### **U.S. SECURITIESAND EXCHANGE COMMISSION**

### **Washington, DC20549**

##  

## **FORM 10-Q**

##  

| **ý** | ** ** | **Quarterly  report under Section 13 or 15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                        |
|------------|------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                                                                                                                           |
|       |       | **For the quarterly period ended October 24,  2004.**                                                                                                                                                                                                          |
|       |       |                                                                                                                                                                                                                                                           |
| **o**      | ** ** | **Transition  report under Section 13 or 15(d) of the Securities Exchange Act of 1934.**                                                                                                                                                                       |
|       |       |                                                                                                                                                                                                                                                           |
|       |       | **For the transition period from                   to                  .** |

 

**Commission File Number0-18369**

 

**BOSTON RESTAURANT ASSOCIATES,INC.**

(Exact Name of Registrant asSpecified 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)has filed 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) has beensubject to such filing requirements for the past 90 days.  Yes  ý  No  o.

 

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

 

Indicate the number of shares outstanding ofeach of the registrant classes of common stock as of the latest practicaldate:  Common stock $0.01 par value7,035,170 shares as of November 29, 2004.

 

 

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BOSTON RESTAURANT ASSOCIATES,INC.

 

INDEX

 
| PART I - FINANCIAL STATEMENTS |                                                                                                                                          |
|-------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                                          |   |
| Item 1.                       | Financial Statements                                                                                                                          |   |
|                          |                                                                                                                                          |   |
|                          | Condensed Consolidated Balance Sheets as of  October 24, 2004 (unaudited) and April 25, 2004                                                  |   |
|                          |                                                                                                                                          |   |
|                          | Unaudited Condensed Consolidated Statements  of Operations for the thirteen and twenty-six weeks ended October 24, 2004  and October 26, 2003 |   |
|                          |                                                                                                                                          |   |
|                          | Unaudited Condensed Consolidated Statements  of Cash Flows for the thirteen and twenty-six weeks ended October 24, 2004  and October 26, 2003 |   |
|                          |                                                                                                                                          |   |
|                          | 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                                                                                                                                    |   |

 

2

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                           | ** ** | **OCTOBER 24,  2004** | ** ** | **April 25,  2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|-----------------------|------------|---------------------|------------|
| ** **                                                                           | ** ** | **(unaudited)**       | ** ** | ** **          | ** ** |
| ASSETS                                                                               |       |                  |       |                |       |
| Current:                                                                             |       |                  |       |                |       |
| Cash and cash equivalents                                                            |       | $                     | 377,530    |                | $          | 651,754 |   |
| Accounts receivable                                                                  |       | 169,612               |       | 169,975             |       |
| Inventories                                                                          |       | 709,620               |       | 735,910             |       |
| Prepaid expenses and other                                                           |       | 217,001               |       | 194,303             |       |
| Property held for sale                                                               |       | 75,420                |       | 0                   |       |
|                                                                                 |       |                  |       |                |       |
| Total current assets                                                                 |       | 1,549,183             |       | 1,751,942           |       |
|                                                                                 |       |                  |       |                |       |
| Property and equipment:                                                              |       |                  |       |                |       |
| Building                                                                             |       | 512,500               |       | 512,500             |       |
| Leasehold improvements                                                               |       | 7,330,430             |       | 8,480,782           |       |
| Equipment, furniture and fixtures                                                    |       | 5,089,866             |       | 5,764,996           |       |
|                                                                                 |       |                  |       |                |       |
|                                                                                 |       | 12,932,796            |       | 14,758,278          |       |
|                                                                                 |       |                  |       |                |       |
| Less accumulated depreciation and  amortization                                      |       | 7,927,304             |       | 9,736,890           |       |
|                                                                                 |       |                  |       |                |       |
| Net property and equipment                                                           |       | 5,005,492             |       | 5,021,388           |       |
|                                                                                 |       |                  |       |                |       |
| Goodwill                                                                             |       | 453,643               |       | 453,643             |       |
|                                                                                 |       |                  |       |                |       |
| Other assets                                                                         |       | 478,228               |       | 513,834             |       |
|                                                                                 |       |                  |       |                |       |
| Total assets                                                                         |       | $                     | 7,486,546  |                | $          | 7,740,807 |   |
|                                                                                 |       |                  |       |                |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                           |       |                  |       |                |       |
| Current liabilities:                                                                 |       |                  |       |                |       |
| Accounts payable                                                                     |       | $                     | 1,256,561  |                | $          | 1,058,469 |   |
| Accrued expenses                                                                     |       | 1,514,271             |       | 1,416,765           |       |
| Short-term borrowings                                                                |       | 200,000               |       | 0                   |       |
| Current maturities:                                                                  |       |                  |       |                |       |
| Notes payable-stockholder                                                            |       | 6,276                 |       | 6,114               |       |
| Long-term debt                                                                       |       | 3,003,041             |       | 3,383,158           |       |
| Obligations under capital leases                                                     |       | 161,016               |       | 191,845             |       |
|                                                                                 |       |                  |       |                |       |
| Total current liabilities                                                            |       | 6,141,165             |       | 6,056,351           |       |
|                                                                                 |       |                  |       |                |       |
| Long-term obligations:                                                               |       |                  |       |                |       |
| Notes payable-stockholder, less current  maturities                                  |       | 85,668                |       | 88,850              |       |
| Long-term debt, less current maturities                                              |       | 0                     |       | 0                   |       |
| Obligations under capital leases, less  current maturities                           |       | 0                     |       | 61,842              |       |
| Subordinated debentures                                                              |       | 1,450,000             |       | 1,450,000           |       |
| Deferred rent                                                                        |       | 413,876               |       | 501,469             |       |
| Other long-term liabilities                                                          |       | 234,100               |       | 251,016             |       |
|                                                                                 |       |                  |       |                |       |
| Total liabilities                                                                    |       | 8,324,809             |       | 8,409,528           |       |
|                                                                                 |       |                  |       |                |       |
| Commitments and contingencies                                                        |       |                  |       |                |       |
|                                                                                 |       |                  |       |                |       |
| Stockholders’ deficit :                                                         |       |                  |       |                |       |
| 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                                                           |       | 10,960,396            |       | 10,952,635          |       |
| Accumulated deficit                                                                  |       | (11,844,569           | )          | (11,667,266         | )          |
|                                                                                 |       |                  |       |                |       |
| Total                                                                                |       | (813,571              | )          | (644,029            | )          |
| Less:                                                                                |       |                  |       |                |       |
| Treasury stock, 25,000 shares at cost                                                |       | (24,692               | )          | (24,692             | )          |
| Total stockholders’ deficit                                                     |       | (838,263              | )          | (668,721            | )          |
|                                                                                 |       |                  |       |                |       |
| Total liabilities and stockholders’ deficit                                     |       | $                     | 7,486,546  |                | $          | 7,740,807 |   |

