which case the number shall be a
maximum of 40,000 shares. These numbers are subject to adjustment in the event
of a stock split and similar events. Stock incentive grants may be in the form
of options, stock appreciation rights, stock awards or a combination thereof.

Options granted under the Incentive Plan may be either "Incentive stock
options," which qualify for special tax treatment under Section 422 of the
Internal Revenue Code (the "Code"), or nonstatutory stock options, which do not
qualify. Incentive stock options may only be granted to persons who are
employees of the Company. Options will expire at such time as the compensation
Committee determines, provided that no stock option may be exercisable later
than ten years from its grant, except that the maximum term of any incentive
stock option granted to a person who owns, directly or indirectly, 10% or

<PAGE>
more of the combined voting power of the Company's capital stock (a "10%
Shareholder") shall be five years. If an optionee ceases to be an employee by
reason of death, incapacity of retirement, the option shall terminate fifteen
months after the optionee ceases to be an employee. If an optionee ceases to be
an employee because of resignation with the consent of the compensation
committee, the option will terminate three months after the optionee ceases to
be an employee. If an optionee ceases to be an employee or director for any
other reason, the option will expire thirty days after the optionee ceases to be
an employee.

The option price per share is determined by the Compensation Committee,
except for incentive stock options which cannot be less than 100% of the fair
market value of the Common Stock on the date such option is granted or less than
110% of such fair market value if the optionee is a 10% shareholder. Payment of
the exercise price may be made in cash, or, unless otherwise provided by the
Compensation Committee, in shares of Common Stock delivered to the Company by
the optionee or by withholding of shares issuable upon exercise of the option or
in a combination thereof. Each Option shall be exercisable in full or in part
not less than six months after the date the Option is granted, or may become
exercisable in one or more installments at such later time or times as the
Committee shall determine. In the event of a "change in control" as defined
under the Incentive Plan, generally any stock incentives which have been
outstanding for at least six months shall be immediately exercisable. Each
option shall be exercised in full or in part. Options are not transferable other
than by will or the laws of descent and distribution, and may be exercised
during the life of the employee or director only by him or her. No Incentive
Stock Options may be granted under the Incentive Plan after November 8, 2007.
However, any options outstanding on November 8, 2007 will remain in effect in
accordance with their terms.

The Incentive Plan also provides for the granting of stock appreciation
rights ("SAR"), which entitle the holder to receive upon exercise an amount in
cash and/or stock which is equal to the appreciation in the fair market value of
the Common stock between the date of the grant and the date of exercise. The
number of shares of Common Stock to which a SAR relates, the period in which it
can be exercised, and other terms and conditions shall be determined by the
Compensation committee, provided, however, that such expiration date shall not
be later than ten years from the date of the grant. SARS are not transferable
other than by will or the laws of descent and distribution, and may be exercised
during the life of the grant only by the grantee. The SARS are subject to the
same rules regarding expiration upon a grantee's cessation of employment or
directorship, as pertains to options, discussed above.

The Compensation Committee may also award shares of Common Stock ("stock
awards") in payment of certain incentive compensation, subject to such
conditions and restrictions as the committee may determine. All shares of Common
Stock subject to a stock award will be valued at not less than 100% of the fair
market value of such shares on the date the stock award is granted. The number
of shares of Common stock which may be granted as a stock award in any calendar
year may not exceed 80,000.

The Incentive Plan will be administered by the compensation Committee,
which has the authority to prescribe, amend and rescind rules and regulations
relating to the Plan, to accelerate the exercise date of any option, to
interpret the Plan and to make all necessary determinations in administering the
Plan.

The Incentive Plan will remain in effect until such time as it is
terminated by the Board of Directors. The Incentive Plan may be amended by the
Board of Directors upon the recommendation of the Compensation Committee, except
that, without stockholder approval, the Plan may not be amended to: increase the
number of shares subject to

<PAGE>
issuance under the Plan: change the class of persons eligible to participate
under the Plan: withdraw the administration of the Plan from the Compensation
Committee, or, to permit any option to be exercised more than ten years after
the date it was granted. As of the date of the Form 10-KSB, the Compensation
Committee has yet to be formed, and no stock incentives have been granted under
the Incentive Plan.

