**U.S. SECURITIES AND EXCHANGE COMMISSION**

**Washington, DC 20549**

 

**FORM 10-Q**

 

**ý****                                ****Quarterly report under Section 13 or 15(d) of the SecuritiesExchange Act of 1934.**

 

**For the quarterly period ended July 27, 2003.**

 

**o****                                ****Transition report under Section 13 or 15(d) of the SecuritiesExchange Act of 1934.**

 

**For the transition periodfrom                  to                  .**

 

**Commission File Number0-18369**

 

**BOSTON RESTAURANT ASSOCIATES, INC.**

(Exact Name of Registrant as Specified in its Charter)

 

| **Delaware**                                                      |   |   | **61-1162263**                  |
|-------------------------------------------------------------------|--------|--------|---------------------------------|
| (State or Other  Jurisdiction of  Incorporation or  Organization) |   |   | IRS Employer Identification No. |
|                                                              |
| **999 Broadway  Saugus, Massachusetts  01906**                    |
| (Address of Principal  Executive Offices)                         |
|                                                              |
| **(781) 231-7575**                                                |
| (Registrant’s Telephone  Number Including area code)         |

 

Indicateby check whether the registrant: (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringpreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes ý  No o.

 

Indicateby check whether the registrant is an accelerated filer (as defined in Rule12b-2 of the Exchange Act).  Yes o  No ý.

 

Indicatethe number of shares outstanding of each of the registrant classes of commonstock as of the latest practical date. Common stock $0.01 par value 7,035,170 of September 5, 2003.

 

 

----

 

BOSTON RESTAURANT ASSOCIATES, INC.

 

INDEX

 
| PART I - FINANCIAL STATEMENTS |
|-------------------------------|
|                          |   |
| Item 1.                       | Financial Statements |
|                          |   |
|                          | Condensed Consolidated  Balance Sheets as of July 27, 2003 (unaudited) and April 27, 2003 |
|                          |   |
|                          | Unaudited  Condensed Consolidated Statements of Operations for the thirteen weeks ended  July 27, 2003 and July 28, 2002 |
|                          |   |
|                          | Unaudited Condensed  Consolidated Statements of Cash Flows for the thirteen weeks ended  July 27, 2003 and July 28, 2002 |
|                          |   |
|                          | 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  Disclosure About Market Risk |
|                          |   |
| Item 4.                       | Controls and Procedures |
|                          |   |
| PART II - OTHER INFORMATION   |
|                          |   |
| Item 6.                       | Exhibits and Reports on Form 8-K |
|                          |   |
|                          | SIGNATURES |

 

----

 

