### **U.S.SECURITIES AND EXCHANGE COMMISSION****Washington,DC 20549**

## **FORM10-Q**

| **o**      | ** ** | **Quarterly report under Section 13 or 15(d) of  the Securities Exchange Act of 1934.**                                                                                                                                                                       |
|------------|------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the quarterly period ended July 30, 2006.**                                                                                                                                                                                                             |
|       |       |                                                                                                                                                                                                                                                          |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of  the Securities Exchange Act of 1934.**                                                                                                                                                                      |
|       |       |                                                                                                                                                                                                                                                          |
| ** ** | ** ** | **For the transition period from                to                    .** |

 

**CommissionFile Number0-18369**

**BOSTON RESTAURANT ASSOCIATES, INC.**(Exact Name ofRegistrant as Specified in its Charter)

| **Delaware**     | ** ** | **61-1162263**               |
|------------------|------------|------------------------------|
| (State or Other  |       | IRS Employer  Identification |
| Jurisdiction of  |       | No.                          |
| Incorporation or |       |                         |
| Organization)    |       |                         |

 

**999BroadwaySaugus, Massachusetts01906**(Address of PrincipalExecutive Offices)

**(781)231-7575**(Registrant’s TelephoneNumber Including areacode)

Indicate by check whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes    o   No o.

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer andlarge accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):
| Large Accelerated Filer | o | Accelerated Filer | o | Non-Accelerated Filer | x |
|-------------------------|---|-------------------|---|-----------------------|---|

 

Indicate by check mark whetherthe registrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct). 

Yes  o  No x

Indicate the number of shares outstanding of each ofthe registrant classes of common stock as of the latest practical date. Commonstock $0.01 par value 7,035,170 as of August 28, 2006.

 

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BOSTON RESTAURANT ASSOCIATES, INC.

INDEX
| PART I - FINANCIAL  STATEMENTS |                                                                                                                     |
|--------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                     |
| Item 1.                        | Financial Statements                                                                                                     |
|                           |                                                                                                                     |
|                           | Condensed Consolidated  Balance Sheets as of July 30, 2006 (unaudited) and April 30, 2006                                |
|                           |                                                                                                                     |
|                           | Unaudited  Condensed Consolidated Statements of Operations for the thirteen weeks ended  July 30, 2006 and July 24, 2005 |
|                           |                                                                                                                     |
|                           | Unaudited  Condensed Consolidated Statements of Cash Flows for the thirteen weeks ended  July 30, 2006 and July 24, 2005 |
|                           |                                                                                                                     |
|                           | Notes to  Condensed Consolidated Financial Statements                                                                    |
|                           |                                                                                                                     |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |
|                           |                                                                                                                     |
| Item 3.                        | Quantitative  and Qualitative Disclosures About Market Risk                                                              |
|                           |                                                                                                                     |
| Item 4.                        | Controls and  Procedures                                                                                                 |
|                           |                                                                                                                     |
| PART II - OTHER  INFORMATION   |                                                                                                                     |
|                           |                                                                                                                     |   |
| Item  6.                       | Exhibits                                                                                                                 |   |
|                           |                                                                                                                     |   |
|                           | SIGNATURES                                                                                                               |   |

 

2

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS
| ** **                                                                                       | ** ** | **July 30,** | ** ** | **April 30,** | ** ** |
|--------------------------------------------------------------------------------------------------|------------|-------------------|------------|--------------------|------------|
| ** **                                                                                       | ** ** | **2006**          | ** ** | **2006**           | ** ** |
| ** **                                                                                       | ** ** | **(unaudited)**   | ** ** | ** **         | ** ** |
| ASSETS                                                                                           |       |              |       |               |       |
| Current:                                                                                         |       |              |       |               |       |
| Cash and cash  equivalents                                                                       |       | $                 | 1,211,018  |               | $          | 811,517 |   |
| Accounts  receivable                                                                             |       | 135,413           |       | 127,370            |       |
| Inventories                                                                                      |       | 464,258           |       | 474,167            |       |
| Prepaid expenses  and other                                                                      |       | 78,612            |       | 213,465            |       |
|                                                                                             |       |              |       |               |       |
| Total current  assets                                                                            |       | 1,889,301         |       | 1,626,519          |       |
|                                                                                             |       |              |       |               |       |
| Property and equipment:                                                                          |       |              |       |               |       |
| Building                                                                                         |       | 512,500           |       | 512,500            |       |
| Leasehold  improvements                                                                          |       | 7,460,862         |       | 6,935,321          |       |
| Equipment,  furniture and fixtures                                                               |       | 4,864,575         |       | 4,700,528          |       |
|                                                                                             |       |              |       |               |       |
|                                                                                             |       | 12,837,937        |       | 12,148,349         |       |
|                                                                                             |       |              |       |               |       |
| Less accumulated  depreciation and amortization                                                  |       | 9,027,107         |       | 8,838,098          |       |
|                                                                                             |       |              |       |               |       |
| Net property and  equipment                                                                      |       | 3,810,830         |       | 3,310,251          |       |
|                                                                                             |       |              |       |               |       |
| Goodwill                                                                                         |       | 453,643           |       | 453,643            |       |
|                                                                                             |       |              |       |               |       |
| Other assets                                                                                     |       | 1,089,289         |       | 1,000,265          |       |
|                                                                                             |       |              |       |               |       |
| Total assets                                                                                     |       | $                 | 7,243,063  |               | $          | 6,390,678 |   |
|                                                                                             |       |              |       |               |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                       |       |              |       |               |       |
| Current liabilities:                                                                             |       |              |       |               |       |
| Accounts payable                                                                                 |       | $                 | 1,328,237  |               | $          | 997,659 |   |
| Accrued expenses                                                                                 |       | 1,229,205         |       | 1,422,477          |       |
| Shareholder’s  liability                                                                    |       | 600,000           |       | —             |       |
| Current  maturities:                                                                             |       |              |       |               |       |
| Notes  payable-stockholder                                                                       |       | 6,815             |       | 6,736              |       |
| Long-term debt                                                                                   |       | 373,816           |       | 374,754            |       |
|                                                                                             |       |              |       |               |       |
| Total current  liabilities                                                                       |       | 3,538,073         |       | 2,801,626          |       |
|                                                                                             |       |              |       |               |       |
| Long-term obligations:                                                                           |       |              |       |               |       |
| Notes  payable-stockholder, less current maturities                                              |       | 73,962            |       | 75,695             |       |
| Long-term debt,  less current maturities                                                         |       | 1,489,871         |       | 1,579,291          |       |
| Subordinated  debentures                                                                         |       | 1,450,000         |       | 1,450,000          |       |
| Deferred rent                                                                                    |       | 395,578           |       | 351,559            |       |
| Other long-term  liabilities                                                                     |       | 69,592            |       | 77,095             |       |
|                                                                                             |       |              |       |               |       |
| Total  liabilities                                                                               |       | 7,017,076         |       | 6,335,266          |       |
|                                                                                             |       |              |       |               |       |
| Commitments and  contingencies                                                                   |       |              |       |               |       |
|                                                                                             |       |              |       |               |       |
| Stockholders’ equity :                                                                      |       |              |       |               |       |
| Preferred stock,  $.01 par value, 10,000,000 shares authorized                                   |       |              |       |               |       |
| Preferred stock  Series A, $.01 par value, 1,176,470 shares authorized, 1,147,056 shares  issued |       | 946,278           |       | 946,278            |       |
| Common stock,  $.01 par value, 25,000,000 shares authorized, 7,060,170 shares issued             |       | 70,602            |       | 70,602             |       |
| Additional paid  in capital - common                                                             |       | 10,960,396        |       | 10,960,396         |       |
| Accumulated  deficit                                                                             |       | (11,726,597       | )          | (11,897,172        | )          |
|                                                                                             |       |              |       |               |       |
| Total                                                                                            |       | 250,679           |       | 80,104             |       |
| Less:                                                                                            |       |              |       |               |       |
| Treasury stock,  25,000 shares at cost                                                           |       | (24,692           | )          | (24,692            | )          |
| Total  stockholders’ equity                                                                 |       | 225,987           |       | 55,412             |       |
|                                                                                             |       |              |       |               |       |
| Total  liabilities and stockholders’ equity                                                 |       | $                 | 7,243,063  |               | $          | 6,390,678 |   |

