<PAGE>
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 quarterly period ended June 27, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _______________ .
Commission File Number 0-24828
GRAND HAVANA ENTERPRISES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4428370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1990 Westwood Boulevard, 3rd Floor
Los Angeles, California 90025
(Address of Principal Executive Offices) (Zip Code)
310/ 475-5600
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) 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 [ ] NO [ x ]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at June 27, 1999
- --------------------- ---------------------------
Common Stock, par 14,174,306 shares
value $.01 per share
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [ x ]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
June 27, September 27,
1999 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 33,963 $ 95,344
Accounts receivable, net 182,124 133,212
Current portion of note receivable 13,544 26,623
Inventories 541,086 663,955
Prepaid expenses 243,229 214,555
----------- ------------
TOTAL CURRENT ASSETS 1,013,946 1,133,689
PROPERTY AND EQUIPMENT, Net 3,958,984 4,100,546
OTHER ASSETS
Restricted cash 938,358 937,057
Note receivable, net of current portion 28,548 28,548
Pre-opening costs - 23,844
Due from related parties 128,549 145,737
Deferred charges - 67,106
Deposits and other assets 90,401 85,627
------------ ------------
TOTAL OTHER ASSETS 1,185,856 1,287,919
------------ ------------
$ 6,158,786 $ 6,522,154
============ ============
</TABLE>
See accompnying notes to consolidated condensed financial statements.
2
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GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
June 27, September 27,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to related parties $ 1,410,280 $ 1,343,000
Bank overdraft 107,524 89,083
Accounts payable 1,183,389 1,114,655
Accrued liabilities 520,833 172,237
Deferred revenues 171,931 129,905
Due to related parties 1,208,239 923,333
Deferred rent payable 483,089 559,478
Fire loss 175,065 -
------------- -------------
TOTAL CURRENT LIABILITIES 5,260,350 4,331,691
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized - 3,000,000
shares; issued and outstanding - none
Common stock, $.01 par value; authorized - 50,000,000
shares; issued and outstanding - 14,174,306 shares 141,744 141,744
Additional paid-in capital 13,279,044 13,279,044
Accumulated deficit (12,522,352) (11,230,325)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 898,436 2,190,463
------------- -------------
$ 6,158,786 $ 6,522,154
============= =============
</TABLE>
3
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GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
------------------------------ ------------------------------
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
------------ ------------ ------------ ------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
REVENUES
<S> <C> <C> <C> <C>
Food and beverage $ 666,750 $ 650,997 $ 2,243,177 $ 2,275,614
Merchandise sales 145,474 219,423 512,461 644,506
Membership fees 442,237 442,844 1,210,783 1,188,164
Other 33,779 15,572 119,709 217,539
------------ ------------ ------------ ------------
TOTAL REVENUES 1,288,240 1,328,836 4,086,130 4,325,823
COSTS AND EXPENSES
Food and beverage 230,519 226,117 683,086 931,802
Merchandise 75,984 123,956 254,935 342,029
Operating expenses
Direct labor 462,084 511,985 1,479,390 1,769,827
Occupancy and other 503,461 567,224 1,762,206 2,136,917
General and administrative 248,205 285,777 779,796 569,344
Depreciation and amortization 129,077 101,761 379,511 296,434
------------ ------------ ------------ ------------
TOTAL COSTS AND EXPENSES 1,649,330 1,816,820 5,338,924 6,046,353
------------ ------------ ------------ ------------
LOSS BEFORE OTHER INCOME (EXPENSE) (361,090) (487,984) (1,252,794) (1,720,530)
OTHER INCOME (EXPENSE)
Interest income 8,517 895 23,327 2,428
Partial insurance settlement - 101,718
Interest expense (46,685) (44,152) (140,434) (136,370)
------------ ------------ ------------ ------------
TOTAL OTHER INCOME (EXPENSE) (38,168) (43,257) (15,389) (133,942)
------------ ------------ ------------ ------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (399,258) (531,241) (1,268,183) (1,854,472)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - (23,844) -
------------ ------------ ------------ ------------
NET LOSS $ (399,258) $ (531,241) $(1,292,027) $(1,854,472)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,174,306 14,174,306 14,174,306 12,501,306
BASIC LOSS PER SHARE
Loss before cumulative effect of change in
accounting priciple $ (0.03) $ (0.04) $ (0.09) $ (0.15)
Cumulative effect of change in
accounting priciple - - - -
------------ ------------ ------------ ------------
$ (0.03) $ (0.04) $ (0.09) $ (0.15)
============ ============ ============ ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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GRAND HAVANA ENTERPRISES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
------------------------------------
June 27, June 28,
1999 1998
----------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(1,292,027) $(1,854,472)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 379,511 296,434
Common stock issued for services 99,681
Amortization of deferred charges 67,106 -
Changes in operating assets and liabilities:
Accounts receivable (48,912) (232,385)
Inventories 122,869 152,255
Prepaid expenses (28,674) (159,220)
Pre-opening costs 23,844 1,448
Net assets of discontinued operations - 234,437
Deposits and other - 92,947
Accounts payable and accrued expenses 803,722 276,037
Accrued costs of discontinued operations - (200,000)
Deferred revenues 42,026 16,819
Deferred rent payable (76,389) 53,154
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (6,924) (1,222,865)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (237,949) (433,464)
Due from related parties 17,188 30,032
Collection of note receivable 13,079 8,132
Deferred charges, deposits and other assets (4,774) -
Restricted cash (1,301) (816,404)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (213,757) (1,211,704)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of notes payable - (455,000)
Due to related parties 140,859 207,832
Collections of subscriptions receivable - 1,288,950
Sale of common stock - 518,390
Payment of bank overdraft 18,441 -
----------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 159,300 1,560,172
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (61,381) (874,397)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,344 879,461
----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 33,963 $ 5,064
=========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
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HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated condensed financial statements presented have been
prepared by Grand Havana Enterprises, Inc. (the Company) without audit and,
in the opinion of the management, reflect all adjustments of a normal
recurring nature necessary for a fair statements of (a) the consolidated
condensed results of operations for the three and nine months ended June 27,
1999, and June 28, 1998 (b) the consolidated condensed financial position at
June 27, 1999 and September 27, 1998 and (c) the consolidated condensed cash
flows for the nine months ended June 27, 1999 and June 28, 1998. Interim
results are not necessarily indicative of the results for a full year.
