###  

### **U.S. SECURITIES ANDEXCHANGE COMMISSION**

 

### **Washington, DC 20549**

###  

## **FORM 10-Q**

##  

**ý****          ****Quarterlyreport under Section 13 or 15(d) of the Securities Exchange Act of1934.**

 

**For the quarterly period ended October 23,2005.**

 

**o****          ****Transitionreport under Section 13 or 15(d) of the Securities Exchange Act of1934.**

 

**For the transition period from                    to                     .**

 

**CommissionFile Number**

**0-18369**

 

**BOSTONRESTAURANT ASSOCIATES, INC.**

(Exact Name ofRegistrant 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)        |

 

Indicate by check whether the registrant: (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during preceding 12 months (or for such shorterperiod that the registrant was required to file such reports), and (2) hasbeen subject to such filing requirements for the past 90 days.  Yes  ý  No  o.

 

Indicate by check whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý.

 

Indicate by check mark whether the registrant is a shellcompany (as defined in Rule 12b-2 of the Exchange Act).  Yes  o  No  ý.

 

Indicate the number of shares outstanding of each of theregistrant classes of common stock as of the latest practical date:  Common stock $0.01 par value 7,035,170 sharesas of November 22, 2005.

 

 

----

 

BOSTON RESTAURANTASSOCIATES, INC.

 

INDEX

 
| PART I  - FINANCIAL STATEMENTS |                                                                                                                                           |
|-------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------|
|                                |                                                                                                                                           |   |
| Item  1.                            | Financial Statements                                                                                                                           |   |
|                                |                                                                                                                                           |   |
|                                | Condensed Consolidated  Balance Sheets as of October 23, 2005 (unaudited) and April 24,  2005                                        |   |
|                                |                                                                                                                                           |   |
|                                | Unaudited Condensed  Consolidated Statements of Operations for the and twenty-six weeks ended October 23,  2005 and October 24, 2004 |   |
|                                |                                                                                                                                           |   |
|                                | Unaudited Condensed  Consolidated Statements of Cash Flows for the twenty-six weeks ended October 23,  2005 and October 24, 2004     |   |
|                                |                                                                                                                                           |   |
|                                | 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 4.                             | Submission of Matters to a  Vote of Security Holders                                                                                           |   |
|                                |                                                                                                                                           |   |
| Item 6.                             | Exhibits                                                                                                                                       |   |
|                                |                                                                                                                                           |   |
|                                | SIGNATURES                                                                                                                                     |   |

 

----

 

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                              | ** ** | **October 23,** | ** ** | **April 24,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                              | ** ** | **2005**             | ** ** | **2005**           | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**      | ** ** | ** **         | ** ** |
| ASSETS                                                                                  |       |                 |       |               |       |
| Current:                                                                                |       |                 |       |               |       |
| Cash and cash equivalents                                                               |       | $                    | 857,189    |               | $          | 687,207 |   |
| Accounts receivable                                                                     |       | 133,878              |       | 111,404            |       |
| Inventories                                                                             |       | 496,035              |       | 460,745            |       |
| Prepaid expenses and other                                                              |       | 138,489              |       | 161,529            |       |
| Current assets of discontinued operations                                               |       | 0                    |       | 164,597            |       |
|                                                                                    |       |                 |       |               |       |
| Total current assets                                                                    |       | 1,625,591            |       | 1,585,482          |       |
|                                                                                    |       |                 |       |               |       |
| Property and  equipment:                                                                |       |                 |       |               |       |
| Building                                                                                |       | 512,500              |       | 512,500            |       |
| Leasehold improvements                                                                  |       | 6,769,259            |       | 6,651,396          |       |
| Equipment, furniture and fixtures                                                       |       | 4,649,165            |       | 4,567,460          |       |
|                                                                                    |       |                 |       |               |       |
|                                                                                    |       | 11,930,924           |       | 11,731,356         |       |
|                                                                                    |       |                 |       |               |       |
| Less accumulated depreciation and amortization                                          |       | 8,043,834            |       | 7,598,139          |       |
|                                                                                    |       |                 |       |               |       |
| Net property and equipment                                                              |       | 3,887,090            |       | 4,133,217          |       |
|                                                                                    |       |                 |       |               |       |
| Goodwill                                                                                |       | 453,643              |       | 453,643            |       |
|                                                                                    |       |                 |       |               |       |
| Other assets                                                                            |       | 421,226              |       | 443,495            |       |
|                                                                                    |       |                 |       |               |       |
| Noncurrent  assets of discontinued operations                                           |       | 0                    |       | 125,464            |       |
|                                                                                    |       |                 |       |               |       |
| Total assets                                                                            |       | $                    | 6,387,550  |               | $          | 6,741,301 |   |
|                                                                                    |       |                 |       |               |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY(DEFICIT)                                     |       |                 |       |               |       |
| Current  liabilities:                                                                   |       |                 |       |               |       |
| Accounts payable                                                                        |       | $                    | 753,074    |               | $          | 715,021 |   |
| Accrued expenses                                                                        |       | 1,311,609            |       | 1,606,671          |       |
| Current maturities:                                                                     |       |                 |       |               |       |
| Notes payable-stockholder                                                               |       | 6,575                |       | 6,420              |       |
| Long-term debt                                                                          |       | 367,237              |       | 353,396            |       |
| Obligations under capital leases                                                        |       | 0                    |       | 31,152             |       |
| Current liabilities of discontinued operations                                          |       | 6,777                |       | 211,335            |       |
|                                                                                    |       |                 |       |               |       |
| Total current liabilities                                                               |       | 2,445,272            |       | 2,923,995          |       |
|                                                                                    |       |                 |       |               |       |
| Long-term  obligations:                                                                 |       |                 |       |               |       |
| Notes payable-stockholder, less current maturities                                      |       | 79,104               |       | 82,430             |       |
| Long-term debt, less current maturities                                                 |       | 1,759,459            |       | 1,946,604          |       |
| Obligations under capital leases, less current  maturities                              |       | 0                    |       | 0                  |       |
| Subordinated debentures                                                                 |       | 1,450,000            |       | 1,450,000          |       |
| Deferred rent                                                                           |       | 357,759              |       | 367,206            |       |
| Other long-term liabilities                                                             |       | 120,497              |       | 135,046            |       |
| Noncurrent liabilities of discontinued operations                                       |       | 0                    |       | 0                  |       |
|                                                                                    |       |                 |       |               |       |
| Total liabilities                                                                       |       | 6,212,091            |       | 6,905,281          |       |
|                                                                                    |       |                 |       |               |       |
| Commitments and  contingencies                                                          |       |                 |       |               |       |
|                                                                                    |       |                 |       |               |       |
| Stockholders’  equity(deficit) :                                                   |       |                 |       |               |       |
| Preferred stock, $.01 par value, 10,000,000 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                                                                     |       | (11,777,125          | )          | (12,116,564        | )          |
|                                                                                    |       |                 |       |               |       |
| Total                                                                                   |       | 200,151              |       | (139,288           | )          |
| Less:                                                                                   |       |                 |       |               |       |
| Treasury stock, 25,000 shares at cost                                                   |       | (24,692              | )          | (24,692            | )          |
| Total stockholders’ equity(deficit)                                                |       | 175,459              |       | (163,980           | )          |
|                                                                                    |       |                 |       |               |       |
| Total liabilities and stockholders’ equity(deficit)                                |       | $                    | 6,387,550  |               | $          | 6,741,301 |   |

