HAVANA GROUP INC, 10KSB/A, 2000-04-05

HAVANA GROUP INC
10KSB/A, 2000-04-05
CATALOG & MAIL-ORDER HOUSES

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-KSB/A

[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, 1999
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)

<S> <C>
Delaware 34-1454529
- ---------------------------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization (Identification No.)
</TABLE>

5701 Mayfair
N. Canton, Ohio 44720
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(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 17, 2000 at 4:00 P.M., the aggregate market value of the voting
stock held by non-affiliates, approximately 1,239,000 shares of Common Stock,
$.001 par value, was approximately $1,393,000 based on the last sale price of
$1.125 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 17, 2000 was
2,345,000.

<PAGE>
Item 1. Description of Business

GENERAL

The Havana Group, Inc. ("Havana" or the "Company") is a Delaware
corporation engaged in the business of (i) operating a retail smokeshop in
Canton, Ohio which primarily sells make your own cigarette kits, pipes, cigars
and smoking accessories; (ii) marketing make your own cigarette kits, pipes,
cigars, 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 pipe tobacco directly to consumers (the "Carey
Tobacco Club"). The Company has developed a website under the name
"Smokecheap.com" and it intends to market its products through this website.

The Company has one wholly owned subsidiary namely, Monarch Pipe
Company ("Monarch"). Monarch manufactures smoking pipes that 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
$8.00 to $12.00 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. 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.

RECENT DEVELOPMENT

The Company has an agreement in principle to purchase 100% of the
outstanding stock of Phillips & King International, Inc. ("P&K") in
consideration of $1,000,000 in cash, $400,000 in short-term notes and an
estimated 300,000 unregistered shares of the Company's Common Stock with
"piggy-back" registration rights. The number of Shares of Common Stock is
subject to downward adjustment in the event the Company's Common Stock exceeds
$3.00 per Share but not more than $4.00 per Share. The number of Shares of
Common Stock is subject to upward adjustment in the event the Company's Common
Stock is less than $3.00 per Share, but in no event shall the Company's Common
Stock be less than $2.00 per Share. Closing of the transaction is subject to
many conditions including, without limitation, the following:

o The outstanding debt of the reorganized P&K will not exceed $1.96 million
on a net basis.

o P&K's usable inventory will have a value of not less than $1.9 million
and accounts receivable will not be less than $950,000.

o Havana must obtain reasonable assurance of current suppliers' willingness
to do business with the reorganized P&K under Havana's ownership.
<PAGE>
o A final Order must be entered confirming P&K's Plan of Reorganization
pursuant to which Mr. & Mrs. John Parker and/or Mr. & Mrs. Jerold Christensen
(collectively the "Sellers") will acquire 100% of the capital stock of P&K as a
reorganized entity out of Chapter 11 Bankruptcy and will resell the capital
stock to Havana pursuant to the terms described herein.

o Havana completing adequate due diligence satisfactory to Havana and its
auditors.

o Havana will have arranged acceptable financing in order to complete the
transaction.

o John Parker and Jerald Christensen shall enter into satisfactory
employment agreements, which shall include provisions pertaining to an agreement
not to compete.

o Havana's Common Stock shall not be less than $2.00 per Share at closing.

o Havana will covenant to comply with all SEC informational requirements
under Rule 144(c) in order to permit the subsequent sale by the sellers under
Rule 144.

o The preparation and execution of a definitive purchase agreement between
the Sellers and Havana.

Description of P&K Business

No assurances can be given that the company will enter into a definitive
agreement to acquire P&K or if completed that the transaction would be completed
on terms as described herein.

Phillips & King International, Inc. was organized by Mr. Harry Phillips in
1906. The controlling interests in P&K today are fourth generation descendants
of the founder.

P&K is a wholesale distributor of tobacco products. Their business is to
sell to retail smoke shops, and P&K has approximately 3,000 such accounts. The
method of sale is by direct contact, and P&K employs nine sales representatives
in that regard.

P&K's sales reached a peak of $26.7 million in 1997, reflecting the
popularity of premium cigars. Following the decline in consumption of premium
cigars, P&K's sales dropped 33% in 1998 and 22% in 1999. Sales in 1999 were also
adversely affected by P&K's Chapter 11 Bankruptcy, filed on a voluntary basis on
February 8, 1999.

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 suit and was awarded a judgment of $1.8 million. P&K responded
by filing for protection under Chapter 11 provisions of the bankruptcy code, and
began defensive actions. The purchase of P&K presented herein presumes a
negotiated resolution of the Cuba Libre claim, and corresponding successful
reorganization under Chapter 11 provisions. In this instance, Havana fulfills
the role of "White Knight".

Until its Chapter 11 filing, P&K operated as a Subchapter S Corporation.
While Havana will analyze the owners' benefits as a part of its due diligence
process, it has not done so at present, and has not identified those costs
beneficial to the owners which would not carry forward on a post transactional
basis. The Company has, however, identified "Salaries - Owners", which it
believes should be considered separately from the operation results of P&K.

<PAGE>
INDUSTRY TRENDS AND DEVELOPMENTS

The market for non-cigarette smoking products is often characterized as the
market for premium cigars. Premium cigars are the largest segment of sales for
traditional smokeshops, and the trends for premium cigars, measured by
importation of premium cigars by the Cigar Association of America, have declined
27.9% since 1997. While the importation for premium cigars has declined 27.9 %
since 1997, the number of units imported in 1999 was 3.2 times greater than
1993. However, there can be no assurance that the market for premium cigars will
not continue the declining trends of the past two years.

Consolidations and Mergers

In January 1999, France's SEITA S.A. acquired Consolidated Cigar Holdings,
Inc. for $730 million in cash and debt. In May of 1999 Swedish Match AB acquired
certain assets of General Cigar Holdings, Inc., and in September acquired El
Credito Cigars, Inc., maker of Gloria Cubana, El Rico Habano and other brands.
In the fourth quarter of 1999 Spain's Tabacalara S.A and France's SEITA merged
in a $3.3 billion transaction that formed the world's largest cigar company,
Altadis. In the fourth quarter of 2000,Swedish Match AB acquired a majority
interest in General Cigar Holdings Inc. for $270 million, a transaction that
values General Cigar at $420 million.

The Company believes that the large consolidations in the premium cigar
business will be accompanied by a proportionate amount of cost-cutting, and that
sales forces will be consolidated, producing an opportunity for growth in the
distribution business to smokeshops. The Company intends to position itself to
take advantage of this trend.

