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                     U.S. SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB
(Mark One)

[X]  Annual Report pursuant to Section 13 or 15(d) of the Securities Exchange 
     Act of 1934 for the fiscal year ended September 28,1997; or

[ ]  Transition Report pursuant to Section 13 or 15(d) of the Securities 
     Exchange Act of 1934 [No Fee Required] for the transition period from _____
     to ____

Commission File Number 0-24828

                         GRAND HAVANA ENTERPRISES, INC.
           -----------------------------------------------------------
           (Name of Small Business Issuer as Specified in its Charter)

             Delaware                                            95-4428370
---------------------------------                            -------------------
   (State or Other Jurisdiction                               (I.R.S. Employer 
of Incorporation or Organization)                            Identification No.)

   1990 Westwood Boulevard, 3rd Floor
       Los Angeles, California                                     90025
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(Address of Principal Executive Offices)                         (Zip Code)

Issuer's Telephone Number:                                   (310) 475-5600

Securities Registered Under Section 12(b) of the Exchange Act:
                                      NONE

Securities Registered Under Section 12(g) of the Act:

                     Common Stock, par value $.01 per share
                     --------------------------------------
                                (Title of Class)

                Class A Redeemable Common Stock Purchase Warrants
                -------------------------------------------------
                                (Title of Class)


                Class B Redeemable Common Stock Purchase Warrants
                -------------------------------------------------
                                (Title of Class)

        Check whether the Issuer (1) filed all Reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the Registrant was required to file such Reports), and (2)
has been subject to such filing requirements for the past 90 days.

                      Yes [X]                        No [ ]

        Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained and no disclosure will be contained, to the best
of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ ]

        State Issuer's revenues for its most recent fiscal year - $5,076,967

        State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the last sale price of
such stock as of January 5, 1998: $3,695,505.

        Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:

                 Class                          Outstanding at December 31, 1997
--------------------------------------          --------------------------------
Common Stock, par value $.01 per share                  11,799,306 shares

                       DOCUMENTS INCORPORATED BY REFERENCE
           No documents are incorporated by reference into this Annual
                             Report on Form 10-KSB.

Transitional Small Business Disclosure Format     Yes [ ]   No [X]
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                            Exhibit Index on Page 47

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                                     PART I

ITEM 1.   DESCRIPTION OF BUSINESS.

GENERAL

          Grand Havana Enterprises, Inc. is engaged in the business of the
ownership, operation and development of private membership restaurants and cigar
clubs known as "Grand Havana Rooms," and in the ownership, operation and
development of retail cigar stores known as "Grand Havana House of Cigars."

          The Company currently owns and operates three Grand Havana Rooms, one
in Beverly Hills, California, one in New York, New York and a third in
Washington, D.C. In addition, the Company currently owns and operates three
Grand Havana House of Cigars locations, one in Beverly Hills, California, one in
Las Vegas, Nevada and one in Washington, D.C. In addition, the Company currently
owns and operates a restaurant known as "On Canon" in Beverly Hills, California.
The Company intends to actively pursue the operation of its existing Grand
Havana Room locations and Grand Havana House of Cigars locations, and to develop
additional locations of these two establishments in major cities in the United
States as its principal business focus.

          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. ("Love's"), which company is the franchisor, owner and 
operator of the Love's restaurant chain. Love's restaurants are mid-priced
family-style restaurants which specialize in barbecued pork and beef, with an
emphasis on ribs. The Company acquired the stock of Love's in May 1993. In
December 1996, 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. See "Recent Developments-- Sale of Love's
Restaurants and Domestic Franchise Rights."

          The Company's principal executive offices are located at 1990 Westwood
Boulevard, 3rd Floor, Los Angeles, California 90025, and its telephone number is
(310) 475-5600. References to the "Company" herein includes Grand Havana
Enterprises, Inc. and its consolidated subsidiaries, unless the context
otherwise requires.

RECENT DEVELOPMENTS

       Expansion of Grand Havana Rooms and Grand Havana House of Cigars

          During 1997 the Company opened two new Grand Havana Rooms, one in
Washington, D.C. which opened in March 1997 and one in New York, New York which
opened in May 1997. See "Business-- Grand Havana Rooms." In addition, in 1997
the Company opened three Grand Havana House of Cigars, one in the Bally's Hotel
in Las Vegas, Nevada which opened in November, 1997, a second adjacent to the
Company's Grand Havana Room in Washington, D.C. which opened in March, 1997, and
a third adjacent to the Company's Grand Havana Room in Beverly Hills, California
which opened in December, 1997. See "Business-- Grand Havana House of Cigars."
In addition, the Company is currently negotiating the lease for a fourth Grand
Havana House of Cigars location which location would take the form of a kiosk in
the lobby of another major Las Vegas hotel. Further, in May 1997 the Company
entered into a Territory Rights Agreement pursuant to which the Company licensed
the rights to operate Grand Havana Rooms in certain territories in the Far East.
See "Other Operations-- Grand Havana Far Eastern Territory Rights Agreement."

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       Sale of Love's Restaurants and Domestic Franchise Rights

          In December 1996 the Company adopted a formal plan of discontinuance
of its Love's franchise and restaurant operations. At the time of the adoption
of such plan of discontinuance, the Company operated three Company-owned Love's
restaurants, one in Beverly Hills, California, one in Westchester, California
and a third in San Bernardino, California, and was the franchisor of an
additional 10 Love's restaurants. See Item 7. "Financial Statements and
Supplementary Data-- Note 3 to Consolidated Financial Statements."

          Since the adoption of the plan of discontinuance for the Love's
franchise operations, the Company has taken the actions discussed below to
discontinue its Love's operations. The Company is currently negotiating with the
landlord of the premises of the Company-owned Westchester, California's Love's
restaurant to terminate the lease in consideration for the Company continuing to
make the lease payments under the lease for the Westchester Love's restaurant
through May 1998 and the payment to the Company by the landlord of a $75,000
termination fee. It is anticipated that the Westchester Love's restaurant will
cease operations in January 1998.

          In August, 1997 the Company sold its Company-owned Beverly Hills
Love's restaurant for an aggregate purchase price of $120,000, payable $40,000
in cash and $80,000 in a three-year 7% promissory note payable in monthly
installments.

          In May 1997 the Company-owned San Bernardino Love's restaurant was
sold by the Company to the franchisee of this location in consideration for the
franchisee becoming a sublessee for the remainder of the lease term of the
premises leased by the Company for this restaurant location.

          During fiscal year 1997 the franchisee of the Love's restaurant
located in Lakewood, California, of which restaurant location the Company was
the lessor, went into bankruptcy and the Company took over operations of this
Love's restaurant.

          The Company is currently negotiating an agreement to sell the
remaining domestic assets of its Love's franchise operation, consisting
primarily of the Love's Company-owned Lakewood, California restaurant and the
franchise rights to nine remaining Love's franchised restaurants. The purchase
price for these remaining assets is anticipated to be approximately $200,000 and
the Company anticipates that this transaction will close in February 1998, with
the full purchase price payable at the closing.

          The only Love's related asset which the Company intends to retain is
the international licensing rights to the Love's restaurants. In this regard in
August 1994, the Company entered into a Territory Rights Agreement with PT
Transpacific Ekagraha, an Asian holding company. The first Love's restaurant to
be opened under this agreement will be located in Jakarta, Indonesia, which
restaurant is currently scheduled to be open in early 1998. See "Business--
Other Operations-- Love's Far Eastern Territory Rights Agreement."

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BUSINESS

       Grand Havana Rooms

          The Company's private membership restaurants and cigar clubs, known as
the Grand Havana Rooms, cater primarily to affluent cigar smokers and their
guests. The Company's initial Grand Havana Room opened in June, 1995 in Beverly
Hills, California, on the second floor in the space above the Company's On Canon
restaurant. See "Business-- Other Operations." The Company opened its second
Grand Havana Room in Washington, D.C. in March 1997 and its third Grand Havana
Room in New York, New York in May 1997.

          The Grand Havana Room concept is to provide a private membership club,
including an upscale restaurant, where members can keep their cigars and smoking
accessories for use when they are at the Grand Havana Room. Both corporate and
individual memberships are sold at the Grand Havana Room, with both corporate
and individual members paying a one-time initiation fee and a continuing monthly
membership fee thereafter. The Grand Havana Room concept includes the operation
of a private smoking lounge, a full bar and an upscale restaurant, as well as
the sale of premium cigars and cigar and tobacco accessories. If space permits,
a Grand Havana Room may also include other membership activities and services,
including a billiards room and screening room. The Company's New York Grand
Havana Room currently has a billiards room and a room which the Company may
designate in the future as a screening room. The Company intends to add a
billiards room to its Beverly Hills Grand Havana Room location in the near
future. All of the facilities of the Grand Havana Room, including the bar and
restaurant, are only available for use by members and their guests.

          The Company commenced offering its own brand of cigars at its Grand
Havana Rooms under the brand names "Grand Havana Reserve" and "Grand Havana
Selection" in the summer of 1997. See "Trademarks and Service Marks," below.
The Company also offers these cigars at its retail Grand Havana House of Cigars
locations and in the future may enter into distribution agreements with respect
to the distribution of its brands of cigars to third party wholesalers or
retailers. See "Grand Havana House of Cigars." The Company does not manufacture
the cigars which use its trade names, but rather the Company orders them
directly from a cigar manufacturer and has its brand names applied to such
cigars. The Company's brands of cigars do not currently account for a
significant portion of the Company's cigar sales.

          Membership at the Company's Grand Havana Rooms is limited to the
number which the Company believes is appropriate to the space of the particular
Grand Havana Room and the number of humidors maintained by the Company at each
Grand Havana Room.

          The Company continues to investigate cites for additional Grand Havana
Room locations, although no new sites for such new locations has as yet been
identified. There can be no assurance that the Company will be successful in
locating additional locations for such Grand Havana Rooms, will be successful in
obtaining funding necessary to develop such additional Grand Havana Rooms, or if
developed, that such additional Grand Havana Rooms will be operated profitably.

          Beverly Hills Grand Havana Room. The Company's initial Grand Havana
Room, which opened in June 1995, is located on the floor above the Company's On
Canon Restaurant in Beverly Hills, California. The Company leases its Beverly
Hills Grand Havana Room pursuant to a five year lease expiring June 30, 1999,
which lease has three five year options to extend, through June 30, 2014. The
Company's Beverly Hills Grand Havana Room consists of approximately 3,000 square
feet. All

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available memberships at the Company's Beverly Hills Grand Havana Room have
been sold, and there currently exists a waiting list with respect to future
members. The Company is currently examining whether to continue operations at
its On Canon restaurant location, and should the Company determine to cease
these operations, the Company may use the ground floor space of its On
Canon restaurant in order to expand the operations of its Beverly Hills Grand
Havana Room. See "Other Operations-- On Canon Restaurant."

          New York Grand Havana Room. The Company's initial New York Grand
Havana Room, which opened in May 1997, is located on the 39th floor of 666 Fifth
Avenue, New York, New York, in the former location of the well-known restaurant,
"Top of the Sixes." Due to the relatively large size of the space leased for the
Company's initial New York Grand Havana Room, in addition to a smoking lounge,
bar and restaurant, the New York Grand Havana Room also includes a billiards
room and there is space which the Company may determine to convert into a
screening room in the future. Approximately one-third of the available
memberships at the Company's Grand Havana Room in New York have been sold to
date. The Company intends to continue to seek new members for its New York Grand
Havana Room by "word of mouth" advertising. In addition, the Company has been
marketing its New York Grand Havana Room for "event parties." The Company
believes that some of those who may attend event parties may determine to become
members of the Grand Havana Room. See Item 2. "Description of Property."

          Washington, D.C. Grand Havana Room. The Company's Grand Havana Room in
Washington D.C. opened in March 1997 and is located at the lower level of 1220
19th Street, N.W., Washington, D.C. and consists of approximately 8,298 square
feet. See Item 2. "Description of Property." Membership at the Washington, D.C.
Grand Havana Room has been lower than anticipated, with the Company to date
selling approximately one-tenth of available memberships. The Company intends to
take actions to try to further promote memberships at its Washington, D.C. Grand
Havana Room, such as sponsoring of "event parties"; however, there can be no
assurance that the Company's efforts to increase its membership base at its
Washington, D.C. Grand Havana Room will be successful, and if these efforts are
not successful, the Washington, D.C. Grand Havana Room may not be financially
viable for the Company as a continuing operation.

          Grand Havana House of Cigars

          The Company's Grand Havana House of Cigars locations specialize in
premium cigars, cigar accessories and related merchandise. In the summer of
1997, the Company commenced offering its own brands of cigars, which are named
"Grand Havana Selection" and "Grand Havana Reserve," at its Grand Havana House
of Cigars retail locations. The Company's brand of cigars have only recently
been introduced and as yet do not account for a significant portion of the sales
of cigars by the Company.

          The Company opened its first Grand Havana House of Cigars adjacent to
its Washington D.C. Grand Havana Room in March 1997. A second Grand Havana House
of Cigars was opened in the lobby of the Bally's Hotel in Las Vegas, Nevada in
November 1997 and a third Grand Havana House of Cigars was opened adjacent to
the Company's On Canon Restaurant (on the floor below the Company's Grand Havana
Room), in Beverly Hills, California in December 1997. In addition, the Company
is currently negotiating a lease for a cigar kiosk to be located in the lobby of
another major Las Vegas hotel.


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          The Company intends to actively pursue the development of additional
Grand Havana House of Cigar locations in other major U.S. cities, although no
additional sites for such new locations has as yet been identified other than as
discussed herein.

          Marketing and Promotion. The Company's Grand Havana Rooms are private
membership clubs.  The Company intends to promote the clubs primarily through
direct targeting of select individuals by the Company's officers and employees,
by word-of-mouth advertising by existing members and by hosting "event parties"
through which to introduce prospective new members to the clubs' facilities;
however, if direct member personal solicitations, "word-of-mouth" advertising
and event parties are insufficient to sell memberships, the Company may find it
necessary to engage in advertising or other promotional activities to attract
members to its Grand Havana Rooms. Because the advertisement of tobacco products
is heavily regulated, there could be significant restrictions on the Company's
ability to advertise its Grand Havana Rooms, which could have a material adverse
effect on the operations of the Company's Grand Havana Rooms. See "Government
Regulation," below.

       Love's

          On May 27, 1993, the Company purchased all of the issued and
outstanding capital stock of Love's from Kyotaru International, Inc., a
subsidiary of a large Japanese concern, for a total consideration of $534,822.
On the date of Closing, Love's operated one Company-owned restaurant and was the
franchisor of an additional 19 Love's restaurants, which were operated by
independent franchisees. In addition, the Company acquired two closed
Company-owned locations.

          Love's restaurants are mid-priced family-style restaurants which
specialize in barbecued pork and beef, primarily ribs. Each Love's restaurant
has a liquor license. Each of the franchised restaurants is owned and operated
by an independent franchisee under a Franchise Agreement pursuant to which a
royalty is paid to Love's.

          In December 1996 the Company adopted a formal plan of discontinuance
of its Love's restaurants operations. At the time of the adoption of such plan
of discontinuance, the Company operated three Company-owned Love's restaurants,
one in Beverly Hills, California, one in Westchester, California and a third in
San Bernardino, California, and was the franchisor of an additional 10 Love's
restaurants.

          Since the adoption of the plan of discontinuance for the Love's
restaurants, the Company has taken various actions to discontinue its Love's
operations. The final domestic assets of the Love's restaurants, consisting
primarily of one Company-owned location in Lakewood California and rights under
the franchise agreements for nine Love's restaurants are currently scheduled to
be sold in February 1998 for an aggregate purchase price of approximately
$200,000. See "Recent Developments- - Sale of Love's Restaurants and Domestic
Franchise Rights."

          The only Love's related asset which the Company intends to retain is
the international licensing rights to the Love's restaurants. In this regard in
August 1994, the Company entered into a Territory Rights Agreement with PT
Transpacific Ekagraha, an Asian holding company. The first

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Love's restaurant to be opened under this agreement will be located in Jakarta,
Indonesia, which restaurant is currently scheduled to be open in early 1998. See
"Business-- Other Operations-- Love's Far Eastern Territory Rights Agreement."

