UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE
ACT OF 1934
FOR THE PERIOD ENDED JUNE 30, 2000
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT HAVE 1934
FOR THE TRANSITION PERIOD FROM _____________________ TO ______________________
COMMISSION FILE NUMBER: 000-24269
THE HAVANA GROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 34-1454529
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYEROR ORGANIZATION
OF INCORPORATION IDENTIFICATION NO.)
5701 MAYFAIR ROAD, NORTH CANTON, OHIO 44720
(ADDRESS OF PRINCIPLE EXECUTIVE OFFICES) (ZIP CODE)
(330) 492-8090
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the past 12
Months (or for such shorter period that the registrant was required to file
such Reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [ X ] No [ ]
As of August 11, 2000, there were 2,795,000 shares of the Registrant's
Common Stock $.001 par value issued and outstanding, after giving effect to the
issuance of 450,000 shares in connection with the Registrant's acquisition of
Phillips & King International, Incorporated on August 4, 2000
Transitional Small Business Disclosure Format.
Yes [ ] No [X]
<PAGE>
INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Consolidated Balance Sheets - June 30, 2000 (Unaudited) and December 31, 1999...................... 3
Consolidated Statements of Operations (Unaudited) - Three Months and Six Months Ended June 30, 2000 and
1999............................................................................................... 4
Consolidated Statements of Cash Flows (Unaudited) - Six Months Ended June 30, 2000 and
1999............................................................................................... 5
Notes to Financial Statements...................................................................... 6
Item 2 - Management's Discussion and Analysis or Plan of Operations................................ 9
Part II - Other Information........................................................................ 11
</TABLE>
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Balance Sheets
<TABLE>
<CAPTION>
(UNAUDITED)
June 30, December 31,
2000 1999
---- ----
ASSETS
CURRENT ASSETS
<S> <C> <C>
Cash $974,433 $1,058,390
Accounts receivable 57,354 56,460
Inventories 774,648 706,070
From affiliates 100 143,753
Deferred catalog expense 97,626 57,357
Prepaid expenses 61,308 23,171
----------------------- --------------------
Total Current Assets 1,965,469 2,040,201
DEFERRED FEDERAL INCOME TAX 29,070 29,070
PROPERTY AND EQUIPMENT:
Leasehold Improvements 104,683 92,244
Machinery and equipment 40,192 10,981
Data Processing equipment 61,299 52,343
Web Site Development 109,474 110,849
Furniture and fixtures 20,403 20,571
----------------------- --------------------
336,051 286,988
Less accumulated depreciation 70,844 51,394
----------------------- --------------------
265,207 235,594
OTHER ASSETS, net of accumulated amortization
Customer lists 367,990 387,067
Catalog and product development 90,335 92,518
Other 10,631 9,654
----------------------- --------------------
468,956 489,239
----------------------- --------------------
2,728,702 2,799,104
======================= ====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable 265,083 276,734
Accrued expenses 10,451 10,062
Due to affiliates - 290,054
Customer advances and other 6,754 7,679
----------------------- --------------------
Total Current Liabilities 282,288 584,529
STOCKHOLDERS' EQUITY:
Preferred stock 6,100 6,100
Common stock 2,345 1,860
Additional paid -in capital 6,842,893 6,501,322
Retained earnings (deficit) (4,404,924) (4,294,707)
----------------------- --------------------
Total Stockholders' Equity 2,446,414 2,214,575
----------------------- --------------------
2,728,702 2,799,104
======================= ====================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(UNAUDITED) (UNAUDITED)
Three Months Ended June 30, Six Months Ended June 30,
----------------------------------- --------------------------------
2000 1999 2000 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total Sales $474,790 $309,163 $924,239 $570,927
Cost of Sales 272,810 177,063 493,345 334,885
--------------- ---------------- -------------- -------------
Gross Profit 201,980 132,100 430,894 236,042
Selling Expenses 118,703 93,238 258,317 175,018
General and Administrative 164,503 85,240 311,299 163,973
Expenses
--------------- ---------------- -------------- -------------
(Loss) >From Operations (81,226) (46,378) (138,722) (102,949)
Other Income (Expense) 15,118 84,044 28,505 100,415
--------------- ---------------- -------------- -------------
Net Income (Loss) $(66,108) $37,666 $(110,217) $(2,534)
=============== ================ ============== =============
Basic and Diluted Earnings (Loss) Per Share $(0.03) $0.02 $(0.05) $0.00
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
The Havana Group, Inc. and Subsidiary
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
(UNAUDITED)
Six Months Ended June 30,
-------------------------------------
2000 1999
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net Loss $(110,217) $(2,534)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 40,710 28,740
(Increase) in accounts receivable (894) (1,914)
(Increase) in inventories (68,578) (175,204)
(Increase) in deferred catalog expense (40,269) (72,898)