Existing Methods of Distribution

Retail Smokeshops

In August 1999 Smokeshop Magazine issued their 1998 annual survey of retail
smokeshops. The magazine reported that the average smokeshop had $400,000 in
retail sales for the year 1998, and the approximate sales by category were as
follows: Premium Cigars 39.7%; Smoking Pipes and Tobaccos 11.9%; Smoking Related
Accessories 13.1%; Other Products 35%. Smokeshop further reported that 95% of
all smokeshops were owner-operator managed, and 75% consisted of single stores.
The Company, from its industry sources, estimates that there are approximately
2,500 retail smokeshops in the United States.

Tobacco Outlet Stores

The Company has identified Tobacco Outlet Stores ("TOS") as a potential
sales outlet for certain of its products. Tobacco Outlet Stores are typically
800 square feet and specialize in selling branded cigarettes at discounts,
frequently at state minimums. While published data regarding the stores is
limited, the Company believes that over 10,000 such stores were in operation at
December 31, 1999.

The Company has had limited discussions with TOS operators who desire to
add other smoking related products which have higher gross profit margins than
branded cigarettes. The Company believes that their branded smoking pipes, pipe
tobaccos, and make-your-own cigarettes are potential TOS product in additions.

Direct To Consumers

The non-cigarette tobacco business has a limited number of companies, that
offer their products direct to consumers. The Company believes that the largest
of these is 800 JR Cigar, which sells cigarettes at retail, along with other
tobacco and related products at retail and by mail order. Other companies
include Thompson Cigar Company and Finck Cigar Company.

The Company has historically offered its products to consumers only through
its Carey's Smokeshop Catalog, exclusively by mail order. The Company believes
that Carey's Smokeshop catalog provides a good initial revenue base, and that
the catalog can be used for both retail and wholesale sales. The Company
believes that it can maintain its customer base of direct sales to consumers,
but significant expansion of the customer base by direct advertising to
consumers is expensive and inefficient. In 1999 the Company established the
Carey "Tobacco Lover's Club" which offers discounted prices to consumers in
return for an annual membership fee, currently $20 per year. The intent of the
Company is to establish both wholesale and retail prices in its catalog, so that
the catalog can be mailed to both retailers and consumers.

<PAGE>
Internet e-commerce Sites

Beginning with the increasing popularity of premium cigars in 1997-1998
and coincidental with the development of the capability of the Internet, the
Company believes that numerous Internet sites have been offering premium cigars
and other smoking related products. The Company has no data regarding the number
of such sites or the amount of sales generated by this medium. The Company does
believe that an Internet e-commerce site can be highly effective when used in
conjunction with other methods of distribution namely, business-to-business
wholesale distribution.

During 1999, the Company has undertaken the development of two Internet
web sites, www.havanagroup.com and www.smokecheap.com. The Company's
www.smokecheap.com became operational in September 1999 as a part of Yahoo!
Shopping. The Company's other Internet site, www.havanagroup.com has not been
completed. The Company estimates that www.havanagroup.com is approximately 60%
complete, and can be modified to accommodate both wholesale and retail business.
At December 31, 1999 the Company had invested over $110,000 in Internet web site
development.

The Company believes that it can develop its business in e-commerce,
and convert its Internet site developments to both wholesale and retail
activity. The Company desires to use the wholesale business-to-business activity
("B2B") to serve both smokeshops and suppliers, so that the movement of product
from the manufacturing level to the consumer would be conducted in the most
efficient manner.

STRATEGIES

The company has been in the business of manufacturing and developing a
balanced line of non-cigarette smoking products for over 20 years. The Company
has sold these products through its "Cary Smokeshop Catalog" directly to
consumers who use smoking pipes, tobaccos, cigars, and accessories. The Company
believes that it can capitalize on its experience in quote its business and
wholesale distribution by use of the following strategies:

o Expand its business in wholesale distribution by acquisition and
proprietary brand development.

o Expand its brand ownership through product development and acquisition.

o Convert its Internet site to accommodate both retail and
business-to-business activity; add PCs, which are Internet based, to customer
(smokeshop) sites for their use in placing orders with the Company.

o Develop wholesale supplier relationships, which are Internet based.

o Maintain Carey's Smokeshop Catalog, by converting it for us in both
retail and wholesale sales environments.

o Discontinue or sell the Company's "Havana Group Smokeshop" retail store.

o Develop its brand of make-your-own cigarettes for sale through catalogs,
retail smokeshops, and Tobacco Outlet Stores.

Expand its business in wholesale distribution by acquisition and proprietary
brand development.

The Company currently owns certain brands namely, E.A.Carey "Magic Inch"
smoking pipes, Duncan Hill "AEROSPHERE" smoking pipes, "Carey's Private Reserve
Blends" of smoking tobaccos, and "Carey's Handmade Honduran Cigars", which the
Company historically offered only by mail order for exclusivity and to provide
the "not available in stores" claim. The Company believes that it has
established brand equity in these product areas, and that it can leverage this
brand equity through wholesale distribution.

<PAGE>
The Company also believes that it can expand its wholesale business by
adding suppliers that have been affected by recent consolidations and mergers.
The Company believes that certain non-cigar products and suppliers displaced by
consolidations are in search of distribution channels to smokeshops.

Expand its brand ownership through product development and acquisition.

During the third and fourth quarters of 1999 the Company began brand
development of a proprietary line of Make-Your-Own cigarettes ("MYO"). The
Company has applied for a federal trademark, has received a federal license for
the possible future importation of tobaccos, and expects the commercial
introduction of the product during the second quarter of 2000. At December 31,
1999 the Company had invested over $50,000 in the development of this brand and
its related products.

Convert its Internet site to accommodate both retail and business-to-business
activity; add PCs that are Internet based to customer (smokeshop) sites for
their use in placing orders with the Company.

At present PC vendors are offering computers as a premium for buying
the Internet service offered, and the Company desires to make PC computers
available to selected smokeshops. While the Company has no specific basis for
determining the feasibility of this program at the present time, it believes
that PC computers installed in selective smokeshops with Internet connections to
the Company can provide a cost effective means of expanding the Company's
wholesale business. However, the Company anticipates that its plans for
acquisition of the wholesale business of Phillips & King International, Inc. are
necessary to provide the basis for expansion into this method of distribution.

Develop wholesale supplier relationships that are Internet based.

