**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 March 28, 2004





or





|** ̈** | **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  ̈ No x





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





Transitional Small Business Disclosure Format





Yes  ̈ No x











INDEX





PART I.
FINANCIAL INFORMATION (unaudited)Item 1.
Financial Statements: (unaudited)Condensed Consolidated Balance Sheets as of March 28, 2004 (unaudited) and September 28, 2003
1Condensed Consolidated Statements of Operations for the three and six months ended March 28, 2004 and March 30, 2003 (unaudited)
2Condensed Consolidated Statements of Cash Flows for the six months ended March 28, 2004 and March 30, 2003 (unaudited)
3Notes to the Condensed Consolidated Financial Statements (unaudited)
4Item 2.
Management's Discussion and Analysis or Plan of Operation
10Item 3.
Controls and Procedures
16PART II.
OTHER INFORMATIONItem 2.
Unregistered Sales of Equity Securities and Use of Proceeds
16Item 6.
Exhibits
16SIGNATURES
17














**PART I - FINANCIAL INFORMATION**




****
**ITEM 1.**
**FINANCIAL STATEMENTS**




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



March 28,
2004

September 28,
2003(unaudited)ASSETSCURRENT ASSETSCash and cash equivalents

$
173,014

$
368,206Accounts receivable, net


32,899


29,846Inventories, net


243,366


200,128Prepaid expenses


96,210


51,770TOTAL CURRENT ASSETS


545,489


649,950PROPERTY AND EQUIPMENT, net of accumulated depreciation


2,108,270


2,220,719OTHER ASSETSRestricted cash


760,000


760,000Due from related parties


1,579


21,458Deposits and other assets


45,692


34,821TOTAL OTHER ASSETS


807,271


816,279TOTAL ASSETS

$
3,461,030


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

$
83,453

$
313,528Accounts payable and accrued liabilities


748,700


868,599Taxes payable


356,858


514,065Notes payable to bank


185,000


185,000Deferred revenues


419,124


464,284Notes payable to related parties


3,516,772


1,511,146Due to related parties


64,372


2,131,863TOTAL CURRENT LIABILITIES


5,374,279


5,988,485LONG TERM LIABILITIESDeferred rent payable-long term portion


491,943


502,959Other long term liabilities


48,308


48,308TOTAL LONG TERM LIABILITIES


540,251


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


(15,877,788
)

(16,277,092
)TOTAL STOCKHOLDERS' DEFICIENCY


(2,453,500
)

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

$
3,461,030

$
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 six months endedMarch 28,
2004

March 30,
2003

March 28,
2004

March 30,
2003REVENUESFood and beverage

$
979,960

$
648,65

$
2,090,470

$
1,439,291Merchandise sales


99,554


61,678


229,425


161,808Humidor rental fees


699,208


550,277


1,373,590


1,008,211Club activities


144,385


185,821


430,726


455,293TOTAL REVENUES


1,923,107


1,446,430


4,124,211


3,064,603COSTS AND EXPENSESFood and beverage


404,767


252,946


838,036


509,894Merchandise


48,467


33,069


120,098


94,150Operating expensesDirect labor


468,842


437,187


928,524


843,079Occupancy and other


582,559


560,085


1,206,876


1,259,577General and administrative


174,453


156,621


361,558


329,993Depreciation and amortization


83,310


88,568


165,071


177,136TOTAL COSTS AND EXPENSES


1,762,398


1,528,476


3,620,163


3,213,829INCOME (LOSS) FROM OPERATIONS BEFORE OTHER INCOME (EXPENSE)


160,709


(82,046
)

504,048


(149,226
)OTHER INCOME (EXPENSE)Interest income


59


3,010


843


6,410Interest expense


(52,372
)

(47,816
)

(104,797
)

(97,524
)Loss on disposal of asset


(791
)




(791
)

TOTAL OTHER INCOME (EXPENSE)


(53,104
)

(44,806
)

(104,745
)

(91,114
)NET INCOME (LOSS)

$
107,605

$
(126,852
)
$
399,303

$
(240,340
)NET INCOME (LOSS) PER COMMON SHAREBASIC

$
0.01

$
(0.01
)
$
0.03

$
(0.02
)DILUTED


0.01


(0.01
)

0.03


(0.02
)WEIGHTED AVERAGE NUMBER OF COMMON SHARESBASIC


14,524,306


14,174,306


14,524,306


14,174,306DILUTED


14,620,973


14,174,306


14,622,658


14,174,306


See accompanying Notes to Condensed Consolidated Financial Statements.