EMPLOYMENT AGREEMENTS

Pursuant to an employment agreement dated as of December 1, 1997, the
Company employed William Miller ("Miller") as its Chairman of the Board and
Chief Executive Officer over a term commencing on December 1, 1997 and expiring
on December 31, 2002. The agreement provides for the following compensation: (i)
a base annual salary of $50,000 for 1998 (and each year thereafter) subject to
increase to at least $100,000 for the beginning of the following fiscal year and
the remainder of the term should the Company's gross revenues exceed $5,000,000
for the prior year; (ii) a cash bonus pool for key management personnel
administered by the Board of Directors or a Compensation Committee under which a
cash bonus will be paid to Miller in an amount ranging from 0% to 50% of
Miller's prior year's base salary; (iii) five-year warrants to purchase 200,000
shares of the Company's Common Stock at an exercise price of $6.00 per share,
which warrants on May 14, 1998 automatically converted into 200,000 Class A
Warrants identical to those sold to the public in connection with its initial
public offering; (iv) in the event the Company engages in any interim financing
in order to raise capital for any venture, subsidiary acquisition or similar
transaction, Miller shall have the option to participate in, or match the terms
of, any such interim financing such that the terms offered to Miller are the
same or similar to those terms offered to such non-affiliated third party, and
Miller is given the opportunity to participate up to an amount equal to the
amount of financing provided by any third party (it being noted that Miller
elected not to participate in the $200,000 bridge financing); and (v) ten-year
options to purchase 200,000 shares of the Company's Common Stock. Options to
purchase 80,000 shares are vested and are currently exercisable. The remaining
options become exercisable as to an additional 40,000 shares on each of January
1, 2000 and January 1, 2001. The initial exercise price of the options shall be
$6.00 per share subject to adjustment as set forth below. The exercise price for
vested options may be decreased if (a) the Company meets certain performance
goals, and (b) Miller timely elects to "lock-in" a lower exercise price with
respect to his vested options. The exercise price for vested options may be
reduced by $1.00 per share for each $200,000 of pre-tax net income of the
Company for the prior fiscal year. The Company shall report to Miller, promptly
upon audited financial statements for the prior fiscal year becoming available,
for pre-tax net income of the Company for that year. Miller shall have thirty
(30) days in which to decide, with respect to his vested options for which an
alternative exercise price has not previously been locked-in, whether to adjust
the exercise price of such vested options based upon the pre-tax income of the
Company for the prior year.

Miller's employment agreement provides for indemnification to the full
extent permitted by law. Provided Miller beneficially owns less than 50% of the
Company's then outstanding voting stock, Miller is entitled to terminate the
agreement on 30 days' prior written notice upon the incurrence of one of the
following events: (a) the failure of the Company to re-reelect him as Chief
Executive Officer; (b) a material change in his responsibilities, functions or
duties; (c) a material breach of the agreement by the Company; or (d) the
liquidation or dissolution, or consolidation, merger or other business
combination of the Company, or transfer of all or substantially all of the
Company' assets unless such consolidation, merger, or business combination does
not adversely affect Miller's position or the dignity or responsibilities of
Miller. The employment agreement can be terminated by the Company at any time
for cause (as defined in the agreement) on 30 days' prior written notice. In the
event that the agreement is terminated by the Company

<PAGE>
without cause or by Miller (as described below) due to a material change in his
responsibilities, functions or duties, the Company shall pay Miller a lump sum
on the date of termination as severance pay an amount derived by multiplying the
factor 2.99 by the sum of Miller's salary and bonus paid in the year prior to
the year of termination. In the event the agreement expires and Miller is not
re-hired as Chairman of the Board and Chief Executive Officer of the Company on
terms mutually acceptable to the parties, the Company shall pay in a lump sum on
the date of termination severance compensation to Miller in an amount equal to
Miller's salary and bonus paid in the year ending December 31, 2002.

In the event that (i) any person other than Miller, Jeanne E. Miller
(Miller's wife), Duncan Hill or their affiliates by any means of purchase or
acquisition becomes the beneficial owner of more than 50% of the Company's
outstanding Common Stock or (ii) the Company enters into an agreement of
reorganization, consolidation or merger of the Company with one or more
corporations as a result of which the Company is not the surviving corporation
or an agreement to sell all or substantially all of the assets of the Company,
then all of Miller's options to purchase Common Stock of the Company outstanding
at the time of the event and which were granted six months or more prior to the
event, shall immediately become exercisable in full. Thereafter, upon the
written election of Miller given within 180 days of the event, the Company shall
repurchase for cash all or any part of the options as specified in the written
election at a price per share equal to the difference in the fair market value
of the Company's Common Stock on the date of the event and the option exercise
price per share.