OTHER OPERATIONS

          On Canon. The Company's On Canon restaurant opened in April 1995 on
Canon Drive in Beverly Hills, California. On Canon offers a light Italian menu
featuring pizza, pasta and other Italian favorites. On Canon is open for lunch
and dinner each day and the ambiance is designed to be "elegantly casual" and
"social" with a modern, sporty look. The Company is currently examining whether
to cease operations of its On Canon restaurant. If the Company should determine
to cease operations of this restaurant, the Company would likely use the
restaurant space to expand the operations of its Beverly Hills Grand Havana
Room, which is located on the floor above the Company's On Canon restaurant.

       Grand Havana Far Eastern Territory Rights Agreement. The Company entered
into an agreement in May 1997 with Grand Havana Room (Asia) Holding Hong Kong
("Grand Havana Asia"), pursuant to which the Company has granted to Grand Havana
Asia certain exclusive territories in the far east, including Hong Kong, Taiwan,
Singapore, Thailand, Japan, Korea, the Philippines and China, in which Grand
Havana Asia can open and operate Grand Havana Rooms for a term of 75 years.
Grand Havana Asia agreed to pay the Company, for the exclusive right to use the
name Grand Havana Room in the territory, a non-refundable territorial fee of
$600,000, of which $300,000 was paid upon execution of the agreement and the
balance of $300,000 is payable on the earlier of the opening of the initial
Grand Havana Room in Hong Kong or April 30, 1998. The Company is required to
provide comprehensive development and training services in connection with the
opening of the first and all subsequent Grand Havana Rooms in the territories.
In return for such services, the Company would receive 25% of the initial
membership fees paid by members of the Hong Kong Grand Havana Room and 15% of
the initial membership fees paid with respect to any other Grand Havana Rooms
opened pursuant to the agreement. Further, the Company would be entitled to
receive 6% of the monthly gross revenues from each Grand Havana Room opened
pursuant to this agreement. Pursuant to the agreement the Company is to open the
Grand Havana Room in Hong Kong within one year after the execution of the
agreement and a total of at least nine Grand Havana Rooms within five years
following the execution of the agreement. Given the recent decline in the Asian
economy, there can be no assurance that any or all of the obligations of Grand
Havana Asia under this agreement will be satisfied or that any Grand Havana
Rooms will be opened in Asia.

       Love's Far Eastern Territory Rights Agreement. In August 1994, the
Company entered into a Territory Rights Agreement with PT Transpacific Ekagraha,
an Asian holding company, which engages in a number of businesses, including
banking and the restaurant development business. Under the Territory Rights
Agreement, the territory rights holder has committed to construct at least eight
Love's Restaurants in portions of Asia, including Mainland China, Hong Kong,
Indonesia, Singapore, Malaysia and Republic of China-Taiwan. The Territory
Rights Agreement provides for additional payments to Love's upon the opening of
each restaurant and for continuing royalties ranging from 5%-8.75% of gross
sales. Love's is to provide certain training, management and other services
during the term of the Territory Rights Agreement. It is expected that the
initial restaurant to be opened under the Territory Rights Agreement will open
in Jakarta, Indonesia in early 1998. Given the recent decline in the Asian
economy, there can be no assurance that any or all of the obligations of PT
Transpacific Ekagraha under this agreement will be satisfied or that any Love's
restaurants will be opened in Asia pursuant to this agreement.

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       Il Forno Restaurant. On June 20, 1994 the Company acquired 85% of the
capital stock of Il Forno, Inc., which corporation owns and operates an
Italian-style restaurant located in Santa Monica, California. On September 20,
1996, due to less than anticipated operating results, the Company sold its 85%
interest in Il Forno back to the minority stockholders, resulting in a loss to
the Company of approximately $600,000. See Item 7. "Financial Statements and
Supplementary Data-- Note 4 to Consolidated Financial Statements."

TRADEMARKS AND SERVICE MARKS

       The Company has registered various service marks or trademarks with the
United States Patent and Trademark Office on the Principal Register, including
"Love's", "Love's Wood Pit Barbecue" and "Love's Express." In addition, the
Company has registered the service marks "Grand Havana Room," and "Grand Havana
House of Cigars," and the trademarks "Grand Havana Selection" and "Grand Havana
Reserve." The Company has also registered the service mark "On Canon." The
Company regards its service marks and trademarks as having significant value and
being an important factor in the marketing of its restaurants and cigar clubs as
well as its Grand Havana House of Cigar locations. The Company currently uses
the "Grand Havana Selection" and "Grand Havana Reserve" trademarks on its own
brand of cigars. See "Business-- Grand Havana House of Cigars." The Company also
uses its Grand Havana Room service marks on T-shirts, hats and golf balls and
other similar products in order to generate additional revenues. The Company's
policy is to pursue registrations of its marks wherever possible and to oppose
vigorously any infringement of its marks. The Company is not aware of any
infringing uses that could materially affect its business or any prior claim to
the trademarks that would prevent the Company from using such trademarks in its
business.

GOVERNMENT REGULATION

       California Smoke-Free Workplace Act of 1994. In 1994 the California
legislature enacted the California Smokefree Workplace Act of 1994 which
prohibits smoking in enclosed spaces at places of employment with certain
exceptions. Since the inception of the Company's Beverly Hills Grand Havana
Room, the Company has relied upon an exemption in the law that expressly exempts
from its coverage retail tobacco shops and private smoker's lounges. Although
the Company believes it is justified in relying on the "private smoker's lounge"
exemption, if it should be determined in the future that the Company is not a
"private smoker's lounge," but rather a restaurant or a bar to which the
California Smoke-Free Workplace Act of 1994 were applicable, this would have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, if other states in which the Company has
Grand Havana Room and Grand Havana House of Cigar locations should enact
legislation similar to the legislation adopted in California, and the Company
were unable to qualify under an exemption with respect to any such legislation,
this could have a material adverse effect on the Company's business, financial
condition and results of operations.

       Tobacco Industry Regulation- General. Cigars and other tobacco products
are subject to regulation in the United States at the federal, state and local
levels. Together with changing public attitudes towards smoking, a constant
expansion of smoking regulations since the early 1970's has been a major cause
of the overall decline in consumption of tobacco products, although cigar
consumption has increased since 1993. Moreover, the trend is toward increasing
regulation in the tobacco industry.

       Federal law has required health warnings on cigarettes since 1965;
however, there is currently no federal law requiring that cigars or pipe tobacco
carry such warnings. However, California requires "clear and reasonable"
warnings to consumers who are exposed to chemicals known to the state to cause
cancer or reproductive toxicity, including tobacco smoke and several of its
constituent chemicals.

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Violations of this law, known as Proposition 65, can result in a civil penalty
not to exceed $2,500 per day for each violation.

       The majority of states, including California, restrict or prohibit
smoking in certain pubic places and restrict the sale of tobacco products to
minors. Local legislative and regulatory bodies have also increasingly moved to
curtail smoking by prohibiting smoking in certain buildings or areas or by
requiring designated "smoking" areas. Although the Company believes that because
it offers a private membership club it will be exempt from future regulations
that might further prohibit smoking, if regulations should be enacted which
would in any way limit or prohibit the smoking of cigars in the Company's Grand
Havana Rooms this would have a material adverse effect on the business of the
Company. See "New California Anti-Smoking Legislation."

       Cigars and pipe tobacco have long been subject to federal, state and
local excise taxes, and such taxes have frequently been increased or proposed to
be increased, in some cases significantly, to fund various legislative
initiatives. Enactment of significant increases in or new federal, state or
local excise taxes may result in significantly increasing the price of cigars
which could result in decreased sales of cigars at the Company's Grand Havana
Rooms and Grand Havana House of Cigar locations, and a decrease in the number of
persons who smoke cigars which could cause a reduction in memberships at the
Grand Havana Rooms.

       A variety of bills relating to tobacco issues have been introduced in the
Congress of the United States in recent years, including bills that would have
(i) prohibited the advertising and promotion of all tobacco products and/or
restricted or eliminated the deductibility of advertising expenses; (ii)
increase labeling requirements on tobacco products to include, among other
things, addiction warnings and lists of additives and toxins; and (iii) shifting
regulatory control of tobacco products and advertisements from the U.S. Federal
Trade Commission to the U.S. Food and Drug Administration. There can be no
assurance as to the ultimate content, timing or effect of any additional
regulation of tobacco products by any federal, state, local or regulatory body,
and there can be no assurance that any such legislation or regulation would have
a material adverse affect on the Company's business.

       Restaurant and Alcohol Regulation. The Company's restaurants, including
the restaurants in the Company's Grand Havana Rooms, are subject to numerous
federal, state and local laws regulating their business, including health,
sanitation, safety standards, alcoholic beverage control and fire regulations.
The development and construction of additional restaurants, including those
within the Company's Grand Havana Rooms, will be subject to compliance with
applicable zoning, land use and environmental regulations. Each of the Love's
restaurants, the On Canon restaurant, and its Grand Havana Rooms, has
appropriate licenses from regulatory authorities allowing it to sell liquor,
beer and wine, and each restaurant has food service licenses from local health
authorities. The failure of a restaurant to obtain or retain liquor or food
service licenses could have a material adverse effect on its operations.
Difficulties in obtaining or failures to obtain the required licenses or
approvals could delay or prevent the development of a new restaurant in a
particular area including any new Grand Havana Rooms which may be developed by
the Company in the future. However, management believes the Company is currently
in compliance in all material respects with all relevant regulations, and the
Company has never experienced abnormal difficulties or delays in obtaining the
required licenses or approvals.

       Alcoholic beverage control regulations require each of the Company's
restaurants to apply to a state authority and, in certain locations, county and
municipal authorities, for a license and permit to sell alcoholic beverages on
the premises. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous

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aspects of the daily operations of the Company's restaurants, including minimum
age of patrons and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, and storage and dispensing of
alcoholic beverages. The Company has not encountered any material problems
relating to alcoholic beverage licenses to date. The failure to receive or
retain, or a delay in obtaining, a liquor license in a particular location could
adversely affect the Company's ability to obtain such a license elsewhere.

       The Company is subject in California, and may be subject in certain other
states, to "dram-shop" statutes, which generally provide a person injured by an
intoxicated person the right to recover damages from an establishment that
wrongfully served alcoholic beverages to the intoxicated person. The Company
carries comprehensive general liability insurance which it believes is
consistent with coverage carried by other entities in the restaurant industry.
Even though the Company is covered by insurance, a judgment against the Company
under a dram-shop statute in excess of the Company's liability coverage could
have a material adverse effect on the Company. The Company has never been the
subject of a "dram-shop" claim.

       Other Regulations. Various federal and state labor laws govern the
Company's relationship with its employees, including such matters as minimum
wage requirements, overtime and other working conditions. Significant additional
government-imposed increases in minimum wages, paid leaves of absence and
mandated health benefits, or increased tax reporting and tax payment
requirements for employees who receive gratuities, could be detrimental to the
economic viability of the Company's restaurants. Management is not aware of any
environmental regulations that have had a material effect on the Company to
date.

       The Americans With Disabilities Act ("ADA") prohibits discrimination on
the basis of disability, accommodations and employment. The ADA became effective
in 1992 as to public accommodations and employment. The Company's restaurants
are currently designed to be accessible to the disabled. The Company believes
that it is in substantial compliance with all current applicable regulations
relating to restaurant accommodations for the disabled. Because of the
relatively recent effectiveness of the ADA and the absence of comprehensive
regulations thereunder, the Company is unable to predict the extent to which the
ADA will affect the Company. However, the Company could be required to expend
funds to modify its restaurants in order to provide service to, or make
reasonable accommodations for the employment of, disabled persons.

       The Company is also currently subject to a number of state laws that
regulate certain substantive aspects of the franchisor/franchisee relationship
with respect to its Love's restaurant franchisees, such as termination,
cancellation or non-renewal of a franchise (such as requirements that "good
cause" exist as a basis for such determination and that a franchisee be given
advance notice of and a right to cure default prior to termination) and may
require the franchisor to deal with its franchisees in good faith, prohibit
interference with the right of free association among franchisees, and regulate
discrimination among franchisees in charges, royalties or fees.

COMPETITION

          The Company's Grand Havana Rooms compete with other clubs that offer
private memberships as well as with other restaurants, bars, smoking lounges and
other establishments which are open to the public and at which cigar smoking is
permitted. The Company believes that by continuing its policy of catering to
affluent clientele, it will be able to compete effectively with other private
membership clubs that may have a broader base membership as well as with other
bars and restaurants that are open to the public and permit the smoking of
cigars. Many of the Grand Havana

                                       10

<PAGE>   11

Rooms' competitors have substantially greater financial, marketing, personnel
and other resources than the Company, and the Company believes its ability to
compete effectively will continue to depend on its ability to offer an exclusive
membership club that caters to affluent cigar smokers and offers a high quality
distinctive restaurant, smoking lounge and bar. Additionally, the restaurant
business is often affected by changes in consumer taste and discretionary
spending priorities, economic conditions, demographic trends, traffic patterns
and employee availability. Any change in these factors could adversely affect
the Company. The Company believes that the ability of the Company's restaurants
located in its Grand Havana Rooms to compete effectively will continue to depend
on its ability to offer high quality food in a full-service, distinctive dining
environment.

          The Company's Grand Havana House of Cigar locations will compete with
other retail cigar stores as well as with other businesses and entities which
sell cigars and cigar related products, such as supermarkets and liquor stores.
Many of these competitors have substantially greater financial, marketing,
personnel and other resources than the Company, and the Company believes that
its ability to compete effectively will depend on establishing prime locations
for its retail cigar stores and carrying the brands of premium cigars which are
in demand.

EMPLOYEES

          As of December 31, 1997, the Company had 184 employees, including 52
full-time and 132 part-time employees. Harry Shuster, the Company's Chairman of
the Board, President and Chief Executive Officer is engaged by the Company as an
independent consultant. See Item 10, "Executive Compensation--Consulting and
Employment Agreements." None of the Company's employees is covered by a
collective bargaining agreement. The Company believes that its relations with
its employees are good.

ITEM 2.   DESCRIPTION OF PROPERTY.

          The Company owns no real property, but rather leases all of the
facilities which it uses. The Company has a five-year lease expiring June 30,
1999, which lease has three five-year options to extend, through June 30, 2014,
for its "On Canon" restaurant location, Grand Havana Room and Grand Havana House
of Cigars in Beverly Hills, California. The aggregate monthly rental under the
lease for these premises is currently $17,344.

          The Company's New York Grand Havana Room is located on the 39th floor
of 666 Fifth Avenue, New York, New York. The New York lease is for a term of
fifteen years expiring September 30, 2011. Annual rental under the New York
lease in its initial five years is $658,880 per annum, payable in equal monthly
installments. The Company commenced making monthly rental payments under this
lease in March 1997. In addition to this rental, the Company will pay as
additional rental under the New York lease an amount equal to 6.5% of the gross
sales from its New York Grand Havana Room in excess of $10,136,600 in any lease
year. The New York lease consists of approximately 16,472 square feet. See Item
1. "Description of Business-- Grand Havana Rooms."

          The lease for the Company's Grand Havana Room and Grand Havana House
of Cigars in Washington D.C., is for a term of fifteen and one-half years
expiring in February, 2012 (the "Washington Lease"). Annual rental under the
Washington Lease is $170,000 per annum, payable in equal monthly installments.
The Company commenced making rental payments under this lease in March 1997. The
Washington D.C. Lease is for premises at the lower level of 1220 19th Street,
N.W., Washington, D.C. and consists of approximately 8,298 square feet.

                                       11

<PAGE>   12

          The Company rents the approximately 400 square feet of space for its
Grand Havana House of Cigars in the Bally's Hotel in Las Vegas, Nevada pursuant
to a seven year lease. Rental under the lease is $60,000 per year during the
initial year of the lease and thereafter the greater of $60,000 or the
applicable annual "percentage rent." The "percentage rent" is calculated as (i)
ten percent of gross sales up to $1,000,000 per year, (ii) 11% of gross sales
from $1,000,000 to $1,500,000 per year, (iii) 12% of gross sales from $1,500,000
to $2,000,000 and (iv) 13% of gross sales in excess of $2,000,000 per lease
year. In addition, upon the Company taking possession of the premises, the
Company delivered to the landlord under the lease $50,000 as "key money" in
consideration for the landlord entering into the lease agreement and completing
certain work on the leased premises. See Item 1. "Description of Business--
Grand Havana House of Cigars."

