<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 March 28, 1999
or
[ ] Transition report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from ____________ to _______________ .
Commission File Number 0-24828
GRAND HAVANA ENTERPRISES, INC.
(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4428370
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1990 Westwood Boulevard, 3rd Floor
Los Angeles, California 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 March 28, 1999
- -------------------- -----------------------------
Common Stock, par 14,174,306 shares
value $.01 per share
Transitional Small Business Disclosure Format (check one):
YES [ ] NO [X]
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
March 28, September 27,
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 161,570 $ 95,344
Accounts receivable, net 228,242 133,212
Current portion of note receivable 13,544 26,623
Inventories 569,746 663,955
Prepaid expenses 219,597 214,555
----------- ------------
TOTAL CURRENT ASSETS 1,192,699 1,133,689
PROPERTY AND EQUIPMENT, Net 4,072,052 4,100,546
OTHER ASSETS
Restricted cash 938,358 937,057
Note receivable, net of current portion 28,548 28,548
Pre-opening costs - 23,844
Due from related parties 130,019 145,737
Deferred charges - 67,106
Deposits and other assets 90,401 85,627
----------- ------------
TOTAL OTHER ASSETS 1,187,326 1,287,919
----------- ------------
$ 6,452,077 $ 6,522,154
=========== ============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS, CONTINUED
<TABLE>
<CAPTION>
March 28, September 27,
1999 1998
------------- -------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to related parties $ 1,410,280 $ 1,343,000
Bank overdraft - 89,083
Accounts payable 1,289,760 1,114,655
Accrued liabilities 333,575 172,237
Deferred revenues 191,370 129,905
Due to related parties 1,100,834 923,333
Deferred rent payable 590,915 559,478
Fire loss 237,650 -
------------- -------------
TOTAL CURRENT LIABILITIES 5,154,384 4,331,691
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value; authorized - 3,000,000
shares; issued and outstanding - none
Common stock, $.01 par value; authorized - 50,000,000
shares; issued and outstanding - 14,174,306 shares 141,744 141,744
Additional paid-in capital 13,279,044 13,279,044
Accumulated deficit (12,123,095) (11,230,325)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 1,297,693 2,190,463
------------- -------------
$ 6,452,077 $ 6,522,154
============= =============
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
----------------------------- ------------------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
----------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Food and beverage $ 521,200 $ 762,305 $ 1,576,427 $ 1,624,617
Merchandise sales 143,114 240,658 366,987 425,083
Membership fees 323,889 471,577 768,546 745,320
Other 57,266 26,162 85,930 201,967
----------- ----------- ----------- -----------
TOTAL REVENUES 1,045,469 1,500,702 2,797,890 2,996,987
COSTS AND EXPENSES
Food and beverage 165,559 288,782 452,567 705,685
Merchandise 68,960 90,684 178,951 218,073
Operating expenses
Direct labor 462,129 604,053 1,017,306 1,257,842
Occupancy and other 602,459 798,495 1,258,746 1,569,693
General and administrative 268,776 182,969 531,591 283,567
Depreciation and amortization 129,015 87,172 250,434 194,673
----------- ----------- ----------- -----------
TOTAL COSTS AND EXPENSES 1,696,898 2,052,155 3,689,595 4,229,533
----------- ----------- ----------- -----------
LOSS BEFORE OTHER INCOME (EXPENSE) (651,429) (551,453) (891,705) (1,232,546)
OTHER INCOME (EXPENSE)
Interest income 3,203 168 15,437 1,533
Partial insurance settlement 101,718 - 101,718 -
Interest expense (48,330) (51,920) (94,376) (92,218)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) 56,591 (51,752) 22,779 (90,685)
----------- ----------- ----------- -----------
LOSS BEFORE CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE (594,838) (603,205) (868,926) (1,323,231)
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE - - (23,844) -
----------- ----------- ----------- -----------
NET LOSS $ (594,838) $ (603,205) $ (892,770) $(1,323,231)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,174,306 13,774,000 14,174,306 12,824,000
BASIC LOSS PER SHARE
Loss before cumulative effect of change in
accounting priciple $ (0.04) $ (0.04) $ (0.06) $ (0.10)
Cumulative effect of change in
accounting priciple - - - -
----------- ----------- ----------- -----------
$ (0.04) $ (0.04) $ (0.06) $ (0.10)
=========== =========== =========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
GRAND HAVANA ENTERPRISES, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
--------------------------------------
March 28, March 29,
1999 1998
---------- -----------
(Unaudited) (Unaudited)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(892,770) $(1,323,231)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 250,434 194,673
Common stock issued for services 99,681
Amortization of deferred charges 67,106 -
Changes in operating assets and liabilities:
Accounts receivable (95,030) (126,011)
Inventories 94,209 126,790
Prepaid expenses (5,042) (89,441)
Pre-opening costs 23,844 (3,652)
Net assets of discontinued operations - 20,125
Deposits and other - 5,723
Accounts payable and accrued expenses 735,729 5,865
Accrued costs of discontinued operations - (70,024)
Deferred revenues 61,465 26,281
Deferred rent payable 31,437 45,165
---------- -----------
NET CASH USED IN OPERATING ACTIVITIES 271,382 (1,088,056)
---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment (221,940) (267,594)
Due from related parties 15,718 30,032
Collection of note receivable 13,079 8,132
Deferred charges, deposits and other assets (4,774) -
Restricted cash (1,301) (856,449)
---------- -----------
NET CASH USED IN INVESTING ACTIVITIES (199,218) (1,085,879)
---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Principal reductions of notes payable - (455,000)
Due to related parties 83,145 152,832
Collections of subscriptions receivable - 1,288,950
Sale of common stock - 518,390
Payment of bank overdraft (89,083) -
---------- -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES (5,938) 1,505,172
---------- -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS 66,226 (668,763)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 95,344 879,461
---------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 161,570 $ 210,698
========== ===========
</TABLE>
See accompanying notes to consolidated condensed financial statements.
