<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended December 27, 1998
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _______________.
Commission File Number 0-24828
GRAND HAVANA ENTERPRISES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4428370
(State or other jurisdiction of (I.R.S.Employer
incorporation or organization) Identification No.)
1990 Westwood Boulevard, 3rd Floor
Los Angeles, California 90210
(Address of Principal Executive Offices) (Zip Code)
310/ 475-5600
(Registrant's Telephone Number, Including Area Code)
Check whether the issuer (1) filed all reports to be filed by Section 13 or
15(d) during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES [ ] NO [X]
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date.
Class Outstanding at December27, 1998
- --------------------- -------------------------------
Common Stock, par 14,174,306 shares
value $.01 per share
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 27, September 27,
1998 1998
------------ -------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ (5,332) $ 95,344
Accounts receivable, net 348,203 133,212
Current portion of note receivable 19,672 26,623
Inventories 620,666 663,955
Prepaid expenses 195,935 214,555
---------- ----------
TOTAL CURRENT ASSETS 1,179,144 1,133,689
PROPERTY AND EQUIPMENT, Net 4,080,717 4,100,546
OTHER ASSETS
Restricted cash 937,057 937,057
Note receivable, net of current portion 28,548 28,548
Pre-opening costs - 23,844
Due from related parties 48,000 145,737
Deferred charges 33,557 67,106
Deposits and other assets 84,867 85,627
---------- ----------
TOTAL OTHER ASSETS 1,132,029 1,287,919
---------- ----------
$6,391,890 $6,522,154
========== ==========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
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GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
December 27, September 27,
1998 1998
--------------- --------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to related parties $ 1,343,000 $ 1,343,000
Bank overdraft 69,647 89,083
Accounts payable 1,442,614 1,114,655
Accrued liabilities 419,895 172,237
Deferred revenues 78,253 129,905
Due to related parties 848,852 923,333
Deferred rent payable 335,240 559,478
------------- -------------
TOTAL CURRENT LIABILITIES 4,537,501 4,331,691
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized - 3,000,000
shares; issued and outstanding - none
Common stock, $.01 par value; authorized - 50,000,000
shares; issued and outstanding - 14,174,306 shares 141,744 141,744
Additional paid-in capital 13,279,044 13,279,044
Accumulated deficit (11,566,399) (11,230,325)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,854,389 2,190,463
------------- -------------
$ 6,391,890 $ 6,522,154
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
2
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GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
December 27, December 28,
1998 1997
---------------- ---------------
(Unaudited) (Unaudited)
<S> <C> <C>
REVENUES
Food and beverage $ 1,055,227 $ 862,312
Merchandise sales 223,873 184,425
Membership fees 444,657 273,743
Other 28,664 175,805
---------------- ---------------
TOTAL REVENUES 1,752,421 1,496,285
COSTS AND EXPENSES
Food and beverage $ 287,008 416,903
Merchandise 109,991 127,389
Operating expenses
Direct labor 555,177 653,789
Occupancy and other 694,429 771,198
General and administrative 262,815 100,598
Depreciation and amortization 121,419 107,501
---------------- ---------------
TOTAL COSTS AND EXPENSES 2,030,839 2,177,378
---------------- ---------------
LOSS BEFORE OTHER INCOME (EXPENSE) (278,418) (681,093)
OTHER INCOME (EXPENSE)
Interest income 12,234 1365
Interest expense (46,046) (40,298)
---------------- ---------------
TOTAL OTHER INCOME (EXPENSE) (33,812) (38,933)
---------------- ---------------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (312,230) (720,026)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE (23,844) -
---------------- ---------------
NET LOSS $ (336,074) $ (720,026)
================ ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,174,306 11,799,306
BASIC LOSS PER SHARE
Loss before cumulative effect of change in accounting priciple $ (0.02) $ (0.06)
Cumulative effect of change in accounting priciple - -
---------------- ---------------
$ (0.02) $ (0.06)
================ ===============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
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GRAND HAVANA ENTERPRISES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended
------------------------------------------
December 27, December 28,
1998 1997
--------------- --------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net loss $(336,074) $ (720,026)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 121,419 120,111
Amortization of deferred charges 33,549 24,518
Changes in operating assets and liabilities:
Accounts receivable (214,991) (97,284)
Inventories 43,289 18,748
Prepaid expenses 18,620 (69,780)
Pre-opening costs 23,844 (2,026)
Accounts payable and accrued liabilities 575,617 57,913
Accrued costs of discontinued operations - (44,932)
Deferred revenues (51,652) 94,263
Deferred rent payable (224,238) (10,616)
--------------- --------------
NET CASH USED IN OPERATING ACTIVITIES (10,617) (629,111)
--------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (101,590) (237,479)
Due from related parties 97,737 32,780
Collection of note receivable 6,951 4,043
Deferred charges, deposits and other assets 760 -
Restricted cash - (875,000)
--------------- --------------
NET CASH USED IN INVESTING ACTIVITIES 3,858 (1,075,656)
--------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of notes payable - (325,000)
Due to related parties (74,481) 69,595
Collections of subscriptions receivable - 1,288,950
Payment of bank overdraft (19,436) -
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES (93,917) 1,033,545
--------------- --------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (100,676) (671,222)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,344 879,461
--------------- --------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ (5,332) $ 208,239
=============== ==============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
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HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated condensed financial statements presented have been
prepared by Grand Havana Enterprises, Inc. (the Company) without audit and,
in the opinion of the management, reflect all adjustments of a normal
recurring nature necessary for a fair statement of (a) the consolidated
results of operations for the three months ended December 27, 1998 and
December 28, 1997, (b) the consolidated financial position at December 27,
1998 and September 27, 1998 and (c) the consolidated cash flows for the
three months ended December 27, 1998 and December 28, 1997. Interim results
are not necessarily indicative of the results for a full year.
The consolidated condensed balance sheet presented as of September 27, 1998
has been derived from the consolidated financial statements that have been
audited by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated condensed financial statements and
notes included herein should be read in conjunction with the financial
statements and notes included in the Company's Annual Report on Form 10-
KSB.
2. CHANGE IN ACCOUNTING PRINCIPLE
During the first quarter of 1998, the Company changed its method of
accounting for pre-operating cost to conform with new requirements of SOP
No. 98-5. The effect of this change was to increase loss for three months
period ended December 27, 1998 by $23,844. Financial statements for year
ended September 27, 1998 have not been restated, and the cumulative effect
of the change is shown as a one-time charge of $23,844 to loss in the three
months ended December 27, 1998 income statement.
5
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
The following discussion should be read in conjunction with the Company's
consolidated financial statements and the notes thereto appearing elsewhere in
this Quarterly Report on Form 10-QSB. Certain statements contained herein that
are not related to historical results, including, without limitations,
statements regarding the Company's business strategy and objectives, future
financial position and estimated cost savings, are forward-looking statements
within the meaning of Section 27A of the Securities Act of 1933, as amended (the
"Securities Act") and Section 21E of the Securities Exchange Act, as amended(the
"Exchange Act"), and involve risks and uncertainties. Although the Company
believes that the assumptions on which these forward-looking statements are
based are reasonable, there can be no assurance that such assumptions will prove
to be accurate and actual results could differ materially form those discussed
in the forward-looking statements. Factors that could cause or contribute to
such differences include, but are not limited to, risks and uncertainties
associated with the ability to obtain adequate working capital on terms
favorable to the Company, compliance with regulatory requirements, the Company's
ability to sell more memberships, a decline in public consumption of cigars and
other tobacco products, significant increases in excise taxes which could
substantially increase the price of cigars and general economic factors. All
forward-looking statements contained in this Quarterly Report on Form 10-QSB are
qualified in their entirety by this statement.
Grand Havana Enterprises, Inc. (the "Company" or "Registrant") is engaged
in the business of the ownership, operation and development of private
membership restaurants and cigar clubs known as "Grand Havana Rooms," and in the
ownership, operation and development of retail cigar stores known as "Grand
Havana House of Cigars." Unless the context otherwise indicates, the "Company"
means Grand Havana Enterprises, Inc. and its consolidated subsidiaries.
The Company currently owns and operates 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 one 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 in
Las Vegas, Nevada, which opened in November 1997. As its principal business
6
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focus, the Company intends to continue the operation of its existing Grand
Havana Rooms and Grand Havana House of Cigars locations (other than Washington,
D.C.), while considering the disposition of locations when that is, in the
opinion of management, in the Company's best interest.
Management of the Company expects that during the membership drives for its
New York and Washington, D.C., Grand Havana Rooms, and for the expansion of its
Beverly Hills Grand Havana Room, the Company will continue to experience
consolidated losses; however, there can be no assurance that such cigar clubs
and the Company's retail cigar stores will be profitable in the future. The
Company has experienced operating losses since its inception with net losses of
($720,026) and ($336,074) for the fiscal quarters ended December 28, 1997, and
December 27, 1998, respectively. Management of the Company is considering the
closing and/or sale of the Washington, D.C., Grand Havana Room and Grand Havana
House of Cigars. The Washington, D.C., Grand Havana Room experienced losses
from operations in the fiscal quarter ended December 27, 1998 of ($118,803).
In December 1998, the Company completed its expansion of its Beverly Hills
Grand Havana Room into the former space of its closed restaurant, On Canon, and
reopened the Beverly Hills Grand Havana Room's membership list, which had been
fully subscribed. The Beverly Hills Grand Havana Room began to accept names off
the waiting list as new members.
The Company was incorporated under the laws of the State of Delaware on
April 13, 1993, under the name "United Restaurants, Inc." The Company was
originally formed in order to acquire all of the capital stock of Love's
Enterprises, Inc. ("LEI"), which company was the franchisor, owner and operator
of the Love's restaurant chain. The Company acquired the stock of LEI in May
1993. In December 1996, due to less than anticipated operating results from the
Love's restaurant chain, the Company adopted a plan of discontinuance with
respect to the Love's restaurant chain, which plan was completed in July 1998.
RESULTS OF OPERATIONS
THREE MONTHS ENDED DECEMBER 27, 1998 COMPARED TO THREE MONTHS ENDED DECEMBER 28,
1997
The Company derives revenues from continuing operations from three
principal sources: food and beverage sales, sales of cigars and related
merchandise, and membership fees. During the fiscal quarter ended December 27,
1998, the Company had revenues of $1,752,421 compared to revenues of $1,496,285
for the fiscal quarter ended December 28, 1997, an increase of $256,136 or
approximately 17.12%. This increase in revenues is primarily due to the
increase in the number of private holiday parties held at the New York Grand
Havana Room in December 1998. Income at the New York Grand Havana Room for the
month of December 1998 was $189,295 compared to losses at the New York Grand
Havana Room in the months of October 1998 and November 1998 of ($19,675) and
($38,732), respectively.
7
<PAGE>
Revenue from food and beverage increased from $862,312 in the fiscal
quarter ended December 28, 1997 to $1,056,227 in the fiscal quarter ended
December 27, 1998, an increase of $192,915 or approximately 22.37%. This
increase is primarily attributable to the increase in private parties at the New
York Grand Havana Room during December 1998.
Revenue from merchandise sales increased from $184,425 in the fiscal
quarter ended December 28, 1997 to $223,873 in the fiscal quarter ended December
27, 1998, an increase of $39,448 or approximately 21.39%. This increase is due
to the increased patronage at both the Grand Havana Rooms and the Grand Havana
House of Cigars locations.
Membership fees increased from $273,743 in the fiscal quarter ended
December 28, 1997 to $444,657 in the fiscal quarter ended December 27, 1998, an
increase of $170,914 or approximately 62.44%. This is primarily a result of
increased membership at the New York Grand Havana Room and the opening of the
Beverly Hills Grand Havana Room to new members in December 1998 after its
expansion into the location previously occupied by the On Canon restaurant.
During the fiscal quarter ended December 27, 1998, the Company included its
revenue from private parties in revenues from merchandise sales and from food
and beverage sales. During the fiscal quarter ended December 28, 1997, income
from private parties was allocated to "Other" under Revenues. Thus, the
decrease in "Other" from $175,805 in the fiscal quarter ended December 28, 1997
to $28,664 in the fiscal quarter ended December 27, 1998, was a result of the
different classification of the income from private parties. The New York Grand
Havana Room earned a substantial portion of its quarterly income during the
month of December 1998 from private holiday parties held at the club.
