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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the fiscal year ended September 27, 1998
[ ] 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 0-24828
GRAND HAVANA ENTERPRISES, INC.
(Name of Small Business Issuer as Specified in its Charter)
Delaware 95-4428370
(State or Other Jurisdiction (I.R.S. Employer Identification No.)
of Incorporation or Organization)
1990 Westwood Boulevard, 3rd Floor 90025
Los Angeles, California (Zip Code)
(Address of Principal Executive Offices)
Issuer's Telephone Number: (310) 475-5600
Securities Registered Under Section 12(b) of the Exchange Act: NONE
Securities Registered Under Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
Class A Redeemable Common Stock Purchase Warrants
(Title of Class)
Class B Redeemable Common Stock Purchase Warrants
(Title of Class)
Check whether the Issuer (1) filed all Reports required to be filed by
Section 13 or 15(d) of the Exchange Act 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 [ ]
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statement
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]
State Issuer's revenues for its most recent fiscal year - $5,523,052
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of September 27, 1998: $1,300,196.
State the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
Class Outstanding at September 27, 1998
- -------------------------------------- ---------------------------------
Common Stock, par value $.01 per share 14,174,306 shares
DOCUMENTS INCORPORATED BY REFERENCE
No documents are incorporated by reference into this Annual Report on
Form 10-KSB.
Transitional Small Business Disclosure Format Yes [ ] No [X]
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PART I
Item 1. Description of Business.
General
- -------
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."
The Company currently owns and operates three Grand Havana Rooms, one in
Beverly Hills, California, one in New York, New York, and a third in Washington,
D.C. In addition, the Company currently owns and operates three Grand Havana
House of Cigars locations, one in Beverly Hills, California, one in Las Vegas,
Nevada, and one in Washington, D.C. The Company's principal business focus is
to operate its existing Grand Havana House of Cigars locations and Grand Havana
Room locations, while considering the disposition or acquisition of locations
when that is, in the opinion of management, in the Company's best interest.
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 was completed in July 1998. See
"Recent Developments--Sale of Love's Restaurants."
The Company's principal executive offices are located at 1990 Westwood
Boulevard, 3rd Floor, Los Angeles, California 90025, and its telephone number is
(310) 475-5600. References to the "Company" herein includes Grand Havana
Enterprises, Inc. and its consolidated subsidiaries, unless the context
otherwise requires.
Recent Developments
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Expansion of Beverly Hills Grand Havana Room
--------------------------------------------
Due to increased demand for membership in the Beverly Hills Grand Havana
Room, the Company closed its On Canon restaurant in January 1998 and is in the
process of converting that space into additional space for the Beverly Hills
Grand Havana Room. The Beverly Hills Grand Havana Room occupies the second
floor above the space previously occupied by the On Canon restaurant.
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Sale of Love's Restaurants
--------------------------
In December 1996, the Company adopted a formal plan of discontinuance of
its Love's franchise and restaurant operations. At the time of the adoption of
such plan of discontinuance, the Company operated three Company-owned Love's
restaurants, one in Beverly Hills, California, one in Westchester, California,
and a third in San Bernardino, California, and was the franchisor of an
additional 10 Love's restaurants. See Item 7, "Financial Statements and
Supplementary Data--Note 3 to Consolidated Financial Statements."
Since the adoption of the plan of discontinuance for the Love's franchise
operations, the Company has taken the following actions in complete
implementation of such plan.
In May 1997, the San Bernardino Love's restaurant was sold by the Company
to the franchisee of this location in consideration for the franchisee becoming
a sublessee for the remainder of the lease term of the premises leased by the
Company for this restaurant location. In August 1997, the Company sold the
Beverly Hills Love's restaurant for an aggregate purchase price of $120,000,
payable $40,000 in cash and $80,000 pursuant to a three-year 7% promissory note
payable in monthly installments.
In January 1998, the Westchester Love's restaurant ceased operations. The
Company and the landlord of this property agreed to terminate the lease early,
in exchange for a net payment to be made by the landlord to the Company of
approximately $23,677 on or before May 31, 1999. The Company has retained the
liquor license at this location and expects to transfer it during fiscal year
1999 for approximately $11,000 net to the Company.
In 1998, the Company sold the remaining domestic assets of its Love's
franchise operation, consisting primarily of the Lakewood, California, Love's
restaurant and the franchise rights to nine remaining Love's franchised
restaurants. LEI, the Company's wholly-owned subsidiary, and Custom Food
Concepts, Inc. ("Concepts") entered into an agreement dated February 24, 1998,
pursuant to which LEI agreed to sell the assets of the Love's Wood Pit Barbecue
Restaurant in Lakewood, California, and assign its leasehold interest in the
premises, for a total purchase price of $18,000 (the "Lakewood Agreement"). The
sale of the property closed on July 30, 1998.
LEI and Custom Food Franchise Group, Inc. ("Franchise Group") entered into
an agreement dated February 24, 1998, pursuant to which LEI (i) sold its rights
as franchisor of the remaining Love's Wood Pit Barbecue restaurants operating in
the United States, and its related leasehold interests; (ii) granted an option
to Franchise Group to franchise Love's Wood Pit Barbecue restaurants in Canada
and Mexico, said option to be exercisable until February 23, 2001 (the
"Franchise Option"); and (iii) assigned to Franchise Group intellectual property
rights in the United States associated with Love's Wood Pit Barbecue
restaurants, including trademarks, service marks, logos, slogans and designs,
for a total purchase price of $117,000 (the "Franchise Agreement"). If the
Franchise Option is exercised, Franchise Group will pay LEI the additional sum
of $10,000.
The Company guaranteed certain of LEI undisclosed obligations as of
February 24, 1998, with respect to the foregoing transactions, for which the
Company was paid $50,000. The Company's maximum liability under said guarantee
is $195,000.
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The only Love's related asset which the Company retained is the
international licensing rights to Love's restaurants. In this regard in August
1994, the Company entered into a Territory Rights Agreement with PT Transpacific
Ekagraha, an Asian holding company. See "Business--Other Operations--Love's
Asian Territory Rights Agreement."
Business
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Grand Havana Rooms
------------------
The Company's private membership restaurants and cigar clubs, known as the
Grand Havana Rooms, cater primarily to affluent cigar smokers and their guests.
The Company's initial Grand Havana Room opened in June 1995 in Beverly Hills,
California. The Company opened its second Grand Havana Room in Washington, D.C.,
in March 1997 and its third Grand Havana Room in New York, New York, in May
1997.
The Grand Havana Room concept is to provide a private membership club,
including an upscale restaurant, where members can keep their cigars and smoking
accessories for use when they are at the Grand Havana Room. Both corporate and
individual memberships are sold at the Grand Havana Room, with both corporate
and individual members paying a one-time initiation fee and a continuing monthly
membership fee thereafter. The Grand Havana Room concept includes the operation
of a private smoking lounge, a full bar and an upscale restaurant, as well as
the sale of premium cigars and cigar and tobacco accessories. All of the
facilities of the Grand Havana Room, including the bar and restaurant, are only
available for use by members and their guests.
The Company commenced offering its own brand of cigars at its Grand Havana
Rooms under the brand names "Grand Havana Reserve" and "Grand Havana Selection"
in the summer of 1997. See "Trademarks and Service Marks," below. The Company
also offers these cigars at its retail Grand Havana House of Cigars locations
and, in the future, may enter into distribution agreements with respect to the
distribution of its brands of cigars to third party wholesalers or retailers.
See "Grand Havana House of Cigars." The Company does not manufacture the cigars
which use its trade names but rather the Company orders them directly from a
cigar manufacturer and has its brand names applied to such cigars. The
Company's brands of cigars do not currently account for a significant portion of
the Company's cigar sales.
Membership at the Company's Grand Havana Rooms is limited to the number
which the Company believes is appropriate to the space of the particular Grand
Havana Room and the number of humidors maintained by the Company at each Grand
Havana Room.
The Company continues to consider sites for additional Grand Havana Room
locations, although no new sites for such locations are being pursued at
present. There can be no assurance that the Company will be successful in
locating additional locations for such Grand Havana Rooms, will be successful in
obtaining funding necessary to develop such additional Grand Havana Rooms, or,
if developed, that such additional Grand Havana Rooms will be profitable.
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The Company will also consider the disposition of Grand Havana Rooms if, in
the opinion of management, that is in the Company's best interest. Presently,
there are no definitive agreements for the disposition of any of the Company's
Grand Havana Rooms.
Beverly Hills Grand Havana Room. The Company's initial Grand Havana Room,
-------------------------------
which opened in June 1995, is located in Beverly Hills, California. The Company
leases its Beverly Hills Grand Havana Room pursuant to a five-year lease
expiring June 30, 1999, which lease has three five-year options to extend,
through June 30, 2014. The Company has exercised its first five-year option to
extend the lease through June 30, 2004; the parties must still negotiate the
rent for this extension period. The Company's Beverly Hills Grand Havana Room
consists of approximately 3,150 square feet. All available memberships at this
location have been sold and there is a waiting list for membership. Once the
expansion of the Beverly Hills Grand Havana Room has been completed, the square
footage will increase to approximately 8,800 square feet and the Company will be
able to accept new members.
New York Grand Havana Room. The Company's New York Grand Havana Room,
--------------------------
which opened in May 1997, is located on the 39th floor of 666 Fifth Avenue, New
York, New York, in the former location of the well-known restaurant, "Top of the
Sixes." Due to the relatively large size of the space leased for the Company's
New York Grand Havana Room, in addition to a smoking lounge, bar and restaurant,
the New York Grand Havana Room also includes a billiards room. Approximately
40% of the available memberships at the Company's Grand Havana Room in New York
have been sold to date. The Company intends to continue to seek new members for
its New York Grand Havana Room by "word of mouth" advertising. In addition, the
Company has been marketing its New York Grand Havana Room for "event parties."
Washington, D.C., Grand Havana Room. The Company's Grand Havana Room in
-----------------------------------
Washington, D.C., opened in March 1997 and is located on the lower level of 1220
19th Street, N.W., Washington, D.C., and consists of approximately 8,298 square
feet. Membership at the Washington, D.C., Grand Havana Room has been lower than
anticipated, with the Company selling approximately 15% of available memberships
to date. The Company has taken actions to try to further promote memberships at
its Washington, D.C., Grand Havana Room, such as opening the club to non-members
for lunch and sponsoring "event parties." The Company intends to aggressively
market this facility. However, there can be no assurance that the Company's
efforts to increase its membership base at its Washington, D.C., Grand Havana
Room will be successful. If these efforts are not successful, the Washington,
D.C., Grand Havana Room may not be financially viable for the Company as a
continuing operation.
Grand Havana House of Cigars.
----------------------------
The Company's Grand Havana House of Cigars locations specialize in premium
cigars, cigar accessories and related merchandise. In the summer of 1997, the
Company commenced offering its own brands of cigars, which are named "Grand
Havana Selection" and "Grand Havana Reserve," at its Grand Havana House of
Cigars retail locations. The Company's brand of cigars do not account for a
significant portion of the sales of cigars by the Company.
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The Company opened its first Grand Havana House of Cigars adjacent to its
Washington, D.C., Grand Havana Room in March 1997. A second Grand Havana House
of Cigars was opened in the lobby of the Bally's Hotel in Las Vegas, Nevada, in
November 1997 and a third Grand Havana House of Cigars was opened adjacent to
the Company's Beverly Hills Grand Havana Room and On Canon Restaurant in
December 1997.
The Company intends to consider the development of additional Grand Havana
House of Cigars locations in other major U.S. cities, although no additional
sites for such new locations are being pursued at present. There can be no
assurance that the Company will be successful in locating additional locations
for such Grand Havana House of Cigars locations, will be successful in obtaining
funding necessary to develop such additional Grand Havana House of Cigars
locations, or, if developed, that such additional Grand Havana House of Cigars
locations will be profitable.
Marketing and Promotion. The Company's Grand Havana Rooms are private
-----------------------
membership clubs. The Company has been promoting and intends to continue
promoting these clubs primarily through direct targeting of select individuals
by the Company's officers and employees, by "word of mouth" advertising by
existing members and by hosting "event parties" through which to introduce
prospective new members to the club's facilities. However, if direct member
personal solicitations, "word of mouth" advertising and event parties are
insufficient to sell memberships, the Company may find it necessary to engage in
advertising or other promotional activities to attract members to its Grand
Havana Rooms. Because the advertisement of tobacco products is heavily
regulated, there could be significant restrictions on the Company's ability to
advertise its Grand Havana Rooms, which could have a material adverse effect on
the operations of the Company. See "Government Regulation," below.
Other Operations
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Grand Havana Asian Territory Rights Agreement. In May 1997, the Company
---------------------------------------------
entered into an agreement (the "Grand Havana Rights Agreement") with Grand
Havana Room (Asia) Holding Hong Kong ("Grand Havana Asia"), an unaffiliated
company. Pursuant to the Grand Havana Rights Agreement, the Company has granted
to Grand Havana Asia certain exclusive territories in Asia, including Hong Kong,
Taiwan, Singapore, Thailand, Japan, Korea, the Philippines and China, in which
Grand Havana Asia can open and operate Grand Havana Rooms for a term of 75
years. Grand Havana Asia agreed to pay the Company, for the exclusive right to
use the name Grand Havana Room in the territory, a non-refundable territorial
fee of $600,000, of which $300,000 was paid upon execution of the Grand Havana
Rights Agreement and the balance of $300,000 was payable on the earlier of the
opening of the initial Grand Havana Room in Hong Kong or April 30, 1998. The
Company is required to provide comprehensive development and training services
in connection with the opening of the first and all subsequent Grand Havana
Rooms in the territories. In return for such services, the Company would
receive 25% of the initial membership fees paid by members of the Hong Kong
Grand Havana Room and 15% of the initial membership fees paid with respect to
any other Grand Havana Rooms opened pursuant to the Grand Havana Rights
Agreement. Further, the Company would be entitled to receive 6% of the monthly
gross revenues from each Grand Havana Room opened pursuant to the Grand Havana
Rights Agreement. Pursuant to the Grand Havana Rights Agreement, Grand Havana
Asia was to have opened the Grand Havana Room in Hong Kong within one year after
the execution of the Grand Havana Rights Agreement and a total of at least nine
Grand Havana
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Rooms within five years following the execution of the Grand Havana Rights
Agreement. As a result of continuing economic uncertainties in Asia, Grand
Havana Asia defaulted in its obligations under the Grand Havana Rights Agreement
and the Company did not receive the second $300,000 payment which was due on
April 30, 1998. The initial deposit of $300,000 was forfeited by Grand Havana
Asia and the parties terminated the Grand Havana Rights Agreement.
Love's Asian Territory Rights Agreement. On May 27, 1993, the Company
---------------------------------------
purchased all of the issued and outstanding capital stock of LEI from Kyotaru
International, Inc., a subsidiary of a large Japanese concern, for total
consideration of $534,822. On the date of closing, LEI operated one Company-
owned restaurant and was the franchisor of an additional 19 Love's restaurants,
which were operated by independent franchisees. In addition, the Company
acquired two closed Company-owned locations. In December 1996, the Company
adopted a formal plan of discontinuance of its Love's restaurants operations.