(Increase) in prepaid expenses (38,137) (115,556)
(Increase) in other assets (977) -
(Decrease) in accounts payable, customer advances and other (12,187) 107,706
----------------- ----------------
Net cash (used) by operating activities (230,549) (161,660)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in property and equipment (49,063) (129,284)
CASH FLOWS FROM FINANCING ACTIVITIES
Change in due to/from affiliates (146,401) (153,020)
Sale of common stock 342,056 -
----------------- ----------------
Net cash provided (used) by financing activities 195,655 (153,020)
----------------- ----------------
Net (decrease) in Cash (83,957) (443,964)
Cash - Beginning 1,058,390 1,634,1276
----------------- ----------------
Cash - Ending $974,433 $1,190,311
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE>
THE HAVANA GROUP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Business Description and Principles of Consolidation
The Havana Group, Inc. (Havana) is in the mail order and Internet business
and sells to customers throughout the United States. The Company sells tobacco,
cigars, smoking pipes and accessories. Products are purchased from a variety of
manufacturers. The consolidated financial statements include the accounts of The
Havana Group, Inc., and its wholly owned subsidiary, Monarch Pipe Company
(collectively, "the Company"). Monarch manufactures smoking pipes and sells them
exclusively to Havana. All significant inter-company accounts and transactions
have been eliminated in consolidation
Note 2. Basis of Presentation
A. The accompanying unaudited financial statements have been prepared by
the Company. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted. In the opinion of the Company's
management, the disclosures made are adequate to make the information presented
not misleading, and the consolidated financial statements contain all
adjustments necessary to present fairly the financial position as of June 30,
2000, the results of operations for the six month periods ended June 30, 2000
and June 30, 1999 and cash flows for the six month periods ended June 30, 2000
and June 30, 1999. The results of operations for the three and six month periods
are not necessarily indicative of the results to be expected for the full year.
Per Share Amounts - The number of shares outstanding in computing basic and
diluted earnings per share for the six-month periods ended June 30, 2000 and
1999 was 2,345,000 and 1,860,000 respectively.
B. Recently Issued Accounting Pronouncements
In June 1999, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the Effective Date
of FASB Statement No. 133 - an amendment of FASB Statement No. 133," which
postponed the effective date of SFAS No. 133, "Accounting for Derivative
Financial Instruments and Hedging Activities," to all fiscal years beginning
after June 15, 2000. The Company does not anticipate having these types of
hedges, and the effect of adoption is expected to be immaterial.
The Accounting Standards Executive Committee issued Statement of Position
(SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use," and SOP 98-5, "Reporting on the Costs of Start-Up
Activities," which are effective for years beginning after Dec. 31, 1998. The
Company's adoption of SOP 98-1 and SOP 98-5 had no material effect on its
results of operations or financial position.
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 fourth 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 3. Agreement with Affiliated Company
Effective January 1, 1997, the Company contracted with Kids Stuff, Inc.
("Kids"), a subsidiary of Duncan Hill, Inc., to provide telemarketing, order
fulfillment, data processing and certain administrative functions. The Companyis
charged for its portion of the expenses on a direct cost basis, as applicable,
or on a pro rata basis. Actual costs are those direct costs that can be charged
on a per order or per hour basis, fixed costs are allocated on a pro rata basis
by dividing the total assets of the Company by the sum of the total assets of
the Company and Kids.
<PAGE>
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 an accounting, data
processing, and administrative charge of $15,000 per year. Additionally, a $1.75
per shipment for warehouse services was paid by Havana until March 8, 2000 when
Havana obtained their own warehousing facility and no longer required Kids Stuff
Inc.'s fulfillment services.
Note 4. Stockholders' Equity
Common Stock
The Havana Group, Inc. has 25,000,000 shares of $.001 par value common
stock authorized. In connection with reorganization, the Company issued
1,000,000 common shares to its parent, Duncan Hill, Inc. The holders of Common
shares are entitled to one vote on all stockholder matters.
The Company is not currently subject to any contractual arrangements, which
restricts its ability to pay cash dividends. The Company's Certificate of
Incorporation prohibits the payment of cash dividends on the Company's Common
Stock in excess of $.05 per share per year so long as any Serial Preferred Stock
remains outstanding unless all accrued and unpaid dividends on Serial Preferred
Stock has been set apart and there are no arrearages with respect to the
redemption of any Serial Preferred Stock.
In Febuary 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 in a private placement for $245,000.