Interest income increased by $10,869 or approximately 796.26% from $1,365
in the fiscal quarter ended December 28, 1997 to $12,234 in the fiscal quarter
ended December 27, 1998. This interest income is primarily earned on monies
pledged to support a letter of credit required in connection with the Company's
lease for the New York Grand Havana Room location. Prior to November 1997, all
interest income on the pledged amount was paid to United Leisure Corporation, an
affiliate of the Company, which had supplied the pledged amount under a
financing agreement with the Company. The Company fully replaced the monies
pledged by United Leisure Corporation by October 1997 and, thereafter, the
Company received the interest accrued on the pledged amount.
During the fiscal quarter ended December 27, 1998, the Company incurred
total costs and expenses of $2,030,839 compared to $2,177,378 for the fiscal
quarter ended December 28, 1997, a decrease of $146,539 or approximately 6.73%.
This decrease is primarily due to decreases in direct labor costs, food and
beverage costs, and merchandise costs resulting from the imposition of more
efficient operations and better controls. In addition, the Company's On Canon
restaurant, which had high labor costs, was still operating in the fiscal
quarter ended December 28, 1997 but was no longer operating during the fiscal
quarter ended December 27, 1998. General and administrative expenses offset
these decreases by increasing from $100,598 in the fiscal quarter ended December
28, 1997 to $262,815 in the fiscal quarter ended December 27, 1998, an increase
of $162,217 or approximately 161.25%. This increase in general and
administrative expenses was primarily a result of increased legal fees arising
from the initial preparation of the Company's Form 10-KSB for the fiscal year
ending September 27, 1998.
The Company experienced a net loss of ($336,074) or $(.02) per share for
the fiscal quarter ended December 27, 1998, compared to a net loss of ($720,026)
or ($.06) per share for the fiscal quarter ended December 28, 1997, a decrease
in loss of ($383,952) or approximately 53.32%.
8
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LIQUIDITY AND CAPITAL RESOURCES
The Company is considering the closing and/or sale of its Washington, D.C.,
Grand Havana Room and House of Cigars location which has been operating at a
loss since its opening. The Company is not planning to open new Grand Havana
Rooms or House of Cigars locations in the near future.
As a result of its past expansion activities, the Company had spent most of
the proceeds from its initial public offering prior to its fiscal year ended
September 30, 1996. Accordingly, the Company raised an aggregate of
approximately $300,000 in gross proceeds through a Regulation S offering of its
securities (the Company's $.01 par value common stock (the "Common Stock") and
warrants to purchase shares of its Common Stock) during its fiscal year ended
September 28, 1997. In addition, warrants to purchase shares of the Company's
Common Stock were exercised during the fiscal year ended September 27, 1998, for
aggregate gross proceeds to the Company from such warrant exercises of
approximately $297,000. Substantially all of the funds raised in these private
placements and warrant exercises, as well as funds loaned by entities affiliated
with the Company, as discussed below, have been spent by the Company for general
working capital purposes. At December 27, 1998, the Company had cash or cash
equivalents of ($5,332).
On August 15, 1998, Harry Shuster, Chairman of the Board, President, Chief
Executive Officer and a director of the Company agreed to lend the Company
$300,000. The Company delivered to Harry Shuster its secured promissory note
dated August 15, 1998 (the "Shuster Note"). The Shuster Note bears interest at
10% per annum and is due and payable in full on March 31, 1999. The Shuster
Note is secured pursuant to a Security Agreement dated August 15, 1998 (the
"Shuster Security Agreement"), in which the Company granted Harry Shuster a
first lien security interest in certain collateral. As of December 27, 1998,
the entire principal amount of the Shuster Note, $300,000, remained outstanding.
In addition to the sums due under the Shuster Note, as of December 27, 1998, the
Company is indebted to Harry Shuster in the amount of $605,654 for advances made
from time to time by Harry Shuster to the Company.
On September 30, 1998, United Leisure Corporation, a publicly-held company
located in Irvine, California ("United Leisure") of which Harry Shuster is
Chairman of the Board, President, Chief Executive Officer and a director, agreed
to make a new installment loan to the Company in the amount of up to $1,250,000
in replacement of the previous loan between United Leisure and the Company. The
Company executed a Secured Promissory Note dated September 30, 1998 (the
"Promissory Note"). The Promissory Note is secured pursuant to a Security
Agreement dated September 30, 1998 (the "Security Agreement"), in which the
Company granted United Leisure a second lien security interest in certain
collateral. On November 30, 1998, Harry Shuster subordinated his security
interest pursuant to the Shuster Security Agreement to the lien granted to
United Leisure under the Security Agreement. 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
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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. At December 27, 1998 the Company owed an aggregate of
$603,280 in principal amount to United Leisure under the Promissory Note.
In addition, as of December 27, 1998, an aggregate of $507,000 in principal
amount remained outstanding under a financing agreement with United Film
Distributors, Inc., an affiliate of the Company, the full amount of which,
together with all accrued but unpaid interest thereon, is due and payable by the
Company upon demand, which demand may not be made prior to November 1, 1998.
The Company believes that it will meet its working capital needs, in the
near future, from the operations of its Grand Havana Rooms and Grand Havana
House of Cigars locations. However, should the Company need additional working
capital the Company may consider selling its securities in private placements.
Due to the low trading price of the Company's Common Stock, there can be no
assurance that the Company will be able to raise additional capital by selling
its securities in private placements on terms that are acceptable to the
Company. In addition, effective the close of business on October 27, 1998, the
Nasdaq Stock Market, Inc. ("Nasdaq") delisted the Company's Common Stock and
Series A and B Warrants from Nasdaq for failure to meet Nasdaq's minimum bid
requirement. Since that time the Company's Common Stock has been quoted on the
OTC Bulletin Board. The delisting of the Company's Common Stock from Nasdaq
might result in the Company having difficulty in placing its securities with
prospective investors.
If the Company is unable to raise additional funds, if and when needed,
through the private placement of its securities it may seek financing from
affiliated or unaffiliated third parties. There can be no assurance, however,
that such financing would be available to the Company when and if it is needed,
or that if available, that it will be available on terms acceptable to the
Company. If the Company is unable to place securities or obtain financing to
meet its working capital needs and to repay indebtedness as it becomes due, the
Company may have to consider such options as selling or pledging portions of its
assets in order to meet such obligations.
Year 2000 Compliance
- --------------------
In fiscal year 1997, the Company initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
operations, infrastructure and technology products, and customers and suppliers,
that are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks. The project comprises
four phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans, and (4) implementation and
testing.
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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.
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
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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.
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
<TABLE>
<S> <C>
(10)-1 Secured Promissory Note dated as of August 15, 1998, by and
between Harry Shuster and the Company.
(10)-2 Security Agreement dated as of August 15, 1998, by and between
Harry Shuster and the Company.
(10)-3 Secured Promissory Note dated as of September 30, 1998, by and
between United Leisure Corporation and the Company.
(10)-4 Security Agreement dated as of September 30, 1998, by and
between United Leisure Corporation and the Company.
(10)-5 Subordination Agreement dated as of November 30, 1998, by and
between Harry Shuster and the Company.
(27) Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
The Company filed one Current Report on Form 8-K on October 28, 1998,
with respect to the delisting of the Company's Common Stock, Class A Warrants
and Class B Warrants from Nasdaq.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GRAND HAVANA ENTERPRISES, INC.
Date: October 7, 1999 /s/ Stanley Shuster
-------------------------------------------
Stanley Shuster
Chief Executive Officer, and Chief Financial
Officer
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<PAGE>
EXHIBIT (10)-1
SECURED PROMISSORY NOTE
-----------------------
with provision for future advances
$300,000.00 Los Angeles, California August 15, 1998
Upon the terms and subject to the restrictions and conditions set
forth herein, Grand Havana Enterprises, Inc., a Delaware corporation (the
"Maker"), promises to pay to the order of Harry Shuster, an individual (the
"Noteholder"), residing in Los Angeles, California, or such other locations as
the Noteholder may designate, the sum of up to Three Hundred Thousand Dollars
($300,000.00) ("Note") together with interest thereon, accrued from the above
date hereof; in lawful money of the United States of America.
The Noteholder make principal advances to Maker in accordance with the
following schedule:
1. One Hundred Fifty Thousand and
no/100 Dollars ($150,000.00)
on or before August 15, 1998; and
2. One Hundred Fifty Thousand and
no/100 Dollars ($150,000.00)
on or before September 15, 1998.
All amounts advanced hereunder will be included in the amounts due
hereunder. In addition to the advances described above the Noteholder may from
time to time, but shall not be obligated to make additional future advances. As
and when advances are made the amount of the advances made shall be recorded on
the "Record of Advances" attached hereto as Exhibit "A" and shall be subscribed
by the Maker in acknowledgment of the amount of the advance. The aggregate
amounts of all advances, less any prepayments of principal shall be the
outstanding balance due under this Note.
The principal amount hereof, as adjusted from time to time, shall bear
interest at the rate of ten percent (10%) per annum. Interest hereunder shall
be calculated on the basis of a three hundred sixty (360) day year for each day,
all or any of the principal balance hereof shall remain outstanding. Prepayment
of interest or principal, in whole or in part, may be made without penalty or
forfeiture.
This Note shall be due and payable in full on March 31, 1999.
This Note is secured by an interest in the real and personal property
and equipment described in Exhibit "B" attached hereto and incorporated herein
by this reference, all of which may be used to secure payment under the terms of
this
Page 1 of 5
<PAGE>
Note in the event of default.
The Maker hereby waives diligence, demand, presentment for payment,
and notice of whatever kind of nature. Without discharging or in any way
affecting the liability of the undersigned, the undersigned hereby consents to
any and all extensions of this Note as the Noteholder hereof may in its sole
discretion grant from time to time, to the release of all or any part of the
security for the payment hereof. The Maker further waives exhaustion of legal
remedies and the right to plead any and all statutes of limitation as a defense
to any demand on this Note, or to any agreement to pay the same.
All payments due on this Note shall be payable in lawful money of the
United States of America, and shall be made to the Noteholder at 1990 Westwood
Boulevard, Los Angeles, California or such other address as the Noteholder may
hereafter designate from time to time.
If any provision of this Note is held to be invalid or unenforceable
by a court of competent jurisdiction, the other provisions of this Note shall
remain in full force.
Any interest rate provided hereunder which exceeds the maximum rate
provided by applicable law shall instead be deemed to be such maximum rate and
any interest in excess of such maximum rate paid to Noteholder shall be applied
to reduce the principal balance of this Note so that in no event shall
Noteholder receive or be entitled to receive interest in excess of the maximum
amount permitted by applicable law.
The provisions and covenants contained herein shall inure to and be
binding upon the heirs, successors and assigns of the parties hereto. Maker
agrees that Noteholder may assign this Note and Maker will make payment to such
assignee upon notice of such assignment. Noteholder shall thereafter be forever
relieved and fully discharged from any and all liability or responsibility to
Maker, but Noteholder shall retain all rights and powers hereby given with
respect to property not so transferred.
Time is of the essence in connection with each and every obligation of
Maker pursuant to this Note.
This Note is to be governed by, and construed in accordance with the
laws of the State of California.
Noteholder and Maker agree to execute such further documents, and take
such further actions, as may reasonably be required to carry out the provisions
of this Note or any agreement or document relating hereto or entered into in
Page 2 of 5
<PAGE>
connection herewith.
This Note may be amended or modified only by an instrument in writing
which by its express terms refers to this Note and which is duly executed by the
parties sought to be bound thereby.
Any failure by Noteholder to insist upon the strict performance by
Maker of any of the covenants, agreements, obligations or conditions hereof
shall not be deemed to be a waiver of any such covenants, agreements,
obligations or conditions, and Noteholder, notwithstanding any such failure,
shall have the right thereafter to insist upon the strict performance by Maker
of any and all of such covenants, agreements, obligations and conditions.
In the event that this Note is placed in the hands of an attorney at
law for collection upon default or in the event that proceedings at law or in
equity are instituted in connection herewith, or in the event that this Note is
placed in the hands of an attorney at law to enforce any of the rights or
agreements contained herein, the undersigned shall pay all costs of collecting
or attempting to collect this Note or protecting or enforcing such rights
including, without limitation, reasonable attorneys fees.
