UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
for the transition period from ______________________ to _______________________
Commission file number
THE HAVANA GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 34-1454529
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
4450 Belden Village Street, N.W., Suite 406, Canton, Ohio 44718
(Address of principle executive offices)
(Zip Code)
(330) 492-8090
(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the past 90
days.
Yes [X] No [ ]
As of May 13, 1999, there were 1,860,000 shares of the Registrant's Common
Stock $.001 par value issued and outstanding.
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C>
Balance Sheets - March 31, 1999 (Unaudited) and December 31, 1998 ................ 3
Statements of Operations - Three Months Ended March 31, 1999 and 1998 (Unaudited) 5
Statements of Cash Flows ......................................................... 6
Notes to Financial Statements .................................................... 7
Item 2 - Management's Discussion and Analysis or Plan of Operations .............. 11
Part II - Other Information ...................................................... 13
</TABLE>
2
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, December 31,
1999 1998
------------ -----------
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash ................................... $1,323,478 $1,634,276
Accounts receivable .................... 43,502 46,460
Inventories ............................ 555,707 500,765
Deferred catalog expense ............... 37,023 32,772
Due from affiliates .................... 0 0
Prepaid expenses ....................... 4,950 0
---------- ----------
Total Current Assets ................ 1,964,660 2,214,273
DEFERRED FEDERAL INCOME TAX ................. 29,070 29,070
PROPERTY & EQUIPMENT:
Data processing equipment .............. 32,252 28,607
Leasehold Improvements ................. 92,244 89,244
Web Site Development ................... 59,016 0
Machinery and equipment ................ 8,207 15,781
Furniture and fixtures ................. 16,863 16,863
---------- ----------
208,582 150,495
Less accumulated depreciation .......... 23,101 18,511
---------- ----------
185,481 131,984
OTHER ASSETS, net of accumulated amortization
Customer List .......................... 416,097 425,773
Other .................................. 2,222 2,222
---------- ----------
418,319 427,995
$2,597,530 $2,803,322
---------- ----------
---------- ----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
March 31, December 31,
1999 1998
------------- -------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
<S> <C> <C>
Accounts payable ............ $ 94,579 $ 90,112
Accrued Expenses ............ 66,911 49,190
Due to Affiliates ........... 40,071 200,602
Customer advances and other . 7,401 2,395
----------- -----------
Total Current Liabilities 208,962 342,299
STOCKHOLDERS' EQUITY:
Preferred stock ............. 6,100 6,100
Common stock ................ 1,860 1,860
Additional paid - in capital 6,459,322 6,459,322
Retained earnings (deficit) . (4,077,714) (4,006,259)
----------- -----------
Total Stockholders' Equity 2,389,568 2,461,023
----------- -----------
$ 2,597,530 $ 2,803,322
----------- -----------
----------- -----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended March 31,
1999 1998
------------ -------------
<S> <C> <C>
Sales .......................... $ 261,764 $ 320,601
Cost of Sales .................. 189,077 192,562
--------- ---------
Gross Profit ................... 72,687 128,039
Selling Expenses ............... 81,780 103,795
General and Administrative
Expenses ................. 78,733 86,966
--------- ---------
Loss From Operations ........... (87,826) (62,722)
Net Other Income (Expense) ..... 16,371 (3)
--------- ---------
Net Loss ....................... (71,455) (62,725)
--------- ---------
--------- ---------
Basic and Diluted Loss Per Share (0.04) (0.06)
--------- ---------
--------- ---------
</TABLE>
The accompanying notes are an integral part of these financial statements.
5
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Three Months Ended Mar 31,
-----------------------------
1999 1998
Cash Flows From Operating Activities:
<S> <C> <C>
Net loss ............................................ $ (71,455) $ (62,725)
Adjustments to reconcile loss to net
cash used by operating activities:
Depreciation and amortization .................. 14,266 12,198
Decrease in accounts receivable ................ 2,958 6,370
Increase in inventories ........................ (54,942) (74,641)
(Increase) decrease in deferred catalog expense (4,251) 16,151
(Increase) in prepaid expenses ................. (4,950) 0
Increase (decrease) in accounts payable, accrued
Expenses, customer advances and other .......... 26,194 (4,949)
--------- -----------
Net cash (used) by operating activities ................... (92,180) (107,596)
Cash Flows From Investing Activities:
Investment in property and equipment ................. (58,087) (1,456)
Cash Flows From Financing Activities:
Borrowings on Notes Payable - Related Parties ........ 0 200,000
Prepaid Amounts for Public Offering .................. 0 (82,338)
(Decrease) in due to affiliates (160,531) 15,231
--------- -----------
Net cash provided (used) by financing activities .......... (160,531) 132,893
Net (Decrease) in Cash .................................... (310,798) 23,841
Cash - Beginning .......................................... 1,634,276 79,611
------------ -----------
Cash - Ending ............................................. $ 1,323,478 $ 103,452
============ ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
6
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Business
A. Business Description and Principles of Consolidation
The Havana Group, Inc. (Havana) 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 manufactures smoking pipes and sells them
exclusively to the Havana. All significant inter-company accounts and
transactions have been eliminated in consolidation
B. Reorganization
The Company was formed as a wholly-owned subsidiary of Duncan Hill, Inc. in
December 1997. The operations included in the accompanying unaudited financial
statements prior to December 1997 are those of E. A. Carey of Ohio, Inc.