The consolidated balance sheet presented as of September 27, 1998 has been
derived from the consolidated financial statements that have been audited by
the Company's independent auditors. The consolidated financial statements
and notes are condensed as permitted by Form 10-QSB and do not contain
certain information included in the annual financial statements and notes of
the Company. The consolidated financial statements and notes included herein
should be read in conjunction with the financial statements and notes
included in the Company's Annual Report on Form 10-KSB.
2. CHANGE IN ACCOUNTING PRINCIPLE
The Company changed its method of accounting for pre-operating cost to
conform with new requirements of Statement of Position ("SOP") No. 98-5
"Reporting on the Costs of Start-Up Activities". This Statement requires
that costs of start-up activities, including organization costs, be expensed
as incurred. Initial application of this SOP should be reported as the
cumulative effect of a change in accounting principle as described in APB
Opinion No. 20 "Accounting Changes".
6
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Quarterly Report on Form 10-QSB. Certain statements contained herein that
are not related to historical results, including, without limitations,
statements regarding the Company's business strategy and objectives, future
financial position and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act, as amended
(the "Exchange Act"), and involve risks and uncertainties. Although the Company
believes that the assumptions on which these forward-looking statements are
based are reasonable, there can be no assurance that such assumptions will prove
to be accurate and actual results could differ materially from those discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, risks and uncertainties
associated with the ability to obtain adequate working capital on terms
favorable to the Company, compliance with regulatory requirements, the Company's
ability to sell more memberships, a decline in public consumption of cigars and
other tobacco products, significant increases in excise taxes which could
substantially increase the price of cigars and general economic factors. All
forward-looking statements contained in this Quarterly Report on Form 10-QSB are
qualified in their entirety by this statement.
Grand Havana Enterprises, Inc. (the "Company" or "Registrant") is engaged
in the business of the ownership, operation and development of private
membership restaurants and cigar clubs known as "Grand Havana Rooms," and in the
ownership, operation and development of retail cigar stores known as "Grand
Havana House of Cigars." Unless the context otherwise indicates, the "Company"
means Grand Havana Enterprises, Inc. and its consolidated subsidiaries.
The Company currently owns and operates two Grand Havana Rooms, one in
Beverly Hills, California, which opened in March 1995 and one in New York, New
York, which opened in May 1997. In addition, the Company currently owns and
operates two Grand Havana House of Cigars locations, one in Beverly Hills,
California, which opened in December 1997 and one in Las Vegas, Nevada, which
opened in November 1997. As its principal business focus, the Company intends to
continue the operation of its existing Grand Havana Rooms and Grand
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Havana House of Cigars locations, while considering the disposition of locations
when that is, in the opinion of management, in the Company's best interest.
In December 1998, the Company completed its expansion of its Beverly Hills
Grand Havana Room into the former space of its closed restaurant, On Canon, and
reopened the Beverly Hills Grand Havana Room's membership list, which had been
fully subscribed. As of the fiscal quarter ended June 27, 1999, the membership
at the Beverly Hills Grand Havana Room was, again, fully subscribed.
In February 1999, the Company closed the Washington, D.C., Grand Havana
Room and Grand Havana House of Cigars and agreed to sell their assets. As of
June 27, 1999, the sale of assets had not yet closed.
Management of the Company expects that the New York Grand Havana Room will
continue to operate at a loss until membership increases. The New York Grand
Havana Room has instituted a new membership plan called "social membership." A
social member is permitted to use the club's dining facilities but does not have
a locker or humidor. Although the social members pay less in initial and monthly
membership fees, the Company receives additional revenue from the increased use
of its facilities. Also, the number of social memberships available is not
limited by the number of lockers or humidors. The Company has employed an
outside consultant to assist the Company in marketing the social memberships.
Until the New York Grand Havana Room membership increases, the Company expects
that the Company will continue to experience consolidated losses; however, there
can be no assurance that such cigar clubs and the Company's retail cigar stores
will be profitable in the future. The Company has experienced operating losses
since its inception.