PART 1 - FINANCIAL INFORMATION

ITEM1. FINANCIAL STATEMENTS

BOSTONRESTAURANT ASSOCIATES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATED BALANCE SHEETS

 
|                                                                                 |   | **July 27,  2003** |      | **April 27,  2003** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------|-----------|--------------------------|--------|
|                                                                                 |   | **(unaudited)**         |      |                     |   |
| ASSETS                                                                               |   |                    |      |                     |   |
| Current:                                                                             |   |                    |      |                     |   |
| Cash  and cash equivalents                                                           |   | $                       | 1,130,453 |                     | $      | 1,106,701 |   |
| Accounts  receivable                                                                 |   | 201,522                 |      | 137,123                  |   |
| Inventories                                                                          |   | 572,383                 |      | 541,030                  |   |
| Prepaid  expenses and other                                                          |   | 186,763                 |      | 164,610                  |   |
|                                                                                 |   |                    |      |                     |   |
| Total  current assets                                                                |   | 2,091,121               |      | 1,949,464                |   |
|                                                                                 |   |                    |      |                     |   |
| Property  and equipment:                                                             |   |                    |      |                     |   |
| Building                                                                             |   | 512,500                 |      | 512,500                  |   |
| Leasehold  improvements                                                              |   | 7,737,907               |      | 6,739,402                |   |
| Equipment,  furniture and fixtures                                                   |   | 4,872,525               |      | 4,509,527                |   |
|                                                                                 |   |                    |      |                     |   |
|                                                                                 |   | 13,122,932              |      | 11,761,429               |   |
|                                                                                 |   |                    |      |                     |   |
| Less  accumulated depreciation and amortization                                      |   | 6,664,822               |      | 6,472,336                |   |
|                                                                                 |   |                    |      |                     |   |
| Net  property and equipment                                                          |   | 6,458,110               |      | 5,289,093                |   |
|                                                                                 |   |                    |      |                     |   |
| Goodwill                                                                             |   | 453,643                 |      | 453,643                  |   |
|                                                                                 |   |                    |      |                     |   |
| Other  assets                                                                        |   | 575,898                 |      | 581,545                  |   |
|                                                                                 |   |                    |      |                     |   |
| Total  assets                                                                        |   | $                       | 9,578,772 |                     | $      | 8,273,745 |   |
|                                                                                 |   |                    |      |                     |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                           |   |                    |      |                     |   |
| Current  liabilities:                                                                |   |                    |      |                     |   |
| Accounts  payable                                                                    |   | $                       | 731,057   |                     | $      | 580,070 |   |
| Accrued  expenses                                                                    |   | 1,037,132               |      | 1,319,805                |   |
| Current  maturities:                                                                 |   |                    |      |                     |   |
| Notes  payable-stockholder                                                           |   | 5,892                   |      | 5,820                    |   |
| Long-term  debt                                                                      |   | 396,368                 |      | 220,835                  |   |
| Obligations  under capital leases                                                    |   | 181,948                 |      | 195,365                  |   |
|                                                                                 |   |                    |      |                     |   |
| Total  current liabilities                                                           |   | 2,352,397               |      | 2,321,895                |   |
|                                                                                 |   |                    |      |                     |   |
| Long-term  obligations:                                                              |   |                    |      |                     |   |
| Notes  payable-stockholder, less current maturities                                  |   | 93,464                  |      | 94,964                   |   |
| Long-term  debt, less current maturities                                             |   | 1,947,896               |      | 511,671                  |   |
| Obligations  under capital leases, less current maturities                           |   | 208,137                 |      | 253,688                  |   |
| Subordinated  debentures                                                             |   | 1,450,000               |      | 1,450,000                |   |
| Deferred  rent                                                                       |   | 402,276                 |      | 396,271                  |   |
| Other  long-term liabilities                                                         |   | 542,932                 |      | 506,698                  |   |
|                                                                                 |   |                    |      |                     |   |
| Total  liabilities                                                                   |   | 6,997,102               |      | 5,535,187                |   |
|                                                                                 |   |                    |      |                     |   |
| Commitments  and contingencies                                                       |   |                    |      |                     |   |
|                                                                                 |   |                    |      |                     |   |
| Stockholders’  equity :                                                         |   |                    |      |                     |   |
| Preferred  stock, $.01 par value, 10,000,000 shares authorized;  none issued    |   | 0                       |      | 0                        |   |
| Common  stock, $.01 par value, 25,000,000 shares authorized, 7,060,170 shares issued |   | 70,602                  |      | 70,602                   |   |
| Additional  paid in capital                                                          |   | 10,922,636              |      | 10,922,636               |   |
| Accumulated  deficit                                                                 |   | (8,386,876              | )         | (8,229,988               | )      |
|                                                                                 |   |                    |      |                     |   |
| Total                                                                                |   | 2,606,362               |      | 2,763,250                |   |
| Less:                                                                                |   |                    |      |                     |   |
| Treasury  stock, 25,000 shares at cost                                               |   | (24,692                 | )         | (24,692                  | )      |
| Total  stockholders’ equity                                                     |   | 2,581,670               |      | 2,738,558                |   |
|                                                                                 |   |                    |      |                     |   |
| Total  liabilities and stockholders’ equity                                     |   | $                       | 9,578,772 |                     | $      | 8,273,745 |   |

 

See accompanying notes.

 

3

----

 

BOSTON RESTAURANTS ASSOCIATES, INC.AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 
|                                                           |   | **Thirteen Weeks Ended** |      |
|----------------------------------------------------------------|--------|--------------------------|-----------|
|                                                           |   | **July 27,  2003**  |      | **July 28,  2002** |   |
|                                                           |   |                     |      |   |   |
| Revenues:                                                      |   |                     |      |   |   |
| Restaurant  sales                                              |   | $                        | 5,270,967 |   | $ | 5,626,541 |   |
| Royalties                                                      |   | 4,405                    |      | 3,437 |   |
|                                                           |   |                     |      |   |   |
| Total  revenues                                                |   | 5,275,372                |      | 5,629,978 |   |
|                                                           |   |                     |      |   |   |
| Costs  and expenses:                                           |   |                     |      |   |   |
| Cost of  food, beverages and liquor                            |   | 1,046,489                |      | 1,089,491 |   |
| Payroll                                                        |   | 1,751,235                |      | 1,694,692 |   |
| Other  operating expenses                                      |   | 1,746,051                |      | 1,703,053 |   |
| General  and administrative                                    |   | 696,580                  |      | 625,561 |   |
| Depreciation  and amortization                                 |   | 256,625                  |      | 254,190 |   |
| Pre-opening  costs                                             |   | 57,170                   |      | 0 |   |
|                                                           |   |                     |      |   |   |
| Total  costs and expenses                                      |   | 5,554,150                |      | 5,366,987 |   |
|                                                           |   |                     |      |   |   |
| Operating  Income (Loss)                                       |   | (278,778                 | )         | 262,991 |   |
|                                                           |   |                     |      |   |   |
| Other  income                                                  |   | 217,351                  |      | 5,202 |   |
| Interest  income                                               |   | 757                      |      | 615 |   |
| Interest  expense                                              |   | (96,218                  | )         | (109,648 | ) |
|                                                           |   |                     |      |   |   |
| Net  Income (Loss)                                             |   | $                        | (156,888  | ) | $ | 159,160 |   |
|                                                           |   |                     |      |   |   |
| Income  (Loss) per share-basic                                 |   | $                        | (0.02     | ) | $ | 0.02 |   |
|                                                           |   |                     |      |   |   |
| Income  (Loss) per share-diluted                               |   | $                        | (0.02     | ) | $ | 0.02 |   |
|                                                           |   |                     |      |   |   |
| Weighted  average number of common shares outstanding-basic    |   | 7,035,170                |      | 7,035,170 |   |
|                                                           |   |                     |      |   |   |
| Weighted  average number of dilutive common shares outstanding |   | 7,035,170                |      | 7,043,646 |   |