Pursuant to an agreement dated as of December 8, 1998, the Company entered
into an employment contract effective February 1, 1999 with Gary J. Corbett
pursuant to which he agreed to serve as President of the Company at a base
salary of $80,000 per annum, bonuses to be determined by the Board of Directors
and a signing bonus of $22,000 should he not receive this amount via a
performance bonus from his prior employer. He was also granted options to
purchase 80,000 shares of the Company's Common Stock at an exercise price of
$3.50 per share with one-fourth of said options vesting on March 1, 1999 and
thereafter the balance of the options vesting in three equal annual installments
on the first three anniversary dates of the employment contract. The options
contain certain provisions to decrease the exercise price similar to those
provisions that apply to Mr. Miller's options which are described above. The
term of the employment contract commenced on February 1, 1999 and will expire on
December 31, 2002. The contract may be terminated by Mr. Corbett on 120 days
prior written notice, by mutual consent of the parties, by the Company for cause
as defined in the contract and by the Company without cause on or before
December 31, 1999. If terminated without cause prior to December 31, 1999, Mr.
Corbett is entitled to four months termination pay. Termination without cause
after January 1, 2000 shall result in the Company being required to pay Mr.
Corbett termination pay equal to twelve months base salary.

LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS

The Company's Certificate of Incorporation contains a provision eliminating
the personal monetary liability of directors to the extent allowed under the
General Corporation Law of the State of Delaware. Under the provision, a
stockholder is able to prosecute an action against a director for monetary
damages only if he can show a breach of the duty of loyalty, a failure to act in
good faith, intentional misconduct, a knowing violation of law, an improper
personal benefit or an illegal dividend or stock repurchase, as referred to in
the provision, and not "negligence" or "gross negligence" in satisfying his duty
of care. In addition, the provision applies only to claims against a director
arising out of his role as a director and not, if he is also an officer, his
role as an officer or in any other capacity or to his responsibilities under any
other law, such as the federal securities laws. In addition,

<PAGE>
the Company's Bylaws provide that the Company will indemnify its directors,
officers, employees and other agents to the fullest extent permitted by Delaware
law. Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act") may be permitted to directors,
officers and controlling persons of the Company pursuant to the foregoing
provisions, or otherwise, the Company has been advised that, in the opinion of
the Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is, therefore, unenforceable.

DIRECTORS COMPENSATION

The Company intends to pay its directors who are not also employees of the
Company $500 for each meeting attended and will reimburse such directors for
travel and other expenses incurred by them in connection with attending Board of
Directors meetings. Miller received options and other compensation pursuant to
his employment contract as discussed under "Employment Contract." In December
1997, the Company granted options to purchase 30,000 shares to each of Messrs.
Cobb and Stokkebye. These options are almost identical to the options given to
Miller and described under "Employment Contract" except for the date of grant
and number of options granted.

POTENTIAL CONFLICTS OF INTEREST

Miller is a co-founder of the Company's parent, Duncan Hill. Miller is
currently the President of Duncan Hill, as well as Chairman of the Board of
Directors and Chief Executive Officer of Kids Stuff and the Company. Miller's
employment agreement with the Company provides that he shall be permitted to
devote such time to managing Duncan Hill and Kids Stuff as he deems appropriate.
Accordingly, Miller will not be devoting his full-time attention to managing the
operations of the Company. Thus, conflicts of interest could potentially develop
(i) to the extent that Miller is not able to devote his full-time and attention
to a matter that would otherwise require the full-time and attention of a
business' chief executive officer, (ii) involving competition for business
opportunities, and (iii) involving transactions between the Company and its
affiliated companies. The Company has not adopted any procedure for dealing with
such conflicts of interest, except that the Company's Board of Directors has
adopted a policy that all new transactions between the Company and Duncan Hill,
Kids Stuff or any other affiliated company must be approved by at least a
majority of the Company's disinterested directors. Currently the Company has
only one disinterested director and Duncan Hill and Miller control the election
of the directors including the disinterested directors.

<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth as of March 31, 1999, certain information
with respect to the beneficial ownership of Common Stock and Series A and Series
B Preferred Stock by each person or entity known by the Company to be the
beneficial owner of 5% or more of such shares, each officer and director of the
Company, and all officers and directors of the Company as a group.
<TABLE>
<CAPTION>

Shares of Shares of Series A
Common Stock and B
Beneficially Preferred Stock
Owned Beneficially Owned

NAME AND ADDRESS OF
BENEFICIAL OWNER(1) NUMBER PERCENT(3 NUMBER PERCENT(4)
<S> <C> <C> <C> <C> <C>
Duncan Hill (2) 931,000(4) 50.0% 6,100,000(4) 100%

William L. Miller (5) 1,251,000(5) 57.4% 6,100,000(6) 100

John W. Cobb (2)(6) 15,000 * -0- -0-

Peter Stokkebye (2)(6) 15,000 * -0- -0-

Gary Corbett (7) 20,000 1.1 -0- -0-

All four Officers and Directors
and Duncan Hill as a Group 1,301,000 58.3% 6,100,000(6) 100%

Linda Gallenberger, Trustee
ARO Trust #1, 1960 Trust (8) 360,900 16.5% -0- -0-
</TABLE>

* Represents less than 1% of the outstanding shares of Common Stock.