 

See accompanyingnotes.

 

3

----

 

BOSTON RESTAURANTS ASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 
| ** **                                                               | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **October 23,**     | ** ** | **October 24,**       | ** ** | **October 23,** | ** ** | **October 24,** | ** ** |
| ** **                                                               | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Revenues:                                                                |       |                     |       |                       |       |   |   |   |   |
| Restaurant sales                                                         |       | $                        | 5,755,534  |                       | $          | 5,856,724 |   | $ | 11,492,376 |   | $ | 11,242,174 |   |
| Franchise fees                                                           |       | 0                        |       | 0                          |       | 0 |   | 269 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Total revenues                                                           |       | 5,755,534                |       | 5,856,724                  |       | 11,492,376 |   | 11,242,443 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Costs and expenses:                                                      |       |                     |       |                       |       |   |   |   |   |
| Cost of food, beverages and liquor                                       |       | 1,108,240                |       | 1,153,719                  |       | 2,214,181 |   | 2,326,294 |   |
| Payroll                                                                  |       | 1,662,945                |       | 1,698,552                  |       | 3,315,604 |   | 3,266,191 |   |
| Other operating expenses                                                 |       | 1,943,666                |       | 1,892,713                  |       | 3,810,964 |   | 3,580,193 |   |
| General and administrative                                               |       | 571,147                  |       | 599,750                    |       | 1,214,830 |   | 1,216,143 |   |
| Depreciation and amortization                                            |       | 231,845                  |       | 240,354                    |       | 463,690 |   | 469,708 |   |
| Pre-opening costs                                                        |       | 0                        |       | 3,242                      |       | 0 |   | 93,196 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Total costs and expenses                                                 |       | 5,517,843                |       | 5,588,330                  |       | 11,019,269 |   | 10,951,725 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Operating Income                                                         |       | 237,691                  |       | 268,394                    |       | 473,107 |   | 290,718 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Other income                                                             |       | 16,816                   |       | 1,925                      |       | 18,769 |   | 4,430 |   |
| Interest income                                                          |       | 4,032                    |       | 716                        |       | 6,450 |   | 811 |   |
| Interest expense                                                         |       | (93,876                  | )          | (130,327                   | )          | (189,605 | ) | (249,416 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Income (Loss) from continuing operations before  discontinued operations |       | 164,663                  |       | 140,708                    |       | 308,721 |   | 46,543 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Discontinued operations :                                                |       |                     |       |                       |       |   |   |   |   |
| Income (Loss) from operations                                            |       | (3,818                   | )          | (5,354                     | )          | (62,286 | ) | (223,846 | ) |
| Gain (Loss) from disposal of discontinued operations                     |       | 0                        |       | 0                          |       | 132,004 |   | 0 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Income (Loss) from discontinued operations                               |       | (3,818                   | )          | (5,354                     | )          | 69,718 |   | (223,846 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Net Income (Loss)                                                        |       | 160,845                  |       | 135,354                    |       | 378,439 |   | (177,303 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Less: preferred stock dividends                                          |       | (19,281                  | )          | 0                          |       | (39,000 | ) | 0 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Income (Loss) available to common shareholders                           |       | $                        | 141,564    |                       | $          | 135,354 |   | $ | 339,439 |   | ($177,303 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Income (Loss) per share of common stock (Basic and  Diluted)             |       |                     |       |                       |       |   |   |   |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Continuing Operations                                                    |       | $                        | 0.02       |                       | $          | 0.02 |   | $ | 0.04 |   | $ | 0.00 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Discontinued Operations                                                  |       | $                        | 0.00       |                       | $          | 0.00 |   | $ | 0.01 |   | ($0.03 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Net Income (Loss)                                                        |       | $                        | 0.02       |                       | $          | 0.02 |   | $ | 0.05 |   | ($0.03 | ) |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Weighted average number of common shares  outstanding-basic              |       | 7,035,170                |       | 7,035,170                  |       | 7,035,170 |   | 7,035,170 |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Weighted average number of dilutive common shares  outstanding           |       | 7,179,751                |       | 7,085,955                  |       | 7,154,755 |   | 7,035,170 |   |

 

See accompanying notes.

 

4

----

 

BOSTONRESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
| ** **                                            | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **October 23,**       | ** ** | **October 24,** | ** ** |
| ** **                                            | ** ** | **2005**                   | ** ** | **2004** | ** ** |
|                                                  |       |                       |       |   |   |
| Net cash  provided by operating activities            |       | $                          | 534,462    |   | $ | 585,262 |   |
|                                                  |       |                       |       |   |   |
| Cash flows from investing activities:                 |       |                       |       |   |   |
| Capital expenditures                                  |       | (199,567                   | )          | (583,678 | ) |
| Proceeds from sale of assets                          |       | 81,714                     |       | 0 |   |
|                                                  |       |                       |       |   |   |
| Net cash used  for investing activities               |       | (117,853                   | )          | (583,678 | ) |
|                                                  |       |                       |       |   |   |
| Cash flows from financing activities:                 |       |                       |       |   |   |
| Repayments of long-term debt                          |       | (173,304                   | )          | (380,117 | ) |
| Repayments of capital lease obligations               |       | (31,152                    | )          | (92,671 | ) |
| Repayments of stockholder loans                       |       | (3,171                     | )          | (3,020 | ) |
| Proceeds from short-term borrowings                   |       | 0                          |       | 200,000 |   |
| Payments of preferred dividends                       |       | (39,000                    | )          | 0 |   |
|                                                  |       |                       |       |   |   |
| Net cash used  for financing activities               |       | (246,627                   | )          | (275,808 | ) |
|                                                  |       |                       |       |   |   |
| Net increase  (decrease) in cash and cash equivalents |       | 169,982                    |       | (274,224 | ) |
|                                                  |       |                       |       |   |   |
| Cash and cash equivalents at beginning of period      |       | 687,207                    |       | 651,754 |   |
|                                                  |       |                       |       |   |   |
| Cash and cash equivalents at end of period            |       | $                          | 857,189    |   | $ | 377,530 |   |

 

See accompanying notes.