 

See accompanyingnotes.

3

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BOSTON RESTAURANTSASSOCIATES,INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 
| ** **                                                     | ** ** | **Thirteen Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                                     | ** ** | **July 30,**                  | ** ** | **July 24,** | ** ** |
| ** **                                                     | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|                                                           |       |                               |       |   |   |
| Revenues:                                                      |       |                               |       |   |   |
| Restaurant sales                                               |       | $                                  | 5,764,527  |   | $ | 5,736,842 |   |
|                                                           |       |                               |       |   |   |
| Total revenues                                                 |       | 5,764,527                          |       | 5,736,842 |   |
|                                                           |       |                               |       |   |   |
| Costs and  expenses:                                           |       |                               |       |   |   |
| Cost of food, beverages and liquor                             |       | 1,035,695                          |       | 1,105,941 |   |
| Payroll                                                        |       | 1,661,453                          |       | 1,652,659 |   |
| Other operating expenses                                       |       | 1,917,421                          |       | 1,867,298 |   |
| General and administrative                                     |       | 633,271                            |       | 643,683 |   |
| Depreciation and amortization                                  |       | 202,375                            |       | 231,845 |   |
| Pre-opening costs                                              |       | 37,904                             |       | — |   |
|                                                           |       |                               |       |   |   |
| Total costs and expenses                                       |       | 5,488,119                          |       | 5,501,426 |   |
|                                                           |       |                               |       |   |   |
| Operating Income                                               |       | 276,408                            |       | 235,416 |   |
|                                                           |       |                               |       |   |   |
| Other income                                                   |       | 1,323                              |       | 1,953 |   |
| Interest income                                                |       | 5,700                              |       | 2,418 |   |
| Interest expense                                               |       | (92,930                            | )          | (95,729 | ) |
|                                                           |       |                               |       |   |   |
| Income from  continuing operations                             |       | 190,501                            |       | 144,058 |   |
|                                                           |       |                               |       |   |   |
| Discontinued  operations :                                     |       |                               |       |   |   |
| Income (Loss) from operations                                  |       | 0                                  |       | (58,468 | ) |
| Gain (Loss) from disposal of discontinued operations           |       | 0                                  |       | 132,004 |   |
|                                                           |       |                               |       |   |   |
| Income (Loss)  from discontinued operations                    |       | 0                                  |       | 73,536 |   |
|                                                           |       |                               |       |   |   |
| Net Income                                                     |       | 190,501                            |       | 217,594 |   |
|                                                           |       |                               |       |   |   |
| Less: preferred stock dividends                                |       | (19,926                            | )          | (19,719 | ) |
|                                                           |       |                               |       |   |   |
| Income available  to common shareholders                       |       | $                                  | 170,575    |   | $ | 197,875 |   |
|                                                           |       |                               |       |   |   |
| Income per share  of common stock (Basic)                      |       |                               |       |   |   |
| Continuing  Operations                                         |       | $                                  | 0.02       |   | $ | 0.02 |   |
|                                                           |       |                               |       |   |   |
| Discontinued  Operations                                       |       | $                                  | 0.00       |   | $ | 0.01 |   |
|                                                           |       |                               |       |   |   |
| Income available  to common shareholders                       |       | $                                  | 0.02       |   | $ | 0.03 |   |
|                                                           |       |                               |       |   |   |
| Income per share  of common stock (Diluted)                    |       |                               |       |   |   |
| Continuing  Operations                                         |       | $                                  | 0.02       |   | $ | 0.02 |   |
|                                                           |       |                               |       |   |   |
| Discontinued  Operations                                       |       | $                                  | 0.00       |   | $ | 0.01 |   |
|                                                           |       |                               |       |   |   |
| Income available  to common shareholders                       |       | $                                  | 0.02       |   | $ | 0.03 |   |
|                                                           |       |                               |       |   |   |
| Weighted average  number of common shares outstanding-basic    |       | 7,035,170                          |       | 7,035,170 |   |
|                                                           |       |                               |       |   |   |
| Weighted average number  of dilutive common shares outstanding |       | 7,243,344                          |       | 7,125,068 |   |

 

See accompanying notes.

4

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BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

(unaudited)
| ** **                                            | ** ** | **Thirteen Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|------------------------------------|------------|
| ** **                                            | ** ** | **July 30,**                  | ** ** | **July 24,** | ** ** |
| ** **                                            | ** ** | **2006**                           | ** ** | **2005** | ** ** |
|                                                  |       |                               |       |   |   |
| Net cash  provided by operating activities            |       | $                                  | 601,027    |   | $ | 183,158 |   |
|                                                  |       |                               |       |   |   |
| Cash flows from investing activities:                 |       |                               |       |   |   |
| Capital expenditures                                  |       | (689,588                           | )          | (43,973 | ) |
| Proceeds from sale of assets                          |       | 0                                  |       | 81,714 |   |
|                                                  |       |                               |       |   |   |
| Net cash used  for investing activities               |       | (689,588                           | )          | 37,741 |   |
|                                                  |       |                               |       |   |   |
| Cash flows from financing activities:                 |       |                               |       |   |   |
| Repayments of long-term debt                          |       | (90,358                            | )          | (85,820 | ) |
| Repayments of capital lease obligations               |       | 0                                  |       | (27,457 | ) |
| Repayments of stockholder loans                       |       | (1,654                             | )          | (1,576 | ) |
| Proceeds from preferred stock subscription            |       | 600,000                            |       | 0 |   |
| Payments of preferred dividends                       |       | (19,926                            | )          | (19,719 | ) |
|                                                  |       |                               |       |   |   |
| Net cash  provided by (used for) financing activities |       | 488,062                            |       | (134,572 | ) |
|                                                  |       |                               |       |   |   |
| Net increase in  cash and cash equivalents            |       | 399,501                            |       | 86,327 |   |
|                                                  |       |                               |       |   |   |
| Cash and cash equivalents at beginning of period      |       | 811,517                            |       | 687,207 |   |
|                                                  |       |                               |       |   |   |
| Cash and cash equivalents at end of period            |       | $                                  | 1,211,018  |   | $ | 773,534 |   |

 

See accompanyingnotes.