(1) Beneficial ownership as reported in the table above has been determined
in accordance with Rule 13d-3 of the Securities Exchange Act. or investment
power, have been deemed beneficially owned. Accordingly, except as noted, all of
the Company's securities over which the officers and directors and nominees
named, or as a group, directly or indirectly have, or share voting

(2) All addresses are c/o The Havana Group, Inc., 4450 Belden Village
Street, N.W., Suite 406, Canton, OH 44718.

(3) Calculated based upon 1,860,000 shares of Common Stock outstanding
without giving effect to the possible exercise of outstanding Class A Warrants..

(4) Calculated based upon 5,000,000 shares of Series A Preferred Stock and
1,100,000 Series B Preferred Stock outstanding. The holders of the Series A
Preferred Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the stockholders. The Series A Preferred Stock
has no conversion right. Each share of Series B Preferred Stock is convertible
at the option of the holder into one share of Common Stock at any time after the
Company has pre-tax earnings of at least $500,000 in any calendar year.

(5) Mr. Miller may be deemed to beneficially own all Duncan Hill's shares
of capital stock based upon his and his wife's 68% controlling interest in
Duncan Hill's shares of Common Stock. The table above reflects his controlling
interest of 931,000 shares owned by Duncan and Class A Warrants to purchase
200,000 shares of Common Stock and options to purchase 120,000 shares of Common
Stock which are directly beneficially owned by him. Not included in the
foregoing are options to purchase 80,000 shares which are not deemed
beneficially owned by him as of February 28, 1999. Mr. Miller by virtue of his
beneficial ownership of Common Stock and Preferred Stock (excluding options and
warrants) has the

<PAGE>
right to vote control the vote of 7,031,000 shares of the Company's voting
capital representing 88.3% of the outstanding voting capital stock of the
Company.

(6) Messrs. Cobb and Stokkebye each beneficially own options to purchase
15,000 shares of Common Stock. An additional 7,500 options will become
beneficially owned on each of January 1, 2000 and January 1, 2001.

(7) Mr. Corbett beneficially owns options to purchase 20,000 shares of
Common Stock. An additional 20,000 options will become beneficially owned on
each of February 1, 2000, February 1, 2001 and February 1, 2002.

(8) Linda Gallenberger's address is N8939 Waterpower road, Deerbrook,
Wisconsin 54424. The table reflects 43,900 shares of Common Stock and Class A
Warrants to purchase 371,000 shares of Common Stock beneficially owned by the
Trust. Linda Gallenberger is the Trustee of the Trust. The Trust was created by
Alan R. Osowski (the "Grantor") on January 5, 1960, who established the Trust
with his own personal funds. The sole beneficiary of the trust is Pamela
Osowski, the sister of the Grantor. The Trust is one of a series of trusts
established for other family members by the Grantor. The Trust is an irrevocable
family Trust. Upon the death of the beneficiary, the Trust passes to the
beneficiary's children, if any, and if none, to the beneficiary's siblings, or
the children of such siblings per stirpes. The terms of the Trust are that the
Trustee has full discretion to distribute or not the income and principal of the
Trust. The beneficiary has no right to demand any distribution of income or
principal. The Grantor has no rights whatsoever with respect to the Trust. The
Trustee has the sole investment decision to purchase securities for the Trust,
including the Company's securities and the Trustee has the sole investment power
and voting control of the Company's securities owned by the Trust.

Item 12. Certain Relationships and Related Transactions.

(i) Over the last five years the Company's operations have been financed by
Duncan Hill (and by Kids Stuff in 1997 and 1998) providing certain
administrative and other services for the benefit of the Company and charging
the Company for these services as described below. On December 31, 1996, Carey
entered into an agreement with United Bank to pledge all of its assets as
collateral along with the assets of Duncan Hill to guarantee an $800,000
revolving bank line of credit in the name of Kids Stuff. The bank line of credit
is for an open term, payable on demand with a balance as of February 28, 1999 of
$762,000. The repayment of this credit facility is guaranteed by both the
Company and Miller. This transaction occurred at a time when the Company was a
wholly-owned subsidiary of Duncan Hill and the Company did not intend to
undertake a public offering of its securities. The Company's guarantee was
without consideration and is irrevocable without the line-of-credit being paid
in full. Although United Bank has been requested by Kids Stuff to waive the
Company's guarantee, no assurance can be given that United Bank will honor such
request.