 

See accompanying notes

 

4

----

 

BOSTON RESTAURANT ASSOCIATES, INC.AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
|                                                  |   | **July 27,  2003** |      | **July 28,  2002** |   |
|-------------------------------------------------------|--------|-------------------------|-----------|-------------------------|--------|
|                                                  |   |                    |      |                    |   |
| Net  cash provided by (used for) operating activities |   | $                       | (122,816  | )                       | $      | 116,674 |   |
|                                                  |   |                    |      |                    |   |
| Cash  flows from  investing activities:          |   |                    |      |                    |   |
| Capital  expenditures                                 |   | (1,404,794              | )         | (104,234                | )      |
|                                                  |   |                    |      |                    |   |
| Net  cash used for investing activities               |   | (1,404,794              | )         | (104,234                | )      |
|                                                  |   |                    |      |                    |   |
| Cash  flows from  financing activities:          |   |                    |      |                    |   |
| Repayments  of long-term debt                         |   | (54,242                 | )         | (908,304                | )      |
| Repayments  of capital lease obligations              |   | (58,968                 | )         | (85,302                 | )      |
| Repayments  of stockholder loans                      |   | (1,428                  | )         | (903                    | )      |
| Proceeds  from long-term debt                         |   | 1,666,000               |      | 922,305                 |   |
|                                                  |   |                    |      |                    |   |
| Net  cash provided by (used for) financing activities |   | 1,551,362               |      | (72,204                 | )      |
|                                                  |   |                    |      |                    |   |
| Net  increase (decrease) in cash and cash equivalents |   | 23,752                  |      | (59,764                 | )      |
|                                                  |   |                    |      |                    |   |
| Cash  and cash equivalents at beginning of period     |   | 1,106,701               |      | 932,806                 |   |
|                                                  |   |                    |      |                    |   |
| Cash  and cash equivalents at end of period           |   | $                       | 1,130,453 |                    | $      | 873,042 |   |

 

See accompanying notes.

 

5

----

 

BOSTON RESTAURANTASSOCIATES, INC.  AND SUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

## JULY 27,2003

(unaudited)

 

1.              NATUREOF BUSINESS AND BASIS OF PRESENTATION

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q and have been reviewed by the Company’sindependent auditors.  Accordingly, theydo not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the thirteen-week period ended July 27, 2003are not necessarily indicative of the results that may be expected for the yearending April 25, 2004.  For furtherinformation, refer to the consolidated financial statements and footnotesthereto included in the Company’s annual report on Form 10-K for the year endedApril 27, 2003.  The balance sheetat April 27, 2003 has been derived from the audited financial statementsat that date.

 

The accompanying statements ofoperations and cash flows for the fiscal 2004 and fiscal 2003 periods reflectthe consolidated operations and cash flow of four casual dining Italianrestaurant and twelve Pizzeria Regina restaurants for the entire period.

 

2.              NETINCOME (LOSS) PER SHARE

 

The Company follows Statement ofFinancial Accounting Standards No. 128, “Earnings per Share” (“SFAS 128”).

 

The following is a reconciliationof the denominator (number of shares) used in the computation of earnings pershare.  The numerator, net income(loss), is the same for the basic and diluted computations.

 

The Company accounts for stockoptions using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”(“APB 25”) and related interpretations. Accordingly, the Company has recognized no compensation cost for itsstock option plans.  The Company followsthe disclosure provisions of Statement of Financial Accounting Standards No.123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation,” which requirethe disclosure of the effects of fair value accounting on earnings and earningsper share of common stock on a pro forma basis.

 

In December 2002, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 148, “Accountingfor Stock-Based Compensation – Transition and Disclosure (“SFAS No. 148”),which (i) amends SFAS No. 123, “Accounting for Stock-Based Compensation,” toprovide alternative methods of transition for an entity that voluntarilychanges to the fair value based method of

 