B. Series A Preferred Stock
The Board of Directors has the authority to issue up to 10,000,000 shares
of Preferred Stock in one or more series and to fix all rights, preferences,
privileges, and restrictions. In December 1997, the Company issued, as a
dividend to Duncan Hill, Inc., 5,000,000 shares of Series A Preferred Stock
(Series A) to Duncan Hill, Inc. The Series A holders are entitled to one vote
for each share held on all matters submitted to a vote of the stockholders. The
Series A stock is not subject to redemption and has no conversion rights or
rights to participate in dividend payments. In the event of any voluntary or
involuntary liquidation of the Company, each share of Series A stock has a
liquidation preference of $.001 per share.
C. Series B Preferred Stock
In December 1997, the Company issued 1,100,000 shares of its Series B
Convertible Preferred Stock (Series B) to Duncan Hill. In return, Duncan Hill
assumed a $300,000 liability due to an affiliate. Series B has the same voting
privileges as the Common Stock. Each share of Series B stock is convertible into
one share of the Company's Common Stock at the option of either the holder or
the Company upon reaching net pre-tax earnings of at least $500,000. If declared
by the Board of Directors, Series B shareholders are entitled to receive
quarterly dividends of no more than $.025 per share, payable out of surplus or
net profits of the Company. As of November 10, 1999, the Board of Directors has
not declared any dividends. As the Series B Preferred pays a $.10 dividend per
share, the Company has recorded the Series B stock at $1.00 per share to reflect
its estimated fair value. The Series B stock is not subject to redemption. In
the event of a voluntary or involuntary liquidation of the Company, each share
of Series B stock has a liquidation preference of $.001, which is subordinated
to the liquidation preference of the Series A stock.
D. Class A Warrants
As of March 31, 2000, the Company has 2,858,000 Class A Warrants
outstanding, which is comprised of 920,000 warrants included in the units sold
in the initial public offering (see Note 8); 1,400,000 warrants issued in
connection with the conversion of a note payable (see Note 4E); 138,000 warrants
issued to Duncan Hill in replacement of warrants issued in conjunction with a
reorganization; and 400,000 warrants issued to Mr. William Miller, the Company's
CEO, as described in Note 5, 200,000 of which he currently owns.
<PAGE>
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, 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.
Note 5. Acquisition
During July 2000, the Company reached an agreement to acquire 100% of the
capital stock of Phillips & King International, Incorporated (P&K) for 450,000
shares of restricted common stock, $900,000 in cash and assumption of
liabilitities of approximately $1,960,000. The purchase closed on August 4, 2000
and is being accounted for as a purchase in accordance with APB 16.
<PAGE>
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
This discussion should be read in conjunction with the information in the
financial statements of the Company and notes thereto appearing elsewhere.
Overview
The Havana Group, Inc. is a consumer catalog and Internet business
specializing in smoking pipes, tobaccos, cigars and related accessories. We are
the manufacturer and sole distributor of the "Magic Inch" and "Aerosphere"
smoking pipe systems, and the sole distributor of "Carey Honduran" lines of
proprietary hand made cigars. Our products are offered through our Carey's
Smokeshop catalog. Carey Tobacco Club is also offered through the catalog, which
is a monthly program of tobacco shipments to Club members. During December 1997
we opened, and have since been developing, our Havana Group retail store. In
June of 1999, we developed and launched our web site www.smokecheap.com as a new
distribution outlet.
Acquisition of Phillips and King International, Inc.
On August 4, 2000, the Company entered into an agreement with John S.
Parker, Priscilla H. Parker, Jerold E. Christensen and Linda L. Christensen (the
"Sellers") and acquired 100% of the capital stock of Phillips and King
International, Incorporated ("P&K") in exchange for (i) 450,000 restricted
shares of the Company's Common Sock with piggy-back registration rights,(ii)
$900,000 in cash which was paid directly to P&K on behalf of Sellers, and (iii)
assumption of liabilities estimated at approximately $1,960,000. Contemporaneous
with the acquisition of P&K, the Company entered into 90-day transitional
consulting contracts with John S. Parker and Jerold E. Christensen and
agreements not to compete for a period of two years.
P&K was organized in 1906 by Mr. Harry Phillips. P&K is a wholesale
distributor of tobaccos, cigars, pipes and related smoking products. P&K sells
tobacco products to retail shops and it has approximately 3,000 accounts. The
method of sale is by direct contact and P&K employs nine sales representatives
in its business. The assets of P&K acquired by Havana will continue to be
utilized in the same line of business as that conducted before the transaction.
P&K's principal assets include, without limitation, inventories, written lists
and accounts receivable.