IN WITNESS WHEREOF, the undersigned has executed this Promissory Note
as of the date first herein above written.
Maker:
Grand Havana Enterprises, Inc.
/s/ Stanley Shuster
- ------------------------------
By: Stanley Shuster
Its: Vice President
Page 3 of 5
<PAGE>
EXHIBIT "A"
-----------
Record of Advances
Starting Principal Balance: $150,000
-------------------------------------
<TABLE>
<CAPTION>
Advance Authorized Note Balance
Date Amount Signature After Advance
---- ------ --------- -------------
<S> <C> <C> <C>
August $150,000.00 $150,000.00
21, 1998
September
21, 1998 $150,000.00 $300,000.00
</TABLE>
Page 4 of 5
<PAGE>
EXHIBIT "B"
-----------
Description of Collateral
1. All membership initiation fees, membership dues whether paid monthly,
annually or in some other periodic payment basis which are paid by patrons or
members for club membership privileges at any of the following locations:
Grand Havana Room--Beverly Hills, CA.
Grand Havana Room--New York City, NY.
Grand Havana Room--Washington, D.C.
all of which shall be referred to herein as the "Clubs".
2. All accounts, receipts, funds held by or to be paid to the Debtor from
the Clubs or from the retail store located in Las Vegas, Nevada in the Bally's
Hotel, known as the Grand Havana House of Cigars and the Grand Havana House of
Cigars in Beverly Hills, California, (collectively, the "Stores").
3. The leasehold interests of the Debtor at the locations for the Clubs
and the Stores.
4. All presently owned or hereafter acquired equipment, supplies,
materials, machines, appliances, fixtures, furniture, furnishings, leasehold
improvements, appurtenances of any description, and all additions and accessions
thereto and replacements therefor; and
5. All personal property of any description, now owned or hereafter to be
acquired by or on behalf of Debtor, including, without limitation, inventory,
work-in-progress, and supplies, and all additions and accessions thereto and
replacements therefor; and
6. All accounts, contract rights, general intangibles, receivables, and
other documents, instruments, and other rights to the payment of money or
performance of services, now existing or hereafter arising in any way relating
to the business of Debtor or in connection with the use of the property
described in (1) and (2) above; and
7. All proceeds of the foregoing collateral, including whatever is
receivable or received when collateral or proceeds is sold, collected, exchanged
or otherwise disposed of, whether such disposition is voluntary or involuntary,
and includes, without limitation, all rights to payment, including return
premiums, with respect to any insurance relating thereto.
Page 5 of 5
<PAGE>
EXHIBIT (10)-2
SECURITY AGREEMENT
------------------
This Security Agreement ("Agreement") is entered as of the 15th day of
August, 1998 by Grand Havana Enterprises, Inc., a Delaware corporation, (the
"Debtor"), and Harry Shuster, an individual (the "Secured Party").
RECITALS
--------
A. The Secured Party has agreed to lend the Debtor the sum set forth in
the attached Secured Promissory Note (the "Note").
B. As a condition of Secured Party agreeing to accept the Note in
consideration for making the loan evidenced by the Secured Party has required
that Debtor enter into this Security Agreement and pledge certain collateral, as
hereinafter described, to assure the Secured Party receives the benefits of the
service contracts.
NOW, THEREFORE, in consideration of the above premises, and for other good
and valuable consideration the receipt of which Debtor hereby acknowledges,
Debtor agrees as follows:
ARTICLE
1. AGREEMENT
1.1 The Collateral. For value received, Debtor hereby pledges, assigns and
--------------
grants to Secured Party without any recourse to Debtor except as provided herein
and subject to the provisions of this Agreement, a security interest in the
following described personal property (the "Collateral"):
See Exhibit "A" attached hereto and incorporated herein by this reference.
1.2 Grant of Security Interest. For value received, Debtor hereby pledges,
--------------------------
assigns, and grants to Secured Party, without any recourse to Debtor whatsoever
and subject to the provisions of this Agreement, a security interest in the
personal property described in Section 1.1 hereof which shall be referred to as
the "Collateral."
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<PAGE>
1.3 The Obligations. The Collateral secures and will secure the prompt and
---------------
unconditional payment of the "Obligations." As used in this Agreement, the term
"Obligations" means any and all amounts due to Secured Party as the successor-
in-interest to the Debtor by virtue of the Note executed by the Debtor and
delivered to the Secured Party.
1.4 Representations, Warranties and Covenants. Debtor acknowledges and
-----------------------------------------
agrees that Secured Party is relying on the representations and warranties and
covenants in this Agreement as a condition precedent to the acceptance of the
Note and that all such representations and warranties and covenants shall
survive the execution and delivery of this Agreement and any bankruptcy,
insolvency or similar proceedings. Debtor hereby represents and warrants to
Secured Party and covenants for the benefit of Secured Party as follows:
A. Debtor is (and with respect to all Collateral acquired hereafter,
shall be) the sole legal and equitable owner of the Collateral
free from any adverse claim, lien, security interest, encumbrance
or other right, title or interest of any person, except for the
security interest created hereby. Debtor has the unqualified
right and power to grant a security interest in the Collateral
without the consent of any person and Debtor shall at Debtor's
expense defend the Collateral against all claims and demands of
all persons at any time claiming the Collateral or any interest
therein adverse to Secured Party. Debtor shall not create, grant
nor suffer to exist any pledge, security interest, lien, levy,
garnishment, attachment, charge or encumbrance upon any of the
Collateral (except in favor of Secured Party) and shall at all
times keep the Collateral free from the same.
B. If new or additional Collateral is pledged to Secured Party, then
the same shall be deemed an increment to the Collateral and under
pledge and assignment to Secured Party hereunder. If evidenced by
a stock certificate, bond, warrant, debenture, certificate, or
other Instrument or writing, then such securities shall (to the
extent acquired or received by or placed under Debtor's control)
be held in trust for and promptly delivered to Secured Party,
together with duly executed stock powers in blank and any other
assignments or endorsements as Secured Party may request. If any
such securities are uncertificated, then Debtor shall immediately
upon acquisition of such securities cause Secured Party to be
registered as the transferee thereof on the books of the
depository, custodian bank, clearing corporation, brokerage
house, issuer or otherwise, as may be requested by Secured Party.
C. Without the prior written consent of Secured Party, Debtor shall
not sell, transfer, assign, convey or otherwise dispose of any
interest in any of the Collateral, nor enter into any contract or
agreement to do so.
Page 2 of 13
<PAGE>
D. Debtor shall pay when due all taxes or other governmental charges
whatsoever levied against the Collateral and all assessments
(including stock assessments) upon the Collateral, and Debtor
shall pay any tax which may be levied on or assessed against this
Agreement;
E. Debtor, or if Debtor fails to do so, Secured Party shall pay on
demand all filing fees and similar charges and all costs incurred
by Secured Party in creating a security interest or securing and
enforcing a security interest in the Collateral including the
expenses and reasonable fees of Secured Party's legal counsel,
whether or not involving litigation and/or appellate,
administrative or bankruptcy proceedings. Debtor agrees to
indemnify and hold Secured Party harmless on demand against all
expenses, losses, consequences or damages incurred or suffered by
Secured Party arising from or relating to any claim, demand,
action or proceeding brought by any person(s) whomsoever in
connection with or relating to the Collateral or this Agreement
(including without limitation any court costs and the expenses
and reasonable fees of Secured Party's legal counsel), except to
the extent that a court of competent jurisdiction shall hold the
same to be the result of Secured Party's own gross negligence or
willful misconduct. Debtor shall pay any documentary stamp taxes,
intangible taxes or other taxes (except for federal or state
franchise or income taxes based on the net income of Secured
Party) which may now or hereafter apply to the Collateral or this
Agreement, and Debtor agrees to indemnify and hold Secured party
harmless from and against any liability, costs, attorney's fees,
penalties, interest or expenses relating to any such taxes, as
and when the same may be incurred. Debtor shall pay on demand,
and indemnify and hold Secured Party harmless against, any and
all present or future taxes, levies, imposts, deductions, charges
and withholdings imposed in connection with this Agreement, the
Collateral or the Obligations by the laws or governmental
authorities of any jurisdiction or the United States of America.
All sums payable by Debtor under this subparagraph are and shall
be secured by the Collateral.
F. There is no fact that the Debtor has not disclosed to Secured
Party in writing that could materially adversely affect its
properties, business or financial condition, or any Collateral.
Debtor shall promptly notify Secured Party in writing if any
event shall occur or become known to Debtor which has or could
have any such materially adverse effect with respect to Debtor,
or which changes the truth or correctness of any representation
or warranty in this Agreement or which affects the value of, or
any rights incidental to, any Collateral or the ability of Debtor
or Secured Party to dispose of the same (including without
limitation the levy of any legal process or the filing of any
lien against the Collateral or the adoption of any marketing
order, arrangement or procedure affecting the Collateral, whether
governmental or otherwise).
Page 3 of 13
<PAGE>
G. Debtor shall not take or permit any action that may impair the
Collateral or Secured Party's security interest therein, and
shall not permit any of the Collateral to be used in violation of
any statute or regulation or ordinance. Without limiting the
foregoing, Debtor will not compromise, release, surrender or
waive any rights of any nature whatsoever in respect of any of
the Collateral without Secured Party's prior written consent,
which Secured Party may grant or withhold in its sole discretion.
H. Debtor shall immediately: (a) to the extent not previously
delivered to Secured Party in compliance with the terms hereof,
deliver to Secured Party any and all Instruments, securities,
notes, drafts and acceptances included in the Collateral at the
time and place and manner specified by Secured Party, together
with any endorsements, stock powers in blank and assignments
requested by Secured Party for their transfer to Secured Party or
to any other person selected by Secured Party, all in form and
substance satisfactory to Secured Party; and (b) execute, deliver
and file any and all financing statements, continuation
statements, mortgages, agreements, notices, vouchers, invoices,
schedules, confirmatory assignments, conveyances, transfer
endorsements, powers of attorney, proxies, certificates, deeds or
other papers and/or perform any act which Secured Party may deem
necessary or appropriate to create, perfect, preserve, validate
or otherwise protect Secured Party's security interest in the
Collateral or to enable Secured Party from time to time to
exercise and enforce Secured Party's rights under this Agreement.
I. The execution and delivery of this Agreement does not and shall
not (a) violate any material provisions of any law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award applicable to Debtor, nor (b) result in a
breach of, or constitute a default under, any indenture, bond,
mortgage, lease, instrument, credit agreement, undertaking,
contract or other agreement to which Debtor is a party or by
which any of them or their respective properties may be bound or
affected. This Agreement constitutes the legal, valid and binding
obligation of the Debtor and is enforceable against Debtor in
accordance with its terms.
1.5 Rights of Secured Party. Debtor agrees with and for the benefit of
-----------------------
Secured Party that:
A. Secured Party shall have the right (but not the obligation) at
its option to discharge or pay any taxes, assessments, liens,
security interests or other encumbrances at any time levied or
placed on or against the Collateral. Any amount so paid or
advanced by Secured Party shall be secured by the Collateral and
shall be repayable by Debtor on demand.
Page 4 of 13
<PAGE>
B. Secured Party may sign and file appropriate financing statements,
security agreements, recording instruments or other documents or
amendments thereto with respect to the Collateral or any portion
thereof without the signature of Debtor, and Debtor shall reimburse
Secured Party on demand for any reasonable costs advanced or
incurred by Secured Party in connection therewith. At Secured
Party's option, a carbon, photographic or other reproduction of
this Agreement (or of any financing statement executed by Debtor)
shall be sufficient as a financing statement.