Prior to 1997, fulfillment and administrative services of the Company were
performed for the Company by Duncan Hill which also provided similar services to
its subsidiary, Kids Stuff. Fulfillment services included order taking, order
processing, customer service, warehouse packing and delivery, telephone
contracts and shipping contracts. Fulfillment services were charged to the
Company and Kids Stuff based on the actual cost. The amount of these charges was
$295,558 during 1996. Administrative services included wages and salaries of
officers, accounting, purchasing, executive and creative/marketing personnel. It
also included, all leases, contracts, equipment rentals and purchases, audit,
legal, data processing, insurance and building rent and maintenance. The
administrative costs were allocated by Duncan Hill to the Company and Kids Stuff
based upon the percentage of assets for each operating subsidiary to the total
assets for all operating subsidiaries. The amount charged to the Company during
1996 was $360,873. The percentages for 1996 were 31% to the Company and 69% to
Kids Stuff. During 1997, all administrative and fulfillment services were
performed or paid by Kids Stuff on behalf of the Company. All fulfillment
services were contracted and paid by Kids Stuff and charged to the Company based
on the actual cost. The charges to the Company were $218,632 for 1997.

<PAGE>
All administrative costs were allocated between the Company and Kids Stuff based
upon the percentage of assets for each respective operating company to the total
assets for both operating companies with 33% charged to the Company for the
period January 1, 1997 through June 30, 1997 and 21% charged to the Company for
the period July 1, 1997 through December 31, 1997. The total charges to the
Company from Kids Stuff were $255,120. Duncan Hill also incurred certain other
costs that were allocated to the Company and Kids Stuff based on the same method
and percentages as described above.

These costs were incurred and billed in the name of Duncan Hill and include
such items as legal fees, outside accounting fees and insurance expense. Though
Duncan Hill was billed for the items the Company partially benefited from the
services received. The charge to the Company was $65,474.

Effective January 1, 1998, the Company entered into a one-year agreement
with Kids Stuff whereby Kids Stuff provides administrative functions to the
Company at an annual cost of $206,100 based upon the following: $34,000 for
accounting and payroll services, $51,600 for administration and human resource
management, $34,900 for data processing, $32,200 for office equipment and
facilities use, $38,100 for merchandising and marketing services and $15,300 for
purchasing services. Kids Stuff is also providing fulfillment services to the
Company at a cost of $2.40 per order processed. The Company has calculated these
fees based on actual 1997 costs, and it is Management's belief that these fees
would represent actual costs should the Company undertake to provide these
services itself. The Company was also obligated to pay Kids Stuff an amount
equal to 5% of the Company's 1998 pre-tax profits, of which there was none, as
additional consideration for Kids Stuff providing the Company with
administrative and fulfillment services. This agreement has been extended by the
parties on a month-to-month basis. In addition to the above, the Company incurs
additional administrative costs such as legal, accounting, depreciation and
amortization and tax expenses which costs are incurred by and paid for directly
by the Company.

Until August, 1997, Duncan Hill received all revenues and deposited these
funds in its own account for the benefit of the Company and made payments
against Company charged expenses including, without limitation, any funds due
Duncan Hill and Kids Stuff.

Effective September 1997, the Company obtained its own banking accounts,
whereby the Company manages all deposits and payments. the Company will manage
its own functions with the exception of those discussed above, for which the
Company will make payment to Kids Stuff for services provided by Kids Stuff. At
January 1, 1998, the Company owed a net of $173,752 to Kids Stuff and is owed a
net amount which consists of charges for fulfilment and administrative services
of $473,752 less $300,000 of affiliate indebtedness assumed by Duncan Hill
relating to the sale of the Company's Series B Preferred Stock. See "(iv)"
below. The Company is also owed a net of $43,860 from Duncan Hill which consists
of balances since 1984 totaling $12,312,833 owned by Duncan Hill for payments
from the Company in the form of revenue deposits as mentioned above, $8,455,066
in payments made on behalf of the Company by Duncan Hill for accounts payable
and other payments and $3,813,907 owed to Duncan Hill for fulfilment and
administrative expenses allocated to the Company. The Company intends to pay the
balance due to Kids Stuff from cash flow over the next 12 months.

(ii) Pursuant to an employment agreement, the Company granted Miller five
year Warrants to purchase 200,000 shares of the Company's Common Stock in
December 1997. Upon the completion of the IPO, the aforesaid Warrants which are
exercisable at $6.00 per share automatically converted into Class A Warrants
identical to those sold in the IPO .

(iii) On December 8 , 1997, the Company declared a stock dividend of
5,000,000 shares of its Series A Preferred Stock and five year warrants to
purchase 138,000 shares of

<PAGE>
the Company's Common Stock to Duncan Hill, the Company's sole common stockholder
prior to the Offering. Upon the completion of the IPO, the aforesaid warrants
which are exercisable at $6.00 per share automatically converted into Class A
Warrants identical to those sold in the IPO.

