UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A No. 1
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report: (date of earliest event reported): August 4, 2000
THE HAVANA GROUP, INC.
--------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Delaware 000-24269 34-1454529
------------------------------------------------------------------------------------------------------------------
(State or other jurisdiction (Commission (IRS Employer
of incorporation) File Number) Identification No.)
</TABLE>
5701 Mayfair Road, North Canton, Ohio 44720
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 492-8090
1
<PAGE>
Item 2. Acquisition or Disposition of Assets.
On August 4, 2000, the Registrant entered into an agreement with John
S. Parker, Priscilla H. Parker, Jerold E. Christensen and Linda L. Christensen
(the "Sellers") and acquired 100% of the capital stock of Phillips & King
International, Incorporated ("P&K") in exchange for (i) 450,000 restricted
shares of the Registrant's Common Stock with piggy- back registration rights,
(ii) $900,000 in cash which was paid directly to P&K on behalf of Sellers, and
(iii) assumption of liabilities estimated at approximately $1,960,000.
Contemporaneous with the acquisition of P&K, the Registrant entered into 90 day
transitional consulting contracts with John S. Parker and Jerold E. Christensen
and agreements not to compete for a period of two years.
The final purchase price was arbitrarily determined based upon the
payment of one dollar of consideration for each one dollar of assets owned by
P&K as of June 30, 2000, with closing combined assets to be not less than
$3,000,000 without the Registrant's consent and liabilities not to exceed
$1,960,000. This transaction will be accounted for under the purchase method of
accounting.
The cash utilized by the Registrant as part of the purchase price was
paid from the Registrant's working capital. Prior to the completion of the
Registrant's acquisition of P&K, there was no prior relationship between the
persons affiliated with P&K and persons affiliated with the Registrant.
P&K was organized in 1906 by Mr. Harry Phillips. P&K is a wholesale
distributor of tobacco, cigar, pipe and related smoking products. P&K sells
tobacco products to retail shops and it has approximately 3,000 accounts. The
method of sale is by direct contact and P&K employs nine sales representatives
in its business. The assets of P&K acquired by the Registrant will continue to
be utilized in the same line of business as that conducted before the
transaction. P&K's principal assets include, without limitation, inventories,
customer lists and accounts receivable.
During the 1997-1998 peak in premium cigars, Cuba Libre Humidors, Inc.
("Cuba Libre") claimed to have received a verbal purchase order for
humidification devices for continuous monthly sale to P&K. This did not happen,
Cuba Libre filed a law suit and was awarded a judgment of $1.8 million. P&K
responded by filing for protection under Chapter 11 of the Bankruptcy Code and
began defensive actions. This action was settled on August 4, 2000 and as part
of the Plan of Reorganization, P&K paid $300,000 in cash and issued notes in
favor of Cuba Libre including: (a) an unsecured note for $400,000 in the
principal amount with interest at 7% per annum and payable in quarterly
installments with the balance due on or before May 1, 2005; and (b) an unsecured
Note in the amount of $125,000 in principal amount without interest for the
first two years and to bear interest at 7% beginning on the third year to be
paid in quarterly installments with the balance due on or before May 1, 2005.
2
<PAGE>
Until its Chapter 11 filing, P&K operated as a subchapter S corporation
under the United States Tax Code of 1986, as amended. Prior to the Registrant's
acquisition of P&K received a Confirmation Order confirming a Plan of
Reorganization which has become a final Order and no timely Order has been filed
as of August 4, 2000, the closing date and the effective date of the Plan of
Reorganization.
Item 7. Financial Statements and Exhibits
(a) - (b) The financial statements of P&K for the two years ended
December 31, 1999 and the pro-forma financial statements of P&K and the
Registrant are filed herewith.
(c) Exhibits. The following exhibits are furnished in accordance with
the provisions of Item 601 of Regulation S-B and were previously filed with the
Form 8-K dated August 4, 2000 (date of earliest event).
Exhibit No. Description
2 Stock Purchase Agreement dated August 4, 2000 by and
among the Registrant and John S. Parker, Priscilla H. Parker,
Jerold E. Christensen and Linda L. Christensen
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE HAVANA GROUP, INC.
By: /s/ William L. Miller
William L. Miller, Chief Executive Officer
Date: October 13, 2000
3
<PAGE>
INTRODUCTION TO SELECTED HISTORICAL AND PRO
FORMA
FINANCIAL DATA AND INFORMATION
The following selected historical and pro forma financial data and
information were derived from Phillips & King International's (audited year end
and unaudited interim) and The Havana Group, Inc.'s (audited year end and
unaudited interim) financial statements. The financial data and information for
Phillips & King International and The Havana Group are based on their year end
of December 31, 1998 and December 31, 1999.