5

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BOSTON RESTAURANTASSOCIATES, INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTSJULY 30, 2006(unaudited)

1.  NATURE OF BUSINESS AND BASIS OF PRESENTATION

Theaccompanying unaudited condensed consolidated financial statements have beenprepared in accordance with generally accepted accounting principles forinterim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the thirteen-weekperiod ended July 30, 2006 are not necessarily indicative of the results thatmay be expected for the year ending April 29, 2007.  For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sannual report on Form 10-K for the year ended April 30, 2006.  The balance sheet at April 30, 2006 has beenderived from the audited financial statements at that date.

Theaccompanying statements of operations and cash flows for the fiscal 2007 periodreflect the consolidated operations and cash flow of three casual diningItalian restaurants and thirteen Pizzeria Reginas for the 13 weeks and for thefiscal 2006 period reflect the consolidated operation and cash flows of fourcasual dining Italian restaurants and thirteen Pizzeria Reginas for the 13weeks.

2.  NET INCOME (LOSS) PER SHARE

TheCompany follows Statement of Financial Accounting Standards No. 128, “Earningsper Share” (“SFAS 128”).

Thefollowing is a reconciliation of the denominator (number of shares) used in thecomputation of earnings per share.  Thenumerator, net income (loss), is the same for the basic and dilutedcomputations.

6

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|                                 | ** ** | **Thirteen weeks ended** | ** ** |
|---------------------------------|------------|------------------------------------|------------|
| ** **                      | ** ** | **July 30,  2006**            | ** ** | **July 24,  2005** | ** ** |
|                            |       |                               |       |   |   |
| Basic Shares                    |       | 7,035,170                          |       | 7,035,170 |   |
|                            |       |                               |       |   |   |
| Effect of  Dilutive Securities: |       |                               |       |   |   |
|                            |       |                               |       |   |   |
| Options and  Warrants           |       | 208,174                            |       | 89,898 |   |
| Diluted Shares                  |       | 7,243,344                          |       | 7,125,068 |   |

 

The following tablesummarizes securities that were outstanding as of July 30, 2006 and July 24,2005, but not included in the calculation of net income (loss) per share becausesuch securities are anti-dilutive:
|                              | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **July 30,  2006**            | ** ** | **July 24,  2005** | ** ** |
|                         |       |                               |       |   |   |
| Options                      |       | 680,000                            |       | 737,410 |   |
|                         |       |                               |       |   |   |
| Warrants                     |       | 525,000                            |       | 601,000 |   |
|                         |       |                               |       |   |   |
| Convertible  Debentures      |       | 1,160,000                          |       | 1,160,000 |   |
|                         |       |                               |       |   |   |
| Convertible Preferred  Stock |       | 1,147,056                          |       | 1,147,056 |   |

 

On May 1, 2006 theCompany adopted FAS 123R SFAS No. 123R supersedes APB Opinion No. 25,Accounting for Stock Issued to Employees, and amends Statement No. 95,Statement of Cash Flows. Under SFAS No. 123R, companies must calculate andrecord in the income statement the cost of equity instruments, such as stockoptions, awarded to employees for services received. The cost of the equityinstruments is to be measured based on the fair value of the instruments on thedate they are granted and is required to be recognized over the period duringwhich the employees are required to provide services in exchange for the equityinstruments.

The adoption of SFAS No.123R had no impact on the Companny’s financial statements as all stock optionsawarded to employees were fully vested pior to May1, 2006.

In fiscal2006 the Company accounted for stock options using the intrinsic value methodin accordance with Accounting Principles Board Opinion No. 25, “Accounting forStock Issued to Employees,” (“APB 25”) and related interpretations.  Accordingly, the Company had recognized nocompensation cost for its stock option plans. The Company followed the disclosure provisions of Statement of FinancialAccounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-BasedCompensation,” and SFAS No. 148, “Accounting

7

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forStock-Based Compensation - Transition and Disclosure” (“SFAS No. 148”),  which require the disclosure of the effectsof fair value accounting on earnings and earnings per share of common stock ona pro forma basis.

Hadcompensation cost for the Company’s stock options been determined based uponthe fair value at the grant date for awards under the plans consistent with themethodology prescribed under SFAS No. 123, the Company’s net income (loss)would have been adjusted to the pro forma amounts indicated below along withthe additional disclosures required by SFAS No. 148  as follows:
|                                                                                               | ** ** | **Thirteen   Weeks   Ending** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                    | ** ** | **July 24, **                 | ** ** |
| ** **                                                                                    | ** ** | **2005**                                | ** ** |
|                                                                                          |       | ** **                              |       |
| Net income  (loss)                                                                            |       | $                                       | 217,594    |   |
| Less dividends                                                                                |       | (19,719                                 | )          |
| Net income  (loss) available to Common Stockholders as reported                               |       | 197,785                                 |       |
| Add:                                                                                          |       |                                    |       |
|                                                                                          |       |                                    | * *   |
| Stock-based employee compensation expense included  in reported net income (loss), net of tax |       | —                                  |       |
|                                                                                          |       |                                    |       |
| Deduct:                                                                                       |       |                                    |       |
| Total stock-based compensation expense determined  under fair value based method              |       | (3,709                                  | )          |
| Net income  (loss) – pro forma                                                           |       | $                                       | 194,166    |   |
| Basic and  diluted loss per share:                                                            |       |                                    |       |
| As reported                                                                                   |       | $                                       | .03        |   |
| Pro forma                                                                                     |       | $                                       | .03        |   |

 

8

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3.                MERGER AGREEMENT