That plan was fully implemented by July 1998. See "Recent Developments."
The only Love's related asset which the Company retained is the
international licensing rights to the Love's restaurants. In August 1994, the
Company entered into a Territory Rights Agreement (the "Love's Rights
Agreement") with PT Transpacific Ekagraha, an Asian holding company ("PT
Transpacific"), which engages in a number of businesses, including banking and
the restaurant development business. Under the Love's Rights Agreement, the
territory rights holder has committed to construct at least eight Love's
restaurants in portions of Asia, including Mainland China, Hong Kong, Indonesia,
Singapore, Malaysia and Republic of China-Taiwan. The Love's Rights Agreement
provides for additional payments to LEI upon the opening of each restaurant and
for continuing royalties ranging from 5% to 8.75% of gross sales, payable in
U.S. dollars. LEI is to provide certain training, management and other services
during the term of the Love's Rights Agreement. The first restaurant opened
under the Love's Rights Agreement was in Jakarta, Indonesia, in April 1998. PT
Transpacific has not made the initial $50,000 payment upon the opening of the
Jakarta facility or royalty payments to the Company under the Love's Rights
Agreement for the following reasons: (i) civil unrest in Jakarta has resulted in
irregular operating hours for the Jakarta facility, adversely affecting its
financial condition; and (ii) the collapse of the Indonesian rupiah in world
foreign exchange markets has made the making of royalty payments in U.S. dollars
prohibitively expensive. The parties are seeking to establish a new payment
program under the Love's Rights Agreement; no such arrangement is yet in place.
Moreover, as a result of economic uncertainties throughout Asia and continuing
political uncertainties in Indonesia, there can be no assurance that any or all
of the obligations of PT Transpacific under the Love's Rights Agreement will be
satisfied or whether there will be any further expansion of Love's restaurants
in Asia.
Trademarks and Service Marks
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The Company has registered the service marks "Grand Havana Room," and
"Grand Havana House of Cigars," and the trademarks "Grand Havana Selection" and
"Grand Havana Reserve." The Company regards its service marks and trademarks as
having significant value and being an important factor in the marketing of its
restaurants and cigar clubs as well as its Grand Havana House of Cigars
locations. The Company currently uses the "Grand Havana Selection" and "Grand
Havana Reserve" trademarks on its own brand of cigars. See "Business--Grand
Havana House of Cigars." The Company also uses its Grand Havana Room service
marks on T-shirts, hats and golf
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balls and other similar products in order to generate additional revenues. The
Company's policy is to pursue registrations of its marks wherever possible and
to oppose vigorously any infringement of its marks. The Company is not aware of
any infringing uses that could materially affect its business or any prior claim
to the trademarks that would prevent the Company from using such trademarks in
its business.
Government Regulation
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California Smoke-Free Workplace Act of 1994. In 1994 the California
-------------------------------------------
legislature enacted the California Smoke-Free Workplace Act of 1994, which
prohibits smoking in enclosed spaces at places of employment with certain
exceptions. Since the inception of the Company's Beverly Hills Grand Havana
Room, the Company has relied upon an exemption in the law that expressly exempts
from its coverage retail tobacco shops and private smoker's lounges. If other
states in which the Company has Grand Havana Rooms and Grand Havana House of
Cigars locations should enact legislation similar to the legislation adopted in
California, and the Company were unable to qualify under an exemption with
respect to any such legislation, this could have a material adverse effect on
the Company's business, financial condition and results of operations.
Tobacco Industry Regulation-General. Cigars and other tobacco products are
-----------------------------------
subject to regulation in the United States at the federal, state and local
levels. Together with changing public attitudes towards smoking, a constant
expansion of smoking regulations since the early 1970s has been a major cause of
the overall decline in the consumption of tobacco products. Cigar consumption,
which increased between 1993 and 1997, has also experienced some declines since
its peak in 1997. Moreover, the trend is toward increasing regulation in the
tobacco industry.
Federal law has required health warnings on cigarettes since 1965; however,
there is currently no federal law requiring that cigars or pipe tobacco carry
such warnings. California requires "clear and reasonable" warnings to consumers
who are exposed to chemicals known to the state to cause cancer or reproductive
toxicity, including tobacco smoke and several of its constituent chemicals.
Violations of this law, known as Proposition 65, can result in a civil penalty
not to exceed $2,500 per day for each violation. The Company believes that it
complies with applicable California laws.
The majority of states, including California, restrict or prohibit smoking
in certain pubic places and restrict the sale of tobacco products to minors.
Local legislative and regulatory bodies have also increasingly moved to curtail
smoking by prohibiting smoking in certain buildings or areas or by requiring
designated "smoking" areas. The Company believes that because of its private
smoker's lounge status in California, it will be exempt from future regulations
in California or other jurisdictions that might further prohibit smoking;
however, if regulations should be enacted in California or other jurisdictions
which in any way limit or prohibit the smoking of cigars in the Company's Grand
Havana Rooms, this would have a material adverse effect on the business of the
Company.
Cigars and pipe tobacco have long been subject to federal, state and local
excise taxes, and such taxes have frequently been increased or proposed to be
increased, in some cases significantly, to fund various legislative initiatives.
Enactment of significant increases in or new federal, state or local excise
taxes may result in significantly increasing the price of cigars which could
result in
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decreased sales of cigars at the Company's Grand Havana Rooms and Grand Havana
House of Cigar locations, and a decrease in the number of persons who smoke
cigars, which could cause a reduction in memberships at the Grand Havana Rooms.
Effective January 1, 1999, the excise tax on the wholesale price of cigars sold
in California will increase from approximately 26% to approximately 62%, an
increase of approximately 138%. The impact of this tax increase on both the
pricing and sales of cigar products sold by the Company in California is unknown
at present.
A variety of legislation relating to tobacco issues has been introduced in
the Congress of the United States in recent years, including legislation that
would (i) prohibit the advertising and promotion of all tobacco products and/or
restrict or eliminate the deductibility of advertising expenses; (ii) increase
labeling requirements on tobacco products to include, among other things,
addiction warnings and lists of additives and toxins; and (iii) shifting
regulatory control of tobacco products and advertisements from the U.S. Federal
Trade Commission to the U.S. Food and Drug Administration. There can be no
assurance as to the ultimate content, timing or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would not
have a material adverse effect on the Company's business.
In addition, there is pending a settlement of major tobacco litigation
brought by the attorneys general of almost every state in the United States
against the major tobacco manufacturers. The effect of this proposed historic
settlement on the manufacture, advertisement, sale and consumption of tobacco
products is unknown. However, there could be a sustained decrease in
consumption of tobacco products over a period of years.
Restaurant and Alcohol Regulation. The Company's restaurants in the
---------------------------------
Company's Grand Havana Rooms are subject to numerous federal, state and local
laws regulating their business, including health, sanitation, safety standards,
alcoholic beverage control and fire regulations. The expansion, development and
construction of any additional restaurants within the Company's Grand Havana
Rooms, will be subject to compliance with applicable zoning, land use and
environmental regulations. Each of the Grand Havana Rooms has appropriate
licenses from regulatory authorities allowing it to sell liquor, beer and wine,
and each restaurant has food-service licenses from local health authorities.
The failure of a restaurant to obtain or retain liquor or food-service licenses
could have a material adverse effect on its operations. Difficulties in
obtaining or failures to obtain the required licenses or approvals could delay
or prevent the development of a new restaurant in a particular area, including
any new Grand Havana Rooms which may be developed by the Company in the future.
However, management believes the Company is currently in compliance in all
material respects with all relevant regulations, and the Company has never
experienced abnormal difficulties or delays in obtaining the required licenses
or approvals.
Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities, for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked
or suspended for cause at any time. Alcoholic beverage control regulations
relate to numerous aspects of the daily operations of the Company's restaurants,
including minimum age of patrons and employees, hours of operation, advertising,
wholesale purchasing, inventory control and handling, and storage and dispensing
of alcoholic beverages. The Company has not
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encountered any material problems relating to alcoholic beverage licenses to
date. The failure to receive or retain, or a delay in obtaining, a liquor
license in a particular location could adversely affect the Company's ability to
obtain such a license elsewhere.
The Company is subject in California, and may be subject in certain other
states, to "dram-shop" statutes, which generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries comprehensive general liability insurance, which it believes is
consistent with coverage carried by other entities in the restaurant industry.
Even though the Company is covered by insurance, a judgment against the Company
under a "dram-shop" statute in excess of the Company's liability coverage could
have a material adverse effect on the Company. The Company has never been the
subject of a "dram-shop" claim.
Other Regulations. Various federal and state labor laws govern the
-----------------
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and other working conditions. Significant
additional government-imposed increases in minimum wages, paid leaves of absence
and mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of the Company's restaurants. Management is not aware of any
environmental regulations that have had a material effect on the Company to
date.
The Americans With Disabilities Act ("ADA") prohibits discrimination on the
basis of disability. The ADA became effective in 1992 as to public
accommodations and employment. The Company's restaurants are currently designed
to be accessible to the disabled. The Company believes that it is in
substantial compliance with all current applicable regulations relating to
restaurant accommodations for the disabled. Because of the relatively recent
effectiveness of the ADA and the absence of comprehensive regulations
thereunder, the Company is unable to predict the extent to which the ADA will
affect the Company. However, the Company could be required to expend funds to
modify its restaurants in order to provide service to, or make reasonable
accommodations for the employment of, disabled persons.
Competition
- -----------
The Company's Grand Havana Rooms compete with other clubs that offer
private memberships as well as with other restaurants, bars, smoking lounges and
other establishments which are open to the public and at which cigar smoking is
permitted. The Company believes that by continuing its policy of catering to
affluent clientele, it will be able to compete effectively with other private
membership clubs that may have a broader base membership as well as with other
bars and restaurants that are open to the public and permit the smoking of
cigars. Many of the Grand Havana Rooms' competitors have substantially greater
financial, marketing, personnel and other resources than the Company, and the
Company believes its ability to compete effectively will continue to depend on
its ability to offer an exclusive membership club that caters to affluent cigar
smokers and offers a high quality, distinctive restaurant, smoking lounge and
bar. Additionally, the restaurant business is often affected by changes in
consumer taste and discretionary spending priorities, economic conditions,
demographic trends, traffic patterns and employee availability. Any change in
these factors could adversely affect the Company. The Company believes that the
ability
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of the Company's restaurants located in its Grand Havana Rooms to compete
effectively will continue to depend on its ability to offer high quality food in
a full-service, distinctive dining environment.
The Company's Grand Havana House of Cigars locations compete with other
retail cigar stores as well as with other businesses and entities which sell
cigars and cigar related products, such as supermarkets and liquor stores. Many
of these competitors have substantially greater financial, marketing, personnel
and other resources than the Company, and the Company believes that its ability
to compete effectively will depend on establishing prime locations for its
retail cigar stores and carrying the brands of premium cigars which are in
demand.
Employees
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As of September 27, 1998, the Company had 99 employees, consisting of 21
full-time and 78 part-time employees. Harry Shuster, the Company's Chairman of
the Board, President and Chief Executive Officer, is engaged by the Company as
an independent consultant. See Item 10, "Executive Compensation-Consulting and
Employment Agreements." None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.
Item 2. Description of Property.
The Company owns no real property, and leases all of the facilities which
it uses. In February 1995, the Company entered into a six-year lease with 1990
Westwood Boulevard, Inc. covering approximately 6,000 square feet of office
space for its principal executive offices. The lease provides for rent of
$4,000 per month through January 31, 1998, and rent of $4,400 per month
thereafter through the end of the term of the lease in January 2001. 1990
Westwood Boulevard, Inc. is presently owned 65% by Harry Shuster, Chairman of
the Board, President, Chief Executive Officer, Chief Financial Officer, a
director and a principal stockholder of the Company, and 35% by Jordan Belfort.
Pursuant to an agreement dated as of December 9, 1997, Mr. Shuster acquired the
15% interest previously owned by Daniel and Nancy Porush. The Company believes
that the rent and other terms of the lease are no more favorable to the lessor
than could have been obtained in a similar building in the same area from an
unrelated lessor. See Item 12, "Certain Relationships and Related
Transactions."
The Company has a five-year lease expiring June 30, 1999, which lease has
three five-year options to extend, through June 30, 2014, for its Grand Havana
Room and Grand Havana House of Cigars location in Beverly Hills, California.
The aggregate monthly rent under the lease for these premises is currently
$17,344. The Beverly Hills lease consists of approximately 8,800 square feet.
The Company has exercised its first five-year option to extend the lease through
June 30, 2004; the parties must still negotiate the rent for this extension
period.
The Company's New York Grand Havana Room is located on the 39th floor of
666 Fifth Avenue, New York, New York. The New York lease is for a term of
fifteen years expiring September 30, 2011. Annual rent under the New York lease
in its initial five years is $658,880 per annum, payable in equal monthly
installments. The Company commenced making monthly rental
11
<PAGE>
payments under this lease in March 1997. In addition to this rent, the Company
pays as additional rent under the New York lease an amount equal to 6.5% of the
gross sales from its New York Grand Havana Room in excess of $10,136,600 in any
lease year. The New York lease consists of approximately 16,472 square feet.
The lease for the Company's Grand Havana Room and Grand Havana House of
Cigars in Washington, D.C., is for a term of fifteen and one-half years expiring
in February, 2012 (the "Washington Lease"). Annual rent under the Washington
Lease is $170,000 per annum, payable in equal monthly installments. The Company
commenced making rent payments under this lease in March 1997. The Washington
Lease is for premises on the lower level of 1220 19th Street, N.W., Washington,
D.C., and consists of approximately 8,298 square feet.
The Company rents approximately 400 square feet of space for its Grand
Havana House of Cigars in Bally's Hotel in Las Vegas, Nevada, pursuant to a
seven-year lease. Rent under the lease is currently the greater of $60,000 or
the applicable annual "percentage rent." The "percentage rent" is calculated as
(i) 10% of gross sales up to $1,000,000 per year, (ii) 11% of gross sales from
$1,000,000 to $1,500,000 per year, (iii) 12% of gross sales from $1,500,000 to
$2,000,000 and (iv) 13% of gross sales in excess of $2,000,000 per lease year.
In addition, upon the Company's taking possession of the premises, the Company
delivered to the landlord under the lease $50,000 as "key money" in
consideration for the landlord entering into the lease agreement and completing
certain work on the leased premises.
The Company considers its leased properties to be adequate for its needs in
the short term or at least until the expiration of such leases. In management's
opinion, all of the properties leased by the Company are adequately covered by
insurance.
Item 3. Legal Proceedings.
The Company is not a party to any pending material legal proceeding, other
than routine litigation that is incidental to its business or is covered by
insurance.
Item 4. Submission of Matters to a Vote of Security Holders.
None.
12
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters.
The Common Stock, par value $.01 per share (the "Common Stock"), of the
Company began trading on The Nasdaq Stock Market's Small Cap Market ("Nasdaq")
since April 12, 1994, the effective date of the Company's initial public
offering. Prior to that date, there was no public market for the Company's
securities. The Company's Common Stock trades under the symbol "PUFF" beginning
in March 1997 and prior to that was traded under the symbol "UNIR." The Company
does not currently meet the new minimum bid listing requirements (the "New
Listing Requirements") for maintenance of the Company's Common Stock on Nasdaq.