Phillips & King International's historical and the pro forma selected
financial data and information should be read in conjunction with Phillips &
King International's and the pro forma financial statements contained elsewhere
in this information statement. Selected financial information for Phillips &
King International for years preceding the year ended December 31, 1998 are not
available.
<PAGE>
As of June 30, 2000
<TABLE>
<CAPTION>
P&K Havana Consolidated
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash 172,219 974,433 1,146,653
Cash, restricted 0
I/C receivables 100 100
A/R 939,414 57,354 996,769
Allowance for A/R (53,000) (53,000)
Inventory 1,451,352 780,617 2,231,968
Advances to vendors-Inv. 0
Employee Advances 2,050 2,050
Prepaid Advertising 91,657 91,657
Cigarette stamps 146,305 146,305
Prepaid Other 32,475 42,254 74,729
-----------------------------------------------------------------------
Total Current Assets 2,690,815 1,946,416 4,637,231
Net Fixed Assets 88,526 265,207 353,733
Other Assets:
Deposits 17,422 17,422
Due from Related Party 0
Other Receivables 88,577 88,577
Banks Secured 18,147 18,147
CSV of officers' life insur 10,878 10,878
Trademark 8,689 8,689
Artwork 40,015 40,015
Deferred Tax Asset 29,070 29,070
Product Development 50,319 50,319
Mailing List-Carey 367,990 367,990
Moving Costs 1,942 1,942
Acquisition Costs 19,054 19,054
----------------------------------
Total Other Assets 135,024 517,078 652,102
-----------------------------------------------------------------------
TOTAL ASSETS 2,914,365 2,728,701 5,643,066
=======================================================================
LIABILITIES
Current Liabilities:
Liabilities subject to compromise 0
A/P 1,648,829 265,083 1,913,912
Accrued Expenses 166,118 10,452 176,570
Customer Advances & Credits 6,754 6,754
CPLTD 14,081 14,081
-----------------------------------------------------------------------
Total Current Liabilities 1,829,029 282,288 2,111,317
Long Term Liabilities
Deferred FIT
Notes Payable (less CPLTD) 1,327,474 1,327,474
-----------------------------------------------------------------------
Total Long Term Liabilities 1,327,474 0 1,327,474
-----------------------------------------------------------------------
TOTAL LIABILITIES 3,156,503 282,288 3,438,791
=======================================================================
Shareholders Equity: 0
Preferred Stock 6,100 6,100
Common Stock 1,000 343,916 344,916
APIC 6,501,322 6,501,322
Retained Earnings (243,138) (4,404,924) (4,648,062)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total Shareholders Equity (242,138) 2,446,413 2,204,276
=======================================================================
-----------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY 2,914,365 2,728,702 5,643,067
=======================================================================
</TABLE>
<PAGE>
As of June 30, 2000
<TABLE>
<CAPTION>
P&K Havana Consolidated
<S> <C> <C> <C>
Net Sales 6,031,880 823,664 6,855,544
Cost of Sales 5,000,727 258,057 5,258,784
-----------------------------------------------------------------------
Gross Profit 1,031,153 565,607 1,596,760
-----------------------------------------------------------------------
Payroll and Other Employee Benefits 617,278 617,278
Promotional Costs 189,320 189,320
Fulfillment Costs 177,553 177,553
Retail Expense 26,157 26,157
General & Administrative Expenses 466,041 288,184 754,225
-----------------------------------------------------------------------
Profit/(Loss) from operations before
interest, lawsuit settlement and reorg exp (52,166) (115,607) (167,773)
-----------------------------------------------------------------------
Interest Expense (31,129) 739 (30,389)
Other Income and (Expense) 39,445 4,651 44,096
Lawsuit Settlement (41,446) (41,446)
Reorganization Expenses - professional fees 0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net Loss (85,296) (110,217) (195,513)
=======================================================================
</TABLE>
INTRODUCTION TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
The accompanying unaudited pro forma combined financial statements give
effect to the August 4, 2000 purchase by The Havana Group, Inc. Of the common
stock of Phillips & King International for approximately $900,000. The purchase
price for the Phillips & King International stock was $900,00, plus the
assumption of a maximum of $1,960,000 of Phillips & King International
liabilities, plus the issuance of 450,000 unregistered shares of The Havana
Group, Inc. After considering such payments of cash, assumption of liabilities
and issuances of stock, the company estimates that, under purchase accounting,
the purchase cost of the transaction is approximately $900,000 plus the issuance
of 450,000 shares of The Havana Group stock.
The unaudited pro forma combined statement of operations for the year ended
December 31, 1998 (which includes Phillips & King International based on
Phillips & King International's year end of December 31, 1998) was prepared as
if the transaction occurred on December 31, 1998, beginning of The Havana
Group's fiscal year. The unaudited prom forma combined statement of operations
for the six months ended June 30, 2000 (which includes Phillips & King
International based on the six months ended June 30, 2000) was prepared as if
the transaction occurred on June 30, 2000, at the end of the second quarter of
operations for The Havana Group, Inc. The unaudited pro forma combined balance
sheet as of December 31, 1999 (which includes Phillips & King International as
of December 31, 1999) has been prepared as if the transaction had occurred as of
December 31, 1999.
