**United States**


**Securities and Exchange Commission**


**Washington, D.C. 20549**





**FORM 10-QSB**





(Mark One)





x
**Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934**





For the quarterly period ended June 27, 2004





or


o
**Transition Report Under Section 13 or 15(d) of the Exchange Act**





For the transition period from  to





Commission file number 0-024828











**GRAND HAVANA ENTERPRISES, INC.**


**(Exact name of small business issuer as specified in its charter)**








**DELAWARE**

**95-4428370****(State or other jurisdiction of incorporation or organization)**

**(IRS Employer Identification No.)**


****


**1990 Westwood Boulevard, 3****rd****Floor**


**Los Angeles, CA 90025**


**(Address of principal executive offices)**





**(310) 475-5600**


**(Issuers telephone number)**





**N/A**********







**(Former name, former address and former fiscal year, if changed since last report)**


****





****


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





Yes  o     No  x





As of January 3, 2005, there were 14,599,306 shares of Common Stock outstanding.





Transitional Small Business Disclosure Format





Yes  o     No  x







INDEX




PART I.
FINANCIAL INFORMATION (unaudited)Item 1.
Financial Statements: (unaudited)Condensed Consolidated Balance Sheets as of June 27, 2004 (unaudited) and September 28, 2003
1Condensed Consolidated Statements of Operations for the three and nine months ended June 27, 2004 and June 29, 2003 (unaudited)
2Condensed Consolidated Statements of Cash Flows for the nine months ended June 27, 2004 and June 29, 2003 (unaudited)
3Notes to the Condensed Consolidated Financial Statements (unaudited)
4Item 2.
Management's Discussion and Analysis or Plan of Operation
8Item 3.
Controls and Procedures
14PART II.
OTHER INFORMATIONItem 6.
Exhibits
14SIGNATURES

14















****


****


**PART I - FINANCIAL INFORMATION**





**ITEM 1.            FINANCIAL STATEMENTS**


****


**GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
**CONDENSED CONSOLIDATED BALANCE SHEETS**


June 27, 2004


September 28,2003UnauditedASSETSCURRENT ASSETSCash and cash equivalents

$
219,711

$
368,206Accounts receivable, net


68,789


29,846Inventories, net


242,934


200,128Prepaid expenses


54,005


51,770-


-TOTAL CURRENT ASSETS


585,439


649,950PROPERTY AND EQUIPMENT, net of accumulated depreciation


2,069,077


2,220,719OTHER ASSETSRestricted cash


760,000


760,000Due from related parties


4,052


21,458Deposits and other assets


58,926


34,821TOTAL OTHER ASSETS


822,978


816,279TOTAL ASSETS

$
3,477,494

$
3,686,948LIABILITIES AND STOCKHOLDERS' DEFICIENCYCURRENT LIABILITIESCash overdraft

$
100,831

$
313,528Accounts payable and accrued liabilities


698,323


868,599Taxes payable


287,858


514,065Note payable to bank


185,000


185,000Deferred revenues


478,783


464,284Notes payable to related parties


3,486,196


1,511,146Due to related parties


55,575


2,131,863-


-TOTAL CURRENT LIABILITIES


5,292,566


5,988,485LONG TERM LIABILITIESDeferred rent payable


486,435


502,959Other long term liabilities


48,308


48,308TOTAL LONG TERM LIABILITIES


534,743


551,267STOCKHOLDERS' DEFICIENCYPreferred stock, $.01 par value; authorized 3,000,000 shares; issued and outstanding  noneCommon stock, $.01 par value; authorized 50,000,000 shares; issued and outstanding 14,524,306 shares


145,244


145,244Additional paid-in capital


13,279,044


13,279,044Accumulated deficit


(15,744,103
)

(16,277,092
)TOTAL STOCKHOLDERS' DEFICIENCY


(2,349,815
)

2,852,804
)TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY

$
3,477,494

$
3,686,948





See accompanying Notes to Condensed Consolidated Financial Statements.




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**GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**
 **CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
**(Unaudited)****


For the three months ended

For the nine months endedJune 27,2004

June 29,2003

June 27,2004

June 29,2003REVENUESFood and beverage

$
978,584

$
788,652

$
3,069,054

$
2,227,943Merchandise sales


113,040


80,699


342,465


242,507Humidor rental fees


681,403


615,790


2,054,993


1,624,001Club activities


170,791


227,231


601,517


682,524TOTAL REVENUES


1,943,818


1,712,372


6,068,029


4,776,975COSTS AND EXPENSESFood and beverage


415,370


304,050


1,253,406


813,944Merchandise


61,333


41,265


181,431


135,415Operating expensesDirect labor


461,449


454,114


1,389,973


1,297,193Occupancy and other


591,594


666,827


1,798,470


1,926,404General and administrative


176,612


160,766


538,170


490,759Depreciation and amortization


80,326


88,568


244,870


265,704TOTAL COSTS AND EXPENSES


1,786,684


1,715,590


5,406,320


4,929,419INCOME (LOSS) FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE)


157,134


(3,218
)

661,709


(152,444
)OTHER INCOME (EXPENSE)Interest income


51


2,415


894


8,825Interest expense


(54,024
)

(254,922
)

(158,821
)