On March 17, 2006, the Company entered into anAgreement and Plan of Merger (the ‘‘Merger Agreement’’) by and among theCompany, Dolphin Direct Equity Partners, LP (‘‘Dolphin’’) and BraidolAcquisition Corp., (‘‘Braidol’’) a wholly-owned subsidiary of Dolphin, whichwas amended on August 15, 2006, whereby Braidol will merge (the ‘‘Merger’’)with and into the Company with the Company surviving the Merger. Under theterms of the Merger Agreement, the common stockholders of the Company, would beentitled to receive an amount equal to $0.70, without interest, per share ofcommon stock and the holders of the Company’s Series B preferred stock willreceive $.70 per share plus accrued and unpaid dividends for such stock as setforth in the certificate of designation. Under the terms of the MergerAgreement, the Series A preferred stockholders of the Company would be entitledto receive a liquidation preference of $0.85 per share ($974,998) plus accruedand unpaid dividends as set forth in the certificate of designation for theSeries A preferred stock, without interest, as well as the product of thenumber of shares of common stock that such shares of preferred stock areconvertible into immediately prior to the merger and $.70, without interest.The consummation of the Merger is subject to customary closing conditions,including the approval of the stockholders of the Company. In addition, theconsummation of the Merger is subject to the condition that certain transactioncosts incurred by the Company not exceed $650,000.  The Company has capitalized certain of thesecosts as deferred merger costs at July 30, 2006.If the merger does not close, the capitalized costs would becharged to operations.  In any event, heCompany is required to pay certain of Dolphin’s expenses.  Under certain circumstances, if the Merger isnot completed, the Company is required to pay a termination fee of up to$325,000, less any expenses it has paid for the benefit of Dolphin and itsaffiliates.

4.                                       UNREGISTEREDSALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

On July 12, 2006, weentered in to an agreement whereby at our option, subject to satisfaction ofcertain terms and conditions, Dolphin Direct Equity Partners, LP (“Dolphin”)and other qualified investors would purchase up to 1,411,764 shares of Series AParticipating Preferred Stock $.01 par value per share in one or more privatetransactions and in such amounts as we request. On August 15, 2006 in consideration of the amendment of the mergeragreement to extend the termination date of that agreement and increase theexpenses we may incur in connection therewith, we amended and restated thatagreement to provide for the sale and issuance of Series B Preferred Stock,$0.01 par value per share instead of Series A Participating Preferred Stock.  Each share of Series B Preferred Stock may beconverted at any time at the option holder of such share into one share of ourcommon stock,at a conversion price of $.70, $.01 par value, per share and isentitled to one vote.  The investors willpay $0.70 per share of Series B Preferred Stock, for aggregate gross proceedsof up to $1,200,000.  The price per shareof Series B Preferred Stock is less than the original price per share of $0.85for the Series A Participating Preferred Stock. However, unlike the Series A Participating Preferred Stock, the Series BPreferred Stock is not entitled to receive a cash liquidation payment inaddition to participating on an as converted to common stock basis in theproceeds for an

9

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acquisition of theCompany.  As of the date of this report,we have requested two draw downs of $600,000 each.  As of the date of this report, Dolphin hasprovided $600,000 for the purchase of 857,142 shares of Series B PreferredStock in satisfaction of the first of the draw downs.  Mr. Salas, a principal of Dolphin EquityPartners, LP is a member of the board of directors.

We agreed pursuantto a rights agreement between the Company and the investors to (i) use bestefforts to register the resale of the shares of Common stock issuable upon theconversion of the shares of Series B Preferred Stock upon demand of asufficient number of the holders of the Series B Preferred Stock and (ii)include such shares of Common Stock in any registration statement for thebenefit of the Company or any third party upon request of a sufficient numberof the holders of the Series B Preferred Stock.

We have sold andwill sell the shares of Series B Preferred Stock pursuant to certain exemptionsfrom registration provided by Rule 506 of Regulation D and Section 4(2) of theSecurities Act of 1933, as amended.

As of the date of thisreport the $600,000 provided by Dolphin for the purchase of 857,142 shares ofSeries B Preferred Stock is reported as shareholders’ liability on the balancesheet.  As of Augst 23, 2006 the Companyissued 857,142 shares of Series B Preferred Stock in consideration for the$600,000 advanced to the Company which was outstanding as of Juy 30, 2006.

5.             CONSTRUCTION OF A NEW LOCATION

The Company has begun theconstruction of a new Pizzeria Regina in Medford, Massachusetts. As ofJuly 30, 2006, the Company had capital expenditures in the amount of$607,000. The Company anticipates that the total cost to build this locationwill be approximately $1,600,000.

ITEM 2.     Management’s Discussion and Analysis ofFinancial Condition and Results of Operations

RESULTS OF OPERATIONS

Overview

TheCompany’s restaurant sales in the most recent quarter were $5,765,000 comparedto sales of $5,737,000 in the first quarter of fiscal 2006, an increase of..5%.  The Company’s management believesthat the increase in revenue is primarily attributable to an increase in samestore sales at its Pizzeria Regina units. The Company’s income from continuingoperations was $191,000 in the first quarter of fiscal 2007 compared to $144,000in the first quarter of fiscal 2006.

The keyfactors that affect our operating results are the impact of new store openings,comparable restaurant sales, which are driven by comparable customer counts andcheck average, and our ability to manage operating expenses such as food cost,labor and benefits and other costs. Changes in the number of restaurants in operation can change theabsolute dollar amounts of revenues and expenses, and the build out and openingof new stores can affect operating profits. Each restaurant unit’s contribution margin will vary over the life ofthe restaurant.  Margins tend to be lowwhen a restaurant is first opened until customer traffic reaches plannedlevels.  Margins can also deteriorate atthe end of a unit’s life cycle due to a decline in customer traffic caused by avariety of factors outside the control of the Company.  These economic conditions impact both thePizzeria Regina units and the Polcari’s North End units.

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On March 17, 2006, the Company entered into anAgreement and Plan of Merger (the ‘‘Merger Agreement’’) by and among theCompany, Dolphin Direct Equity Partners, LP (‘‘Dolphin’’) and BraidolAcquisition Corp., (‘‘Braidol’’) a wholly-owned subsidiary of Dolphin, whichwas amended on August 15, 2006, whereby Braidol will merge (the ‘‘Merger’’)with and into the Company with the Company surviving the Merger. Under theterms of the Merger Agreement, the common stockholders of the Company, would beentitled to receive an amount equal to $0.70, without interest, per share ofcommon stock and the holders of the Company’s Series B preferred stock willreceive $.70 per share plus accrued and unpaid dividends for such stock as setforth in the certificate of designation. Under the terms of the MergerAgreement, the Series A preferred stockholders of the Company would be entitledto receive a liquidation preference of $0.85 per share ($974,998) plus accruedand unpaid dividends as set forth in the certificate of designation for theSeries A preferred stock, without interest, as well as the product of thenumber of shares of common stock that such shares of preferred stock areconvertible into immediately prior to the merger and $.70, without interest.The consummation of the Merger is subject to customary closing conditions,including the approval of the stockholders of the Company. In addition, theconsummation of the Merger is subject to the condition that certain transactioncosts incurred by the Company not exceed $650,000.  The Company has capitalized certain of thesecosts as deferred merger costs at July 30, 2006.