(Carey), which was dissolved as part of the reorganization, and Monarch. Carey
and Monarch were both wholly-owned subsidiaries of Duncan Hill, Inc. prior to
the reorganization. The Company acquired the assets and liabilities of Carey and
the common stock of Monarch Pipe in the reorganization, which was accounted for
at historical cost as a reorganization of companies under common control.
Note 2. Basis of Presentation
A. The accompanying unaudited financial statements have been prepared by
the Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of the Company's
management, the disclosures made are adequate to make the information presented
not misleading, and the consolidated financial statements contain all
adjustments necessary to present fairly the financial position as of March 31,
1999, the results of operations for the three months ended March 31, 1999 and
1998, and cash flows for the three months ended March 31, 1999 and 1998. The
results of operations for the three months ended March 31, 1999 are not
necessarily indicative of the results to be expected for the full year.
Per Share Amounts - The number of shares outstanding in computing basic and
diluted earnings per shares for the three monthly periods ended March 31, 1999
and 1998 were 1,860,000 and 1,000,000 respectively.
B. Recently Issued Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued SFAS 133,
"Accounting for Derivative Instruments and Hedging Activities." This statement
established accounting and reporting standards for derivative instruments,
including certain derivative instruments embedded in other contracts, and for
hedging activities. It requires recognition of all derivatives as either assets
or liabilities on the balance sheet and measurement of those instruments at fair
value. If certain conditions are met, a derivative may be designated
specifically as (a) a hedge of the exposure to changes in fair value of a
recognized asset or liability or an unrecognized firm commitment (fair hedge),
(b) a hedge of the exposure to variable cash flows of a forecasted transaction
(a cash hedge), or (c) a hedge of the foreign currency exposure of a net
investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency-denominated forecasted
transaction. The Company does not anticipate having each of these types of
hedges, but will comply with requirements of SFAS 133 when adopted.
7
<PAGE>
This statement is effective for all fiscal quarters or fiscal years
beginning after June 15, 1999. The Company will adopt SFAS 133 beginning January
1, 2000. The effect of adopting SFAS 133 is not expected to be material.
Note 3. Parent Corporation
Effective January 1, 1997, the Company contracted with Kids Stuff, Inc.
("Kids"), a subsidiary of Duncan Hill, Inc., to provide telemarketing, order
fulfillment, data processing and certain administrative functions. The Company
is charged for its portion of the expenses on a direct cost basis, as
applicable, or on a pro rata basis. Actual costs are those direct costs that can
be charged on a per order or per hour basis, fixed costs are allocated on a pro
rata basis by dividing the total assets of the Company by the sum of the total
assets of the Company and Kids. Effective January 1, 1998, the Company renewed
this contract with Kids at an annual cost of approximately $206,100 for the
administrative, executive and accounting services, as outlined below, and $2.40
per order processed. The Company is also obligated to pay 5% of its 1998 pre-tax
profit to Kids in connection with these administrative and fulfillment services.
Management believes that this is substantially the same cost that it would incur
should it procure these services itself. At January 1, 1999 the agreement was
extended on a month-to-month basis.
Accounting and Payroll Services $34,000
Administration and Human Resource Management 51,600
Data Processing 34,900
Office Equipment and Facilities Use 32,200
Merchandising and Marketing Services 38,100
Purchasing Services 15,300
------
Total $206,100
The Company's accounts receivable and inventories are pledged as collateral
on Kids line of credit. The Company is also a guarantor which is irrevocable. At
March 31, 19989 the balance on the line of credit was $762,000.