(352,446
)Loss on disposal of asset





-


(791
)

-TOTAL OTHER INCOME (EXPENSE)


(53,973
)

(252,507
)

(158,718
)

(343,621
)-


-


-


-NET INCOME (LOSS)

$
103,161

$
(255,725
)
$
502,991

$
(496,065
)NET INCOME (LOSS) PER COMMON SHAREBASIC

$
0.01

$
(0.02
)
$
0.03

$
(0.03
)DILUTED


0.01


(0.02
)

0.03


(0.03
)WEIGHTED AVERAGE NUMBER OF COMMON SHARESBASIC


14,524,306


14,174,306


14,524,306


14,174,306DILUTED


14,824,306


14,174,306


14,689,874


14,174,306




See accompanying Notes to Condensed Consolidated Financial Statements.


|
|
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|

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**GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**


For the nine months endedJune 27,2004

June 29,2003CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
502,991

$
(496,065
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


244,870


265,704Changes in operating assets and liabilities:Accounts receivable, net


(38,943
)

14,361Inventories, net


(42,806
)

17,176Prepaid expenses


(2,235
)

(36,358
)Due from related parties


17,406


(14,938
)Deposits and other assets


(24,105
)

180Accounts payable and accrued liabilities


(170,276
)

(197,348
)Taxes payable


(226,207
)

403,544Deferred revenues


14,499


(11,331
)Deferred rent payable


(16,524
)

(16,524
)NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


258,670


(71,599
)CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment


(93,230
)

(38,165
)CASH FLOWS FROM FINANCING ACTIVITIESCash overdraft


(212,697
)

(274,830
)Notes payable and due to related parties


(101,238
)

150,815Note payable to bank





185,000NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES


(313,935
)

60,985NET DECREASE IN CASH AND CASH EQUIVALENTS


(148,495
)

(48,779
)CASH AND CASH EQUIVALENTS, beginning of period


368,206


429,268CASH AND CASH EQUIVALENTS, end of period

$
219,711

$
380,489SUPPLEMENTAL DISCLOSURES:Interest paid

$
35,999

$
19,435Income taxes paid


4,705


4,705





See accompanying Notes to Condensed Consolidated Financial Statements.


3










**GRAND HAVANA ENTERPRISES, INC. AND SUBSIDIARIES**


**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**


**FOR THE THREE AND NINE MONTHS ENDED JUNE 27, 2004 and JUNE 29, 2003**


**(Unaudited)**






1.                BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICES





The interim consolidated condensed financial statements presented have been prepared by Grand Havana Enterprises, Inc. (the Company) without audit, and in the opinion of the management, reflect all adjustments of a normal recurring nature necessary for a fair statement of (a) the consolidated results of operations for the three months and nine months ended June 27, 2004 and June 29, 2003, (b) the consolidated financial position at June 27, 2004 and (c) the consolidated cash flows for the nine months ended June 27, 2004 and June 29, 2003. Interim results are not necessarily indicative of the results for a full year. The consolidated balance sheet presented as of September 28, 2003 has been derived from the consolidated financial statements that have been audited by the Companys independent auditors. The
consolidated financial statements and notes are condensed as permitted by Form 10-QSB and do not contain certain information included in the annual financial statements and notes of the Company. The consolidated financial statements and notes included herein should be read in conjunction with the financial statements and notes included in the Companys Annual Report on Form10-KSB.





Use of Estimates. The preparation of financial statements in conformity with generally accepted accounting principles requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates.





Revenue Recognition and Measurement. The Company derives revenues from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise; (3) private events and club activities; and (4) food and beverage sales. Revenue from sales of cigars and related merchandise, private events and club activities, and food and beverage sales are recognized at the time of the sale. The Company recognizes two types of membership (humidor rental) fees, an initial fee, or set up fee, and a monthly rental fee. The initial fee is recognized at the time the member joins. The monthly rental fee is charged in advance for a three-month period, and recognized equally over the
three-month period. Deferred revenue represents those humidor fees charged in advance and recognized equally over the three-month period.





Income (Loss) Per Share. Basic income (loss) per share is calculated by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted income per share is calculated assuming the issuance of common shares, if dilutive, resulting from the exercise of stock options and warrants. These potentially dilutive securities were not included in the calculation of loss per share for the three and nine months ended June 29, 2003, because the Company incurred a loss during the periods and thus, their effect would have been anti-dilutive.





Principles of Consolidation. The consolidated financial statements include the accounts of Grand Havana Enterprises, Inc., and its wholly-owned subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.





Fair Value of Financial Instruments. The Company's financial instruments consist of cash and cash equivalents, trade accounts receivable, trade accounts payable, accrued expenses, related party receivables and payables, deferred liabilities and term loans. The fair value of the Company's financial instruments approximates the carrying value of the instruments.





Recent Accounting Pronouncements. In January 2003 (as revised in December 2003), the Financial Accounting Standards Board (FASB) issued Interpretation No. 46, entitled Consolidation of Variable Interest Entities (Interpretation 46), an interpretation of Accounting Research Bulletin No. 51 (ARB 51). Interpretation 46 addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties; or (ii) the investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make
decisions about the entitys activities through voting rights or similar rights, or (b) the obligation to absorb the expected losses of the entity if they occur.