In any event, the Company is required to pay certainof Dolphin’s expenses.  Under certaincircumstance, if the Merger is not completed, the Company is required to pay atermination fee of up to $325,000, less any expenses it has paid for thebenefit of Dolphin and its affiliates. As of the date hereof, Dolphon and its affiliate Dolphon OffshorePartners, L.P. hold a 50.7% beneficial interest in the Company’s commonstock.  Peter Salas, a member of theCompany’s Board of Directors, is President of Dolphin Asset Management Corp. anaffiliate of Dolphin, and its related companies.

If the Merger is successfully completed, the Companywill operate as a private company with no SEC reporting obligations.

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In the fiscal 2007and 2006 period, there were 16 unitsin continuing operation for the entire period. The following table sets forth all revenues, costs and expenses as apercentage of total revenues for the periods indicated for revenue and expenseitems included in the consolidated statements of operations:
|                                                                          | ** ** | **July 30,  2006** | ** ** | **July 24,  2005** | ** ** |
|--------------------------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| (1)                                                                      |       |                    |       |                    |       |
| Revenues:                                                                |       |                    |       |                    |       |
| Restaurant sales                                                         |       | 100                     | %          | 100                     | %          |
| Other                                                                    |       | —                  |       | —                  |       |
|                                                                     |       |                    |       |                    |       |
| Total revenues                                                           |       | 100                     | %          | 100                     | %          |
|                                                                     |       |                    |       |                    |       |
| Costs and  expenses:                                                     |       |                    |       |                    |       |
| Cost of food, beverages and liquor                                       |       | 18.0                    |       | 19.3                    |       |
| Other operating  expenses- payroll                                       |       | 28.8                    |       | 28.9                    |       |
| Other operating  expenses exclusive of payroll                           |       | 33.3                    |       | 32.5                    |       |
| General and  administrative                                              |       | 11.0                    |       | 11.2                    |       |
| Depreciation and  amortization                                           |       | 3.5                     |       | 4.0                     |       |
| Pre-opening  costs                                                       |       | .6                      |       | —                  |       |
| Operating income  (loss)                                                 |       | 4.8                     |       | 4.1                     |       |
| Interest  expense, net                                                   |       | (1.5                    | )          | (1.6                    | )          |
| Other income                                                             |       | —                  |       | —                  |       |
| Income (loss)  from continuing operations before discontinued operations |       | 3.3                     |       | 2.5                     |       |
| Income (loss)  from discontinued operations                              |       | —                  |       | 1.3                     |       |
| Net Income (loss)                                                        |       | 3.3                     | %          | 3.8                     | %          |

 

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(1)  In fiscal 2006, the Company completed theasset sale of Polcari’s of Cambridge, Inc. on July 22, 2005.  The financial statements included with thisreport have been reclassified to reflect, Polcari’s of Cambridge, Inc., and Polcari’s of Hyannis (which closedMarch of 2005) as discontinued operations.

ThirteenWeeks Ended July 30, 2006 as Compared to Thirteen Weeks ended July 24, 2005

RestaurantSales

Restaurantsales in the most recent quarter were $5,765,000 compared to restaurant salesin the prior year’s period of $5,737,000. The Company’s increase in revenue is primarily attributable to anincrease in same store sales at its Pizzeria Regina units.  Sales volume for the restaurants openthroughout both fiscal 2007 and 2006 periods increased by .5%

Netsales at the Company’s Pizzeria Regina restaurants increased to $3,589,000 inthe current period from $3,489,000 in the prior year’s period. The Companybelieves the increase in sales was primarily attributable to favorable economicconditions and a 1% menu price increase. Same store sales increased 2.9% for the current period.

Netsales at the Company’s full service casual dining restaurants decreased to$2,140,000 in the current period from $2,233,000 in the prior year’speriod.  The Company believes thedecrease in sales was primarily attributable to an increase in gas pricesresulting in a decrease in discretionary spending.  Same store sales decreased 4.2% for thecurrent period.

Netsales to third parties at the Company’s commissary were $36,000 in the currentperiod compared to $15,000 in the prior year’s period due to sales to a licensee

Costs and Expenses

Costof Food, Beverages and Liquor

Cost offood, beverages and liquor as a percentage of total revenues for all restaurantswas 18% in the fiscal 2007 period compared to 19% in the fiscal 2006period.  The decrease as a percentage oftotal revenues was primarily attributable to a decrease in cheese costs and anincrease in menu prices

Thecost of food, beverage and liquor was $1,036,000 in the fiscal 2007 periodcompared to $1,106,000 in the fiscal 2006 period. The dollar decrease was duein part to a decrease in cheese costs.

Thecost of food, beverages and liquor as a percentage of restaurant sales at thePizzeria Regina restaurants was 15% in the current period compared to 16% inthe prior year’s period.  The decrease asa percentage of restaurant sales was primarily due to a decrease in cheesecosts and an increase in menu prices.

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Thecost of food, beverage and liquor at Pizzeria Regina restaurants was $530,000in the current period compared to $549,000 in the prior year’s period.  The dollar decrease was primarily due toreduced cheese costs.

Thecost of food, beverages and liquor as a percentage of restaurant sales at theCompany’s full service casual dining restaurants decreased to 24% in the periodcompared to 25% in the prior year’s period. The decrease as a percentage of restaurant sales was principally duelower cheese costs.

Thecost of food, beverage and liquor at the Company’s full service casual diningrestaurants was $506,000 in the current period compared to $557,000 in theprior year’s period.  The dollar decreasewas primarily due to reduced sales and lower cheese costs.

Other Operating Expenses

PayrollExpenses

Payrollexpenses as a percentage of total revenues for all restaurants were 29% in boththe fiscal 2007 and fiscal 2006 periods.

Payrollexpenses were $1,661,000 in the fiscal 2007 period, compared to $1,653,000 inthe fiscal 2006 period.  The dollarincrease in payroll expenses was primarily due to higher employee incentivecosts at the Company’s full service casual dining restaurants.

Payrollexpenses at the Pizzeria Regina restaurants were 24% of restaurant sales in thecurrent period compared to 25% of restaurant sales in the prior year’speriod.  The decrease as a percentage ofrestaurant sales was primarily due to lower employee incentive costs.

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Payrollexpenses of the Pizzeria Regina restaurants were $859,000 in the current periodcompared to $864,000 in the prior year’s period.  This dollar decrease was primarily due loweremployee incentive costs.

Payrollexpenses at the Company’s full service casual dining restaurants were 33% ofrestaurant sales in the current compared to 31% in the prior year’speriod.  The increase as a percentage ofrestaurant sales was primarily attributable to higher employee incentive costs.

Payrollexpenses at the Company’s full service casual dining restaurants were $697,000in the current period compared to $688,000 in the prior year’s period.  This dollar increase was primarily due tohigher employee incentive costs.

Payrollexpenses at the Company’s Commissary were $105,000 for the current period ascompared to $101,000 in the prior year’s period.

OtherOperating Expenses, Exclusive of Payroll

Otheroperating expenses, exclusive of payroll, were 33% of total revenues in boththe fiscal 2007 and fiscal 2006 periods.