          In February 1995 the Company entered into a six-year lease with 1990
Westwood Boulevard, Inc. covering approximately 6,000 square feet of office
space for its principal executive offices. The Lease provides for a rental of
$4,000 per month through January 31, 1998, and a rental of $4,400 per month
thereafter through the end of the term of the lease in January 2001. 1990
Westwood Boulevard, Inc. is owned 50% by Harry Shuster, Chairman of the Board,
President and Chief Executive Officer, a Director and a promoter of the Company,
35% by Jordan Belfort and 15% by Daniel Porush. Each of such latter persons is a
shareholder of Chicken & Ribs, Inc., a promoter of the Company. The Company is
advised that the rental and other terms of the agreed-upon Lease are no more
favorable to the lessor than could have been obtained in a similar building in
the same area from an independent, unrelated lessor. See Item 12. "Certain
Relationships and Related Transactions".

          Until the closing of the sale of the remaining Love's Company-owned
location and nine franchised locations, which sale is anticipated to close in
early February 1998, the Company will remain the lessee under certain
franchised, subleased and Company-owned Love's locations. The leases are
generally "triple net" leases, obligating the Company, as tenant, to be
responsible for taxes, utilities and insurance. In the subleases which the
Company enters into with its franchisees, the Company passes on the "triple net"
obligations to such franchisees, and receives specified percentages of such
sublessees' sales of food, liquor and other items.

          The Company considers its leased properties to be adequate for its
needs in the short term or at least until the expiration of such leases, subject
to such additional leases as need be entered into in connection with the
Company's expansion plans discussed elsewhere in this Annual Report on Form
10-KSB. In management's opinion, all of the properties leased by the Company are
adequately covered by insurance.

ITEM 3.   LEGAL PROCEEDINGS.

          The Company is not a party to any pending material legal proceeding,
other than routine litigation that is incidental to its business or is covered
by insurance.

ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

          No matter was submitted during the fourth quarter of the fiscal year
ended September 28 1997, to a vote of security holders of the Company through
the solicitation of proxies, or otherwise. On October 7, 1997, the Board of
Directors of the Company approved and recommended that the Company's Certificate
of Amendment be amended to increase the number of authorized shares of Common
Stock of the Company from 22,000,000 to 50,000,000 (the "Amendment"). On October
7, 1997 the holders of more than a majority of the issued and outstanding shares
of Common Stock executed a Written Consent to Corporate Action pursuant to which
such holders approved the

                                       12

<PAGE>   13

Amendment. The Company did not solicit proxies with respect to the taking of
such action by written consent. An Information Statement with respect to the
Amendment was mailed to all of the stockholders of the Company on or about
November 20, 1997. The Amendment became effective upon the filing of such
Amendment with the Secretary of State of Delaware on December 12, 1997.

                                       13

<PAGE>   14

                                     PART II


ITEM 5.   MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

       The Common Stock, par value $.01 per share, of the Company has been
traded on The Nasdaq Stock Market's Small Cap Market ("Nasdaq") since April 12,
1994, the effective date of the Company's initial public offering. Prior to that
date, there was no public market for the Company's securities. The Company's
common stock has been traded under the symbol "PUFF" since March 1997 and prior
to that was traded under the symbol "UNIR." In its initial public offering, the
Company sold a total of 2,012,000 Units, each Unit consisting of one share of
Common Stock, one Class A Warrant and one Class B Warrant. Each of the Class A
Warrants and the Class B Warrants entitles the holders thereof to purchase one
share of the Company's Common Stock at exercise prices of $4.80 and $5.60 per
share, respectively. In addition to the market for the Company's Common Stock,
as to which certain information is provided below, the Company's Class A
Warrants and Class B Warrants are also traded on Nasdaq.

       The following table sets forth, for the Company's fiscal quarters
indicated, the high and low bid prices of the Common Stock in The Nasdaq Stock
Market's Small Cap Market, as reported to the Company in monthly Reports from
Nasdaq:

<TABLE>
<CAPTION>
                                                  Reported
                                                 Bid Prices
                                             -----------------
                                             High          Low
<S>                                          <C>           <C>
       1996
         1st Quarter                         3-3/8         1
         2nd Quarter                         2-1/8         15/16
         3rd Quarter                         2-3/16        1-1/4
         4th Quarter                         1-11/16       7/8

       1997
         1st Quarter                         2             1
         2nd Quarter                         3-3/4         1-3/4
         3rd Quarter                         3             1-1/2
         4th Quarter                         2             1
</TABLE>

          The above quotations represent prices between dealers, do not include
retail mark-up, markdown or commission and do not necessarily represent actual
transactions.

          There were approximately 71 record holders of the Common Stock of the
Company as of December 1, 1997.

          The Company has never declared or paid any cash dividends and does not
intend to pay cash dividends in the foreseeable future on the shares of Common
Stock. Cash dividends, if any, that may be paid in the future to holders of
Common Stock will be payable when, as and if declared by the Board of Directors
of the Company, based upon the Board's assessment of the financial condition of
the Company, its earnings, need for funds, capital requirements, and prior
claims, if any, of Preferred

                                       14

<PAGE>   15

Stock to the extent issued, and other factors, including any applicable laws.
The Company is not currently a party to any agreement restricting the payment of
dividends.

       Changes in Securities

          In July 1997 the Company issued a 3-year warrant to Westminster
Capital, Inc. to purchase 150,000 shares of common stock of the Company
exercisable at the lesser of $.75 per share or 75% of the average trading price
ten trading days prior to exercise. This Warrant was issued to Westminster
Capital, Inc. as designee of United Leisure Corporation pursuant to an Amendment
to Financing Agreement dated July 15, 1997 between the Company and United
Leisure Corporation. See Item 12.
"Certain Relationships and Related Transactions."

          Also in July 1997 the Company issued 100,000 shares of its common
stock to the law firm of Richman, Lawrence, Mann, Greene, Chizever & Phillips in
consideration for legal services rendered.

          In September 1997 the Company agreed to issue 50,000 shares of its
common stock to an investor relations consultant in consideration for services
performed by such consultant.

          Each of the foregoing issuances was made directly by the officers and
directors of the Company and no underwriting discounts or commissions were paid.
Each of the foregoing transactions was exempt from registration pursuant to
Section 4(2) of the Securities Act of 1933, as amended, for issuance of shares
not involving any public offering.

                                       15

<PAGE>   16

ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS
        OF OPERATIONS

General

          Grand Havana Enterprises, Inc. is engaged in the business of the
ownership, operation and development of private membership restaurants and cigar
clubs known as "Grand Havana Rooms," and in the ownership, operation and
development of retail cigar stores known as "Grand Havana House of Cigars."

          The Company currently owns and operates three Grand Havana Rooms, one
in Beverly Hills, California which opened in June 1995, one in Washington, D.C.
which opened in March 1997 and a third in New York, New York which opened in May
1997. In addition, the Company currently owns and operates three Grand Havana
House of Cigars locations, one in Beverly Hills, California which opened in
December, 1997, one in Washington D.C. which opened in March 1997 and one is Las
Vegas, Nevada which opened in November, 1997. The Company intends to actively
pursue the operation of its existing Grand Havana Room locations and Grand
Havana House of Cigars locations, and to develop additional locations of these
two establishments in major cities in the United States as its principal
business focus. The Company also operated its On Canon restaurant during the
fiscal years ended September 30, 1996 and September 28, 1997 and its Il Forno
restaurant during the fiscal year ended September 30, 1996. See "Business--
Other Operations."

The Company was incorporated under the laws of the State of Delaware on April
13, 1993. The Company was originally formed in order to acquire all of the
capital stock of Love's Enterprises, Inc. ("Love's"), which company was the
franchisor owner and operator of the Love's restaurant chain. Love's restaurants
are mid-priced family-style restaurants which specialize in barbecued pork and
beef, with an emphasis on ribs. The Company acquired the stock of Love's in May
1993. In December 1996, 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. See "Recent Developments-- Sale of
Love's Restaurants and Domestic Franchise Rights."

          Management of the Company expects that during the membership drive for
its new New York and Washington D.C. Grand Havana Rooms, and during the period
it is working on the development of additional Grand Havana Rooms and Grand
Havana House of Cigars locations, the Company will continue to experience
consolidated losses, until such time as there are enough profitable Grand Havana
Rooms and Grand Havana House of Cigars locations developed to absorb the
increased expenses and overhead; however, there can be no assurance that such
cigar clubs and retail cigar stores will be profitable in the future. The
Company has experienced operating losses since its inception with net losses of
$1,468,044 and $3,795,909 for the fiscal years ended September 30, 1996 and
September 28, 1997, respectively.

          To the extent that any of the statements contained herein relating to
the Company's business, including its development plans with respect to its
Grand Havana Rooms and Grand Havana House of Cigars locations, contain
forward-looking statements, such statements are based on current expectations
that involve a number of uncertainties and risks that could cause actual results
to differ materially from those projected in the forwarded-looking statements,
including risks and uncertainties associated with the costs of the development
of new Grand Havana Room and Grand Havana House of Cigars locations, the timing
of the proposed developments, compliance with regulatory requirements and the
Company's ability to sell memberships in its New York, New York and Washington,
D.C. locations. In addition to these risks, other important factors that could
cause the Company's results of operations to differ materially from those
anticipated by management include a decline in public consumption of cigars and
other tobacco products and significant increases in excise taxes which could
substantially increase the price of cigars.

                                       16

<PAGE>   17

RESULTS OF OPERATIONS - FISCAL YEAR ENDED SEPTEMBER 28, 1997, COMPARED TO FISCAL
YEAR ENDED SEPTEMBER 30, 1996

       The Company derives revenues from five principal sources: food and
beverage sales, franchise royalties, sublease income, merchandise sales and
membership fees. During its fiscal year ended September 28, 1997 the Company had
revenues of $5,076,967 compared to revenues of $5,262,790 for its fiscal year
ended September 30, 1996, a decrease of $185,823 or approximately 3.5%. The
decrease in revenues is primarily due to decreases in food and beverage sales,
from $3,984,246 in the fiscal year ended September 30, 1996 to $2,820,785 in the
fiscal year ended September 28, 1997 or $1,163,461 or approximately 29.2%. The 
above-mentioned decreases were offset by increases in membership revenues from
$649,608 in the fiscal year ended September 30, 1996 to $1,186,591 in the 
fiscal year ended September 28, 1997 or $536,983 or 82.7%, and an increase in
territorial fees from $200,000 in the fiscal year ended September 30, 1996 to
$600,000 in the fiscal year ended September 28, 1997.

       The decrease in food and beverage sales was mainly due to the Company's
sale late in fiscal year 1996 of the IL Forno restaurant and decreased sales at
the On Canon Restaurant. These decreases were offset in part by a new revenue
source created by the opening of the two new Grand Havana Rooms during the
fiscal year ended September 28, 1997. The Company's former Il Forno restaurant,
which was sold in late September 1996, had $933,783 of food and beverage sales
in the fiscal year ended September 30, 1996 and no revenue in 1997. Food and
beverage sales were lower at the Company's On Canon restaurant during the fiscal
year ended September 28, 1997, with $2,217,070 in food and beverage revenue for
fiscal year 1996 as compared to $1,606,837 in food and beverage sales in the
fiscal year ended September 28, 1997 or a decrease of $610,233 or approximately
27.5%. This decrease was due primarily to changes in restaurant and kitchen
management throughout the fiscal year ended September 28, 1997 and the
competition faced by the Company in the highly competitive Beverly Hills
restaurant community. Food and beverage sales at the two new Grand Havana Rooms
in New York and Washington D.C. were approximately $253,000 for four months of
operations and $84,000 for eight months of operations, respectively. Food and
beverage sales at the Beverly Hills Grand Havana Room were similar in fiscal
years 1996 and 1997. The increase in territorial fees of $400,000 is due to a
one-time fee for the development of certain international rights of Love's in
fiscal year 1996, as compared with $600,000 in revenue in the fiscal year ended
September 28, 1997 from the sale of territorial rights of the Grand Havana Rooms
in nine Asian countries. The increase in membership revenue, from $649,608 in
the fiscal year ended September 30, 1996 to $1,186,591 for the fiscal year ended
September 28, 1997, is due primarily to initial membership fees recognized for
new members joining the two new Grand Havana Rooms in New York and Washington,
D.C. with membership revenue of approximately $477,000 and $94,000,
respectively.

       Total costs and expenses of the Company increased from $5,967,516 for the
fiscal year ended September 30, 1996 to $8,088,534 for the fiscal year ended
September 28, 1997, an increase of $2,121,018 or 35.5%. The increase is mainly
due to increased occupancy and other costs, increased pre-opening costs and
increase labor due to the two new Grand Havana Rooms in Washington, D.C. and New
York, New York which opened during fiscal year 1997 which increase in costs was
offset by lower food and beverage costs.

       Occupancy and other costs increased during fiscal year 1997 due to
additional rents for the new Grand Havana Rooms, additional utilities, increased
professional fees, reserve for doubtful accounts and travel costs. The New York
and Washington D.C. Grand Havana Rooms rents were $660,000 and $168,000,
respectively for the fiscal year ended September 30, 1997. There was no rent
expense for these two facilities in the fiscal year ended September 30, 1996.
Utilities increased from $112,000 in the fiscal year ended September 30, 1996 to
approximately $207,000 in the fiscal year ended September 28, 1997, an increase
of $95,000 or 84.8% due to the two new Grand Havana Rooms. Professional fees
increased from

                                       17

<PAGE>   18

approximately $59,000 in 1996 to $185,000 in 1997, or an increase of $126,000 or
213.6%. The increase in professional fees is mainly due to a consulting
agreement whereby an unrelated consultant agreed to provide marketing services
to the Company. The increase in reserve for doubtful accounts is due primarily
to the Company's $300,000 receivable from an Asian company and deteriorating
economic conditions in Asia.

       Travel costs increased from approximately $20,000 in the fiscal year
ended September 30, 1996 to $85,000 for the fiscal year ended September 28,
1997, or $65,000. The increased travel costs related primarily to the Company
personnel commuting to New York and Washington D.C. during the construction and
opening of these two new Grand Havana Rooms.

       The Company incurred pre-opening costs of $488,492 in the fiscal year
ended September 28, 1997, and no pre-opening costs in the fiscal year ended
September 30, 1996. The pre-opening costs include the costs associated with the
opening of New York and Washington D.C. Grand Havana Rooms. No Grand Havana
Rooms opened during the fiscal year ended September 30, 1996, thus no costs were
incurred.

       Direct labor and benefits increased in the fiscal year ended September
28, 1997 due primarily to the opening of the two new Grand Havana Rooms which
increase was offset in part by lower costs due to the sale of the Company's
interest in Il Forno. Direct labor and benefits in the New York Grand Havana
Room and the Washington, D.C. Grand Havana Room were $276,930 and $196,360 in
the fiscal year ended September 28, 1997 and the fiscal year ended September 30,
1996, respectively. This increase was offset by no labor and benefits costs for
IL Forno, which was sold in the fiscal year ended September 30, 1996. The labor
and benefit costs incurred at Il Forno in 1996 were $393,507.

       Cost of sales of food, beverages and merchandise were lower in fiscal
year 1997 due to no costs for these items at Il Forno in the fiscal year ended
September 28, 1997 and decreased costs for these items at On Canon and the Grand
Havana Room in Beverly Hills. These decreased costs were offset, in part, by
increased costs at the two new Grand Havana Rooms. Il Forno was sold in
September 1996 and incurred costs of $393,507 in fiscal year 1996 compared with
no costs incurred in fiscal year 1997. On Canon had costs of sales of $636,605
in fiscal year 1996 compared with $586,164 in the fiscal year ended September
28, 1997, a decrease of $50,441 or 7.9%. The Grand Havana Room in Beverly Hills
had costs of approximately $572,000 in 1996 compared with $494,623 in the fiscal
year ended September 28, 1997, or a decrease of $77,377, or approximately 13.5%.
This decrease correlates to a similar decrease in food, beverage and merchandise
sales at the Grand Havana Room, Beverly Hills. Costs incurred at the Grand
Havana Rooms in New York and Washington, D.C. during the fiscal year ended
September 28, 1997 were approximately $168,000 and $136,000, respectively
compared with no costs incurred for these items in the fiscal year ended
September 30, 1996.