Interpretation 46, as revised, also requires expanded disclosure by the primary beneficiary of a variable interest entity, and by an enterprise that holds a significant variable interest in a variable interest entity, but is not the primary beneficiary.





Interpretation 46, as revised, applies to small business issuers no later than the end of the first reporting period after December 15, 2004. The effective date includes those entities to which Interpretation 46 had previously applied. However, prior to the required application of Interpretation 46, a public entity that is a small business issuer must apply Interpretation 46 to those entities that are considered to be special purpose entities no later than as of the end of the first reporting period after December 15, 2003.





Interpretation 46 may be applied prospectively with a cumulative effect adjustment as of the date which it is first applied, or by restating previously issued financial statements for one or more years with a cumulative effect adjustment as of the beginning of the first year restated.





In June 2003, FASB issued an exposure draft for a proposal under the Statements of Financial Accounting Standards (SFAS), entitled Qualifying Special Purpose Entities (QSPE) and Isolation of Transferred Assets,**an amendment to SFAS No. 140 (The Exposure Draft). The Exposure Draft is a proposal that is subject to change, and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS No. 140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obligates a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special purpose entitys obligation to beneficial interest holders.





In April 2003, FASB issued SFAS No. 149, entitled Amendment of Statement 133 on Derivative Instruments and Hedging Activities (SFAS 149). SFAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and hedging activities under SFAS No. 133, entitled Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The changes in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. All of its provisions must be applied prospectively.





In May 2003, FASB issued SFAS No. 150, entitled Accounting for Certain Financial Instruments and Characteristics of Both Liabilities and Equity (SFAS 150). SFAS 150 changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS 150 requires that those instruments be classified as liabilities on the balance sheet.





4








SFAS 150 affects the issuers accounting for three types of freestanding financial instruments. One type is mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involve instruments that require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under SFAS 150 are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or that vary inversely with the value of the issuers shares. SFAS 150 does not apply to features embedded in a financial instrument that are not derivative in their entirety.





Most of the provisions of SFAS 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, entitled Elements of Financial Statements. The remaining provisions of SFAS 150 are consistent with FASBs proposal to revise the definition to encompass certain obligations that a reporting entity can settle by issuing its own shares. SFAS 150 is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a non-public entity, where the effective date is the fiscal period beginning after December 15, 2004.





The implementation of the provisions of these pronouncements are not expected to have a significant effect on the Companys consolidated financial statement presentation.




2.                SEGMENT INFORMATION





The Company maintains two locations, New York, New York and Beverly Hills, California. Information concerning principal geographic areas is set forth below:








Three monthsendedJune 27,2004

Three monthsendedJune 29,2003RevenuesNew York, New York

$
1,259,138

$
1,105,155Beverly Hills, California


684,680


607,217Total

$
1,943,818

$
1,712,372Gross ProfitNew York, New York

$
695,593

$
629,873Beverly Hills, California


310,073


283,070Total

$
1,005,666

$
912,943Net Income (Loss)New York, New York

$
210,573

$
(134,038
)Beverly Hills, California


141,206


89,546Los Angeles, California (corporate)


(248,618
)

(211,233
)Total

$
103,161


(255,725
)




5


Nine Monthsended June 27,2004

Nine MonthsendedJune 29,2003RevenuesNew York, New York

$
4,011,960

$
2,901,884Beverly Hills, California


2,056,069


1,875,091Total

$
6,068,029

$
4,776,975Gross ProfitNew York, New York

$
2,314,776

$
1,629,446Beverly Hills, California


928,443


900,977Total

$
3,243,219

$
2,530,423Net Income (Loss)New York, New York

$
835,404

$
(153,608
)Beverly Hills, California


358,056


292,161Los Angels, California (corporate)


(690,469
)

(634,618
)Total

$
502,991

$
(496,065
)Total AssetsNew York, New York

$
2,257,066

$
2,293,746Beverly Hills, California


1,069,172


1,129,114Los Angeles, California (corporate)


151,256


452,335Total

$
3,477,494

$
3,875,195




3.                RELATED PARTY TRANSACTIONS





Notes Payable to Related Parties. Notes payable to related parties at June 27, 2004 and September 28, 2003 consisted of principal amounts due to the following:


June 27, 2004

September 28, 2003(A) Promissory notes, former Chief Executive Officer

$
2,460,901

$
940,246(B) Affiliated Company


782,917


489,000(C) Former landlord


166,055


(D) Chief Executive Officer


76,323


81,900Total

$
3,486,196

$
1,511,146





(A) As of March 1, 2004, the Company was indebted to its former Chief Executive Officer in the principal amount of $2,500,901 as a result of monies owed pursuant to notes issued to the former CEO in 1998 and 2001, and as a result of accrued liabilities to advances made by the former CEO. On March 1, 2004, the Company and its former Chief Executive Officer agreed to cancel and terminate the outstanding obligations owed by the Company as of such date, and, in lieu thereof, the Company issued a promissory note to the former CEO in the amount of $2,500,901 (the "March 2004 Promissory Note"). In connection therewith, the former CEO agreed to terminate a  Security Agreement dated September 30, 1998, whereby he was granted a security interest in substantially all of the assets of the Company. The March 2004
Promissory Note provided for interest at the rate of 5% per annum, and was due and payable upon the earlier of (i) the sale of all or substantially all of the assets of the Company, (ii) a change in control of the Company, or (iii) ninety days after written demand for payment was made by the former Chief Executive Officer. The Company agreed to make payments to the former Chief Executive Officer of at least $10,000 a month. As of June 27, 2004, the Company owed a principal balance of $2,460,901.