 

5

----

 

BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

## OCTOBER 23, 2005

##  

## (unaudited)

 

**1.  NATURE OF 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. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the thirteen-weekperiod and twenty-six week period ended October 23, 2005 are not necessarilyindicative of the results that may be expected for the year ending April 30,2006.  For further information, refer tothe consolidated financial statements and footnotes thereto included in theCompany’s annual report on Form 10-K for the year ended April 24,2005.  The balance sheet at April 24,2005 has been derived from the audited financial statements at that date.

 

The accompanying statementsof operations and cash flows for the fiscal 2006 period reflect theconsolidated operations and cash flows of three casual dining Italianrestaurants and, thirteen Pizzeria Regina restaurants for the entire period.For the fiscal 2005 period there were five casual dining Italian restaurantsand twelve Pizzeria Regina restaurants for the entire period and one PizzeriaRegina for part of the period.

 

In fiscal 2005, theCompany completed the asset sale of Polcari’s of Hyannis, Inc.  and closed the Pizzeria Regina in Richmond,Virginia at the end of the lease term. The sale of Polcari’s of Cambridge, Inc. was completed on July 22,2005.  The accompanying financialstatements have been reclassified to reflect Polcari’s of Hyannis, Inc.,Polcari’s of Cambridge, Inc. and Pizzeria Regina at Richmond, Virginia asdiscontinued operations.

 

**2.  NET INCOME (LOSS) PER SHARE**

 

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

 

The following is areconciliation of the denominator (number of shares) used in the computation ofearnings per share.  The numerator, netincome (loss), is the same for the basic and diluted computations.

 

6

----

 
| ** **                     | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|--------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                     | ** ** | **October 23,**     | ** ** | **October 24,**       | ** ** | **October 23,** | ** ** | **October 24,** | ** ** |
| ** **                     | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
|                           |       |                     |       |                       |       |   |   |   |   |
| Basic Shares                   |       | 7,035,170                |       | 7,035,170                  |       | 7,035,170 |   | 7,035,170 |   |
|                           |       |                     |       |                       |       |   |   |   |   |
| Effect of Dilutive Securities: |       |                     |       |                       |       |   |   |   |   |
|                           |       |                     |       |                       |       |   |   |   |   |
| Options                        |       | 144,581                  |       | 50,785                     |       | 119,585 |   | 0 |   |
|                           |       |                     |       |                       |       |   |   |   |   |
| Diluted Shares                 |       | 7,179,751                |       | 7,085,955                  |       | 7,154,755 |   | 7,035,170 |   |

 

 

Thefollowing table summarizes securities that were outstanding as of October 23,2005 and October 24, 2004, but not included in the calculation of netincome (loss) per share because such securities are anti-dilutive:

 
| ** **                   | ** ** | **Thirteen  weeks ended** | ** ** | **Twenty-six  weeks ended** | ** ** |
|------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                   | ** ** | **October 23,**      | ** ** | **October 24,**        | ** ** | **October 23,** | ** ** | **October 24,** | ** ** |
| ** **                   | ** ** | **2005**                  | ** ** | **2004**                    | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                   | ** ** | ** **                | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** |
| Options                      |       | 829,800                   |       | 834,800                     |       | 829,800 |   | 1,234,800 |   |
|                         |       |                      |       |                        |       |   |   |   |   |
| Warrants                     |       | 601,000                   |       | 601,000                     |       | 601,000 |   | 601,000 |   |
|                         |       |                      |       |                        |       |   |   |   |   |
| Convertible  Debentures      |       | 1,160,000                 |       | 1,160,000                   |       | 1,160,000 |   | 1,160,000 |   |
|                         |       |                      |       |                        |       |   |   |   |   |
| Convertible  Preferred Stock |       | 1,147,056                 |       | —                      |       | 1,147,056 |   | — |   |

 

7

----

 

The Company accounts forstock options using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” (“APB 25”) and related interpretations.  Accordingly, the Company has recognized nocompensation cost for its stock option plans. The Company follows the disclosure provisions of Statement of FinancialAccounting Standards No. 123 (“SFAS No. 123”), “Accounting forStock-Based Compensation,” and SFAS No. 148 “Accounting for Stock BasedCompensation Transition and Disclosure” which require the disclosure of theeffects of fair value accounting on earnings and earnings per share of commonstock on a pro forma basis.

 

  Had compensation cost for the Company’s stockoptions been determined based upon the fair value at the grant date for awards underthe plans consistent with the methodology prescribed under SFAS No. 123,the Company’s net income (loss) would have been adjusted to the pro formaamounts indicated below.

 
| ** **                                                                                    | ** ** | **Thirteen Weeks Ended**  | ** ** | **Twenty- Six Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                    | ** ** | **October 23, 2005** | ** ** | **October 24, 2004**   | ** ** | **October 23, 2005** | ** ** | **October 24, 2004** | ** ** |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Net income (loss) as reported                                                                 |       | $                         | 160,845    |                        | $          | 135,354 |   | $ | 378,439 |   | $ | (177,303 | ) |
| Less:dividends                                                                                |       | (19,281                   | )          | —                      |       | (39,000 | ) | — |   |
| Net income (loss) available to common stockholders  as reported                               |       | 141,564                   |       | 135,354                     |       | 339,439 |   | (177,303 | ) |
| 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              |       | —                    |       | (59,003                     | )          | (3,709 | ) | (79,372 | ) |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Net income (loss)-pro forma                                                                   |       | $                         | 141,564    |                        | $          | 76,351 |   | $ | 335,730 |   | $ | (256,675 | ) |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Basic and diluted earnings per share:                                                         |       |                      |       |                        |       |   |   |   |   |
| As reported                                                                                   |       | $                         | .02        |                        | $          | .02 |   | $ | .05 |   | $ | (.03 | ) |
| Pro forma                                                                                     |       | $                         | .02        |                        | $          | .01 |   | $ | .05 |   | $ | (.04 | ) |

 

8

----

 

**3.****            ****CONTINGENCY**

 

TheCompany currently operates Pizzeria Regina at the Burlington Mall, Burlington,Massachusetts and is negotiating a lease renewal for this location.