Otheroperating expenses, exclusive of payroll, were $1,917,000 in the fiscal 2007period compared to $1,867,000 in the fiscal 2006 period. The increase inoperating expenses, exclusive of payroll, was primarily attributable to anincrease in advertising costs, maintenance costs, and higher energy costs atthe Company’s full service casual dining restaurants.

Otheroperating expenses, exclusive of payroll, for the Pizzeria Regina restaurantsas a percentage of restaurant sales were 34% in both the current and prior year’speriod.

 Other operating expenses, exclusive ofpayroll, from the Pizzeria Regina restaurants were $1,204,000 in the currentperiod, compared to $1,202,000 in the prior year’s period.

Otheroperating expenses, exclusive of payroll, for the Company’s full service casualdining restaurants as a percentage of restaurant sales were 32% in the currentperiod compared to 28% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily attributable to an increase in advertising costs,maintenance costs, and energy costs.

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Otheroperating expenses, exclusive of payroll, for the Company’s full service casualdining restaurants were $681,000 in the current period compared to $630,000 inthe prior year’s period.  The dollarincrease was primarily attributable to higher advertising costs, maintenancecosts, and energy costs.

Otheroperating expenses, exclusive of payroll, also include commissary expenseswhich were $32,000 in the current period compared to $35,000 in the prior yearsperiod.

Generaland Administrative Expenses

Generaland administrative expenses were 11% of total revenues in both the fiscal 2007and fiscal 2006 periods.

Generaland administrative expenses were $633,000 in the current period, compared to$644,000 in the prior year’s period. This dollar decrease was primarily attributable to reduced legal andconsulting costs.

Depreciationand Amortization Expenses

Depreciationand amortization expenses were 4% of total revenues in both the fiscal 2007 andfiscal 2006 periods.

Depreciationand amortization expense was $202,000 in the current period, compared to$232,000 in the prior year’s period.  Thedollar decrease was primarily attributable to the impairment charges taken inthe fourth quarter of fiscal 2006 associated with the Polcari’s bistrorestaurant in Salem, New Hampshire, Inc.

Pre-OpeningCosts

Pre-openingcosts were $38,000 in the fiscal 2007 period compared to $0 in the fiscal 2006period. The pre-opening expenses, which consists of labor, advertising, rentand training materials, related primarily to the anticipated opening of a newPizzeria Regina in Medford, Massachusetts.

OtherIncome

Otherincome was $1,000 in the fiscal 2007 period compared to $2,000 in the fiscal2006 period.

InterestExpense and Interest Income

Interestexpense was $93,000 in the current period as compared to $96,000 in the prioryear’s period.

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Interestincome was $6,000 in the current period compared to $2,000 in the prior year’speriod.

Discontinued Operations

In thefiscal 2006 period, the sale of Polcari’s of Cambridge, Inc. was completed onJuly 22, 2005.  The Company’s financialresults reflect Polcari’s of Cambridge, Inc. and the Polcari’s of Hyannis, Inc.(which closed in March of 2005) as discontinued operations.

Theincome from discontinued operations was $0 in the fiscal 2007 period comparedto $74,000 in fiscal 2006 period.

LIQUIDITY AND CAPITALRESOURCES

At July30, 2006, the Company had negative net working capital of $1,649,000 comparedto negative working capital of $1,175,000 at April 30, 2006.  During the thirteen weeks ended July 30,2006, the Company had a net increase in cash and cash equivalents of $399,000 reflectingnet cash provided by operating activities of $601,000, net cash used forinvesting activities of $690,000 and net cash provided by financing activitiesof $488,000.

Netcash provided by operating activities included income of $191,000, a decreasein inventories of $10,000, a decrease in prepaid expenses of $135,000, anincrease in deferred rent of $44,000, an increase in accounts payables of$330,000 and depreciation and amortization expenses of $202,000, which werepartially offset by a decrease in other long-term liabilities of $8,000, anincrease in accounts receivables of $8,000, a decrease in accrued expenses of$193,000, and an increase other assets of $102,000.  Net cash used for investing activities of$690,000 reflects capital expenditures associated with the new Pizzeria Reginain Medford, Massachusetts scheduled to open in the late fall and variousPizzeria Reginas, Polcari’s North End, and Polcai’s North End bistrorestaurants.  Net cash provided by financingactivities of $488,000 consisted of proceeds from the subscription for thepurchase of Series B Preferred Stock, partially offset by repayments of longterm debt, lease obligations and stockholders loans and payments of preferreddividends.

On July 12, 2006, we entered in to an agreement (the “Series AAgreement”) whereby at our option, subject to satisfaction of certain terms andconditions, Dolphin Direct Equity Partners, LP (“Dolphin”) and other qualifiedinvestors would purchase up to 1,411,764 shares of Series A ParticipatingPreferred Stock $.01 par value per share in one or more private transactionsand in such amounts as we request.  OnAugust 15, 2006 in consideration of the amendment of the merger agreement toextend the termination date of that agreement and increase the expenses we mayincur in connection therewith, we amended and restated the Series A Agreementto provide for the sale and issuance of Series B Preferred Stock, $0.01 parvalue per share instead of Series A Participating Preferred Stock.  Each share of Series B Preferred Stock may beconverted at a conversion price of $.70 per share , at any time at the optionof the holder of such share into one share of our common stock, $.01 par valueper share and is entitled to one vote. The investors will pay $0.70 per share of Series B Preferred Stock, foraggregate gross proceeds of up to $1,200,000. The price per share of Series B Preferred Stock is less than

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the original price per share of $0.85 for the Series A ParticipatingPreferred Stock.  However, unlike theSeries A Participating Preferred Stock, the Series B Preferred Stock is notentitled to receive a cash liquidation payment in addition to participating onan as converted to common stock basis in the proceeds for an acquisition of theCompany.  As of the date of this report,we have requested two draw downs of $600,000 each.  As of the date of this report, Dolphin hasprovided $600,000 for the purchase of 857,142 shares of Series B PreferredStock in satisfaction of the first of the draw downs.  Mr. Salas, a principal of Dolphin EquityPartners, LP is a member of the board of directors.

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At July 30,2006, theCompany had current liabilities of $3,538,000, including $1,328,000 of accountspayable, $1,229,000 of accrued liabilities, shareholders’ liability of $600,000and current maturities of long term obligations in the amount of $381,000.    At July 30, 2006, the Company had long-termobligations, less current maturities, in the amount of $3,479,000, including$74,000 of notes payable to a stockholder, $1,490,000 due under its creditfacility with Commerce Bank and Trust Company, $1,450,000 of convertiblesubordinated debentures, $396,000 of deferred rent, and $69,000 of otherlong-term liabilities.