6


(B) As of March 1, 2004, the Company was indebted to an affiliated company, United Film Distributors, Inc. (United Films) in the amount of $782,917, as a result of monies due under a promissory note issued to the affiliated company in May 1997 (the "1997 Promissory Note"). On March 1, 2004, the Company and United Films agreed to cancel and terminate the obligations due under the 1997 Promissory Note, and, in lieu thereof, the Company issued a promissory note in the amount of $782,917. The promissory note provided for interest at the rate of 5% per annum, and was due and payable upon the earlier of (i) the sale of all or substantially all of the assets of the Company, (ii) a change in control of the Company, or (iii) ninety days after written demand for payment was made by United Films.





(C) As of March 1, 2004, the Company was indebted to 1990 Westwood Boulevard, Inc. (1990 Westwood), the Companys former landlord of its corporate office, in the amount of  $181,720 for outstanding rent due under its lease. On March 1, 2004, the Company entered into a letter agreement with its former landlord, whereby the Company issued a promissory note in the amount of $181,720. The promissory note provided for interest at the rate of 5% per annum, and was due and payable upon the earlier of (i) the sale of all or substantially all of the assets of the Company, (ii) a change in control of the Company, or (iii) ninety days after written demand for payment was made by 1990 Westwood. The Company made a $15,665 payment to 1990 Westwood on March 8, 2004. As of June 27, 2004, the Company owed a
total of $166,055 to its former landlord.





(D) In 1999, the Chief Executive Officer and principal stockholder of the Company advanced the Company $60,000. The note bears interest at 10.3% per annum. On June 18, 2003, the Company entered into a loan agreement with its Chief Executive Officer to borrow an additional $50,000. The note bears interest at 7% per annum, and is due and payable on September 15, 2004. As of June 27, 2004, the Company repaid $33,677, bringing the total indebtedness to $76,900.





As of June 27, 2004, United Leisure Corporation (United Leisure), an affiliated company, owned 966,666 shares of the Companys common stock. This stock was issued to United Leisure in repayment of advances the affiliate granted the Company.





Due from Related Parties. Amounts due from related parties at June 27, 2004 and September 28, 2003 consisted of the following:


June 27, 2004

September 28, 2003Affiliated Company

$
3,424

$
20,794Former landlord


13


Expenses owed by related party


615


664$
4,052

$
21,458


Due to Related Parties . Amounts due to related parties at June 27, 2004 and September 28, 2003 consisted of the following:


June 27, 2004

September 28, 2003Advances from the former Chief Executive Officer

$


$
725,530Accrued interest expense to affiliate


12,655


306,399Accrued interest expense toformer Chief Executive Officer


39,844


874,161Accrued salary and interest expense to Chief Executive Officer


346


44,053Accrued interest and rent from former landlord


2,730


181,720$
55,575

$
2,131,863
 These advances are unsecured, bear interest at 10% per annum, and are due and payable on demand.
 
 4.            TAXES PAYABLE
 
 In May 2003, the Company began negotiations with the State of New York Department of Finance with regards to the Companys sales tax in arrears. The Company paid $100,000 as a down payment and entered into a tentative agreement to pay $25,000 a month until the total balance was paid-in-full. In July 2003, the Company began making monthly payments. On January 24, 2004, the State of New York formally approved the $25,000 per month payment agreement, which is scheduled to end in July 2005. The Company owed the New York State Department of Taxation $287,858 in back sales tax, interest and penalties as of June 27, 2004.
 
 5.            NOTE PAYABLE
 
 The Company has a $185,000 loan with Bank Leumi. The note is dated February 28, 2003 and matures on March 1, 2005. The interest rate is LIBOR plus 2%. The Company's Chief Executive Officer is a guarantor of the Company's credit line and has pledged certain personal assets to secure the obligation.
 
 6.            SUBSEQUENT EVENTS
  On September 26, 2004, the Company cancelled the notes issued to its former Chief Executive Officer, United Films and 1990 Westwood on March 1, 2004. In consideration for such cancellation and termination of the March 1, 2004 notes, the Company issued its former Chief Executive Officer, United Films and 1990 Westwood new, unsecured promissory notes for principal and unpaid interest owed to such parties as of such date in amounts of $2,435,050, $798,786 and $170,866, respectively (collectively, the September 2004 Notes). The September 2004 Notes bear interest at a rate of 5% per annum. The Company has the right to prepay the September 2004 Notes in whole or in part at any time. In addition, the Company has agreed to pay its former Chief Executive Officer successive monthly installments of at least
$10,000, commencing on October 1, 2004 and continuing on the first day of each month until the loan matures. The September 2004 Notes are all due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
    7