C. Debtor hereby irrevocably constitutes and appoints Secured Party
its attorney-in-fact for the purpose of carrying out the provisions
of this Agreement and taking any action and executing any
instrument which Secured Party may deem necessary or advisable to
accomplish the purposes hereof, which appointment is irrevocable
and coupled with an interest. Without limiting the generality of
the foregoing, Secured Party shall have the right, after the
occurrence and during the continuance of an Event of Default, with
full power of substitution either in Secured Party's or Debtor's
name, to ask for, demand, sue for, collect, receive and give
acquittance for any and all moneys due or to become due with
respect to or in connection with the Collateral; to endorse checks,
drafts, orders and other instruments for the payment of money
representing payment on account, dividends or other distribution
with respect to or in connection with the Collateral or any part
thereof and to give full discharge for the same; to settle,
compromise, prosecute or defend any action, claim or proceeding
with respect to the Collateral; and to sell, assign, endorse,
pledge, transfer and make any agreement respecting, or otherwise
deal with, the Collateral.
D. Secured Party shall have such other rights as are provided under
applicable law.
E. Secured Party may take control of any Proceeds of Collateral at any
time and may at its option apply any cash Proceeds of the
Collateral (including without limitation any insurance proceeds or
amounts payable in any lawsuit on account of the Collateral) to the
payment of the Obligations, whether or not matured, in any manner
deemed appropriate by Secured Party.
1.6 Events of Default. For purposes of this Agreement, an "Event of Default"
-----------------
shall exist hereunder upon the happening of any of the following events:
A. The failure of Debtor to pay or to deliver to Secured Party any sum
when due under the Note;
B. Any representation or warranty made in this Agreement or the Note
shall prove false or misleading in any material respect, or Debtor
shall
Page 5 of 13
<PAGE>
fail to perform any covenant, agreement or undertaking under this
Agreement or the Note;
C. Debtor from and after the date hereof shall, or shall attempt to,
encumber, subject to any further pledge or security interest, sell,
transfer or otherwise dispose of any of the Collateral or any
interest therein;
D. All or any part of the Collateral shall be attached or levied upon
or seized in any legal proceedings, or held by virtue of any lien;
E. If the Debtor shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, apply to or petition any
tribunal for the appointment of a custodian, receiver, intervenor
or trustee for the Debtor or a substantial part of the Debtor's
assets; or if the Debtor shall commence any proceeding under any
bankruptcy, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; or if any such petition or application shall
have been filed or proceeding commenced against the Debtor or if
any such custodian, receiver, intervenor or trustee shall have been
appointed.
1.7 Rights and Remedies on Default. If any of the foregoing Events of
------------------------------
Default shall occur, then Secured Party, in its sole discretion and without
prior notice to Debtor, may at any time and from time to time during the
continuation thereof take any or all of the following actions:
A. Foreclose Secured Party's security interest(s) in any or all of the
Collateral as provided by law;
B. Sell, resell, discount or dispose of all or any portion of the
Collateral, or endorse, assign and convey the same to any third
party;
C. Require Debtor to assemble Debtor's books, records, files, papers
and other data pertaining to the Collateral and deliver them to
Secured Party at Debtor's expense to a place designated by Secured
Party;
D. Exercise any and all other rights and remedies with respect to the
Collateral which Secured Party may enjoy as a secured party under
this Agreement, the California Commercial Code or any other
applicable law.
All rights, remedies and powers granted to Secured Party in this
Agreement or the Note or by applicable law shall be cumulative and may be
exercised singly or concurrently on one or more occasions. No delay in
exercising or failure to exercise any of Secured Party's rights or remedies
shall constitute a waiver thereof, nor shall any single or partial exercise of
any right or remedy by Secured Party preclude any other or further exercise of
that or any other right or remedy. No waiver of any right or remedy by Secured
Party shall
Page 6 of 13
<PAGE>
be effective unless made in writing and signed by Secured Party, nor shall any
waiver on one occasion apply to any future occasion, but shall be effective only
with respect to the specific occasion addressed in that signed writing.
1.8 Sale of the Collateral. With respect to any sale or disposition of any
----------------------
of the Collateral, whether made under the power of sale in this Agreement, under
any applicable provisions of the California Commercial Code or other applicable
law, or under judgment or order or decree in any judicial proceeding for the
foreclosure of Secured Party's security interest or involving the enforcement of
this Agreement:
A. The Collateral may be sold, resold, assigned or delivered in one or
more parcels, at the same or at different times, at public or
private sale or at any broker's board or on any securities exchange
if publicly traded at the time of the sale, for cash or on credit
or for other property, for immediate or future delivery, and at
such price(s) and on such terms as Secured Party may determine in
its sole discretion, so long as such disposition is commercially
reasonable. Without precluding any other methods of sale, the sale
of the Collateral shall be deemed made in a commercially reasonable
manner if conducted in conformity with reasonable commercial
practices of banks or other financial institutions when disposing
of similar property.
B. Secured Party agrees to give Debtor not less than fifteen (15)
business days prior written notice of the time and place of any
non-judicial public sale of the Collateral and not less than
fifteen (15) days prior written notice of the date after which
Secured Party will effect a private sale of the Collateral. Debtor
hereby waives any and all other demands, advertisements or notices
except as required by law. In the case of any sale at a broker's
board or on a securities exchange, the notice required by this
subsection B shall identify the board or exchange at which such
sale is to be made and the day on which the Collateral (or a
portion thereof) will first be offered for sale. Any public sale of
any of the Collateral shall be held at such time or times within
ordinary business hours at such place or places as Secured Party
may state in the notice or publication (if any) of such sale.
C. Secured Party shall not be obligated to sell any of the Collateral
if it determines not to do so, notwithstanding that notice of a
sale of such Collateral may have been given. Secured Party may,
without notice or publication, adjourn any public or private sale
or cause the same to be adjourned from time to time by announcement
at the time and place fixed for the sale, and such sale may be
made, without further notice, at the time and place identified in
such announcement. In case of any sale of all or any part of the
Collateral on credit or for future delivery, Secured Party may
retain the Collateral sold until the sales price is paid by the
purchaser(s) thereof, but Secured Party shall not incur any
liability if any such purchaser shall fail to
Page 7 of 13
<PAGE>
take up and pay for the Collateral so sold, in which case such
Collateral may again be sold upon like notice.
D. Debtor understands that applicable federal and state laws
restricting and imposing requirements on the sales of securities to
the general public (the "Securities Laws") may affect the
disposition of any securities and that Secured Party's concern that
its sale or disposition of any such securities be in compliance
with the Securities Laws may limit Secured Party's course of
conduct in disposing or attempting to dispose of all or any part of
such securities, and may also limit the extent to which or the
manner in which any subsequent transferee may dispose of the same.
Consequently, Debtor agrees that Secured Party may, in selling or
disposing of any such securities, proceed in such manner and under
such circumstances as it may deem necessary or advisable to assure
compliance with all Securities Laws. Without limiting the
generality of the foregoing, the Secured Party may, subject to
compliance with applicable law, in its discretion: i) sell
privately any such securities notwithstanding that such securities
may be qualified or registered for sale to the general public; ii)
approach and negotiate with a restricted number of potential
purchasers to effect such sale; and iii) restrict such sale to
purchasers as to their number, nature of business and investment
intention (including, without limitation, to purchasers each of
whom will represent and agree to the satisfaction of Secured Party
that such purchaser is purchasing for its own account, for
investment, and not with a view to the distribution or sale of such
securities or part thereof), it being understood that Secured Party
may require Debtor, and Debtor hereby agrees upon the written
request of Secured Party to cause: a) a legend or legends to be
placed on the certificates or Instruments to be delivered to such
purchasers to the effect that the securities represented thereby
have not been registered under the Securities Laws and setting
forth or referring to restrictions on the transferability of such
securities; b) the issuance of stock transfer instructions to the
issuer's transfer agent, if any, with respect to such securities,
or, if the issuer transfers its own securities, a notation in the
appropriate records of such issuer; and to be delivered to the
purchasers a signed acknowledgment of the issuer of such securities
that, as concerns such securities, such purchasers shall be
entitled to the rights of Debtor by virtue of their purchase of
such securities from Secured Party.
E. Debtor agrees, if requested by Secured Party, at Debtor's sole
expense to take (and to cause any Issuer(s) of securities pledged
and assigned hereunder to take) such actions, render such
assistance and prepare, distribute and/or file such documents as
Secured Party or its legal counsel may reasonably request in
connection with the private or public sale of such securities.
Debtor agrees to indemnify and hold harmless Secured Party and any
underwriter against all loss, liability, expenses or claims
(including the reasonable cost of any investigation) which any of
them may incur in
Page 8 of 13
<PAGE>
connection with the sale of such securities to the extent that such
loss, liability, expense or claim arises out of or is based upon
any alleged untrue statement of a material fact by Debtor contained
in any registration statement, prospectus (or any amendment or
supplement thereto) or in any notification or offering circular, or
arises out of or is based upon any alleged omission to state a
material fact by Debtor required to be stated therein or necessary
to make the statements therein not misleading, except to the extent
due to the gross negligence or willful misconduct of Secured Party
or any such underwriter.
F. Secured Party may, to the fullest extent permitted by applicable
law, bid for and purchase the Collateral in a commercially
reasonable manner, and upon compliance with the terms of sale may
hold, retain and possess and dispose of the same in its own
absolute right.
G. Upon consummation of any sale, Secured Party shall have the right
to assign, transfer, endorse, convey and deliver to the respective
purchaser(s) the Collateral or portion thereof so sold.
H. A sale of the Collateral shall divest all right, title, interest,
equity, redemption, claim and demand whatsoever of Debtor,
including Debtors right to claim a percentage or royalty from the
profits or proceeds derived from the Collateral and shall be a
perpetual bar both at law and in equity against Debtor and Debtor's
successors and assigns, and against any and all persons claiming or
who may claim all or any part of the Collateral from, through or
under any of them.
I. To the fullest extent permitted by law, Debtor hereby waives any
claims against Secured Party arising with respect to any decrease
in the market value of any Collateral during the period held for
sale, or arising by reason of the possibility that the price at
which the Collateral may have been sold was less that the price
that might have been obtained had the sale been otherwise effected.
J. Secured Party shall have no obligation whatsoever to resort first
to any other security which Secured Party may hold for the
Obligations. Secured Party shall not incur any liability to Debtor
as a result of the sale of any Collateral at any private sale
conducted in a commercially reasonable manner, or as a result of
any failure to sell or offer for sale any Collateral for any reason
whatsoever or to exercise any other right, privilege, option or
power to the fullest extent permitted by law granted to Secured
Party hereunder.
K. A written agreement to sell any Collateral, which agreement Secured
Party in good faith deems itself bound to perform, shall be treated
as a sale of such Collateral and Secured Party shall be free to
carry out such agreement.
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<PAGE>
If such an agreement is then effective, Debtor shall not be
entitled to the return of any Collateral subject thereto, even if
after the date of such agreement all Events of Default shall have
been cured or the Obligations shall have been fully paid and
performed.
L. After deducting all costs and expenses of every kind for taking,
retaking, care, safekeeping, collecting, holding, preparing for
sale, selling, delivering and the like (including legal costs,
insurance, commission for sale, and reasonable attorney's fees) and
all other charges against the Collateral, Secured Party shall apply
the residue of the proceeds of any such sale or other disposition
against any and all amounts remaining unpaid under the Obligations,
all in such order of priority as Secured Party may determine in its
sole and reasonable discretion.
1.9 Waiver of Rights. To the fullest extent permitted by law, Debtor hereby
----------------
waives notice, demand, presentment, protest, notice of dishonor, suit against or
joinder of any other person, and all other requirements necessary to charge or
hold Debtor liable with respect to the obligations hereunder. Debtor hereby
consents and agrees that, at any time and from time to time without notice to
Debtor, Secured Party and any other owner(s) of any collateral or security given
for the Obligations may agree to renew, extend, compromise, discharge or release
the Obligations in whole or in part, and/or to release, increase, change,
substitute or exchange all or any part of such collateral or security, or to
modify the terms of the Obligations in any other way that Secured Party and such
person(s) may deem appropriate; no such renewal, extension, compromise,
discharge, release, increase, change, substitution, exchange or modification
shall release or affect in any way the liability of Debtor or Secured Party's
rights against the Collateral, and Debtor hereby waives any and all defenses and
claims whatsoever based thereon. Until Secured Party receives all sums due with
respect to the Obligations in immediately available funds, Debtor shall not be
released from liability unless Secured Party expressly releases Debtor in a
writing signed by Secured Party.