2





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


**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**


**(Unaudited)**







For the six months endedMarch 28,
2004

March 30,
2003CASH FLOWS FROM OPERATING ACTIVITIESNet income (loss)

$
399,303

$
(240,340
)Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:Depreciation and amortization


165,071


177,136Changes in operating assets and liabilities:Accounts receivable, net


(3,053
)

(4,995
)Inventories, net


(43,238
)

5,119Prepaid expenses


(44,440
)

(69,509
)Due from related parties


19,879


(11,987
)Deposits and other assets


(10,870
)

580Accounts payable and accrued liabilities


(119,899
)

(146,732
)Taxes payable


(157,207
)

190,837Deferred revenues


(45,160
)

(4,676
)Deferred rent payable


(11,016
)

(11,016
)NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES


149,370


(115,583
)CASH FLOWS FROM INVESTING ACTIVITIESPurchases of property and equipment


(52,623
)

(20,976
)CASH FLOWS FROM FINANCING ACTIVITIESCash overdraft


(230,075
)

38,026Notes and due to related parties


(61,864
)

83,651NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES


(291,939
)

121,677NET DECREASE IN CASH AND CASH EQUIVALENTS


(195,192
)

(14,882
)CASH AND CASH EQUIVALENTS, beginning of period


368,206


429,268CASH AND CASH EQUIVALENTS, end of period

$
173,014

$
414,386Supplemental disclosures:Interest paid

$
12,719

$
11,437Income 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 SIX MONTHS ENDED MARCH 28, 2004 AND MARCH 30, 2003**


**(Unaudited)**





1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES





The interim consolidated condensed financial statements presented have been prepared by Grand Havana Enterprises, Inc. (the Company) without audit, and in the opinion of the management, reflect all adjustments of a normal recurring nature necessary for a fair statements of (a) the consolidated results of operations for the three and six months ended March 28, 2004 and March 30, 2003, (b) the consolidated financial position at March 28, 2004 and (c) the consolidated cash flows for the six months ended March 28, 2004 and March 30, 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 accounting principles generally accepted in the United States of America 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 six months ended March 30, 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.





4


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.





5  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 months

Three monthsended

endedMarch 28,

March 30,2004


2003RevenuesNew York, New York

$
1,234,185

$
811,998Beverly Hills, California


688,922


634,432Total

$
1,923,107

$
1,446,430Gross ProfitNew York, New York

$
700,041

$
411,220Beverly Hills, California


300,990


311,168Total

$
1,001,031

$
722,388Net Income (Loss)New York, New York

$
221,404

$
(21,099
)Beverly Hills, California


99,986


95,974Los Angeles, California (corporate)


(213,785
)

(201,727
)Total

$
107,605

$
(126,852
)
6Six months

Six monthsended

endedMarch 28,

March 30,2004

2003RevenuesNew York, New York

$
2,752,822

$
1,796,729Beverly Hills, California


1,371,389


1,267,874Total

$
4,124,211

$
3,064,603Gross ProfitNew York, New York

$
1,619,183

$
999,572Beverly Hills, California


618,370


617,906Total

$
2,237,553

$
1,617,478Net Income (Loss)New York, New York

$
624,831

$
(19,570
)Beverly Hills, California


216,850


202,615Los Angeles, California (corporate)


(442,378
)

(423,385
)Total

$
399,303

$
(240,340
)Total AssetsNew York, New York

$
2,248,530

$
2,306,659Beverly Hills, California


1,071,974


1,154,756Los Angeles, California (corporate)


140,526


580,270Total

$
3,461,030

$
4,041,685


3.
RELATED PARTY TRANSACTIONS


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


March 28,

September 28,2004

2003(A)  Related Party

$
2,490,901

$
940,246(B)  Affiliated Company


782,917


489,000(C)  Former landlord


166,055


(D)  Chief Executive Officer


76,900


81,900Total

$
3,516,773

$
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 payments was made by the former Chief Executive Officer.  As of March 28, 2004, the Company owed a principal balance of $2,490,901.





7


(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 March 28, 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 the 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 March 28, 2004, the Company repaid $33,100, bringing the total indebtedness to $76,900.