**ITEM 2.**            **MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATION**





OVERVIEW





The following discussion should be read in conjunction with the Companys consolidated financial statements and the notes thereto appearing elsewhere in this Quarterly Report on Form 10-QSB. Certain statements contained herein that are not related to historical results, including, without limitation, statements regarding the Companys business strategy and objectives, future financial position and estimated cost savings, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the Securities Act) and Section 21E of the Securities Exchange Act of 1934 (the Exchange Act), and involve risks and uncertainties. Although the Company believes that the assumptions on which these forward-looking statements are based are reasonable, there can be no
assurance that such assumptions will prove to be accurate and actual results could differ materially from those discussed in the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, risks and uncertainties associated with the ability to obtain adequate working capital on terms favorable to the Company, compliance with regulatory requirements, the Companys ability to sell more memberships, a decline in public consumption of cigars and other tobacco products, significant increases in excise taxes which could substantially increase the price of cigars and general economic factors. All forward-looking statements contained in the Quarterly Report on Form 10-QSB are qualified in their entirety by this statement.





The Company is engaged in the business of the ownership and operation of private membership cigar clubs known as Grand Havana Rooms, and in the ownership and operation of retail cigar stores known as Grand Havana House of Cigars. Unless the context otherwise indicates, the Company means Grand Havana Enterprises, Inc. and its consolidated subsidiaries.





The Company was incorporated under the laws of the State of Delaware on April 13, 1993 under the name United Restaurants, Inc. The Company was originally formed in order to acquire all of the capital stock of Loves Enterprises, Inc. (LEI), which company was the franchiser, owner and operator of the Loves restaurant chain. The Company acquired the stock of LEI in May 1993. In December 1996, due to less than anticipated operating results from the Loves restaurant chain, the Company adopted a plan of discontinuance with respect to the Loves restaurant chain, which plan was completed in July 1998.





The Company currently owns and operates two Grand Havana Rooms, one in Beverly Hills, California, which opened in June 1995 and one in New York, New York, which opened in May 1997. The Company formerly operated a third Grand Havana Room and House of Cigars in Washington, D.C. That location was closed in February 1999 and substantially all of the assets were sold. In addition, the Company currently owns and operates one Grand Havana House of Cigars location, in Beverly Hills, California, which opened in December 1997. The Company previously operated a Grand Havana House of Cigars in Las Vegas, Nevada, which opened in November 1997. The Company closed the Las Vegas Grand Havana House of Cigars, on January 1, 2002. The Companys primary business focus is operating its existing cigar clubs and retail store.





For the nine months ended June 27, 2004, the Company had a net income of $502,991, compared to a net loss of $(496,065) for the nine months ended June 29, 2003. This is primarily due to an increase in membership and club usage at the Grand Havana Room in New York City.





8


RESULTS OF OPERATIONS





THREE MONTHS ENDED JUNE 27, 2004 COMPARED TO THREE MONTHS ENDED JUNE 29, 2003.





REVENUES





The Company derives revenues from continuing operations from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise, (3) club activities; and (4) food and beverage sales. During the fiscal quarter ended June 27, 2004, the Company had revenues for $1,943,818, compared to revenues of $1,712,372 for fiscal quarter ended June 29, 2003, an increase of $231,446, or approximately 13.5%. This increase in revenue is primarily due to an increase in humidor rental fees.





Humidor Rental Fees. Revenue from humidor rental fees increased from $615,790 in the fiscal quarter ended June 29, 2003 to $681,403 in the fiscal quarter ended June 27, 2004, an increase of $65,613, or approximately 10.7%. This was primarily due to an increase in membership at the New York Grand Havana Room. The New York Grand Havana Room is now maintaining a waiting list for membership.





Merchandise Sales. Revenue from merchandise sales increased from $80,699 in the fiscal quarter ended June 29, 2003 to $113,040 in the fiscal quarter ended June 27, 2004, an increase of $32,341, or approximately 40.1%. This increase is principally due to an increase in membership in the New York Grand Havana Room.





Club Activities. Revenue from club activities or private events decreased from $227,231 in the fiscal quarter ended June 29, 2003 to $170,791 in the fiscal quarter ended June 27, 2004, a decrease of $56,440, or approximately 24.8%.





Food and Beverage. Revenue from food and beverage increased from $788,652 in the fiscal quarter ended June 29, 2003 to $978,584 in the fiscal quarter ended June 27, 2004, an increase of $189,932, or approximately 24.1%. This increase is primarily due to a greater number of members in the New York Grand Havana Room.





COSTS AND EXPENSES





During the fiscal quarter ended June 27, 2004, the Company incurred total costs and expenses of $1,786,684, compared to $1,715,590 for the fiscal quarter ended June 29, 2003, an increase of $71,094, or approximately 5.1%.





Food and Beverage. During the quarter ended June 27, 2004, food and beverage expenses were $415,370, an increase of $111,320, or 36.6%, over food and beverage expenses for the quarter ended June 29, 2003. This increase was attributable to a 24.1% increase in food and beverage income. The Company also closed its kitchen in Beverly Hills at the end of January 2001, and entered into a contract with Mistrals Brasserie L.L.C. (Mistrals) to provide food for the club. In June 2002, Mistrals was replaced by 301 N. Canon Dr. L.L.C. (301 Canon). In August 2003, 301 Canon was replaced by Luce of Beverly Hills (Luce). The contract calls for food costs to be 78% of Luces sales.