On April21, 2005 the Company refinanced its debt with Commerce Bank and Trust Companyand a new $2,300,000 Credit Facility was established.  This Credit Facility consists of a $1,500,0004 year term note bearing interest at the bank base rate plus 2% and an $800,000mortgage in favor of Commerce bank and Trust Company at a fixed rate of7%.  The mortgage has a twenty yearamortization schedule with a complete payment of principal due at the end offive years.  All borrowing under theCredit Facility are collateralized by substantially all of the assets of theCompany and are subject to various financial covenants.  At July 30, 2006 the Company was incompliance with all financial covenants.

In the upcoming year the Company expects to spend $1,600,000 in capital improvements in connection with its plan to open a newrestaurant in Medford, Massachusetts. Regardless of whether the Company completes the Merger described above,the Company believes that its existing resources, together with cash flowgenerated from operations, will be sufficient to fund its cash flowrequirements and maintain debt covenant compliance for the next twelve months.Under certain circumstances, if the Merger is not completed, the Company isrequired to pay a termination fee of up to $325,000, less any expenses it haspaid for the benefit of Dolphin and its affiliates. In addition, the Companyestimates that it will be required to incur direct transaction costs of$650,000 in connection with the Merger, which include fees related to financialadvisors, attorneys, accountants and financial printers.

However,the Company’s growth will be dependent upon obtaining additionalfinancing.  There can be no assurancethat any future additional financing will be available on commerciallyreasonable terms, or at all, and the success or lack of success of the Company’srestaurants opened within the last year and planned to be opened in the futuremay have a critical effect on the Company’s ability to raise funds through thesale of stock or otherwise.

NEWACCOUNTING PRONOUNCEMENTS

None

“SAFEHARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995

*Forward-lookingstatements in this report, including without limitation statements relating tothe adequacy of the Company’s working capital and other resources, ability toobtain additional financing, the timing of the Company’s new store openings andfuture expansion, and anticipated future cash flows from particular*

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*locations are made pursuant to the safe harbor provisions ofthe Private Securities Litigation Reform Act of 1995.  Investors are cautioned that suchforward-looking statements involve risks and uncertainties, including withoutlimitation:  potential quarterlyfluctuations in the Company’s operating results; seasonality of sales;competition; risks associated with expansion; the*

*Company’s reliance on key employees; risks generallyassociated with the restaurant industry; risks associated with geographic concentrationof the Company’s restaurants; risks associated with serving alcoholicbeverages; and other risks and uncertainties indicated elsewhere in this reportand from time to time in the Company’s filings with the Securities and ExchangeCommission.  In addition, forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “will,” “except,” “expect,” “intend,” “estimate,” “anticipate”or “believe” or the negative thereof or variations thereon or similarterminology.  Although the Companybelieves that the expectations reflected in such forward-looking statementswill prove to have been correct, it can give no assurance that suchexpectations will prove to have been correct. Investors are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.*

Item 3.  Quantitativeand Qualitative Disclosures about Market Risk

InterestRate Risk.  

We haveexposure to interest rate risk related to certain instruments entered into forother than trading purposes. Specifically, borrowings under the Credit Facility described in Item 2bear interest at a variable rate based on the bank’s prime rate plus 2%. A 100basis point change in the Credit Facility interest rate (approximately 10.25%at July 30, 2006) would cause the interest expense for fiscal 2007 to change byapproximately $11,000. This computation is determined by considering the impactof hypothetical interest rates on our variable long-term debt at July 30, 2006.However, the nature and amount of our borrowings under the Credit Facility mayvary as a result of future business requirements, market conditions, covenantcompliance and other factors.

Ourother outstanding long-term debt bears fixed rates of interest. The Companybelieves there is no material exposure to a market interest rate risk thatcould affect future results of operations or financial conditions.

CommodityPrice Risk.

Many ofthe food products and other operating essentials purchased by us are affectedby commodity pricing and are, therefore, subject to price volatility caused byweather, production problems, delivery difficulties and other factors that arebeyond our control.  Our supplies and rawmaterials are available from several sources and we are not dependent upon anysingle source for these items. The Company negotiates directly with wholesalesuppliers of certain high volume food ingredients such as cheese, tomato sauce,and flour to ensure consistent quality and competitive pricing. Theseingredients are then purchased for the Company by a third party independentdistributor at the negotiated price and redistributed to the Company’srestaurants.  All other food ingredientsand beverage products are purchased directly by the general manager of each

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restaurantin accordance with corporate guidelines. Certain significant items that could be subject to price fluctuationsare cheese and flour products. The Company believes that it will be able topass through increased commodity costs by adjusting menu pricing in most cases.However, we believe that any changes in commodity pricing that cannot be offsetby changes in menu pricing or other product delivery strategies would not bematerial.

ITEM  4.  Controls and Procedures

As ofJuly 30, 2006, our Chief Executive Officer and Chief Financial Officerperformed an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in SEC Rule 13a-15(e)), which have beendesigned to ensure that material information related to the Company is madeknown to them and timely disclosed.  TheCompany’s management, including the CEO and CFO, does not expect that theCompany’s disclosure controls or internal controls will prevent all errors andall fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met.  Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.Notwithstanding the foregoing, however, based upon their evaluations, our CEOand CFO concluded that the Company’s disclosure controls are effective toprovide a reasonable level of assurance that material information relating tothe Company is accumulated and communicated to management, including the CEOand CFO, as appropriate, to allow timely decisions regarding requireddisclosure.

Therehave been no changes in the Company’s internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

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PART II

OTHER INFORMATION

ITEM 1. LegalProceedings.

Fromtime to time the Company has been, and expects to continue to be, subject tolegal proceedings and claims in the ordinary course of its business.  Such claims, even if not meritorious, couldresult in the expenditure of significant financial and managerial resources.

ITEM1A. Risk Factors

Thefollowing risk factors incorporate all material changes from the risk factorsdisclosed in our Annual Report on Form 10-K for the fiscal year ended April 30,2006.

*The Company’s Ability To Grow May BeDependent On Additional Funding*

As of July 30, 2006, the Company had a working capitaldeficiency of approximately $1,649,000 and stockholders’ equity of $226,000.The long-term financial stability of the Company and compliance with the bankcovenants will be substantially dependent upon achieving sustained profitableoperations. If the Company fails to comply with bank covenants, the bank debtcould be due on demand. The Company’s growth will be dependent upon obtainingadequate additional financing. There can be no assurance that any future additionalfinancing will be available on commercially reasonable terms, or at all, andthe success or lack of success of the Company’s restaurants opened withinrecent years may have a critical effect on the Company’s ability to raise fundsthrough the sale of stock or otherwise.