6

----

 

accounting for stock-based employeecompensation (ii) amends the disclosure provisions of SFAS No. 123 to requireprominent disclosure about the effects on reported net income of an entity’saccounting policy decisions with respect to stock-based employee compensationand (iii) amends APB Opinion No. 28, “Interim Financial Reporting,” to requiredisclosure about those effects in interim financial information.  Items (ii) and (iii) of the new requirementsin SFAS No. 148 are effective for financial statements for fiscal years endingafter December 15, 2002.  TheCompany adopted items (ii) and (iii) of SFAS No. 148 for the fiscal year endedApril 27, 2003 and continues to account for stock-based compensationutilizing the intrinsic value method. Had compensation cost for the Company’s stock options been determinedbased upon the fair value at the grant date for awards under the plansconsistent with the methodology prescribed under SFAS No. 123, the Company’snet income (loss) would have been adjusted to the pro forma amounts indicatedbelow along with the additional disclosures required by SFAS No. 148 are asfollows:

 
|                                                                                           |   | **Thirteen Weeks Ending**    |     | **Thirteen Weeks Ending**    |   |
|------------------------------------------------------------------------------------------------|--------|------------------------------|----------|------------------------------|--------|
|                                                                                           |   | **July 27, 2003  2003** |     | **July 28, 2002  2002** |   |
| Net  income (loss) as reported                                                                 |   | $                            | (156,888 | )                            | $      | 159,160 |   |
| 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               |   | (10,337                      | )        | (20,963                      | )      |
|                                                                                           |   |                         |     |                         |   |
| Net  income (loss)— pro forma                                                             |   | $                            | (167,225 | )                            | $      | 138,197 |   |
|                                                                                           |   |                         |     |                         |   |
| Basic  and diluted earnings per share:                                                         |   |                         |     |                         |   |
| As  reported                                                                                   |   | $                            | (.02     | )                            | $      | .02 |   |
| Pro  forma                                                                                     |   | $                            | (.02     | )                            | $      | .02 |   |

 

7

----

 
|                            |   | **Thirteen weeks ended** |   |
|---------------------------------|--------|--------------------------|--------|
|                            |   | **July 27,  2003**  |   | **July 28,  2002** |   |
|                            |   |                     |   |   |   |
| Basic Shares                    |   | 7,035,170                |   | 7,035,170 |   |
|                            |   |                     |   |   |   |
| Effect  of Dilutive Securities: |   |                     |   |   |   |
|                            |   |                     |   |   |   |
| Options                         |   | 0                        |   | 8,476 |   |
| Diluted Shares                  |   | 7,035,170                |   | 7,043,646 |   |

###  

The following table summarizessecurities that were outstanding as of July 27, 2003 and July 28,2002, but not included in the calculation of net income (loss) per sharebecause such securities are anti-dilutive:

 
|                    |   | **Thirteen weeks ended** |   |
|-------------------------|--------|--------------------------|--------|
|                    |   | **July 27,  2003**  |   | **July 28,  2002** |   |
|                    |   |                     |   |   |   |
| Options                 |   | 713,800                  |   | 802,146 |   |
|                    |   |                     |   |   |   |
| Warrants                |   | 500,000                  |   | 500,000 |   |
|                    |   |                     |   |   |   |
| Convertible  Debentures |   | 1,160,000                |   | 1,200,000 |   |

 

3.              NEWACCOUNTING PRONOUNCEMENTS

 

In November 2002, the EITFreached a consensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables”. EITF 00-21 addresses certain aspects of the accounting by avendor for arrangements under which the vendor will perform multiple revenuegenerating activities.  EITF 00-21 willbe effective for periods beginning after June 15, 2003. The adoption of

 

8

----

 

EITF 00-21 is not expected to havea material impact on the Company’s financial position and results ofoperations.

 

In April 2003, the FASB issuedSFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under SFASNo. 133.  SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003, and hedgingrelations designated after June 30, 2003, except for those provisions ofSFAS No. 149 which relate to SFAS No. 133 implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003.  For those issues, the provisions that arecurrently in effect should continue to be applied in accordance with their respectiveeffective dates.  In addition, certainprovisions of SFAS No. 149, which relate to forward purchases or sales ofwhen-issued securities or other securities that do not yet exist, should beapplied to both existing contracts and new contracts entered into afterJune 30, 2003.  The adoption ofSFAS No. 149 is not expected to have a material effect on the Company’sfinancial statements.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Instruments with Characteristics of bothLiabilities and Equity”.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuerclassify a financial instrument that is within the scope of SFAS No. 150 as aliability.  SFAS No. 150 is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective beginning September 1, 2003.  The adoption of SFAS No. 150 is not expectedto have a material effect on the Company’s financial statements.

 

ITEM2.                              Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

### RESULTS OFOPERATIONS

 

# Overview

 

The Company’s restaurant sales inthe most recent quarter were $5,271,000 compared to sales of $5,627,000 in the firstquarter of fiscal 2003, a decrease of 6.3%. The Company’s management believes that the decrease in revenue isprimarily attributable to the continuing economic slow down in the Northeastand to the loss of revenue due to the temporary closing of the Faneuil HallPizzeria Regina location from May 9, 2003 to July 2, 2003. TheCompany had a net loss for the first quarter of fiscal 2004 of $157,000,compared to net income of $159,000 for the same quarter of fiscal 2003.  The Company’s management believes that thedecrease in profit is the result of the decline in sales volume and of anincrease in pre-opening expenses related to the forthcoming opening of a newPolcari’s North End restaurant in Cambridge, MA.