Merchandise. During the quarter ended June 27, 2004, merchandise expenses were $61,333 an increase of $20,068, or 48.6%, over merchandise expenses for the quarter ended June 29, 2003. This increase was due to a 40.1% increase in merchandise sales.





Operating Expenses. During the quarter ended June 27, 2004, operating expenses were $1,053,043, a decrease of $67,898, or 6.0%, from operating expenses for the quarter ended June 29, 2003.








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Depreciation and Amortization. Depreciation and amortization expenses decreased by approximately 9.3%, from $88,568 in the fiscal quarter ended June 29, 2003, to $80,326 in the fiscal quarter ended June 27, 2004.





General and Administrative. General and administrative expenses increased by approximately 9.9%, from $160,766 in the fiscal quarter ended June 29, 2003, to $176,612 in the fiscal quarter ended June 27, 2004.





NET INCOME





The Company experienced a net income of $103,161, or $0.01 per share, for the fiscal quarter ended June 27, 2004, compared to a net loss of $(255,725), or $(0.02) per share, for fiscal quarter ended June 29, 2003, an increase in net income of $358,886, or approximately 140.3%.





NINE MONTHS ENDED JUNE 27, 2004 COMPARED TO NINE MONTHS ENDED JUNE 29, 2003.





REVENUES





During the nine months ended June 27, 2004, the Company had revenues of $6,068,029, compared to revenues of $4,776,975 for the nine months ended June 29, 2003, an increase of $1,291,054, or approximately 27.0%. This increase in revenue is primarily due to an increase in humidor rental fees and food and beverage revenue from the New York Grand Havana Room.





Humidor Rental Fees. Revenue from humidor rental fees increased from $1,624,001 in the nine months ended June 29, 2003 to $2,054,993 in the nine months ended June 27, 2004, an increase of $430,992, or approximately 26.5%. This increase is due to an increase in membership at the Grand Havana Room in New York.





Merchandise Sales. Revenue from merchandise sales increased from $242,507 in the nine months ended June 29, 2003 to $342,465 in the nine months ended June 27, 2004, an increase of $99,958, or approximately 41.2%.





Club Activities. Revenue from club events decreased from $682,524 in the nine months ended June 29, 2003 to $601,517 in the nine months ended June 27, 2004, a decrease of $81,007, or approximately 11.9%.





Food and Beverage. Revenue from food and beverage increased from $2,227,943, in the nine months ended June 29, 2003 to $3,069,054 in the nine months ended June 27, 2004, an increase of $841,111, or approximately 37.8%. This is primarily due to an increase in members utilizing the club in New York City.





COST AND EXPENSES





During the nine months ended June 27, 2004, the Company incurred total costs and expenses of $5,406,320, compared to $4,929,419 for the nine months ended June 29, 2003, an increase to $411,901, or approximately 9.6%.





Food and Beverage. During the nine months ended June 27, 2004, food and beverage expenses were $1,253,406, an increase of $439,462, or 54.0%, over food and beverage expenses for nine months ended June 29, 2003.





Merchandise. During the nine months ended June 27, 2004, merchandise expenses were $181,431, an increase of $46,016, or 34.0%, over merchandise expenses for the nine months ended June 29, 2003.





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Operating Expenses. During the nine months ended June 27, 2004, operating expenses were $3,188,443, a decrease of $35,154, or 1.0%, from operating expenses for the nine months ended June 29, 2003.





Depreciation and Amortization. Depreciation and amortization expenses decreased by approximately 7.8%, from $265,704 in the nine months ended June 29, 2003, to $244,870 in the nine months ended June 27, 2004.





General and Administrative. General and administrative expenses increased by approximately 9.7%, from $490,759 in the nine months ended June 29, 2003, to $538,170 in the nine months ended June 27, 2004.





NET INCOME





The Company had net income of $502,991, or $0.03 per share, for the nine months ended June 27, 2004, compared to a net loss of $(496,065), or $(0.03) per share, for the nine months ended June 29, 2003, an increase in net income of $999,056, or 201.4%.





LIQUIDITY AND CAPITAL RESOURCES





At June 27, 2004, the Company had cash or cash equivalents of $219,711.





As of March 1, 2004, the Company was indebted to Harry Shuster, the former Chief Executive Officer, in the amount of $2,500,901 as a result of amounts due under notes issued to Mr. Shuster in 1998 and 2001, and as a result of accrued liabilities to advances made by the former CEO. As of March 1, 2004, the Company and Mr. Shuster agreed to cancel and terminate the outstanding obligations owed by the Company as of such date, and, in lieu thereof, the Company issued the March 2004 Promissory Note to the former CEO in the amount of $2,500,901. In connection therewith, Mr. Shuster agreed to terminate a Security Agreement dated September 30, 1998, whereby he was granted a security interest in substantially all of the assets of the Company. The March 2004 Promissory Note provided for interest at the rate of 5% per annum,
and was due and payable upon the earlier of (1) the sale of all or substantially all of the assets of the Company, (2) a change in control of the Company, or (3) ninety days after written demand for payment was made by Mr. Shuster. As of June 27, 2004, the Company owed a principal balance of $2,460,901.