The Company believes that an Internet based distribution system, if
incorporated, must also link suppliers to the Company to be of maximum
effectiveness. If adopted, the Company's goal would be to link any supplier to
the Company from any location in the world, so that the supplier can be informed
of inventory levels and sales of his products at any time on a real-time basis.
However, there can be no assurance that this will occur due to a number of
factors including, but not limited to, the Company's acquisition of the
wholesale business of Phillips & King International, Inc

Maintain Carey's Smokeshop Catalog by converting the catalog to be used for both
retail and wholesale sales.

The Company believes that Carey's Smokeshop catalog provides a good
initial revenue base, and that the catalog can be used for both retail and
wholesale sales. The Company believes that it can maintain its customer base of
direct sales to consumers. In 1999 the Company established the Carey "Tobacco
Lover's Club" which offers discounted prices to consumers in return for an
annual membership fee, currently $20 per year. The intent of the Company is to
establish both wholesale and retail prices in its catalog, so that the catalog
can be mailed both to retailers and consumers.

<PAGE>
Discontinue or sell the Company's "Havana Group Smokeshop" retail store.

Company had operated a smokeshop named "Carey's Smokeshop" from 1984 to
1996 to maintain a retail presence, which can 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 make your own cigarette kits, pipes,
cigars, smoking accessories, and fine wines. The Company believes that its
experience in the retail smokeshop business has provided valuable experience to
enable the Company to be a provider of products and services to other smokeshops
on a wholesale basis. At present the Company believes that owning retail store
is not consistent with its current strategies, and intends to explore the
possibility of sale of its retail store.

Develop its brand of make-your-own cigarettes for sale through catalogs, retail
smokeshops, and Tobacco Outlet Stores.

In July 1999 the Company introduced Make-Your-Own cigarettes in its
Carey's Smokeshop Catalog. The Company offered three types of cigarette
machines, paper tubes with and without filters, and three varieties of cigarette
tobacco. The Company devoted approximately 9% of its catalog space to
Make-Your-Own cigarettes, and market tested the direct sell advertising in the
third and fourth quarters of 1999. The products were sold under a variety of
supplier brand names. Based upon its success in its 1999 efforts, it is the
Company's intent to develop its own line of Make-Your-Own cigarettes for sale
through catalogs, smokeshops, and Tobacco Outlet stores.

MERCHANDISING AND PRODUCT DEVELOPMENT

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.

The Company merchandises tobaccos and cigars from domestic sources,
which either import their products or manufacture them domestically. 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's 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.

In July 1999 the Company introduced Make-Your-Own cigarettes in its
Carey's Smokeshop Catalog. The Company offered three types of cigarette
machines, paper tubes with and without filters, and three varieties of cigarette
tobacco. The Company devoted approximately 9% of its catalog space to
Make-Your-Own cigarettes, and tested the direct sell advertising in the third
and fourth quarters of 1999. The products were sold under a variety of supplier
brand names, and supplier relationships were developed for the supply of
cigarette tobacco, paper cigarette tubes, and related cigarette making machines.
The merchandising efforts in this area included supply of existing products, and
provided for the future supply of products on a private label basis.

<PAGE>
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, 1999, Carey mailed 293,534 catalogs, which
generated average gross revenues of $4.33 per catalog mailed. The catalog
consists of 56 full color pages, with approximately 60% offering pipes,
tobaccos, and related accessories, approximately 20% offering cigars and cigar
related accessories, 9% offering make-Your-Own cigarettes, 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 members have been members in excess
of five years. At December 31, 1999, Carey Tobacco Club had 1,768 active members
who placed 12,469 orders during the year ended December 31, 1999, and generated
$264,593 in gross sales in 1999 for the Company.

During the third and fourth quarters of 1999 the Company began
marketing Make-Your-Own Cigarettes, using a variety of supplier brand names. The
Company's marketing strategy was to devote approximately 9% of its catalog to
this product area, and test direct sales to consumers through Weekly World News,
The National Enquirer, USA Today, and various Sunday newspapers. While the
direct marketing success of unsolicited reorders from this program is still
being analyzed, the Company estimates that approximately 23% of its gross sales
in the third and fourth quarters of 1999 were derived from this product area.

The Company has 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 retail outlet offers product groups
proven historically in the smokeshop industry, and has added other product
lines, such as make your own cigarette kits and fine wines. The Company
considers that the "Havana Group" retail store has served the Company well in
providing the Company with valuable retail experience. The Company intends to
sell or license the business to others.

CUSTOMER SERVICE AND TELEMARKETING

During 1999, the Company derived approximately 67% of its non-club
revenues through orders placed over the telephone, emphasizing 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% of sales. The Company purchases telemarketing services from its
affiliate, Kids Stuff, Inc. ("Kids Stuff"), a publicly held corporation
controlled by Duncan Hill. During the past three fiscal years, Kids Stuff
processed over 57,000 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 purchased
its fulfillment operations from its affiliate, Kids Stuff. Kids Stuff's facility
consists of 39,000 square feet of owned 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 were 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 100,000
Havana Group shipments in the past three fiscal years.

<PAGE>
In November 1999 the Company leased an operations facility effective
January 1, 2000. The facility consists of 6,000 square feet of offices and
11,000 square feet of warehouse space. The Company will pay $96,000 per annum
for this facility, less any sub-lease income that the Company may realize from
unused office space. The Company moved into this facility in March, 2000. At
that time the Company assumed direct responsibility for its fulfillment and
delivery functions, and incurring direct costs for these functions.

INVENTORY/PURCHASING

The Company conducts its purchasing operations at its general offices
in Canton, Ohio. Each catalog contains approximately 436 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 11% 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 Havatampa Inc. (21%), Lane Limited (14%) and
CTC Industries (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 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

At the present time the Company relies upon Kids Stuff for data
processing services to process its orders and shipments. Additionally, the
Company has invested approximately $52,000 in data processing equipment to link
to the Kids Stuff system to provide e-mail, networking, and high-speed Internet
access. 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 who 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.

<PAGE>
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 that 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.

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 were none, as
additional consideration for Kids Stuff providing the Company with
administrative and fulfillment services. At January 1, 1999 the agreement was
modified and extended on a month-to-month basis as the Company began to incur
direct costs for its administrative functions. The Company paid to Kids Stuff an
accounting, data processing, and administrative charge of $15,000 per year plus
$1.75 per shipment for warehouse services. The Company is also obligated to pay
5% of its 1999 pretax profits to Kids Stuff in connection with these services,
however the Company had no pre-tax profits for 1999. This agreement is still in
effect, but as of this printing the Company has started providing some of these
services themselves.