*The Company May Be Unable to ExpandAs Planned*

The Company intends to open additional restaurants inan orderly manner as conditions permit, including its plans to open a newPizzeria Regina restaurant in Medford, Massachusetts. The Company’s ability toopen additional Company restaurants will depend upon a number of factors, suchas identifying satisfactory sites, negotiating satisfactory leases, securingrequired governmental permits and approvals, obtaining of any requiredfinancing at acceptable terms, providing adequate supervision of construction,and recruiting and training management personnel, some of which are beyond thecontrol of the Company. The Company cannot guarantee that it will be able toopen any other future restaurants within budget or on a timely basis, if atall, or that any of the new restaurants will operate profitably. If the Companyis unable to expand, it may reduce the Company’s ability to increaseprofitability.

*The Restaurant Business Is Risky*

The Company’s future performance will be subject to anumber of factors that affect the restaurant industry generally, including: (i)the highly competitive nature of the industry, (ii) general and local economicconditions, (iii) changes in tastes and eating and drinking habits, (iv)changes in food costs due to shortages, inflation or other causes, (v)population and traffic patterns, (vi) demographic trends, (vii) generalemployment, and

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wage and benefit levels in the restaurant industry,which may be affected by changes in federal and local minimum wage requirementsor by federally or locally mandated health insurance, (viii) the number ofpeople willing to work at or near the minimum wage and (ix) weather conditions.

*We Are Dependent on Key ExecutiveOfficers*

The future success of the Company will depend in largepart on the continued services of its President, George R. Chapdelaine, as wellas on the Company’s ability to attract and retain other qualified seniormanagement personnel. The Company carries $2,000,000 of key man life insuranceon the life of Mr. Chapdelaine.

*Insiders Control the Company*

The Company’s executive officers, directors and theiraffiliates and members of their immediate families control the vote ofapproximately 72.9% of the outstanding shares of the Common Stock. As a result,they have the practical ability to implement or block changes in the Company’smanagement and direction which may or may not be in the best interest ofstockholders generally.

*The Merger May Not Be Completed*

On March 17, 2006 the Company entered into andAgreement and Plan of Merger by and among the Company, Dolphin Direct EquityPartners, LP and Braidol Acquisition Corp., a wholly owned subsidiary ofDolphin which was amended on August 15, 2006 by which Braidol will merge withand into the Company with the Company surviving the Merger. The consummation ofthe Merger is subject to customary closing conditions, including the approvalof stockholders of the Company. Should the merger be completed, stockholder’scommon and preferred stock would be redeemed and stockholders would no longerparticipate in any future earnings, should there be any future earnings. Inaddition, the consummation of the Merger is subject to the condition thatcertain transaction costs incurred by the Company not exceed $650,000.  Under certain circumstances, if the Merger isnot completed, the Company is required to pay a termination fee of up to$325,000, less any expenses it has paid for the benefit of Dolphin and itsaffiliates. In addition, the Company estimates that it will be required toincur direct transaction costs of $650,000, which include fees related tofinancial advisors, attorneys, accountants and financial printers. The Companyhas capitalized certain of these costs as deferred merger costs at July 30,2006. If the Merger is not closed, the Company’s financial results, includingearnings per share, could suffer, and the Company’s market price could decline.

*The Company’s Restaurants AreConcentrated in Massachusetts*

A total of eleven of the Company’s sixteen existingrestaurants are located in eastern Massachusetts. As a result, the Company’sresults of operations may be materially affected by changes in theMassachusetts economy.

*Our Stock Is Relatively Illiquid andthe Price Is Volatile*

Compared to many other publicly traded companies, theCompany is relatively small and has a relatively low average daily tradingvolume. Quarterly operating results of the

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Company or other restaurant companies, changes ingeneral conditions in the economy, the restaurant industry, or the financialmarkets, or other developments affecting the Company, its competitors or thefinancial markets could cause the market price of the Company’s Common Stock tofluctuate significantly. These broad market fluctuations may adversely affectthe market price of the Company’s Common Stock. In addition, the low tradingvolume may make it difficult for a stockholder to buy or sell a significantamount of stock without affecting the market price. The Company’s securitiesare principally traded on the OTC Bulletin Board or its successor. 

ITEM 2.Unregistered Sales of Equity Securities and Use of Proceeds.

On July 12, 2006, weentered in to an agreement whereby at our option, subject to satisfaction ofcertain terms and conditions, Dolphin Direct Equity Partners, LP (“Dolphin”)and other qualified investors would purchase up to 1,411,764 shares of Series AParticipating Preferred Stock $.01 par value per share in one or more privatetransactions and in such amounts as we request. On August 15, 2006 in consideration of the amendment of the mergeragreement to extend the termination date of that agreement and increase theexpenses we may incur in connection therewith, we amended and restated thatagreement to provide for the sale and issuance of Series B Preferred Stock,$0.01 par value per share instead of Series A Participating PreferredStock.  Each share of Series B PreferredStock may be converted at any time at the option holder of such share into oneshare of our common stock, $.01 par value per share and is entitled to onevote.  The investors will pay $0.70 pershare of Series B Preferred Stock, for aggregate gross proceeds of up to$1,200,000.  The price per share ofSeries B Preferred Stock is less than the original price per share of $0.85 forthe Series A Participating Preferred Stock. However, unlike the Series A Participating Preferred Stock, the Series BPreferred Stock is not entitled to receive a cash liquidation payment inaddition to participating on an as converted to common stock basis in theproceeds for an acquisition of the Company. As of the date of this report, we have requested two draw downs of$600,000 each.  As of the date of thisreport, Dolphin has provided $600,000 for the purchase of 857,142 shares ofSeries B Preferred Stock in satisfaction of the first of the draw downs.  Mr. Salas, a principal of Dolphin EquityPartners, LP is a member of the board of directors.

We agreed pursuantto a rights agreement between the Company and the investors to (i) use bestefforts to register the resale of the shares of Common stock issuable upon theconversion of the shares of Series B Preferred Stock upon demand of asufficient number of the holders of the Series B Preferred Stock and (ii)include such shares of Common Stock in any registration statement for thebenefit of the Company or any third party upon request of a sufficient numberof the holders of the Series B Preferred Stock.

We have sold andwill sell the shares of Series B Preferred Stock pursuant to certain exemptionsfrom registration provided by Rule 506 of Regulation D and Section 4(2) of theSecurities Act of 1933, as amended. 

ITEM 3.Defaults Upon Senior Securities.

None.

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ITEM 4.Submission of Matters to a Vote of Security Holders.

None.

ITEM 5.Other Information.

None.

ITEM 6. Exhibits 

Exhibit 31: Sarbanes-Oxley Section 302 Certification

Exhibit 32: Sarbanes-Oxley Section 906 Certification

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SIGNATURES

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 
|                          |   | BOSTON RESTAURANT ASSOCIATES, INC. |
|--------------------------|--------|------------------------------------|
|                     |   |                               |   |   |
|                     |   |                               |   |   |
| Date: September  1, 2006 |   |                               | By: | /s/ George R. Chapdelaine |   |
|                     |   |                               | George R. Chapdelaine, President and |
|                     |   |                               | Chief Executive Officer |   |
|                          |        |                                    |  |  |  |  |

 

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