1.10 Interest. All obligations of Debtor to Secured Party arising under this
--------
Agreement shall bear interest, from the date when due until paid in full. All
such interest is and shall be secured by the Collateral. Notwithstanding any
contrary provision of the obligations, in no event shall any agreed to or actual
exaction charged, reserved or taken as an advance or forbearance by Secured
Party as consideration for the Obligations exceed the limits (if any) imposed or
provided by the law applicable from time to time to the Obligations for the use
or detention of money or for forbearance in seeking its collection; Secured
Party hereby waives any right to demand such excess. In the event that the
interest provisions of the Note or any exactions required thereunder shall
result at any time or for any reason in an effective rate of interest that
exceeds the maximum interest rate permitted by applicable law (if any), then
without further agreement or notice the obligation to be fulfilled shall be
automatically reduced to such limit and all sums received by Secured Party in
excess of those lawfully collectible as interest shall be applied against the
principal of the Obligations immediately upon Secured Party's receipt thereof,
with the same force and
Page 10 of 13
<PAGE>
effect as though the payor had specifically designated such extra sums to be so
applied to principal and Secured Party had agreed to accept such extra
payment(s) as a premium-free prepayment or prepayments. During any time that any
of the Obligations bear interest at the maximum lawful rate (whether by
application of this paragraph or otherwise), interest shall be computed on the
basis of the actual number of days elapsed and the actual number of days in the
respective calendar year.
1.11 Actions or Proceedings. With respect to any legal action or proceeding
----------------------
arising under this Agreement or the Note or concerning the Obligations and/or
the Collateral, Debtor to the fullest extent permitted by law: (A) submits to
the jurisdiction of the state and federal courts in the State of California; (B)
agrees that the venue of any such action or proceeding may be laid in Los
Angeles County and waives any claim that the same is an inconvenient forum; (C)
to the extent not prohibited by applicable law waives any right to immunity from
any such action or proceeding; and (D) waives any right to interpose any set off
or counterclaim or to plead laches or any statute of limitations as a defense in
any such action or proceeding, and waives all statutory provisions and
requirements for the benefit of Debtor, now or hereafter in force. No provision
of this Agreement shall limit Secured Party's right to serve legal process in
any other manner permitted by law or to bring any such action or proceeding in
any other competent jurisdiction.
1.12 Notices. Except as otherwise provided in this Agreement for service of
-------
legal process, any notice to Debtor shall be in writing and shall be deemed
sufficiently made if delivered personally or if transmitted by postage prepaid
first class mail (airmail if international) or by telegraph or by telex with
confirmed answer back, to the address appearing below:
Debtor:
Grand Havana Enterprises, Inc.
1990 Westwood Blvd.
Los Angeles, CA.
Secured Party:
Harry Shuster
Attn: Jerry Chizever, Esq.
9601 Wilshire Blvd.
Beverly Hills, CA 90210
Any party may change its address for notice by giving written notice of the
change.
1.13 Binding Effect. The terms of this Agreement shall inure to the benefit
--------------
of Secured Party and its successors and assigns and shall be binding upon Debtor
and Debtor's permitted successors and assigns.
Page 11 of 13
<PAGE>
1.14 Term. This Agreement shall take effect when signed by Debtor and
----
delivered to Secured Party. This Agreement is a continuing agreement and shall
remain in full force and effect until all the Obligations shall have been paid
in full, unless earlier terminated by Secured Party in writing.
1.15 Interpretation. If this Agreement is signed by more than one person,
--------------
then the term "Debtor" as used in this Agreement shall refer to all such persons
jointly and severally, and all promises, agreements, covenants, waivers,
consents, representations, warranties and other provisions in this Agreement are
made by and shall be binding upon each and every undersigned person, jointly and
severally. Whenever used in this Agreement, the term "person" means any
individual, firm, corporation, trust or other organization or association or
other enterprise or any governmental or political subdivision, agency,
department or instrumentality thereof. Whenever used in this Agreement, the
terms "written" or "in writing" mean any form of written communication and any
communication by means of telex, telecopier device, telegraph or cable.
Captions and paragraph headings contained in this Agreement are for convenience
only and shall not affect its interpretation. Whenever used in this Agreement
and unless the context otherwise requires, words in the plural include the
singular, words in the singular include the plural, and pronouns of any gender
include the other genders.
1.16 Cumulative Rights. The rights of Secured Party under this Agreement are
-----------------
in addition to, and not in substitution for, any rights available to Secured
Party against Debtor at law or in equity, all of which are cumulative and may be
exercised by Secured Party in whole or in part from time to time.
1.17 Miscellaneous. Time is of the essence with respect to the provisions of
-------------
this Agreement. This Agreement may be amended but only by an instrument in
writing executed by the party to be burdened thereby. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction only, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of California.
WITNESS THE DUE EXECUTION by Debtor as of the 15th day of August, 1998.
DEBTOR:
Grand Havana Enterprises, Inc.
/s/ Stanley Shuster
- -----------------------------------
By: Stanley Shuster
Its: Vice President
Page 12 of 13
<PAGE>
Exhibit "A"
DESCRIPTION OF COLLATERAL
1. All membership initiation fees, membership dues whether paid monthly,
annually or in some other periodic payment basis which are paid by patrons or
members for club membership privileges at any of the following locations:
Grand Havana Room--Beverly Hills, CA.
Grand Havana Room--New York City, NY.
Grand Havana Room--Washington, D.C.
all of which shall be referred to herein as the "Clubs".
2. All accounts, receipts, funds held by or to be paid to the Debtor
from the Clubs or from the retail stores located in Las Vegas, Nevada in the
Bally's Hotel, known as the Grand Havana House of Cigars and the Grand Havana
House of Cigars in Beverly Hills (collectively, the "Stores").
3. The leasehold interests of the Debtor at the locations for the Clubs
and the Store.
4. All presently owned or hereafter acquired equipment, supplies,
materials, machines, appliances, fixtures, furniture, furnishings, leasehold
improvements, appurtenances of any description, and all additions and accessions
thereto and replacements therefor; and
5. All personal property of any description, now owned or hereafter to
be acquired by or on behalf of Debtor, including, without limitation, inventory,
work-in-progress, and supplies, and all additions and accessions thereto and
replacements therefor; and
6. All accounts, contract rights, general intangibles, receivables, and
other documents, instruments, and other rights to the payment of money or
performance of services, now existing or hereafter arising in any way relating
to the business of Debtor or in connection with the use of the property
described in (1) and (2) above; and
7. All proceeds of the foregoing collateral, including whatever is
receivable or received when collateral or proceeds is sold, collected, exchanged
or otherwise disposed of, whether such disposition is voluntary or involuntary,
and includes, without limitation, all rights to payment, including return
premiums, with respect to any insurance relating thereto.
Page 13 of 13
<PAGE>
EXHIBIT (10)-3
SECURED PROMISSORY NOTE
-----------------------
with provision for future advances
$1,250,000.00 Los Angeles, California September 30, 1998
Recitals
--------
A. On or about February 12, 1997 United Leisure Corporation, a Delaware
Corporation (the "Noteholder") entered into a loan agreement with United
Restaurants, Inc., a Delaware corporation (the "Maker") whereby the Noteholder
agreed to lend to the Maker the sum of One Million Two Hundred and Fifty
Thousand and no/100 Dollars ($1,250,000) upon the terms and conditions contained
in that certain Promissory Note, a copy of which is attached hereto as Exhibit
"A" (the "Original Note").
B. The Original Note is due and payable in full on September 30, 1998.
C. On or about February 27, 1997 the Maker changed its name from United
Restaurants, Inc., to Grand Havana Enterprises, Inc.
D. During the time from the execution of the Original Note until the
effective date of this Secured Promissory Note ("Replacement Note") the
Noteholder lent the Maker money in accordance with the terms of the Original
Note and the Maker repaid the Noteholder a portion of the amounts due under the
Original Note. The Noteholder and Maker mutually agree and acknowledge that the
full amount of principal and interest currently due under the Original Note is
Six Hundred Three Thousand Two Hundred Seventy Nine and 71/100 ($603,279.71).
E. The Noteholder and Maker, for good and valuable consideration, now
desire to replace the Original Note and to enter into a new loan agreement to be
evidenced by this Replacement Note, in accordance with the terms set forth
herein, which shall be secured by the Collateral described in the Security
Agreement attached hereto as Exhibit "B".
AGREEMENT
NOW THEREFORE, for good and valuable consideration, the reciept and
sufficiency of which is hereby acknowledged the parties agree as follows:
Upon the terms and subject to the restrictions and conditions set
forth herein, Grand Havana Enterprises, Inc., a Delaware corporation (the
"Maker"), promises to pay to the order of United Leisure Corporation, a
Delaware Corporation
Page -1-
<PAGE>
(the "Noteholder"), or such other locations as the Noteholder may designate, the
sum of up to One Million Two Hundred and Fifty Thousand Dollars ($1,250,000.00)
together with interest thereon, accrued from the above date hereof; in lawful
money of the United States of America.
The parties that the initial loan advance under this Replacement Note
shall be the sum of Six Hundred Three Thousand Two Hundred Seventy Nine and
71/100 ($603,279.71) which represents the current amount currently due under the
Original Note. The Noteholder agrees and acknowledges that by executing this
Replacement Note all of Makers payment obligations under the Original have been
satisfied.
In addition to the advances described above the Noteholder may from
time to time, but shall not be obligated to make additional future advances,
which shall in no event exceed the total outstanding loan balance of One
Million Two Hundred and Fifty Thousand Dollars ($1,250,000.00). All amounts
advanced hereunder will be included in the principal balance due under this
Replacement Note. As and when advances are made the amount of the advances
made shall be recorded on the "Record of Advances" attached hereto as Exhibit
"A" and shall be subscribed by the Maker in acknowledgment of the amount of the
advance. The aggregate amounts of all advances, less any prepayments of
principal shall be the outstanding balance due under this Note.
The principal amount hereof, as adjusted from time to time, shall bear
interest at the rate of eight percent (8%) per annum. Interest hereunder shall
be calculated on the basis of a three hundred sixty (360) day year for each day,
all or any of the principal balance hereof shall remain outstanding. Prepayment
of interest or principal, in whole or in part, may be made without penalty or
forfeiture.
This Note shall be due and payable in full on March 31, 1999.
This Note is secured by an interest in the real and personal property
and equipment described in Exhibit "B" attached hereto and incorporated herein
by this reference, all of which may be used to secure payment under the terms of
this Note in the event of default.
The Maker hereby waives diligence, demand, presentment for payment,
and notice of whatever kind of nature. Without discharging or in any way
affecting the liability of the undersigned, the undersigned hereby consents to
any and all extensions of this Note as the Noteholder hereof may in its sole
discretion grant from time to time, to the release of all or any part of the
security for the payment hereof. The Maker further waives exhaustion of legal
remedies and the right to plead any and all statutes of limitation as a defense
to any demand on this Note, or to any agreement to pay the same.
Page -2-
<PAGE>
All payments due on this Note shall be payable in lawful money of the
United States of America, and shall be made to the Noteholder at 1990 Westwood
Blvd., Los Angeles, California or such other address as the Noteholder may
hereafter designate from time to time.
If any provision of this Note is held to be invalid or unenforceable
by a court of competent jurisdiction, the other provisions of this Note shall
remain in full force.
Any interest rate provided hereunder which exceeds the maximum rate
provided by applicable law shall instead be deemed to be such maximum rate and
any interest in excess of such maximum rate paid to Noteholder shall be applied
to reduce the principal balance of this Note so that in no event shall
Noteholder receive or be entitled to receive interest in excess of the maximum
amount permitted by applicable law.
The provisions and covenants contained herein shall inure to and be
binding upon the heirs, successors and assigns of the parties hereto. Maker
agrees that Noteholder may assign this Note and Maker will make payment to such
assignee upon notice of such assignment. Noteholder shall thereafter be forever
relieved and fully discharged from any and all liability or responsibility to
Maker, but Noteholder shall retain all rights and powers hereby given with
respect to property not so transferred.
Time is of the essence in connection with each and every obligation of
Maker pursuant to this Note.
This Note is to be governed by, and construed in accordance with the
laws of the State of California.
Noteholder and Maker agree to execute such further documents, and take
such further actions, as may reasonably be required to carry out the provisions
of this Note or any agreement or document relating hereto or entered into in
connection herewith.