COMPETITION

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. No assurances can be given that
the Company will be able to successfully compete in all aspects of its business
in the future.

REGULATORY MATTERS

The Company's business, and the catalog industry in general, is also
subject to regulation by a variety of state and federal laws relating to, among
other things, advertising and sales taxes. The 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 has no claims or regulatory matters in
process or pending as of March 17, 2000.

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. Although hearings have been held on certain of these proposals, to
date, none of such proposals have been passed by Congress.

<PAGE>
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 Federal Trade Commission is considering regulations that would
require manufacturers to affix warning statements to cigar packaging in the year
2000.

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 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.

While the Master Settlement Agreement (MSA) has not been codified by
federal law, 46 states have adopted, or are likely to adopt during year 2000
legislative terms, "model laws" which were defined in the agreement with the
states. These model laws provide, in part, for bans on outdoor billboard and
transit advertising of tobacco products, significant document disclosure by the
settling tobacco companies, bans on sports advertising and product logos on
non-tobacco products.

Under the model laws adopted by most states, tobacco companies which
are not signatories to the MSA are required to place funds equivalent to their
respective market share assessments of the total settlement payments into escrow
funds on a state-by-state basis over a period of 25 years. Roll-your-own (RYO)
cigarette tobaccos are considered to be the equivalent of cigarettes under the
model laws and manufacturers may be compelled to either sign the MSA or make
equivalent escrow payments into state funds.

Sales of these tobaccos and accessories used by consumers to make their
own cigarettes have become an important source of revenues for the Company since
June 1999. While the Company is not a manufacturer of RYO tobaccos, there is no
guarantee that it will not become liable, directly or indirectly, for settlement
payments in the states where the Company may have nexus (property or personnel
located within the states). There can be no assurances that the Company will not
be drawn into future litigation by individuals or classes regarding claims of
injury allegedly resulting from tobacco use or exposure to tobacco smoke.

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 recent increase in the sales of RYO
tobaccos, as well as the continued popularity of cigar smoking, and the
publicity of such increases may increase the probability of legal claims.

POTENTIAL PRODUCT LIABILITY.

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, Duncan Hill has maintained, for itself and its subsidiaries
(including the Company), 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 two years and are currently in effect through
September 17, 2002.

EMPLOYEES

As of January 1, 2000, the Company has four full-time salaried
management employees, five salaried non-management employees, seven hourly
full-time employees, and one hourly part-time employee; this includes its retail
store and, Monarch pipe manufacturing facility.

<PAGE>
Item 2. Properties.

At December 31, 1999, the Company's principal offices were located in
North Canton, Ohio, and were shared with the Company's parent and Kids Stuff.
The facility consists of 38,600 square feet of offices and warehouse and is
owned by Kids Stuff. The Company utilizes approximately 5,000 square feet of
warehouse and 1,000 of office space in this building. The Company currently pays
$32,200 per annum to Kids Stuff for the use of the aforementioned facilities and
for use of certain equipment.

In November 1999 the Company leased an operations facility effective
January 1, 2000. The facility consists of 6,000 square feet of offices and
11,000 square feet of warehouse space. The Company pays $96,000 per annum for
this facility, less any sub-lease income that the Company may realize from
unused office space. The Company moved into this facility in March, 2000.

The facility is located approximately three miles from the Kids Stuff
facility, and this proximity will enable the Company to connect to Kids Stuff by
high-speed telephone line connections. The Company anticipates that it will be
able to utilize the computer systems, telephone system hardware, and Internet
connections at Kids Stuff.

<PAGE>
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.
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 February 25, 2000 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 $1.25 and $0.312, 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, 1999 HIGH LOW
----------------------------------- ---- ---
<S> <C> <C>
First Quarter $5.25 $1.50
Second Quarter 5.50 1.63
Third Quarter 4.00 2.00
Fourth Quarter 3.75 0.19

Fiscal Year Ended December 31, 1998 HIGH LOW
----------------------------------- ---- ---
May 15 - June 30 $12.50 $5.750
Third Quarter 7.50 3.125
Fourth Quarter 5.125 3.375

Class A Warrants

Fiscal Year Ended December 31, 1999 HIGH LOW
----------------------------------- ---- ---
First Quarter $1.88 $0.08
Second Quarter 1.75 1.00
Third Quarter 1.13 0.30
Fourth Quarter 0.81 0.03

Fiscal Year Ended December 31, 1998 HIGH LOW
----------------------------------- ---- ---
May 15 - June 30 $2.125 $0.75
Third Quarter 2.625 0.50
Fourth Quarter 2.125 0.25
</TABLE>
<PAGE>
The quotations in the tables above reflect inter-dealer prices without
retail markups, markdowns or commissions.

The Company had approximately 6 record holders as of March 17, 2000 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).

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.

<PAGE>
RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.

Total net sales for the year ended December 31, 1999 were $1,551,624, an
increase of 14.6% from 1998 sales of $1,354,164. Net sales include sales from
merchandise, shipping and handling charges and mailing list rental. Tobacco Club
sales decreased slightly by $6,481, a decline of 2.4% from 1998 sales of
$271,052. This decline was in addition to revenue decrease of the retail store,
which decreased slightly to $115,484 in 1999 compared with $122,480 in 1998.
Sales of the "Carey Smokeshop" catalog segment increased 15.6% to $1,171,569 in
1999, compared to $1,013,336 in 1998.

Cost of sales as a percentage of net sales remained unchanged at 66.5% for
both 1998 and 1999. Merchandise costs increased slightly from 42.6% of net sales
in 1998 to 43.0% of net sales in 1999. The Company attributes this increase to
product tests and promotions of premium cigars, especially in the fourth quarter
of 1999. Premium cigars typically carry lower gross margins and higher costs of
sales than the Company's proprietary pipes and tobaccos.

Selling expenses, as a percentage of net sales, decreased from 32.1% for
1998 to 29.9% for 1999. This reflects slightly lower catalog advertising costs
from 20.0% of sales in 1998 to 18.6% of sales in 1999, and also decreased
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 1999 were $412,931, or 26.6% of net sales,
compared with $473,598, or 35.0% of net sales, for the year ended December 31,
1998. The decrease is attributable to decreased direct costs of operations, such
as executive wages, professional fees, and travel expense which are lower than
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. This agreement is still in effect, but as of this
printing, the Company has started providing some of these services themselves.