The New Listing Requirements became effective in February 1998. In June 1998,
the Company was notified that Nasdaq intended to delist the Company's Common
Stock for failure to meet the New Listing Requirements. The Company appealed
the proposed Nasdaq delisting and the appeal was heard on September 18, 1998.
The decision of Nasdaq is still pending. During the pendency of this appeal,
the Company's Common Stock will not be delisted by Nasdaq. If the Company's
Common Stock is ultimately delisted from Nasdaq, it may be automatically
eligible to trade on the OTC Bulletin Board.
In its initial public offering, the Company sold a total of 2,012,000
Units, each Unit consisting of one share of Common Stock, one Class A Warrant
and one Class B Warrant. Each of the Class A Warrants and the Class B Warrants
entitles the holders thereof to purchase one share of the Company's Common Stock
at exercise prices of $4.80 and $5.60 per share, respectively. The Company's
Class A Warrants and Class B Warrants are also traded on Nasdaq.
The following table sets forth for the Company's fiscal quarters indicated,
the high and low bid prices of the Common Stock in The Nasdaq Stock Market's
Small Cap Market:
<TABLE>
<CAPTION>
Reported
Bid Prices
--------------
High Low
<S> <C> <C>
1997
1st Quarter 2 1
2nd Quarter 3-3/4 1-3/4
3rd Quarter 3 1-1/2
4th Quarter 2 1
1998
1st Quarter 2-7/8 -9/16
2nd Quarter -21/32 -7/32
3rd Quarter -11/32 -7/64
4th Quarter -6/32 -1/16
</TABLE>
The above quotations represent prices between dealers, do not include
retail mark-up, mark-down or commission and do not necessarily represent actual
transactions.
13
<PAGE>
There were approximately 69 record holders of the Common Stock of the
Company as of September 27, 1998.
The Company has never declared or paid any cash dividends and does not
intend to pay cash dividends in the foreseeable future on the shares of Common
Stock. Cash dividends, if any, that may be paid in the future to holders of
Common Stock will be payable when, as, and if declared by the Board of Directors
of the Company, based upon the Board's assessment of the financial condition of
the Company, its earnings, need for funds, capital requirements, and prior
claims, if any, of Preferred Stock to the extent issued, and other factors,
including any applicable laws. The Company is not currently a party to any
agreement restricting the payment of dividends.
Changes in Securities
- ---------------------
During the quarter ended December 28, 1997, the Company conducted a
Regulation S offering of its Common Stock and warrants to purchase its Common
Stock, raising aggregate gross proceeds for the Company of approximately
$2,650,000. In addition, subsequent to the fiscal quarter ended December 28,
1997, the Company agreed to reduce the warrant exercise price of warrants to
purchase an aggregate of 1,100,000 shares of Common Stock of the Company held by
the finder in this offering, which warrants had an original warrant exercise
price of $.82 per share. The warrant exercise price of such finder's warrants
was reduced to an exercise price of $.27 per share on condition that all of such
warrants be then-exercised. All of such warrants were exercised in January
1998, for aggregate gross proceeds to the Company from such warrant exercise of
approximately $297,000, and net proceeds, after deducting a 10% placement fee, a
3% non-accountable expense allowance and other related expenses of $260,000.
During the quarter ended March 29, 1998, the Company conducted a Regulation
S Offering of 1,200 units, consisting of shares of its Common Stock and warrants
to purchase its Common Stock, resulting in aggregate gross proceeds to the
Company of approximately $300,000, and net proceeds, after deducting an 8%
placement fee, a 2% non-accountable expenses allowance and other related
expenses of $260,000.
In October 1997, the Company issued 50,000 shares of its Common Stock to an
investor relations consultant in consideration for services performed by such
consultant.
Each of the foregoing offerings and issuances was made directly by the
officers and directors of the Company and no underwriting discounts or
commissions were paid. Each of the foregoing transactions was exempt from
registration pursuant to Regulation S promulgated under the Securities Act of
1933, as amended, for offers and sales of securities made outside the United
States or under Section 4(2) of the Securities Act of 1933, as amended, for
offers and sales not involving a public offering.
Item 6. Management's Discussion and Analysis of Financial Conditions and
Results of Operations
General
- -------
Grand Havana Enterprises, Inc. 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."
14
<PAGE>
The Company currently owns and operates three Grand Havana Rooms, one in
Beverly Hills, California which opened in June 1995, one in Washington, D.C.,
which opened in March 1997 and a third in New York, New York, which opened in
May 1997. In addition, the Company currently owns and operates three Grand
Havana House of Cigars locations, one in Beverly Hills, California which opened
in December, 1997, one in Washington, D.C., which opened in March 1997 and one
is Las Vegas, Nevada, which opened in November, 1997. The Company intends to
continue to operate its existing Grand Havana Room locations and Grand Havana
House of Cigars locations. In January 1998, the Company ceased operations of
its On Canon restaurant, which was adjacent to the Beverly Hills Grand Havana
Room. The Company is in the process of converting the space formerly occupied
by On Canon to additional space for the Beverly Hills Grand Havana Room. See
"Business--Recent Developments--Expansion of Beverly Hills Grand Havana Room."
The Company was incorporated under the laws of the State of Delaware on
April 13, 1993. The Company was originally formed in order to acquire all of
the capital stock of 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 was completed in July 1998. See
"Recent Developments--Sale of Love's Restaurants."
Management of the Company expects that during the membership drive for its
new New York and Washington, D.C., Grand Havana Rooms, and during the period it
is working on the development of additional Grand Havana Rooms and Grand Havana
House of Cigars locations, the Company will continue to experience consolidated
losses, until such time as there are enough profitable Grand Havana Rooms and
Grand Havana House of Cigars locations developed to absorb the increased
expenses and overhead; however, there can be no assurance that such cigar clubs
and retail cigar stores will be profitable in the future. The Company has
experienced operating losses since its inception with net losses of $3,795,909
and $3,019,722 for the fiscal years ended September 28, 1997, and September 27,
1998, respectively.
To the extent that any of the statements contained herein relating to the
Company's business, including its development plans with respect to its Grand
Havana Rooms and Grand Havana House of Cigars locations, contain forward-looking
statements, such statements are based on current expectations that involve a
number of uncertainties and risks that could cause actual results to differ
materially from those projected in the forwarded-looking statements, including
risks and uncertainties associated with the costs of the development of new
Grand Havana Rooms and Grand Havana House of Cigars locations, the timing of the
proposed developments, compliance with regulatory requirements and the Company's
ability to sell memberships in its New York, New York, and Washington, D.C.,
locations. In addition to these risks, other important factors that could cause
the Company's results of operations to differ materially from those anticipated
by management include a decline in public consumption of cigars and other
tobacco products and significant increases in excise taxes which could
substantially increase the price of cigars.
15
<PAGE>
Results of Operations - Fiscal Year Ended September 27, 1998 Compared to Fiscal
- -------------------------------------------------------------------------------
Year Ended September 28, 1997
- -----------------------------
The Company derives revenues from three principal sources: food and
beverage sales, sales of cigars and related merchandise, and membership fees.
During its fiscal year ended September 27, 1998, the Company had revenues of
$5,523,052 compared to revenues of $5,076,967 for its fiscal year ended
September 28, 1997, an increase of $446,085 or approximately 8.79%. The
increase in revenues is primarily due to a $407,041 or approximately 99.6%
increase in sales of cigars and related merchandise, from $408,687 in the fiscal
year ended September 28, 1997, to $815,728 in the fiscal year ended September
27, 1998; a $442,696 or 37.31% increase in membership revenues from $1,186,591
in the fiscal year ended September 28, 1997, to $1,629,287 in the fiscal year
ended September 27, 1998; and a $174,297 or 286.18% increase in revenues from
renting the Grand Havana Rooms for private parties from $60,904 in fiscal year
ended September 28, 1997, to $235,201 in fiscal year ended September 27, 1998.
The above-mentioned increases were offset by decreases in territorial fees from
$600,000 in the fiscal year ended September 28, 1997, to $0 in the fiscal year
ended September 27, 1998. The territorial fee received by the Company in the
fiscal year ended September 28, 1997, was a one-time only payment from the sale
of territorial rights of the Grand Havana Rooms in nine Asian countries. The
increase in sales of cigars and related merchandise was due primarily to the
opening, in the fiscal year ending September 27, 1998, of Grand Havana House of
Cigars locations in Beverly Hills and Las Vegas and increased patronage at the
Grand Havana Rooms. The increase in membership revenue, from $1,186,591 in the
fiscal year ended September 28, 1997 to $1,629,287 for the fiscal year ended
September 27, 1998, is due primarily to initial membership fees recognized for
new members joining the two Grand Havana Rooms in New York and Washington, D.C.,
with membership revenue of approximately $655,444 and $98,800, respectively.
These Grand Havana Rooms were only open for four and six months, respectively,
in fiscal year ending September 28, 1997, but were open throughout the fiscal
year ended September 27, 1998.
Food and beverage revenues were flat compared to the fiscal year ending
September 28, 1997. Although all three Grand Havana Rooms were operating in the
fiscal year ending September 27, 1998 compared to only 6 months of operations in
Washington, D.C., and 4 months of operations in New York during the fiscal year
ending September 28, 1997, there was no longer any revenue from On Canon, the
Beverly Hills restaurant which the Company closed in January 1998.
Total costs and expenses of the Company increased from $8,088,534 for the
fiscal year ended September 28, 1997, to $8,410,893 for the fiscal year ended
September 27, 1998, an increase of $322,359 or 3.99%. The increase is mainly due
to a full year of operations at the three Grand Havana Rooms and the addition of
two Grand Havana House of Cigars locations.
The Company had impairment losses of $487,657 in the fiscal year ending
September 27, 1998, compared to $0 in the fiscal year ending September 28, 1997.
The Company's auditors wrote down the net book value of the furniture and
fixtures at the Washington, D.C., Grand Havana Room to coincide with its fair
market value.
16
<PAGE>
Occupancy and other costs for the fiscal year ended September 27, 1998,
were flat compared to fiscal year 1997. The increased costs due to the full
year's operations of the three Grand Havana Rooms were offset by the decreased
costs resulting from the closure of On Canon.
Pre-operating costs decreased by $479,506 or 98.16% from $488,492 in the
fiscal year ended September 28, 1997 to $8,986 in the fiscal year ended
September 27, 1998. This decrease in pre-operating costs was a result of the
fact that both New York and Washington, D.C., Grand Havana Rooms opened in the
fiscal year ended September 28, 1997. The pre-operating costs incurred in
the fiscal year ended September 27, 1998, were left-over costs associated with
the opening of those two Grand Havana Rooms.
Direct labor and benefits increased in the fiscal year ended September 27,
1998, by $342,162 or 17.64% from $1,939,862 in the fiscal year ended September
28, 1997, to $2,282,024 in the fiscal year ended September 27, 1998. This was
due primarily to the opening of the two new Grand Havana Rooms in New York and
Washington, D.C., which operated for only 4 months and 6 months, respectively,
in the fiscal year ending September 28, 1997, and which operated throughout the
entire fiscal year 1998. The combined direct labor and benefits costs in the New
York Grand Havana Room and the Washington, D.C., Grand Havana Room increased
from $276,930 in the fiscal year ended September 28, 1997, to $1,029,410 in the
fiscal year ended September 27, 1998.
Cost of sales of food and beverages were flat in the fiscal year ended
September 27, 1998, compared to costs in fiscal year 1997. This was due to flat
revenues from sales of food and beverages. Cost of merchandise increased by
$127,588 or 46.77% from $272,804 in the fiscal year ended September 28, 1997, to
$400,392 in the fiscal year ended September 27, 1998, due primarily to the
almost 100% increase in merchandise revenues.
General and administrative costs decreased by $471,890 or 32.88% from
$1,435,403 in the fiscal year ended September 28, 1997, to $963,513 in the
fiscal year ended September 27, 1998. This was due to the Company's efforts to
reduce corporate overhead, including some layoffs of personnel.
The decrease in pre-operating expense and general and administrative
expenses was offset by the impairment losses of $487,657, the increases in
merchandise costs, and the increases in depreciation and amortization costs
which increased from $289,895 in the fiscal year ended September 28, 1997, to
$439,255 in the fiscal year ended September 27, 1998, or $149,360 or 51.52%, due
primarily to the full year's operation of the New York and Washington, D.C.,
Grand Havana Rooms.
The Company's loss from continuing operations decreased from ($3,259,817)
in the fiscal year ended September 28, 1997, to ($3,013,517) in the fiscal year
ended September 27, 1998, or a decrease in loss from continuing operations of
$246,300. This decrease in loss was due primarily to the full year's operations
of all three Grand Havana Rooms. Losses from operations of the New York and
Washington, D.C., Grand Havana Rooms were approximately $418,000 and $475,819,
respectively during the fiscal year ended September 27, 1998, compared to losses
from operations of $820,000 and $814,000 respectively in the fiscal year ended
September 28, 1997. The net loss decreased from ($3,795,909) or $0.46 per share
in the fiscal year ended September 28, 1997, to ($3,019,722) or $0.22 per share
for the fiscal year ended September 27, 1998.
17
<PAGE>
Liquidity and Capital Resources
- -------------------------------
The Company completed an initial public offering in April 1994, receiving
net proceeds from the offering of approximately $6,386,642. The initial public
offering consisted of the sale of 2,012,500 Units, each Unit consisting of one
share of Common Stock, one five-year Class A Common Stock Purchase Warrant to
purchase one share of Common Stock at $4.80 per share, and one five-year Class B
Common Stock Purchase Warrant to purchase one share of Common Stock at $5.60 per
share.
As a result of its 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 (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 September 27,
1998, the Company had cash or cash equivalents of $95,344.
At September 27, 1998, the Company owed an aggregate of $536,000 in
principal amount to United Leisure Corporation pursuant to a financing agreement
dated as of February 12, 1997. All principal plus accrued interest thereon was
due on or before September 30, 1998. In addition, as of September 27, 1998, the
Company owed an aggregate of $507,000 in principal amount to United Film
Distributors, Inc. for advances made to the Company under a financing agreement.
The full amount, together with all accrued but unpaid interest thereon, is due
and payable upon demand, which demand may be made any time after September 30,
1998. See Item 12. "Certain Relationship and Related Transactions," and Item 7
"Financial Statements and Supplementary Information--Note 9 to Notes to
Consolidated Financial Statements."
The Company anticipates that in connection with the operation of its
existing Grand Havana Rooms and Grand Havana House of Cigars, it will need
additional working capital during the next 12 months. In the fiscal year ended
September 27, 1998, the Company's New York and Washington, D.C., Grand Havana
Rooms had losses of approximately $418,000 and $475,819, respectively. The
Company anticipates that it will continue to incur substantial future losses
from these Grand Havana Rooms until substantially more memberships are sold in
each of these clubs.