The Company was incorporated under the laws of the State of Delaware on
April 13, 1993, under the name "United Restaurants, Inc." The Company was
originally formed in order to acquire all of the capital stock of Love's
Enterprises, Inc. ("LEI"), which company was the franchisor, owner and operator
of the Love's restaurant chain. The Company acquired the stock of LEI in May
1993. In December 1996, due to less than anticipated operating results from the
Love's restaurant chain, the Company adopted a plan of discontinuance with
respect to the Love's restaurant chain, which plan was completed in July 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED JUNE 27, 1999 COMPARED TO THREE MONTHS ENDED JUNE 28, 1998
The Company derives revenues from continuing operations from three
principal sources: food and beverage sales, sales of cigars and related
merchandise, and membership fees. During the fiscal quarter ended June 27, 1999,
the Company had revenues of $1,288,240 compared to revenues of $1,328,836 for
the fiscal quarter ended June 28, 1998, a decrease of $40,596 or
8
<PAGE>
approximately 3.06%. The relatively flat revenues are due in part to the loss of
revenues from the closure of the Washington, D.C., Grand Havana Room which
closed in February 1999 but which was operating throughout the fiscal quarter
ended June 28, 1998. In addition, the Las Vegas Grand Havana House of Cigars
retail store has experienced sales decreases which the Company believes is
partly due to its location which is not close to most of the new hotels in Las
Vegas. These decreases were partially off-set by increases in revenue from
private parties.
Revenue from food and beverage was flat compared to the fiscal quarter
ended June 28, 1998. This was, in part, a result of increases in private
parties off-set by the loss of revenue from the closure of the Washington, D.C.,
Grand Havana Room.
Revenue from merchandise sales decreased from $219,423 in the fiscal
quarter ended June 28, 1998 to $145,474 in the fiscal quarter ended June 27,
1999, a decrease of $73,949 or approximately 33.7%. This decrease is due, in
part, to the loss of revenue resulting from the closure of the Washington, D.C.,
Grand Havana Room and the decline in sales at the Las Vegas Grand Havana House
of Cigars retail store.
Membership fees were flat in the fiscal quarter ended June 27, 1999
compared to the fiscal quarter ended June 28, 1998. Initial membership fees
decreased by $19,500 or approximately 17.49% to $92,000 in the fiscal quarter
ended June 27, 1999 from $111,500 in the fiscal quarter ended June 28, 1998
while monthly membership fees increased by $18,893 or approximately 5.7% to
$350,237 in the fiscal quarter ended June 27, 1999 from $331,344 in the fiscal
quarter ended June 28, 1998. With the Beverly Hills Grand Havana Room fully
subscribed and the New York Grand Havana Room operating for two years, the
allocation of membership fees has shifted from initial membership fees earned
during the clubs' opening periods to monthly membership fees earned during a
period of regular operations. This allocation was not as dramatic as it might
have been, however, due, in part, to the acceptance of new members at the
Beverly Hills Grand Havana Room following the expansion into the area previously
occupied by the Company's "On Canon" restaurant and the initiation of the
social membership plan at the New York Grand Havana Room.
Revenues from private parties ("Other" on the Company's Consolidated
Condensed Statements of Operations) increased from $15,573 for the fiscal
quarter ended June 28, 1998 to $33,779 in the fiscal quarter ended June 27,
1999, an increase of $18,205 or approximately 116.9%.
During the fiscal quarter ended June 27, 1999, the Company incurred total
costs and expenses of $1,649,330 compared to $1,816,820 for the fiscal quarter
ended June 28, 1998, a decrease of $167,490 or approximately 9.22%. This
decrease is partially due to decreases in direct labor costs, occupancy costs,
and merchandise costs resulting from decreased sales at the Las Vegas Grand
Havana House of Cigars and the closure of the Washington, D. C., Grand Havana
Room which was closed throughout the fiscal quarter ended June 27, 1999 but
which was operating during the fiscal quarter ended June 28, 1998. General and
administrative expenses also decreased from $285,777 in the fiscal quarter ended
June 28, 1998 to $248,205 in
9
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the fiscal quarter ended June 27, 1999, a decrease of $37,572 or approximately
13.15%. This decrease in general and administrative expenses was primarily due
to the Company's efforts to reduce corporate overhead. Depreciation and
amortization costs increased from $101,761 in the fiscal quarter ended June 28,
1998 to $129,077 in the fiscal quarter ended June 27, 1999, an increase of
$27,316 or approximately 26.84%. This increase in depreciation and amortization
expenses was primarily a result of construction at the Beverly Hills Grand
Havana Room following the fire which occurred there in January 1999.
The Company experienced a net loss of ($399,258) or ($.03) per share for
the fiscal quarter ended June 27, 1999, compared to a net loss of ($531,241) or
($.04) per share for the fiscal quarter ended June 28, 1998, a decrease in loss
of ($131,983) or approximately 24.84%.