Net loss for the year ended December 31, 1999 was $288,448 compared with a
net loss of $3,829,372 for the year 1998. 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 loss was due to reduced gross profit margins for premium cigars.

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, 1999, the Company had a deficit in retained earnings of
$4,294,707, compared to a deficit in retained earnings of $4,006,259 at December
31, 1998. This resulted from an operating loss of $288,448 for the year ended
December 31, 1999. For the year ended December 31, 1999, the impact of the
operating loss on the Company's cash position was increased by changes in
working capital, which affected operating activities. The operating activities
consumed $270,493 in cash through increases in accounts receivable, inventories,
other assets, deferred catalog expenses and prepaid expenses., but provided
$152,778 from an increase in accounts payable. The net effect of these changes
and non-cash charges of $72,483 relating to depreciation and amortization, when
added to the Company's net loss, resulted in net cash used by operating
activities of $333,680. For the year ended December 31, 1999, the Company
purchased property and equipment in the amount of $136,493. The Company also
invested $93,412 in catalog and product development. Financing activities during
1999 used cash of $12,301 as a result of decrease of $54,301 in due to
affiliates and the issuance of $200,000 options to the CEO providing $42,000.
The Company's ending cash balance decreased to $1,058,390 at December 31, 1999.

<PAGE>
The Company has no credit facility at the current time, but is a
guarantor on Kids Stuff, Inc. line of credit. The balance on the line
was$500,000 at December 31, 1999.

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 affected 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.

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 initial public offering. 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.

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."

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.

<PAGE>

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

<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-21

</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 (subsidiaries of Duncan Hill, Inc.) as of
December 31, 1999, and the related consolidated statements of operations,
stockholders' equity, and cash flows for the years ended December 31, 1999 and
1998. 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, 1999, and the results of their
operations and their cash flows for the years ended December 31, 1999 and 1998,
in conformity with generally accepted accounting principles.

Canton, Ohio
March 17, 2000

F-3
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 1999
<TABLE>
<CAPTION>

ASSETS

CURRENT ASSETS

<S> <C>
Cash $ 1,058,390
Accounts receivable, net of allowance
for doubtful accounts of $5,500 56,460
Inventories 706,070
Due from affiliates 143,753
Prepaid expenses 23,171
Deferred catalog expenses 57,357
---------
Total current assets 2,045,201

DEFERRED FEDERAL INCOME TAX 29,070

PROPERTY AND EQUIPMENT
Leasehold improvements 92,244
Furniture and fixtures 20,571
Data processing equipment 52,343
Website development 110,849
Machinery and equipment 10,981
---------
286,988

Less accumulated depreciation 51,394
---------
235,594

OTHER ASSETS, net of accumulated amortization
Customer lists 387,067
Catalog and product development 92,518
Deposits and other 9,654
---------
489,239

---------
$ 2,799,104
=========
</TABLE>

The accompanying notes are an integral part to these financial statements

F-4
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED BALANCE SHEET

December 31, 1999

LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

CURRENT LIABILITIES
<S> <C>
Accounts payable $ 276,734
Accrued expenses 10,062
Due to affiliate 290,054
Customer advances 7,679
---------
Total current liabilities 584,529

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) 6,501,322
Retained earnings (deficit) (4,294,707)
---------
Total stockholders' equity 2,214,575
---------
$ 2,799,104
=========
</TABLE>

The accompanying notes are an integral part to these financial statements

F-5

<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>

1999 1998
---- ----
<S> <C> <C>
NET SALES $ 1,551,623 $ 1,354,164

COST OF SALES 1,032,582 900,272
--------- ---------
GROSS PROFIT 519,041 453,892

SELLING EXPENSES 463,972 434,897

GENERAL AND ADMINISTRATIVE EXPENSES 412,931 473,598
---------- ----------
LOSS FROM OPERATIONS (357,862) (454,603)

INTEREST INCOME 79,597 -

INTEREST EXPENSE 10,183 3,374,769
---------- ----------
NET LOSS $ (288,448) $ (3,829,372)
========== ===========
BASIC AND DILUTED LOSS PER SHARE
AFTER CONSIDERING PREFERRED
STOCK CUMULATIVE DIVIDEND $ (0.21) $ (2.61)
========== ===========
</TABLE>

The accompanying notes are an integral part to these financial statements

F-6

<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

Years Ended December 31, 1999 and 1998

Common Preferred Paid-In Retained
Stock Stock Capital Earnings Total
----- ----- ------- -------- -----

<S> <C> <C> <C> <C> <C> <C>
BALANCE - JANUARY 1, 1998 $ 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 OF 400,000 COMMON
SHARES AND 1,400,000
WARRANTS FOR CONVERSION
OF NOTE PAYABLE 400 - 3,449,600 - 3,450,000

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

ISSUANCE OF 200,000 OPTIONS TO
COMPANY CEO IN LIEU OF
ACCRUED COMPENSAION - - 42,000 - 42,000

NET LOSS - - - (288,448) (288,448)

BALANCE - DECEMBER 31, 1999 $ 1,860 $ 6,100 $ 6,501,322 $ (4,294,707) $ 2,214,575
============ =========== =========== ============= ===========
</TABLE>

The accompanying notes are an integral part to these financial statements

F-7

<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 1999 and 1998
<TABLE>
<CAPTION>

1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $ (288,448) $ (3,829,372)
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 72,483 54,608
(Increase) in accounts receivable (10,000) (8,886)
(Increase) in inventories (205,305) (22,858)
(Increase) decrease in deferred catalog expenses (24,585) 21,411
(Increase) decrease in prepaid expenses (23,171) 3,587
(Increase) in deposits and other (7,432) (2,500)
Increase (decrease) in accounts payable, customer advances
and accrued expenses 152,778 (45,026)
---------- ----------
Net cash (used) by operating activities (333,680) (479,036)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (136,493) (53,791)
Investment in catalog and product development (93,412) -
---------- ----------
Net cash (used) by investing activities (229,905) (53,791)

CASH FLOWS FROM FINANCING ACTIVITIES
Change in due to/from affiliates - net (54,301) 70,210
Issuance of 200,000 options to Company CEO
in lieu of accrued compensation 42,000 -
Net proceeds from sale of common stock - 1,917,282
Proceeds from convertible note - 100,000
---------- ----------
Net cash (used) provided by financing activities (12,301) 2,087,492
---------- ----------
NET (DECREASE) INCREASE IN CASH (575,886) 1,554,665

CASH - BEGINNING 1,634,276 79,611
---------- ----------
CASH - ENDING $ 1,058,390 $ 1,634,276
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid during the year for interest $ 10,183 $ 24,769
========== ==========
</TABLE>

The accompanying notes are an integral part to 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
its tobacco club members.