This pro forma information is not necessarily indicative of future
consolidated results of operations or past operations and should be read in
conjunction with the separate historical statements and related footnotes of the
respective entities.
<PAGE>
As of December 31, 1999
<TABLE>
<CAPTION>
P&K Havana Consolidated
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash 273,880 1,058,390 1,332,270
Cash, restricted 18,029 18,029
I/C receivables 143,753 143,753
A/R 961,093 56,460 1,017,553
Allowance for A/R (53,000) (53,000)
Inventory 1,876,393 706,069 2,582,462
Advances to vendors-Inv. 110,859 110,859
Prepaid Advertising 57,357 57,357
Prepaid Other 23,171 23,171
-----------------------------------------------------------------------
Total Current Assets 3,187,254 2,045,201 5,232,455
Net Fixed Assets 96,714 235,594 332,308
Other Assets:
Deposits 17,424 17,424
Due from Related Party 88,577 88,577
CSV of officers' life insur 109,788 109,788
Trademark 9,654 9,654
Artwork 35,011 35,011
Deferred Tax Asset 29,070 29,070
Product Development 57,507 57,507
Mailing List-Carey 387,067 387,067
-----------------------------------------------------------------------
Total Other Assets 215,789 518,309 734,098
-----------------------------------------------------------------------
TOTAL ASSETS 3,499,757 2,799,104 6,298,861
=======================================================================
LIABILITIES
Current Liabilities:
Liabilities subject to compromise 1,381,626 1,381,626
A/P 388,726 566,788 955,514
Accrued Expenses 369,078 10,063 379,141
Customer Advances & Credits 7,678 7,678
CPLTD 691,339 691,339
-----------------------------------------------------------------------
Total Current Liabilities 2,830,769 584,530 3,415,299
Long Term Liabilities
Deferred FIT
Notes Payable (less CPLTD) 825,830 825,830
-----------------------------------------------------------------------
Total Long Term Liabilities 825,830 0 825,830
-----------------------------------------------------------------------
TOTAL LIABILITIES 3,656,599 584,530 4,241,129
=======================================================================
Shareholders Equity: 0
Preferred Stock 6,100 6,100
Common Stock 1,000 1,860 2,860
APIC 6,501,322 6,501,322
Retained Earnings (157,842) (4,294,707) (4,452,549)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total Shareholders Equity (156,842) 2,214,574 2,057,732
=======================================================================
-----------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY 3,499,757 2,799,104 6,298,861
=======================================================================
</TABLE>
<PAGE>
<PAGE>
As of December 31, 1999
<TABLE>
<CAPTION>
P&K Havana Consolidated
<S> <C> <C> <C>
Net Sales 13,868,624 1,390,699 15,259,323
Cost of Sales 11,400,892 691,455 12,092,347
-----------------------------------------------------------------------
Gross Profit 2,467,732 699,243 3,166,975
-----------------------------------------------------------------------
Payroll and Other Employee Benefits 1,274,919 1,274,919
Promotional Costs 330,741 330,741
Fulfillment Costs 285,395 285,395
Retail Expense 61,657 61,657
General & Administrative Expenses 1,376,216 352,818 1,729,034
-----------------------------------------------------------------------
Profit/(Loss) from operations before
interest, lawsuit settlement and reorg exp (183,403) (331,368) (514,771)
-----------------------------------------------------------------------
Interest Expense (63,667) 10,183 (53,484)
Other Income and (Expense) 32,737 32,737
Lawsuit Settlement (825,000) (825,000)
Reorganization Expenses - professional fees (249,518) (249,518)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net Loss (1,321,588) (288,448) (1,610,036)
=======================================================================
</TABLE>
<PAGE>
As of December 31, 1998
<TABLE>
<CAPTION>
P&K Havana Consolidated
ASSETS
Current Assets:
<S> <C> <C> <C>
Cash 85,234 1,634,276 1,719,510
Cash, restricted 17,101 17,101
I/C receivables (200,602) (200,602)
A/R 883,565 45,960 929,525
Allowance for A/R (53,000) (53,000)
Inventory 2,825,323 500,765 3,326,088
Advances to vendors-Inv. 450 450
Prepaid Advertising 32,771 32,771
Prepaid Other 0 0
-----------------------------------------------------------------------
Total Current Assets 3,758,673 2,013,170 5,771,843
Net Fixed Assets 126,399 131,984 258,383
Other Assets:
Deposits 16,770 16,770
Due from Related Party 88,577 88,577
CSV of officers' life insur 47,328 47,328
Trademark 0
Artwork 2,222 2,222
Deferred Tax Asset 0
Product Development 0
Mailing List-Carey 425,773 425,773
-----------------------------------------------------------------------
Total Other Assets 152,675 427,995 580,670
-----------------------------------------------------------------------
TOTAL ASSETS 4,037,747 2,573,150 6,610,897
=======================================================================
LIABILITIES
Current Liabilities:
Liabilities subject to compromise
A/P 1,848,076 136,513 1,984,589
Accrued Expenses 247,601 2,790 250,391
Customer Advances & Credits 2,395 2,395
CPLTD 169,576 169,576
-----------------------------------------------------------------------
Total Current Liabilities 2,265,253 141,698 2,406,951
Long Term Liabilities
Deferred FIT (29,070) (29,070)
Notes Payable (less CPLTD) 607,748 607,748
-----------------------------------------------------------------------
Total Long Term Liabilities 607,748 (29,070) 578,678
-----------------------------------------------------------------------
TOTAL LIABILITIES 2,873,001 112,628 2,985,629
=======================================================================
Shareholders Equity: 0
Preferred Stock 6,100 6,100
Common Stock 1,000 2,360 3,360
APIC 6,459,322 6,459,322
Retained Earnings 1,163,746 (4,007,259) (2,843,513)
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Total Shareholders Equity 1,164,746 2,460,522 3,625,268
=======================================================================
-----------------------------------------------------------------------
TOTAL LIABILITIES & EQUITY 4,037,747 2,573,150 6,610,897
=======================================================================
</TABLE>
<PAGE>
As of December 31, 1998
<TABLE>
<CAPTION>
P&K Havana Consolidated
<S> <C> <C> <C>
Net Sales 17,858,159 1,283,931 19,142,090
Cost of Sales 14,534,132 594,656 15,128,788
-----------------------------------------------------------------------
Gross Profit 3,324,027 689,276 4,013,303
-----------------------------------------------------------------------
Payroll and Other Employee Benefits 1,597,279 1,597,279
Promotional Costs 298,180 298,180
Fulfillment Costs 202,560 202,560
Retail Expense 103,399 103,399
General & Administrative Expenses 1,830,029 492,996 2,323,025
-----------------------------------------------------------------------
Profit/(Loss) from operations before
interest, lawsuit settlement and reorg exp (103,281) (407,859) (511,140)
-----------------------------------------------------------------------
Interest (Expense) (109,151) (3,374,769) (3,483,920)
Other Income and (Expense) (47,245) (47,245)
Lawsuit Settlement 0
Reorganization Expenses - professional fees 0
-----------------------------------------------------------------------
-----------------------------------------------------------------------
Net Loss (212,432) (3,829,872) (4,042,304)
=======================================================================
</TABLE>
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
(EMERGED UNDER A CONFIRMED PLAN
EFFECTIVE AUGUST 4, 2000)
FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
CONTENTS
Page
<S> <C>
Independent Auditors' Report 1
Financial Statements:
Balance Sheets 2
Statements of Operations 3
Statement of Shareholders' Equity 4
Statements of Cash Flows 5
Notes to Financial Statements 6-13
Independent Auditors' Report on Supplemental Information 14
Supplemental Information:
Schedule of General and Administrative Expenses 15
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Phillips & King International, Inc.
City of Industry, California
We have audited the accompanying balance sheets of Phillips & King
International, Inc. (debtor-in-possession) as of December 31, 1999 and 1998, and
the related statements of operations, shareholders' equity and cash flows for
each of the years then ended. 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 financial statements referred to above present fairly, in
all material respects, the financial position of Phillips & King International,
Inc. at December 31, 1999 and 1998, and the results of its operations and cash
flows for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Stonefield Josephson, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
September 20, 2000
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
ASSETS 1999 1998
---- ----
Current assets:
<S> <C> <C>
Cash $ 273,880 $ 85,234
Cash, restricted 18,029 17,101
Accounts receivable, net of allowance for
$53,000 at December 31, 1999 and 1998 908,093 830,565
Inventory 1,876,393 2,825,323
Advances to vendors - inventory 110,859 450
--------------- ---------------
Total current assets 3,187,254 3,758,673
--------------- ---------------
Property and equipment, net of
accumulated depreciation and amortization 96,714 126,399
--------------- ---------------
Other assets:
Deposits 17,424 16,770
Due from related party 88,577 88,577
Cash surrender value of officers' life insurance 109,788 47,328
--------------- ---------------
Total other assets 215,789 152,675
--------------- ---------------
$ 3,499,757 $ 4,037,747
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Liabilities subject to compromise $ 1,381,626 $ -
Liabilities not subject to compromise:
Accounts payable 388,726 1,848,076
Accrued expenses 369,078 247,601
Current maturities of notes payable 691,339 169,576
--------------- ---------------