On September 26, 2004, the Company cancelled the March 2004 Promissory Note. In consideration for cancellation and termination of the note, the Company issued its former Chief Executive Officer a new, unsecured promissory note in the amount of $2,435,050 (the September 2004 Promissory Note). The September 2004 Promissory Note bears interest at a rate of 5% per annum. The Company has the right to prepay the September 2004 Promissory Note in whole or in part at any time. In addition, the Company has agreed to pay its former Chief Executive Officer successive monthly installments of at least $10,000, commencing on October 1, 2004 and continuing on the first day of each month until the loan matures. The September 2004 Promissory Note is due and payable upon the earlier of (1) September 30, 2007, (2)
the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.
  On March 1, 2004, the Company was indebted to 1990 Westwood Boulevard, its former landlord, in the amount of $181,720 for outstanding accrued rent due under its lease. On March 1, 2004, the Company and 1990 Westwood entered into a letter agreement, whereby the Company issued a promissory note to 1990 Westwood in the amount of $181,720. The promissory note provided for interest at the rate of 5% per annum, and was due and payable upon the earlier of (1) the sale of all or substantially all of the assets of the Company, (2) a change in control of the Company, or (3) ninety days after written demand for payment was made by 1990 Westwood. The balance as of June 27, 2004 was $166,055.




On September 26, 2004, the Company cancelled the note issued to 1990 Westwood on March 1, 2004. In consideration for cancellation and termination of the note, the Company issued 1990 Westwood a new, unsecured promissory note in the amount of $170,866 for principal and unpaid interest owed as of September 26, 2004. The new note bears interest at a rate of 5% per annum. The Company has the right to prepay the note in whole or in part at any time. The promissory note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.




As of March 1, 2004, the Company was indebted to United Films in the amount of $782,917 as a result of monies due under the 1997 Promissory Note. The president of United Films is Brian Shuster, the son of Harry Shuster and brother of Stanley Shuster, the current Chief Executive Officer and principal stockholder of the Company. On March 1, 2004, the Company and United Films agreed to cancel and terminate the obligations due under the 1997 Promissory Note, and, in lieu thereof, the Company issued a promissory note to United Films in the amount of $782,917 (the March 2004 United Films Promissory Note). The March 2004 United Films Promissory Note provided for interest at the rate of 5% per annum, and was due and payable upon the earlier of (1) the sale of all or substantially all of the assets of the
Company, (2) a change in control of the Company, or (3) ninety days after written demand for payment was made by United Films.








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On September 26, 2004, the Company cancelled the March 2004 United Films Promissory Note. In consideration for cancellation and termination of the note, the Company issued United Films a new, unsecured promissory note in the amount of $798,786 for principal and unpaid interest owed as of September 26, 2004 (the September 2004 United Films Promissory Note). The September 2004 United Films Promissory Note bears interest at a rate of 5% per annum. The Company has the right to prepay the note in whole or in part at any time. The September 2004 United Films Promissory Note is due and payable upon the earlier of (1) September 30, 2007, (2) the sale of all or substantially all of the assets of the Company, or (3) a change in control of the Company.

In 1999, Stanley Shuster, the Chief Executive Officer and principal stockholder of the Company, advanced the Company $60,000. The note bears interest at 10.3% per annum. On June 18, 2003, the Company entered into a loan agreement with its Chief Executive Officer to borrow an additional $50,000. The note bears interest at 7% per annum, and was due and payable on September 15, 2004. As of June 27, 2004, the Company owed $76,323 to Stanley Shuster.





The Company believes that it will meet its working capital needs in the current fiscal year from the operations of its Grand Havana Rooms and Grand Havana House of Cigars locations. Due to the fact that the trading price of the Companys common stock has remained low in the last twelve months and because it is not trading on a nationally recognized exchange, the Company does not anticipate that it will be able to sell its securities in private placements on terms that are acceptable to the Company for the foreseeable future. If the Company is unable to raise additional funds through 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 on terms acceptable to the Company.





CRITICAL ACCOUNTING POLICIES





Revenue Recognition and Measurement. The Company derives revenues from four principal sources: (1) membership (humidor rental) fees; (2) sales of cigars and related merchandise; (3) private events and club activities; and (4) food and beverage sales. Revenue from sales of cigars and related merchandise, private events and club activities, and food and beverage sales are recognized at the time of the sale. The Company recognizes two types of membership (humidor rental) fees, an initial fee, or set up fee, and a monthly rental fee. The initial fee is recognized at the time the member joins. The monthly rental fee is charged in advance for a three-month period, and recognized equally over the three-month period. Deferred revenue represents those humidor fees charged in advance and recognized equally over
the three-month period.





Recent Accounting Pronouncements. In January 2003, FASB issued Interpretation 46 which addresses consolidation by business enterprises of variable interest entities, which have one or both of the following characteristics: (i) the equity investment at risk is not sufficient to permit the entity to finance its activities without additional subordinated support from other parties; or (ii) the investors lack one or more of the following essential characteristics of a controlling financial interest: (a) the direct or indirect ability to make decisions about the entitys activities through voting rights or similar rights, or (b) the obligation to absorb the expected losses of the entity if they occur.