NINE MONTHS ENDED JUNE 27, 1999 COMPARED TO NINE MONTHS ENDED JUNE 28, 1998
The Company had revenues of $4,086,130 for the nine-month period ended June
27, 1999, compared to $4,325,823 for the nine-month period ended June 28, 1998,
a decrease of $239,693 or approximately 5.54%. This decrease in revenues was due
primarily to the closure of the Washington, D.C., Grand Havana Room, the
temporary closure of the Beverly Hills Grand Havana Room in the fiscal quarter
ended March 28, 1999 due to a fire which occurred in January 1999, and a
decrease in sales at the Las Vegas House of Cigars retail store. Decreases in
revenue from private parties ("Other") is primarily due to the fact that during
the nine months ended June 27, 1999, the Company included some of its revenue
from private parties in revenues from merchandise sales and from food and
beverage sales while during the nine months ended June 28, 1998, income from
private parties was allocated only to "Other" under Revenues.
Total costs and expenses of the Company decreased from $6,046,353 for the
nine-month period ended June 28, 1998 to $5,338,924 for the nine-month period
ended June 27, 1999, a decrease of $707,429 or approximately 11.7%. This
decrease is primarily due to decreases in all categories, other than general and
administrative and depreciation and amortization costs, and resulted, for the
most part, from the closure of the Washington, D.C., Grand Havana Room and the
temporary closing of the Beverly Hills Grand Havana Room in the fiscal quarter
ended March 28, 1999 due to the fire which occurred in January 1999.
The Company experienced a net loss of ($1,292,027) for the nine-month
period ended June 27, 1999 compared to a net loss of ($1,854,472) for the nine-
month period ended June 28, 1998, a decrease of $562,445 or approximately
30.33%. This decrease in loss is partly a result of the closure of the
Washington, D.C., Grand Havana Room and the imposition of more efficient cost
controls and operating systems.
LIQUIDITY AND CAPITAL RESOURCES
10
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The Company is not planning to open new Grand Havana Rooms or House of
Cigars locations in the near future.
As a result of its past expansion activities, the Company had spent most of
the proceeds from its initial public offering prior to its fiscal year ended
September 30, 1996. Accordingly, the Company raised an aggregate of
approximately $300,000 in gross proceeds through a Regulation S offering of its
securities (the Company's $.01 par value common stock (the "Common Stock") and
warrants to purchase shares of its Common Stock) during its fiscal year ended
September 28, 1997. In addition, warrants to purchase shares of the Company's
Common Stock were exercised during the fiscal year ended September 27, 1998, for
aggregate gross proceeds to the Company from such warrant exercises of
approximately $297,000. Substantially all of the funds raised in these private
placements and warrant exercises, as well as funds loaned by entities affiliated
with the Company, as discussed below, have been spent by the Company for general
working capital purposes. At June 27, 1999, the Company had cash and cash
equivalents of $33,963.
On August 15, 1998, Harry Shuster, the former Chairman of the Board,
President, Chief Executive Officer and director of the Company agreed to lend
the Company $300,000, pursuant to a promissory note secured by a second position
lien on the Company's assets (the "Shuster Note"). As of June 27, 1999, the
entire principal amount of the Shuster Note, $300,000, remained outstanding. In
addition to the sums due under the Shuster Note, as of June 27, 1999, the
Company is indebted to Harry Shuster in the amount of $1,044,869 for advances
made from time to time by Harry Shuster to the Company. The Shuster Note was all
due and payable on March 31, 1999. Harry Shuster agreed to extend the due date
of the Shuster Note to September 30, 1999.
On September 30, 1998, United Leisure Corporation, a publicly-held company
located in Irvine, California ("United Leisure") of which Harry Shuster was
Chairman of the Board, President, Chief Executive Officer and a director, agreed
to make a new installment loan to the Company in the amount of up to $1,250,000
in replacement of the previous loan between United Leisure and the Company. The
Company executed and delivered to United Leisure its secured promissory note
(the "Promissory Note") in the principal amount of up to $1,250,000. United
Leisure may from time to time, but shall not be obligated to, make future
advances under the Promissory Note up to a total amount of $1,250,000. The
Promissory Note is secured by a first lien on the assets of the Company. The
initial loan advance under the Promissory Note was $603,280, which represents
the principal amount due under the previous note of $536,000, together with
accrued interest of $67,280. At June 27, 1999 the Company owed an aggregate of
$603,280 in principal amount to United Leisure under the Promissory Note. The
Promissory Note was all due and payable on March 31, 1999. United Leisure
agreed to extend the due date of the Promissory Note to September 30, 1999.
In addition, as of June 27, 1999, an aggregate of $507,000 in principal
amount remained outstanding under a financing agreement with United Film
Distributors, Inc., an affiliate of the
11
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Company, the full amount of which, together with all accrued but unpaid interest
thereon, is due and payable by the Company upon demand.
The Company believes that it will meet its working capital needs, in the
near future, from the operations of its Grand Havana Rooms and Grand Havana
House of Cigars locations. However, should the Company need additional working
capital the Company may consider selling its securities in private placements.