 

**4.****            ****NEW ACCOUNTING PRONOUNCEMENTS**

 
|        | None Applicable                                                                                          |
|-------------|----------------------------------------------------------------------------------------------------------|
|        |                                                                                                     |
| **ITEM 2.** | **Management’s  Discussion and Analysis of Financial Condition and Results of** **Operations** |

 

**RESULTSOF OPERATIONS**

 

# **Overview**

 

In fiscal 2005, theCompany completed the asset sale of Polcari’s of Hyannis, Inc. in March,2005 and closed the Pizzeria Regina in Richmond, Virginia at the end of the leaseterm in November, 2004.  The sale ofPolcari’s of Cambridge, Inc. was completed in fiscal 2006 on July 22,2005.  The accompanying financial statementshave been reclassified to reflect Polcari’s of Hyannis, Inc., Polcari’s ofCambridge, Inc. and Pizzeria Regina at Richmond, Virginia as discontinuedoperations.

 

The Company’s restaurant sales in the most recentquarter were $5,755,000 compared to sales of $5,857,000 in the second quarterof fiscal 2005, a decrease of 1.7%.  TheCompany believes that the decrease in revenue is primarily attributable to anincrease in gas prices resulting in a decrease in discretionary spending at ourfull service Polcari’s restaurants.  TheCompany had income for the second quarter of fiscal 2006 of $161,000, comparedto net income of $135,000 for the same quarter in fiscal 2005.  This increase in income is the result ofincreased sales from Pizzeria Regina restaurants as a percentage of total salesand lower costs of food, beverages and liquor expenses and payroll expenses atthe Company’s Pizzeria Regina restaurants The key factors that affect our operating results are the impact of newstore openings, comparable restaurant sales, which are driven by customercounts and check average, and our ability to manage operating expenses such asfood cost, labor and benefits and other costs. Changes in the number of restaurants in operation can increase ordecrease total Company revenues and expenses, and the build out and opening ofnew 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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In the fiscal 2006 period,there were 16 units in operation for the entire period.  In fiscal 2005 period there were 15 units inoperation for the entire period and one Pizzeria Regina restaurant for part ofthe period.  The following table setsforth all revenues, costs and expenses as a percentage for the periodsindicated for revenue and expense items included in the consolidated statementsof operations:

 

TheCompany is currently negotiating a lease renewal at the Burlington Mall,Burlington, Massachusetts and at the South Shore Plaza in Braintree,Massachusetts.

 
| ** **                                                               | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six weeks Ended** | ** ** |
|--------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                               | ** ** | **October 23,**     | ** ** | **October 24,**            | ** ** | **October 23,** | ** ** | **October 24,** | ** ** |
| ** **                                                               | ** ** | **2005**                 | ** ** | **2004**                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                               | ** ** | ** **               | ** ** | ** **                 | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues: (1)                                                            |       |                     |       |                       |       |   |   |   |   |
| Restaurant sales                                                         |       | 100                      | %          | 100                        | %          | 100 | % | 100 | % |
| Other                                                                    |       | —                   |       | —                     |       | — |   | — |   |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Total revenues                                                           |       | 100                      | %          | 100                        | %          | 100 | % | 100 | % |
|                                                                     |       |                     |       |                       |       |   |   |   |   |
| Costs and  expenses:                                                     |       |                     |       |                       |       |   |   |   |   |
| Cost of food, beverages and liquor                                       |       | 19.3                     |       | 19.7                       |       | 19.3 |   | 20.7 |   |
| Other operating expenses- payroll                                        |       | 28.9                     |       | 29.0                       |       | 28.8 |   | 29.1 |   |
| Other operating expenses exclusive of payroll                            |       | 33.8                     |       | 32.3                       |       | 33.2 |   | 31.8 |   |
| General and administrative                                               |       | 9.9                      |       | 10.2                       |       | 10.6 |   | 10.8 |   |
| Depreciation and amortization                                            |       | 4.0                      |       | 4.1                        |       | 4.0 |   | 4.2 |   |
| Pre-opening costs                                                        |       | —                   |       | .1                         |       | — |   | .8 |   |
| Operating income  (loss)                                                 |       | 4.1                      |       | 4.6                        |       | 4.1 |   | 2.6 |   |
| Interest  expense, net                                                   |       | (1.5                     | )          | (2.2                       | )          | (1.6 | ) | (2.2 | ) |
| Other income                                                             |       | .3                       |       | —                     |       | .2 |   | — |   |
| Income (loss) from continuing operations before  discontinued operations |       | 2.9                      |       | 2.4                        |       | 2.7 |   | .4 |   |
| Income (loss) from discontinued operations                               |       | (.1                      | )          | (.1                        | )          | .6 |   | (2.0 | ) |
| Net income (loss)                                                        |       | 2.8                      | %          | 2.3                        | %          | 3.3 | % | (1.6 | )% |

 

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(1)  In fiscal2005, the Company completed the asset sale of Polcari’s of Hyannis, Inc.in March 2005 and closed the Pizzeria Regina in Richmond, Virginia at theend of the lease term in November 2004. The sale of Polcari’s of Cambridge, Inc. was completed on July 22,2005.  The financial statements includedwith this report have been reclassified to reflect Polcari’s of Hyannis, Inc.Polcari’s of Cambridge, Inc., and Pizzeria Regina at Richmond, Virginia asdiscontinued operations.

 

**Thirteen Weeks Ended October 23,2005 as Compared to Thirteen Weeks ended October 24, 2004 Restaurant Sales****.**

 

Restaurant sales in the mostrecent quarter were $5,756,000 compared to restaurant sales in the prior year’speriod of $5,857,000.  The Companybelieves that the decrease in revenue was primarily attributable to an increasein gas prices resulting in a decrease in discretionary spending at our Polcari’srestaurants.  Sales volume for therestaurants open throughout both fiscal 2006 and 2005 decreased by 1.7%.