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THE THREE MONTHS ENDED
JUNE 30, 1999
Net sales for the quarter ended June 30, 2000 were $474,790, an increase of
$165,627 or 53.6% from the same quarter last year. The increase is due to a
favorable response to the current selection in the company's Carey Catalog and
the sales of the Company's make-your-own products.
Cost of sales increased to 57.5% of net sales in 2000 from 57.3% in 1999.
Selling expenses were 25.0% of sales for the second quarter of 2000
compared with 30.2% of sales in the second quarter of 1999. The decrease in
selling expense percentage in 2000 resulted from a higher cost effective
marketing program implemented by the Company.
For the second quarter of 2000, general and administrative expenses were
$164,503 or 34.6% of sales, compared to $85,240 or 27.6% of sales during the
same quarter in 1999. The increase of $79,263 was due to increased personnel
costs related to the relocation of the Company to a new warehousing facility and
also to costs associated with the acquisition of Phillips & King.
Losses from operations for the second quarter of 2000 were $81,226, or
17.1% of sales, as compared to an operating loss of $46,378, or 15.0% of sales
in 1999. The increase in loss was due to increase in G&A expenses associated
with new office and warehouse facility and additional operational personnel to
fill needed positions.
SIX MONTHS ENDED JUNE 30,2000 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Net sales for the six months ended June 30, 2000 were $924,239, an increase of
61.9% from the $570,927 for the same period last year.
Cost of sales decreased from 58.7% of net sales in 1999 to 53.4% in 2000.
Selling expenses decreased from 30.7% of net sales in 1999 to 27.9% in 2000.
For the six months ended June 30, 2000, general and administrative expenses
amounted to $311,299, or 33.7% of net sales, as compared to $163,973, or 28.7%
of net sales for the same period last year.
The operating loss before other income for the first six months of 2000 was
$138,722 or 15.0% of net sales, as compared to $102,949, or 18.0% of net sales
for the same period last year.
The net loss for the six months ended June 30, 2000 amounted to $110,217
compared with $2,534 for the six months ended June 30, 1999.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES.
At June 30, 2000, our accumulated deficit increased by $110,217 from
December 31, 1999 due to the net loss.
In addition to the net loss, cash was used by operating activities for
paying off of accounts payable of $11,651. Other operating activity cash uses
included an increase in accounts receivable of $894 and an increase in deferred
catalog expense, deposits and other of $41,246. Additionally, customer advances
and accrued expense decreased $536. Cash uses were somewhat offset by non-cash
charges including depreciation and amortization of $40,710. Cash from operations
was also used by an increase in inventory of $68,578 and an increase in prepaid
expenses of $38,137. Cash was used by investing activities in the amount of
$49,063, as a result of purchases of property and equipment. The Company's
financing activities consisted of a decrease in amounts due to affiliates of
$146,401. Additionally, cash was provided from the sale of common stock of
$342,056.
At June 30, 1999, our accumulated deficit increased $2,534 from December
31, 1998 because of the net loss. In addition to the net loss, cash was used by
operating activities primarily to increase inventories. Cash uses were partially
offset by non-cash charges of $28,740 for depreciation and amortization, and by
increases in accounts payable, customer advances and other liabilities in the
amount of $107,706. Cash was used by investing activities, as investments in
property and equipment rose by $120,720, reflecting the Company's investment in
its Havana Group site on the world-wide-web. The Company believes that its web
site is substantially complete, and anticipates the total cost of its web site
will be approximately $100,000. Financing activities for the quarter consisted
of a reduction in amounts due to affiliates, as the Company paid down its
balances due by $153,020 during the quarter.
Currently, the Company has no credit facility. However, the Company expects
to meet cash needs over the next 12 to 15 months through working capital
provided by the recently completed offering and cash from operations.
<PAGE>
FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS
Management's discussion and analysis contains forward-looking statements,
which reflect Management's current views and estimates of future economic
circumstances, industry conditions, company performance and financial results.
These forward-looking statements are based largely on the Company's expectations
and are subject to a number of risks and uncertainties, many of which are beyond
the Company's control. Actual results could differ materially from these forward
looking statements as a result of changes in the trends in the tobacco or cigar
retail and mail order industry, government regulations imposed on the tobacco
industry, competition, availability and price of goods, credit availability,
printers' schedules and availability, and other factors. Any changes in such
assumptions or factors could produce significantly different results.
<PAGE>
PART II. OTHER INFORMATION
(a) Exhibits filed as part of this report:
27. Financial Data Schedule
Signature
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
The Havana Group, Inc.
DATE: 8/14/00
/s/ William Miller
William Miller, CEO & CFO