In order to raise additional capital to fund its existing operations and to
develop any future Grand Havana Rooms and Grand Havana House of Cigars
locations, the Company may consider selling its securities in private
placements. Due to the fact that the trading price of the Company's Common
Stock has fallen significantly in the last twelve months, there can be no
assurance that the Company will be able to sell its securities on terms that are
acceptable to the Company. In addition, the Company does not currently meet
the New Listing Requirements for maintenance of the Company's Common Stock on
Nasdaq. The New Listing Requirements became effective in February 1998. In June
1998, the Company was notified that Nasdaq intended to delist the Company's
Common
18
<PAGE>
Stock for failure to meet the New Listing Requirements. The Company appealed the
proposed Nasdaq delisting and the appeal was heard on September 18, 1998. The
decision of Nasdaq is pending as of September 27, 1998. During the pendency of
this appeal, the Company's Common Stock will not be delisted by Nasdaq. If the
Company's Common Stock is ultimately delisted from Nasdaq, it may be
automatically eligible to trade on the OTC Bulletin Board. Nonetheless, such a
development could result in the Company's having difficulty in offering and
selling its securities to prospective investors.
If the Company is unable to raise additional funds 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.
Management does not expect that inflation will adversely affect the
Company's existing or planned operations in the future unless it increases
significantly over current levels.
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. The Company's Year 2000 project is currently in the assessment
phase. 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, and Windows 95, and Windows NT are not Year
2000 compliant. The Company will make a determination as to which operating
systems will need to be replaced entirely and which will be upgraded to become
Year 2000 compliant. It is the Company's expectation that a final determination
on these matters will be made by March 31, 1999. Because this assessment is
still in a preliminary phase, it is not known at this time if the cost of any
such upgrades or replacements will be material.
The Company expects to have completed by March 31, 1999, a full assessment
of all hardware, operating systems and software applications in use on a
Company-wide basis. Some upgrading is expected to be required, including
upgrading to a uniform operating system on a Company-wide basis. In addition,
the hardware used in connection with the Grand Havana Room Point-of-Sale systems
will need upgrading and possibly full replacement. It is not known at this time
if the cost of any such upgrades or replacements will be material. Required
upgrading is expected to be completed on or before June 30, 1999. In addition,
the Company is in the process of obtaining Year 2000 compliance statements from
the manufacturers of the Company's hardware and software products.
19
<PAGE>
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 at the beginning stage of assessments for its operations and
infrastructure, and cannot predict whether significant problems will be
identified. The Company is asking 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. The Company expects that all such requests
will be supplied to vendors by February 28, 1999. The Company has not yet
determined the full extent of contingency planning that may be required. 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 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.
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. Specific
contingency plans will be formulated after the Company has received information
on the status of vendor and supplier Year 2000 compliance.
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 Company. The Company is continuing to evaluate Year 2000
related risks and will take such further corrective actions as may be required.
Item 7. Financial Statements and Supplementary Data.
The Financial Statements of the Company are submitted as a separate section
of this Form 10-KSB commencing on page F-1 immediately following Part IV of this
Report on Form 10-KSB.
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
20
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.
Directors and Executive Officers
The following table sets forth certain information with respect to the
Company's directors and executive officers:
<TABLE>
<CAPTION>
Positions Currently Held
Name Age With the Company Director Since
- ---- --- -------------------------------------------- --------------
<S> <C> <C> <C>
Harry Shuster 63 Chairman of the Board, President and Chief 1993
Executive Officer, Chief Financial Officer
and a Director
Stanley Shuster 38 Executive Vice President and Director 1995
Alvin Cassell 84 Director 1998
J. Brooke Johnston, Jr. 58 Director 1998
Harvey Bibicoff 59 Former Director 1993
Steven T. Ousdahl 52 Vice President--Administration --
</TABLE>
Harry Shuster, Chairman of the Board, President, Chief Executive Officer
and Chief Financial Officer, as well as a principal stockholder of the Company,
has been engaged in managing the affairs of the Company in his current positions
since the inception of the Company in 1993. Mr. Shuster is, and for more than
five years has served as, Chairman of the Board, President, Chief Executive
Officer and a director of United Leisure Corporation, a publicly-held company
located in Irvine, California ("United Leisure"). Mr. Shuster also serves as
the Chairman of the Board of United Film Distributors, Inc. (formerly known as
HIT Entertainment, Inc.) ("UFD"), an independent motion picture production
company in Los Angeles, California. See Item 10, "Executive Compensation--
Consulting and Employment Agreements."
Stanley Shuster was elected Executive Vice President of the Company and a
director of the Company in June 1995. Since April 1994, Mr. Shuster has been
employed by the Company to develop its Grand Havana Room concept and is
currently supervising the operations of the Company's Grand Havana Rooms. From
March 1991 through February 1994, he was Vice President of Artist and Repertoire
for J.R.S. Records, an independent record company, with major distribution
through BMG. The artist roster of J.R.S. included Stray Cats, Jimmy Cliff, Kool
and the Gang and Asia. From May 1989 through March 1991, Mr. Shuster acted as
Director of Artist and Repertoire for Venture Music Group, a music company based
in Los Angeles, California. Prior to that time, Mr. Shuster was a partner and
operated a chain of 10 restaurants. Stanley Shuster is the son of Harry
Shuster.
21
<PAGE>
Alvin Cassell has served as a director of the Company since March 1998.
Mr. Cassell is of counsel to the law firm of Broad and Cassell, Miami, Florida.
He has been engaged in a general civil law practice for more than 60 years. Mr.
Cassell is also a director of United Leisure.
J. Brooke Johnston, Jr. has served as a director of the Company since March
1998. Mr. Johnston is a partner of the law firm of Baker, Johnston & Wilson,
LLP, in Birmingham, Alabama. He was Senior Vice President and General Counsel
for Med Partners, Birmingham, Alabama, from April 1996 until July 1998. Prior
to that, Mr. Johnston was a senior principal of the law firm of Haskell,
Slaughter, Young & Johnston, a professional association, in Birmingham, Alabama,
where he practiced securities law for over 17 years. Mr. Johnston is also a
director of United Leisure.
Harvey Bibicoff has served as Chairman of the Board of Directors and as a
director of Harmony Holdings, Inc., a publicly-held producer of commercials,
since August 1991. Mr. Bibicoff served as the Chairman of the Board, Chief
Financial Officer, Secretary and as a director of Ventura Entertainment Group
Ltd. ("Ventura") from May 1988 through April 1995. From 1989 until March 1995,
he served as an officer and a director of The Producers Entertainment Group Ltd.
(formerly named Ventura Motion Picture Group Ltd.), a subsidiary of Ventura
whose stock is traded on Nasdaq as "TPEG." Since 1981, Mr. Bibicoff has been
the sole shareholder of Bibicoff & Associates, Inc., a financial consulting firm
that was engaged in the representation of public companies in their
relationships with the investment banking and brokerage communities. Mr.
Bibicoff received a Bachelor of Sciences degree from Bowling Green State
University in 1960 as a business and finance major and a J.D. degree from
Columbia University School of Law in 1963. He has been a member of the New York
State Bar since 1963. Mr. Bibicoff was elected a director of the Company in
August 1993 and resigned as a director of the Company in February 1998.
Steven T. Ousdahl was elected Vice President--Administration of the Company
in August 1993. He has also served as Operations Administrator for LEI since
September 1985, in which capacity he managed the operations of the Love's
restaurant chain until its disposition and continues to administer LEI's
overseas operations. Prior to that time, for over 15 years, Mr. Ousdahl was
engaged as an operations executive in the food-service business for several
firms, all in the Southern California area, including IHOP Corp.
All directors hold office until the next Annual Meeting of Stockholders and
until their successors are elected and have qualified. Officers are elected to
serve, subject to the discretion of the Board of Directors, until their
successors are appointed.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who beneficially own more than 10% 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.
Officers, directors and beneficial owners of more than 10% of the Company's
Common Stock are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such forms furnished to the Company, or written representations that no
reports on Form 5 were required, the Company
22
<PAGE>
believes that for the period through September 27, 1998, all officers, directors
and greater-than-10% beneficial owners complied with all Section 16(a) filing
requirements applicable to them, except that Alvin Cassell and J. Brooke
Johnston, Jr. were each late in filing Form 3, and United Leisure Corporation
was late in filing one Form 4.
Item 10. Executive Compensation.
The following table sets forth the cash compensation paid by the Company to
Harry Shuster, pursuant to a consulting arrangement, during fiscal years 1998,
1997 and 1996 and the compensation paid by the Company to Stanley Shuster during
fiscal years 1998 and 1997, the first year in which Stanley Shuster's
compensation exceeded $100,000:
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
Annual Compensation
-----------------------------------------------
All Other
Name and Principal Position Year Salary Compensation
- --------------------------- ---- ------ ------------
<S> <C> <C> <C>
Harry Shuster 1998 $ 79,768(1) $22,832(2)
Chairman of the Board, 1997 323,244(3) 43,522(2)
President, Chief Executive Officer 1996 284,814 0
and Chief Financial Officer
Stanley Shuster 1998 $145,010(4) $ 6,000(5)
Executive Vice President 1997 145,000(6) 6,000(5)
</TABLE>
- --------------------
(1) $21,875 of this amount was paid to Harry Shuster in the fiscal year ended
September 27, 1998, with the remaining $57,893 deferred. The deferred amount
has not been paid to date. In addition, Mr. Shuster waived payment of
$229,174 under his consulting agreement for fiscal 1998. See "Consulting and
Employment Agreements," below.
(2) Represents payments with respect to the apartment Mr. Shuster uses when he
is in New York. For fiscal 1997, 100% of such costs were paid by the
Company. Effective October 1, 1997, 50% of such costs were paid by the
Company and 50% of such costs were paid by United Leisure. See Item 12,
"Certain Relationships and Related Transactions--Other Transactions."
(3) $101,939 of this amount was paid to Harry Shuster in the fiscal year ended
September 28, 1997, with the remaining $221,305 deferred. The deferred
amount has not been paid to date.
(4) Consists of $85,010 paid to Stanley Shuster as employment compensation and
an additional $60,000 paid to him as consulting fees.
(5) $500 per month car allowance.
(6) Consists of $85,000 paid to Stanley Shuster as employment compensation and
an additional $60,000 paid to him as consulting fees.
23
<PAGE>
Directors receive no cash compensation for their services to the Company as
directors, but are reimbursed for expenses actually incurred in connection with
attending meetings of the Board of Directors.
Consulting and Employment Agreements
The Company and Harry Shuster are parties to a Consulting Agreement, dated
as of June 1, 1993 (the "Consulting Agreement"). The Consulting Agreement
provides that Mr. Shuster will be engaged as an independent contractor by the
Company to act as the Chairman of the Board, President and Chief Executive
Officer and a director of the Company during the term of the Agreement. The
initial three-year term of the Consulting Agreement expired in May 1996, and the
Consulting Agreement is now continuing on a year-to-year basis until either
party terminates the Consulting Agreement by giving at least 60 days prior
notice of termination prior to the expiration of any one-year renewal term of
the Consulting Agreement. Mr. Shuster receives minimum annual consulting fees
under the Consulting Agreement in the initial amount of $250,000 per annum,
which minimum amount is increased five percent per annum during each successive
year of the Consulting Agreement. Mr. Shuster is also provided with either the
use of a Company car to be used in carrying out his duties for the Company or a
$500 per month car allowance. The Consulting Agreement also provides for
certain disability benefits. The Company may maintain a $1,000,000 life
insurance policy on his life throughout the term of the Consulting Agreement.
The Company has obtained and maintains in force such life insurance policy. In
addition, Mr. Shuster has the right under the terms of the Consulting Agreement
to increase the size of the Board of Directors of the Company by one director
and to fill this vacancy prior to the election of directors by the stockholders.
In addition, at each meeting of stockholders of the Company at which directors
are to be elected, Mr. Shuster has the right to request, and the Company shall
place, Mr. Shuster and any designee of Mr. Shuster on the management slate of
directors to be put up for election at any such meeting of stockholders. In
addition, if at any time during the term of the Consulting Agreement, the number
of directors is increased to more than four, then Mr. Shuster has the right to
designate at least 50% of the whole Board of Directors of the Company. The
Consulting Agreement provides that as long as Mr. Shuster spends as much time as
necessary to properly carry out his duties as Chairman of the Board, President
and Chief Executive Officer of the Company, he will be otherwise permitted to
spend a reasonable amount of time pursuing other outside interests. Because Mr.
Shuster is involved in multiple business enterprises in addition to the Company,
Mr. Shuster may have a conflict of interest if his services should be required
by both the Company and one of Mr. Shuster's other business enterprises. See
Item 9, "Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act--Directors and Executive
Officers." The Consulting Agreement terminates upon Mr. Shuster's death or in
the event of a breach of the Consulting Agreement by Mr. Shuster.
The Company has entered into an Employment Agreement (the "Employment
Agreement") with Stanley Shuster, pursuant to which Stanley Shuster serves as a
Vice President of the Company for an initial term of three (3) years. The
Employment Agreement is renewed automatically for additional terms of one year
each. Pursuant to the Employment Agreement, Stanley Shuster receives
compensation of at least $145,000 per annum.
24
<PAGE>
Stock Options
1996 Stock Option Plan
The Company's 1996 Stock Option Plan (the "Option Plan") provides officers,
directors, key employees and other key contributors of the Company an
opportunity to purchase the Common Stock of the Company pursuant to "non-
qualified stock options" which may be granted at the discretion of the Board of
Directors.
Under the Option Plan, options to purchase an aggregate of 626,250 shares
of Common Stock may be granted. The purchase price shall be no less than 85% of
the fair market value of the Common Stock on the date of grant. The Board of
Directors of the Company, or a committee established by the Board of Directors
shall determine, among other things (i) the purchase price of the shares covered
by each option, (ii) whether any payment will be required upon grant of the
option, (iii) the individual to whom and the time or times at which options
shall be granted, (iv) the number of shares to be subject to each option and (v)
when an option can be exercised and whether in whole or installments.
At September 27, 1998, there were outstanding presently exercisable non-
qualified stock options to purchase an aggregate of 25,000 shares of the Common
Stock of the Company held by a former director of the Company, Arnold Wasserman,
at an option price of $3.00 per share. Mr. Wasserman resigned as a director of
the Company in June 1995. The option was granted at an exercise price
approximately equal to the then fair market value of the Company's Common Stock
in consideration of Mr. Wasserman's service on the Board of Directors. The
option may be exercised at any time during its five-year term, is
nontransferable except by will or pursuant to the laws of descent and
distribution, and is protected against dilution.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of September 27, 1998, (a) by each
person who is known by the Company to own beneficially more than 5% of the
Company's Common Stock, (b) by each of the Company's Directors and (c) by all
officers and directors of the Company as a group:
25
<PAGE>
<TABLE>
<CAPTION>
Percentage
Name and Address Number of Shares Ownership
of Beneficial Owner(1) Beneficially Owned(2)(3) of Class(3)
- ---------------------- ------------------------ -----------
<S> <C> <C>
Harry Shuster 1,453,466(4) 10%
Harvey Bibicoff 225,000(5) *
Alvin Cassell 0 0
J. Brooke Johnston, Jr. 5,200 *
United Leisure 966,666 6.8%
Corporation
The Venezuela Recovery 913,978(7) 6.3%
Fund N.V.(6)
The International Investment 1,278,896(8) 8.8%
Group Equity Fund N.V.(6)
Stanley Shuster 100,000(9) *
All officers and directors 1,558,666(4)(9)(10) 10.6%
as a group (5 people)
</TABLE>
- --------------------
* less than 1%
(1) Each person's address is c/o the Company, 1990 Westwood Boulevard, Los
Angeles, California 90025, unless otherwise noted.