<PAGE>
GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The interim consolidated condensed financial statements presented have been
prepared by Grand Havana Enterprises, Inc. (the Company) without audit and,
in the opinion of the management, reflect all adjustments of a normal
recurring nature necessary for a fair statements of (a) the consolidated
condensed results of operations for the three and six months ended March
28, 1999, (b) the consolidated condensed financial position at March 28,
1999 and September 27, 1998 and (c) the consolidated condensed cash flows
for the six months ended March 28, 1999 and March 29, 1998. Interim results
are not necessarily indicative of the results for a full year.
The consolidated balance sheet presented as of September 27, 1998 has been
derived from the consolidated financial statements that have been audited
by the Company's independent auditors. The consolidated financial
statements and notes are condensed as permitted by Form 10-QSB and do not
contain certain information included in the annual financial statements and
notes of the Company. The consolidated financial statements and notes
included herein should be read in conjunction with the financial statements
and notes included in the Company's Annual Report on Form 10-KSB.
2. CHANGE IN ACCOUNTING PRINCIPLE
The Company changed its method of accounting for pre-operating cost to
conform with new requirements of Statement of Position ("SOP") No. 98-5
"Reporting on the Costs of Start-Up Activities". This Statement requires
that costs of start-up activities, including organization costs, be
expensed as incurred. Initial application of this SOP should be reported as
the cumulative effect of a change in accounting principle as described in
APB Opinion No. 20 "Accounting Changes".
<PAGE>
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 two Grand Havana Rooms, one in
Beverly Hills, California, which opened in June 1995 and one in New York, New
York, which opened in May 1997. In addition, the Company currently owns and
operates two Grand Havana House of Cigars locations, one in Beverly Hills,
California, which opened in December 1997 and one in Las Vegas, Nevada, which
opened in November 1997. A third Grand Havana Room and Grand Havana House of
Cigars located in Washington, D.C., were closed in February 1999. (See
1
<PAGE>
"Recent Developments," below.) As its principal business focus, the Company
intends to continue the operation of its existing Grand Havana Rooms and Grand
Havana House of Cigars locations, while considering the disposition of locations
when that is, in the opinion of management, in the Company's best interest.
Management of the Company expects that during the membership drives for its
New York Grand Havana Room, 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.
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.
RECENT DEVELOPMENTS
On February 1, 1999, the Company entered into an agreement with Thursdays
Restaurant Group, LLC (the "Asset Agreement") for the sale of substantially all
of the assets of the Washington, D.C., Grand Havana Room. The total
consideration payable to the Company for the assets is $225,000. A deposit of
$10,000 was paid on the execution of the Asset Agreement. The balance will be
payable on closing, in cash and by the purchaser's promissory note for $115,000
payable in twelve months from the closing date with interest at the rate of 9%
per annum. On February 8, 1999, the Washington, D.C., Grand Havana Room and the
Grand Havana House of Cigars ceased operations.
On January 22, 1999, there was a fire at the Beverly Hills Grand Havana
Room (the "Fire"). The Fire caused approximately $400,000 in property damage
and, the Company estimates, approximately $275,000 in lost revenues. The Company
believes that its insurance will cover all or a substantial portion of the costs
to rebuild the Beverly Hills Grand Havana Room and a portion of the lost
revenues. As a result of the Fire, the Beverly Hills Grand Havana Room was
closed for over 7 weeks, re-opening on March 17, 1999.
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 but, because of the Fire, the Company was forced
to delay its acceptance of new members.
2
<PAGE>
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 28, 1999 COMPARED TO THREE MONTHS ENDED MARCH 29, 1998
The Company derives revenues from continuing operations from three
principal sources: food and beverage sales, sales of cigars and related
merchandise, and membership fees. During the fiscal quarter ended March 28,
1999, the Company had revenues of $1,045,469 compared to revenues of $1,500,702
for the fiscal quarter ended March 29, 1998, a decrease of $455,233 or
approximately 30.33%. This decrease in revenues is primarily due to the fact
that during the fiscal quarter ended March 28, 1999, only the New York Grand
Havana Room was operating for the entire quarter, as compared to the fiscal
quarter ended March 29, 1998 in which all three of the Grand Havana Rooms were
operating. The Washington, D.C., Grand Havana Room was closed in February 1999
and the Beverly Hills Grand Havana Room was temporarily closed from January 22,
1999 to March 17, 1999 due to the Fire.
Revenue from food and beverage decreased from $762,305 in the fiscal
quarter ended March 29, 1998 to $521,200 in the fiscal quarter ended March 28,
1999, a decrease of $241,105 or approximately 31.63%. This decrease is
primarily attributable to the closure of the Washington, D.C., Grand Havana Room
and the temporary closing of the Beverly Hills Grand Havana Room due to the
Fire.
Revenue from merchandise sales decreased from $240,658 in the fiscal
quarter ended March 29, 1998 to $143,114 in the fiscal quarter ended March 28,
1999, a decrease of $97,544 or approximately 40.53%. This decrease is primarily
due to the closure of the Washington, D.C., Grand Havana Room and the temporary
closing of the Beverly Hills Grand Havana Room due to the Fire.
Membership fees decreased from $471,577 in the fiscal quarter ended March
29, 1998 to $323,889 in the fiscal quarter ended March 28, 1999, a decrease of
$147,688 or approximately 31.32%. This is primarily a result of the closure of
the Washington, D.C., Grand Havana Room and the temporary closing of the Beverly
Hills Grand Havana Room due to the Fire. During the temporary closing of the
Beverly Hills Grand Havana Room, no new members were enrolled, no monthly
membership fees were received, and a one-month rebate of membership fees was
given to existing members who had pre-paid for the quarter.
The "Other" revenue consists primarily of revenue from private parties held
at the Grand Havana Rooms. This revenue increased from $26,162 during the
fiscal quarter ended March 29, 1998 to $57,266 in the fiscal quarter ended March
28, 1999, an increase of $31,104 or 118.89%.
The Company expects to be reimbursed for a portion of the lost revenues
resulting from the Fire.
At March 28, 1999, the Company had $101,718 in excess of costs remaining
from the insurance proceeds paid to that date, for property damage and lost
revenues. The Company expects to receive additional insurance proceeds, but the
amount has not yet been determined.