       The Company's loss from continuing operations increased from $(1,259,787)
in the fiscal year ended September 30, 1996 to $(3,259,817) in the fiscal year
ended September 28, 1997, or an increase in loss from continuing operations of
$2,000,030. This increase in loss was due primarily to the start-up and overhead
costs associated with the construction of the Company's New York and Washington
D.C. Grand Havana Rooms and losses at the Company's On Canon restaurant. Loss
from operations of the New York and Washington D.C. Grand Havana Rooms was
approximately $820,000 and $814,000, respectively during fiscal year 1997. This
loss was due to the start-up of these two clubs. On Canon generated net income
from operations of approximately $23,000 in the fiscal year ended September 30,
1996 compared to incurring a net loss of $431,000 in the fiscal year ended
September 28, 1997. This loss was attributable to an erosion of sales from
increased competition in Beverly Hills without a corresponding decrease in
costs. The net loss increased from ($1,468,044) or $0.23 per share in the fiscal
year ended September 30, 1996 to $(3,795,909) or $0.46 per share for the fiscal
year ended September 28, 1997. This increased loss was due primarily to a
provision of $441,283 for the disposal of Love's and additional interest expense
incurred for interest bearing debt.

                                       18

<PAGE>   19

LIQUIDITY AND CAPITAL RESOURCES

       The Company completed an initial public offering in April, 1994,
receiving net proceeds from the offering of approximately $6,386,642. The
initial public offering consisted of the sale of 2,012,500 Units, each Unit
consisting of one share of Common Stock, one five-year Class A Common Stock
Purchase Warrant to purchase one share of Common Stock at $4.80 per share, and
one five-year Class B Common Stock Purchase Warrant to purchase one share of
Common Stock at $5.60 per share. After the offering, the Company had issued and
outstanding 6,262,500 shares of Common Stock, 2,012,500 Class A Warrants and
2,012,500 Class B Warrants.

       As a result of its expansion activities, the Company had spent most of
the proceeds from its initial public offering prior to its fiscal year ended
September 30, 1996. Accordingly, in order to continue with its expansion plans
with respect to its Grand Havana Rooms and Grand Havana House of Cigar
locations, the Company raised an aggregate of approximately $4,009,500 in gross
proceeds through various private placements of its securities (common stock and
warrants to purchase shares of its common stock) during its fiscal year ended
September 28, 1997. In addition, warrants to purchase shares of the Company's
common stock were exercised during the fiscal year ended September 28, 1997 for
aggregate gross proceeds to the Company from such warrant exercises of
approximately $575,000. 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 in
connection with the development of the Company's new Grand Havana Rooms and
Grand Havana House of Cigar locations, as well as for general working capital
purposes and repayment of indebtedness. At September 28, 1997 the Company had
cash or cash equivalents of $879,461.

       At September 28, 1997 the Company owed an aggregate of $775,000 in
principal amount to United Leisure Corporation pursuant to a financing agreement
dated as of February 12, 1997. All principal plus unaccrued interest thereon is
due on or before September 30, 1998. Subsequent to the fiscal year ended 
September 28, 1997, $75,000 of the principal amount was repaid on this loan. In
addition, as of September 28, 1997, an aggregate of $707,000 had been advanced
to the Company under a financing agreement with United Film Distributors, Inc.,
the full amount of which, together with all accrued but unpaid interest thereon,
is due and payable upon demand, which demand may not be made prior to September
30, 1998. Subsequent to September 28, 1997, the Company repaid an aggregate of
$200,000 in principal amount of this loan. In addition, subsequent to the fiscal
year ended September 28, 1997, the Company replaced in full the $875,000 in
collateral that had previously been pledged by United Leisure Corporation on
behalf of the Company to support a letter of credit. See Item 12. "Certain
Relationship and Related Transactions,: and Item 7 "Financial Statements and
Supplementary Information-- Note 13 to Notes to Consolidated Financial
Statements."

       The Company intends to continue the expansion of its business, primarily
through the development and operation of additional Grand Havana Rooms and Grand
Havana House of Cigar locations.

       The Company anticipates that in connection with continuing the operation
of its currently operational Grand Havana Rooms and Grand Havana House of Cigars
as well as its future development plans with respect to its Grand Havana Rooms
and Grand Havana House of Cigars it will need additional working capital during
the next 12 months. In fiscal year 1997 the Company's New York Grand Havana Room
and Beverly Hills Grand Havana Room had losses of approximately $820,000 for
four months of operations and $814,000 for eight months of operations,
respectively, and the Company anticipates that it will continue to incur
substantial future losses from these two Grand Havana Rooms until substantially
more memberships are sold in each of these clubs. In

                                       19

<PAGE>   20


addition, the Company has experienced losses from the operation of its On Canon
restaurant in the fiscal year ended September 28, 1997 and is currently
examining whether to continue operations at its On Canon restaurant location,
and should the Company determine to cease these operations, the Company may
convert the space into additional room for its Beverly Hills Grand Havana Room.

          In order to raise additional capital to fund its existing operations
and to develop future Grand Havana Rooms and Grand Havana House of Cigar
locations, the Company intends to continue to seek to sell its securities in
private placements, and anticipates that it will seek to raise an additional
$3,000,000 through the sale of its securities (and/or through the exercise of
outstanding warrants to purchase its securities) in the next twelve month
period. Due to the fact that the trading price of the Company's common stock has
fallen during recent months, there can be no assurance that the Company will be
able to sell its securities in private placements on terms that are acceptable
to the Company. In addition, the Company does not currently meet the new listing
standards for maintenance of the Company's securities on Nasdaq's SmallCap
Market, which new standards will become effective in late February 1998.
Although the Company intends to seek to comply with the new maintenance criteria
for continued listing of its securities on the Nasdaq SmallCap Market, and
believes it will be able to do so, if the Company should be unable to meet these
criteria, it is possible that its securities could be de-listed from the Nasdaq
SmallCap Market, which might result in the Company having difficulty in placing
its securities with prospective investors.

          If the Company is unable to raise additional funds through the private
placement of its securities it may seek financing from affiliated or
unaffiliated third parties. There can be no assurance, however, that such
financing would be available to the Company when and if it is needed, or that if
available, that it will be available on terms acceptable to the Company. If the
Company is unable to place securities or obtain financing to meet its working
capital needs and to repay indebtedness as it becomes due, the Company may have
to consider such options as selling or pledging portions of its assets in order
to meet such obligations.

       Management does not expect that inflation will adversely affect the
Company's existing or planned operations in the future unless it increases
significantly over current levels.


ITEM 7.   FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

          The Financial Statements of the Company are submitted as a separate
section of this Form 10-KSB commencing on page F-1 immediately following Part IV
of this Report on Form 10-KSB.

ITEM 8.   CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND 
          FINANCIAL DISCLOSURE.

       None.

                                       20

<PAGE>   21

                                            PART III


ITEM 9.   DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; 
          COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT.

DIRECTORS AND EXECUTIVE OFFICERS

       The following table sets forth certain information with respect to the
Company's Directors and executive officers as of December 31, 1996.

<TABLE>
<CAPTION>
                                                      Positions Currently Held
       Name               Age                             With the Company
       ----               ---                         ------------------------
<S>                       <C>                    <C>        
Harry Shuster             62                     Chairman of the Board, President and Chief
                                                   Executive Officer, Chief Financial
                                                   Officer and a Director

Harvey Bibicoff           58                     Director

Stanley Shuster           37                     Executive Vice President and Director

Steven T. Ousdahl         51                     Vice President -- Administration
</TABLE>

       Harry Shuster, the Chairman of the Board, President, Chief Executive
Officer and Chief Financial Officer, as well as one of the original promoters of
the Company and a control person of the Company, has been engaged in managing
the affairs of the Company in his current positions since the inception of the
Company in 1993. During the period from 1986 through March 1990, Mr. Shuster and
members of his family owned Love's (which was acquired by the Company in May
1993), during which time he acted as the Chairman of the Board and Chief
Executive Officer of Love's. Mr. Shuster is and has been for more than five
years Chairman of the Board, President and Chief Executive Officer of and a
Director of United Leisure Corporation, a publicly-held company located in
Irvine, California ("United Leisure"). Mr. Shuster also serves as the Chairman
of the Board of United Film Distributors, Inc. (formerly known as HIT
Entertainment, Inc.), an independent motion picture production company in Los
Angeles, California which currently has a registration statement on file with
the Securities and Exchange Commission with respect to an initial public
offering of its securities. See Item 10, "Executive Compensation--Consulting and
Employment Agreements".

          United Leisure Corporation's primary operating subsidiary, Lion
Country Safari, Inc.--California, of which Mr. Shuster is the president and
chief executive officer, has been engaged in protracted and difficult litigation
with its landlord, The Irvine Company, since 1986. In connection with this
litigation, as a strategic matter, the Board of Directors of United Leisure
determined that it would be in the best interest of its stockholders to place
such subsidiary under the jurisdiction of the United States Bankruptcy Court by
filing a petition for reorganization. The petition was filed on July 23, 1990.
The trial related to this litigation commenced on October 1, 1993, and resulted
in a jury verdict in favor of the United Leisure subsidiary in the approximate
amount of $42,000,000. After the jury verdict was rendered, United Leisure's
landlord brought a motion for a new trial and the court granted the Landlord's
motion. United Leisure appealed this order. The appeal was argued in late
November 1997 and the judge has taken this matter under submission. After the
initial jury verdict

                                       21

<PAGE>   22

was rendered in favor of United Leisure, a motion was filed for the dismissal of
the subsidiary's petition for reorganization, which was granted by the
Bankruptcy Court.

       Harvey Bibicoff has served as Chairman of the Board of Directors and as a
director of Harmony Holdings, Inc., a publicly held producer of commercials,
since August 1991. Mr. Bibicoff served as the Chairman of the Board, Chief
Financial Officer, Secretary and as a director of Ventura Entertainment Group
Ltd. ("Ventura") from May 1988 through April 1995. From 1989 until March 1995,
he served as an officer and a director of The Producers Entertainment Group Ltd.
(formerly named Ventura Motion Picture Group Ltd.), a subsidiary of Ventura
whose stock is traded on Nasdaq as "TPEG." Since 1981, Mr. Bibicoff has been the
sole shareholder of Bibicoff & Associates, Inc., a financial consulting firm
that was engaged in the representation of public companies in their
relationships with the investment banking and brokerage communities. Mr.
Bibicoff received a Bachelor of Sciences degree from Bowling Green State
University in 1960 as a business and finance major and a J.D. degree from
Columbia University School of Law in 1963. He has been a member of the New York
State Bar since 1963. Mr. Bibicoff is one of the original promoters of the
Company and was originally elected a Director of the Company in August 1993.

       Stanley Shuster was elected Executive Vice President of the Company and a
Director in June 1995. Since April 1994, Mr. Shuster has been employed by the
Company in order to develop its Grand Havana Room concept, and is currently
supervising the operations and development of the Company's Grand Havana Rooms.
From March 1991 through February 1994, he was Vice President of Artist and
Repertoire for J.R.S. Records, an independent record company, with major
distribution through BMG. The Artist roster of J.R.S. included Stray Cats, Jimmy
Cliff, Kool and the Gang and Asia. From May 1989 through March 1991, Mr. Shuster
acted as Director of Artist and Repertoire for Venture Music Group, a music
company based in Los Angeles, California. Prior to that time, Mr. Shuster was a
partner and operated a chain of 10 restaurants. Stanley Shuster is the son of
Harry Shuster.

       Steven T. Ousdahl has acted as Operations Administrator for Love's since
September 1985, in which capacity he has been engaged, in managing the
operations of the Love's restaurant chain. Prior to that time, for over 15
years, Mr. Ousdahl was engaged as an operations executive in the food service
business for several firms, all in the southern California area, including IHOP
Corp. Mr. Ousdahl was elected Vice President -- Administration of the Company in
August 1993.

       All Directors hold office until the next annual meeting of stockholders
and until their successors are elected. Officers are elected to serve, subject
to the discretion of the Board of Directors, until their successors are
appointed.

SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE

       Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and Directors, and persons who beneficially own more than 10%
of a registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission.
Officers, Directors and beneficial owners of more than 10% of the Company's
Common Stock are required by SEC regulations to furnish the Company with copies
of all Section 16(a) forms that they file. Based solely on review of the copies
of such forms furnished to the Company, or written representations that no
reports on Form 5 were required, the Company believes that for the period
through September 28, 1997, all officers, directors and greater-than-10%
beneficial owners complied with all Section 16(a) filing requirements applicable
to them, except that the following

                                       22

<PAGE>   23

persons were each late in filing one Form 4: Harry Shuster, Stanley Shuster,
Harvey Bibicoff, Clarinda Investments and United Leisure Corporation. In
addition, David M. Kane was late in filing a Form 3.

ITEM 10.  EXECUTIVE COMPENSATION.

       The following table sets forth the cash compensation paid by the Company
to Harry Shuster, Chairman of the Board, President and Chief Executive Officer
of the Company, pursuant to a consulting arrangement, during fiscal years 1997,
1996 and 1995 and the compensation paid by the Company to Stanley Shuster during
fiscal year 1997, the first year in which Mr. Shuster's compensation exceeded
$100,000.

                           SUMMARY COMPENSATION TABLE

<TABLE>
<CAPTION>
                                                       Annual Compensation
                                                                          All Other
Name and Principal Position          Year     Consulting Fee            Compensation
---------------------------          ----     --------------            ------------
<S>                                  <C>      <C>                       <C>          
Harry Shuster                        1997     $323,244(1)               $   43,522(2)
  Chairman of the Board,             1996      284,814                           0
  President, Chief Executive         1995      266,876                       6,000(3)
  Officer and Chief Financial
  Officer

Stanley Shuster
  Executive Vice President           1997     $151,000(4)               $    6,000(3)
</TABLE>

----------
(1)    Only $101,939 of this compensation was paid to Mr. Shuster in the fiscal
       year ended September 28. 1997, with the remaining $221,305 being
       deferred.

(2)    Represents payments with respect to the condominium where Mr. Shuster
       stays when he is in New York.

(3)    Includes $500 per month car allowance.

(4)    Consists of $85,000 paid to Stanley Shuster as employment compensation
       and an additional 60,000 paid to him as consulting fees.

       No other person received compensation in excess of $100,000 during either
of the twelve-month periods ended September 28, 1997 or September 30, 1996, nor
is any other person expected to receive such compensation for the current fiscal
year. See this Item 10, "Executive Compensation -- Consulting and Employment
Agreements."

                      OPTION GRANTS IN LAST FISCAL YEAR(1)

<TABLE>
<CAPTION>
                  # of Securities      % of Total             Exercise or             Expiration
Name            Underlying Options   Options Granted           Base Price                Date
----            ------------------   ---------------          -----------             ----------
<S>                 <C>                   <C>                    <C>                   <C>   
Stanley Shuster     100,000               100%                   $1.00(2)              12/02/01
</TABLE>

----------
(1)    No stock options were exercised in fiscal year 1997.

(2)    Exercise price represents fair market value of shares at date of grant.

                                       23

<PAGE>   24

       Directors receive no cash compensation for their services to the Company
as Directors, but are reimbursed for expenses actually incurred in connection
with attending meetings of the Board of Directors.

CONSULTING AND EMPLOYMENT AGREEMENTS

       The Company and Harry Shuster are parties to a Consulting Agreement,
dated as of June 1, 1993. The Consulting Agreement provides that Mr. Shuster
will be engaged as an independent contractor by the Company to act as the
Chairman of the Board, President and Chief Executive Officer and a Director of
the Company during the term of the Agreement. The initial three-year term of the
Consulting Agreement expired in May 1996, and the Consulting Agreement is now
continuing on a year-to-year basis until either party terminates the Agreement
by giving the other at least 60 days prior notice of termination prior to the
expiration of any one-year renewal term of the Consulting Agreement. Mr. Shuster
is to receive minimum annual consulting fees under the Consulting Agreement
initially of $250,000 per annum, which minimum amount is to be increased five
percent per annum during each successive year of the Agreement. Mr. Shuster is
also to be provided with either the use of a Company car to be used in carrying
out his duties for the Company or a $500 per month car allowance. The Agreement
also provides for certain disability benefits. Under the Agreement, Mr. Shuster
has agreed that the Company may maintain a $1,000,000 life insurance policy on
his life throughout the term of the Agreement. The Company has obtained and is
maintaining in force such life insurance policy. In addition, Mr. Shuster has
the right under the terms of the Agreement to increase the size of the Board of
Directors of the Company by one director and to fill this vacancy prior to the
election of directors by the stockholders. In addition, at each meeting of
stockholders of the Company at which directors are to be elected, Mr. Shuster
has the right to request, and the Company shall place, Mr. Shuster and any
designee of Mr. Shuster on the management slate of directors to be put up for
election at any such meeting of stockholders. In addition, if at any time during
the term of the Consulting Agreement, the number which shall constitute the
whole board of directors shall be increased to more than four, then Mr. Shuster
has the right to designate at least 50% of the whole board of directors of the
Company. The Agreement provides that as long as Mr. Shuster spends as much time
as necessary to properly carry out his duties as Chairman of the Board,
President and Chief Executive Officer of the Company, he will be otherwise
permitted to spend a reasonable amount of time pursuing his own outside
interests. Because Mr. Shuster is involved in multiple business enterprises in
addition to the Company, Mr. Shuster may have a conflict of interest if his
services should be required by both the Company and one of Mr. Shuster's other
business enterprises. See Item 9, "Directors, Executive Officers, Promoters and
Control Persons; Compliance with Section 16(a) of the Exchange Act--Directors
and Executive Officers." The Consulting Agreement terminates upon Mr. Shuster's
death or in the event of a breach of the Agreement by Mr. Shuster.