(2) Unless otherwise indicated, the Company believes that all persons named in
the table have sole voting and investment power with respect to the shares
of Common Stock beneficially owned by them.
(3) A person is deemed to be the beneficial owner of Common Stock that can be
acquired by such person within 60 days of the date hereof upon the exercise
of warrants or stock options. Except as otherwise specified, each beneficial
owner's percentage ownership is determined by assuming that warrants and
stock options that are held by such person (but not those held by any other
person) and that are exercisable within 60 days from the date hereof, have
been exercised.
(4) Includes 100,000 shares of Common Stock, and warrants to purchase an
additional 100,000 shares of Common Stock, owned by The Harry and Nita
Shuster Charitable Foundation. Includes warrants to purchase 333,333 shares
owned by Mr. Shuster. Does not include 966,666 shares owned by United
Leisure, a public company of which Mr. Shuster is Chairman of the Board,
Chief Executive Officer, President and a director, and as to which shares
Mr. Shuster disclaims beneficial ownership.
(5) Includes 25,000 shares owned by Clarinda Investments, Inc. of which
corporation Mr. Bibicoff is the sole shareholder and a director. Includes
200,000 shares owned by H&H Restaurant Holding Corporation, of which
corporation Mr. Bibicoff is the sole shareholder and a director. Mr.
Bibicoff resigned as a director of the Company in February 1998. See Item
12, "Certain Relationships and Related Transactions."
(6) The address of this shareholder is Kaya Flamboyan 9, P.O. Box 812, Curacao,
Netherlands Antilles.
(7) Includes warrants to purchase 304,666 shares of Common Stock.
(8) Includes warrants to purchase 426,299 shares of Common Stock.
26
<PAGE>
(9) Includes stock options to purchase 100,000 shares of Common Stock held by
an officer and director of the Company.
(10) Excludes 966,666 shares of Common Stock owned by United Leisure.
Item 12. Certain Relationships and Related Transactions.
Sale of Common Stock By Chicken & Ribs, Inc. On February 4, 1994, Chicken
--------------------------------------------
& Ribs, Inc. ("C&R"), one of the initial stockholders of the Company, sold
1,066,000 shares of the Common Stock of the Company owned by it to H&H
Restaurant Holding Corporation ("H&H"), a corporation which prior to November 1,
1996, was 50%-owned by each of Harry Shuster, Chairman of the Board, President,
Chief Executive Officer, Chief Financial Officer, a director and a principal
stockholder of the Company, and Clarinda Investments, Inc., a corporation
controlled by Harvey Bibicoff, who, until February 1998, was a director of the
Company. The original purchase price paid by H&H for the 1,066,000 shares was
$4.00 per share. Payment of the purchase price was evidenced by a Promissory
Note in the principal amount of $4,264,000 drawn to the order of C&R and made by
H&H (the "Promissory Note"). C&R had originally paid a total of $133,250 for
the 1,066,000 shares in June 1993. Because H&H was unable to pay the Promissory
Note when it initially became due, the parties extended the due date of the
Promissory Note, made the note non-recourse and C&R agreed to accept as full and
complete satisfaction of the Promissory Note any proceeds received by H&H from
the sale of the 1,066,000 shares of the Common Stock of the Company held by H&H,
whether or not such value is equal to the principal amount and accrued interest
on the Promissory Note, more or less. In this regard, the Company registered
for resale, on behalf of H&H, the 1,066,000 shares of Common Stock. H&H has
sold an aggregate of 250,000 of such shares to date and intends to continue to
sell these shares on a delayed or continuous basis in order to meet its
obligations under the Promissory Note. As of November 1, 1996, Harvey Bibicoff
acquired Harry's Shuster's 50% ownership interest in H&H and, accordingly, is
now the 100% shareholder and the sole officer and director of H&H.
In the event of the failure by H&H to pay the Promissory Note, the sole
recourse by C&R would be either to settle the matter by negotiation or to resort
to litigation to cause H&H to sell the shares of Common Stock. Under no
circumstances, including a default in payment of amounts owed under the
Promissory Note, will C&R or any of its shareholders acquire clear title to, or
any right to vote or control, the shares transferred to H&H to which C&R or its
shareholders may become entitled, any such shares shall be placed with the court
or a mutually agreed-upon fiduciary. Such shares shall be placed in a
segregated account in a manner which prohibits C&R and its shareholders from
exercising any rights of ownership with respect to such shares.
Lease of Office Premises. The Company entered into a five-year lease with
------------------------
1990 Westwood Boulevard, Inc. covering approximately 6,000 square feet of office
space for its principal executive offices. The lease provides for rent of
$4,000 per month through January 31, 1998, and rent of $4,400 per month
thereafter through the end of the term of the lease in January 2001. 1990
Westwood Boulevard, Inc. is presently owned 65% by Harry Shuster, Chairman of
the Board, President, Chief Executive Officer, Chief Financial Officer, a
director and a principal stockholder of the Company, and 35% by Jordan Belfort.
Pursuant to an agreement dated as of December 9, 1997, Mr. Shuster acquired the
15% interest previously owned by Daniel and Nancy Porush. Messrs. Belfort and
Porush are shareholders of C&R, one of the initial stockholders of the Company.
27
<PAGE>
The Company believes that the rent and other terms of the lease are no more
favorable to the lessor than could have been obtained in a similar building in
the same area from an unrelated lessor.
Transactions With United Leisure. In connection with the lease for the
--------------------------------
Company's New York Grand Havana Room, the Company was required to provide a
letter of credit. In order to establish this letter of credit the Company
entered into a financing agreement dated September 10, 1996, with its affiliate,
United Leisure, pursuant to which United Leisure pledged the sum of $875,000 in
order for the Company to obtain the required letter of credit. The Company had
initially agreed to apply one-half of all initial membership fees received from
members of its New York, New York, and Washington, D.C., Grand Havana Rooms to
replace the cash collateral pledged by United Leisure, and, in any event, the
Company has agreed to replace all of the cash collateral within 18 months after
United Leisure's pledge of the cash collateral. In consideration for United
Leisure's pledging the collateral for the letter of credit, the Company has
agreed to pay an amount to United Leisure equal to 10% per annum on the amount
of the pledged cash collateral as it exists from time to time. As additional
consideration, the Company agreed to issue 100,000 shares of its Common Stock to
United Leisure, and has agreed to grant to United Leisure a warrant to purchase
an additional 100,000 shares of Common Stock of the Company, which warrant is
exercisable for a period of five years at an exercise price of $.75 per share.
The warrant was subsequently exercised by United Leisure. On July 15, 1997, the
Company and United Leisure entered into an amendment to the financing agreement
pursuant to which amendment, in consideration for United Leisure agreeing to
forego the requirement that the Company replace the collateral pledged by United
Leisure from the initial membership fees it received from its New York and
Washington, D.C., Grand Havana Rooms, the Company agreed to issue to United
Leisure or its designee a warrant to purchase 150,000 shares of its Common Stock
at an exercise price of the lesser of $.75 per share or 75% of the average of
the last trade price for the Common Stock for the 10-day period prior to the
exercise of the warrant. United Leisure subsequently designated Westminster
Capital, Inc, an unrelated third party, as the entity to receive this warrant.
The Company had fully replaced the collateral pledged by United Leisure to
support the letter of credit by October 1997. Harry Shuster, the Chairman of the
Board, President, Chief Executive Officer, Chief Financial Officer, a director
and a principal stockholder of the Company is Chairman of the Board, Chief
Executive Officer, President, a director and a principal stockholder of United
Leisure.
In February 1997, the Company entered into a second financing agreement
with United Leisure pursuant to which agreement United Leisure agreed to provide
advances to the Company from time to time during a period of six months.
Interest on any amounts advanced bears interest at the rate of 9% per annum
until paid. In consideration for making the loan, the Company issued 75,000
shares of its Common Stock to United Leisure. The agreement further provided
that if all of the advances plus accrued but unpaid interest thereon were not
paid on or prior to September 30, 1997, that the Company would issue an
additional 25,000 shares of its Common Stock to United Leisure. The loan was
not repaid by September 30, 1997, and the parties agreed to extend the maturity
date of the advances made under this financing agreement to September 30, 1998.
As of September 28, 1997, the principal balance of $536,000 remained
outstanding.
28
<PAGE>
As of September 27, 1998, United Leisure held 966,666 shares of the
Company's Common Stock.
Transactions With UFD. In May 1997, the Company entered into a financing
---------------------
agreement with UFD, an affiliate of the Company, whereby UFD agreed to provide
advances to the Company from time to time. Interest on any amount advanced
bears interest at the rate of prime pus 3%. The full principal amount and all
accrued but unpaid interest on any amounts advanced is due and payable on
demand, which demand may not be made prior to September 30, 1998. At September
27, 1998, an aggregate of $507,000 principal remained due under this financing
agreement. Harry Shuster, the Chairman of the Board, President, Chief Executive
Officer, Chief Financial Officer, a director and a principal stockholder of the
Company is the Chairman of the Board of UFD. Brian Shuster, a son of Harry
Shuster, is the President of UFD.
Other Transactions. During the fiscal year ended September 27, 1998, Harry
------------------
Shuster made advances to the Company from time to time. At September 27, 1998,
the principal balance owed to Mr. Shuster is $765,000. This amount is secured by
a lien on all of the Company's assets.
The Company leases on a month-to-month basis an apartment for Harry
Shuster's use while he is in New York on business at a monthly rent of $3,000
plus common area maintenance charges. Effective October 1, 1997, this expense
has been shared with United Leisure, an affiliate of the Company. Rent expense
incurred in the fiscal year ended September 27, 1998, by the Company for this
apartment was $22,832. The Company believes this amount is similar to hotel
costs the Company would have incurred had such apartment not been available to
Mr. Shuster.
PART IV
Item 13. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a) Financial Statements.
--------------------
The audited consolidated financial statements of Grand Havana Enterprises,
Inc. and Subsidiaries filed as a part of this Annual Report on Form 10-KSB are
listed in the "Index to Consolidated Financial Statements" preceding the
Company's Consolidated Financial Statements, which directly follow this Part IV
of this Annual Report on Form 10-KSB, which "Index to Consolidated Financial
Statements" is hereby incorporated herein by reference.
(b) Exhibits.
--------
See index to exhibits.
(c) Reports on Form 8-K.
-------------------
None.
29
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<S> <C>
Report of Independent Auditors F-1
Consolidated Balance Sheets
as of September 28, 1997 and September 27, 1998 F-2 - F-3
Consolidated Statements of Operations
for the Years Ended September 28, 1997 and September 27, 1998 F-4
Consolidated Statement of Stockholders' Equity
for the Years Ended September 28, 1997 and September 27, 1998 F-5
Consolidated Statements of Cash Flows
for the Years Ended September 28, 1997 and September 27, 1998 F-6
Notes to Consolidated Financial Statements
as of September 28, 1997 and September 27, 1998 F-7 - F-17
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders
Grand Havana Enterprises, Inc.
We have audited the accompanying consolidated balance sheets of Grand Havana
Enterprises, Inc. and Subsidiaries as of September 28, 1997 and September 27,
1998 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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 Grand Havana
Enterprises, Inc. and Subsidiaries at September 28, 1997 and September 27, 1998,
and the results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.