As of March 28, 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 March 28, 2004 and September 28, 2003 consisted of the following:




March 28,


September 28,2004


2003Affiliated Company

$
1,406

$
20,793Former landlord


13


Expenses owed by related party


160


665Total

$
1,579

$
21,458





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




March 28,

September 28,2004

2003Advances from the former Chief Executive Officer

$


$
725,530Accrued interest expense to affiliate


2,895


306,399Accrued interest expense toformer Chief Executive Officer


10,191


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


50,657


44,053Accrued interest and rent to former landlord


629


181,720$
64,372

$
2,131,863







These advances are unsecured and bear no interest.








8







4.         TAXES PAYABLE





On February 11, 2003, the Company was notified by the City of New York Department of Finance that it was in arrears in payment of Commercial Rent Tax. This tax is based on annual rent payments made to the Companys landlord at a rate of 6%, after a 35% discount. The Company has never paid any Commercial Rent Tax since its opening in June 1997. The City informed the Company that it was the responsibility of the landlord to inform its tenants of the rent tax in effect. Upon notification by the City of New York, the Company requested a conciliation conference, which was granted and held on June 24, 2003, and attended by Stanley Shuster, the Companys Chief Executive Officer. At this conference, the Company agreed to pay the back rent tax and interest,
while the City of New York agreed to waive all penalties. This amounted to $137,498 in back taxes and $36,036 in interest. The City waived $53,293 in penalties. On July 31, 2003, the Company made a down payment of $43,250. On September 12, 2003, the Company was notified by the City of New York of its upcoming amnesty period, starting October 20, 2003 and running until January 23, 2004. During this period if payment of remaining back rent tax was paid-in-full, the interest portion would be reduced to $20,154. During the three months ended March 31, 2004, the Company paid off the remaining total of $90,472 due to the City of New York.





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. As of March 28, 2004, the Company owed the New York State Department of Taxation $356,858 in back sales tax, interest and penalties.




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.




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**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 six months ended March 28, 2004, the Company had a net income of $399,303, compared to a net loss of $(240,340) for the six months ended March 30, 2003. This is primarily due to the increased membership and club usage at the Grand Havana Room in New York City.





10 RESULTS OF OPERATIONS





THREE MONTHS ENDED MARCH 28, 2004 COMPARED TO THREE MONTHS ENDED MARCH 30, 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 March 28, 2004, the Company had revenues of $1,923,107, compared to revenues of $1,446,430 for fiscal quarter ended March 30, 2003, an increase of $476,677, or approximately 33.0%. This increase in revenue is primarily due to an increase in humidor rental fees, and an increase in food and beverage revenue.





Humidor Rental Fees. Revenue from humidor rental fees increased from $550,277 in the fiscal quarter ended March 30, 2003 to $699,208 in the fiscal quarter ended March 28, 2004, an increase of $148,931, or approximately 27.1%. 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 $61,678 in the fiscal quarter ended March 30, 2003 to $99,554 in the fiscal quarter ended March 28, 2004, an increase of $37,876, or approximately 61.4%. 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 $185,821 in the fiscal quarter ended March 30, 2003 to $144,385 in the fiscal quarter ended March 28, 2004, a decrease of $41,436, or approximately 22.3%.





Food and Beverage. Revenue from food and beverage increased from $648,654 in the fiscal quarter ended March 30, 2003 to $979,960 in the fiscal quarter ended March 28, 20 04, an increase of $331,306, or approximately 51.1%. 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 March 28, 2004, the Company incurred total costs and expenses of $1,762,398, compared to $1,528,476 for the fiscal quarter ended March 30, 2003, an increase of $233,922, or approximately 15.3%.





Food and Beverage. During the quarter ended March 28, 2004, food and beverage expenses were $404,767, an increase of $151,821, or 60.0%, over food and beverage expenses for the quarter ended March 30, 2003. This increase was attributable to a 51% 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 March 28, 2004, merchandise expenses were $48,467, an increase of $15,398, or 46.6%, over merchandise expenses for the quarter ended March 30, 2003. This increase was due to a 27% increase in merchandise sales.





Operating Expenses. During the quarter ended March 28, 2004, operating expenses were $1,051,401, an increase of $54,129, or 5.4%, over operating expenses for the quarter ended March 30, 2003. This was attributable to an increase in activity at the New York Grand Havana Room.





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Depreciation and Amortization. Depreciation and amortization expenses decreased by approximately 5.9%, from $88,568 in the fiscal quarter ended March 30, 2003, to $83,310 in the fiscal quarter ended March 28, 2004.