B. 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.

C. 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.

D. Trade Receivables - It is the Company's policy to record accounts
receivable net of an allowance for doubtful accounts. The allowance was $5,500
as of December 31, 1999. Bad debt expense was $5,514 and $13,965 for the years
ended December 31, 1999 and 1998, respectively.

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

F. 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 $274,099 and $271,158 for the years ended
December 31, 1999 and 1998, respectively.

Product development expenses are costs of developing new flavored tobacco
and the new Make-Your-Own cigarette products. These costs are deferred and
amortized over 48 months.

F-9
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary of Significant Accounting Policies (continued)

G. 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 $32,883 and $15,624 for
the years ended December 31, 1999 and 1998, respectively.

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

H. A customer list was obtained by the Company's predecessor, E.A. Carey of
Ohio, Inc. in 1984 for $889,000. The list is being amortized on a straight-line
basis through 2008. At December 31, 1999, accumulated amortization was $501,933.

I. 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.

J. The Company maintains its cash at a financial institution. The bank
balance is $1,146,683 (which exceeds book amounts due to reconciling items) as
of December 31, 1999 and at times throughout the year exceeds federally insured
amounts.

K. Per Share Amounts - Net income per share is calculated using the
weighted average number of shares outstanding during the year. There were no
securities outstanding or granted as of December 31, 1999 and 1998 that would
have a dilutive effect on per share amounts. Additionally, the Company
experienced a net loss in 1999 and 1998. Therefore, no potential common shares
have been 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 1,860,000 and 1,511,287 for 1999 and 1998,
respectively. The 1999 and 1998 earnings per share calculations include a charge
of $110,000 relative to the cumulative dividends on the Series B Preferred
Stock.

F-10
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Summary of Significant Accounting Policies (continued)

L. New Authoritative 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. 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, 2000.

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 effect of adoption was not
material.

In December 1999, the Securities and Exchange Commission issued SAB101,
"Revenue Recognition in Financial Statements." SAB101 provides guidance on
applying generally accepted accounting principles to revenue recognition issues
in financial statements. This statement is effective in the second quarter of
2000. The Company is evaluating the effect the adoption may have on the
Company's consolidated results of operations and financial position.

Note 1. Inventories

Inventories consist of the following at December 31, 1999:

<S> <C>
Raw materials $ 160,401
Tobacco, cigars, and pipes 518,676
Supplies and catalogs 26,993
--------
$ 706,070

</TABLE>

F-11
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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, 1999 and 1998:

1999 1998
---- ----

Deferred tax assets:
<S> <C> <C>
Net operating loss carryforward ............ $ 372,266 $ 261,256
Depreciation ............................... -- 368
Valuation allowance ........................ (318,701) (221,412)
--------- ---------
Total deferred tax assets .............. $ 53,565 $ 40,212

Deferred tax liabilities:
Deferred catalog expense ................... $ (19,501) $ (11,142)
Depreciation ............................... (4,994) --
--------- ---------
Total deferred tax liabilities ......... (24,495) (11,142)
--------- ---------
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 5E).

F-12
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 2. Income Taxes (continued)

The Company has net operating loss carryforwards which will
expire as follows:

Year Amount

<S> <C> <C>
2008 $ 6,500
2009 57,600
2010 105,900
2011 121,000
2012 74,400
2018 403,000
2019 326,500
----------
$ 1,094,900

</TABLE>

Note 3. Lease Commitment

Havana Group, Inc. has entered into an operating lease
effective January 1, 2000 for warehouse and office space.
Prior to January 1, 2000, the Company occupied space in a
building owned by Kids Stuff. A portion of the related
occupancy costs are allocated to the Company as described in
Note 4. Total future minimum lease payments required under
this noncancellable operating lease for the years ending
December 31 are as follows:

Year Amount

Note 4. Agreement with Affiliated Company

Duncan Hill, Inc., the parent of The Havana Group,
Inc., owns 80% 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 plus $2.40 per order
processed. Havana is also obligated to pay 5% of its 1999
and 1998 pre-tax profits to Kids Stuff in connection with
these administrative and fulfillment services. However,
Havana had no pre-tax profits in 1999.

F-13
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 4. Agreement with Affiliated Company (continued)

or 1998. At January 1, 1999, the agreement was modified and
extended on a month-to-month basis as Havana began to incur
direct costs for its administrative functions. Havana
currently pays to Kids Stuff accounting, data processing, and
administrative charges of $15,000 per year plus shipment and
warehouse services on a per order basis. Total costs charged
to Havana in 1999 and 1998 amounted to $225,086 and $293,432,
respectively. 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.

<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>

The accounts receivable and inventory of Havana and
Kids Stuff are pledged as collateral which guarantees a
$500,000 line of credit reflected on the financial
statements of Kids Stuff. The Company's guarantee relative
to the line of credit is irrevocable. The outstanding loan
balance on the line of credit was $500,000 at December 31,
1999.

Note 5. Stockholders' Equity

A. Common Stock

The Havana Group, Inc. has 25,000,000 shares of $.001
par value common stock authorized. 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 5. Stockholders' Equity (continued)

In May 1998, the Company completed an initial public
offering (see Note 10) 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 5E).

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.

Duncan Hill, Inc. owns 5,000,000 shares of Series A
Preferred Stock (Series A), $.001 par value. 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.

f-15
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5. Stockholders' Equity (continued)

C. Series B Preferred Stock

The Company has issued 1,100,000 shares of its Series B
Convertible Preferred Stock (Series B) $.001 par value to
Duncan Hill, Inc. 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 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 1999 or 1998 on the
Series B Preferred Stock. Dividends in arrears on the Series B
preferred stock amount to $.20 per share or $220,000 in the
aggregate at December 31, 1999.

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 plus dividends
in arrears, which is subordinated to the liquidation
preference of the Series A stock.

D. Class A Warrants

As of December 31, 1999, 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 10); 1,400,000 warrants issued in conjunction with the
conversion of a note payable (see Note 5E); 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.

F-16
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 5. Stockholders' Equity (continued)

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 common stock and 1,400,000
Class A warrants. 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 6. 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 5E, "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 7. Stock Incentive Plan

The Company maintains 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,

F-17
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 7. Stock Incentive Plan (continued)

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 1999 and 1998.