HOLLANDER, LUMER & CO. LLP
Los Angeles, California
November 23, 1998, except for Note 10 as to which the date is September 17, 1999
F-1
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 879,461 $ 95,344
Accounts receivable, less allowance for doubtful accounts
of $307,762 in 1997 and $6,500 in 1998 56,924 133,212
Current portion of note receivable 24,829 26,623
Subscriptions receivable 1,288,950 -
Inventories 786,168 663,955
Prepaid expenses 206,685 214,555
Net assets of discontinued operations 237,143 -
---------- ----------
TOTAL CURRENT ASSETS 3,480,160 1,133,689
PROPERTY AND EQUIPMENT, Net 4,458,734 4,100,546
OTHER ASSETS
Restricted cash 118,596 937,057
Note receivable, net of current portion 55,171 28,548
Pre-opening costs 6,895 23,844
Due from related parties 78,032 145,737
Deferred charges 205,596 67,106
Deposits and other assets 95,650 85,627
---------- ----------
TOTAL OTHER ASSETS 559,940 1,287,919
---------- ----------
$8,498,834 $6,522,154
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-2
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED
SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
1997 1998
------------- -------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to related parties $ 1,482,000 $ 1,343,000
Bank overdraft - 89,083
Accounts payable 1,054,547 1,114,655
Accrued liabilities 203,942 172,237
Deferred revenues 57,026 129,905
Due to related parties 420,599 923,333
Deferred rent payable 488,606 559,478
Accrued costs of discontinued operations 200,000 -
----------- ------------
TOTAL CURRENT LIABILITIES 3,906,720 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 -
11,799,306 shares in 1997 and 14,174,306
shares in 1998 117,994 141,744
Additional paid-in capital 12,684,723 13,279,044
Accumulated deficit (8,210,603) (11,230,325)
----------- ------------
TOTAL STOCKHOLDERS' EQUITY 4,592,114 2,190,463
----------- ------------
$ 8,498,834 $ 6,522,154
=========== ============
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-3
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
1997 1998
------------ ------------
<S> <C> <C>
REVENUES
Food and beverage $ 2,820,785 $ 2,842,836
Merchandise sales 408,687 815,728
Membership fees 1,186,591 1,629,287
Initial territorial rights 600,000 -
Other 60,904 235,201
----------- -----------
TOTAL REVENUES 5,076,967 5,523,052
----------- -----------
COSTS AND EXPENSES
Food and beverage 1,116,841 1,119,358
Merchandise 272,804 400,392
Operating expenses
Direct labor and benefits 1,939,862 2,282,024
Occupancy and other 2,545,237 2,709,708
Pre-opening expense 488,492 8,986
General and administrative 1,435,403 963,513
Depreciation and amortization 289,895 439,255
Impairment losses - 487,657
----------- -----------
TOTAL COSTS AND EXPENSES 8,088,534 8,410,893
----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (3,011,567) (2,887,841)
----------- -----------
OTHER INCOME (EXPENSE)
Interest income 14,332 43,304
Interest expense (266,858) (168,980)
Other, net 4,276 -
----------- -----------
TOTAL OTHER INCOME (EXPENSE) (248,250) (125,676)
----------- -----------
LOSS FROM CONTINUING OPERATIONS (3,259,817) (3,013,517)
DISCONTINUED OPERATIONS
Loss from operations (94,809) (188,800)
Estimated loss on disposal, including a provision of
$400,000 for operating losses during the phase-out period (441,283) -
Gain on sale of assets - 182,595
----------- -----------
LOSS FROM DISCONTINUED OPERATIONS (536,092) (6,205)
----------- -----------
NET LOSS $(3,795,909) $(3,019,722)
=========== ===========
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING 8,231,400 13,524,000
=========== ===========
BASIC AND DILUTED LOSS PER SHARE
Loss from continuing operations $ (.40) $ (.22)
Loss from discontinued operations (.06) -
Estimated loss on disposal (.05) -
----------- -----------
$ (.46) $ (.22)
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-4
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
YEARS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
Common Stock Additional
------------------------- Paid-In Accumulated
Shares Amount Capital Deficit Total
------------ ---------- ----------- ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance - September 30, 1996 6,362,500 $ 63,625 $ 7,850,042 $ (4,414,694) $ 3,498,973
Common stock issued
as financing cost 75,000 750 138,000 138,750
Common stock issued for
services 220,000 2,200 374,100 376,300
Common stock issued for
warrants exercised 433,333 4,333 570,667 575,000
Common stock issued in
private placements 1,479,206 14,793 1,419,707 1,434,500
Common stock issued in
Regulation S offerings 3,229,267 32,293 2,303,207 2,335,500
Options and warrants
issued for services and fees 29,000 29,000
Net loss - year ended
September 28, 1997 (3,795,909) (3,795,909)
---------- -------- ----------- ------------ -----------
Balance - September 28, 1997 11,799,306 $117,994 $12,684,723 $ (8,210,603) $ 4,592,114
Common stock issued
as financing cost 25,000 250 38,431 38,681
Common stock issued for
services 50,000 500 60,500 61,000
Common stock issued for
warrants exercised 1,100,000 11,000 247,390 258,390
Common stock issued in
Regulation S offerings 1,200,000 12,000 248,000 260,000
Net loss - year ended
September 27, 1998 (3,019,722) (3,019,722)
---------- -------- ----------- ------------ -----------
Balance - September 27, 1998 14,174,306 $141,744 $13,279,044 $(11,230,325) $ 2,190,463
========== ======== =========== ============ ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-5
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
<TABLE>
<CAPTION>
1997 1998
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(3,795,909) $(3,019,722)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 386,197 440,892
Loss on impairment - 487,657
Amortization of deferred charges 142,804 138,490
Estimated loss on disposal of discontinued operations 200,000 -
Gain on sale of assets of discontinued operation - (182,595)
Common stock, options and warrants issued for services and
financing costs 275,650 99,681
Changes in operating assets and liabilities:
Accounts receivable 68,478 (76,288)
Inventories (576,114) 122,213
Prepaid expenses (61,498) (7,870)
Pre-opening costs 125,828 (16,949)
Deposits and other assets 6,839 10,023
Accounts payable and other accrued liabilities 932,050 66,137
Deferred revenues 57,026 72,879
Deferred rent payable 488,606 70,872
Accrued costs of discontinued operations - (200,000)
----------- -----------
NET CASH USED IN OPERATING ACTIVITIES (1,750,043) (1,994,580)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (3,008,828) (570,361)
Proceed from sale of assets of discontinued operation - 419,738
Due from related parties (8,613) (67,705)
Collection of equipment contract receivable 330,000 -
Restricted cash (118,596) (818,461)
----------- -----------
NET CASH USED IN INVESTING ACTIVITIES (2,806,037) (1,036,789)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of short-term and long-term obligations (172,571) -
Collection of subscriptions receivable - 1,288,950
Bank overdraft - 89,083
Collection of note receivable - 24,829
Sale of common stock 3,056,050 518,390
Borrowings from related parties 1,932,000 765,000
Advances from officer 60,000 -
Repayments of borrowings from related parties (450,000) (439,000)
----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,425,479 2,247,252
----------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS (130,601) (784,117)
CASH AND CASH EQUIVALENTS, beginning of period 1,010,062 879,461
----------- -----------
CASH AND CASH EQUIVALENTS, end of period $ 879,461 $ 95,344
=========== ===========
NON-CASH TRANSACTIONS
Common Stock, options and warrants issued for services and
financing costs $ 275,650 $ 99,681
=========== ===========
OTHER CASH INFORMATION
Interest paid $ 127,692 $ 198,352
=========== ===========
Interest received $ 14,332 $ 43,304
=========== ===========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
F-6
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 28, 1997 AND SEPTEMBER 27, 1998
1. BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
Description of Business. Grand Havana Enterprises, Inc., formerly United
------------------------
Restaurants, Inc. (the "Company"), was incorporated under the laws of the
State of Delaware on April 13, 1993. The Company is engaged in the business
of the ownership, operation and development of private membership cigar
clubs/restaurants known as "Grand Havana Rooms", and retail cigar stores
known as "Grand Havana House of Cigars". The Company currently owns and
operates three Grand Havana Rooms and three Grand Havana House of Cigars.
The Company was originally formed to acquire all of the capital stock of
Love's Enterprises, Inc. ("Love's"). Love's is in the business of
franchising Love's restaurants. Love's restaurants specialize in barbecued
pork and beef, with an emphasis on ribs. The Company acquired the stock of
Love's in May 1993. In December 1996, the Company adopted a plan of
discontinuance of Love's franchising business, including Company-owned
Love's restaurants (see Note 3).
Principles of Consolidation. The consolidated financial statements include
----------------------------
the accounts of Grand Havana Enterprises, Inc. and its wholly-owned
subsidiaries. All significant intercompany transactions and balances have
been eliminated in consolidation.
Use of Estimates. The preparation of financial statements in conformity with
-----------------
generally accepted accounting principles requires management to make
estimates and assumptions that affect certain reported amounts and
disclosures. Accordingly, actual results could differ from those estimates.
Cash and Cash Equivalents. The Company considers all highly liquid
--------------------------
investments purchased with an original maturity of three months or less to
be cash equivalents.
Fair Value of Financial Instruments. The Company's financial instruments
------------------------------------
consist of cash equivalents, trade accounts receivable, notes receivable,
trade accounts payable and term loans. The fair value of the Company's
financial instruments approximate the carrying value of the instruments.
Inventories. Inventories, consisting of food and beverage products, cigars
------------
and other merchandise, are stated at the lower of cost (first-in, first-out
method) or market.
Property and Equipment. Property and equipment are stated at cost.
-----------------------
Depreciation is provided using the straight-line method over the estimated
useful lives of the assets. Leasehold improvements are amortized on the
straight-line method over the shorter of the lease term or estimated useful
lives of the assets. Useful lives generally are as follows:
Leasehold improvements 5 to 15 years
Restaurant equipment 2 to 8 years
Other equipment 3 to 15 years
Property and equipment are reviewed for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
recoverable. An impairment loss should be recognized when the aggregate of
estimated future cash inflows (less estimated future cash outflows) to be
generated by an asset is less than the asset's carrying value. Future cash
inflows includes an estimate of the proceeds from eventual disposition. For
purposes of this comparison, estimated future cash flows are determined
without reference to their discounted present value. If the sum of
undiscounted estimated future cash inflows is equal to or greater than the
asset's carrying value, impairment does not exist. If, however, expected
future cash inflows are less than carrying value, a loss on impairment
F-7
<PAGE>
should be recorded. Such a loss is measured as the excess of the asset's
carrying value over its fair value. Fair value of an asset is the amount at
which an asset could be bought or sold in a current transaction between a
willing buyer and seller other than in a forced or liquidation sale. The
Company measures an impairment loss by comparing the fair value of the asset
to its carrying amount. Fair value of an asset is calculated as the present
value of expected future cash flows.
Pre-Opening Costs. Restaurant and cigar club pre-opening costs are deferred
------------------
and charged to operations when the location is opened or the location plans
are abandoned.
Membership Fees. Membership fee revenue represents initial and monthly
----------------
membership fees paid by members of the Company's "Grand Havana Room" clubs.
Initial membership fees are deferred and recognized as income when
membership services commence. Monthly membership fees are recognized as
income when earned.
Initial Territorial Fees. Revenues from the sale of initial territorial
-------------------------
rights are recognized, net of allowance for uncollectible amounts, when
substantially all significant services to be provided by the Company have
been performed.
Stock-Based Compensation. Statement of Financial Accounting Standard
-------------------------
("SFAS") No. 123, "Accounting for Stock-Based Compensation", encourages, but
does not require, companies to record compensation cost for stock-based
employee compensation plans at fair value. The Company has chosen to
continue to account for stock-based compensation using the intrinsic value
method as prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees", and related Interpretations,
under which no compensation cost related to stock options has been
recognized as the exercise price of each option at the date of grant was
equal to the fair value of the underlying common stock.
Lease Commitment. Rent expense is recognized on a straight-line basis over
-----------------
the term of the lease.
Earnings (Loss) per Share. The Company adopted SFAS No. 128 "Earnings per
---------------------------
Share" during its fiscal year ended September 27, 1998. SFAS No. 128
requires the presentation of basic earnings per common share and diluted
earnings per common share. A basic earnings per common share is computed by
dividing income available to common stockholders by the weighted average
number of common shares outstanding. A diluted earnings per common share
includes the diluting effect of stock options and warrants using the
treasury stock method. The Company had loss from continuing operations,
and, as a result, basic and diluted loss per share are the same amount.
Reclassifications. Certain 1997 balances have been reclassified to conform
------------------
with 1998 presentation.
Recent Accounting Pronouncements
--------------------------------
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income (i.e., foreign currency
translation gains/losses and unrealized gains/losses on securities) and its
components in a full set of general-purpose financial statements. This
Statement requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)display
the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. This statement is effective for financial
statements for periods beginning after December 15, 1997. The impact of SFAS
130 will not be material to the Company's financial disclosures.
SFAS No. 131, "Disclosure about Segments of an Enterprise and Related
Information", establishes standards for public business enterprises to
report information about operating segments in annual financial statements
and requires those enterprises to report selected information about
operating segments in interim financial reports issued to stockholders. It
also establishes the standards for related disclosures
F-8
<PAGE>
about products and services, geographic areas, and major customers. This
statement requires a public business enterprise to report financial and
descriptive information about its reportable operating segments. The
financial information is required to be reported on the basis that is used
internally for evaluating segment performance and deciding how to allocate
resources to segments. Operating segments are components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision-maker in deciding how to allocate
resources and in assessing performance. This statement is effective for
financial statements for periods beginning after December 15, 1997. The
impact of SFAS 131 will not be material to the Company's financial
disclosures, since in the fiscal year 1998, the Company had discontinued
Love's franchising business, including Company-owned Love's restaurants (see
Note 3).
Statement of Position ("SOP") No. 98-5 "Reporting on the Costs of Start-Up
Activities" requires that costs of start-up activities, including
organization costs, be expensed as incurred. This SOP is effective for
financial statements for fiscal year beginning after December 15, 1998.
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". The Company will change its accounting policy on Pre-
Opening Costs upon adoption of this statement.
2. DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES
Significant Operating Losses. The Company has experienced operating losses
-----------------------------
since its inception. For the fiscal years ended September 28, 1997 and
September 27, 1998, the Company experienced net losses of $3,795,909 and
$3,019,722, respectively. The Company anticipates that it will continue to
experience losses as it continues working on its ongoing development and
reorganization plans, including the establishment of additional Grand Havana
Rooms and Grand Havana House of Cigars. Even after the Company's development
and reorganization plans are completed, there can be no assurance that the
cigar clubs/restaurants owned by the Company will be profitable.
Significant Capital Requirements. The Company's capital requirements have
---------------------------------
been and will continue to be significant. At September 27, 1998, the
Company had cash and cash equivalents of $95,344 and a working capital
deficit of $3,198,002. As a result of its expansion activities, the
Company's working capital has continually been reduced. The Company will
need additional financing, which the Company may raise through the private
placements of its securities. There can be no assurance that additional
financing will be available to the Company on acceptable terms, or at all.
Effective the close of business on October 27, 1998, the NASDAQ Stock
Market, Inc. delisted the Company's common stock from NASDAQ for failure to
meet the minimum bid requirement. Since that time the Company's common
stock has been quoted on the OTC Bulletin Board.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and satisfaction of
liabilities in the normal course of business. The financial statements do
not include any adjustments relating to the recoverability of the recorded
assets or the classification of the liabilities that might be necessary
should the Company be unable to continue as a going concern.
California Smoke-Free Workplace Act of 1994. In 1994 the California
--------------------------------------------
legislature enacted the California Smoke-Free Workplace Act of 1994 which
prohibits smoking in enclosed spaces at places of employment with certain
exemptions. Since the inception of the Company's Beverly Hills Grand Havana
Room, the Company has relied upon an exemption in the law that expressly
exempts from its coverage retail tobacco shops and private smoker's
lounges. Although the Company believes it is justified in relying on the
"private smoker's lounge" exemption, if it should be determined in the
future that the Company is not a "private smoker's lounge", but rather a
restaurant or a bar to which the California Smoke-Free Workplace Act of
1994 were
F-9
<PAGE>
applicable, this would have a material adverse effect on the
Company's business, financial condition and results of operations.
3. DISCONTINUED OPERATIONS
In December 1996, the Company adopted a formal plan of discontinuance of
its Love's franchising and restaurants operations except its international
licensing rights to the Love's restaurants. At the time of the adoption,
the Company operated three Company-owned Love's restaurants and was the
franchisor of an additional ten Love's restaurants. In May 1997, the
Company sold its Company-owned Love's restaurant in San Bernardino,
California to the franchisee of this location in consideration for the
franchisee becoming a sublessee of the premises leased by the Company for
the remainder of the lease term. In June 1997 the Company acquired a Love's
restaurant in Lakewood, California from its franchisee, when the franchisee
went into bankruptcy and the Company took over operations of this Love's
restaurant. In August 1997, the Company sold its Company-owned Love's
restaurant in Beverly Hills, California for an aggregate sales price of
$120,000, payable $40,000 in cash and $80,000 in a three-year 7% promissory
note payable in monthly installments. As of September 28, 1997, the Company
had two Company-owned Love's restaurants and was the franchisor of an
additional nine Love's restaurants.
In January 1998, the Westchester Love's restaurant ceased operations. The
Company and the landlord of this property have agreed to terminate the
lease early, in exchange for a net payment to be made by the landlord to
the Company of $23,677. The Company has retained the liquor license at this
location and expects to transfer it during the fiscal year 1999 for
$11,000. Pursuant to an agreement dated February 24, 1998 that closed on
July 30, 1998, the Company sold the remaining domestic assets of its Love's
franchise operations, consisting primarily of the Lakewood, California
Love's restaurant and the franchise rights to nine remaining Love's
franchised restaurants for a total purchase price of $135,000.
Additionally, the Company guaranteed certain of Love's undisclosed
obligations as of February 24, 1998 with respect to the foregoing
transactions, for which the Company was paid $50,000. The Company's maximum
liability under said guarantee is $195,000.
Operating results of Love's for the three months ended December 29, 1996
are shown separately as discontinued operations in the accompanying
consolidated statement of operations for 1997.