Total current liabilities 2,830,769 2,265,253
--------------- ---------------
Notes payable, less current maturities 825,830 607,748
--------------- ---------------
Shareholders' equity (deficit):
Common stock; no par value, 10,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000
Retained earnings (deficit) (157,842) 1,163,746
--------------- ---------------
Total shareholders' equity (deficit) (156,842) 1,164,746
--------------- ---------------
$ 3,499,757 $ 4,037,747
=============== ===============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Revenue $ 13,868,624 $ 17,858,159
Cost of sales 11,400,892 14,534,132
---------------- ----------------
Gross profit 2,467,732 3,324,027
---------------- ----------------
Operating costs and expenses:
Payroll and other employee benefits 1,274,919 1,597,279
General and administrative expenses 1,376,216 1,830,029
---------------- ----------------
Total operating costs and expenses 2,651,135 3,427,308
---------------- ----------------
Loss from operations before interest, lawsuit
settlement and reorganization expenses (183,403) (103,281)
---------------- ----------------
Interest expense, net (63,667) (109,151)
Lawsuit settlement (Notes 10 and 11) (825,000) -
Reorganization expenses - professional fees (249,518) -
---------------- ----------------
(1,138,185) (109,151)
---------------- ----------------
Net loss $ (1,321,588) $ (212,432)
================ ================
Net loss per share, basic and diluted $ (1,322) $ (212)
================ ================
Weighted average number of shares
outstanding, basic and diluted 1,000 1,000
================ ================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF SHAREHOLDERS' EQUITY (DEFICIT)
YEARS ENDED DECEMBER 31, 1999 AND 1998
<TABLE>
<CAPTION>
Retained Total
Common stock earnings/ shareholders'
------------
Shares Amount (deficit) equity
------ ------ -------- ------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1998 1,000 $ 1,000 $ 1,596,178 $ 1,597,178
Net loss for the year ended
December 31, 1998 (212,432) (212,432)
Dividends paid (220,000) (220,000)
------- -------------- --------------- --------------
Balance at December 31, 1998 1,000 1,000 1,163,746 1,164,746
Net loss for the year ended
December 31, 1999 (1,321,588) (1,321,588)
------- -------------- --------------- --------------
Balance at December 31, 1999 1,000 $ 1,000 $ (157,842) $ (156,842)
======= ============== =============== ==============
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
STATEMENTS OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Cash flows provided by (used for) operating activities:
<S> <C> <C>
Net loss $ (1,321,588) $ (212,432)
---------------- ----------------
Adjustments to reconcile net loss to net cash provided by (used for) operating
activities:
Depreciation and amortization 29,685 34,933
Provision for doubtful accounts 3,998 103,144
Lawsuit settlement 825,000 -
Changes in assets and liabilities:
(Increase) decrease in assets:
Accounts receivable (81,526) 548,540
Inventory 948,930 191,035
Advances to vendors - inventory (110,409) 5,723
Deposits (654) 30,000
Increase (decrease) in liabilities:
Accounts payable (77,724) (294,283)
Accrued expenses 121,477 93,805
---------------- ----------------
Total adjustments 1,658,777 712,897
---------------- ----------------
Net cash provided by operating activities 337,189 500,465
---------------- ----------------
Cash flows provided by (used for) investing activities:
Payments for officer life insurance (62,460) (15,780)
Payments to acquire property and equipment - (28,758)
Due from related party - 5,097
Cash - restricted (928) (101)
---------------- ----------------
Net cash used for investing activities (63,388) (39,542)
---------------- ----------------
Cash flows provided by (used for) financing activities:
Payments on notes payable (176,313) (171,525)
Proceeds from notes payable 91,158 28,727
Payments on note payable, related party - (113,236)
Dividends paid - (220,000)
---------------- ----------------
Net cash used for financing activities (85,155) (476,034)
---------------- ----------------
Net increase (decrease) in cash and cash equivalents 188,646 (15,111)
Cash and cash equivalents, beginning of year 85,234 100,345
---------------- ----------------
Cash and cash equivalents, end of year $ 273,880 $ 85,234
================ ================
Supplemental disclosure of cash flow information -
interest paid $ 67,187 $ 111,082
================ ================
</TABLE>
See accompanying independent auditors' report and notes to financial statements.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1999 AND 1998
(1) Organization:
Phillips & King International, Inc. (the "Company") is a
California S corporation (see Note 11). The Company was
incorporated under the laws of the State of California on June
21, 1982. The Company sells and distributes tobacco and related
products to wholesalers and retailers in the United States.