 

The key factors that affect ouroperating results are the impact of new store openings, comparable restaurantsales, which are driven by comparable customer counts and check average, andour ability to manage operating expenses such as food cost, labor and benefitsand other costs.  Changes

 

9

----

 

in the number of restaurants inoperation can change the absolute dollar amounts of revenues and expenses, andthe build out and opening of new stores can affect operating profits.  Each restaurant unit’s contribution marginwill vary over the life of the restaurant. Margins tend to be low when a restaurant is first opened until customertraffic reaches planned levels.  Marginscan also deteriorate at the end of a unit’s life cycle due to a decline incustomer traffic caused by a variety of factors outside the control of theCompany.  These economic conditionsimpact both the Pizzeria Regina units and the Polcari’s North End units.

 

There were 16 units in operationthroughout each of fiscal 2004 and 2003 first quarters.

The following table sets forth allrevenues, costs and expenses as a percentage of[total revenues ?] for theperiods indicated for revenue and expense items included in the consolidatedstatements of operations:

 

|                                           |   | **July 27,  2003** |   | **July 28,  2002** |   |
|------------------------------------------------|--------|-------------------------|--------|-------------------------|--------|
|                                           |   |                    |   |                    |   |
| Revenues:                                      |   |                    |   |                    |   |
| Restaurant  sales                              |   | 100                     | %      | 100                     | %      |
| Other                                          |   | —                  |   | —                  |   |
|                                           |   |                    |   |                    |   |
| Total  revenues                                |   | 100                     | %      | 100                     | %      |
|                                           |   |                    |   |                    |   |
| Costs  and expenses:                           |   |                    |   |                    |   |
| Cost of  food, beverages and liquor            |   | 20                      |   | 19                      |   |
| Other  operating expenses—payroll         |   | 33                      |   | 30                      |   |
| Other  operating expenses exclusive of payroll |   | 33                      |   | 30                      |   |
| General  and administrative                    |   | 13                      |   | 11                      |   |
| Depreciation  and amortization                 |   | 5                       |   | 5                       |   |
| Pre-opening  costs                             |   |                    |   |                    |   |
| Operating  income (loss)                       |   | (5                      | )      | 5                       |   |
| Interest  expense, net                         |   | (2                      | )      | (2                      | )      |
| Other  income                                  |   | 4                       |   | —                  |   |
| Net  income (loss)                             |   | (3                      | )%     | 3                       | %      |

 

Thirteen Weeks Ended July 27,2003 as Compared to Thirteen Weeks ended July 28, 2002

Restaurant Sales.

 

Restaurant sales in the most recentquarter were $5,271,000 compared to restaurant sales in the prior year’s periodof $5,627,000.  The Company’s managementbelieves that the decrease in revenue was primarily attributable to thecontinuing economic slow down in the Northeast and to the loss of

 

10

----

 

revenue due to the temporaryclosing of the Faneuil Hall Pizzeria Regina location from May 9, 2003 toJuly 2, 2003.

 

Net sales at the Company’s PizzeriaRegina restaurants decreased to $2,580,000 in the current period from$2,859,000 in the prior year’s period. The decrease in restaurant sales was principally due to a continuingeconomic slow down in the Northeast and the temporary closing of the FaneuilHall location from May 9, 2003 to July 2, 2003.  The loss of revenue from that location waspartially compensated by payments under the Company’s insurance policies, whichwas recorded under Other Income.

 

Net sales at the Company’s fullservice casual dining restaurants decreased to $2,680,000 in the current periodfrom $2,762,000 in the prior year’s period. This decrease was primarily attributable to the continuing economic slowdown in the Northeast.

 

Net sales at the Company’scommissary were $11,000 in the current period compared to $6,000 in the prioryear’s period.

 

# Royalties

 

During the current year period, theCompany recognized $4,000 in royalties from a domestic Pizzeria Reginafranchise compared to $3,000 in royalties in the prior year’s period.

 

# Costs andExpenses

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage andliquor was $1,046,000 in the current period compared to $1,089,000 in the prioryear’s period. The dollar decrease was due in part to the reduction in amountof product sold in the first quarter of fiscal 2004.  The increase as a percentage of total revenues was primarily attributableto increases in costs from suppliers generally.

 

The cost of food, beverage andliquor at Pizzeria Regina restaurants was $400,000 in the current periodcompared to $430,000 in the prior year’s period due to a decrease in the amountof product sold.

 

The cost as a percentage of restaurantsales at the Pizzeria Regina restaurants was 16% in the fiscal 2004 periodcompared to 15% in the fiscal 2003 period. The increase as a percentage of restaurant sales was principally due toincreases in costs from suppliers in general.

 

The cost of food, beverage andliquor at the Company’s full service casual dining restaurants was $646,000 inthe current period compared to $659,000 in the prior year’s period.  The dollar decrease was primarily due to thereduction in amount of product sold. The cost as a percentage of restaurantsales at these restaurants was 24% in both fiscal periods.