General and Administrative. General and administrative expenses increased by approximately 11.4%, from $156,621 in the fiscal quarter ended March 30, 2003, to $174,453 in the fiscal quarter ended March 28, 2004.





NET INCOME (LOSS)





The Company experienced a net income of $107,605, or $0.01 per share, for the fiscal quarter ended March 28, 2004, compared to a net loss of $(126,852), or $(0.01) per share, for fiscal quarter ended March 30, 2003, an increase in net income of $234,457, or approximately 184.8%.





SIX MONTHS ENDED MARCH 28, 2004 COMPARED TO SIX MONTHS ENDED MARCH 30, 2003.





REVENUES





During the six months ended March 28, 2004, the Company had revenues of $4,124,211, compared to revenues of $3,064,603 for the six months ended March 30, 2003, an increase of $1,059,608, or approximately 34.6%. This increase in revenues 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 $1,008,211 in the six months ended March 30, 2003 to $1,373,590 in the six months ended March 28, 2004, an increase of $365,379, or approximately 36.2%. 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 $161,808 in the six months ended March 30, 2003 to $229,425 in the six months ended March 28, 2004, an increase of $67,617, or approximately 41.8%.





Club Activities. Revenue from club events decreased from $455,293 in the six months ended March 30, 2003 to $430,726 in the six months ended March 28, 2004, a decrease of $24,567, or approximately 5.4%.





Food and Beverage. Revenue from food and beverage increased from $1,439,291 in the six months ended March 30, 2003 to $2,090,470 in the six months ended March 28, 2004, an increase of $651,179, or approximately 45.2%. This is primarily due to an increase in members utilizing the club in New York City.





COST AND EXPENSES





During the six months ended March 28, 2004, the Company incurred total costs and expenses of $3,620,163, compared to $3,213,829 for the six months ended March 30, 2003, an increase to $406,334, or approximately 12.56%.





Food and Beverage. During the six months ended March 28, 2004, food and beverage expenses were $838,036, an increase of $328,142, or 64.4%, over food and beverage expenses for six months ended March 30, 2003.





Merchandise. During the six months ended March 28, 2004, merchandise expenses were $120,098, an increase of $25,948, or 27.6%, over merchandise expenses for the six months ended March 30, 2003.





12  Operating Expenses. During the quarter ended March 28, 2004, operating expenses were $2,135,400, an increase of $32,744, or 1.86%, over operating expenses for the six months ended March 30, 2003.





Depreciation and Amortization. Depreciation and amortization expenses decreased by approximately 6.8%, from $177,136 in the six months ended March 30, 2003, to $165,071 in the six months ended March 28, 2004.





General and Administrative. General and administrative expenses increased by approximately 9.6%, from $329,993 in the six months ended March 30, 2003, to $361,558 in the six months ended March 28, 2004.





NET INCOME (LOSS)





The Company experienced a net income of $399,303, or $0.03 per share, for the six months ended March 28, 2004, compared to a net loss of $(240,340), or $(0.02) per share, for the six months ended March 30, 2003, an increase in net income of $639,643, or 266.1%.





LIQUIDITY AND CAPITAL RESOURCES





At March 28, 2004, the Company had cash or cash equivalents of $173,014 .





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 obligatons owed by the Company as of such date, and, in lieu thereof, issued the March 2004 Promissory Note note to Mr. Shuster 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. For the quarter ended March 28, 2004, the Company made a $10,000 payment to Mr. Shuster, leaving a balance of $2,490,901.




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. During the quarter ended March 28, 2004, the Company made a $15,000 payment to its former landlord, leaving a balance of $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 is 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 March 28, 2004, the Company repaid $33,100, bringing the total indebtedness to $76,900.





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.





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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.





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








15








**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.





**PART II - OTHER INFORMATION**





****
**ITEM 2.**
**UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**


On March 1, 2004, the Company issued stock options to its employees to purchase an aggregate of 300,000 shares of common stock. The exercise price of the options is $0.01 per share, the estimated fair market value of the common stock on the date of grant. The options are exercisable at any time during a five-year period, commencing March 1, 2004 and ending on March 1, 2009. The options were granted pursuant to Rule 701 of the Securities Act.





**ITEM 6.**
**EXHIBITS**
****Exhibits




31.1
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








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**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
By:
/s/ Stanley ShusterChairman of the Board, President, Chief Executive Officer and Chief Financial Officer


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