In February 1999, the Company (the "Debtor") filed a petition for
relief under Chapter 11 of the federal bankruptcy laws in the
United States Bankruptcy Court for the Central District of
California. Under Chapter 11, certain claims against the Debtor
in existence prior to the filing of the petitions for relief
under the federal bankruptcy laws are stayed while the Debtor
continues business operations as a Debtor-in-Possession. These
claims are reflected in the December 31, 1999, balance sheet as
"liabilities subject to compromise." Additional claims
(liabilities subject to compromise) may arise subsequent to the
filing date resulting from rejection of executory contracts and
from the determination by the court (or agreed to by parties in
interest) of allowed claims for contingencies and other disputed
amounts. Claims secured against the Debtor's assets ("secured
claims") also are stayed, although the holders of such claims
have the right to move the court for relief from the stay.
Secured claims are secured primarily by liens on the Debtor's
property and equipment.
In March 2000, the Company filed a Plan of Reorganization with
the Bankruptcy Court (Note 11).
(2) Summary of Significant Accounting Policies:
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.
Fair Value:
Unless otherwise indicated, the fair values of all reported
assets and liabilities which represent financial instruments
(none of which are held for trading purposes) approximate the
carrying values of such amounts.
Cash:
Equivalents
For purposes of the statement of cash flows, cash equivalents
include all highly liquid debt instruments with original
maturities of three months or less which are not securing any
corporate obligations.
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(2) Summary of Significant Accounting Policies, Continued:
Cash, Continued:
Concentration
The Company maintains its cash in bank deposit accounts which, at
times, may exceed federally insured limits. The Company has not
experienced any losses in such accounts.
Inventory:
Inventory, consisting principally of tobacco products, is valued
at the lower of cost (first-in, first-out) or market.
Property and Equipment:
Property and equipment are recorded at cost. Depreciation is
being provided by use of straight-line and accelerated methods
over the estimated useful lives of the assets.
Advertising and Sales Promotion Costs:
Advertising and sales promotion costs are expensed as incurred
and totaled approximately $238,000 and $204,000 for the years
ended December 31, 1999 and 1998, respectively.
Income Taxes:
The Company and its shareholders have elected income tax status
as an S corporation. Under this election, the stockholders of the
corporation are personally liable for federal and state income
taxes arising on income. The Company is liable for and has
provided for corporate state taxes on income.
The shareholders have the right to declare and receive dividends
up to the amount of any S corporation earnings without incurring
any additional personal taxes (see Note 11).
Comprehensive Loss:
Comprehensive loss consists of net loss only.
Earnings Per Share:
Earnings per share is computed based upon the weighted average
number of shares of common stock outstanding during each period.
The Company has no common stock equivalents for the years ended
December 31, 1999 and 1998.
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(2) Summary of Significant Accounting Policies, Continued:
Recent Pronouncements:
In June 1998, the FASB issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities", the effective
date for which was deferred by SFAS No. 137 until fiscal years
beginning after June 15, 1999. The Company anticipates that due
to its limited use of derivative instruments, the adoption of
SFAS No. 133 will not have a material effect on its financial
statements.
(3) Cash - Restricted:
Under the terms of the Company's bond agreement with its insurance
company, the Company is required to maintain minimum restricted cash
balances with a financial institution. The bond is required by the
various states in which the Company does business to support excise
taxes due in the normal course of business.
(4) Property and Equipment:
A summary is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Furniture and fixtures $ 116,417 $ 116,417
Vehicles 76,476 76,476
Leasehold improvements 42,501 42,501
--------------- ---------------
235,394 235,394
Less accumulated depreciation and amortization 138,680 108,995
--------------- ---------------
$ 96,714 $ 126,399
=============== ===============
</TABLE>
Depreciation and amortization expense totaled $29,685 and $34,933 for
the years ended December 31, 1999 and 1998, respectively.
(5) Due from Related Party:
The Company has non-interest bearing amounts due from an affiliated
company. The affiliate is commonly controlled by the shareholders of
Phillips & King International, Inc. The amounts due are secured by
trademarks owned by the affiliate.
(6) Accounts Payable and Accrued Expenses:
Included in accounts payable and accrued expenses at December 31, 1998
is approximately $303,000 owed to one vendor. Purchases from this vendor
totaled approximately $2,152,000 for the year ended December 31, 1998.
There were no major vendors during the year ended December 31, 1999.