 

11

----

 

# OtherOperating Expenses

 

Payroll Expenses.

 

Payroll expenses were $1,751,000 inthe current period, compared to $1,695,000 in the prior year’s period.  The dollar increase in payroll expenses wasprimarily due to an increase in employee benefit health care costs. Theincrease as a percentage of total revenues was attributable to the fact thatduring the temporary closing of the Faneuil Hall location the Company continuedto incur payroll costs associated with that location and to the increasedemployee benefit costs.

 

Payroll expenses of the PizzeriaRegina restaurants were $745,000 in the current period compared to $730,000 inthe prior year’s period.  This dollarincrease was primarily due to an increased cost in employee health benefits.Payroll expenses at these restaurants were 29% of restaurant sales in thecurrent period compared to 26% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily due to the temporary closing of the Faneuil Hall locationand to an increase in employee benefit costs.

 

Payroll expenses at the Company’sfull service casual dining restaurants were $909,000 in the current periodcompared to $874,000 in the prior year’s period.  This dollar increase was primarily due to an increase in employeebenefit costs. Payroll expenses at these restaurants were 34% of restaurantsales in the current period compared to 32% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily attributable to an increase in employee benefit costs.

 

Payroll expenses at the Company’sCommissary were $97,000 for the fiscal 2004 period as compared to $91,000 inthe fiscal 2003 period.

 

Other Operating Expenses, Exclusiveof Payroll.

 

Other operating expenses, exclusiveof payroll, were $1,746,000 in the current period compared to $1,703,000 in theprior year’s period. The increase in operating expenses, exclusive of payroll,as a percentage of total revenues was primarily due to the reduction inrevenue.

 

Other operating expenses, exclusiveof payroll, from the Pizzeria Regina restaurants were $951,000 in the currentperiod, compared to $956,000 in the prior year’s period.  Other operating expenses, exclusive ofpayroll, for the Pizzeria Regina restaurants as a percentage of restaurantsales were 37% in the current period compared to 33% in the prior year’speriod.  The increase as a percentage ofsales was primarily attributable to the temporary closing of the Faneuil Halllocation, where the Company nonetheless continued to incur some of such costswithout any corresponding revenue.

 

Other operating expenses, exclusiveof payroll, for the Company’s full service casual dining restaurants were$771,000 in the current period compared to $723,000 in the prior year’s period.The dollar increase was primarily attributable to recruiting and rentexpenses.  Other operating expenses alsoinclude commissary expenses, which were $24,000 in both fiscal periods.  Other operating expenses, exclusive ofpayroll, for the Company’s full service casual dining restaurants as apercentage of restaurant sales were 29% in the current period compared to 26%in the prior year’s

 

12

----

 

period.  The increase as a percentage of restaurant sales was primarilydue to the reduction in revenue.

 

General and Administrative Expenses.

 

General and administrative expenseswere $697,000 in the current period, compared to $626,000 in the prior year’speriod.  This dollar increase wasprimarily attributable to consulting costs and legal fees.

 

Depreciation and AmortizationExpenses.

 

Depreciation and amortizationexpense was $257,000 in the current period, compared to $254,000 in the prioryear’s period.

 

Pre-Opening Costs

 

Pre-opening costs for the currentperiod were $57,000.  These costs areattributable to the forthcoming opening of a new Polcari’s North End restaurantin Cambridge, Massachusetts.

 

Other Income

 

Other income was $217,000 in thecurrent period compared to $5,000 in the prior year’s period.  The increase in other income is attributableto insurance proceeds related to the temporary closing of Faneuil Hall PizzeriaRegina.

 

Interest Expense and InterestIncome.

 

Interest expense was $96,000 in thecurrent period as compared to $110,000 in the prior year’s period. This dollardecrease was primarily due to a decrease in interest expense under theCompany’s credit facility.

 

Interest income was $1,000 in bothfiscal periods.

 

### LIQUIDITYAND CAPITAL RESOURCES

###  

At July 27, 2003, the Companyhad negative net working capital of $261,000 compared to negative workingcapital of $372,000 at April 27, 2003. It is common for companies in the restaurant industry to operate withnet working capital deficits.  We areable to operate with a substantial working capital deficit because (1)restaurant operations and most food service operations are conducted primarilyon a cash (and cash equivalent) basis with a low level of accounts receivable,(2) rapid turnover allows a limited investment in inventories, and (3) accountspayable for food, beverages and supplies usually become due after the receiptof cash from the related sales. Accordingly, the Company believes that its existing resources describedbelow will be sufficient to allow it to meet its existing obligations over thenext twelve months, notwithstanding that it may have a net working capitaldeficit.

 

13

----

 

During the thirteen weeks endedJuly 27, 2003, the Company had a net increase in cash and cash equivalentsof  $24,000 reflecting net cash usedfor  operating activities of $123,000,net cash used for investing activities of $1,405,000 and net cash providedby  financing activities of $1,551,000.