Due to the low trading price of the Company's Common Stock, there can be no
assurance that the Company will be able to raise additional capital by selling
its securities in private placements on terms that are acceptable to the
Company. In addition, effective the close of business on October 27, 1998, the
Nasdaq Stock Market, Inc. ("Nasdaq") delisted the Company's Common Stock and
Series A and B Warrants from Nasdaq for failure to meet Nasdaq's minimum bid
requirement. Since that time the Company's Common Stock has been quoted on the
OTC Bulletin Board. The delisting of the Company's Common Stock from Nasdaq
might result in the Company having difficulty in placing its securities with
prospective investors.
If the Company is unable to raise additional funds, if and when needed,
through the private placement of its securities it may seek financing from
affiliated or unaffiliated third parties. There can be no assurance, however,
that such financing would be available to the Company when and if it is needed,
or that if available, that it will be available on terms acceptable to the
Company. If the Company is unable to place securities or obtain financing to
meet its working capital needs and to repay indebtedness as it becomes due, the
Company may have to consider such options as selling or pledging portions of its
assets in order to meet such obligations.
Year 2000 Compliance
- --------------------
In fiscal year 1997, the Company initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
operations, infrastructure and technology products, and customers and suppliers,
that are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks. The project comprises
four phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans, and (4) implementation and
testing.
The Company's Year 2000 project is being overseen by a senior member of
Company staff. During an initial assessment, the Company determined that
although several applications being used may be Year 2000 compliant, operating
systems such as Microsoft DOS, Windows 3.11, Windows 95, and Windows NT are not
Year 2000 compliant. The Company has replaced some computers and has upgraded
the operating systems of others to Windows 98 which is Year 2000 compliant. The
Company plans to replace other computers later in the calendar year. As of June
27, 1999, the Company has spent approximately $3,000 in replacing
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its office computer hardware and software. The Company estimates that a total of
approximately $5,000 to $6,000 will be spent in upgrading the Company's hardware
and software not including the Grand Havana Room Point-of-Sale systems.
The Company is still assessing whether the hardware and software used in
connection with the Grand Havana Room Point-of-Sale systems will need upgrading
and/or full replacement. It is not known at this time if the cost of any such
upgrades or replacements will be material. The Company has upgraded its credit
card terminals at its Grand Havana Rooms and Grand Havana House of Cigars
locations so that they are able to accept credit cards dated after 1999. The
cost of this upgrade was $500. The Company has obtained Year 2000 compliance
statements from the manufacturers of the Company's hardware and software
products other than those associated with the Grand Havana Room Point-of Sale
systems.
The Company believes that its greatest potential risks are associated with
(i) its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers of operating systems and software applications. The
Company is still assessing its operations and infrastructure, and cannot predict
whether significant problems will be identified. The Company has asked its
critical vendors and suppliers to provide information on the status of their
Year 2000 compliance in order to assess the effect it could have on the Company.
As of June 27, 1999, the Company has not received any responses from its vendors
and suppliers. Based on the status of the assessments made and remediation
plans developed to date, the Company is not in a position to state the total
cost of remediation of all Year 2000 issues. Costs identified and spent to date
have not been material. However, the Company has not yet completed its
assessments, developed remediations for all problems, developed any contingency
plans, or completely implemented or tested any of its remediation plans.
Specific contingency plans will be formulated after the Company has received
information on the status of vendor and supplier Year 2000 compliance.
Based on the Company's current analysis and assessment of the state of its
Year 2000 compliance, the Company's most reasonably likely worst case scenario
involves total replacement of certain systems at all of the Company's Grand
Havana Room locations and at the Company's corporate offices. This would
include all equipment in collecting and processing dining room sales and
reporting systems used in the Company's accounting department.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test corrections
or contingency plans, or may find that the costs of these activities become
material. In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be Year 2000
compliant. The Company plans to test such third-party products, but cannot be
sure that its tests will be adequate or that, if problems are identified, they
will be addressed in a timely and satisfactory way. Because the Company uses a
variety of information systems and has additional systems embedded in its
operations and infrastructure, the Company cannot be sure that all its systems
will work together in a Year 2000 compliant fashion. Furthermore, the Company
cannot be sure that it will not suffer business interruptions, either because of
its own Year 2000 problems, or those of its customers or suppliers whose Year
2000 problems may make it difficult or impossible for them to fulfill their
commitments to the
13
<PAGE>
Company. The Company is continuing to evaluate Year 2000 related risks and will
take such further corrective actions as may be required.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Reference is made to Part II, Item 1 of the Company's Quarterly Report on
Form 10-QSB for the quarter ending March 28, 1999, for a description of the
action filed against the Company, and certain directors and officers of the
Company, concerning the Company's failure to effect a 10-1 reverse stock split
(the "Action.") The parties entered into a Settlement Agreement dated April 13,
1999 (the "Settlement Agreement") pursuant to which the Action was dismissed in
April 1999. The Settlement Agreement provided for the transfer by the plaintiff
of all of its Common Stock and warrants of the Company to the defendants or
their designee. The shares of Common Stock were transferred to Harry Shuster.
In exchange for the dismissal of the Action and a general release of all claims,
the Company granted the plaintiffs a $10,000 allowance for food, beverages
and/or merchandise at the New York Grand Havana Room to be used prior to October
13, 1999.