This Note may be amended or modified only by an instrument in writing
which by its express terms refers to this Note and which is duly executed by the
parties sought to be bound thereby.
Any failure by Noteholder to insist upon the strict performance by
Maker of any of the covenants, agreements, obligations or conditions hereof
shall not be deemed to be a waiver of any such covenants, agreements,
obligations or conditions, and Noteholder, notwithstanding any such failure,
shall have the right
Page -3-
<PAGE>
thereafter to insist upon the strict performance by Maker of any and all of such
covenants, agreements, obligations and conditions.
In the event that this Note is placed in the hands of an attorney at
law for collection upon default or in the event that proceedings at law or in
equity are instituted in connection herewith, or in the event that this Note is
placed in the hands of an attorney at law to enforce any of the rights or
agreements contained herein, the undersigned shall pay all costs of collecting
or attempting to collect this Note or protecting or enforcing such rights
including, without limitation, reasonable attorneys fees.
IN WITNESS WHEREOF, the undersigned has executed this Promissory Note
as of the date first herein above written.
Maker:
Grand Havana Enterprises, Inc.
/s/ Harry Shuster
- ------------------------------
By: Harry Shuster
Its: President
Page -4-
<PAGE>
EXHIBIT "A"
-----------
Record of Advances
Starting Principal Balance: $603,279.71
----------------------------------------
<TABLE>
<CAPTION>
Advance Authorized Note Balance
Date Amount Signature After Advance
---- ------ --------- -------------
<S> <C> <C> <C>
September 30, 1998 $603,279.71 $603,279.71
</TABLE>
Page -5-
<PAGE>
EXHIBIT (10)-4
SECURITY AGREEMENT
------------------
This Security Agreement ("Agreement") is entered as of the 30th of
September, 1998 by Grand Havana Enterprises, Inc., a Delaware corporation,
(the"Debtor"), and United Leisure Corporation, a Delaware corporation (the
"Secured Party").
RECITALS
--------
A. The Secured Party has agreed to lend the Debtor the sum set forth in
the attached Secured Promissory Note (the "Replacement Note").
B. As a condition of Secured Party agreeing to accept the Replacement Note
in consideration for making the loan evidenced by the Secured Party has required
that Debtor enter into this Security Agreement and pledge certain collateral, as
hereinafter described, to assure the Secured Party receives the benefits of the
service contracts.
NOW, THEREFORE, in consideration of the above premises, and for other good
and valuable consideration the receipt of which Debtor hereby acknowledges,
Debtor agrees as follows:
ARTICLE
1. AGREEMENT
1.1 The Collateral. For value received, Debtor hereby pledges, assigns and
--------------
grants to Secured Party without any recourse to Debtor except as provided herein
and subject to the provisions of this Agreement, a security interest in the
following described personal property (the "Collateral"):
See Exhibit "A" attached hereto and incorporated herein by this reference.
1.2 Grant of Security Interest. For value received, Debtor hereby pledges,
--------------------------
assigns, and grants to Secured Party, without any recourse to Debtor whatsoever
and subject to the provisions of this Agreement, a security interest in the
personal property described in Section 1.1 hereof which shall be referred to as
the "Collateral."
Page -1-
<PAGE>
1.3 The Obligations. The Collateral secures and will secure the prompt and
---------------
unconditional payment of the "Obligations." As used in this Agreement, the term
"Obligations" means any and all amounts due to Secured Party as the successor-
in-interest to the Debtor by virtue of the Replacement Note executed by the
Debtor and delivered to the Secured Party.
1.1 Representations, Warranties and Covenants. Debtor acknowledges and
-----------------------------------------
agrees that Secured Party is relying on the representations and warranties and
covenants in this Agreement as a condition precedent to the acceptance of the
Replacement Note and that all such representations and warranties and covenants
shall survive the execution and delivery of this Agreement and any bankruptcy,
insolvency or similar proceedings. Debtor hereby represents and warrants to
Secured Party and covenants for the benefit of Secured Party as follows:
A. Debtor is (and with respect to all Collateral acquired hereafter,
shall be) the sole legal and equitable owner of the Collateral
free from any adverse claim, lien, security interest, encumbrance
or other right, title or interest of any person, except for the
security interest created hereby and for a prior security interest
in the Collateral granted in favor of Harry Shuster dated as of
August 15, 1998 securing payment of a promissory note in the
principal face amount of Three Hundred Thousand and no/100 Dollars
($300,000.00). Debtor has the unqualified right and power to grant
a security interest in the Collateral without the consent of any
person and Debtor shall at Debtor's expense defend the Collateral
against all claims and demands of all persons at any time claiming
the Collateral or any interest therein adverse to Secured Party
except to the extent that such prior interest is disclosed herein.
Debtor shall not create, grant nor suffer to exist any pledge,
security interest, lien, levy, garnishment, attachment, charge or
encumbrance upon any of the Collateral (except in favor of Secured
Party) and shall at all times keep the Collateral free from the
same.
B. If new or additional Collateral is pledged to Secured Party, then
the same shall be deemed an increment to the Collateral and under
pledge and assignment to Secured Party hereunder. If evidenced by
a stock certificate, bond, warrant, debenture, certificate, or
other Instrument or writing, then such securities shall (to the
extent acquired or received by or placed under Debtor's control)
be held in trust for and promptly delivered to Secured Party,
together with duly executed stock powers in blank and any other
assignments or endorsements as Secured Party may request. If any
such securities are uncertificated, then Debtor shall immediately
upon acquisition of such securities cause Secured Party to be
registered as the transferee thereof on the books of the
depository, custodian bank, clearing corporation, brokerage house,
issuer or otherwise, as may be requested by Secured Party.
Page -2-
<PAGE>
C. Without the prior written consent of Secured Party, Debtor shall
not sell, transfer, assign, convey or otherwise dispose of any
interest in any of the Collateral, nor enter into any contract or
agreement to do so.
D. Debtor shall pay when due all taxes or other governmental charges
whatsoever levied against the Collateral and all assessments
(including stock assessments) upon the Collateral, and Debtor
shall pay any tax which may be levied on or assessed against this
Agreement;
E. Debtor, or if Debtor fails to do so, Secured Party shall pay on
demand all filing fees and similar charges and all costs incurred
by Secured Party in creating a security interest or securing and
enforcing a security interest in the Collateral including the
expenses and reasonable fees of Secured Party's legal counsel,
whether or not involving litigation and/or appellate,
administrative or bankruptcy proceedings. Debtor agrees to
indemnify and hold Secured Party harmless on demand against all
expenses, losses, consequences or damages incurred or suffered by
Secured Party arising from or relating to any claim, demand,
action or proceeding brought by any person(s) whomsoever in
connection with or relating to the Collateral or this Agreement
(including without limitation any court costs and the expenses and
reasonable fees of Secured Party's legal counsel), except to the
extent that a court of competent jurisdiction shall hold the same
to be the result of Secured Party's own gross negligence or
willful misconduct. Debtor shall pay any documentary stamp taxes,
intangible taxes or other taxes (except for federal or state
franchise or income taxes based on the net income of Secured
Party) which may now or hereafter apply to the Collateral or this
Agreement, and Debtor agrees to indemnify and hold Secured party
harmless from and against any liability, costs, attorney's fees,
penalties, interest or expenses relating to any such taxes, as and
when the same may be incurred. Debtor shall pay on demand, and
indemnify and hold Secured Party harmless against, any and all
present or future taxes, levies, imposts, deductions, charges and
withholdings imposed in connection with this Agreement, the
Collateral or the Obligations by the laws or governmental
authorities of any jurisdiction or the United States of America.
All sums payable by Debtor under this subparagraph are and shall
be secured by the Collateral.
F. There is no fact that the Debtor has not disclosed to Secured
Party in writing that could materially adversely affect its
properties, business or financial condition, or any Collateral.
Debtor shall promptly notify Secured Party in writing if any event
shall occur or become known to Debtor which has or could have any
such materially adverse effect with respect to Debtor, or which
changes the truth or correctness of any representation or warranty
in this Agreement or which affects the value of, or any rights
incidental to, any Collateral or the ability of Debtor or Secured
Party to dispose of the same (including without
Page -3-
<PAGE>
limitation the levy of any legal process or the filing of any lien
against the Collateral or the adoption of any marketing order,
arrangement or procedure affecting the Collateral, whether
governmental or otherwise).
G. Debtor shall not take or permit any action that may impair the
Collateral or Secured Party's security interest therein, and shall
not permit any of the Collateral to be used in violation of any
statute or regulation or ordinance. Without limiting the
foregoing, Debtor will not compromise, release, surrender or waive
any rights of any nature whatsoever in respect of any of the
Collateral without Secured Party's prior written consent, which
Secured Party may grant or withhold in its sole discretion.
H. Debtor shall immediately: (a) to the extent not previously
delivered to Secured Party in compliance with the terms hereof,
deliver to Secured Party any and all Instruments, securities,
notes, drafts and acceptances included in the Collateral at the
time and place and manner specified by Secured Party, together
with any endorsements, stock powers in blank and assignments
requested by Secured Party for their transfer to Secured Party or
to any other person selected by Secured Party, all in form and
substance satisfactory to Secured Party; and (b) execute, deliver
and file any and all financing statements, continuation
statements, mortgages, agreements, notices, vouchers, invoices,
schedules, confirmatory assignments, conveyances, transfer
endorsements, powers of attorney, proxies, certificates, deeds or
other papers and/or perform any act which Secured Party may deem
necessary or appropriate to create, perfect, preserve, validate or
otherwise protect Secured Party's security interest in the
Collateral or to enable Secured Party from time to time to
exercise and enforce Secured Party's rights under this Agreement.
I. The execution and delivery of this Agreement does not and shall
not (a) violate any material provisions of any law, rule,
regulation, order, writ, judgment, injunction, decree,
determination or award applicable to Debtor, nor (b) result in a
breach of, or constitute a default under, any indenture, bond,
mortgage, lease, instrument, credit agreement, undertaking,
contract or other agreement to which Debtor is a party or by which
any of them or their respective properties may be bound or
affected. This Agreement constitutes the legal, valid and binding
obligation of the Debtor and is enforceable against Debtor in
accordance with its terms.
1.5 Rights of Secured Party. Debtor agrees with and for the benefit of
-----------------------
Secured Party that:
A. Secured Party shall have the right (but not the obligation) at its
option to discharge or pay any taxes, assessments, liens, security
interests or other encumbrances at any time levied or placed on or
against the Collateral. Any
Page -4-
<PAGE>
amount so paid or advanced by Secured Party shall be secured by
the Collateral and shall be repayable by Debtor on demand.
B. Secured Party may sign and file appropriate financing statements,
security agreements, recording instruments or other documents or
amendments thereto with respect to the Collateral or any portion
thereof without the signature of Debtor, and Debtor shall
reimburse Secured Party on demand for any reasonable costs
advanced or incurred by Secured Party in connection therewith. At
Secured Party's option, a carbon, photographic or other
reproduction of this Agreement (or of any financing statement
executed by Debtor) shall be sufficient as a financing statement.
C. Debtor hereby irrevocably constitutes and appoints Secured Party
its attorney-in-fact for the purpose of carrying out the
provisions of this Agreement and taking any action and executing
any instrument which Secured Party may deem necessary or advisable
to accomplish the purposes hereof, which appointment is
irrevocable and coupled with an interest. Without limiting the
generality of the foregoing, Secured Party shall have the right,
after the occurrence and during the continuance of an Event of
Default, with full power of substitution either in Secured Party's
or Debtor's name, to ask for, demand, sue for, collect, receive
and give acquittance for any and all moneys due or to become due
with respect to or in connection with the Collateral; to endorse
checks, drafts, orders and other instruments for the payment of
money representing payment on account, dividends or other
distribution with respect to or in connection with the Collateral
or any part thereof and to give full discharge for the same; to
settle, compromise, prosecute or defend any action, claim or
proceeding with respect to the Collateral; and to sell, assign,
endorse, pledge, transfer and make any agreement respecting, or
otherwise deal with, the Collateral.
D. Secured Party shall have such other rights as are provided under
applicable law.