Total revenues of Love's for 1997 and 1998 were $2,645,838 and $620,046,
respectively. These amounts are not included in total revenues from
continuing operations in the accompanying consolidated statements of
operations.
Assets and liabilities of Love's to be disposed of at September 28, 1997
consisted of property and equipment of $208,243 and liquor licenses of
$28,900. Net assets of discontinued operations have been separately
classified in the accompanying consolidated balance sheet at September 28,
1997.
The estimated loss on the disposal of the discontinued operations of
$441,283 represents the estimated loss on the disposal of the assets of
Love's and a provision of $400,000 for expected operating losses during the
phase-out period from January 1, 1997 through February 28, 1998.
Approximately $195,000 of the expected operating loss was incurred from
January 1, 1997 through September 28, 1997. Actual operating losses of the
discontinued operations during the year ended September 27, 1998 exceeded
the estimate by $188,800 and the actual gain on the sale of assets exceeded
the estimate by $182,595. Accordingly, the accompanying statement of
operations for 1998 includes an additional loss of $6,205.
No income tax benefits have been allocated to Love's losses because there
are no realizable taxable benefits available to allocate to the
discontinued operations. Love's losses are included in the Company's net
operating loss carryforwards disclosed in Note 6.
F-10
<PAGE>
4. TERRITORY RIGHTS AGREEMENT
Love's Far Eastern Territory Rights Agreement. In August 1994, the Company
----------------------------------------------
entered into a Territory Rights Agreement with PT Transpacific Ekagraha, an
Asian holding company. Under the Territory Rights Agreement, the territory
rights holder paid to the Company a non-refundable initial development fee
of $200,000 for the rights to develop Love's Woodpit Barbecue Restaurants
in Asia. The territory rights holder has committed to construct at least
eight Love's Restaurants in portions of Asia, including Mainland China,
Hong Kong, Indonesia, Singapore, Malaysia and Republic of China-Taiwan,
during the three years ended August 1997. The Agreement provides for
additional payments to the Company at the opening of each restaurant and
for continuing royalties ranging from 5%-8.75% of gross sales. Under the
Agreement, the Company is to provide certain training, management and other
services during the term of the Agreement. The initial development services
required under the agreement were performed and completed during the fiscal
year ended September 30, 1996. Given the recent decline in the Asian
economy, there can be no assurance that any or all of the obligations of PT
Transpacific Ekagraha under the territory rights agreements will be
satisfied or that any Love's restaurant will be opened in Asia.
Grand Havana Far Eastern Territory Rights Agreement. In May 1997, the
----------------------------------------------------
Company entered into an agreement with Grand Havana Room (Asia) Holdings,
Ltd., a Hong Kong corporation ("Grand Havana Asia"), pursuant to which the
Company has granted to Grand Havana Asia certain exclusive territories in
the Far East, including Hong Kong, Taiwan, China, Singapore, Malaysia,
Thailand, Japan, Philippines and Korea for a term of 75 years. Grand Havana
Asia agreed to pay the Company for the exclusive right to use the name
Grand Havana Room in the territory a non-refundable territorial fee of
$600,000, of which $300,000 was paid upon execution of the agreement and
the balance of $300,000 was payable on the earlier of the opening of the
first Grand Havana Room in Hong Kong or April 30, 1998. The Company was
required to provide comprehensive development and training services in
connection with the opening of the first and all subsequent Grand Havana
Rooms in the territories. In return for such services, the Company was to
receive 25% of the initial membership fees paid by the members of the Grand
Havana Room in Hong Kong and 15% of the initial membership fees paid with
respect to subsequent Grand Havana Rooms. Further the Company was to
receive 6% of the monthly gross revenues from each Grand Havana Room. At
September 30, 1997, the Company has provided for an allowance for
uncollectible accounts for the $300,000 receivable. During 1998, the
parties terminated the agreement. As a result, the Company wrote-off the
receivable.
5. PROPERTY AND EQUIPMENT
Property and equipment is comprised of the following at September 28, 1997
and September 27, 1998:
<TABLE>
<CAPTION>
1997 1998
---------- -----------
<S> <C> <C>
Leasehold improvements $3,988,242 $ 4,318,791
Restaurant equipment 892,207 910,828
Office equipment 153,154 189,464
Signage - 184,881
---------- -----------
$5,033,603 $ 5,603,964
Less accumulated depreciation
and amortization (574,869) (1,015,761)
Loss on impairment - 487,657
---------- -----------
$4,458,734 $ 4,100,546
========== ===========
</TABLE>
The Company's Washington D.C. operation generated increasing cash flow
losses. These circumstances indicated that the carrying amounts of property
and equipment related to this location might not be recoverable.
Accordingly, management reviewed the property and equipment related to this
facility for recoverability in accordance with SFAS No. 121 and determined
that these assets were impaired. As of September 27, 1998, the Company made
provision for impairment loss of $487,657. See Note 10.
F-11
<PAGE>
The depreciation expense charged to operation for the year ended September
28, 1997 and September 27, 1998 were $386,197 and $440,892, respectively.
6. INCOME TAXES
At September 27, 1998, the Company had approximate net operating loss
carryforwards for federal tax purposes expiring as follows (in million):
<TABLE>
<CAPTION>
Year Expires Amount
------------ ------
<S> <C>
1999 $ 2
2000 -
2004 -
2006 -
2007 -
2008 -
2009 1
2010 2
2011 1
2012 3
2013 3
---
TOTAL $12
===
</TABLE>
The Company had provided 100% allowance on all of its deferred income
taxes benefits.
7. COMMITMENTS AND CONTINGENCIES
Consulting Agreement. The Company and Mr. Harry Shuster are parties to an
---------------------
Agreement (the "Agreement") dated as of June 1, 1993, The Agreement
provides that Mr. Shuster will act as the Chairman of the Board, President
and Chief Executive Officer and a Director of the Company throughout the
rolling three year term of the Agreement for annual compensation initially
set at $250,000 per annum, to be increased five percent during each
successive year of the Agreement. Mr. Shuster is also to be provided with
either the use of a company car to be used in carrying out his duties for
the Company or a $500 per month car allowance. The Agreement provides for
certain disability benefits for a period of up to three years. The
Agreement provides for automatic one-year renewals for each contract year
that ends without termination of the Agreement by either party.
Operating Leases. The Company leases restaurant, club and corporate
----------------
facilities under operating leases with original terms ranging from 10 to 25
years. The lease obligations include provisions requiring the payment of
property taxes, insurance, repairs and maintenance, and generally contain
renewal options and call for contingency rentals based on percentages of
sales. Restaurant facilities subleased to franchisees are subleased under
similar terms to the lease the Company has with the lessor.
Minimum lease payments required under noncancelable leases and subleases,
respectively, at September 27, 1998 are as follows:
<TABLE>
<CAPTION>
Fiscal Year Ending
<S> <C>
1999 $ 1,202,327
2000 1,203,577
2001 977,588
2002 1,018,531
2003 987,998
Thereafter 8,033,417
-----------
$13,423,438
===========
</TABLE>
F-12
<PAGE>
Rent expense was $1,433,888 in 1997 and $1,344,091 in 1998. At September
27, 1998, the Company had $875,000 in certificate of deposit which was used
as a collateral for an irrevocable letter of credit issued to guarantee the
lease of its Grand Havana Room in New York.
8. STOCKHOLDERS' EQUITY
Warrants. In April 1994, the Company issued public warrants consisting of
---------
2,012,500 Class A Common Stock Purchase Warrants and 2,012,500 Class B
Common Stock Purchase Warrants. The Class A Warrants are exercisable at
$4.80 per share and Class B Warrants are exercisable at $5.60 per share.
Both warrants expire in April 1999. The Company granted the underwriter
175,000 units, each unit consisting of 175,000 shares of common stock,
Class A underwriter warrants to purchase 175,000 shares of common stock and
Class B underwriters warrants to purchase 175,000 shares of common stock at
a price to be adjusted as new shares are issued at less than the then-
current exercise price. The underwriters units expire on April 12, 1999.
Stock Options. During fiscal year ended September 28, 1997, the Company
--------------
adopted the 1996 Stock Option Plan (the "Plan") to provide to officers,
directors, key employees and other key contributors to the Company an
opportunity to purchase the common stock of the Company pursuant to "non-
qualified stock options" at the discretion of the Board of Directors.
Under the Plan options to purchase an aggregate of 626,250 shares of common
stock may be granted. The purchase price shall be no less than 85% of the
fair market value of the common stock on the date of grant. The Board of
Directors of the Company, or a committee established by the Board of
Directors shall determine, among other things (i) the purchase price of the
shares covered by each option, (ii) whether any payment will be required
upon grant of the option, (iii) the individual to whom, and the time or
times at which, options shall be granted, (iv) the number of shares to be
subject to each option and (v) when an option can be exercised and whether
in whole or installments.
During fiscal year 1997, options to purchase an aggregate of 100,000 shares
of the common stock of the Company were issued under the Plan to Stanley
Shuster. The options are exercisable at $1.00 per share, which represents
100% of the fair market value of the stock on December 3, 1996, and expire
on December 3, 2001. None of those options have yet been exercised.
The Company accounts for the Stock Option Plan under the provisions of APB
No. 25. The following pro forma information is based on estimating the fair
value of grants under the above plan based upon the provisions of SFAS No.
123. For the Stock Option Plan, the fair value of each option granted in
1997 has been estimated as of the date of grant using the Black-Scholes
option pricing model with the following weighted average assumptions: risk
free interest rate of 5.7%, expected life for the option of five years,
expected dividend yield of 0%, and expected volatility of 10%. Under these
assumptions for the Stock Option Plan, the weighted average fair value of
options granted in 1997 was $.25. The fair value of the grants would be
amortized over the vesting period for stock options. The Company's pro
forma net loss and net loss per common share assuming compensation cost was
determined under SFAS No. 123 would have no material difference on net
losses or net loss per common share.
In addition to options granted under the Plan, at September 28, 1997, there
were outstanding presently exercisable non-qualified stock options to
purchase an aggregate of 25,000 shares of the common stock of the Company
held by a former director of the Company, Arnold Wasserman, at an option
price of $3.00 per share.
F-13
<PAGE>
Mr. Wasserman resigned as a director of the Company in June 1995. The
option was granted at an exercise price approximately equal to the then
fair market value of the Company's common stock in consideration of Mr.
Wasserman's service on the Board of Directors. The option may be exercised
at any time during its five-year term, is nontransferable except by will or
pursuant to the laws of descent and distribution and is protected against
dilution.
Stock Issued for Services. In March 1997, the Company issued 110,000 shares
--------------------------
of common stock pursuant to a two-year consulting agreement. The shares
were valued at $268,900 and are being amortized over two years. The Company
also granted the consultant options to purchase 20,000 shares at $.80 per
share and 5,000 shares at $1.00 per share, expiring on January 30, 2001.
The options were valued at $9,000 using the Black-Scholes pricing model.
In October 1997, the Company issued 50,000 shares of common stock for
consulting services rendered to the Company. The shares were valued at
$61,000.
Private Placements. During the fiscal year ended September 28, 1997, the
-------------------
Company, in various private placements, raised net proceeds of $1,434,500
through the issuance of 1,479,206 shares of common stock and warrants to
purchase 1,126,666 shares of common stock at $1.50 per share. Included in
the private placements were 333,333 shares to Harry Shuster, 333,333 shares
to United Leisure Corporation and 100,000 shares to H&N Shuster Charitable
Foundation. United Leisure Corporation exercised 333,333 warrants in 1997.
Regulation S Offerings. In September 1997, the Company completed a
-----------------------
Regulation S Offering of 3,229,267 units, each unit consisting of one share
of common stock and a three-year warrant to purchase 1/2 share of common
stock, exercisable at $1.50 per share of common stock for net proceeds of
$2,335,500. The Company paid a placement fee to the selling agent of 10%, a
non-accountable expense allowance of 3%, and in addition, delivered a
warrant expiring in September 2000 to purchase 600,000 shares of common
stock exercisable at $.85 per share as a finder's fee. The warrants were
valued at $72,000 using the Black-Scholes option pricing model. The value
of the warrants had no impact in the accompanying statements of operations.
Subscriptions receivable at September 28, 1997 of $1,288,950 was collected
in October 1997. During the fiscal year ended September 27, 1998, the
Company agreed to reduce to $.27 per share, the warrant exercise price of
warrants to purchase an aggregate of 1,100,000 shares of common stock of
the Company held by the finder in this offering on condition that all of
such warrants be exercised. All of such warrants were exercised in January
1998 for aggregate net proceeds to the Company of approximately $260,000,
after deducting a 10% placement fee, a 3% non-accountable expense allowance
and other related expenses.
During the fiscal year ended September 27, 1998, the Company completed a
Regulation S Offering of 1,200 units, each unit consisting of 1,000 shares
of common stock and warrants to purchase 1,000 share of common stock,
resulting in aggregate net proceeds of approximately $260,000, after
deducting an 8% placement fee, a 2% non-accountable expense allowance and
other related expenses.
Increase in Authorized Capital Stock. On December 12, 1997, the Company
-------------------------------------
amended its Certificate of Incorporation to increase the number of
authorized shares of common stock to 50,000,000.
9. RELATED PARTY TRANSACTIONS
1990 Westwood. The Company entered into a five-year lease with 1990
--------------
Westwood Boulevard, Inc. for an office space. The Lease provides for a
rental of $4,000 per month through January 31, 1998 and $4,400 per month
thereafter through the end of the term of the lease in January 2001. 1990
Westwood Boulevard, Inc. is presently owned 65% by Harry Shuster.
F-14
<PAGE>
Notes Payable To Related Parties
--------------------------------
Notes payable to related parties at September 28, 1997 and September 27,
1998 consisted of principal amounts due to the following:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Harry Shuster $ - $ 300,000
United Leisure Corporation 775,000 536,000
United Film Distributors, Inc. 707,000 507,000
---------- ----------
$1,482,000 $1,343,000
========== ==========
</TABLE>
Harry Shuster. The Company is leasing on a month to month basis an
--------------
apartment in New York from Harry Shuster at a monthly rent of $3,000 plus
common area maintenance charges. Effective October 1, 1997, the rent has
been shared with United Leisure. Rent expense incurred for this apartment
was $43,522 in 1997 and $22,832 in 1998.
The Promissory Note to Harry Shuster is secured by a lien in substantially
all assets of the Company. The Promissory Note bears interest at 10% per
annum and is due and payable in March 31, 1999.
United Leisure. In connection with the lease for the Company's New York
---------------
Grand Havana Room the Company was required to provide a letter of credit.
In order to establish this letter of credit the Company entered into a
financing agreement dated September 10, 1996, with its affiliate, United
Leisure Corporation, pursuant to which United Leisure pledged the sum of
$875,000 in order for the Company to obtain the required letter of credit.