          The Company has entered into a Employment Agreement with Stanley
Shuster pursuant to which Stanley Shuster has agreed to continue to serve as a
Vice President of the Company for an initial term of three (3) years, which
agreement shall be renewed automatically thereafter for additional terms of one
year each. Pursuant to this agreement, Stanley Shuster is to receive minimum
compensation of $125,000 per annum.

STOCK OPTIONS

1996 Stock Option Plan

          During fiscal year ended September 28, 1997 the Company adopted the
1996 Stock Option Plan (the "Plan") to provide to officers, directors, key
employees and other key contributors to the

                                       24

<PAGE>   25

Company an opportunity to purchase the common stock of the Company pursuant to
"non-qualified stock options" at the discretion of the Board of Directors.

          Under the Plan options to purchase an aggregate of 626,250 shares of
common stock may be granted. The purchase price shall be no less than 85% of the
fair market value of the common stock on the date of grant. The Board of
Directors of the Company, or a committee established by the Board of Directors
shall determine, among other things (i) the purchase price of the shares covered
by each option, (ii) whether any payment will be required upon grant of the
option, (iii) the individual to whom, and the time or times at which, options
shall be granted, (iv) the number of shares to be subject to each option and (v)
when an option can be exercised and whether in whole or installments.

          During fiscal year 1997 options to purchase an aggregate of 100,000
shares of the common stock of the Company were issued under the Plan to one
individual. None of those options have yet been exercised.

          In addition to options granted under the Plan, at September 28, 1997,
there were outstanding presently exercisable non-qualified stock options to
purchase an aggregate of 25,000 shares of the Common Stock of the Company held
by a former Director of the Company, Arnold Wasserman, at an option price of
$3.00 per share. Mr. Wasserman resigned as a Director of the Company in June
1995. The option was granted at an exercise price approximately equal to the
then fair market value of the Company's Common Stock in consideration of Mr.
Wasserman's service on the Board of Directors. The option may be exercised at
any time during its five-year term, is nontransferable except by will or
pursuant to the laws of descent and distribution, is protected against dilution.

                                       25

<PAGE>   26

ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

          The following table sets forth certain information regarding
beneficial ownership of the Company's Common Stock as of December 15, 1997, (a)
by each person who is known by the Company to own beneficially more than 5% of
the Company's Common Stock, (b) by each of the Company's Directors and (c) by
all officers and Directors of the Company as a group.

<TABLE>
<CAPTION>
                                                              Percentage
  Name and Address            Number of Shares                 Ownership
of Beneficial Owner(1)       Beneficially Owned(2)(3)         of Class(3)
----------------------       ------------------------         -----------
<S>                                <C>                          <C>  
Harry Shuster                      1,453,466(4)                 11.9%
Harvey Bibicoff                    1,087,000(5)                  8.9%
United Leisure                  
  Corporation                        941,666                     8.0%
The Venezuela Recovery          
  Fund N.V.(6)                       913,978(7)                  7.6%
The International Investment    
  Group Equity Fund N.V. (6)       1,278,896(8)                 10.5%
Stanley Shuster                      100,000(9)                   .8%
                                
Officers and directors          
  as a group (3 people)            2,640,466(4)(5)(9)(10)       21.6%
</TABLE>                     
----------
(1)    Each person's address is c/o the Company, 1990 Westwood Boulevard, Los
       Angeles, California 90025, unless otherwise noted.

(2)    Unless otherwise indicated, the Company believes that all persons named
       in the table have sole voting and investment power with respect to the
       shares of Common Stock beneficially owned by them.

(3)    Based on 11,799,306 shares outstanding. A person is deemed to be the
       beneficial owner of Common Stock that can be acquired by such person
       within 60 days of the date hereof upon the exercise of warrants or stock
       options. Except as otherwise specified, each beneficial owner's
       percentage ownership is determined by assuming that warrants and stock
       options that are held by such person (but not those held by any other
       person) and that are exercisable within 60 days from the date hereof,
       have been exercised.

(4)    Includes 100,000 shares of Common Stock, and warrants to purchase an
       additional 100,000 shares of Common Stock, owned by The Harry and Nita
       Shuster Charitable Foundation. Includes warrants to purchase 333,333
       shares owned by Mr. Shuster. Does not include 941,666 shares owned by
       United Leisure Corporation ("United Leisure"), a public company of which
       Mr. Shuster is the Chief Executive Officer and a director, and of which
       shares Mr. Shuster disclaims beneficial ownership. Mr. Shuster is the
       Chief Executive Officer and a director of the Company.

(5)    Includes 271,000 shares owned by Clarinda Investments, Inc. of which
       corporation Mr. Bibicoff is the sole shareholder and a director. Includes
       816,000 shares owned by H&H Restaurant Holding Corporation, of which
       corporation Mr. Bibicoff is the sole shareholder and a director. Mr.
       Bibicoff is a director of the Company. See Item 12. "Certain
       Relationships and Related Transactions."

(6)    The address of this shareholder is Kaya Flamboyan 9, P.O. Box 812,
       Curacao, Netherlands Antilles.

(7)    Includes warrants to purchase 304,666 shares of Common Stock.

(8)    Includes warrants to purchase 426,299 shares of Common Stock.

(9)    Includes stock options to purchase 100,000 shares of Common Stock held by
       an officer and director of the Company.

(10)   Excludes 941,666 shares of Common Stock owned by United Leisure.

                                       26

<PAGE>   27

ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

       On February 4, 1994, Chicken & Ribs, Inc. ("C&R"), one of the initial
stockholders and a promoter of the Company, sold 1,066,000 shares of the Common
Stock of the Company owned by it to H&H Restaurant Holding Corporation ("H&H"),
a corporation which prior to November 1, 1996 was 50%-owned by each of Harry
Shuster, a promoter, control person, Director and Chairman of the Board,
President and Chief Executive Officer of the Company, and Clarinda Investments,
Inc., a corporation controlled by Harvey Bibicoff, a promoter, control person
and Director of the Company. The original purchase price paid by H&H for the
1,066,000 shares was $4.00 per share. Payment of the purchase price was
evidenced by a Promissory Note in the principal amount of $4,264,000 drawn to
the order of C&R and made by H&H (the "Promissory Note"). C&R had originally
paid a total of $133,250 for the 1,066,000 shares in June 1993. Because H&H was
unable to pay the promissory note when it initially became due, the parties
extended the due date of the Promissory Note, made the note non-recourse and C&R
agreed to accept as full and complete satisfaction of the Promissory Note any
proceeds received by H&H from the sale of the 1,066,000 shares of the Common
Stock of the Company held by H&H, whether or not such value is equal to the
principal amount and accrued interest on the Promissory Note, more or less. In
this regard, the Company registered for resale, on behalf of H&H, the 1,066,000
shares of Common Stock. H&H has sold an aggregate of 250,000 of such shares to
date and intends to continue to sell these shares on a delayed or continuous
basis in order to meet its obligations under the Promissory Note. As of November
1, 1996, Harvey Bibicoff acquired Harry's Shuster's 50% ownership interest in
H&H and, accordingly, is now the 100% shareholder and the sole officer and
director of H&H.

       In the event of the failure by H&H to pay the Promissory Note, the sole
recourse by C&R would be either to settle the matter by negotiation or to resort
to litigation to cause H&H to sell the shares of Common Stock. Under no
circumstances, including a default in payment of amounts owed under the
Promissory Note, will C&R or any of its shareholders acquire clear title to, or
any right to vote or control, the shares transferred to H&H to which C&R or its
shareholders may become entitled, any such shares shall be placed with the Court
or a mutually agreed-upon fiduciary. Such shares shall be placed in a segregated
account in a manner which prohibits C&R and its shareholders from exercising any
rights of ownership with respect to such shares.

       The Company entered into a five-year lease with 1990 Westwood Boulevard,
Inc. covering approximately 6,000 square feet of office space for its executive
offices. The Lease provides for a current rental of $4,000 per month. 1990
Westwood Boulevard, Inc. is owned 50% by Harry Shuster, Chairman of the Board,
President and Chief Executive Officer, Chief Financial Officer, a Director and a
promoter of the Company, 35% by Jordan Belfort and 15% by Daniel Porush. Each of
such latter persons is a shareholder of C&R, a promoter of the Company. The
Company is advised that the rental and other terms of the agreed-upon lease are
no more favorable to the lessor than could have been obtained in a similar
building in the same area from an independent, unrelated lessor.

       In connection with the lease for the Company's New York Grand Havana
Room, the Company was required to provide a letter of credit. In order to
establish this letter of credit the Company entered into a financing agreement
dated September 10, 1996, with its affiliate, United Leisure Corporation,
pursuant to which United Leisure pledged the sum of $875,000 in order for the
Company to obtain the required letter of credit. The Company had initially
agreed to apply one-half of all initial membership fees received from members of
its New York, New York and Washington D.C. Grand Havana Rooms to replace the
cash collateral pledged by United Leisure, and, in any event, the Company has
agreed to replace all of the cash collateral within 18 months after United
Leisure's pledge

                                       27

<PAGE>   28
of the cash collateral. In consideration for United Leisure pledging the
collateral for the letter of credit, the Company has agreed to pay an amount to
United Leisure equal to 10% per annum on the amount of the pledged cash
collateral, as it exists from time to time. As additional consideration, the
Company agreed to issue 100,000 shares of its common stock to United Leisure,
and has agreed to grant to United Leisure a warrant to purchase an additional
100,000 shares of common stock of the Company, which warrant is exercisable for
a period of five years at an exercise price of $.75 per share. The warrant was
subsequently exercised by United Leisure. On July 15, 1997 the Company and
United Leisure entered into an amendment to financing agreement pursuant to
which amendment, in consideration for Untied Leisure agreeing to forego the
requirement that the Company replace the collateral pledged by United Leisure
from the initial membership fees it received from its New York and Washington
D.C. Grand Havana Rooms, the Company agreed to issue to United Leisure or its
designee a warrant to purchase 150,000 shares of its common stock at an exercise
price of the lesser of $.75 per share or 75% of the average of the last trade
price for the common stock for the 10 day period prior to the exercise of the
warrant. United Leisure subsequently designated Westminster Capital, Inc, an
unrelated third party, as the entity to receive this warrant. The Company had
fully replaced the collateral pledged by United Leisure Corporation to support
this letter of credit by October 1997. Harry Shuster, the Chairman of the
Board, President and Chief Executive Officer of the Company is an officer and
director of United Leisure.

          In February 1997, the Company entered into a second financing
agreement with United Leisure pursuant to which agreement United Leisure agreed
to provide advances to the Company from time to time during a period of six
months. Interest on any amounts advanced bears interest at the rate of 9% per
annum until paid. In consideration for making the loan, the Company issued
75,000 shares of its common stock to United Leisure. The agreement further
provided that if all of the advances plus accrued but unpaid interest thereon
were not paid on or prior to September 30, 1997 that the Company would issue an
additional 25,000 shares of its common stock to United Leisure. The loan was not
repaid by September 30, 1997 and the parties agreed to extend the maturity date
of the advances made under this financing agreement to September 30, 1998. An
aggregate of $775,000 was advanced under this loan, the full principal amount of
which remained outstanding at September 28, 1997. Subsequent to the fiscal year
ended September 28, 1997, an aggregate of $75,000 in principal amount of this
loan was repaid. The Chairman of the Board, President and Chief Executive
Officer of the Company is the Chairman of the Board, President and Chief
Executive Officer of United Leisure.

          In May 1997 the Company entered into a financing agreement with United
Film Distributors, Inc., an affiliate of the Company ("United Film"), whereby
United Film agreed to provide advances to the Company from time to time.
Interest on any amount advanced bears interest at the rate of prime pus 3%. The
full principal amount and all accrued but unpaid interest on any amounts
advanced is due and payable on demand, which demand may not be made prior to
September 30, 1998. At September 28, 1997 an aggregate of $707,000 had been
advanced under this financing agreement. Subsequent to the fiscal year ended
September 28, 1997, an aggregate of $200,000 in principal amount of this loan
was repaid. Harry Shuster, the Chairman of the Board, President and Chief
Executive Officer of the Company is the Chairman of the Board of United Film.
Brian Shuster, the son of Harry Shuster, is the President of United Film.

          During the fiscal year ended September 28, 1997, Harry Shuster made
advances to the Company aggregating $60,000, all of which advances were repaid
by the Company to Mr. Shuster subsequent to the fiscal year ended September 28,
1997.

          The Company is leasing on a month to month basis an apartment for
Harry Shuster's use while he is in New York on business at a monthly rental of
$3,000 plus common area maintenance charges. Rent expense incurred in fiscal
year 1997 by the Company for this apartment was $43,522. The Company believes
that this amount is similar to hotel costs the Company would have incurred had
such apartment not been available to Mr. Shuster.

                                       28
<PAGE>   29

                                     PART IV


ITEM 13.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

       (a) Financial Statements.

       The audited consolidated financial statements of Grand Havana
Enterprises, Inc. and Subsidiaries filed as a part of this Annual Report on Form
10-KSB are listed in the "Index to Consolidated Financial Statements" preceding
the Company's Consolidated Financial Statements, which directly follow this Part
IV of this Annual Report on Form 10-KSB, which "Index to Consolidated Financial
Statements" is hereby incorporated herein by reference.

       (b)   Exhibits.

       See index to exhibits

       (c) Reports on Form 8-K. The Company filed one report a Report on Form
8-K to report an event occurring on October 14, 1997 with respect to the sale of
securities by the Company in an offering exempt from registration under
Regulation S. Pursuant to the offering the Company sold an aggregate of
3,229,267 units, each unit consisting of one share of common stock and a warrant
to purchase one-half share of common stock for aggregate gross proceeds to the
Company of approximately $2,650,000.

                                       29

<PAGE>   30

                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
                    SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997






<TABLE>
<S>                                                                           <C>
Report of Independent Auditors                                                      F-1

Consolidated Balance Sheets                                                   F-2 - F-3
 as of September 30, 1996 and September 28, 1997

Consolidated Statements of Operations                                               F-4
 for the Years Ended September 30, 1996 and September 28, 1997

Consolidated Statement of Stockholders' Equity                                      F-5
 for the Years Ended September 30, 1996 and September 28, 1997


Consolidated Statements of Cash Flows                                               F-6
 for the Years Ended September 30, 1996 and September 28, 1997

Notes to Consolidated Financial Statements                                   F-7 - F-15
 as of September 30, 1996 and September 28, 1997
</TABLE>

                                       30
<PAGE>   31

                         REPORT OF INDEPENDENT AUDITORS



To the Board of Directors and Stockholders
Grand Havana Enterprises, Inc.

We have audited the accompanying consolidated balance sheets of Grand Havana
Enterprises, Inc. and Subsidiaries as of September 30, 1996 and September 28,
1997 and the related consolidated statements of operations, stockholders'
equity, and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Grand Havana
Enterprises, Inc. and Subsidiaries at September 30, 1996 and September 28, 1997,
and the results of operations and cash flows for the years then ended in
conformity with generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company's significant operating losses, working
capital deficiency and significant capital requirements raise substantial doubt
about the Company's ability to continue as a going concern. The consolidated
financial statements do not include any adjustments that might result from the
outcome of these uncertainties.