ITEM 2. CHANGES IN SECURITIES
In April 1999, all of the Company's Class A Warrants and Class B Warrants
expired according to their terms.
ITEM 5. OTHER INFORMATION
On May 21, 1999, Harry Shuster resigned as a director and officer of the
Company in order to devote a greater amount of his time to defend himself in
criminal proceedings following his indictment by the U.S. Attorney for the
Southern District of New York. The Company believes that the charges against
Harry Shuster are unrelated to the Company or its stock. Proceedings are still
pending in this matter. On May 24, 1999, the remaining directors appointed
Stanley Shuster, Harry Shuster's son and a Vice President of the Company, to
serve as Chief Executive Officer and Chief Financial Officer of the Company. In
June 1999, Harry Shuster sold all of his shares of the Common Stock of the
Company, registered in his name, totaling 5,749,876 shares, to Stanley Shuster.
Harry Shuster also sold to Stanley Shuster warrants to purchase 1,157,689 shares
of Common Stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)-1 Settlement Agreement dated as of April 13, 1999, by and between the
Company, Harry Shuster, Stanley Shuster, and Brian Shuster on the
one hand and Cowrie Holdings, Ltd., Strata Equities Limited, Sparta
Capital Ltd.,
14
<PAGE>
Baytree Capital Associates, LLP, Baytree Associates, Inc., and
Michael Gardner on the other.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended June 27, 1999
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GRAND HAVANA ENTERPRISES, INC.
Date: October 21, 1999 /s/ Stanley Shuster
---------------------------------------------
Stanley Shuster
Chief Executive Officer, and Chief Financial
Officer
15
<PAGE>
EXHIBIT (10)-1
SETTLEMENT AGREEMENT
THIS SETTLEMENT AGREEMENT (the "Agreement") is made the 13/th/ day of
April, 1999, by and among COWRIE HOLDINGS, LTD. ("Cowrie"), STRATA EQUITIES
LIMITED ("Strata"), SPARTA CAPITAL LTD. ("Sparta"), BAYTREE CAPITAL ASSOCIATES
LLP ("Baytree Capital"), BAYTREE ASSOCIATES, INC. ("Baytree Associates"), and
MICHAEL GARDNER ("Gardner"), (collectively, the "Baytree and Offshore Parties"),
and HARRY SHUSTER ("Harry"), BRIAN SHUSTER ("Brian"), STANLEY SHUSTER
("Stanley"), and GRAND HAVANA ENTERPRISES, INC. ("Grand Havana") (collectively,
the "Shuster Parties"). (The Baytree and Offshore Parties and the Shuster
Parties are collectively referred to herein as the "Parties").
WHEREAS, on or about February 16, 1998, Cowrie purchased by private
placement 1,200,000 shares of Grand Havana common stock and a warrant to
purchase 1,200,000 additional shares of Grand Havana common stock at an exercise
price of $0.30 per share (the "Grand Havana Warrant"), which warrant contained
an anti-dilution provision so that neither the exercise price of the warrant nor
the number of shares of common stock that the warrant entitled the holder to
purchase would be affected by any reverse split with respect to Grand Havana's
common stock.
WHEREAS, in total the Baytree Offshore Parties, including Cowrie, owned
2,787,168 shares of Grand Havana common stock, and now own 2,514,368 shares of
Grand Havana common stock.
1
<PAGE>
WHEREAS, certain disputes have arisen between the Parties in connection
with the management of Grand Havana, from which the Baytree and Offshore Parties
have alleged certain improprieties and breaches of fiduciary duty against the
Shuster Parties. The Shuster Parties have denied any impropriety or breach of
fiduciary duty. In this regard, Cowrie has commenced an action against Harry,
Harvey Bibicoff, Stanley, and Grand Havana, in Delaware Chancery Court for a
declaratory judgment, injunctive relief, and, in the alternative, for damages
for breach of fiduciary duty and breach of contract alleging Grand Havana's
failure to effect a reverse stock split declared and authorized by the Board of
Directors of Grand Havana and allegedly consented to by the holders of not less
than 51% of the Company's common stock (the "Delaware Action").
WHEREAS, without any admission of liability, the Parties are desirous of
settling their disputes, of settling and dismissing the Delaware Action, as
against each other with prejudice, and of releasing any and all claims which
they possess each against the other.
WHEREAS, as a condition of such settlement, and upon the terms and
conditions hereinafter provided, Cowrie is willing to dismiss with prejudice the
Delaware Action as against Harry, Harvey Bibicoff, Stanley, and Grand Havana.
NOW, THEREFORE, in consideration of the mutual promises herein contained,
the Parties agree as follows:
1. The Stock Transfer
------------------
The Baytree and Offshore Parties agree to convey, transfer and assign
the
2
<PAGE>
2,514,368 shares of Grand Havana common stock (the "Grand Havana Shares")
currently held by the Baytree and Offshore Parties and the Grand Havana Warrant
currently held by Cowrie to the Shuster Parties and/or their designees.
Grand Havana hereby grants to the Baytree and Offshore Parties and/or
their designees a Ten Thousand Dollar ($10,000.00) allowance which may be used
to purchase food, beverages and/or merchandise in the normal course of business
at the Grand Havana Room in New York City; provided, however, said allowance
shall expire on October 13, 1999 and may not be used for private parties.