3
<PAGE>
During the fiscal quarter ended March 28, 1999, the Company incurred total
costs and expenses of $1,696,898 compared to $2,052,155 for the fiscal quarter
ended March 29, 1998, a decrease of $355,257 or approximately 17.31%. This
decrease is primarily due to decreases in direct labor costs, occupancy costs,
food and beverage costs, and merchandise costs resulting from the imposition of
more efficient operations and better controls and from the facts that the
Beverly Hills Grand Havana Room was closed for over 7 weeks of the fiscal
quarter ended March 28, 1999 due to the Fire and the Washington, D.C., Grand
Havana Room was operated for only one month of the fiscal quarter ended March
28, 1999 but was operated throughout the fiscal quarter ended March 29, 1998.
Increases in general and administrative expenses and depreciation and
amortization costs offset these decreases. General and administrative expenses
increased from $182,969 in the fiscal quarter ended March 29, 1998 to $268,776
in the fiscal quarter ended March 28, 1999, an increase of $85,807 or
approximately 46.9%. This increase in general and administrative expenses was
primarily a result of a different method of accounting for general corporate
expenses. In the fiscal quarter ended March 29, 1998, some general corporate
expenses which were connected to a particular Grand Havana Room were allocated
to occupancy and other costs, while in the fiscal quarter ended March 28, 1999,
these costs were included as general and administrative expenses. Depreciation
and amortization costs increased from $87,172 in the fiscal quarter ended March
29, 1998 to $129,015 in the fiscal quarter ended March 28, 1999, an increase of
$41,843 or approximately 48%. This increase in depreciation and amortization
expenses was primarily a result of construction at the Beverly Hills Grand
Havana Room following the Fire.
The Company's losses were essentially flat for the fiscal quarter ended
March 28, 1999. The Company experienced a net loss of ($594,838) or ($.04) per
share for the fiscal quarter ended March 28, 1999, compared to a net loss of
($603,205) or ($.04) per share for the fiscal quarter ended March 29, 1998. The
decreases in revenue were off-set by decreases in costs and expenses and by the
remaining $101,718 of the insurance proceeds received for the losses from the
Fire.
SIX MONTHS ENDED MARCH 28, 1999 COMPARED TO SIX MONTHS ENDED MARCH 29, 1998
The Company had revenues of $2,797,890 for the six-month period ended March
28, 1999, compared to $2,996,987 for the six-month period ended March 29, 1998,
a decrease of $199,097 or approximately 6.64%. This decrease in revenues was
primarily due to the closure of the Washington, D.C., Grand Havana Room and the
temporary closing of the Beverly Hills Grand Havana Room due to the Fire.
Total costs and expenses of the Company decreased from $4,229,533 for the
six-month period ended March 29, 1998 to $3,689,595 for the six-month period
ended March 28, 1999, a decrease of $539,938 or approximately 12.77%. This
decrease is primarily due to the closure of the Washington, D.C., Grand Havana
Room, the temporary closing of the Beverly Hills Grand Havana Room due to the
Fire, and the imposition of more efficient operations and better controls.
4
<PAGE>
The Company experienced a net loss of $(892,770) for the six-month period
ended March 28, 1999 compared to a net loss of $(1,323,231) for the six-month
period ended March 29, 1998, a decrease of $430,461 or approximately 32.53%.
This decrease in loss, despite the Company's flat performance for the fiscal
quarter ended March 28, 1999, is attributable to the Company's net loss of
($336,074) in the fiscal quarter ended December 27, 1998, a 53.32% decrease in
net loss from its ($720,026) loss in the fiscal quarter ended December 28, 1997.
A principal reason for the decrease in loss in the fiscal quarter ended December
27, 1998 was the increased revenue from private holiday parties at the New York
Grand Havana Room.
LIQUIDITY AND CAPITAL RESOURCES
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 March 27, 1999, the Company had cash or cash
equivalents of $161,570.
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, pursuant to a promissory note secured by a second position lien on the
Company's assets (the "Shuster Note"). The Shuster Note is due and payable on
March 31, 1999. As of March 28, 1999, the entire principal amount of the Shuster
Note, $300,000, remained outstanding. In addition to the sums due under the
Shuster Note, as of March 28, 1999, the Company is indebted to Harry Shuster in
the amount of $687,155 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 and delivered to United Leisure its secured promissory note
(the "Promissory Note") in the principal amount of up to $1,250,000. United
Leisure may from time to time, but shall not be obligated to, make future
advances under the Promissory Note up to a total amount of $1,250,000. The
Promissory Note is due and payable on March 31, 1999. The Promissory Note is
secured by a first
5
<PAGE>
lien on the assets of the Company. The initial loan advance under the Promissory
Note was $603,280, which represents the principal amount due under the previous
note of $536,000, together with accrued interest of $67,280. At March 28, 1999
the Company owed an aggregate of $603,280 in principal amount to United Leisure
under the Promissory Note.
In addition, as of March 28, 1999, 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. The Company believes that the sale of the Washington,
D.C., Grand Havana Room will decrease the Company's operating losses. 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. The delisting of the Company's
Common Stock from Nasdaq in October 1998 might result in the Company having
difficulty in placing its securities with prospective investors.
If the Company is unable to raise additional funds, if and when needed,
through the private placement of its securities it may seek financing from
affiliated or unaffiliated third parties. There can be no assurance, however,
that such financing would be available to the Company when and if it is needed,
or that if available, that it will be available on terms acceptable to the
Company. If the Company is unable to place securities or obtain financing to
meet its working capital needs and to repay indebtedness as it becomes due, the
Company may have to consider such options as selling or pledging portions of its
assets in order to meet such obligations.
Year 2000 Compliance
- --------------------
In fiscal year 1997, the Company initiated a Year 2000 project designed to
identify and assess the risks associated with its information systems,
operations, infrastructure and technology products, and customers and suppliers,
that are not Year 2000 compliant, and to develop, implement, and test
remediation and contingency plans to mitigate these risks. The project comprises
four phases: (1) identification of risks, (2) assessment of risks, (3)
development of remediation and contingency plans, and (4) implementation and
testing.