Note 4. Stockholders' Equity
A. Common Stock
The Company issued 1,000,000 shares of Common stock to its parent, Duncan
Hill, Inc., in connection with the reorganization (Note 1). The holders of
Common shares are entitled to one vote on all stockholder matters. The Company
is not currently subject to any contractual arrangements which restricts its
ability to pay cash dividends. However, the Company's Certificate of
Incorporation prohibits the payment of cash dividends in excess of $.05 per
common share per year so long as any Serial Preferred Stock remains outstanding
unless all accrued and unpaid dividends on Serial Preferred Stock has been set
apart and there are no arrearages for the redemption of any Series Preferred
Stock.
B. Series A Preferred Stock
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix all rights, preferences,
privileges, and restrictions. On December 8, 1997, the Company issued, as a
dividend to Duncan Hill, Inc., 5,000,000 shares of Series A Preferred Stock
(Series A) to Duncan Hill, Inc. The Series A holders are entitled to one vote
for each share held on all matters submitted to a vote of the stockholders. The
Series A stock is not subject to redemption and has no conversion rights or
rights to participate in dividend payments. In the event of any voluntary or
involuntary liquidation of the Company, each share of Series A stock has a
liquidation preference of $.001 per share.
8
<PAGE>
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) to Duncan Hill. In return, Duncan Hill
assumed a $300,000 liability due to an affiliate. Series B has the same voting
privileges as the Common Stock. Each share of Series B stock is convertible into
one share of the Company's Common Stock at the option of either the holder or
the Company upon reaching net pre-tax earnings of at least $500,000 in any
calendar year. If declared by the Board of Directors, Series B shareholders are
entitled to receive quarterly dividends of no more than $.025 per share, payable
out of surplus or net profits of the Company. As of March 31, 1999, the Board of
Directors have not declared any dividends. As the Series B Preferred pays a $.10
dividend per share, the Company has recorded the Series B stock at $1.00 per
share to reflect its estimated fair value. The Series B stock is not subject to
redemption. In the event of a voluntary or involuntary liquidation of the
Company, each share of Series B stock has a liquidation preference of $.001,
which is subordinated to the liquidation preference of the Series A stock.
D. In December 1997, the Company issued 138,000 warrants as a dividend to
Duncan Hill, Inc. Upon completion of the Company's initial public offering,
these warrants automatically convert into Class A Warrants identical to those
sold to the public.
E. Issuance of Securities in Note Conversion
In January 1998, the Company borrowed $100,000 from a private investor in
exchange for a convertible promissory note (Convertible Note). The Convertible
Note bore interest at 8% per annum and was converted into 400,000 shares of
Common Stock and 1,400,000 warrants. In accordance with APB 14 and EITF Topic
No. D-60, the beneficial conversion feature (in the amount of $3,350,000) of the
note was recognized as additional paid-in capital and charged to interest
expense during 1998.
Note 5. Bridge Loan
In January 1998, the Company borrowed $100,000 from one private investor
evidenced by a promissory note of $100,000. This is the same private investor
mentioned in Note 4E, "Sale of Unregistered Securities." The note bore interest
at 8% per annum and was paid on May 22, 1998 out of proceeds of the Company's
initial public offering.
Note 6. Employment Agreement
In December 1997, the Company and its CEO entered into an employment
agreement, which among other terms, granted the CEO 200,000 Common Stock
Purchase Warrants at $6.00 per share. The warrants were converted into Class A
warrants upon the effectiveness of the Company's registration statement. The CEO
was also granted an option to purchase 200,000 shares of the Company's Common
Stock, which will vest 20% on each of the following dates: December 1, 1997;
January 1, 1998; January 1, 1999; January 1, 2000; and January 1, 2001,
regardless of whether the executive is employed on such dates by the Company.
The vested options will be immediately exercisable and will expire 10 years from
the date of the agreement. The exercise price of the options will be $6.00 per
share, subject to downward adjustments in the exercise price if the Company
meets certain performance goals.
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.
9
<PAGE>
Note 7. 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 over-allotment 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.
10
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the information in the
financial statements of the Company and notes thereto appearing elsewhere.
Overview
The Havana Group, Inc. is a consumer catalog business specializing in
smoking pipes, tobaccos, cigars and related accessories. We are the manufacturer
and sole distributor of the "Magic Inch" and "Aerosphere" smoking pipe systems,
and the sole distributor of "Carey Honduran" lines of proprietary hand made
cigars. Our products are offered through our Carey's Smokeshop catalog. Carey
Tobacco Club is also offered through the catalog, which is a monthly program of
tobacco shipments to Club members. During December 1997 we opened, and have
since been developing, our Havana Group retail store.