E. Secured Party may take control of any Proceeds of Collateral at
any time and may at its option apply any cash Proceeds of the
Collateral (including without limitation any insurance proceeds or
amounts payable in any lawsuit on account of the Collateral) to
the payment of the Obligations, whether or not matured, in any
manner deemed appropriate by Secured Party.
1.6 Events of Default. For purposes of this Agreement, an "Event of Default"
-----------------
shall exist hereunder upon the happening of any of the following events:
A. The failure of Debtor to pay or to deliver to Secured Party any
sum when due under the Replacement Note;
Page -5-
<PAGE>
B. Any representation or warranty made in this Agreement or the
Replacement Note shall prove false or misleading in any material
respect, or Debtor shall fail to perform any covenant, agreement
or undertaking under this Agreement or the Replacement Note;
C. Debtor from and after the date hereof shall, or shall attempt to,
encumber, subject to any further pledge or security interest,
sell, transfer or otherwise dispose of any of the Collateral or
any interest therein;
D. All or any part of the Collateral shall be attached or levied upon
or seized in any legal proceedings, or held by virtue of any lien;
E. If the Debtor shall make an assignment for the benefit of
creditors, file a petition in bankruptcy, apply to or petition any
tribunal for the appointment of a custodian, receiver, intervenor
or trustee for the Debtor or a substantial part of the Debtor's
assets; or if the Debtor shall commence any proceeding under any
bankruptcy, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; or if any such petition or application shall
have been filed or proceeding commenced against the Debtor or if
any such custodian, receiver, intervenor or trustee shall have
been appointed.
1.7 Rights and Remedies on Default. If any of the foregoing Events of
------------------------------
Default shall occur, then Secured Party, in its sole discretion and without
prior notice to Debtor, may at any time and from time to time during the
continuation thereof take any or all of the following actions:
A. Foreclose Secured Party's security interest(s) in any or all of
the Collateral as provided by law;
B. Sell, resell, discount or dispose of all or any portion of the
Collateral, or endorse, assign and convey the same to any third
party;
C. Require Debtor to assemble Debtor's books, records, files, papers
and other data pertaining to the Collateral and deliver them to
Secured Party at Debtor's expense to a place designated by Secured
Party;
D. Exercise any and all other rights and remedies with respect to the
Collateral which Secured Party may enjoy as a secured party under
this Agreement, the California Commercial Code or any other
applicable law.
All rights, remedies and powers granted to Secured Party in this Agreement
or the Replacement Note or by applicable law shall be cumulative and may be
exercised singly or concurrently on one or more occasions. No delay in
exercising or failure to exercise any of Secured Party's rights or remedies
shall constitute a waiver thereof, nor shall any single
Page -6-
<PAGE>
or partial exercise of any right or remedy by Secured Party preclude any other
or further exercise of that or any other right or remedy. No waiver of any right
or remedy by Secured Party shall be effective unless made in writing and signed
by Secured Party, nor shall any waiver on one occasion apply to any future
occasion, but shall be effective only with respect to the specific occasion
addressed in that signed writing.
1.8 Sale of the Collateral. With respect to any sale or disposition of any
----------------------
of the Collateral, whether made under the power of sale in this Agreement, under
any applicable provisions of the California Commercial Code or other applicable
law, or under judgment or order or decree in any judicial proceeding for the
foreclosure of Secured Party's security interest or involving the enforcement of
this Agreement:
A. The Collateral may be sold, resold, assigned or delivered in one
or more parcels, at the same or at different times, at public or
private sale or at any broker's board or on any securities
exchange if publicly traded at the time of the sale, for cash or
on credit or for other property, for immediate or future delivery,
and at such price(s) and on such terms as Secured Party may
determine in its sole discretion, so long as such disposition is
commercially reasonable. Without precluding any other methods of
sale, the sale of the Collateral shall be deemed made in a
commercially reasonable manner if conducted in conformity with
reasonable commercial practices of banks or other financial
institutions when disposing of similar property.
B. Secured Party agrees to give Debtor not less than fifteen (15)
business days prior written notice of the time and place of any
non-judicial public sale of the Collateral and not less than
fifteen (15) days prior written notice of the date after which
Secured Party will effect a private sale of the Collateral. Debtor
hereby waives any and all other demands, advertisements or notices
except as required by law. In the case of any sale at a broker's
board or on a securities exchange, the notice required by this
subsection B shall identify the board or exchange at which such
sale is to be made and the day on which the Collateral (or a
portion thereof) will first be offered for sale. Any public sale
of any of the Collateral shall be held at such time or times
within ordinary business hours at such place or places as Secured
Party may state in the notice or publication (if any) of such
sale.
C. Secured Party shall not be obligated to sell any of the Collateral
if it determines not to do so, notwithstanding that notice of a
sale of such Collateral may have been given. Secured Party may,
without notice or publication, adjourn any public or private sale
or cause the same to be adjourned from time to time by
announcement at the time and place fixed for the sale, and such
sale may be made, without further notice, at the time and place
identified in such announcement. In case of any sale of all or any
part of the Collateral on credit or for future delivery, Secured
Party may retain the Collateral sold until the sales price is paid
by the purchaser(s) thereof, but
Page -7-
<PAGE>
Secured Party shall not incur any liability if any such purchaser
shall fail to take up and pay for the Collateral so sold, in which
case such Collateral may again be sold upon like notice.
D. Debtor understands that applicable federal and state laws
restricting and imposing requirements on the sales of securities
to the general public (the "Securities Laws") may affect the
disposition of any securities and that Secured Party's concern
that its sale or disposition of any such securities be in
compliance with the Securities Laws may limit Secured Party's
course of conduct in disposing or attempting to dispose of all or
any part of such securities, and may also limit the extent to
which or the manner in which any subsequent transferee may dispose
of the same. Consequently, Debtor agrees that Secured Party may,
in selling or disposing of any such securities, proceed in such
manner and under such circumstances as it may deem necessary or
advisable to assure compliance with all Securities Laws. Without
limiting the generality of the foregoing, the Secured Party may,
subject to compliance with applicable law, in its discretion: i)
sell privately any such securities notwithstanding that such
securities may be qualified or registered for sale to the general
public; ii) approach and negotiate with a restricted number of
potential purchasers to effect such sale; and iii) restrict such
sale to purchasers as to their number, nature of business and
investment intention (including, without limitation, to purchasers
each of whom will represent and agree to the satisfaction of
Secured Party that such purchaser is purchasing for its own
account, for investment, and not with a view to the distribution
or sale of such securities or part thereof), it being understood
that Secured Party may require Debtor, and Debtor hereby agrees
upon the written request of Secured Party to cause: a) a legend or
legends to be placed on the certificates or Instruments to be
delivered to such purchasers to the effect that the securities
represented thereby have not been registered under the Securities
Laws and setting forth or referring to restrictions on the
transferability of such securities; b) the issuance of stock
transfer instructions to the issuer's transfer agent, if any, with
respect to such securities, or, if the issuer transfers its own
securities, a notation in the appropriate records of such issuer;
and to be delivered to the purchasers a signed acknowledgment of
the issuer of such securities that, as concerns such securities,
such purchasers shall be entitled to the rights of Debtor by
virtue of their purchase of such securities from Secured Party.
E. Debtor agrees, if requested by Secured Party, at Debtor's sole
expense to take (and to cause any Issuer(s) of securities pledged
and assigned hereunder to take) such actions, render such
assistance and prepare, distribute and/or file such documents as
Secured Party or its legal counsel may reasonably request in
connection with the private or public sale of such securities.
Debtor agrees to indemnify and hold harmless Secured Party and any
underwriter against all loss, liability, expenses or claims
(including the
Page -8-
<PAGE>
reasonable cost of any investigation) which any of them may incur
in connection with the sale of such securities to the extent that
such loss, liability, expense or claim arises out of or is based
upon any alleged untrue statement of a material fact by Debtor
contained in any registration statement, prospectus (or any
amendment or supplement thereto) or in any notification or
offering circular, or arises out of or is based upon any alleged
omission to state a material fact by Debtor required to be stated
therein or necessary to make the statements therein not
misleading, except to the extent due to the gross negligence or
willful misconduct of Secured Party or any such underwriter.
F. Secured Party may, to the fullest extent permitted by applicable
law, bid for and purchase the Collateral in a commercially
reasonable manner, and upon compliance with the terms of sale may
hold, retain and possess and dispose of the same in its own
absolute right.
G. Upon consummation of any sale, Secured Party shall have the right
to assign, transfer, endorse, convey and deliver to the respective
purchaser(s) the Collateral or portion thereof so sold.
H. A sale of the Collateral shall divest all right, title, interest,
equity, redemption, claim and demand whatsoever of Debtor,
including Debtors right to claim a percentage or royalty from the
profits or proceeds derived from the Collateral and shall be a
perpetual bar both at law and in equity against Debtor and
Debtor's successors and assigns, and against any and all persons
claiming or who may claim all or any part of the Collateral from,
through or under any of them.
I. To the fullest extent permitted by law, Debtor hereby waives any
claims against Secured Party arising with respect to any decrease
in the market value of any Collateral during the period held for
sale, or arising by reason of the possibility that the price at
which the Collateral may have been sold was less that the price
that might have been obtained had the sale been otherwise
effected.
J. Secured Party shall have no obligation whatsoever to resort first
to any other security which Secured Party may hold for the
Obligations. Secured Party shall not incur any liability to Debtor
as a result of the sale of any Collateral at any private sale
conducted in a commercially reasonable manner, or as a result of
any failure to sell or offer for sale any Collateral for any
reason whatsoever or to exercise any other right, privilege,
option or power to the fullest extent permitted by law granted to
Secured Party hereunder.
K. A written agreement to sell any Collateral, which agreement
Secured Party in good faith deems itself bound to perform, shall
be treated as a sale of
Page -9-
<PAGE>
such Collateral and Secured Party shall be free to carry out such
agreement. If such an agreement is then effective, Debtor shall
not be entitled to the return of any Collateral subject thereto,
even if after the date of such agreement all Events of Default
shall have been cured or the Obligations shall have been fully
paid and performed.
L. After deducting all costs and expenses of every kind for taking,
retaking, care, safekeeping, collecting, holding, preparing for
sale, selling, delivering and the like (including legal costs,
insurance, commission for sale, and reasonable attorney's fees)
and all other charges against the Collateral, Secured Party shall
apply the residue of the proceeds of any such sale or other
disposition against any and all amounts remaining unpaid under the
Obligations, all in such order of priority as Secured Party may
determine in its sole and reasonable discretion.
1.9 Waiver of Rights. To the fullest extent permitted by law, Debtor hereby
----------------
waives notice, demand, presentment, protest, notice of dishonor, suit against or
joinder of any other person, and all other requirements necessary to charge or
hold Debtor liable with respect to the obligations hereunder. Debtor hereby
consents and agrees that, at any time and from time to time without notice to
Debtor, Secured Party and any other owner(s) of any collateral or security given
for the Obligations may agree to renew, extend, compromise, discharge or release
the Obligations in whole or in part, and/or to release, increase, change,
substitute or exchange all or any part of such collateral or security, or to
modify the terms of the Obligations in any other way that Secured Party and such
person(s) may deem appropriate; no such renewal, extension, compromise,
discharge, release, increase, change, substitution, exchange or modification
shall release or affect in any way the liability of Debtor or Secured Party's
rights against the Collateral, and Debtor hereby waives any and all defenses and
claims whatsoever based thereon. Until Secured Party receives all sums due with
respect to the Obligations in immediately available funds, Debtor shall not be
released from liability unless Secured Party expressly releases Debtor in a
writing signed by Secured Party.