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(7) Notes Payable:
A summary is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C> <C>
Note payable, bank (Note 11), interest at the bank's prime rate
plus 1% per annum, due in monthly installments of $15,000 plus
interest through November 2001, secured by substantially all
assets of the Company and the guarantee of the
shareholders and a related party (Note 5) $ 345,552 $ 254,395
Note payable, bank (Note 11), interest at the bank's
prime rate plus 1.5% per annum, due in monthly installments of
$8,333 plus interest through July 2001, secured by
substantially all assets of the Company and the guarantee of
the shareholders
and a related party (Note 5) 166,667 275,000
Note payable, bank (Note 11), interest at the bank's
prime rate plus 1.5% per annum, due in monthly installments of
$5,000 plus interest through August 2002, secured by
substantially all assets of the Company and the guarantee of
the shareholders and a
related party (Note 5) 160,000 220,000
Equipment line, bank, for borrowings up to $100,000,
interest at the bank's prime rate plus 1% per annum, due in
monthly installments of $798 plus interest through January
2002, secured by the related equipment and the guarantee of the
shareholders and a
related party (Note 5) 19,950 27,929
Note payable, Cuba Libre Humidors, Inc. (see Note 11),
interest at 7% per annum, $300,000 paid in August
2000, the remainder due in quarterly installments of
$25,369, including interest, through May 1, 2005 700,000 -
Note payable, Cuba Libre Humidors, Inc. (see Note 11),
interest at 7% per annum (starting two years after
confirmation), due in quarterly installments of $13,347,
including interest, commencing August
2002 through November 2004 125,000 -
--------------- ---------------
1,517,169 777,324
Less current maturities 691,339 169,576
--------------- ---------------
$ 825,830 $ 607,748
=============== ===============
</TABLE>
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(7) Notes Payable, Continued:
The scheduled repayment of the notes payable balance at December 31,
1999 is as follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
2000 $ 691,339
2001 380,224
2002 147,375
2003 137,546
2004 160,685
---------------
$ 1,517,169
</TABLE>
Interest expense on all corporate borrowings totaled approximately
$67,000 and $111,000 for the years ended December 31, 1999 and 1998,
respectively.
(8) Profit Sharing Plan:
The Company has a defined contribution profit sharing plan covering all
eligible employees. Profit sharing contributions are made (i) at the
discretion of the Board of Directors, (ii) by the employees in amounts
from 1% to 15% of the employees' compensation and (iii) from employer
discretionary contributions. Contributions to the plan totaled $37,070
and $27,390 for the years ended December 31, 1999 and 1998,
respectively.
(9) Commitments:
Office and Warehouse
The Company leases its office and warehouse facility under a lease
agreement expiring July 2001.
As of December 31, 1999, minimum rental payments required under the
operating lease are as follow:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
2000 $ 137,000
2001 81,305
---------------
$ 218,305
</TABLE>
Rental expense under the operating lease totaled $133,025 and $121,532
for the years ended December 31, 1999 and 1998, respectively.
Automobile Leases
The Company leases automobiles for its employees under certain operating
lease agreements which expire through May 2001.
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(9) Commitments, Continued:
Automobile Leases, Continued
As of December 31, 1999, minimum lease payments required under the
operating leases are as follow:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C> <C>
2000 $ 29,969
2001 3,204
---------------
$ 33,173
</TABLE>
Automobile lease expense totaled $35,079 and $30,637 for the years ended
December 31, 1999 and 1998, respectively.
(10) Settlement:
The Company was a defendant in a lawsuit and, in 1999, the plaintiff,
Cuba Libre Humidors, Inc. ("Cuba Libre"), was awarded $1,777,550 by a
jury. The Company filed for protection under Chapter 11 of the United
States Bankruptcy code (Note 1). As part of the Company's plan of
reorganization, they entered into two notes payable to Cuba Libre
totaling $825,000, in full satisfaction of the jury award (Notes 7 and
11).
(11) Subsequent Events:
Note Payable
In July 2000, the Company obtained a loan from a bank in the amount of
$487,424. The note is secured by substantially all assets of the Company
and accrues interest at 1.5% above the bank's prime rate. Monthly
payments of $20,000, plus interest, are due through July 2002, at which
time the principal and any unpaid interest are due. The proceeds were
used to pay down prior notes with a bank (Note 7).
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(11) Subsequent Events, Continued:
Plan of Reorganization
On July 5, 2000, an order confirming the Debtor's Second Amended Plan of
Reorganization (the "Plan"), filed with the United States Bankruptcy
Court, Central District of California was entered. The plan became
effective August 4, 2000. The plan provided for the following:
o Administrative Expenses - Legal fees and court costs are
payable in cash on the Effective Date or the date the Court
enters an order approving the fees due.
o Secured Debt - The Company's secured debt (see Notes 7 and 11
"Note Payable") shall be paid in monthly installments of
principal and interest.
Unsecured Claims - Holders of Unsecured Claims in amounts
equal to or less than $10,000 shall be entitled to a one-time
distribution in cash on the first business day after the first
calendar month after the Effective Date. The amount to be paid
will be equal to the lesser of 75% of the allowed amount of
the Claim, or $7,500. The total amount due on these unsecured
claims is $102,315. Payments totaling $49,527 have been paid
to Holders of Unsecured Claims subsequent to December 31,
1999, with a balance due of $28,195, resulting in a gain on
extinguishment of debt of $24,593.