(iv) On December 8, 1997, the Company sold 1,100,000 shares of its Series B
Preferred Stock to Duncan Hill in exchange for Duncan Hill's assumption of
$300,000 of indebtedness owing to an affiliate. The holder of each share of
Series B Preferred Stock will be entitled to receive, when, as and if declared
by the Board of Directors of the Company, out of funds legally available
therefor, cumulative quarterly cash dividends at the rate of $.025 per share,
quarterly on March 31, June 30, September 30 and December 31 commencing with
March 31, 1998. All issued and outstanding shares of Series B Preferred Stock
are owned by Duncan Hill.

All the aforesaid transactions occurred at a time when the Company was a
sole shareholder of Duncan Hill. All future transactions between the Company,
Duncan Hill and Kids Stuff must be approved by a majority of the Company's
disinterested directors.

Item 13. Exhibits and Reports on Form 8-K.

(a) Exhibits

All Exhibits have been previously filed herewith in connection with Form
SB-2 Registration Statement, file No. 333-45863 unless otherwise noted.
<TABLE>
<CAPTION>

<S> <C>
2.0 Certificate of Merger (Ohio)
2.1 Certificate of Merger (Delaware)
2.2 Agreement and Plan of Merger
3.0 Certificate of Incorporation
3.1 Designation of Rights of Series A and Series B Preferred Stock
3.2 By-Laws
3.3 Form of Certificate of Amendment Correcting Designation of
Rights of Series A and Series B Preferred Stock 4.0 Specimen of Common Stock
4.1 Specimen of Class A Warrant
4.2 Form of Underwriter's Unit Purchase Option
4.3 Form of Warrant Agreement 5.0 Opinion of Lester Morse P.C.
10.0 Employment Agreement with William L. Miller
10.1 Agreement with Kids Stuff, Inc. as of January 1, 1998
10.2 1997 Long-Term Incentive Plan
10.3 Duncan Hill lease for principal office
10.4 First Amendment to Exhibit 10.3 lease 10.5 Kids Stuff credit facility with United National Bank
10.6 Registrant's guarantee of Exhibit 10.5 (included in Exhibit 10.5)
10.7 Employment Agreement dated as of December 8, 1998 with Gary Corbett.*
27 Selected Financial Data*
</TABLE>

- -------------------------
* Filed herewith.

(b) Reports on Form 8-K

During the three months ended December 31, 1998, a Form 8-K was not filed
or required to be filed.

<PAGE>
SIGNATURES

Pursuant to the requirements 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.

THE HAVANA GROUP, INC.

By: /s/ William L. Miller
William L. Miller,
Chief Executive Officer

Dated: Canton, Ohio
April 14, 1999

Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated:
<TABLE>
<CAPTION>

Signatures Titles Date

<S> <C>
/s/ William L. Miller Chairman of the
William L. Miller Board, Chief Executive Officer,
Principal Financial Officer,
Treasurer and Secretary April 14, 1999

/s/ Peter Stokkebye
Peter Stokkebye Director April 14, 1999

/s/ John Cobb
John Cobb Director April 14, 1999
</TABLE>

EXHIBIT 10.7

EXECUTIVE EMPLOYMENT AGREEMENT

This Agreement is made as of the 8th day of December, 1998, between THE
HAVANA GROUP, INC., an Delaware Corporation with its principal offices at 4450
Belden Village Street, N.W., Suite 406, Canton, Ohio 44718 (the "Company") and
Gary J. Corbett residing at 106 Scateswood Drive, Martin, Tennessee 38237 (the
"Executive").

AGREEMENT

In consideration of the mutual agreements set forth herein, the
parties, intending to be legally bound, agree as follows:

1. Employment.

(A) Position. Executive hereby accepts employment by the company as
President. Executive warrants that he has not signed any other agreement which
would restrict in any way his ability to accept this position.

(B) Performance. Executive agrees to devote his full time, energies and
attention to the performance of his duties and functions hereunder, to exercise
his best efforts, judgment, skills, and talents exclusively in the business and
affairs of the Company and, in the performance thereof, to comply with the
policies of and be subject to the direction of the Board of Directors of the
Company.

(C) Responsibilities. Executive shall be responsible for the duties
assigned to him by the Board of Directors and shall be subject to and report to
the Board of Directors. Executive is engaged to act as the President and shall
perform all of the usual duties inherent in such position as well as such other
duties as may from time to time be delegated to him by the Board of Directors.

2. Compensation.

(A) Base Salary. The Company agrees to pay Executive and Executive agrees
to accept as compensation for all of his services, a base salary payable in
accordance with the Company's standard payroll policy at the annual rate of
$80,000. The Board of Directors or the Compensation Committee of the Board of
Directors shall review the Executive's performance on an annual basis.

(B) Bonuses. In addition to a base salary, the Executive shall be eligible
to receive bonuses as determined by the Board of Directors of the Company based
upon the performance of the Executive and the overall profitability of the
Company.