The Company's Year 2000 project is being overseen by a senior member of
Company staff. During an initial assessment, the Company determined that
although several applications being used may be Year 2000 compliant, operating
systems such as Microsoft DOS, Windows 3.11, and Windows 95, and Windows NT are
not Year 2000 compliant. The Company has replaced some computers and has
upgraded the operating systems of others to Windows 98 which is Year 2000
compliant. The Company plans to replace other computers later in the
6
<PAGE>
calendar year. As of March 28, 1999, the Company has spent approximately $3,000
in replacing its computer hardware and software. The Company estimates that a
total of approximately $5,000 to $6,000 will be spent in upgrading the Company's
hardware and software not including the Grand Havana Room Point-of-Sale systems.
The Company is still assessing whether the hardware and software used in
connection with the Grand Havana Room Point-of-Sale systems will need upgrading
and/or full replacement. It is not known at this time if the cost of any such
upgrades or replacements will be material. The Company has upgraded its credit
card terminals at its Grand Havana Rooms and Grand Havana House of Cigars
locations so that they are able to accept credit cards dated after 1999. The
cost of this upgrade was approximately $500. The Company has obtained Year 2000
compliance statements from the manufacturers of the Company's hardware and
software products other than those associated with the Grand Havana Room Point-
of Sale systems.
The Company believes that its greatest potential risks are associated with
(i) its information systems and systems embedded in its operations and
infrastructure; and (ii) its reliance on Year 2000 compliance by the Company's
vendors and suppliers of operating systems and software applications. The
Company is still assessing its operations and infrastructure, and cannot predict
whether significant problems will be identified. The Company has asked its
critical vendors and suppliers to provide information on the status of their
Year 2000 compliance in order to assess the effect it could have on the Company.
As of March 28, 1999, the Company has not received any responses from its
vendors and suppliers. Based on the status of the assessments made and
remediation plans developed to date, the Company is not in a position to state
the total cost of remediation of all Year 2000 issues. Costs identified and
spent to date have not been material. However, the Company has not yet
completed its assessments, developed remediations for all problems, developed
any contingency plans, or completely implemented or tested any of its
remediation plans. Specific contingency plans will be formulated after the
Company has received information on the status of vendor and supplier Year 2000
compliance.
Based on the Company's current analysis and assessment of the state of its
Year 2000 compliance, the Company's most reasonably likely worst case scenario
involves total replacement of certain systems at all of the Company's Grand
Havana Room locations and at the Company's corporate offices. This would
include all equipment in collecting and processing dining room sales and
reporting systems used in the Company's accounting department.
As the Year 2000 project continues, the Company may discover additional
Year 2000 problems, may not be able to develop, implement, or test corrections
or contingency plans, or may find that the costs of these activities become
material. In many cases, the Company is relying on assurances from suppliers
that new and upgraded information systems and other products will be Year 2000
compliant. The Company plans to test such third-party products, but cannot be
sure that its tests will be adequate or that, if problems are identified, they
will be addressed in a timely and satisfactory way. Because the Company uses a
variety of information systems and has additional systems embedded in its
operations and infrastructure, the Company cannot be sure that all its systems
will work together in a Year 2000 compliant fashion. Furthermore, the Company
cannot be sure that it will not suffer business interruptions, either
7
<PAGE>
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 1. LEGAL PROCEEDINGS
On or about January 27, 1999, an action was filed against the Company and
Harry Shuster and Stanley Shuster, directors and officers of the Company, and
Harvey Bibicoff, a former director of the Company. The action was filed by
Cowrie Holdings, LTD., plaintiff, a shareholder of the Company, in the Court of
Chancery of the State of Delaware, in and for the County of New Castle. The
action alleges certain improprieties and breaches of fiduciary duty against the
defendants in connection with the Company's failure to effect a 10-1 reverse
stock split (the "Reverse Split") as proposed in an Information Statement mailed
to the Company's shareholders on April 24, 1998. The action seeks a declaratory
judgment and injunctive relief to require the Company to take steps to effect
the Reverse Split. In the alternative, plaintiff is seeking damages in an
amount of not less than $3,000,000. The Company has appeared in the action
through its attorney. Discussions have commenced between the plaintiff and the
defendants towards reaching a settlement of this matter.
ITEM 2. CHANGES IN SECURITIES
UNREGISTERED SECURITIES
On January 4, 1999, the Company issued to Alvin Cassel and J. Brooke
Johnston, Jr., directors of the Company, in consideration for their
contributions to the Company, options to purchase up to 50,000 shares, each, of
the Company's $.01 par value common stock (the "Common Stock") at a price of
$.04 per share, the estimated fair market value of the Common Stock on the date
of the grant of the options. The options are exercisable for a term of 5 years,
expiring on January 3, 2004. The options may be exercised in whole or in part
at any time and from time to time during the term of the options by written
notice to the Company. The Company believes that the issuance of the options to
Messrs. Cassel and Johnston was exempt from the registration requirements of the
Securities Act of 1933, as amended (the "Securities Act") under Section 4(2) of
the Securities Act because the issuance of the options did not involve a public
offering.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
(10)-1 Asset Purchase Agreement dated as of February 1, 1999, by and
between the Company and Thursdays Restaurant Group, LLC.
8
<PAGE>
(10)-2 Option Agreement dated as of January 4, 1999, by and between the
Company and Alvin Cassel.
(10)-3 Option Agreement dated as of January 4, 1999, by and between the
Company and J. Brooke Johnston, Jr.
(27) Financial Data Schedule
(b) Reports on Form 8-K
No reports on Form 8-K were filed during the quarter ended March 28, 1999.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
GRAND HAVANA ENTERPRISES, INC.
Date: October 14, 1999 /s/ Stanley Shuster
--------------------------------------------
Stanley Shuster
Chief Executive Officer, and Chief Financial
Officer
9
<PAGE>
EXHIBIT (10)-1
ASSET PURCHASE AGREEMENT
This Asset Purchase (hereinafter referred to as the "Agreement") is made
and entered into by and between United Restaurants, Inc. T/A Grand Havana Room,
(hereinafter referred to as "Seller") and Thursdays Restaurant Group, LLC,
(hereinafter referred to as "Purchaser".)