 

Net cash used for operatingactivities included  a reduction inaccrued expenses of $283,000, an increase in accounts receivables of $64,000,an increase in inventories of $31,000, an increase in prepaid expenses of$22,000, and a net loss of $157,000, which were partially offset by a decreasein other assets of $6,000, an increase in deferred rent of $6,000, an increasein accounts payable of $151,000, an increase in other long-term liabilities of$36,000 and depreciation and amortization expense of $257,000.  Net cash used for investing activitiesreflects costs associated with leasehold improvements and with the purchase ofequipment, furniture and fixtures for the new Cambridge, MassachusettsPolcari’s North End Restaurant and the other Company restaurants.  Net cash provided by financing activities of$1,551,000 consisted of proceeds from the Company’s credit facility withCommerce Bank and Trust, offset by the net repayments of long term debt, leaseobligations and stockholders loans.

 

At July 27, 2003, the Companyhad current liabilities of $2,352,000, including $731,000 of accounts payable,$1,037,000 of accrued liabilities and current maturities of long termobligations in the amount of $584,000. At July 27, 2003, the Company had long-term obligations, lesscurrent maturities, in the amount of $4,645,000, including $1,948,000 due underits credit facility with Commerce Bank and Trust, $94,000 of notes payable to astockholder, $208,000 due under capital lease obligations, $1,450,000 ofconvertible subordinated debentures, $402,000 of deferred rent, and $543,000 ofother long-term liabilities.

 

On April 30, 2002, the Companyentered into its new $3,500,000 credit facility with Commerce Bank and Trust Company(the “Credit Facility”).  The CreditFacility permits the Company to borrow amounts to pay the costs for newrestaurant openings and repay over a fixed term of either four or five years.  No new borrowings may be made under theCredit Facility after April 30, 2005. Each borrowing under the Credit Facility bears interest at the bank’sbase rate plus 2.0%, subject to an annual adjustment to the bank’s then currentbase rate.  The Company borrowed$922,000 under the Credit Facility on April 30, 2002 to pay off the priorbank facility.  During the first quarterof fiscal 2004, the Company borrowed an additional $1,666,000 under the CreditFacility to finance the construction of a Polcari’s North End restaurant inCambridge, Massachusetts.  Both notes arepayable over four years and bear interest at 6% as of July 27, 2003.

 

All borrowings under the CreditFacility are collateralized by substantially all of the assets of the Companyand are subject to various financial covenants.  The Company was in compliance with the various financialcovenants of the Credit Facility at July 27, 2003.

 

The Company plans to open three newrestaurants in the next 12 months and estimates that the cost of opening thethree new restaurants will be approximately $3,200,000.  The Company believes that its anticipatedcash flow from operations, together with the Credit Facility, will besufficient to fund its working capital needs for at least the next 12 monthsand to fund the addition of three new restaurants.  The Company may pursue additional debt or equity financing if theBoard of Directors

 

14

----

 

determines this to be necessary orappropriate.  However, it cannotguarantee that this will be the case or that the bank financing will actuallybe available, under the Credit Facility or otherwise, for each restaurant whenrequired.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In November 2002, the EITFreached a consensus on Issue No. 00-21, “Revenue Arrangements with MultipleDeliverables”. EITF 00-21 addresses certain aspects of the accounting by avendor for arrangements under which the vendor will perform multiple revenuegenerating activities.  EITF 00-21 willbe effective for periods beginning after June 15, 2003. The adoption ofEITF 00-21 is not expected to have a material impact on the Company’s financialposition and results of operations.

 

In April 2003, the FASB issuedSFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends and clarifiesfinancial accounting and reporting for derivative instruments, includingcertain derivative instruments embedded in other contracts (collectivelyreferred to as derivatives) and for hedging activities under SFAS No. 133.  SFAS No. 149 is effective for contractsentered into or modified after June 30, 2003, and hedging relationsdesignated after June 30, 2003, except for those provisions of SFAS No.149 which relate to SFAS No. 133 implementation issues that have been effectivefor fiscal quarters that began prior to June 15, 2003.  For those issues, the provisions that arecurrently in effect should continue to be applied in accordance with theirrespective effective dates.  Inaddition, certain provisions of SFAS No. 149, which relate to forward purchasesor sales of when-issued securities or other securities that do not yet exist,should be applied to both existing contracts and new contracts entered intoafter June 30, 2003.  The adoptionof SFAS No. 149 is not expected to have a material effect on the Company’sfinancial statements.

 

In May 2003, the FASB issuedSFAS No. 150, “Accounting for Certain Instruments with Characteristics of bothLiabilities and Equity”.  SFAS No. 150establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuerclassify a financial instrument that is within the scope of SFAS No. 150 as aliability.  SFAS No. 150 is effectivefor financial instruments entered into or modified after May 31, 2003, andotherwise is effective beginning September 1, 2003.  The adoption of SFAS No. 150 is not expectedto have a material effect on the Company’s financial statements.