Note 8. Employment Agreements

A. The Company 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.

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

F-18
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 8. Employment Agreement (continued)

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.

B. The Company 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 9. Fair Value of Stock Based Compensation

In 1999, 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 and the
options to purchase 80,000 shares of common stock issued to
Mr. Corbett (all described in Note 8), the Company has granted
options to purchase 60,000 shares of common stock to certain
directors (see Note 11).

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
$172,700 or $.11 per share for the year ended December 31,
1998 and $241,500 or $.13 per share for the year ended
December 31, 1999.

F-19
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 9. Fair Value of Stock Based Compensation (continued)

For purposes of the pro forma disclosures presented above, the
Company computed the fair values of options granted during
1999 using the Black-Scholes option pricing model assuming no
dividends, 211% volatility, an expected life of 50% of the
ten-year option terms, and a risk-free interest rate of 6.0%.
The fair value of Class A warrants issued to Mr. Miller was
calculated as the value of compensation forgone in return for
the warrants. The fair value of options and warrants granted
during 1999 was $339,200.

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,
1999.

Note 10. 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 11. 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.

F-20
<PAGE>

THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 11. Non-Qualified Stock Option Agreement (continued)

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 9.

Note 12. Subsequent Event

In February 2000, the Company cancelled the 200,000
options granted to Mr. Miller as described in Note 8A. The
Company concurrently issued 200,000 options to Mr. Miller
exercisable at $.40. The fair value of the options granted
to Mr. Miller in February 2000 was $78,000, as calculated
using the Black-Scholes option pricing model assuming no
dividends, 211% volatility, an expected life of five years,
and a risk-free interest rate of 6.0%.

Additionally, in February 2000, Mr. Miller purchased
240,000 unregistered shares of the Company's common stock at
a price of $.4044 per share for total proceeds of
approximately $97,000. In March, 2000, the Company sold
245,000 unregistered common shares to seven investors for
$242,000, net of expenses. The following unaudited pro-forma
condensed consolidated balance sheet gives affect to the
sales of these sales.

F-21

<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Note 12. Subsequent Events (continued)

The Havana Group, Inc. and Subsidiary
Pro-Forma Condensed Consolidated Balance Sheet
(Unaudited)
December 31, 1999

ASSETS Unaudited

<S> <C>
Current assets $ 2,384,201
Deferred Federal income tax 29,070
Property and equipment 235,594
Other assets, net 489,239
----------
$ 3,138,104

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities $ 584,529
Stockholders' equity 2,553,575
---------
$ 3,138,104
</TABLE>

F-22

<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:
<TABLE>
<CAPTION>

First
Term of Became Principal
Name Age Office Director Occupation

<S> <C> <C> <C> <C>
William L. Miller 63 (1) 1997 Chairman of the
Board, Chief
Executive Officer,
and Principal
Financial Officer of
the Company

John W. Cobb, Jr. 58 (1) 1997 Director of Marketing
Global Outreach
University of Maryland

Peter Stokkebye VI 69 (1) 1997 Retired

Clark D. Swisher 48 (1) 3/31/00 Vice President,
Employee Benefits
Division of Leonard
McCormick Agency
</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.

<PAGE>
(c) Business Experience

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 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 the Director of Marketing, Global Outreach, at the University of
Maryland since 10/99. Previously, Mr. Cobb was a Senior Vice President of
Marketing at McGraw-Hill Continuing Education center in Washington, DC from
1981-1999. From 1979-1981, he was the Vice President of Marketing and
Syndication Sales for C.B.S., Inc., Columbia House Division in New York 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

<PAGE>
with two independent directors and the Board would 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.

Clark D. Swisher is a director of Kids Stuff, Inc. since July 1996. Mr.
Swisher has been Vice President of the Employee Benefits Division of the
Leonard-McCormick Agency, a general insurance agency, since 1984. Mr. Swisher's
professional background includes membership in the National Association of Life
Underwriters and the University of Akron Business Advisory Council. Mr. Swisher
has been a director of Duncan Hill, Inc. since 1995.

As of the date of the 10-KSB, the Company does not have any committees of
the Board of Directors although it may have committees in the future.

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, 1999.

<PAGE>
Item 10. Executive Compensation

The following table provides a summary compensation table with
respect to the compensation of William L. 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 ($) ($)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
W. Miller,
Chief Executive 1999 -0-(5) -0- 3,600 -0- 200,000 -0- -0-
Officer (2)
1998 46,400 -0- 3,600 -0- -0- -0- -0-

1997 28,167(1) -0- 4,000 -0-(3) 400,000(4) -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% of Miller's compensation paid by Duncan Hill or Kids Stuff to Miller was
expensed to the Company in 1997. 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 or 240,000 shares sold to Mr. Miller on February 7,
2000 at a price of $.4044 per share. See "Certain Transactions" 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.
<PAGE>
(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.

(5) Mr. Miller's employment contract required him to be paid a salary of
$50,000 for 1999. On June 30, 1999, Mr. Miller modified his employment agreement
to receive 200,000 Class A Warrants identical to those sold to the public in
exchange for $42,000 in accrued salary. Accordingly, Mr. Miller did not receive
any cash compensation in 1999 but did receive 200,000 Class A Warrants.

OPTION GRANTS TABLE

The information provided in the table below provides information with
respect to individual grants of stock options (or warrants) during fiscal 1999
to the Company's Chief Executive Officer.
<TABLE>
<CAPTION>

Option Grants in Last Fiscal Year
Potential
Realizable Value at
Assumed Annual
Individual Grants Rates of Stock Price Appreciation
for Option Term (2)

(a) (b) (c) (d) (e) (f) (g)
% of
Total
Options/
Granted to
Options Employees Exercise Expira-
Granted in Fiscal Price tion
Name (#) Year (1) ($/Sh) Date 5% ($) 10% ($)

<S> <C> <C> <C> <C> <C> <C> <C>
William L. Miller 200,000 100% 5.25 5/14/03 226,000 488,000
</TABLE>

(1) The percentage of total options granted to employees in fiscal year is
based upon options granted to officers, directors and employees.

(2) The potential realizable value of each grant of options assumes that
the market price of Havana's Common Stock appreciates in value from the date of
grant to the end of the option term at annualized rates of 5% and 10%,
respectively, and after subtracting the exercise price from the potential
realizable value.
<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 1999 by the
Company's Chief Executive Officer and the fiscal year end value of the Company's
unexercised options.