WITNESSETH
WHEREAS, Seller owns the business formerly trading as Grand Havana Room
(hereinafter referred to as the "Restaurant"), located at 1220 19th Street NW,
Washington, DC (hereinafter referred to as the "Premises") and Seller desires to
sell to Purchaser and Purchaser desires to buy from the Seller the Assets
("Assets") of the business including, but not limited to, the equipment,
furniture, fixtures, furnishings, inventory, leasehold and leasehold
improvements, and the sublease of the Premises pursuant to Section 2.
NOW, THEREFORE, in consideration for the mutual promises contained herein
and for other good and valuable consideration, it is as follows:
DEFINITIONS
-----------
A. Equipment, Furnishings and Fixtures shall mean:
-----------------------------------
(i) all tables, chairs, booths, furniture, cabinetry, office
furnishings, glassware, dishes, cutlery, cooking utensils, ovens, refrigerators,
trade fixtures and other items of equipment owned by Seller which are presently
used or are used on the date of Closing by the Seller in the conduct of the
Restaurant business.
(ii) all cash registers, computers, computer support equipment and
software, telephone and communication systems, sound system and stereos,
televisions, security systems, faxes, copiers and other office equipment owned
by Seller which are presently used or are used on the date of Closing by the
Seller in the conduct of the Business.
(iii) all other supplies, maintenance equipment and other incidental
tangible personal property owned by Seller and located at the Premises on the
date hereof.
B. Inventory shall mean:
---------
All unopened bottles of liquor, wine and beer; and all unopened
packages or containers of food, stores and supplies approved and accepted by the
Purchaser at closing.
1. Subject to the terms and conditions set forth herein, Seller
agrees to sell to
<PAGE>
Purchaser on the closing date set forth in this Agreement, free and clear of all
liens, pledges and encumbrances of every kind, character and description
whatsoever, and Purchaser agrees to purchase from Seller on the closing date all
of the Assets of the Seller used in the operation of the Restaurant, which shall
include the following:
(a) All tangible personal property located on the premises
occupied by the Restaurant;
(b) All equipment, fixtures, furnishings, inventory, and
leasehold and leasehold improvements, subject to the terms of the Lease,
hereinafter referred to;
(c) Photographs of some of the Assets were taken by digital
camera by the Purchaser on the 25th day of January 1999.
2. Seller shall deliver to the Purchaser a valid sublease (the
"Sublease") for the Restaurant under the same terms and conditions of the
current lease (the "Lease") dated the 23rd day of August 1996 between WRIT
Limited Partnership (Landlord) and United Restaurants, Inc. T/A Grand Havana
Room, annexed hereto as Exhibit 1.
3. Upon execution of this Agreement all representatives of Seller
shall resign as members and directors of the Grand Havana Room, Inc. ("Havana
Corp"), a non-profit corporation, organized in the District of Columbia.
Thereafter, Purchaser shall have the sole right to appoint members and
directors, complete control of this corporation and ownership of its Assets,
including its leasehold rights to the Restaurant.
4. Seller represents and warrants the following:
(a) Seller owns good and marketable title to all of the Assets,
free and clear of any mortgages, liens, encumbrances, charges, claims or
security interests and will deliver the Assets at closing free and clear of any
such encumbrances.
(b) To the best of Seller's knowledge, the Restaurant and
equipment are in good repair and no uncorrected notice of any violation of any
building, zoning, health or other law relating to the Assets has been received
by Seller.
(c) Seller has paid or will pay prior to closing all federal and
local taxes that are due with respect to the Assets and the conduct of the
business of the Restaurant or that could constitute a lien on the Assets,
including, but not limited to income, employment, withholding, sales, property,
excise and franchise taxes.
(d) There are no suits, actions, proceedings, or investigations
now pending or threatened against or affecting the Seller that would affect the
Assets, Seller's ability to transfer and convey the Assets, or the Purchaser's
ability to conduct business at the restaurant.
2
<PAGE>
(e) That all issues regarding members of the private club Grand
Havana Room, a business which was conducted by the Seller at the Restaurant,
have been settled and that no claims will be made by members or former members
of this club against the Purchaser, the Assets or the corporation Grand Havana
Room, Inc.
(f) That a sublease has been executed between the Seller and
Havana Corp. ("Havana Corp. Sublease"), under the same terms and conditions of
the Lease and is in full force and effect and there are no amendments and
modifications thereto. A true copy of the Havana Corp. Sublease is annexed
hereto as Exhibit 2.
(g) All third party vendors and creditors of Seller with respect
to the Restaurant and the Premises and of Havana Corp have been paid in full and
there are no liabilities and payments due to any party which could be a claim
under any bulk sales transaction.
5. The sale and purchase, as provided herein shall be consummated at
a closing to be held at a site in Washington, D.C., mutually agreed upon by the
parties hereto, on or before February 28, 1999 (hereinafter referred to as
"closing date"), or in such other manner or at such other time and date as the
parties may otherwise agree to in writing. Time is of the essence in this
Agreement.
6. On closing date, Seller shall:
(a) Convey good marketable title to the Assets
(b) Provide any and all indemnification agreements
(c) Certification that Havana Corp. Sublease is in full force
and effect and that all rents and other charges are current to date of closing
(d) Execution and delivery of the Sublease
(e) Evidence that Seller has fully complied with the applicable
provisions of the District of Columbia Unified Commercial Code regarding bulk
transfer or bulk sales.
7. The consideration to be paid by the Purchaser to Seller shall be
the sum of TWO HUNDRED AND TWENTY-FIVE THOUSAND DOLLARS ($225,000.00),
hereinafter referred to as "purchase price", payable as follows:
(a) Simultaneously with the signing of this Agreement, Purchaser will
pay a deposit towards the purchase price of TEN THOUSAND AND 00/100 DOLLARS
($10,000.00).