 

# “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  anticipatedfuture cash flows from particular locations are made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.  Investors are cautioned that such forward-lookingstatements involve risks and uncertainties, including without limitation:  potential quarterly fluctuations in theCompany’s operating results; seasonality of sales; competition; risksassociated*

 

15

----

 

*with expansion; the Company’s reliance on key employees;risks generally associated with the restaurant industry; risks associated withgeographic concentration of the Company’s restaurants; risks associated**withserving alcoholic beverages; and other risks and uncertainties indicated fromtime to time in the Company’s filings with the Securities and ExchangeCommission.  In addition,forward-looking statements generally can be identified by the use of forward-lookingterminology such as “may,” “will”, “except,” “intend,” “estimate,” “anticipate”or “believe” or the negative thereof or variations thereon similar terminology. Although the Company believes that the expectations reflected in suchforward-looking statements will prove to have been correct, it can give noassurance that such expectations will prove to have been correct.  Investors are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datehereof.*

 

Item 3.             Quantitativeand Qualitative Disclosure about Market Risk

 

Interest Rate Risk.

 

We have exposure to interest raterisk related to certain instruments entered into for other than tradingpurposes.  Specifically, borrowingsunder the Credit Facility described in Item 2 bear interest at a variable ratebased on the bank’s prime rate plus 2%. A 100 basis point change in the CreditFacility interest rate (approximately 6% at July 27, 2003) would cause theinterest expense for fiscal 2004 to change by approximately $16,000 from fiscal2003. This computation is determined by considering the impact of hypotheticalinterest rates on our variable long-term debt at July 27, 2003. However,the nature and amount of our borrowings under the Credit Facility may vary as aresult of future business requirements, market conditions covenant complianceand other factors.

 

Our other outstanding long-termdebt bears fixed rates of interest. The Company believes there is no materialexposure to a market interest rate risk that could affect future results of operationsor financial conditions.

 

Commodity Price Risk.

 

Many of the food products and otheroperating essentials purchased by us are affected by commodity pricing and are,therefore, subject to price volatility caused by weather, production problems,delivery difficulties and other factors that are beyond our control.  Our supplies and raw materials are availablefrom several sources and we are not dependent upon any single source for theseitems. The Company negotiates directly with wholesale suppliers of certain highvolume food ingredients such as cheese, tomato sauce, and flour to ensureconsistent quality and competitive pricing. These ingredients are thenpurchased for the Company by a third party independent distributor at thenegotiated price and redistributed to the Company’s restaurants.  All other food ingredients and beverageproducts are purchased directly by the general manager of each restaurant inaccordance 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

 

16

----

 

changes in commodity pricing thatcannot be offset by changes in menu pricing or other product deliverystrategies would not be material.

 

ITEM4.                   Controlsand Procedures

 

As of June 27, 2003, our ChiefExecutive Officer and Chief Financial Officer performed an evaluation of theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15(e)), which have been designed to ensure that materialinformation related to the Company is made known to them and timely disclosed.  The Company’s management, including the CEOand CFO, does not expect that the Company’s disclosure controls or internalcontrols will prevent all error and all fraud. A control system, no matter howwell conceived and operated, can provide only reasonable, not absolute,assurance that the objectives of the control system are met.  Further, the design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Because of the inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the company have been detected. Notwithstanding the foregoing, however,based upon their evaluations, our CEO and CFO concluded that the Company’sdisclosure controls are effective to provide a reasonable level of assurancethat material information relating to the Company is accumulated andcommunicated to management, including the CEO and CFO, as appropriate, to allowtimely decisions regarding required disclosure.

 

There have been no changes in theCompany’s internal control over financial reporting that occurred during theperiod covered by this report that have materially affected, or are reasonablylikely to materially affect, the Company’s internal control over financialreporting.

 

17

----

 

## PART II

##  

## OTHERINFORMATION

##  

ITEM 1.  Legal Proceedings.

 

The Company is involved in variouslegal matters in the ordinary course of its business.  Each of these matters is subject to various uncertainties andsome of these matters may be resolved unfavorably to the Company.  Management believes that any liability thatmay ultimately result from these matters will not have a material adverseeffect on the Company’s financial position.

 

ITEM 2.  Changes in Securities and Use of Proceeds.

 

None.

 

ITEM 3.  Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

ITEM 5.  Other Information.

 

### None.

###  

ITEM 6.  Exhibits and Reports On Form 8-K.

 

(a)                                  Exhibits

 

Exhibit 31: Sarbanes-OxleySection 302 Certification

 

Exhibit 32: Sarbanes-OxleySection 906 Certification

 

 

(b)                                 ReportsOn Form 8-K.

 

None.

 

18

----

 

SIGNATURES

 

 

In accordance with the requirementsof the Securities Exchange Act of 1934, the registrant caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|                         | BOSTON RESTAURANT ASSOCIATES,  INC. |
|------------------------------|-------------------------------------|
|                         |                                |   |
|                         |                                |   |
| Date: September 5, 2003 | By:                                 | /s/ George R. Chapdelaine |   |
|                         |                                | George R. Chapdelaine, President  and  Chief Executive Officer |
|                              |                                     |  |  |  |

 

19

----