 

Net sales at the Company’sPizzeria Regina restaurants increased to $3,613,000 in the current period from$3,612,000 in the prior year’s period.

 

Net sales at the Company’sfull service casual dining restaurants decreased to $2,121,000 in the currentperiod from $2,235,000 in the prior year’s period. This decrease in sales wasprimarily attributable to an increase in gas prices resulting in a decrease indiscretionary spending.  Same store salesdecreased 5.0% for the current period.

 

Net sales to third partiesat the Company’s commissary were $22,000 in the current period compared to$10,000 in the prior year’s period.

 

**Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages andliquor as a percentage of total revenues for all restaurants was 19% in thefiscal 2006 period compared to 20% in the fiscal 2005 period.  The decrease as a percentage of totalrevenues was primarily attributable to two pizzeria Regina locations thateliminated certain food items from their menus and to a decrease in cheesecosts.

 

The cost of food, beverageand liquor was $1,108,000 in the current period compared to $1,154,000 in theprior year’s period. The dollar decrease was due in part to the elimination ofcertain food items at two Pizzeria Regina locations and to a decrease in cheesecosts.

 

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The cost of food, beverageand liquor as a percentage of restaurant sales at the Pizzeria Reginarestaurants was 16% in the fiscal 2006 period compared to 17% in the fiscal2005 period.  The decrease as apercentage of restaurant sales was primarily due to the elimination of fooditems at two Pizzeria Regina locations and to a decrease in cheese costs.

 

The cost of food, beverageand liquor at Pizzeria Regina restaurants was $571,000 in the current periodcompared to $621,000 in the prior year’s period. The dollar decrease wasprimarily due to two Pizzeria Regina locations which eliminated food items fromtheir menus and reduced cheese costs.

 

The cost of food, beverageand liquor as a percentage of restaurant sales at the Company’s full servicecasual dining restaurants was 25% in the fiscal 2006 period compared to 24% inthe fiscal 2005 period. The increase as a percentage of restaurant sales wasprincipally due to increases in costs from suppliers in general.

 

The cost of food, beverageand liquor at the Company’s full service casual dining restaurants was $537,000in the current period compared to $533,000 in the prior year’s period.  The dollar increase was primarily due toincreases in costs from suppliers in general.

 

# **Other Operating Expenses**

# ** **

Payroll Expenses.

 

Payroll expenses as a percentage of total revenues forall restaurants were 29% in both the fiscal 2006 and the fiscal 2005 periods.

 

Payroll expenses were$1,663,000 in the current period, compared to $1,699,000 in the prior year’speriod.  The dollar decrease in payrollexpenses was primarily due to the eliminations of food items at two PizzeriaRegina locations which required additional personnel.

 

Payroll expenses at thePizzeria Regina restaurants were 24% of restaurant sales in the current periodcompared to 26% of restaurant sales in the prior year’s period.  The decrease as a percentage of restaurantsales was primarily due to the elimination of food items at two Pizzeria Reginalocations.

 

Payroll expenses of thePizzeria Regina restaurants were $863,000 in the current period compared to$926,000 in the prior year’s period. This dollar decrease was primarily due to the reduction in personnel attwo Pizzeria Regina due to the elimination of food items from their menus.

 

Payroll expenses at theCompany’s full service casual dining restaurants were 32% of restaurant salesin the current period compared to 30% in the prior year’s period.  The increase as a percentage of restaurant saleswas primarily attributable to higher employee incentive costs.

 

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Payroll expenses at theCompany’s full service casual dining restaurants were $685,000 in the currentperiod compared to $668,000 in the prior year’s period.  This dollar increase was primarily due tohigher employee incentive costs.

 

Payroll expenses at theCompany’s Commissary were $115,000 for the fiscal 2006 period as compared to$105,000 in the fiscal 2005 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses exclusive of payroll were 34%of total revenues in the fiscal 2006 period compared to 32% in the fiscal 2005period. The increase as a percentage of total revenues was primarilyattributable to legal costs associated with the Pizzeria Regina at BurlingtonMall, Burlington, Massachusetts relating to the renegotiation and extension ofthe Company’s lease there.

 

Other operating expenses,exclusive of payroll, were $1,944,000 in the current period compared to$1,893,000 in the prior year’s period. The increase in operating expenses,exclusive of payroll, was primarily attributable to legal costs associated withthe Pizzeria Regina at Burlington, Mall.

 

Other operating expensesexclusive of payroll, for the Pizzeria Regina restaurants as a percentage ofrestaurant sales were 35% in the current period compared to 33% in the prioryear’s period.  The increase as apercentage of restaurant sales was primarily due to legal costs associated withthe Pizzeria Regina at the Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $1,271,000 inthe current period, compared to $1,205,000 in the prior year’s period.  This dollar increase is primarily due to thelegal costs associated with the Pizzeria Regina at the Burlington Mall,Burlington, Massachusetts.

 

Other operating expensesexclusive of payroll, for the Company’s full service casual dining restaurantsas a percentage of restaurant sales were 30% in the current period compared to29% in the prior years period.  Theincrease as a percentage of restaurant sales was primarily attributable tolower revenues.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $642,000 in the current period compared to $656,000 in the prior year’speriod. The dollar decrease was primarily attributable a decrease in promotionsat the Polcari’s bistro in Salem, New Hampshire.

 

Other operating expenses alsoinclude commissary expenses, which were $31,000 for the fiscal 2006 period ascompared to $32,000 in the fiscal 2005 period.

 

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General and Administrative Expenses.

 

General and administrativeexpenses were 10% of total revenues in both fiscal 2006 and fiscal 2005periods.

 

General and administrativeexpenses were $571,000 in the current period compared to $600,000 in the prioryear’s period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortizationexpenses were 4% of total revenues in both fiscal 2006 and fiscal 2005 periods.

 

 Depreciation and amortization expense was$232,000 in the current period compared to $240,000 in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs consistingprimarily of labor, rent and training materials for the current period were $0compared to $3,000 in the prior year’s period.

 

**Other Income**

 

Other income was $17,000 inthe current fiscal period compared to $2,000 in the prior year’s fiscal period.  The increase in other income was primarilydue to a business interruption insurance reimbursement for the Pizzeria Reginarestaurant in Paramus, New Jersey.

 

**Interest Expense and InterestIncome****.**

 

Interest expense was $94,000in the current period as compared to $130,000 in the prior year’s period. Thisdollar decrease was primarily due to a restructuring of the Company’s creditfacility.