3
<PAGE>
This deposit shall be non-refundable. At the time of closing this $10,000.00
payment shall be applied to the purchase price.
(b) The sum of FIFTY THOUSAND DOLLARS AND 00/100 DOLLARS ($50,000.00)
shall be paid at closing by cashier's check or certified check payable to Seller
or by wire transfer at the time of closing.
(c) The sum of FIFTY THOUSAND AND 00/100 DOLLARS shall be paid three
days after the receipt by the Purchaser of a Class "C" license from the District
of Columbia Alcohol Beverage Control Board.
(d) The balance will be paid by the execution and delivery by the
Purchaser of its promissory note in the principal amount of ONE HUNDRED AND
FIFTEEN THOUSAND AND 00\100 DOLLARS ($115,000.00), payable in full in twelve
months from the date of closing plus interest of 9% per annum.
8. Seller hereby agrees to indemnify, defend and hold harmless Purchaser,
its officers and employees against any and all loss, costs, damages, claims, and
expenses (including reasonable attorney fees) which any of them may sustain at
any time by reason of:
(a) The inaccuracy of or failure to comply with or the existence of
any facts in the inaccuracy of any material warranty, representation, covenant
or agreement of the Seller contained in this Agreement or in any agreement or
document delivered pursuant hereto or in connection with the Closing
contemplated hereby;
(b) Any event, action or failure to act occurring with respect to any
aspect of Seller's operation of the Restaurant or ownership of the Assets prior
to Closing, including but not limited to any claim for personal injury or
property damage, or any claim for taxes, refund or payment which arises from any
supplies or inventory purchased, products sold or service provided by Seller
prior to Closing;
(c) Any failure of Seller to comply with any applicable bulk sales or
similar law in connection with the transactions contemplated by this Agreement;
(d) Any employment claim, including but not limited to claims of
discrimination and wrongful discharge, and any other claim with respect to the
conduct of its business by Seller prior to Closing; or
(e) Any claims by members or former members of the private club known
as Grand Havana Room which was operated at the Restaurant by the Seller.
9. The Purchaser shall not assume any liabilities or obligations of any
kind of the Seller, all of which shall remain Seller's sole liability.
4
<PAGE>
10. This Agreement and Closing is subject and contingent upon the
following:
(a) Receipt by the Purchaser of approval from the Alcohol Control
Board allowing the Purchaser to temporarily operate its business using the
liquor license currently held by Grand Havana Club, Inc.
(b) Execution and delivery of the Sublease consented to by Writ
Limited Partnership.
11. Seller warrants and agrees that it is a ___________ (state)__________
corporation registered to do business in _________________ , with full authority
to enter into and perform in accordance with the terms of this Agreement and
that it is the sole owner of the business Assets which are subject to the
Agreement.
12. This instrument contains the entire agreement between the parties with
respect to the transaction referred to herein. Any changes, amendments or
additions hereto shall be agreed to in writing and signed by both parties.
13. This Agreement shall be constructed, interpreted, and enforced
according to the laws of the District of Columbia.
14. Insignia, ESG, being the agent of Seller in procuring this sale and
procuring the tenant for the lease associated with it, shall receive from Seller
the commission of $18,000. Said commission is to be paid out of the proceeds of
this sale. Seller and Purchaser represent that no other broker was instrumental
in procuring this sale, and agrees to indemnify and hold each other harmless
from claims of any broker other than Insignia, ESG.
15. This Agreement may be executed in counterparts, each of which shall be
considered a duplicate original document. The parties may execute and deliver
this document by telefax, which will be binding upon the party executing and
delivering such telefacsimile signature as if it were original signature.
IN WITNESS WHEREOF, the parties hereto do hereby ratify, accept and agree
to all of the terms set forth herein, as of the 1st day of February, 1999.
SELLER:
ATTEST: UNITED RESTAURANTS, INC.
/s/ Shannon Taylor By: /s/ Harry Shuster
- ----------------------------- -------------------------------
Harry Shuster, President
5
<PAGE>
ATTEST: GRAND HAVANA CLUB, INC.
By: /s/ Harry Shuster
- ----------------------------- -------------------------------
Harry Shuster, President
PURCHASER
WITNESS:
ATTEST: THURSDAY RESTAURANT GROUP, LLC
/s/ Dainell Howell By: /s/ Daryl A. Hill
- ----------------------------- -------------------------------
Darryl A. Hill Managing Member
6
<PAGE>
EXHIBIT (10)-2
OPTION AGREEMENT
AGREEMENT, dated as of January 4, 1999, between GRAND HAVANA ENTERPRISES,
INC, a Delaware corporation (the "Company"), and ALVIN CASSEL (the "Optionee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Optionee is a director of the Company and is considered by the
Board of Directors of the Company to have made substantial contributions to the
Company;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants hereinafter contained, the Company and the Optionee hereby agree
as follows:
1. Grant of Option. The Company hereby grants to the Optionee the
---------------
irrevocable option (the "Option") to purchase, on the terms and conditions
herein set forth, up to 50,000 of the Company's fully paid and nonassessable
shares of Common Stock, par value $.01 per share, at an option price determined
as set forth in Section 2 of this Agreement.
2. Option Price. The option price for any shares of Common Stock of
------------
the Company to be purchased pursuant to the Option by valid exercise from time
to time during the term thereof by the Optionee shall be $.04 per share, the
estimated fair market value of such Common Stock on the date hereof.
3. Period of Option. The Option is exercisable at any time during a
----------------
period of five years commencing January 4, 1999 and ending January 3, 2004. The
Option may be exercised from time to time during the option period as to the
total number of shares covered thereby or any lesser amount thereof. The Option
is nonexercisable after January 3, 2004. Termination of the Optionee's
relationship with the Company shall not affect the Optionee's ability to
exercise the Option.