                                                  HOLLANDER, GILBERT & CO.
Los Angeles, California
December 29, 1997

                                       F-1
<PAGE>   32
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                    SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997

<TABLE>
<CAPTION>
                                                                   1996          1997
                                                                ----------    ----------
<S>                                                             <C>           <C>       
                               ASSETS
CURRENT ASSETS
   Cash and cash equivalents                                    $1,010,062    $  879,461
   Accounts receivable, less allowance for doubtful accounts
     of $15,500 and $307,762 in 1996 and 1997, respectively 
     (Note 5)                                                      125,402        56,924
   Current portion of note receivable (Note 3)                                    24,829
   Subscriptions receivable (Note 12)                                          1,288,950
   Equipment contract receivable (Note 7)                          330,000
   Inventories                                                     210,054       786,168
   Prepaid expenses                                                145,187       206,685
   Net assets of discontinued operations (Note 3)                                237,143
                                                                ----------    ----------

      TOTAL CURRENT ASSETS                                       1,820,705     3,480,160

PROPERTY AND EQUIPMENT, Net (Notes 6 and 8)                      2,124,346     4,458,734

OTHER ASSETS
   Restricted cash (Note 10)                                                     118,596
   Note receivable, net of current portion (Note 3)                               55,171
   Pre-opening costs                                               132,723         6,895
   Due from related parties (Note 13)                               69,419        78,032
   Deferred charges (Notes 12 and 13)                               80,000       205,596
   Deposits and other assets                                       131,389        95,650
                                                                ----------    ----------
      TOTAL OTHER ASSETS                                           413,531       559,940
                                                                ----------    ----------
                                                                $4,358,582    $8,498,834
                                                                ==========    ==========
</TABLE>



          See accompanying Notes to Consolidated Financial Statements.

                                      F-2
<PAGE>   33
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                     CONSOLIDATED BALANCE SHEETS, CONTINUED
                    SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997

<TABLE>
<CAPTION>
                                                             1996            1997
                                                         -----------     ------------
<S>                                                      <C>             <C>
            LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES
   Current portion of long-term debt (Note 8)            $   172,571     $
   Notes payable to related parties (Note 13)                               1,482,000
   Accounts payable                                          561,819        1,054,547
   Accrued liabilities                                       125,219          203,942
   Deferred revenues                                                           57,026
   Due to related parties (Note 13)                                           420,599
   Deferred rent payable                                                      488,606
   Accrued costs of discontinued operations (Note 3)                          200,000
                                                         -----------     ------------
      TOTAL CURRENT LIABILITIES                              859,609        3,906,720

COMMITMENTS AND CONTINGENCIES (Notes 2, 5, 10 and 11)

STOCKHOLDERS' EQUITY (Notes 12 and 13)
   Preferred Stock, $.01 par value
      Authorized - 3,000,000 shares
      Issued and outstanding - none
   Common Stock, $.01 par value
      Authorized - 22,000,000 shares
      Issued and Outstanding - 6,362,500 shares
        in 1996 and 11,799,306 shares in 1997                 63,625          117,994
   Additional paid-in capital                              7,850,042       12,684,723
   Accumulated deficit                                    (4,414,694)      (8,210,603)
                                                         -----------     ------------
      TOTAL STOCKHOLDERS' EQUITY                           3,498,973        4,592,114
                                                         -----------     ------------
                                                         $ 4,358,582     $  8,498,834
                                                         ===========     ============
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                      F-3
<PAGE>   34

                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
              YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997

<TABLE>
<CAPTION>
                                                                        1996            1997
                                                                    -----------     -----------
<S>                                                                 <C>             <C>        
REVENUES
   Food and beverage                                                $ 3,984,246     $ 2,820,785
   Merchandise sales                                                    356,641         408,687
   Membership fees                                                      649,608       1,186,591
   Initial territorial fees (Note 5)                                    200,000         600,000
   Other                                                                 72,295          60,904
                                                                    -----------     -----------
      TOTAL REVENUES                                                  5,262,790       5,076,967
                                                                    -----------     -----------
COSTS AND EXPENSES
   Food and beverage                                                  1,199,552       1,116,841
   Merchandise                                                          268,076         272,804
   Operating expenses
      Direct labor and benefits                                       1,832,092       1,939,862
      Occupancy and other                                             1,438,399       2,545,237
   Pre-opening expense                                                                  488,492
   General and administrative                                           945,489       1,435,403
   Depreciation and amortization                                        283,908         289,895
                                                                    -----------     -----------
      TOTAL COSTS AND EXPENSES                                        5,967,516       8,088,534
                                                                    -----------     -----------
                                                                       (704,726)     (3,011,567)
                                                                    -----------     -----------

OTHER INCOME (EXPENSE)
   Interest income                                                      114,371          14,332
   Interest expense                                                     (60,083)       (266,858)
   Loss on disposition of assets (Notes 4 and 7)                       (627,682)
   Other, net                                                            18,333           4,276
                                                                    -----------     -----------
                                                                       (555,061)       (248,250)
                                                                    -----------     -----------
LOSS FROM CONTINUING OPERATIONS                                      (1,259,787)     (3,259,817)


DISCONTINUED OPERATIONS (NOTE 3)
   Loss from operations                                                (208,257)        (94,809)
   Estimated loss on disposal, including a provision of $400,000
      for operating losses during the phase-out period                                 (441,283)
                                                                    -----------     -----------
      LOSS FROM DISCONTINUED OPERATIONS                                (208,257)       (536,092)
                                                                    -----------     -----------
NET LOSS                                                            $(1,468,044)    $(3,795,909)
                                                                    ===========     ===========
WEIGHTED AVERAGE NUMBER OF
  COMMON SHARES OUTSTANDING                                           6,262,500       8,231,400
                                                                    ===========     ===========
LOSS PER SHARE
   Loss from continuing operations                                  $      (.20)    $      (.40)
   Loss from discontinued operations                                       (.03)           (.01)
   Estimated loss on disposal                                                              (.05)
                                                                    -----------     -----------

                                                                    $      (.23)    $      (.46)
                                                                    ===========     ===========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-4
<PAGE>   35

                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
              YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997

<TABLE>
<CAPTION>
                                        Common Stock             Additional           
                                  -------------------------       Paid-In      Accumulated
                                   Shares         Amount          Capital        Deficit         Total
                                  ---------     -----------     -----------    -----------     ----------
<S>                               <C>           <C>             <C>            <C>             <C>       
Balance - September 30, 1995      6,262,500     $    62,625     $ 7,771,042    $(2,946,650)    $4,887,017

Common stock issued
  as financing cost                 100,000           1,000          79,000                        80,000

Net loss - year ended
  September 30, 1996                                                            (1,468,044)    (1,468,044)
                                -----------     -----------     -----------    -----------     ----------

Balance - September 30, 1996      6,362,500          63,625       7,850,042     (4,414,694)     3,498,973

Common stock issued
  as financing cost                  75,000             750         138,000                       138,750

Common stock issued for
  services                          220,000           2,200         374,100                       376,300

Common stock issued for
  warrants exercised                433,333           4,333         570,667                       575,000

Common stock issued in
  private placements              1,479,206          14,793       1,419,707                     1,434,500

Common stock issued in
  Regulation S offerings          3,229,267          32,293       2,303,207                     2,335,500

Options and warrants
  issued for services and fees                                       29,000                        29,000 
Net loss - year ended
  September 28, 1997                                                            (3,795,909)    (3,795,909)
                                -----------     -----------     -----------    -----------     ----------
Balance - September 28, 1997     11,799,306     $   117,994     $12,684,723    $(8,210,603)    $4,592,114
                                ===========     ===========     ===========    ===========     ==========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.


                                      F-5
<PAGE>   36

                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
              YEARS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997

<TABLE>
<CAPTION>
                                                                       1996            1997
                                                                   -----------     -----------
<S>                                                                <C>             <C>         
CASH FLOWS FROM OPERATING ACTIVITIES
   Net loss                                                        $(1,468,044)    $(3,795,909)
   Adjustments to reconcile net loss to net cash used in
    operating activities:
      Depreciation and amortization                                    392,034         386,197
      Amortization of deferred charges                                                 142,804
      Loss on disposition of assets                                    627,682
      Estimated loss on disposal of discontinued operations                            200,000
      Common stock, options and warrants issued for services and 
        financing costs                                                                275,650
      Changes in operating assets and liabilities:
         Accounts receivable                                             4,880          68,478
         Inventories                                                   (48,342)       (576,114)
         Prepaid expenses                                               30,030         (61,498)
         Pre-opening costs                                                             125,828
         Deposits and other assets                                    (126,419)          6,839
         Accounts payable and other accrued liabilities               (156,677)        932,050
         Deferred revenues                                            (200,000)         57,026
         Deferred rent payable                                                         488,606
                                                                   -----------     -----------
         NET CASH USED IN OPERATING ACTIVITIES                        (944,856)     (1,750,043)
                                                                   -----------     -----------
CASH FLOWS FROM INVESTING ACTIVITIES
   Purchases of property and equipment                                (138,581)     (3,008,828)
   Due from related parties                                                             (8,613)
   Sale of subsidiary                                                    1,000
   Collection of equipment contract receivable                                         330,000
   Restricted cash                                                                    (118,596)
                                                                   -----------     -----------
         NET CASH USED IN INVESTING ACTIVITIES                        (137,581)     (2,806,037)
                                                                   -----------     -----------
CASH FLOWS FROM FINANCING ACTIVITIES
   Principal reductions of short-term and long-term obligations       (189,474)       (172,571)
   Sale of common stock                                                              3,056,050
   Borrowings from related parties                                                   1,932,000
   Advances from officer                                                                60,000
   Repayments of borrowings from related parties                                      (450,000)
                                                                   -----------     -----------
        NET CASH PROVIDED BY (USED IN)
         FINANCING ACTIVITIES                                         (189,474)      4,425,479
                                                                   -----------     -----------
NET DECREASE IN CASH AND CASH EQUIVALENTS                           (1,271,911)       (130,601)
CASH AND CASH EQUIVALENTS, beginning of period                       2,281,973       1,010,062
                                                                   -----------     -----------
CASH AND CASH EQUIVALENTS, end of period                           $ 1,010,062     $   879,461
                                                                   ===========     ===========
NON-CASH TRANSACTIONS
   Common Stock, options and warrants issued for services and 
     financing costs                                               $    80,000     $   275,650
                                                                   ===========     ===========
OTHER CASH INFORMATION
   Interest paid                                                   $    60,083     $   127,692
                                                                   ===========     ===========
   Interest received                                               $   114,371     $    14,332
                                                                   ===========     ===========
</TABLE>

          See accompanying Notes to Consolidated Financial Statements.

                                      F-6
<PAGE>   37

                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                    SEPTEMBER 30, 1996 AND SEPTEMBER 28, 1997


1.   BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

     Description of Business. Grand Havana Enterprises, Inc., formerly United
     Restaurants, Inc. (the "Company"), was incorporated under the laws of the
     State of Delaware on April 13, 1993. The Company is engaged in the business
     of the ownership, operation and development of private membership
     cigar clubs/restaurants known as "Grand Havana Rooms," and retail cigar
     stores known as "Grand Havana House of Cigars." The Company currently owns
     and operates three Grand Havana Rooms and three Grand Havana House of
     Cigars. The Company also operates a restaurant known as "On Canon" in
     Beverly Hills, California.

     The Company was originally formed to acquire all of the capital stock of
     Love's Enterprises, Inc. ("Love's"). Love's is in the business of
     franchising Love's restaurants. Love's restaurants specialize in barbecued
     pork and beef, with an emphasis on ribs. The Company acquired the stock of
     Love's in May 1993. In December 1996, the Company adopted a plan of
     discontinuance of Love's franchising business, including company-owned
     Love's restaurants (Note 3).

     Principles of Consolidation. The consolidated financial statements include
     the accounts of Grand Havana Enterprises, Inc. and its subsidiary
     companies, all of which are wholly-owned, except for Il Forno, Inc. (Note
     4). All significant intercompany transactions and balances have been
     eliminated.

     Use of Estimates. The preparation of financial statements in conformity
     with generally accepted accounting principles requires management to make
     estimates and assumptions that affect certain reported amounts and
     disclosures. Accordingly, actual results could differ from those estimates.

     Cash and Cash Equivalents. The Company considers all highly liquid
     investments purchased with an original maturity of three months or less to
     be cash equivalents.

     Concentration of Credit Risk. The Company invests its excess cash in
     certificates of deposit and money market funds, which, at times, may exceed
     federally insured limits. The Company maintains its accounts with financial
     institutions with high credit ratings. As of September 28, 1997, the
     Company had $850,000 deposited in two banks.

     Direct Financing Leases. Restaurant equipment leases the Company has with
     franchisees and others have been classified as direct financing leases.

     Inventories. Inventories, consisting of food and beverage products, cigars
     and other merchandise, are stated at the lower of cost (first-in, first-out
     method) or market.

     Property and Equipment. Property and equipment are stated at cost.
     Depreciation is provided using the straight-line method over the estimated
     useful lives of the assets. Leasehold improvements are amortized on the
     straight-line method over the shorter of the lease term or estimated useful
     lives of the assets. Useful lives generally are as follows:

                      Leasehold improvements              5 to 15 years
                      Restaurant equipment                 2 to 8 years
                      Other equipment                     3 to 15 years

     Property and equipment are reviewed for impairment whenever events or
     circumstances indicate that the asset's undiscounted expected cash flows
     are not sufficient to recover its carrying amount. The Company measures an
     impairment loss by comparing the fair value of the asset to its carrying
     amount. Fair value of an asset is calculated as the present value of
     expected future cash flows.

     Pre-Opening Costs. Restaurant and cigar club pre-opening costs are deferred
     and charged to operations when the location is opened or the location plans
     are abandoned.


                                      F-7
<PAGE>   38
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED


     Membership Fees. Membership fee revenue represents initial and monthly
     membership fees paid by members of the Company's "Grand Havana Room" clubs.
     Initial membership fees are deferred and recognized as income when
     membership services commence. Monthly membership fees are recognized as
     income when earned.

     Initial Territorial Fees. Revenues from initial territorial fees are
     recognized, net of allowance for uncollectible amounts, when substantially
     all significant initial services to be provided by the Company have been
     performed.

     Stock-Based Compensation. The Company adopted Statement No. 123 during its
     fiscal year ended September 28, 1997, and has elected to account for
     stock-based compensation arrangement under APB Opinion No. 25 and
     accordingly recognizes compensation expense for the stock option grants as
     the difference between the fair value and the exercise price at the grant
     date.

     Impact of Recently Issued Accounting Standard. In February 1997, the FASB
     issued Statement No. 128, "Earnings Per Share." Under the new requirements,
     primary earnings per share will be renamed basic earnings per share and
     will exclude the dilutive effect of stock options. The statement is
     effective for annual and interim periods ending after December 15, 1997.
     Early application is not permitted. After the effective date, the Statement
     requires that all prior period earnings per share data presented be
     restated to conform with the provisions of this statement. The impact will
     not change primary loss per share for the fiscal year ended September 28,
     1997.

     Loss per Common Share. Loss per common share is based upon the weighted
     average number of common shares outstanding during the period. Common share
     equivalents, when antidilutive, are excluded from weighted average number
     of shares outstanding for all periods presented.

     Lease Commitment. Rent expense is recognized on a straight-line basis over
     the term of the lease.

     Reclassifications. Certain 1996 balances have been reclassified to conform
     with 1997 presentation.


2.   DISCLOSURE OF CERTAIN SIGNIFICANT RISKS AND UNCERTAINTIES

     Significant Operating Losses. The Company has experienced operating losses
     since its inception. For the fiscal years ended September 30, 1996 and
     September 28, 1997, the Company experienced net losses of $1,468,044 and
     $3,795,909, respectively. The Company anticipates that it will continue to
     experience losses as it continues working on its ongoing development plans,
     including the establishment of additional Grand Havana Rooms and Grand
     Havana House of Cigars. Even after the Company's development plans are
     completed, there can be no assurance that the cigar clubs/restaurants owned
     by the Company will be profitable.

     Significant Capital Requirements. The Company's capital requirements have
     been and will continue to be significant. At September 28, 1997, the
     Company had cash and cash equivalents of $879,461 and a working capital
     deficit of $426,560. As a result of its expansion activities, the Company's
     working capital has continually been reduced. The Company will need
     additional financing, which the Company may raise through the private
     placements of its securities. There can be no assurance that additional
     financing will be available to the Company on acceptable terms, or at all.
     In addition, the Company does not currently meet the new listing standards
     for maintenance of the Company's securities on Nasdaq's SmallCap Market,
     which new standards will become effective in late February 1998. Although
     the Company intends to seek to comply with the new maintenance criteria for
     continued listing, if the Company should be unable to meet these criteria,
     it is possible that its securities could be de-listed from the Nasdaq
     SmallCap Market, which might result in the Company having difficulty in
     placing its securities with prospective investors.