(C) Signing Bonus. The parties acknowledge that the Executive currently has
a position that would entitle him to a performance bonus for the year 1998. If
the Executive should not receive that performance bonus solely because of his
accepting the position with the Company, the Company will pay a signing bonus to
the Executive of $22,000 upon verification by the Executive that he did not
receive the performance bonus from his current employer.

3. Expenses. The company shall pay or reimburse Executive during his
employment hereunder for all reasonable travel and othe expenses incurred by
Executive in the performance of his duties and obligations hereunder upon
submission of appropriate supporting documentation. In addition, the Company
will reimburse the Executive for reasonable relocation expenses to Ohio. Where
possible, the Executive agrees to obtain competitive bids for moving and
relocation expenses.

4. Benefit Plans. Executive shall be entitled to participate in all of the
Company sponsored employee benefit plans for which he may be eligible.

5. Vacation. Executive shall be entitled to three weeks of vacation during
each twelve-month period of his employment hereunder.

6. Stock Options. The Company hereby grants the Executive the option to
purchase 80,000 shares of the Company's Common Stock (the Option). The common
stock and options are currently not registered and any shares purchased will be
restricted. The options will be exercisable as follows:

<PAGE>
(A) An option to purchase 20,000 shares of Common Stock thirty days after
the Executive begins his employment and will vest on that date. The option price
will be the market value of the shares at the time of vesting.

(B) An option to purchase an additional 20,000 shares will vest on the
first anniversary date of this Agreement.

(D) The final option to purchase 20,000 shares will vest on the third
anniversary date of this Agreement.

All options will expire and will be nonexercisable ten years from the date
hereof.

The exercise price of the option shall be $3.50 per share of Common Stock,
subject to adjustment as set forth below. The exercise price for vested options
may be decreased if (i) the Company meets certain perfo9rmance goals, and (ii)
Executive timely elects to "lock-in" a lower exercise price with respect to his
vested options.

The exercise price for vested options may be reduced by $1.00 per share for
each $500,000 of pretax net income of the Company for the prior fiscal year. The
Company shall report to Executive, promptly upon audited financial statements
for the prior fiscal year becoming available, the pretax net income of the
Company for that year. Executive shall have thirty (30) days in which to decide,
with respect to his vested options for which an alternative exercise price has
not previously been locked-in, whether to adjust the exercise price of such
vested options based upon the pretax income of the Company from the prior year.
For example, if the Company has $1,100,000 of pretax net income for the year
ended December 31, 1999, the Company shall report such net income to Executive
in 2000. Executive will have to decide, within thirty (30) days of receipt of
the financial information whether to modify or "lock-in" an amended exercise
price for the vested options (with the original grant date of January 1, 1999
options to purchase 20,000 shares of Common Stock would be vested at that time).
The exercise price for such vested options could be lowered to $1.00 per share
and locked-in with respect to the underlying shares (two $500,000 increments of
pretax net profit (no additional adjustment for the $100,000 partial increment).

If Executive locks-in the new exercise price, that price will be the
exercise price for those shares for the entire term of the option. However,
Executive may determine not to so lock-in the exercise price. In that event,
Executive may in the subsequent year(s), elect to lock-in a new exercise for all
vested options with respect to which alternate exercise price has not previously
been locked-in. In no event shall Executive be allowed to lock-in a new exercise
price based on the Company's pretax net income for the year ending December 31,
2002.

7. Confidential Information. Executive acknowledges that the information,
observations and data regarding the Company and its subsidiaries obtained by him
during the course of his employment, either before or after the effective date
of the Agreement, are the property of the Company. Therefore, Executive agrees
that he will not disclose to any unauthorized person or use for his own account
or for the benefit of any third party (other than the Company and its
subsidiaries) any of such information, observations or data without the prior
express written approval of the Board of Directors of the Company. Executive
agrees to deliver to the Company, at the termination of his employment, all
memoranda, notes, plans, records, reports and other documents (and copies
thereof) relating to the Company and its subsidiaries, which he may then possess
or have under his control.

8. Non Competition. Except as an employee of the Company, the Executive
shall not, during the term of this Agreement and for a period of two years after
termination of his employment, engage either directly or indirectly in any
business involved in consumer or retail catalog promotion or sales of a)
children's products including but not limited to clothing, toys, hard goods and
the like, b) tobacco or smoking related products or c) any other business sector
in which the Company or any of its affiliated Companies has or has plans to
issue a consumer or retail catalog while the Executive was employed by the
Company. This restriction will further prohibit the Executive from becoming a
consultant, owner, investor, director, agent, or in any way perform services or
lend support to any business engaged in the restricted businesses. This
provision shall not apply if the Company terminates Executive pursuant to
Section 9(b)(iii) below except when Executive is terminated for misuse of
Company funds or violation of Section 7 or 8 of this Agreement.
<PAGE>
Because of the national and international nature of the catalog business of
the Company, the parties agree that this restriction shall cover all of North
America and the Executive acknowledges that this restriction as to territory and
duration is reasonable.