4. Adjustments. If each of the outstanding shares of Common Stock of
-----------
the Company (other than shares held by dissenting stockholders) shall be changed
into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation (whether by reason of
agreement, consolidation, recapitalization, reclassification, split-up,
combination of the shares or otherwise), then there shall be substituted for
each share covered by the Option, the number and kind of shares of stock or
other securities into which each outstanding share of Common Stock of the
Company (other than shares held by dissenting stockholders) shall be so changed
or for which each such share shall be changed. If there shall be any other
change in the number or kind of the outstanding shares of Common Stock of the
Company, or any stock or securities into which such Common Stock shall have been
changed, or for which it shall have been exchanged, then if the Board of
Directors of the Company shall, in
<PAGE>
its sole discretion, determine that such change equitably requires an adjustment
in the number or kind or option price of the shares covered by the Option, or an
adjustment in the number or kind of other shares subject, or which may be
subject, to the Option, such adjustment shall be made in accordance with such
determination. Fractional shares resulting from any adjustment in the Option
pursuant to this Section 4 may be settled in cash or otherwise as the Board of
Directors of the Company shall determine. Notice of any adjustment shall be
given by the Company to the Optionee and such adjustment (whether or not such
notice is given or received) shall be effective and binding for all purposes of
the Option.
5. Reservation of Shares. The Company covenants and agrees that it
---------------------
has reserved and shall at all time, so long as the Option is outstanding,
reserve and keep available out of its authorized but unissued Common Stock, par
value $.01 per share, solely for the purpose of issuing Common Stock upon the
exercise of the Option, the full number of shares of Common Stock deliverable
upon the exercise of the Option.
6. Stockholder's Rights. The Optionee shall not, based on his being
--------------------
Optionee hereunder, be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other security of the Company which may at any
time be issuable on the exercise of the Option for any purpose, nor shall
anything contained herein be construed to confer upon the Optionee, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of Directors on any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issue of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Option shall have been exercised and
the Common Stock purchasable upon the exercise hereof shall have become
deliverable as provided herein.
7. Transferability. The Option is not transferable by the Optionee
---------------
other than by will or the laws of descent or distribution, and is exercisable
during the Optionee's lifetime only by the Optionee.
8. Method of Exercise of Option. The Option may be exercised in
----------------------------
whole or in part by the Optionee's giving written notice, specifying the number
of shares which the Optionee elects to purchase and the date on which such
purchase is to be made, to the Company by mail, postage prepaid, or delivering
such notice addressed to the Company, at its principal office in Los Angeles,
California, attention of the President, at least ten and not more than thirty
days prior to the date specified in such notice as the date on which such
purchase is to be made. Such notice shall contain (if required by the Company so
that the Company, on issuing the shares to the Option, will comply with the
applicable securities laws) a written representation by the Optionee that (i) he
is acquiring the shares to be so purchased for investment and not with a view to
distribution to the public and (ii) he will not dispose of the shares so
purchased except in compliance with the Securities Act of 1933, as amended, and
the rules and regulations (such as Rule 144) promulgated thereunder applicable
at the time to such disposition. The Company may require further assurances that
the acquisition of the shares will not involve any violations of law.
2
<PAGE>
If such exercise shall be in accordance with the provisions of the Option,
the Company shall, on the date specified in the notice and against receipt from
the Optionee of the option price, deliver, at its principal office in Los
Angeles, California, a certificate or certificates for the shares of Common
Stock so purchased and shall pay all stamp taxes payable in connection
therewith. For purposes of this Section 8, a person to whom the Option is
transferred by will or the laws of descent and distribution, as contemplated by
Section 7, shall be deemed the Optionee.
Each stock certificate for shares issued on exercise of the Option shall
bear a legend substantially as follows:
"The Shares represented by this Certificate have not been registered
under the Securities Act of 1933. The Shares may not be sold or offered for
sale in the absence of an effective Registration Statement for the Shares
under the Securities Act of 1933 or an option of counsel of the Company
that such registration is not required."
9. Binding Agreement. This Option Agreement shall be binding upon and
-----------------
shall inure to the benefit of any successor or assign of the Company and the
Optionee's legal representatives.
10. Entire Agreement. This Agreement contains the entire agreement of
----------------
the parties with respect to the Option and may not be changed orally, but only
by an instrument in writing signed by the party against whom enforcement of any
change, modification or extension is sought.
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
as of the day and year first above written.
GRAND HAVANA ENTERPRISES, INC.
By: /s/ Harry Shuster
---------------------------------------
Harry Shuster
Chairman of the Board, President and
Chief Executive Officer
AGREED TO AND ACCEPTED:
/s/ Alvin Cassel
- -------------------------------
Alvin Cassel
3
<PAGE>
EXHIBIT (10)-3
OPTION AGREEMENT
AGREEMENT, dated as of January 4, 1999, between GRAND HAVANA ENTERPRISES,
INC, a Delaware corporation (the "Company"), and J. BROOKE JOHNSTON, JR. (the
"Optionee").
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Optionee is a director of the Company and is considered by the
Board of Directors of the Company to have made substantial contributions to the
Company;
NOW, THEREFORE, in consideration of the premises and the mutual promises
and covenants hereinafter contained, the Company and the Optionee hereby agree
as follows:
1. Grant of Option. The Company hereby grants to the Optionee the
---------------
irrevocable option (the "Option") to purchase, on the terms and conditions
herein set forth, up to 50,000 of the Company's fully paid and nonassessable
shares of Common Stock, par value $.01 per share, at an option price determined
as set forth in Section 2 of this Agreement.
2. Option Price. The option price for any shares of Common Stock of the
------------
Company to be purchased pursuant to the Option by valid exercise from time to
time during the term thereof by the Optionee shall be $.04 per share, the
estimated fair market value of such Common Stock on the date hereof.
3. Period of Option. The Option is exercisable at any time during a
----------------
period of five years commencing January 4, 1999 and ending January 3, 2004. The
Option may be exercised from time to time during the option period as to the
total number of shares covered thereby or any lesser amount thereof. The Option
is nonexercisable after January 3, 2004. Termination of the Optionee's
relationship with the Company shall not affect the Optionee's ability to
exercise the Option.