In accordance with the Plan, Cuba Libre received cash in the
sum of $300,000 in August 2000. Cuba Libre will also be
entitled to two promissory notes. Note 1 will be in the
principal amount of $400,000, bearing interest at 7% per annum
and payable in 20 quarterly payments of $23,603, commencing
the first calendar month after Confirmation, through June
2005. Note 2 will be in the principal amount of $125,000, and
bears no interest for the first 2 years after Confirmation.
Thereafter, Note 2 bears interest at 7% per annum and is
payable in 12 quarterly payments of $11,506 commencing the
first calendar month after the second anniversary of
Confirmation, through June 2005.
Class 4 creditors shall receive prorated distributions on the
Effective Date from a fund which contains $350,000 in cash.
Additionally, a promissory note was issued in the principal
amount of $501,500, bearing interest at 7% per annum and
payable in 20 quarterly payments of $29,905, commencing the
first calendar month after Confirmation, through June 2005.
The total amount due Class 4 creditors is $1,279,310,
resulting in a gain on extinguishment of debt of $427,810.
Amounts payable to the Class 4 creditors are secured by
corporate assets, subordinate to prior liens.
See accompanying independent auditors' report.
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
YEARS ENDED DECEMBER 31, 1999 AND 1998
(11) Subsequent Events, Continued:
Stock Purchase and Sale Agreement
In August 2000, the shareholders of the Company entered into a Stock
Purchase and Sale Agreement (the "Agreement") with The Havana Group,
Inc., a Delaware corporation ("Havana"). Pursuant to the Agreement,
Havana issued 300,000 unregistered shares of Havana's stock in exchange
for all the outstanding shares of the Company's stock.
Personal guarantees referred to in Note 7 were released upon the
substitution of the corporate guarantee of Havana, and the sellers
executed a stock pledge agreement whereby Havana shares received as
consideration upon the sale are held as collateral for obligations of
seller under the Stock Purchase and Sale Agreement. Due to restrictions
imposed by the Internal Revenue Service with respect to S corporations,
the Company, upon the completion of the sale, had its S corporation
status revoked and reverted to a C corporation for tax reporting
purposes.
Infusion of Capital
In August 2000, Havana contributed $900,000 to the equity of Phillips &
King International, Inc. The funds will be used to pay for normal
operating expenses of the Company, including the fulfillment of debt
obligations arising from the confirmed Plan of Reorganization.
See accompanying independent auditors' report.
<PAGE>
Board of Directors
Phillips & King International, Inc.
City of Industry, California
Our report on our audits of the basic financial statements of Phillips & King
International, Inc. (debtor-in-possession) for the years ended December 31, 1999
and 1998 appears on page 1. The audits were made for the purpose of forming an
opinion on the basic financial statements taken as a whole. The supplemental
information is presented for purposes of additional analysis and is not a
required part of the basic financial statements. Such information has been
subjected to the auditing procedures applied in the audits of the basic
financial statements and, in our opinion, is fairly stated in all material
respects in relation to the basic financial statements taken as a whole.
CERTIFIED PUBLIC ACCOUNTANTS
Santa Monica, California
September 20, 2000
<PAGE>
PHILLIPS & KING INTERNATIONAL, INC.
(DEBTOR-IN-POSSESSION)
SCHEDULES OF GENERAL AND ADMINISTRATIVE EXPENSES
<TABLE>
<CAPTION>
Year ended Year ended
December 31, 1999 December 31, 1998
----------------- -----------------
Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Advertising $ 237,639 1.7% $ 203,771 1.1%
Bank charges - 10,936
Commissions 172,590 1.2 219,672 1.2
Depreciation and amortization 29,685 .2 34,933 .2
Dues and subscriptions 15,329 12,111
Insurance:
General 64,523 .5 53,803 .3
Medical 142,126 1.0 137,523 .8
Lease expense 35,079 .3 30,637 .2
Miscellaneous (income) expense (36,697) (.3) 81,280 .5
Office expense 81,648 .6 101,382 .6
Postage and mailing 39,327 .3 28,015 .2
Professional fees 1,099 31,191 .2
Profit sharing plan 37,070 .3 27,390 .2
Provision for doubtful accounts 3,998 103,144 .6
Rent 133,025 1.0 121,532 .7
Repairs and maintenance 31,033 .2 94,828 .5
Sales expense 248,063 1.8 310,448 1.7
Shop expense 25,515 .2 20,187
Taxes and licenses 21,171 .2 32,564 .2
Telephone 60,289 .4 84,514 .5
Temporary services 13,601 .1 70,163 .4
Utilities 20,104 .2 20,005 .1
-------------- ------ -------------- ------
$ 1,376,216 9.9% $ 1,830,029 10.2%
============== ====== ============== ======
</TABLE>
See accompanying independent auditors' report on supplemental information.
<PAGE>