 

Interest income was $4,000in the fiscal 2006 period compared to $1,000 in the fiscal 2005 period.

 

**Discontinued Operations**

 

In the fiscal 2006period, the sale of Polcari’s of Cambridge, Inc. was completed on July 22,2005.  In fiscal 2005, the Companycompleted the asset sale of Polcari’s of Hyannis, Inc. in March 2005and closed the Pizzeria Regina in Richmond, Virginia at the end of the leaseterm in November.  The Company hasreclassified its financial results to reflect Polcari’s of Hyannis, Inc.,Polcari’s of Cambridge, Inc. and Pizzeria Regina in Richmond, Virginia asdiscontinued operations.

 

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The loss fromdiscontinued operations was $4,000 in the fiscal 2006 period compared to a lossof $5,000 in fiscal 2005 period. In the fiscal 2006 period the loss fromdiscontinued operations represents operating losses from the Polcari’s bistrorestaurant in Hyannis, Massachusetts, and the Polcari’s North End restaurant inCambridge, Massachusetts. In the fiscal 2005 period, the loss of $5,000 fromdiscontinued operations represents operating losses from the Polcari’s bistro restaurantin Hyannis, Massachusetts, the Polcari’s North End restaurant in Cambridge,Massachusetts, and the Pizzeria Regina restaurant in Richmond, Virginia.

 

**Twenty-six weeks Ended October 23,2005**

 

Restaurant sales for thetwenty-six weeks ended October 23, 2005 were $11,492,000 compared torestaurant sales in the prior year’s period of $11,242,000.  The increase in revenue was primarilyattributable to the Pizzeria Regina at South Station in Boston, Massachusettsoperating for the entire period, partially offset by an increase in gas pricesresulting in a decrease in discretionary spending at our Polcari’srestaurants.  Sales volume for therestaurants open throughout both fiscal 2006 and 2005 periods increased by .4%

 

Net sales at the Company’sPizzeria Regina restaurants increased to $7,102,000 in the current twenty- sixweek period from $6,840,000 in the prior year’s period.  The increase in restaurant sales wasprincipally due to the Pizzeria Regina at South Station being opened for theentire period.  The same store sales forthe Pizzeria Regina restaurants increased .9% in the current period.

 

Net sales at the Company’sfull service casual dining restaurants decreased to $4,355,000 in thetwenty-six week current period from $4,388,000 in the prior year’s period.  This decrease was primarily attributable toan increase in gas prices resulting in a decrease in discretionaryspending.  The same store sales for thefull service casual dining restaurants decreased .8% in the current period.

 

Net sales at the Company’scommissary were $35,000 in the current period compared to $14,000 in the prioryear’s period.

 

# **Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages, liquor as a percentage of totalrevenues for all restaurants was 19% in the current period compared to 21% inthe prior year’s period.  The decrease asa percentage of total revenues was primarily attributable to the elimination offood items at two Pizzeria Regina locations and to a decrease in cheese costs.

 

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The cost of food, beverageand liquor was $2,214,000 in the current twenty-six week period compared to$2,326,000 in the prior year’s period. The dollar decrease was due in part totwo Pizzeria Regina locations that eliminated certain food items from theirmenus and to a decrease in cheese costs.

 

The cost as a percentage ofrestaurant sales at the Pizzeria Regina restaurants was 16% in the fiscal 2006period compared to 18% in the fiscal 2005 period.  The decrease as a percentage of restaurantsales was principally due to the elimination of food items at two PizzeriaRegina locations and to a decrease in cheese costs.

 

The cost of food, beverageand liquor at Pizzeria Regina restaurants was $1,121,000 in the current periodcompared to $1,231,000 in the prior year’s period.  The dollar decrease was due to two PizzeriaRegina locations that eliminated certain food items from their menus and to adecrease in cheese costs.

 

The cost as a percentage ofrestaurant sales at the Company’s full service casual dining restaurants was25% in both the fiscal 2006 and the fiscal 2005 periods.

 

The cost of food, beverageand liquor at the Company’s full service casual dining restaurants was$1,093,000 in the current twenty-six week period compared to $1,095,000 in theprior year’s period.

 

# **Other Operating Expenses**

# ** **

Payroll Expenses.

 

Payroll expenses as a percentage of the total revenuesfor all restaurants were 29% in both fiscal 2006 and fiscal 2005 periods.

 

Payroll expenses were$3,316,000 in the current period, compared to $3,266,000 in the prior year’stwenty-six week period.  The dollarincrease in payroll expenses was primarily due to the Pizzeria Regina at SouthStation in Boston, Massachusetts being open for the entire period.

 

Payroll expenses at thePizzeria Regina restaurants were 24% of restaurant sales in the current periodcompared to 25% in the prior year’s period. The decrease as a percentage of restaurant sales was primarily due tothe reduction in personnel at two Pizzeria Regina restaurants due to theelimination of food items from their menus.

 

Payroll expenses of thePizzeria Regina restaurants were $1,727,000 in the current twenty-six weekperiod compared to $1,731,000 in the prior year’s period.  This dollar decrease was primarily due to theelimination of food items at two Pizzeria Regina locations.

 

Payroll expenses as apercentage of restaurant sales at the Company’s full service casual diningrestaurants were 32% of restaurant sales in the current period compared to 30%in the prior year’s period.  The increaseas a percentage of restaurant sales was primarily attributable to higheremployee incentive costs.

 

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Payroll expenses at theCompany’s full service casual dining restaurants were $1,373,000 in the currenttwenty-six week period compared to $1,332,000 in the prior year’s period.  This dollar increase was primarily due tohigher employee incentive costs.

 

 Payroll expenses at the Company’s Commissarywere $216,000 for the fiscal 2006 period as compared to $203,000 in the fiscal2005 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses, exclusive of payroll, were 33%of total revenues in the fiscal 2006 period compared to 32% in the fiscal 2005period.  The increase as a percentage oftotal revenues was primarily attributable to legal costs associated with thePizzeria Regina at Burlington Mall, Burlington, Massachusetts relating to the renegotiationand extension of the Company’s lease there.