1.10 Interest. All obligations of Debtor to Secured Party arising under this
--------
Agreement shall bear interest, from the date when due until paid in full. All
such interest is and shall be secured by the Collateral. Notwithstanding any
contrary provision of the obligations, in no event shall any agreed to or actual
exaction charged, reserved or taken as an advance or forbearance by Secured
Party as consideration for the Obligations exceed the limits (if any) imposed or
provided by the law applicable from time to time to the Obligations for the use
or detention of money or for forbearance in seeking its collection; Secured
Party hereby waives any right to demand such excess. In the event that the
interest provisions of the Replacement Note or any exactions required thereunder
shall result at any time or for any reason in an effective rate of interest that
exceeds the maximum interest rate permitted by applicable law (if any), then
without further agreement or notice the obligation to be fulfilled shall be
automatically reduced to such limit and all sums received by Secured Party in
excess of those lawfully collectible as interest shall be applied against the
principal
Page -10-
<PAGE>
of the Obligations immediately upon Secured Party's receipt thereof, with the
same force and effect as though the payor had specifically designated such extra
sums to be so applied to principal and Secured Party had agreed to accept such
extra payment(s) as a premium-free prepayment or prepayments. During any time
that any of the Obligations bear interest at the maximum lawful rate (whether by
application of this paragraph or otherwise), interest shall be computed on the
basis of the actual number of days elapsed and the actual number of days in the
respective calendar year.
1.11 Actions or Proceedings. With respect to any legal action or proceeding
----------------------
arising under this Agreement or the Replacement Note or concerning the
Obligations and/or the Collateral, Debtor to the fullest extent permitted by
law: (A) submits to the jurisdiction of the state and federal courts in the
State of California; (B) agrees that the venue of any such action or proceeding
may be laid in Los Angeles County and waives any claim that the same is an
inconvenient forum; (C) to the extent not prohibited by applicable law waives
any right to immunity from any such action or proceeding; and (D) waives any
right to interpose any set off or counterclaim or to plead laches or any statute
of limitations as a defense in any such action or proceeding, and waives all
statutory provisions and requirements for the benefit of Debtor, now or
hereafter in force. No provision of this Agreement shall limit Secured Party's
right to serve legal process in any other manner permitted by law or to bring
any such action or proceeding in any other competent jurisdiction.
1.12 Notices. Except as otherwise provided in this Agreement for service of
-------
legal process, any notice to Debtor shall be in writing and shall be deemed
sufficiently made if delivered personally or if transmitted by postage prepaid
first class mail (airmail if international) or by telegraph or by telex with
confirmed answer back, to the address appearing below:
Debtor:
Grand Havana Enterprises, Inc.
1990 Westwood Blvd.
Los Angeles, CA.
Secured Party:
United Leisure Corporation
1990 Westwood Blvd.
Los Angeles, CA.
Any party may change its address for notice by giving written notice of the
change.
1.13 Binding Effect. The terms of this Agreement shall inure to the benefit
--------------
of Secured Party and its successors and assigns and shall be binding upon Debtor
and Debtor's permitted successors and assigns.
Page -11-
<PAGE>
1.14 Term. This Agreement shall take effect when signed by Debtor and
----
delivered to Secured Party. This Agreement is a continuing agreement and shall
remain in full force and effect until all the Obligations shall have been paid
in full, unless earlier terminated by Secured Party in writing.
1.15 Interpretation. If this Agreement is signed by more than one person,
--------------
then the term "Debtor" as used in this Agreement shall refer to all such persons
jointly and severally, and all promises, agreements, covenants, waivers,
consents, representations, warranties and other provisions in this Agreement are
made by and shall be binding upon each and every undersigned person, jointly and
severally. Whenever used in this Agreement, the term "person" means any
individual, firm, corporation, trust or other organization or association or
other enterprise or any governmental or political subdivision, agency,
department or instrumentality thereof. Whenever used in this Agreement, the
terms "written" or "in writing" mean any form of written communication and any
communication by means of telex, telecopier device, telegraph or cable.
Captions and paragraph headings contained in this Agreement are for convenience
only and shall not affect its interpretation. Whenever used in this Agreement
and unless the context otherwise requires, words in the plural include the
singular, words in the singular include the plural, and pronouns of any gender
include the other genders.
1.16 Cumulative Rights. The rights of Secured Party under this Agreement are
-----------------
in addition to, and not in substitution for, any rights available to Secured
Party against Debtor at law or in equity, all of which are cumulative and may be
exercised by Secured Party in whole or in part from time to time.
1.17 Miscellaneous. Time is of the essence with respect to the provisions of
-------------
this Agreement. This Agreement may be amended but only by an instrument in
writing executed by the party to be burdened thereby. Any provision of this
Agreement which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction only, be ineffective only to the extent of such prohibition or
unenforceability without invalidating the remaining provisions hereof or
affecting the validity or enforceability of such provision in any other
jurisdiction. This Agreement shall be governed by, and construed and enforced
in accordance with, the laws of the State of California.
WITNESS THE DUE EXECUTION by Debtor as of the 30th day of September, 1998.
DEBTOR:
Grand Havana Enterprises, Inc.
/s/ Harry Shuster
- -----------------------------------------
By: Harry Shuster
Its:President
Page -12-
<PAGE>
Exhibit "A"
DESCRIPTION OF COLLATERAL
1. All membership initiation fees, membership dues whether paid
monthly, annually or in some other periodic payment basis which are paid by
patrons or members for club membership privileges at any of the following
locations:
Grand Havana Room--Beverly Hills,CA.
Grand Havana Room--New York City, NY.
Grand Havana Room--Washington, D.C.
all of which shall be referred to herein as the "Clubs".
2. All accounts, receipts, funds, held by or to be paid to the Debtor
from the Clubs or from the retail stores located in Las Vegas, Nevada in the
Bally's Hotel, known as the Grand Havana House of Cigars and the Grand Havana
House of Cigars in Beverly Hills (collectively, the "Stores").
3. The leasehold interests of the Debtor at the locations for the
Clubs and the Store.
4. All presently owned or hereafter acquired equipment, supplies,
materials, machines, appliances, fixtures, furniture, furnishings, leasehold
improvements, appurtenances of any description, and all additions and accessions
thereto and replacements therefor; and
5. All personal property of any description, now owned or hereafter
to be acquired by or on behalf of Debtor, including, without limitation,
inventory, work-in-progress, and supplies, and all additions and accessions
thereto and replacements therefor; and
6. All accounts, contract rights, general intangibles, receivables,
and other documents, instruments, and other rights to the payment of money or
performance of services, now existing or hereafter arising in any way relating
to the business of Debtor or in connection with the use of the property
described in (1) and (2) above; and
7. All proceeds of the foregoing collateral, including whatever is
receivable or received when collateral or proceeds is sold, collected, exchanged
or otherwise disposed of, whether such disposition is voluntary or involuntary,
and includes, without limitation, all rights to payment, including return
premiums, with respect to any insurance relating thereto.
Page -13-
<PAGE>
Exhibit (10)-5
SUBORDINATION AGREEMENT
NOTICE: THIS SUBORDINATION AGREEMENT RESULTS IN YOUR SECURITY INTEREST IN THE
PROPERTY AND COLLATERAL BECOMING SUBJECT TO AND OF LOWER PRIORITY THAN
THE LIEN OF SOME OTHER OR LATER SECURITY INSTRUMENT.
THIS SUBORDINATION AGREEMENT ("AGREEMENT"), made this 30th day of November,
1998, by GRAND HAVANA ENTERPRISES, INC., a Delaware corporation ("GRA"), owner
of the collateral hereinafter defined and HARRY SHUSTER, an individual
("SHUSTER") present owner and holder of that certain secured promissory note
(the "Shuster Note") dated as of August 15, 1998 entered into by and between GRA
as Maker and Shuster as Noteholder;
WITNESSETH
A. On or about February 12, 1997 GRA entered into a loan agreement with
United Leisure Corporation ("ULC") pursuant to which GRA executed an unsecured
promissory note (the "Unsecured ULC Note") having a due date of September 30,
1998.
B. On or about August 15, 1998 the GRA executed and delivered the Shuster
Note to Shuster. In connection with the delivery of the Shuster Note and as a
condition of lending the funds evidenced by the Shuster Note, Shuster required
that GRA execute a Security Agreement (the "Shuster Security Agreement") and a
UCC-1 Financing Statement (the "Shuster Financing Statement") creating a
security interest in the equipment, fixtures, furniture and other property
rights described therein (the "Collateral") in favor of Shuster.
C. Shuster caused the Shuster Financing Statement to be recorded with
California Secretary of State.
D. On or about September 30, 1998 GRA executed a new promissory note with
ULC which replaced the Unsecured ULC Note due on September 30, 1998. The new
note with ULC shall be referred to herein as the "Secured ULC Note". In
connection with the issuance and execution of the Secured ULC Note, GRA also
executed a security agreement (the "ULC Security Agreement") and UCC-1 Financing
Statement (the "ULC Financing Statement").
E. In order to induce ULC to accept the Secured ULC Note and as a
condition to accepting the Secured ULC Note, ULC required that its security
interest in the Collateral be prior, and superior to, Shuster's security
interest in the Collateral.
F. Shuster is now willing to subordinate his security interest in the
Collateral to ULC.
<PAGE>
1. GRA acknowledges and agrees that ULC agreed to accept the ULC Note
only upon the condition that the ULC Financing Statement securing the Secured
ULC Note would constitute on lien upon the Collateral prior, and superior to,
the lien or charge of the Shuster Financing Statement and provided that Shuster
specifically and unconditionally subordinate the lien or charge of the Shuster
Note to the charge of the ULC Financing Statement.
2. Shuster acknowledges and agrees that the ULC Financing Statement
securing the Secured ULC Note when recorded, constituted a lien or charge upon
said Collateral, and that upon execution of this Agreement, the Secured ULC Note
shall be deemed to be unconditionally prior and superior to the lien or charge
of the Shuster Financing Statement and the Shuster Note.
3. GRA and Shuster mutually agree and acknowledge that:
(a) the ULC Financing Statement securing the Secured ULC Note in favor of
ULC, and any renewals or extensions thereof, shall unconditionally be
and remain at all times a lien or charge on the Collateral therein
described, prior and superior to the lien or charge of the Shuster
Note and the Shuster Financing Statement above mentioned.
(b) That ULC would not have made the ULC loan and accepted the Secured ULC
Note without this Agreement.
(c) That this Agreement shall be the whole and only agreement with regard
to the subordination of the lien or charge of the Shuster Note and the
Shuster Financing Statement to the lien or charge of the ULC Financing
Statement and that the ULC Financing Statement shall supersede the
Shuster Financing Statement.
4. Shuster declares, agrees and acknowledges that:
(a) He consents to and approves all provisions of the ULC Financing
Statement;
(b) ULC, in accepting the Secured ULC Note, is under no obligation or
duty to, nor has ULC represented that it will see to the
application of any loan proceeds by GRA on that the use of
proceeds will be used for any particular purpose whatsoever and
that such failure to supervise the disbursement of loan proceeds
shall not defeat the subordination herein made in whole or in
part;
(c) He intentionally and unconditionally waives, relinquishes and
subordinates the lien or charge of the Shuster Financing
Statement in favor of the lien or charge upon the Collateral in
favor of ULC, and understands that in reliance upon, and in
consideration of, this waiver, relinquishment and subordination
ULC accepted the Secured ULC
2
<PAGE>
Note and that ULC would not have agreed to accept the Secured ULC
Note but for its reliance upon this waiver, relinquishment and
subordination.
"GRA" GRAND HAVANA ENTERPRISES, INC.
a Delaware Corporation
By:/s/ Harry Shuster
-----------------
Harry Shuster
Its: President
"SHUSTER"
/s/ Harry Shuster
____________________________
Harry Shuster
3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED DECEMBER
27, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> SEP-28-1998
<PERIOD-END> DEC-27-1998
<CASH> (5,332)
<SECURITIES> 0
<RECEIVABLES> 374,375
<ALLOWANCES> 6,500
<INVENTORY> 620,666
<CURRENT-ASSETS> 1,179,144
<PP&E> 4,080,717
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,391,890
<CURRENT-LIABILITIES> 4,537,501
<BONDS> 0
0
0
<COMMON> 141,744
<OTHER-SE> 1,712,645
<TOTAL-LIABILITY-AND-EQUITY> 6,391,890
<SALES> 1,723,757
<TOTAL-REVENUES> 1,752,421
<CGS> 1,646,605
<TOTAL-COSTS> 2,030,839
<OTHER-EXPENSES> 33,812
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 46,046
<INCOME-PRETAX> (312,230)
<INCOME-TAX> 0
<INCOME-CONTINUING> (312,230)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (23,844)
<NET-INCOME> (336,074)
<EPS-BASIC> (0.02)
<EPS-DILUTED> (0.02)
</TABLE>