                                      F-8
<PAGE>   39
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

     The Company's significant operating losses and significant capital
     requirements raise substantial doubt about the Company's ability to
     continue as a going concern. The accompanying financial statements have
     been prepared on a going concern basis, which contemplates the realization
     of assets and satisfaction of liabilities in the normal course of business.
     The financial statements do not include any adjustments relating to the
     recoverability of the recorded assets or the classification of the
     liabilities that might be necessary should the Company be unable to
     continue as a going concern.

     California Smoke-Free Workplace Act of 1994. In 1994 the California
     legislature enacted the California Smoke-Free Workplace Act of 1994 which
     prohibits smoking in enclosed spaces at places of employment with certain
     exemptions. Since the inception of the Company's Beverly Hills Grand Havana
     Room, the Company has relied upon an exemption in the law that expressly
     exempts from its coverage retail tobacco shops and private smoker's
     lounges. Although the Company believes it is justified in relying on the
     "private smoker's lounge" exemption, if it should be determined in the
     future that the Company is not a "private smoker's lounge," but rather a
     restaurant or a bar to which the California Smoke-Free Workplace Act of
     1994 were applicable, this would have a material adverse effect on the
     Company's business, financial condition and results of operations.


3.   DISCONTINUED OPERATIONS

     In December 1996, the Company adopted a formal plan of discontinuance of
     its Love's franchising and restaurants operations except its international
     licensing rights to the Love's restaurants. At the time of the adoption,
     the Company operated three Company-owned Love's restaurants and was the
     franchisor of an additional ten Love's restaurants. In August 1997, the
     Company sold its Company-owned Love's restaurant in Beverly Hills,
     California for an aggregate sales price of $120,000, payable $40,000 in
     cash and $80,000 in a three-year 7% promissory note payable in monthly
     installments. In May 1997, the Company sold its Company-owned Love's
     restaurant in San Bernardino, California to the franchisee of this location
     in consideration for the franchisee becoming a sublessee of the premises
     leased by the Company for the remainder of the lease term. In June 1997 the
     Company also acquired a Love's restaurant in Lakewood, California from its
     franchisee, when the franchisee went into bankruptcy and the Company took
     over operations of this Love's restaurant. As of September 28, 1997, the
     Company had two Company-owned Love's restaurants and was the franchisor of
     an additional nine Love's restaurants. The Company is currently
     negotiating with the landlord of the premises of the Company-owned Love's
     restaurant in Westchester, California to terminate the lease in
     consideration for the Company continuing to make lease payments under the
     lease through May 31, 1998, and the payment by the landlord to the Company
     of a $75,000 termination fee. It is anticipated that the Westchester Love's
     will cease operations in January 1998. The Company anticipates that the
     remaining assets of Love's will be sold by February 1998.

     The estimated loss on the disposal of the discontinued operations of
     $441,283 represents the estimated loss on the disposal of the assets of
     Love's and a provision of $400,000 for expected operating losses during the
     phase-out period from January 1, 1997 through February 28, 1998.
     Approximately $195,000 of the expected operating loss was incurred from
     January 1, 1997 through September 28, 1997.

     Operating results of Love's for the three months ended December 29, 1996
     are shown separately in the accompanying consolidated statement of
     operations. The consolidated statement of operations for the fiscal year
     ended September 30, 1996 has been restated and operating results of Love's
     are also shown separately.

     Total revenues of Love's for 1996 and 1997 were $2,774,467 and $2,645,838,
     respectively. These amounts are not included in total revenues from
     continuing operations in the accompanying consolidated statements of
     operations.

     Assets and liabilities of Love's to be disposed of at September 28, 1997
     consisted of property and equipment of $208,243 and liquor licenses of
     $28,900. Net assets of discontinued operations have been separately
     classified in the accompanying consolidated balance sheet at September 28,
     1997. The 1996 consolidated balance sheet has not been restated.


                                      F-9
<PAGE>   40
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

4.   ACQUISITION AND DISPOSITION

     Il Forno, Inc. On June 20, 1994, the Company acquired 85% of the issued and
     outstanding capital stock of Il Forno, Inc. ("Il Forno"). Il Forno owns and
     operates an Italian-style restaurant located in Santa Monica, California.

     The Stock Purchase Agreement required the Company to advance approximately
     $498,000 to Il Forno for the settlement of various Il Forno related party
     loans and other arued expenses. Additionally, the Company was to pay
     $252,000 to Il Forno stockholders for 85% of the outstanding capital stock
     of Il Forno, payable $2,000 in cash upon closing with the balance of
     $250,000 due, without interest, over a three year period.

     The transaction was accounted for as a purchase and resulted in an excess
     of purchase price over net assets acquired of $546,750. Amortization of
     such goodwill amounted to $54,675 in 1996.

     On September 20, 1996, the Company sold its 85% interest in Il Forno back
     to the minority stockholders for $1,000 in cash. The sale resulting in a
     loss to the Company of $607,682 which is included on the accompanying
     consolidated statement of operation under "Loss on disposition of assets."


5.   TERRITORY RIGHTS AGREEMENT

     Love's Far Eastern Territory Rights Agreement. In August 1994, the Company
     entered into a Territory Rights Agreement with PT Transpacific Ekagraha, an
     Asian holding company. Under the Territory Rights Agreement, the territory
     rights holder paid to the Company a non-refundable initial development fee
     of $200,000 for the rights to develop Love's Woodpit Barbecue Restaurants
     in Asia. The territory rights holder has committed to construct at least
     eight Love's Restaurants in portions of Asia, including Mainland China,
     Hong Kong, Indonesia, Singapore, Malaysia and Republic of China-Taiwan,
     during the three years ended August 1997. The Agreement provides for
     additional payments to the Company at the opening of each restaurant and
     for continuing royalties ranging from 5% - 8.75% of gross sales. Under the
     Agreement, the Company is to provide certain training, management and other
     services during the term of the Agreement. The initial development services
     required under the agreement were performed and completed during the fiscal
     year ended September 30, 1996.

     Grand Havana Far Eastern Territory Rights Agreement. In May 1997, the
     Company entered into an agreement with Grand Havana Room (Asia) Holdings,
     Ltd., a Hong Kong corporation ("Grand Havana Asia"), pursuant to which the
     Company has granted to Grand Havana Asia certain exclusive territories in
     the Far East, including Hong Kong, Taiwan, China, Singapore, Malaysia,
     Thailand, Japan, Philippines and Korea for a term of 75 years. Grand Havana
     Asia agreed to pay the Company for the exclusive right to use the name
     Grand Havana Room in the territory a non-refundable territorial fee of
     $600,000, of which $300,000 was paid upon execution of the agreement and
     the balance of $300,000 is payable on the earlier of the opening of the
     first Grand Havana Room in Hong Kong or April 30, 1998. The Company shall
     be required to provide comprehensive development and training services in
     connection with the opening of the first and all subsequent Grand Havana
     Rooms in the territories. In return for such services, the Company would
     receive 25% of the initial membership fees paid by the members of the Grand
     Havana Room in Hong Kong and 15% of the initial membership fees paid with
     respect to subsequent Grand Havana Rooms. Further the Company would receive
     6% of the monthly gross revenues from each Grand Havana Room. At September
     30, 1997, the Company has provided for an allowance for uncollectible
     accounts for the $300,000 receivable.

     Given the recent decline in the Asian economy, there can be no assurance
     that any or all of the obligations of PT Transpacific Ekagraha or Grand
     Havana Asia under the territory rights agreements will be satisfied or that
     any Love's restaurant or Grand Havana Rooms will be opened in Asia.   

6.   PROPERTY AND EQUIPMENT

     Property and equipment is comprised of the following at September 30, 1996
     and 1997:

<TABLE>
<CAPTION>
                                               1996            1997
                                            ----------      ----------
<S>                                         <C>             <C>       
          Leasehold improvements            $1,626,573      $3,988,242
          Restaurant equipment                 871,811         981,105
          Office equipment                     176,589          64,256
          Signage                               11,690
                                            ----------      ----------
</TABLE>

                                      F-10
<PAGE>   41
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<S>                                                                          <C>              <C>      
                                                                             2,686,663        5,033,603
               Less accumulated depreciation and amortization                 (562,317)        (574,869)
                                                                        ---------------   --------------
                                                                        $    2,124,346    $   4,458,734
                                                                        ===============   ==============
</TABLE>

7.   EQUIPMENT CONTRACT RECEIVABLE

     In October of 1993, Love's entered into an agreement with Huntington Beach
     Market Broiler ("HBMB"), the operator of an independent restaurant,
     pursuant to which HBMB assumed all of Love's obligations under the
     Huntington Beach real property lease, executed an equipment lease with
     Love's and granted Love's a profit-sharing interest in the restaurant. The
     duration of the Agreement is to September 2005. Under the terms of the
     Agreement, the lessee is to pay an equipment rental of $2,250 per month for
     the first 36 months of the lease against 40% of the annual profits (as
     defined) of the restaurant. During the remainder of the term, the monthly
     equipment rental will be $3,375 against 40% of profits. During 1996, the
     Company received $52,540 as a result of the 40% profit override. The lessee
     has the right to purchase the equipment under lease at any time during the
     first five years of the Agreement for $350,000 and at the end of the
     agreement for $50,000. In September of 1996, Love's entered into an
     agreement with HBMB pursuant to which Love's would terminate its
     profit-sharing interest in the restaurant and transfer to HBMB the
     equipment under lease for a current payment of $330,000. The sale closed
     and the payment was received in October of 1996. A loss of $20,000 as a
     result of this transaction has been provided for as of September 30, 1996.

8.   LONG-TERM DEBT

     Long-term debt at September 30, 1996 was comprised of a 10% secured note,
     principal and accrued interest payable in 84 monthly installments of $4,135
     beginning February 1994. The equipment securing this note was sold in
     October of 1996 (Note 7) and, accordingly, this note was repaid at that
     time.

9.   INCOME TAXES

     At September 28, 1997, the Company had approximate net operating loss
     carryforwards for federal tax purposes expiring as follows:

<TABLE>
<CAPTION>
           Year Expires                                   Amount
           ------------                                   ------
<S>                                                  <C>           
              1998                                   $    3,102,000
              1999                                        1,512,000
              2000                                          100,000
              2004                                            1,000
              2006                                           51,000
              2007                                          268,000
              2008                                          303,000
              2009                                        1,355,000
              2010                                        1,742,000
              2011                                          712,000
              2012                                        3,341,000
                                                     ---------------

                  TOTAL                              $   12,487,000
                                                     ===============
</TABLE>

     The components of deferred tax assets were as follows at September 30, 1996
     and September 28, 1997:

<TABLE>
<CAPTION>
                                                                              1996             1997
                                                                        ---------------   --------------
<S>                                                                     <C>               <C>
            Deferred tax assets:
               Net operating loss carryforwards                         $    3,718,000    $    4,609,000
               Valuation reserves                                              285,000           220,000
</TABLE>


                                      F-11
<PAGE>   42
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

<TABLE>
<S>                                                                     <C>               <C>
               Employee benefit plans                                           23,000            14,000
               State income tax                                                  1,000             2,000
               Contribution carryforwards                                        3,000             8,000
               Pre-opening costs                                               118,000           254,000
               Capital loss carryforwards                                      316,000           316,000
               Related party expenses                                                             96,000
               Valuation allowance                                          (4,387,000)       (5,458,000)
                                                                        ---------------   --------------
               Total deferred tax assets                                        77,000            61,000      

            Deferred tax liability:
               Depreciation                                                     77,000            61,000
                                                                        ---------------   --------------

               Net deferred taxes                                       $           -0-   $          -0-
                                                                        ===============   ==============
</TABLE>


10.  OPERATING LEASES

     The Company leases restaurant, club and corporate facilities under
     operating leases with original terms ranging from 10 to 25 years. The lease
     obligations include provisions requiring the payment of property taxes,
     insurance, repairs and maintenance, and generally contain renewal options
     and call for contingency rentals based on percentages of sales. Restaurant
     facilities subleased to franchisees are subleased under similar terms to
     the lease the Company has with the lessor.

     Minimum lease payments required under noncancelable leases and subleases,
     respectively, at September 28, 1997 are as follows:

<TABLE>
<CAPTION>
                                                                    Minimum          Minimum
                                                                     Lease          Sublease
                                                                   Payments         Payments
                                                                  to be Paid     to be Received
                                                               ---------------   --------------
<S>                                                            <C>               <C>          
             Years Ending September 30,

                1998                                           $    1,380,140    $     109,914
                1999                                                1,331,795           54,801
                2000                                                1,219,027           43,200
                2001                                                  975,988           43,200
                2002                                                1,018,531           43,200
                Thereafter                                          9,021,415            3,600
                                                               ---------------   --------------
                                                               $   14,946,896    $     297,915
                                                               ===============   ==============
</TABLE>

     Rent expense was $989,110 in 1996 and $1,433,888 in 1997. Sublease income
     included in discontinued operations was $291,027 in 1996 and $227,928 in
     1997.

     At September 28, 1997, the Company had $118,596 in certificate of deposit
     which was used as a collateral for an irrevocable letter of credit issued
     to guarantee the lease of its On Canon restaurant.


11.  COMMITMENTS AND CONTINGENCIES

     Consulting Agreement. The Company and Mr. Harry Shuster are parties to an
     Agreement (the "Agreement") dated as of June 1, 1993, The Agreement
     provides that Mr. Shuster will act as the Chairman of the Board, President
     and Chief Executive Officer and a Director of the Company throughout the
     rolling three year term of the Agreement for annual compensation initially
     set at $250,000 per annum, to be increased five percent during each
     successive year of the Agreement. Mr. Shuster is also to be provided with
     either the use of a company car to be used in carrying out his duties for
     the Company or a $500 per month car allowance. The Agreement 


                                      F-12
<PAGE>   43
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

     provides for certain disability benefits for a period of up to three years.
     The Agreement provides for automatic one-year renewals for each contract
     year that ends without termination of the Agreement by either party.

     Lease Agreements. The Company is contingently liable on two assigned leases
     relating to former Love's locations.


12.  STOCKHOLDERS' EQUITY

     Warrants - In April 1994, the Company issued public warrants consisting of
     2,012,500 Class A Common Stock Purchase Warrants and 2,012,500 Class B
     Common Stock Purchase Warrants. The Class A Warrants are exercisable at
     $4.80 per share and Class B Warrants are exercisable at $5.60 per share.
     Both warrants expire in April 1999. The Company granted the underwriter
     175,000 units, each unit consisting of 175,000 shares of common stock,
     Class A underwriter warrants to purchase 175,000 shares of common stock and
     Class B underwriters warrants to purchase 175,000 shares of common stock at
     a price to be adjusted as new shares are issued at less than the
     then-current exercise price. The underwriters units expire on April 12,
     1999.

     Stock Options. During fiscal year ended September 28, 1997, the Company
     adopted the 1996 Stock Option Plan (the "Plan") to provide to officers,
     directors, key employees and other key contributors to the Company an
     opportunity to purchase the common stock of the Company pursuant to
     "non-qualified stock options" at the discretion of the Board of Directors.

     Under the Plan options to purchase an aggregate of 626,250 shares of common
     stock may be granted. The purchase price shall be no less than 85% of the
     fair market value of the common stock on the date of grant. The Board of
     Directors of the Company, or a committee established by the Board of
     Directors shall determine, among other things (i) the purchase price of the
     shares covered by each option, (ii) whether any payment will be required
     upon grant of the option, (iii) the individual to whom, and the time or
     times at which, options shall be granted, (iv) the number of shares to be
     subject to each option and (v) when an option can be exercised and whether
     in whole or installments.

     During fiscal year 1997, options to purchase an aggregate of 100,000 shares
     of the common stock of the Company were issued under the Plan to Stanley
     Shuster. The options are exercisable at $1.00 per share, which represents
     100% of the fair market value of the stock on December 3, 1996, and expire
     on December 3, 2001. None of those options have yet been exercised.