On May 14, 1998, the Securities and Exchange Commission declared our
initial public offering effective, and it was subsequently completed on May 22,
1998. Proceeds from that offering amounted to $1,917,282, net of operating
expenses of $842,718.
During the three months ended March 31, 1999, catalog sales provided about
71% of gross revenues, Club member sales comprised another 20%, and the balance
was provided by the developing retail store.
RESULTS OF OPERATIONS
Three months ended March 31, 1999 compared to three months ended March 31,
1998.
Net sales for the three months ended March 31, 1999 declined 18.4% to
$261,764, compared with $320,601 during the three months ended March 31, 1998.
The Company's sales are derived principally from the mailing of its catalogs,
and the Company attributes the sales decline to timing differences between the
mailing of its March 1999 and March 1998 catalogs. The Company anticipates that
this revenue will be recaptured as the year progresses.
Cost of sales increased from 60.1% of net sales in 1998 to 72.2% in 1999.
The Company's Cost of Sales includes merchandise, which declined as a percentage
of sales, and fulfillment expenses which increased as a percentage of sales. The
Company's fulfillment expenses rose from 23.9% of sales in 1998 to 37.1% in
1999. The increase reflects higher charges under the Company's Operating
Agreement with Kids Stuff, Inc.
Selling expenses were 31.2% of net sales in 1999, compared with 32.4% of
net sales for the first quarter of 1998. The Company's mailings in the first
quarter of 1999 were essentially the same as those in 1998, with similar costs
and slightly improved results.
For the three months ended March 31,1999, general and administrative were
$78,733, or 30.1% of net revenues, as compared to $86,966, or 27.1% of net
revenues, for the same period last year. This decrease in costs of $8,233 is due
to a decrease in administrative charges from Kids Stuff, Inc., an affiliated
company, which provides support services to Havana.
The operating loss before interest income for the three months of 1999 was
$87,826, or 33.6% of net sales, as compared to an operating loss of $62,722, or
19.6% of net sales, for the same period last year. The higher operating loss was
due primarily to the reduced sales in the quarter and higher operating costs in
the Company's fulfillment operations.
11
<PAGE>
Liquidity and Capital Resources
At March 31, 1999, our accumulated deficit increased ($71,455) from
December 31, 1998 because of the net loss. In addition to the net loss, cash was
used by operating activities primarily to increase inventories. Cash uses were
partially offset by non-cash charges of $14,266 for depreciation and
amortization, and by increases in accounts payable customer advances and other
liabilities in the amount of $26,194. Cash was used by investing activities, as
investments in property and equipment rose by $58,087, reflecting the Company's
investment in its Havana Group site on the world-wide-web. The Company's
believes that its web site is approximately 60% complete, and anticipates the
total cost of its web site will be approximately $100,000. Financing activities
for the quarter consisted of a reduction in amounts due to affiliates, as the
Company paid down its balances due by $160,531 during the quarter.
During the three months ended March 31, 1998, we used cash in operating
activities of $107,596. Cash uses were partially offset by non cash charges of
$12,198 for depreciation and amortization and by a decrease in accounts
receivable and deferred catalog expense. During the three months ended March 31,
1998, we used cash to purchase property and equipment of $1,456. During the
three months ended March 31, 1998, net cash was provided by our financing
activities. This included $200,000 of borrowings from a related party, an
increase in the amount due to affiliates of $15,231 partially offset by our
prepaid expenses of $82,338 relating to our initial public offering.
Currently, the Company has no credit facility, but believes that its
current operations can be financed through its working capital position and
through ongoing operations.
The Company expects to meet current cash requirements from its working
capital and from ongoing operations.
Forward Looking Statements and Associated Risks
Management's discussion and analysis contains forward looking statements
which reflect Management's current views and estimates of future economic
circumstances, industry conditions, company performance and financial results.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, many of which are beyond
the Company's control. Actual results could differ materially from these forward
looking statements as a result of changes in the trends in the tobacco or cigar
retail and mail order industry, government regulations imposed on the tobacco
industry, competition, availability and price of goods, credit availability,
printers' schedules and availability, and other factors. Any changes in such
assumptions or factors could produce significantly different results.
12
<PAGE>
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits filed as part of this report:
27. Financial Data Schedule
(b) No report on form 8-K was filed during the second quarter of 1999.
13
<PAGE>
Signature
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Havana Group, Inc.
Date: 5/15/99 /s/ William Miller
William Miller, CEO
and Chief Financial Officer
14