Interpretation 46, as revised, also requires expanded disclosure by the primary beneficiary of a variable interest entity, and by an enterprise that holds a significant variable interest in a variable interest entity, but is not the primary beneficiary.





Interpretation 46 applies to small business issuers no later than the end of the first reporting period after December 15, 2004. The effective date includes those entities to which Interpretation No. 46 had previously applied. However, prior to the required application of Interpretation 46, a public entity that is a small business issuer must apply Interpretation 46 to those entities that are considered to be special purpose entities no later than as of the end of the first reporting period after December 15, 2003.





Interpretation No. 46 may be applied prospectively with a cumulative effect adjustment as of the date it is first applied, or by restating previously issued financial statements for one or more years with a cumulative effect adjustment as of the beginning of the first year restated.


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In June 2003, FASB issued the Exposure Draft. The Exposure Draft is a proposal that is subject to change, and as such, is not yet authoritative. If the proposal is enacted in its current form, it will amend and clarify SFAS 140. The Exposure Draft would prohibit an entity from being a QSPE if it enters into an agreement that obligates a transferor of financial assets, its affiliates, or its agents to deliver additional cash or other assets to fulfill the special purpose entitys obligation to beneficial interest holders.




In April 2003, FASB issued SFAS 149 which amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and hedging activities under SFAS 133. The changes in SFAS 149 improve financial reporting by requiring that contracts with comparable characteristics be accounted for similarly. SFAS 149 is effective for contracts entered into or modified after June 30, 2003. All of its provisions must be applied prospectively.





In May 2003, FASB issued SFAS 150 which changes the accounting for certain financial instruments with characteristics of both liabilities and equity that, under previous pronouncements, issuers could account for as equity. The new accounting guidance contained in SFAS 150 requires that those instruments be classified as liabilities on the balance sheet.





SFAS 150 affects the issuers accounting for three types of freestanding financial instruments. One type is mandatory redeemable shares, which the issuing company is obligated to buy back in exchange for cash or other assets. A second type includes put options and forward purchase contracts, which involves instruments that require the issuer to buy back some of its shares in exchange for cash or other assets. The third type of instruments that are liabilities under SFAS 150 are obligations that can be settled with shares, the monetary value of which is fixed, tied solely or predominantly to a variable such as a market index, or that vary inversely with the value of the issuers shares. SFAS 150 does not apply to features embedded in a financial instrument that are not derivative in their
entirety.





Most of the provisions of SFAS 150 are consistent with the existing definition of liabilities in FASB Concepts Statement No. 6, entitled Elements of Financial Statements. The remaining provisions of SFAS 150 are consistent with FASBs proposal to revise the definition to encompass certain obligations that a reporting entity can settle by issuing its own shares. SFAS 150 is effective for the first interim period beginning after June 15, 2003, except for mandatory redeemable financial instruments of a non-public entity, where the effective date is the fiscal period beginning after December 15, 2004.





The implementation of the provisions of these pronouncements are not expected to have a significant effect on the Companys consolidated financial statement presentation.





TRENDS AND UNCERTAINTIES





The Department of Health and Mental Hygiene (DOHMH) of the City of New York passed the Smoke-Free Act (SFA), which prohibited smoking in restaurants and bars after September 26, 2003. Local Law 47 of 2002 amended the SFA, providing that an establishment considered a Tobacco Bar could allow smoking indoors past the September 26, 2003 deadline. On March 26, 2003, DOHMH passed an amendment to Local Law 47 of 2002 which stated that Tobacco Bars must prohibit smoking indoors as of July 25, 2003, unless they register with DOHMH. DOHMH defines a Tobacco Bar as an entity that generates less than 40% of total revenue from food, and more than 10% of revenue from the sale of tobacco products and accessories, including humidor rentals. The entity must also not have expanded or
changed its size or location as of December 31, 2001. The Company feels that it conforms to all aspects of this exemption. On June 25, 2003, the Company submitted its application to DOHMH. On July 22, 2003, DOHMH approved the Companys application. The exemption is valid until July 25, 2005. There can be no assurances that the Company will be able to maintain its Tobacco Bar status. Failure to do so could have a material adverse effect on the Companys business, financial condition and results of operations.


13**ITEM 3.  CONTROLS AND PROCEDURES**





(a)    Evaluation of Disclosure Controls and Procedures.




Stanley Shuster, the Companys Chief Executive Officer and Chief Financial Officer, after evaluating the Companys disclosure controls and procedures (as defined in the rules and regulations of the Securities and Exchange Commission under the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-QSB), concluded that as of such date, the Companys disclosure controls and procedures were effective to ensure that information the Company is required to disclose in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.





(b)    Changes in Internal Controls.





During the period covered by the Quarterly Report on Form 10-QSB, there were no significant changes in the Companys internal controls over financial reporting or in other factors that have materially affected, or are reasonably likely to materially affect, the Companys internal controls over financial reporting.


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**PART II - OTHER INFORMATION**

**ITEM 6.  EXHIBITS**

Exhibits31.1
Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 200232.1
Certification of Chief Executive Officer and Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002





**SIGNATURES**





In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.





**GRAND HAVANA ENTERPRISES, INC.**Date: February 9, 2005

/s/ Stanley ShusterChief Executive Officer and Chief Financial Officer





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