                                      F-13
<PAGE>   44
                GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

     The Company accounts for the Stock Option Plan under the provisions of APB
     No. 25. The following pro forma information is based on estimating the fair
     value of grants under the above plan based upon the provisions of SFAS No.
     123. For the Stock Option Plan, the fair value of each option granted in
     1997 has been estimated as of the date of grant using the Black-Scholes
     option pricing model with the following weighted average assumptions: risk
     free interest rate of 5.7%, expected life for the option of five years,
     expected dividend yield of 0%, and expected volatility of 10%. Under these
     assumptions for the Stock Option Plan, the weighted average fair value of
     options granted in 1997 was $.25. The fair value of the grants would be
     amortized over the vesting period for stock options. Accordingly, the
     Company's pro forma net loss and net loss per common share assuming
     compensation cost was determined under SFAS No. 123 would have been the
     following:

<TABLE>
<CAPTION>
                                                                 Year Ended
                                                             September 28, 1997
                                                             ------------------
<S>                                                           <C>            
            Net loss                                          $   (3,820,909)
            Net loss per common share                         $         (.46)
</TABLE>
     In addition to options granted under the Plan, at September 28, 1997, there
     were outstanding presently exercisable non-qualified stock options to
     purchase an aggregate of 25,000 shares of the common stock of the Company
     held by a former director of the Company, Arnold Wasserman, at an option
     price of $3.00 per share. Mr. Wasserman resigned as a director of the
     Company in June 1995. The option was granted at an exercise price
     approximately equal to the then fair market value of the Company's common
     stock in consideration of Mr. Wasserman's service on the Board of
     Directors. The option may be exercised at any time during its five-year
     term, is nontransferable except by will or pursuant to the laws of descent
     and distribution and is protected against dilution. 

     In March 1997, the Company issued 110,000 shares of common stock pursuant
     to a two-year consulting agreement. The shares were valued at $268,900 and
     are being amortized over two years. The Company also granted the consultant
     options to purchase 20,000 shares at $.80 per share and 5,000 shares at
     $1.00 per share, expiring on January 30, 2001. The options were valued at
     $9,000 using the Black-Scholes pricing model. 

     Private Placements. During the fiscal year ended September 28, 1997, the
     Company, in various private placements, raised net proceeds of $1,434,500
     through the issuance of 1,479,206 shares of common stock and warrants to
     purchase 1,126,666 shares of common stock at $1.50 per share. Included in
     the private placements were 333,333 shares to Harry Shuster, 333,333 shares
     to United Leisure Corporation and 100,000 shares to H&N Shuster Charitable
     Foundation. United Leisure Corporation exercised 333,333 warrants in 1997.

     Regulation S Offerings. In September 1997, the Company completed a
     Regulation S Offering of 3,229,267 units, each unit consisting of one share
     of common stock and a three-year warrant to purchase 1/2 share of common
     stock, exercisable at $1.50 per share of common stock for net proceeds of
     $2,335,500. The Company paid a placement fee to the selling agent of 10%, a
     non-accountable expense allowance of 3%, and in addition, delivered a
     warrant expiring in September 2000 to purchase 600,000 shares of common
     stock exercisable at $.85 per share as a finder's fee. The warrants were
     valued at $72,000 using the Black-Scholes option pricing model. The value
     of the warrants had no impact in the accompanying statements of operations.
     Subscriptions receivable at September 28, 1997 of $1,288,950 was collected
     in October 1997.

     Increase in Authorized Capital Stock. On December 12, 1997, the Company
     amended its Certificate of Incorporation to increase the number of
     authorized shares of common stock to 50,000,000.


13.  RELATED PARTY TRANSACTIONS

     The Company entered into a five-year lease expiring on January 31, 1998
     with 1990 Westwood Boulevard, Inc. covering approximately 6,000 square feet
     of Class A office space for its executive offices. The Lease provides for a
     rental of $4,000 per month. 1990 Westwood Boulevard, Inc. is owned 50% by
     Harry Shuster, Chairman of the Board, President and Chief Executive
     Officer, a Director and a promoter of the Company, 35% by Jordan Belfort
     and 15% by Daniel Porush. Each of such latter persons is a shareholder of
     C&R, a promoter of the Company.

     The Company is leasing on a month to month basis an apartment in New York
     from Harry Shuster at a monthly rent of $3,000 plus common area maintenance
     charges. Rent expense incurred in 1997 for this apartment was $43,522.

     In connection with the lease for the Company's New York Grand Havana Room,
     the Company was required to provide a letter of credit. In order to
     establish this letter of credit the Company entered into a financing
     agreement dated September 10, 1996, with its affiliate, United Leisure
     Corporation, pursuant to which United Leisure pledged the sum of $875,000
     in order for the Company to obtain the required letter of credit. The
     Company had additionally agreed to apply one-half of all initial membership
     fees from the members of its New York, New York and Washington D.C. Grand
     Havana Rooms to replace the cash collateral pledged by United Leisure, and,
     in any event, the Company has agreed to replace all of the cash collateral
     within 18 months after United Leisure's pledge of the cash collateral. In
     consideration for United Leisure pledging the collateral for the letter of
     credit, the Company has agreed to pay an amount to United Leisure equal to
     10% per annum on the 


                                      F-14
<PAGE>   45
                 GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES
              NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

     amount of the pledged cash collateral, as it exists from time to time. As
     additional consideration, the Company agreed to issue 100,000 shares of its
     common stock to United Leisure, and has agreed to grant to United Leisure a
     warrant to purchase an additional 100,000 shares of common stock of the
     Company, which warrant is exercisable for a period of five years at an
     exercise price of $.75 per share. The warrant was subsequently exercised by
     United Leisure. On July 15, 1997 the Company and United Leisure entered
     into an amendment to financing agreement pursuant to which amendment, in
     consideration for United Leisure agreeing to forego the requirement that
     the Company replace the collateral pledged by United Leisure from the
     initial membership fees it received from its New York and Washington D.C.
     Grand Havana Rooms, the Company agreed to issue to United Leisure or its
     designee a warrant expiring on August 1, 2000 to purchase 150,000 shares of
     its common stock at an exercise price of the lesser of $.75 per share or
     75% of the average of the last trade price for the common stock for the
     10-day period prior to the exercise of the warrant. The warrants were
     valued at $20,000 using the Black-Scholes option pricing model. United
     Leisure subsequently designated Westminster Capital, Inc., an unrelated
     third party, as an entity to receive this warrant. The full $875,000 cash
     collateral under this financing agreement, was repaid by the Company to
     United Leisure in October 1997. Harry Shuster, the Chairman of the Board,
     President and Chief Executive Officer of the Company, is an officer and
     director of United Leisure.

     In February 1997, the Company entered into a second financing agreement
     with United Leisure pursuant to which agreement United Leisure agreed to
     provide advances to the Company from time to time during a period of six
     months. Interest on any amounts advanced bears interest at the rate of 9%
     per annum until paid. In consideration for making the loan, the Company
     issued 75,000 shares of its common stock to United Leisure. The agreement
     further provided that if all of the advances plus accrued but unpaid
     interest thereon were not paid on or prior to September 30, 1997 that the
     Company would issue an additional 25,000 shares of its common stock to
     United Leisure. The loan was not repaid by September 30, 1997 and the
     parties agreed to extend the maturity date of the advances made under this
     financing agreement to March 31, 1998. An aggregate of $775,000 was
     advanced under this loan, the full principal amount of which remained
     outstanding at September 28, 1997.

     In May 1997 the Company entered into a financing agreement with United Film
     Distributors, Inc., an affiliate of the Company ("United Film"), whereby
     United Film agreed to provide advances to the Company from time to time.
     Interest on any amount advanced bears interest at the rate of prime plus
     3%. The full principal amount and all accrued but unpaid interest on any
     amounts advanced is due and payable on demand. The Company borrowed
     $507,000 in May 1997, repaid $450,000 in July 1997 and borrowed an
     additional $650,000 in August 1997, leaving a balance due to United Film of
     $707,000 as of September 28, 1997. Harry Shuster, the Chairman of the
     Board, President and Chief Executive Officer of the Company is the Chairman
     of the Board of United Film. Brian Shuster, the son Harry Shuster, is the
     President of United Film.

     Due to related parties at September 28, 1997 consisted of the following:

<TABLE>
<S>                                                              <C>     
       Advances from Harry Shuster                               $ 60,000
       Accrued interest expense to United Leisure                 120,989
       Accrued interest expense to United Film                     18,305
       Accrued consulting fees and expenses to Harry Shuster      221,305
                                                                 --------
                                                                 $420,599
                                                                 ========
</TABLE>

     Due from related parties at September 30, 1996 and September 28, 1997
     included $48,000 advanced to the Company's Chairman of the Board, President
     and Chief Executive Officer and also included receivables from United
     Leisure and other similarly affiliated companies resulting from charges for
     common expenses.


                                      F-15


<PAGE>   46

                                   SIGNATURES

       Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                       GRAND HAVANA ENTERPRISES, INC.


                                       By          /s/ HARRY SHUSTER
                                          --------------------------------------
                                          Harry Shuster, Chairman of the Board,
                                          President and Chief Executive Officer

                                       Dated: January 8, 1998

       Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.


<TABLE>
<CAPTION>
       Signature                            Capacity                                     Date
       ---------                            --------                                     ----
<S>                                         <C>                                    <C>
        /s/HARRY SHUSTER                    Chairman of the Board,                  January 8, 1998
------------------------------------        President and Chief Executive Officer,
         Harry Shuster                      Chief Financial Officer (Principal    
                                            Financial Officer) and Director       

                                            Director                                January _, 1998
------------------------------------
         Harvey Bibicoff


       /s/ STANLEY SHUSTER                  Director                                January 8, 1998
------------------------------------
        Stanley Shuster
</TABLE>



                                       31

<PAGE>   47

                                  EXHIBIT INDEX

(3)-1     Restated Certificate of Incorporation of the Company, filed in the
          office of the Secretary of State of the State of Delaware, filed as
          Exhibit (3)-1 to the Company's Registration Statement on Form SB-2
          (Registration No. 33-68252-LA), is hereby incorporated herein by
          reference.

(3)-2     Bylaws of the Company, filed as Exhibit (3)-2 to the Company's
          Registration Statement on Form SB-2 (Registration No. 33-68252-LA), is
          hereby incorporated herein by reference.

(3)-3     Certificate of Amendment to Certificate of Incorporation of the
          Company, filed in the Office of the Secretary of State of Delaware on
          February 28, 1997.*

(3)-4     Certificate of Amendment to Certificate of Incorporation of the
          Company filed in the Office of the Secretary of State of Delaware on
          December 12, 1997.*

(4)-1     Warrant Agreement, dated April 20, 1994, between the Company and OTR,
          Inc., filed as Exhibit (4)-1 to the Company's Annual Report on Form
          10-KSB for the fiscal year ended September 30, 1994, is hereby
          incorporated herein by reference.

(4)-2     Form of Underwriters' Unit Purchase Options, Underwriters' Class A
          Warrant and Underwriters' Class B Warrant issued to M. H. Meyerson &
          Co., Inc. and Biltmore Securities, Inc. and their designees, filed as
          Exhibit (1)-2 to the Company's Registration Statement on Form SB-2
          (Registration No. 33-68252-LA), is hereby incorporated herein by
          reference.

(10)-1    Consulting Agreement, dated as of June 1, 1993, between the Company
          and Harry Shuster, filed as Exhibit (10)-38 to the Company's
          Registration Statement on Form SB-2 (Registration No. 33-68252-LA), is
          hereby incorporated herein by reference.

(10)-2    Form of Indemnity Agreement entered into by the Company with each of
          its Directors, filed as Exhibit (10)-39 to the Company's Registration
          Statement on Form SB-2 (Registration No. 33-68252-LA), is hereby
          incorporated herein by reference.

(10)-3    Stock Purchase Agreement, dated as of February 4, 1994, between
          Chicken & Ribs, Inc. and H & H Restaurant Holding Corporation and
          related Promissory Note, filed as Exhibit (10)-40 to the Company's
          Registration Statement on Form SB-2 (Registration No. 33-68252-LA), is
          hereby incorporated herein by reference.

(10)-4    Amendment No. 1, dated March 24, 1994, to Stock Purchase Agreement
          dated as of February 4, 1994, between Chicken & Ribs, Inc. and H & H
          Restaurant Holding Corporation, filed as Exhibit (10)-41 to the
          Company's Registration Statement on Form SB-2 (Registration No.
          33-68252-LA), is hereby incorporated herein by reference.

<PAGE>   48

(10)-5    Amendment No. 2 to Stock Purchase Agreement, dated as of April 4,
          1994, between Chicken & Ribs, Inc. and H & H Restaurant Holding
          Corporation, filed as Exhibit (10)-34 to the Company's Annual Report
          on Form 10-KSB for the fiscal year ended September 30, 1994, is hereby
          incorporated by reference.

(10)-6    Note Modification and Extension Agreement, dated as of January 21,
          1995, between H & H Restaurant Holding Corporation and Chicken & Ribs,
          Inc., as filed as Exhibit (10)-25 to the Company's Annual Report on
          Form 10-KSB for the fiscal year ended September 30, 1995, is hereby
          incorporated by reference.

(10)-7    Territory Rights Agreement, dated August 22, 1994, between Love's
          Enterprises, Inc. and PT Transpacific Ekagraha, filed as Exhibit
          (10)-29 to the Company's Annual Report on Form 10-KSB for the fiscal
          year ended September 30, 1994, is hereby incorporated by reference.

(10)-8    Stock Option Agreement, dated September 21, 1994, as amended, between
          the Company and Arnold Wasserman covering 25,000 shares of the Common
          Stock, par value $.01 per share, of the Company, as filed as Exhibit
          (10)-27 to the Company's Annual Report on Form 10-KSB for the fiscal
          year ended September 30, 1995, is hereby incorporated by reference.

(10)-9    Village on Canon Lease, dated July 1, 1994, between Pinkwood
          Properties Corp. and the Company, filed as Exhibit (10)-37 to the
          Company's Annual Report on Form 10-KSB for the fiscal year ended
          September 30, 1994, is hereby incorporated by reference.

(10)-10   Lease Agreement, dated December 1, 1994, between 1990 Westwood
          Boulevard and the Company, with respect to the Company's corporate
          offices, Filed as Exhibit (10)-32 to the Company's Annual Report on
          Form 10-KSB for the fiscal year ended September 30, 1995, is hereby
          incorporated by reference.

(10)-11   Agreement of Lease, dated September 16, 1996, between 666 Fifth Avenue
          Limited Partnership and Grand Havana Room -- New York, Inc., filed as
          Exhibit (10)-35 to the Company's Registration Statement on Form S-3
          (File No. 333-16045), is hereby incorporated by reference.

(10)-12   Office Building Lease dated August 23, 1996, by and between Writ
          Limited Partnership and the Company, T/A Grand Havana Room, filed as
          Exhibit (10)-39 to the Company's Registration Statement on Form S-3
          (File No. 333-16045), is hereby incorporated by reference.

(10)-13   Financing Agreement dated September 10, 1996 by and between the
          Company and United Leisure Corporation, filed as Exhibit (10)-40 to
          the Company's Registration Statement on Form S-3 (File No. 333-16045),
          is hereby incorporated by reference.

(10)-14   Territorial Rights Agreement dated as of May 6, 1997 by and among the
          Company and Grand Havana Room (Asia) Holding Hong Kong*

(10)-15   Financing Agreement dated as of February 12, 1997 by and between
          United Leisure Corporation and the Company*

<PAGE>   49

(10)-16   Amendment No. 1 to Financing Agreement dated as of September 30, 1997
          between United Leisure Corporation and the Company (amending financing
          agreement dated February 12, 1997)*

(10)-17   Amendment No. 1 to Financing Agreement dated as of July 15, 1997
          between United Leisure Corporation and the Company (amending financing
          agreement dated September 10, 1996)*

(10)-18   Financing Agreement dated as of May 1, 1997 by and between United Film
          Distributors, Inc. and the Company*

(10)-19   1996 Stock Option Plan of the Company*

(10)-20   Lease Agreement dated as of February 24, 1997 by and between the
          Company and Bally's Grand, Inc.*

(10)-21   Consulting Agreement between the Company and IPO Consultants dated
          September 16, 1997*

(21)      List of Subsidiaries*

(23)      Consent of Hollander, Gilbert & Co., independent public accountants.*

(27)      Financial Data Schedule*

----------
*  Filed herewith