The Company had additionally agreed to apply one-half of all initial
membership fees from the members of its New York, New York and Washington
D.C. Grand Havana Rooms to replace the cash collateral pledged by United
Leisure, and, in any event, the Company has agreed to replace all of the
cash collateral within 18 months after United Leisure's pledge of the cash
collateral. In consideration for United Leisure pledging the collateral for
the letter of credit, the Company has agreed to pay an amount to United
Leisure equal to 10% per annum on the amount of the pledged cash
collateral, as it exists from time to time. As additional consideration,
the Company agreed to issue 100,000 shares of its common stock to United
Leisure, and has agreed to grant to United Leisure a warrant to purchase an
additional 100,000 shares of common stock of the Company, which warrant is
exercisable for a period of five years at an exercise price of $.75 per
share. The warrant was subsequently exercised by United Leisure. On July
15, 1997 the Company and United Leisure entered into an amendment to
financing agreement pursuant to which amendment, in consideration for
United Leisure agreeing to forego the requirement that the Company replace
the collateral pledged by United Leisure from the initial membership fees
it received from its New York and Washington D.C. Grand Havana Rooms, the
Company agreed to issue to United Leisure or its designee a warrant
expiring on August 1, 2000 to purchase 150,000 shares of its common stock
at an exercise price of the lesser of$.75 per share or 75% of the average
of the last trade price for the common stock for the 10-day period prior to
the exercise of the warrant. The warrants were valued at $20,000 using the
Black-Scholes option pricing model. United Leisure subsequently designated
Westminster Capital, Inc., an unrelated third party, as an entity to
receive this warrant. The full $875,000 cash collateral under this
financing agreement, was repaid by the Company to United Leisure in October
1997. Harry Shuster is an officer and director of United Leisure.
In February 1997, the Company entered into a second financing agreement
with United Leisure pursuant to which agreement United Leisure agreed to
provide advances to the Company from time to time during a period of six
months. Interest on any amounts advanced bears interest at the rate of 9%
per annum until paid. In consideration for making the loan, the Company
issued 75,000 shares of its common stock to United Leisure. The agreement
further provided that if all of the advances plus accrued but unpaid
interest thereon were not paid on or prior to September 30, 1997 that the
Company would issue an additional 25,000 shares of its common stock to
United Leisure. The loan was not repaid by September 30, 1997 and during
the year ended September 27, 1998, the Company issued 25,000 shares of
common stock to United Leisure valued at $38,681. The parties agreed to
extend the maturity date of the advances made under this financing
agreement to March 31, 1998. An aggregate of $775,000 was advanced under
this loan, the full
F-15
<PAGE>
principal amount of which remained outstanding at September 28, 1997.
During fiscal year 1998, the Company repaid $255,000 in principal amount
and borrowed additional $16,000, resulting to a principal balance of
$536,000 at September 27, 1998.
On September 30, 1998, United Leisure 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. The Company executed Secured Promissory Note dated September
30, 1998 (the "Promissory Note"). The Promissory Note bears interest at 8%
per annum and is due and payable in full on March 31, 1999. The Promissory
Note is secured by a second lien in substantially all assets of the
Company. Presently, this security interest is subordinate to a security
interest in the same collateral granted in favor of Harry Shuster, securing
payment of a promissory in the principal amount of $300,000. Mr. Shuster
intends to subordinate his position to that of United Leisure. The initial
loan advance under the Promissory Note on September 30, 1998 was $603,280,
which represents the principal amount due under the previous note of
$536,000, together with accrued interest of $67,280. 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.
As of September 27, 1998, United Leisure owned 966,666 shares of the
Company's common stock.
United Film. In May 1997 the Company entered into a financing agreement
------------
with United Film Distributors, Inc., an affiliate of the Company ("United
Film"), whereby United Film agreed to provide advances to the Company from
time to time. Interest on any amount advanced bears interest at the rate of
prime plus 3% (11% at September 27, 1998). The full principal amount and
all accrued but unpaid interest on any amounts advanced is due and payable
on demand. The Company borrowed $507,000 in May 1997, repaid $450,000 in
July 1997 and borrowed an additional $650,000 in August 1997, leaving a
balance due to United Film of $707,000 as of September 28, 1997. During
fiscal 1998, the Company repaid $200,000 in principal amount, leaving a
principal balance of $507,000 at September 27, 1998. Harry Shuster is the
Chairman of the Board of United Film. Brian Shuster, the son Harry Shuster,
is the President of United Film.
Due From Related Parties
------------------------
Due from related parties at September 28, 1997 and September 27, 1998
consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Harry Shuster $48,000 $ 48,000
United Leisure Corporation 20,258 87,534
Hit Entertainment 3,750 4,063
United Film Distributors, Inc. 5,990 5,990
1990 Westwood Blvd., Inc. 34 150
------- --------
$78,032 $145,737
======= ========
</TABLE>
Due To Related Parties
----------------------
Due to related parties at September 28, 1997 and September 27, 1998
consisted of the following:
<TABLE>
<CAPTION>
1997 1998
-------- --------
<S> <C> <C>
Advances from Harry Shuster $ 60,000 $465,000
Accrued interest expense to United Leisure 120,989 71,155
Accrued interest expense to United Film 18,305 72,250
Accrued consulting fees and expenses to Harry Shuster 221,305 314,928
-------- --------
$420,599 $923,333
======== ========
</TABLE>
Advances from Harry Shuster in 1998 represents unsecured loans. The loans bear
interest at 10.5% per annum (prime rate plus 2%) and is due and payable on
demand.
F-16
<PAGE>
10. SUBSEQUENT EVENTS
Sale of Washington D.C. operation
---------------------------------
On February 1, 1999 the Company entered into agreement which was closed on
September 17, 1999 with Thursdays Restaurant Group, LLC to sell the
Washington D.C. business, including but not limited to the property and
equipment and substantial all of the inventory for $250,000. The carrying
value of property and equipment and inventory related to this location as
of September 27, 1998 were $695,987 and $16,670 respectively. See Note 5
F-17
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
Dated: September 30, 1999 GRAND HAVANA ENTERPRISES, INC.
BY /s/ Stanley Shuster
-------------------------------------
Stanley Shuster, Chairman of the Board,
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Capacity Date
--------- -------- ----
<S> <C> <C>
/s/ Stanley Shuster President and Chief Executive Officer, September 30, 1999
- --------------------------- Chief Financial Officer (Principal
Stanley Shuster Financial Officer) and Director
/s/ Alvin Cassell Director September 30, 1999
- ---------------------------
Alvin Cassell
/s/ J. Brooke Johnston, Jr. Director September 30, 1999
- ---------------------------
J. Brooke Johnston, Jr.
</TABLE>
30
<PAGE>
EXHIBIT INDEX
(3)-1 Restated Certificate of Incorporation of the Company, filed in the
office of the Secretary of State of the State of Delaware, filed as
Exhibit (3)-1 to the Company's Registration Statement on Form SB-2
(Registration No. 33-68252-LA), is hereby incorporated herein by
reference.
(3)-2 Bylaws of the Company, filed as Exhibit (3)-2 to the Company's
Registration Statement on Form SB-2 (Registration No. 33-68252-LA), is
hereby incorporated herein by reference.
(3)-3 Certificate of Amendment to Certificate of Incorporation of the
Company, filed in the Office of the Secretary of State of Delaware on
February 28, 1997, filed as Exhibit (3)-3 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 28, 1997, is
hereby incorporated by reference.
(3)-4 Certificate of Amendment to Certificate of Incorporation of the Company
filed in the Office of the Secretary of State of Delaware on December
12, 1997 filed as Exhibit (3)-4 to the Company's Annual Report on Form
10-KSB for the fiscal year ended September 28, 1997, is hereby
incorporated by reference.
(4)-1 Warrant Agreement, dated April 20, 1994, between the Company and OTR,
Inc., filed as Exhibit (4)-1 to the Company's Annual Report on Form 10-
KSB for the fiscal year ended September 30, 1994, is hereby
incorporated herein by reference.
(4)-2 Form of Underwriters' Unit Purchase Options, Underwriters' Class A
Warrant and Underwriters' Class B Warrant issued to M. H. Meyerson
& Co., Inc. and Biltmore Securities, Inc. and their designees, filed as
Exhibit (1)-2 to the Company's Registration Statement on Form SB-2
(Registration No. 33-68252-LA), is hereby incorporated herein by
reference.
(10)-1 Consulting Agreement, dated as of June 1, 1993, between the Company and
Harry Shuster, filed as Exhibit (10)-38 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-68252-LA), is hereby
incorporated herein by reference.
(10)-2 Form of Indemnity Agreement entered into by the Company with each of
its Directors, filed as Exhibit (10)-39 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-68252-LA), is hereby
incorporated herein by reference.
(10)-3 Stock Purchase Agreement, dated as of February 4, 1994, between Chicken
& Ribs, Inc. and H & H Restaurant Holding Corporation and related
Promissory Note, filed as Exhibit (10)-40 to the Company's Registration
Statement on Form SB-2 (Registration No. 33-68252-LA), is hereby
incorporated herein by reference.
(10)-4 Amendment No. 1, dated March 24, 1994, to Stock Purchase Agreement
dated as of February 4, 1994, between Chicken & Ribs, Inc. and H & H
Restaurant Holding Corporation, filed as Exhibit (10)-41 to the
Company's Registration Statement on Form SB-2 (Registration No. 33-
68252-LA), is hereby incorporated herein by reference.
31
<PAGE>
(10)-5 Amendment No. 2 to Stock Purchase Agreement, dated as of April 4, 1994,
between Chicken & Ribs, Inc. and H & H Restaurant Holding Corporation,
filed as Exhibit (10)-34 to the Company's Annual Report on Form 10-KSB
for the fiscal year ended September 30, 1994, is hereby incorporated by
reference.
(10)-6 Note Modification and Extension Agreement, dated as of January 21,
1995, between H & H Restaurant Holding Corporation and Chicken & Ribs,
Inc., as filed as Exhibit (10)-25 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1995, is hereby
incorporated by reference.
(10)-7 Territory Rights Agreement, dated August 22, 1994, between Love's
Enterprises, Inc. and PT Transpacific Ekagraha, filed as Exhibit (10)-
29 to the Company's Annual Report on Form 10-KSB for the fiscal year
ended September 30, 1994, is hereby incorporated by reference.
(10)-8 Stock Option Agreement, dated September 21, 1994, as amended, between
the Company and Arnold Wasserman covering 25,000 shares of the Common
Stock, par value $.01 per share, of the Company, filed as Exhibit
(10)-27 to the Company's Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1995, is hereby incorporated by reference.
(10)-9 Village on Canon Lease, dated July 1, 1994, between Pinkwood Properties
Corp. and the Company, filed as Exhibit (10)-37 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 30, 1994, is
hereby incorporated by reference.
(10)-10 Lease Agreement, dated December 1, 1994, between 1990 Westwood
Boulevard and the Company, with respect to the Company's corporate
offices, filed as Exhibit (10)-32 to the Company's Annual Report on
Form 10-KSB for the fiscal year ended September 30, 1995, is hereby
incorporated by reference.
(10)-11 Agreement of Lease, dated September 16, 1996, between 666 Fifth Avenue
Limited Partnership and Grand Havana Room -- New York, Inc., filed as
Exhibit (10)-35 to the Company's Registration Statement on Form S-
3(File No. 333-16045), is hereby incorporated by reference.
(10)-12 Office Building Lease dated August 23, 1996, by and between Writ
Limited Partnership and the Company, T/A Grand Havana Room, filed as
Exhibit (10)-39 to the Company's Registration Statement on Form S-3
(File No. 333-16045), is hereby incorporated by reference.
(10)-13 Financing Agreement dated September 10, 1996, by and between the
Company and United Leisure Corporation, filed as Exhibit (10)-40 to the
Company's Registration Statement on Form S-3 (File No. 333-16045), is
hereby incorporated by reference.
(10)-14 Territorial Rights Agreement dated as of May 6, 1997, by and among the
Company and Grand Havana Room (Asia) Holding Hong Kong as filed as
Exhibit (10)-14 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended September 28, 1997, is hereby incorporated by
reference.
32
<PAGE>
(10)-15 Financing Agreement dated as of February 12, 1997, by and between
United Leisure Corporation and the Company as filed as Exhibit (10)-15
to the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-16 Amendment No. 1 to Financing Agreement dated as of September 30, 1997,
between United Leisure Corporation and the Company (amending financing
agreement dated February 12, 1997) as filed as Exhibit (10)-16 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-17 Amendment No. 1 to Financing Agreement dated as of July 15, 1997,
between United Leisure Corporation and the Company (amending financing
agreement dated September 10, 1996) as filed as Exhibit (10)-17 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-18 Financing Agreement dated as of May 1, 1997, by and between United Film
Distributors, Inc. and the Company as filed as Exhibit (10)-18 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-19 1996 Stock Option Plan of the Company as filed as Exhibit (10)-19 to
the Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-20 Lease Agreement dated as of February 24, 1997, by and between the
Company and Bally's Grand, Inc. filed as Exhibit (10)-20 to the
Company's Annual Report on Form 10-KSB for the fiscal year ended
September 28, 1997, is hereby incorporated by reference.
(10)-21 Consulting Agreement between the Company and IPO Consultants dated
September 16, 1997, filed as Exhibit (10)-21 to the Company's Annual
Report on Form 10-KSB for the fiscal year ended September 28, 1997, is
hereby incorporated by reference.
(21) List of Subsidiaries*
(27) Financial Data Schedule*
- ------------
* Filed herewith
33
<PAGE>
Exhibit 21
SUBSIDIARIES OF GRAND HAVANA ENTERPRISES, INC.
Each of the following is a 100% owned subsidiary of Grand Havana
Enterprises, Inc.
<TABLE>
<CAPTION>
Name Jurisdiction of Incorporation
---- -----------------------------
<S> <C>
Love's Enterprises, Inc. California
Grand Havana Room-- Delaware, Inc. Delaware
Grand Havana Room-- New York, Inc. New York
Grand Havana Room-- Washington, Corp. District of Columbia
On Canon, Inc. California
Hopping Jalapeno, Inc. California
Grand Havana Room-- California, Inc.
(formerly, Havana, Inc.) California
Grand Havana House of Cigars
(formerly, Club Havana, Inc.) Delaware
</TABLE>
34
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS OF THE COMPANY FOR THE FISCAL YEAR ENDED
SEPTEMBER 27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> SEP-27-1998
<PERIOD-START> SEP-29-1997
<PERIOD-END> SEP-27-1998
<CASH> 95,344
<SECURITIES> 0
<RECEIVABLES> 166,335
<ALLOWANCES> 6,500
<INVENTORY> 663,955
<CURRENT-ASSETS> 1,133,689
<PP&E> 4,100,546
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,522,154
<CURRENT-LIABILITIES> 4,331,691
<BONDS> 0
0
0
<COMMON> 141,744
<OTHER-SE> 2,048,719
<TOTAL-LIABILITY-AND-EQUITY> 6,522,154
<SALES> 5,287,851
<TOTAL-REVENUES> 5,523,052
<CGS> 6,511,482
<TOTAL-COSTS> 8,410,893
<OTHER-EXPENSES> 125,676
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 168,980
<INCOME-PRETAX> (3,013,517)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,013,517)
<DISCONTINUED> (6,205)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,019,722)
<EPS-BASIC> (0.22)
<EPS-DILUTED> (0.22)
</TABLE>