<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)

Number of
Securities Underlying
Unexercised Value of
Options/Warrants Unexercised
Shares at FY-End (#) In-the-Money
Acquired on Exercisable/ Options/Warrants
Name Exercise (#) Value Unexercisable at Fy-End($)
Realized Exercisable/
($)(1) Unexercisable(1)

<S> <C> <C> <C> <C> <C> <C>
William L. Miller -0- -0- 360,000/40,000 -0-/-0-

</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
$.1875 per share. It does not reflect the value of the Warrants, which
could be sold in the open market.
<PAGE>
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 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.

<PAGE>
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 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.

<PAGE>
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. On February 7, 2000, the Company extended Mr. Miller's one
additional year to December 31, 2003 and agreed to sell to Mr. Miller 240,000
shares of Havana's Common Stock at the then fair market value of $.4044 per
share. 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. As March 30, 2000, options to purchase 160,000
shares are vested and are currently exercisable at $.4044. The remaining options
become exercisable at the same exercise price on January 1, 2001. On February 4,
2000 Mr. Miller's options which were originally exercisable at $6.00, subject to
adjustment, were cancelled and were re-granted on terms identical to those in
his original options except the exercise price was lowered to $.4044 per common
share representing the market value of the Company's common stock at February 4,
2000. Reference is made to footnote 5 to Summary Compensation Table under
"Executive Summary" for a discussion of a modification to Mr. Miller's
employment contract which resulted in the issuance of 200,000 Class A Warrants
in exchange for his waiver of a total of $42,000 of monies due him.

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-elect 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 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.

<PAGE>
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, 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.

<PAGE>
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

DIRECTORS COMPENSATION

<PAGE>
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.

Item 11. Security Ownership of Certain Beneficial Owners and Management.

The following table sets forth as of March 17, 2000, 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 and B
Common Stock Preferred Stock
Beneficially 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) 866,000(4) 36.9% 6,100,000(4) 100%

William L. Miller (5) 1,466,000(5) 54.6% 6,100,000(6) 100

John W. Cobb (2)(6) 22,500 1.0% -0- -0-

Peter Stokkebye(2)(6) 22,500 1.0% -0- -0-

Gary Corbett (7) 40,000 1.0% -0- -0-

All five Officers and Directors 1,551,000 1.7% -0- -0-
</TABLE>

* Represents less than 1% of the outstanding shares of Common Stock.
<PAGE>
(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., 5701 Mayfair Rd, North
Canton, OH 44720.

(3) Calculated based upon 2,345,000 shares of Common Stock outstanding
without giving effect to the possible exercise of outstanding Class A Warrants
and Options.

(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 866,000 shares owned by Duncan and 240,000 shares of Havana's Common
Stock, Class A Warrants to purchase 200,000 shares of Common Stock and options
to purchase 160,000 shares of Common Stock, which are directly beneficially
owned by him. Not included in the foregoing are options to purchase 40,000
shares which are not deemed beneficially owned by him as of March 17, 2000. Mr.
Miller by virtue of his beneficial ownership of Common Stock and Preferred Stock
(excluding options and warrants) has the right to vote control the vote of
7,606,000 shares of the Company's voting capital representing 88.4% 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 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, 2001 and February 1, 2002.

<PAGE>
Item 12. Certain Relationships and Related Transactions.

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. 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. At January 1, 1999 the agreement was
modified and extended on a month-to-month basis as the Company began to incur
direct costs for its administrative functions. The Company pays to Kids Stuff an
accounting, data processing, and administrative charge of $15,000 per year plus
$1.75 per shipment for warehouse services. The Company is also obliged to pay 5%
of its 1999 pretax profits to Kids Stuff in connection with these services
however the Company had no pre-tax profits for 1999. This agreement is still in
effect, but as of this printing, the Company has started provided some of these
services themselves.

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.

<PAGE>
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 fulfillment 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 owed 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
fulfillment 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 William
L. Miller five year Warrants to purchase 200,000 shares of the Company's Common
Stock in December 1997. Upon the completion of the Company's initial public
offering ("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 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
therefore, 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.

(v) See Footnote 5 in Summary Compensation Table under "Executive
Compensation" for a description of the issuance of 200,000 Class A Warrants to
Mr. Miller on June 30, 1999.

(vi) On February 7, 2000, the Company sold 240,000 shares of its Common
Stock to Miller at a cash purchase price of $.4044 per share.

(vii) In March 2000, the Company sold 245,000 shares of its Common Stock to
seven non-affiliated persons at a purchase price of $1.00 per share.
<PAGE>
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.
** Incorporated by reference from the Issuer's Form 10-KSB

(b) Reports on Form 8-K

During the three months ended December 31, 1999, 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 4, 2000

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:

Signatures Titles Date

<S> <C> <C>
/s/ William L. Miller Chairman of the
William L. Miller Board, Chief Executive Officer,
Principal Financial Officer,
Treasurer and Secretary April 4, 2000

/s/ Peter Stokkebye

Peter Stokkebye Director April 4, 2000

/s/ John Cobb

John Cobb Director April 4, 2000

___________________ Director April 4, 2000
Clark D. Swisher
</TABLE>

<ARTICLE> 5

<LEGEND>
Exhibit 27.1 Financial Data Schedule

This schedule contains summary financial information extracted from financial
statements and Related Footnotes of Kids Stuff, Inc.

</LEGEND>

<S> <C>
<PERIOD-TYPE> 12-mos
<FISCAL-YEAR-END> dec-31-1999
<PERIOD-END> dec-31-1999
<CASH> 1,058,390
<SECURITIES> 0
<RECEIVABLES> 61,960
<ALLOWANCES> 5,500
<INVENTORY> 706,070
<CURRENT-ASSETS> 2,045,201
<PP&E> 286,988
<DEPRECIATION> 51,394
<TOTAL-ASSETS> 2,799,104
<CURRENT-LIABILITIES> 584,529
<BONDS> 0
0
6,100
<COMMON> 1,860
<OTHER-SE> 2,206,615
<TOTAL-LIABILITY-AND-EQUITY> 2,799,104
<SALES> 1,551,623
<TOTAL-REVENUES> 1,551,623
<CGS> 1,032,582
<TOTAL-COSTS> 1,496,554
<OTHER-EXPENSES> 412,931
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,183
<INCOME-PRETAX> (288,448)
<INCOME-TAX> 0
<INCOME-CONTINUING> (288,448)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (288,448)
<EPS-BASIC> (.21)
<EPS-DILUTED> (.21)

</TABLE>