4. Adjustments. If each of the outstanding shares of Common Stock of the
-----------
Company (other than shares held by dissenting stockholders) shall be changed
into or exchanged for a different number or kind of shares of stock or other
securities of the Company or of another corporation (whether by reason of
agreement, consolidation, recapitalization, reclassification, split-up,
combination of the shares or otherwise), then there shall be substituted for
each share covered by the Option, the number and kind of shares of stock or
other securities into which each outstanding share of Common Stock of the
Company (other than shares held by dissenting stockholders) shall be so changed
or for which each such share shall be changed. If there shall be any other
change in the number or kind of the outstanding shares of Common Stock of the
Company, or any stock or securities into which such Common Stock shall have been
changed, or for which it shall have been exchanged, then if the Board of
Directors of the Company shall, in
<PAGE>
its sole discretion, determine that such change equitably requires an adjustment
in the number or kind or option price of the shares covered by the Option, or an
adjustment in the number or kind of other shares subject, or which may be
subject, to the Option, such adjustment shall be made in accordance with such
determination. Fractional shares resulting from any adjustment in the Option
pursuant to this Section 4 may be settled in cash or otherwise as the Board of
Directors of the Company shall determine. Notice of any adjustment shall be
given by the Company to the Optionee and such adjustment (whether or not such
notice is given or received) shall be effective and binding for all purposes of
the Option.
5. Reservation of Shares. The Company covenants and agrees that it has
---------------------
reserved and shall at all time, so long as the Option is outstanding, reserve
and keep available out of its authorized but unissued Common Stock, par value
$.01 per share, solely for the purpose of issuing Common Stock upon the exercise
of the Option, the full number of shares of Common Stock deliverable upon the
exercise of the Option.
6. Stockholder's Rights. The Optionee shall not, based on his being
--------------------
Optionee hereunder, be entitled to vote or receive dividends or be deemed the
holder of Common Stock or any other security of the Company which may at any
time be issuable on the exercise of the Option for any purpose, nor shall
anything contained herein be construed to confer upon the Optionee, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of Directors on any matter submitted to stockholders at any meeting
thereof, or to give or withhold consent to any corporate action (whether upon
any recapitalization, issue of stock, reclassification of stock, change of par
value or change of stock to no par value, consolidation, merger, conveyance or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Option shall have been exercised and
the Common Stock purchasable upon the exercise hereof shall have become
deliverable as provided herein.
7. Transferability. The Option is not transferable by the Optionee
---------------
otherwise than by will or the laws of descent or distribution, and is
exercisable during the Optionee's lifetime only by the Optionee.
8. Method of Exercise of Option. The Option may be exercised in whole or
----------------------------
in part by the Optionee's giving written notice, specifying the number of shares
which the Optionee elects to purchase and the date on which such purchase is to
be made, to the Company by mail, postage prepaid, or delivering such notice
addressed to the Company, at its principal office in Los Angeles, California,
attention of the President, at least ten and not more than thirty days prior to
the date specified in such notice as the date on which such purchase is to be
made. Such notice shall contain (if required by the Company so that the
Company, on issuing the shares to the Option, will comply with the applicable
securities laws) a written representation by the Optionee that (i) he is
acquiring the shares to be so purchased for investment and not with a view to
distribution to the public and (ii) he will not dispose of the shares so
purchased except in compliance with the Securities Act of 1933, as amended, and
the rules and regulations (such as Rule 144) promulgated thereunder applicable
at the time to such disposition. The Company may require further assurances
that the acquisition of the shares will not involve any violations of law.
2
<PAGE>
If such exercise shall be in accordance with the provisions of the Option,
the Company shall, on the date specified in the notice and against receipt from
the Optionee of the option price, deliver, at its principal office in Los
Angeles, California, a certificate or certificates for the shares of Common
Stock so purchased and shall pay all stamp taxes payable in connection
therewith. For purposes of this Section 8, a person to whom the Option is
transferred by will or the laws of descent and distribution, as contemplated by
Section 7, shall be deemed the Optionee.
Each stock certificate for shares issued on exercise of the Option shall
bear a legend substantially as follows:
"The Shares represented by this Certificate have not been registered
under the Securities Act of 1933. The Shares may not be sold or offered for
sale in the absence of an effective Registration Statement for the Shares
under the Securities Act of 1933 or an option of counsel of the Company
that such registration is not required."
9. Binding Agreement. This Option Agreement shall be binding upon and
-----------------
shall inure to the benefit of any successor or assign of the Company and the
Optionee's legal representatives.
10. Entire Agreement. This Agreement contains the entire agreement of the
----------------
parties with respect to the Option and may not be changed orally, but only by an
instrument in writing signed by the party against whom enforcement of any
change, modification or extension is sought.
IN WITNESS WHEREOF, the parties hereto have executed this Option Agreement
as of the day and year first above written.
GRAND HAVANA ENTERPRISES, INC.
By: /s/ Harry Shuster
-----------------------------------------------
Harry Shuster
Chairman of the Board, President and Chief
Executive Officer
AGREED TO AND ACCEPTED:
/s/ J. Brooke Johnston, Jr.
- ------------------------------
J. Brooke Johnston, Jr.
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 MARCH 28,
1999 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> MAR-28-1998
<CASH> 161,570
<SECURITIES> 0
<RECEIVABLES> 248,286
<ALLOWANCES> 6,500
<INVENTORY> 569,746
<CURRENT-ASSETS> 1,192,699
<PP&E> 4,072,052
<DEPRECIATION> 0
<TOTAL-ASSETS> 6,452,077
<CURRENT-LIABILITIES> 5,154,384
<BONDS> 0
0
0
<COMMON> 141,744
<OTHER-SE> 1,155,949
<TOTAL-LIABILITY-AND-EQUITY> 6,452,077
<SALES> 2,711,960
<TOTAL-REVENUES> 2,797,890
<CGS> 2,907,570
<TOTAL-COSTS> 3,689,595
<OTHER-EXPENSES> (22,779)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 94,376
<INCOME-PRETAX> (868,926)
<INCOME-TAX> 0
<INCOME-CONTINUING> (868,926)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (23,844)
<NET-INCOME> (892,770)
<EPS-BASIC> (0.06)
<EPS-DILUTED> (0.06)
</TABLE>