2. Representations.
----------------
(a) The Baytree and Offshore Parties represent and warrant that they
are the record and beneficial owners of the Grand Havana Shares and the Grand
Havana Warrant free and clear of all liens, claims, and encumbrances.
(b) The Baytree and Offshore Parties represent that they currently
hold only a total of 2,514,368 shares of Grand Havana common stock along with
the Grand Havana Warrant.
3. Releases.
---------
(a) The Baytree and Offshore Parties and their officers, directors,
shareholders, successors, and assigns, release and forever discharge the Shuster
Parties and their officers, directors, shareholders, successors, and assigns
from any and all actions, causes of action, suits, debts, dues, sums of money,
accounts, reckonings, bonds, bills, specialties,
3
<PAGE>
covenants, contracts, controversies, agreements, promises, variances,
trespasses, damages, judgments, extents, executions, claims, and demands
whatsoever, in law, known and unknown, admiralty or equity ("Claims"), which the
Baytree and Offshore Parties or their officers, directors, shareholders,
successors, and assigns, ever had, now have or hereafter can, shall or may, have
against the Shuster Parties and their officers, directors and shareholders, for,
upon, or by reason of any or all of the Baytree and Offshore Parties'
investments in Grand Havana as well as the disputes described in this Agreement
from the beginning of the world to the day of the date of this Agreement; and
(b) Upon receipt of the Grand Havana Stock and Warrant, the Shuster
Parties and their officers, directors, shareholders, successors, and assigns,
release and forever discharge the Baytree and Offshore Parties and their
officers, directors, shareholders, successors, and assigns from any and all
actions, causes of action, suits, debts, dues, sums of money, accounts,
reckonings, bonds, bills, specialties, covenants, contracts, controversies,
agreements, promises, variances, trespasses, damages, judgments, extents,
executions, claims, and demands whatsoever, known and unknown, in law, admiralty
or equity ("Claims"), which the Shuster Parties, or their officers, directors,
shareholders, successors, and assigns, ever had, now have or hereafter can,
shall or may, have against the Baytree and Offshore Parties, for, upon, or by
reason of any or all of the Baytree and Offshore Parties' investments in Grand
Havana as well as the disputes described in this Agreement from the beginning of
the world to the day of the date of this Agreement.
4
<PAGE>
(c) The Parties acknowledge that each may hereafter discover facts
different from or in addition to those known or believed to be true with respect
to the Claims and agree that this Agreement shall be and remain effective in all
respects notwithstanding any such differences or additional facts.
(d) The Parties warrant that no assignment of the Claims has been made
and they agree to indemnify and hold the others harmless against any assignment
of the Claims.
3. Dismissal of Delaware Action. Within five (5) business days after
-----------------------------
the execution of this Agreement, Cowrie will execute, deliver, and promptly
thereafter will file, a notice of dismissal of the Delaware Action, with
prejudice and without costs as to either party.
4. General Representations and Warranties. Each of the Parties represents
---------------------------------------
and warrants to the other Party that no provision of its certificate of
incorporation or by-laws, in the case of corporate parties, or of any agreement,
instrument or understanding to which it is a party or by which it is bound, has
been or will be violated by the execution by it of this Agreement or the
performance or satisfaction of any agreement or condition herein contained upon
its part to be performed or satisfied, and all requisite corporate and other
authorizations for such execution, delivery, performance and satisfaction have
been duly obtained. This Agreement will upon execution and delivery be a valid
and binding obligation of such party, enforceable in accordance with its terms.
5. Notices. All notices, requests, demands, and other communications
--------
hereunder shall be in writing and shall be deemed to have been duly given on the
date of delivery if (a) delivered by hand delivery, (b) mailed, postage pre-
paid, certified mail, return receipt
5
<PAGE>
requested, (c) delivered by overnight courier, or (d) delivered by telecopy, as
follows:
COWRIE HOLDINGS, LTD.
STRATA EQUITIES LIMITED
SPARTA CAPITAL LTD.
BAYTREE ASSOCIATES, INC.
BAYTREE CAPITAL ASSOCIATES LLC
MICHAEL GARDNER
c/o Camhy Karlinsky & Stein LLP
1740 Broadway, 16/th/ Floor
New York, New York 10016
(212) 977-6600
(212) 977-8389 (fax)
HARRY SHUSTER
BRIAN SHUSTER
STANLEY SHUSTER
GRAND HAVANA ENTERPRISES, INC.
c/o Law Offices of Richman, Lawrence, Mann, Chizever & Phillips
9601 Wilshire Boulevard, Penthouse
Beverly Hills, California 90210-5270
(310) 274-8300
(310) 274-2831 (fax)
and/or to such other person(s) and address(es) as either Party shall have
specified in writing to the other.
6. Survival. The representations, warranties, covenants and agreements of
---------
the Parties contained in this Agreement or otherwise made in writing by any of
them or on their behalf pursuant hereto or otherwise made in connection with the
transactions contemplated hereby shall survive the signing hereof and the
transactions which take place in conjunction therewith and shall not be affected
by any investigation by either of the Parties hereto or by any knowledge
obtained as a result thereof or otherwise obtained.