 

Other operating expenses,exclusive of payroll, were $3,811,000 in the current twenty-six week periodcompared to $3,580,000 in the prior year’s period. The increase in operatingexpenses, exclusive of payroll, as a percentage of total revenues was primarilydue to the Pizzeria Regina at South Station in Boston, Massachusetts being openfor the entire period and to legal costs associated with the Pizzeria Regina atthe Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses, exclusiveof payroll, for the Pizzeria Regina restaurants as a percentage of restaurantsales were 35% in the current period compared to 33% in the prior year’speriod.  The increase as a percentage ofsales was primarily attributable to the Pizzeria Regina at South Station beingopen for the entire period and legal costs associated with the Pizzeria Reginaat Burlington Mall, Burlington, Massachusetts .

 

Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $2,473,000 inthe current twenty-six week period, compared to $2,254,000 in the prior year’speriod.  This dollar increase isprimarily due to the addition of a new Pizzeria Regina restaurant at SouthStation operating for the entire period and legal costs associated with thePizzeria Regina at the Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantsas a percentage of restaurant sales were 29% in both the current and in theprior year’s period.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $1,272,000 in the current twenty-six week period compared to $1,268,000 inthe prior year’s period.

 

Other operating expensesalso include commissary expenses, which were $66,000 in fiscal 2006 periodcompared to $58,000 in fiscal 2005 period.

 

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Generaland Administrative Expenses.

 

Generaland Administrative expenses were 11% of total revenues in both fiscal 2006period and fiscal 2005 period.

 

General and administrativeexpenses were $1,215,000 in the current period, compared to $1,216,000 in theprior year’s period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortizationexpense were 4% of total revenues in both fiscal 2006 and fiscal 2005 periods.

 

Depreciation andamortization expense was $464,000 in the current period, compared to $470,000in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs for thecurrent period were $0 in the fiscal 2006 period compared to $93,000 in thefiscal 2005 period.  These costs whichconsist of labor, rent and training materials are attributable to the openingof the new Pizzeria Regina restaurant at South Station in Boston, Massachusettsin the fiscal 2005 period.

 

**Other Income**

 

Other income was $19,000 inthe current period compared to $4,000 in the prior year’s period.  The increase was primarily due to aninsurance reimbursement for the Pizzeria Regina restaurant in Paramus, NewJersey.

 

**Interest Expense and InterestIncome****.**

 

Interest expense was$190,000 in the current period as compared to $249,000 in the prior year’speriod. This dollar decrease was primarily due to a restructuring of theCompany’s credit facility.

 

Interest income was $6,000in the current period compared to $1,000 in the prior year’s period.

 

**DiscontinuedOperations**

 

In the fiscal 2006period, the sale of Polcari’s of Cambridge, Inc. was completed on July 22,2005.  In fiscal 2005, the Company completedthe asset sale of Polcari’s of Hyannis, Inc.in March,2005 and closed thePizzeria Regina in Richmond, Virginia at the end of the lease termiin Nvember,2004.  The Company has reclassified itsfinancial results to reflect Polcari’s of Hyannis, Inc., Polcari’s ofCambridge, Inc. and Pizzeria Regina in Richmond, Virginia as discontinuedoperations.

 

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The income fromdiscontinued operations was $70,000 in the fiscal 2006 period compared to aloss of $224,000 in fiscal 2005 period. In the fiscal 2006 period the incomefrom discontinued operations represents operating losses from the Polcari’sbistro restaurant in Hyannis, Massachusetts, the Polcari’s North End restaurantin Cambridge, Massachusetts and a gain of $132,000 from the disposal of certainassets of the Polcari’s North End Restaurant in Cambridge, Massachusetts.  In the fiscal 2005 period, the loss of$218,000 from discontinued operations represents operating losses from thePolcari’s bistro restaurant in Hyannis, Massachusetts, the Polcari’s North Endrestaurant in Cambridge, Massachusetts, and the Pizzeria Regina restaurant inRichmond, Virginia.

 

### **LIQUIDITY AND CAPITALRESOURCES**

 

At October 23,2005, the Company had negative net working capital of $820,000 compared to negative net working capital of$1,339,000 at April 24, 2005.  It iscommon for companies in the restaurant industry to operate with net workingcapital deficits.  We are able to operatewith a substantial working capital deficit because (1) restaurantoperations and most food service operations are conducted primarily on a cash(and cash equivalent) basis with a low level of accounts receivable, (2) rapidturnover 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. During the twenty-six weeks ended October 23,2005, the Company had a net increase in cash and cash equivalents of  $170,000, reflecting net cash provided byoperating activities of $534,000, net cash used for investing activities of$118,000 and net cash used for financing activities of $246,000.

 

Net cash provided byoperating activities included income of $378,000, a decrease in inventories of$100,000, a decrease in accounts receivables of $7,000, a decrease in prepaidexpenses of $23,000, a decrease in other assets of $48,000, and depreciationand amortization expense of $464,000 which were partially offset by a decreasein accounts payable of $22,000, a decrease in deferred rent of $9,000, adecrease in other long-term liabilities of $15,000 and a decrease in accruedexpenses of $440,000.  Net cash used forinvesting activities includes capital expenditures of $200,000 related toPolcari’s North End restaurant, Polcari’s North End bistro restaurants andvarious Pizzeria Regina restaurants partially offset by the asset sale ofPolcari’s North End in Cambridge, Massachusetts of $82,000.  Net cash used for financing activities of$247,000 consisted of repayments of long term debt, lease obligations,stockholders loans and payments of preferred dividends.

 

At October 23,2005, the Company had current liabilities of $2,445,000, including $753,000 ofaccounts payable, $1,312,000 of accrued liabilities, current maturities of longterm obligations in the amount of $374,000 and current liabilities fromdiscontinued operations of $6,000.  At October 23,2005, the Company had long-term obligations, less current maturities, in theamount of $3,767,000 including,  $1,759,000due under its credit facility with Commerce Bank and Trust Company,$79,000 ofnotes payable to a

 

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stockholder,$1,450,000 of convertible subordinated debentures, $358,000 of deferred rent,and $121,000 of other long-term liabilities.

 

On April 21, 2005the Company refinanced its debt with Commerce Bank and Trust Company and a new$2,300,000 Credit Facility was established. This Credit Facility consists of a $1,500,000 4 year term note bearinginterest at the bank base rate plus 2% and an $800,000 mortgage in favor ofCommerce bank and Trust Company at a fixed rate of 7%.  The mortgage has a twenty year amortization schedule witha complete payment of principal due at the end of five years.  All borrowing under the Credit Facility arecollateralized by substantially all of the assets of the Company and aresubject to various financial covenants. At October 23, 2005 the Company was in compliance with allfinancial covenants.