The Executive acknowledges that based upon his training and experience, he
has the capabilities of finding other employment which would not require him to
violate the terms of this Agreement. The Executive acknowledges that this is a
very important term and that absent the inclusion of this provision, he would
not be employed by the Company. The Executive further acknowledges that he will
not assert any defense to the enforcement of this provision, that the
enforcement creates a hardship, precludes him from employment or raise other
equitable defenses related to the possibility of nonviolating gainful
employment.

9. Term and Termination.

a) Term. The term of this Agreement shall begin on February 1, 1999 and
shall terminate on December 31, 2002 unless extended by agreement of the parties
or terminated at an earlier date as provided hereinafter. ----

b) Termination.

(i) Employment may be terminated by the Executive upon 120 days prior
written notice.

(ii) This Agreement may be terminated by mutual agreement of the parties at
any time.

(iii) This Agreement may be immediately terminated by the Company for cause
which shall include but not limited to any misuse of corporate funds, material
breach of duties and responsibilities, a breach of this Agreement, personal
conduct that may result in potential liability to the Company or other
significant event.

(iv) This Agreement may be terminated by the Company without cause with 120
days prior notice or alternatively upon immediate notice, with the Company to
pay four months severance to Executive.

c) In the event of termination by either party, Executive agrees that the
termination will be deemed an automatic resignation as an officer and director
of the Company or any of its affiliates.

10. Miscellaneous.

a) Severability. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision.

b) No Waivers. The failure of either party to insist upon the strict
performance of any of the terms, conditions, and provisions of this Agreement
shall not be construed as a waiver or relinquishment of future compliance
therewith, and said terms, conditions, and provisions shall remain in full force
and effect. No waiver of any term or condition of this Agreement on the part of
either party shall be effective for any purpose whatsoever unless such waiver is
in writing and signed by such party.

c) Modification. This Agreement may not be changed, amended, or modified
except by a writing signed by both parties.

d) Notices. Any notice, request, demand, waiver, consent, approval, or
other communication which is required to be or may be given under this Agreement
shall be in writing and shall be deemed given only if delivered to the party
personally or sent to the party by registered or certified mail, return receipt
requested, postage prepaid, to the parties at the addresses set forth herein or
to such other address as either party may designate from time to time by notice
to the other party sent in like manner.
<PAGE>
e) Governing Law. This Agreement constitutes the entire agreement between
the parties and shall be governed by and construed in accordance with the laws
of the State of Ohio applicable to agreements made and to be performed solely
within such state. Any disputes between the parties will be exclusively in the
Court of Common Pleas, Stark County, Ohio or the United States District Court
for the Northern District of Ohio and the parties consent to the exclusive
jurisdiction of those Courts.

f) Headings. The section headings contained in this Agreement are for
reference purposes only and shall not be deemed to be a part of this Agreement
or to affect the construction or interpretation of this Agreement.

IN WITNESS WHEREOF, the parties hereto have caused the Agreement to be
executed as of the day and year first above written.

THE HAVANA GROUP, INC.

By:
Title:

EXECUTIVE

By:
Gary J. Corbett

<ARTICLE> 5
<LEGEND>
EXHIBIT 27

FINANCIAL DATA SCHEDULE THIS SCHEDULE CONTAINS SUMMARY FINANCIAL
INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS AND RELATED FOOTNOTES
THERETO, OF THE HAVANA GROUP, INC. AND SUBSIDIARY.

</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> dec-31-1998
<PERIOD-END> dec-31-1998
<CASH> 1,634,276
<SECURITIES> 0
<RECEIVABLES> 51,460
<ALLOWANCES> 5,000
<INVENTORY> 500,765
<CURRENT-ASSETS> 2,214,273
<PP&E> 150,495
<DEPRECIATION> 18,511
<TOTAL-ASSETS> 2,803,322
<CURRENT-LIABILITIES> 342,299
<BONDS> 0
0
6,100
<COMMON> 1,860
<OTHER-SE> 2,453,063
<TOTAL-LIABILITY-AND-EQUITY> 2,803,322
<SALES> 1,354,164
<TOTAL-REVENUES> 1,354,164
<CGS> 900,272
<TOTAL-COSTS> 1,335,169
<OTHER-EXPENSES> 473,598
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,374,769
<INCOME-PRETAX> (3,829,372)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,829,372)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,829,372)
<EPS-PRIMARY> (2.61)
<EPS-DILUTED> (2.61)

</TABLE>