7. Waivers. Any waiver of any terms or conditions or of the breach of any
--------
6
<PAGE>
covenant, representation or warranty of this Agreement, in any one instance,
shall not operate as or be deemed to be or construed as a further or continuing
waiver of any other breach of such terms, conditions, covenant, representation
or warranty, nor shall any failure at any time or times to enforce or require
performance of any provision hereof operate as a waiver of or affect in any
manner such Party's right at a later time to enforce or require performance of
such provision or of any other provision hereof; provided, however, that no such
written waiver, unless it, by its own terms, explicitly provides to the
contrary, shall be construed to effect a continuing waiver of the provision
being waived and no such waiver in any instance shall constitute a waiver in any
other instance or for any other purpose or impair the right of the Party against
whom such waiver is claimed in all other instances or for all other purposes to
require full compliance with such provision.
8. Amendments and Modifications. This Agreement contains the entire
-----------------------------
agreement of the Parties with respect to the subject matter hereof and may not
be amended, nor shall any waiver, change, modification, consent or discharge be
effected, except by an instrument in writing executed by or on behalf of the
Party against whom
7
<PAGE>
enforcement of such amendment, waiver, change, modification, consent or
discharge is sought.
9. Further Actions. At any time and from time to time, each party agrees,
----------------
without further consideration, to take such actions and to execute and deliver
such documents as may be reasonably necessary to effectuate the purposes of this
Agreement, including, but not limited to, the stock purchase agreements, the
warrants, the releases, and the notice of dismissal, and including but not
limited to a certificate from a duly-authorized officer of each Party, other
than the individual parties, attesting to the due authority and the office held
by each signatory to this Agreement.
10. Assignment; Successors and Assigns. This Agreement shall not be
-----------------------------------
assignable by any Party. This Agreement shall be binding upon and shall inure
to the benefit of the Parties hereto and their respective successors or
permitted assigns. Nothing in this Agreement expressed or implied is intended
to confer upon any person (other than the Parties) any rights or remedies.
11. Choice of Law. This Agreement shall be governed by and construed and
--------------
enforced in accordance with the laws of the State of New York, without giving
effect to conflict of laws.
12. Choice of Forum. Any action to enforce, arising out of, or relating
----------------
in any way to, any of the provisions of this Agreement shall be brought and
prosecuted only in the Supreme Court of the State of New York, County of New
York, and the Parties consent to the
8
<PAGE>
jurisdiction of such court.
13. Counterparts. This Agreement may be executed by facsimile and in two
-------------
or more counterparts, all of which shall be deemed an original, but all of which
together shall constitute one and the same instrument.
14. Section and Other Headings. The headings contained in this Agreement
---------------------------
are for reference purposes only and shall not in any way affect the meaning or
interpretation of this Agreement.
15. Joint Preparation and Representation by Counsel. The Parties
------------------------------------------------
acknowledge that this Agreement was prepared by them jointly, and that each
party was represented by counsel in connection therewith. No presumption shall
arise from this Agreement against the drafter of any particular provision
hereof.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed
by their respective duly authorized officers as of the date first stated above.
COWRIE HOLDINGS, LTD.
By: /s/ E. Mory
-----------------------------------
STRATA EQUITIES LIMITED
By: /s/ E. Mory
----------------------------------
9
<PAGE>
SPARTA CAPITAL LTD.
By: /s/ E. Mory
-----------------------------------
BAYTREE ASSOCIATES, INC.
By: /s/ Michael Gardner
----------------------------------
BAYTREE CAPITAL ASSOCIATES LLC
By: /s/ Michael Gardner
----------------------------------
/s/ Michael Gardner
--------------------------------------
MICHAEL GARDNER
/s/ Harry Shuster
--------------------------------------
HARRY SHUSTER
/s/ Brian Shuster
--------------------------------------
BRIAN SHUSTER
/s/ Stanley Shuster
--------------------------------------
STANLEY SHUSTER
GRAND HAVANA ENTERPRISES, INC.
By: /s/ Harry Shuster
-----------------------------------
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED JUNE 27,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> MAR-29-1999
<PERIOD-END> JUN-27-1999
<CASH> 33,963
<SECURITIES> 0
<RECEIVABLES> 202,168
<ALLOWANCES> 6,500
<INVENTORY> 541,086
<CURRENT-ASSETS> 1,013,946
<PP&E> 3,958,984
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,158,786
<CURRENT-LIABILITIES> 5,260,350
<BONDS> 0
0
0
<COMMON> 141,744
<OTHER-SE> 756,692
<TOTAL-LIABILITY-AND-EQUITY> 6,158,786
<SALES> 3,966,421
<TOTAL-REVENUES> 4,086,130
<CGS> 4,179,617
<TOTAL-COSTS> 5,338,924
<OTHER-EXPENSES> 15,389
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 140,434
<INCOME-PRETAX> (1,268,183)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,268,183)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (23,844)
<NET-INCOME> (1,292,027)
<EPS-BASIC> (0.09)
<EPS-DILUTED> (0.09)
</TABLE>