 

The Company has no additionalsignificant capital commitments in fiscal 2006. The Company believes that its existing resources, including its loanfacility, together with cash flow generated from operations, will be sufficientto fund its cash flow requirements and maintain debt covenant compliance forthe next twelve months.  However, theCompany’s growth will be dependent upon obtaining additional financing.  There can be no assurance that any futureadditional financing will be available on commercially reasonable terms, or atall, and the success or lack of success of the Company’s restaurants openedwithin the last year and planned to be opened in the future may have a criticaleffect on the Company’s ability to raise funds through the sale of stock orotherwise.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

None Applicable.

 

# **“SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATIONREFORM ACT OF 1995**

# ** **

*Forward-lookingstatements in this report, including without limitation statements relating tothe adequacy of the Company’s working capital and other resources the Company’sability to obtain additional financing, the Company’s ability to comply withits financial covenants, the Company’s new store openings and future expansion,and anticipated future cash flows from particular locations are made pursuantto the safe harbor provisions of the Private Securities Litigation Reform Actof 1995.  Investors are cautioned thatsuch forward-looking statements involve risks and uncertainties, including withoutlimitation: risks associated with the Company’s financial condition andpossible need for additional funding; risks associated with the illiquidity ofthe Company’s common stock; risks associated with the Company’slitigation;  potential quarterlyfluctuations in the Company’s operating results; seasonality of sales;competition; risks associated with expansion; the Company’s reliance on keyemployees; risks generally associated with the restaurant industry; risksassociated with geographic concentration of the Company’s restaurants; risks associatedwith serving*

 

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*alcoholic beverages; and otherrisks and uncertainties indicated from time to time in the Company’s filingswith the Securities and Exchange Commission. In addition, forward-looking statements generally can be identified bythe use of forward-looking terminology such as “may,” “will”, “except,” “intend,”“estimate,” “anticipate” or “believe” or the negative thereof or variationsthereon or similar terminology.  Althoughthe Company believes that the expectations reflected in such forward-lookingstatements will 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 these forward-lookingstatements, which speak only as of the date hereof.*

 

**Item 3.  Quantitative and Qualitative Disclosureabout Market Risk**

 

Interest Rate Risk.

 

We have exposure to interestrate risk related to certain instruments entered into for other than tradingpurposes.  Specifically, borrowings underthe Credit Facility described in Item 2 bear interest at a variable rate basedon the bank’s prime rate plus 2%. A 100 basis point change in the CreditFacility interest rate (approximately 8.75% at October 23, 2005) wouldcause the interest expense for fiscal 2006 to change by approximately $21,000.This computation is determined by considering the impact of hypotheticalinterest rates on our variable long-term debt at October 23, 2005.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.

 

Our other outstandinglong-term debt bears fixed rates of interest. The Company believes there is nomaterial exposure to a market interest rate risk that could affect futureresults of operations or financial conditions.

 

Commodity Price Risk.

 

Many of the food productsand other operating essentials purchased by us are affected by commodity pricingand are, therefore, subject to price volatility caused by weather, productionproblems, delivery difficulties and other factors that are beyond ourcontrol.  Our supplies and raw materialsare available from several sources and we are not dependent upon any singlesource 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 eachrestaurant in accordance with corporate guidelines.  Certain significant items that could besubject to price fluctuations are cheese and flour products. The Companybelieves that it will be able to pass through increased commodity costs byadjusting menu pricing in most cases. However, we believe that any changes incommodity pricing that cannot be offset by changes in menu pricing or otherproduct delivery strategies would not be material.

 

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**ITEM 4.  Controls and Procedures**

 

As of October 23,2005, our Chief Executive Officer and Chief Financial Officer performed anevaluation of the effectiveness of the Company’s disclosure controls andprocedures (as defined in SEC Rule 13a-15(e)), which have been designed toensure that material information related to the Company is made known to themand timely disclosed.  The Company’smanagement, including the CEO and CFO, does not expect that the Company’sdisclosure controls or internal controls will prevent all error and all fraud.A control system, no matter how well conceived and operated, can provide onlyreasonable, not absolute, assurance that the objectives of the control systemare met.  Further, the design of acontrol system must reflect the fact that there are resource constraints, andthe benefits of controls must be considered relative to their costs. Because ofthe inherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that all control issues and instances of fraud, ifany, within the Company have been detected. Notwithstanding the foregoing,however, based upon their evaluations, our CEO and CFO concluded that theCompany’s disclosure controls are effective to provide a reasonable level ofassurance that material information relating to the Company is accumulated andcommunicated to management, including the CEO and CFO, as appropriate, to allowtimely decisions regarding required disclosure.

 

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. Legal Proceedings.**

 

None.

 

**ITEM 2. Unregistered Sales ofEquity Securities and Use of Proceeds.**

 

None.

 

**ITEM 3. Defaults Upon SeniorSecurities.**

 

None.

 

**ITEM 4. Submission of Mattersto a Vote of Security Holders.**

 

The annual meeting of the Company’s stockholders washeld on September 9, 2005 at which the Company’s stockholders voted toelect the following directors:

 

GeorgeR. Chapdelaine with 6,378,126 shares voting for and 25,035 shares withheld;

HughDevine with 6,388,686 shares voting for and 14,474 shares withheld;

EdwardP. Grace III with 6,388,686 shares voting for and 14,475 shares withheld;

RogerLipton with 6,109,897 shares voting for and 293,264 shares withheld;

JohnP. Polcari, Jr. with 6,380,086 shares voting for and 23,075 shareswithheld;

PeterE. Salas with 6,388,686 shares voting for and 14,475 shares withheld;

and

RobertC. Taft with 6,388,686 shares voting for and 14,425 shares withheld;

 

in each case, there were no shares abstaining and nobroker nonvoting shares cast.

 

**ITEM 5. Other Information.**

 

None.

 

**ITEM6. Exhibits .**

 

Exhibit 31.1 and 32.2: Sarbanes-Oxley Section 302 Certification

Exhibit 32.1 and 32.2: Sarbanes-Oxley Section 906Certification

 

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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: November 28, 2005 |                               | By: | /s/ George R. Chapdelaine |   |
|                         |                               |   | George R. Chapdelaine, President and |
|                         |                               |   | Chief Executive Officer |

 

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