 

See accompanying notes.

 

3

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BOSTON RESTAURANTSASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

(unaudited)

 
| ** **                                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                     | ** ** | **October 24,  2004**    | ** ** | **October 26,  2003**      | ** ** | **October 24,  2004** | ** ** | **October 26,  2003** | ** ** |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Revenues:                                                      |       |                     |       |                       |       |   |   |   |   |
| Restaurant sales                                               |       | $                        | 7,006,188  |                       | $          | 5,838,068 |   | $ | 13,532,823 |   | $ | 11,109,035 |   |
| Royalties                                                      |       | 0                        |       | 4,220                      |       | 269 |   | 8,625 |   |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Total revenues                                                 |       | 7,006,188                |       | 5,842,288                  |       | 13,533,092 |   | 11,117,660 |   |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Costs and expenses:                                            |       |                     |       |                       |       |   |   |   |   |
| Cost of food, beverages and liquor                             |       | 1,494,362                |       | 1,210,885                  |       | 3,026,182 |   | 2,257,374 |   |
| Payroll                                                        |       | 2,192,275                |       | 1,850,831                  |       | 4,273,565 |   | 3,602,066 |   |
| Other operating expenses                                       |       | 2,141,617                |       | 1,800,413                  |       | 4,274,719 |   | 3,546,464 |   |
| General and administrative                                     |       | 599,750                  |       | 623,112                    |       | 1,216,143 |   | 1,319,692 |   |
| Depreciation and amortization                                  |       | 277,161                  |       | 283,972                    |       | 544,343 |   | 540,597 |   |
| Pre-opening costs                                              |       | 3,242                    |       | 257,998                    |       | 93,196 |   | 315,168 |   |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Total costs and expenses                                       |       | 6,708,407                |       | 6,027,211                  |       | 13,428,148 |   | 11,581,361 |   |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Operating Income(Loss)                                         |       | 297,781                  |       | (184,923                   | )          | 104,944 |   | (463,701 | ) |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Other income                                                   |       | 1,925                    |       | 958                        |       | 4,473 |   | 218,309 |   |
| Interest income                                                |       | 716                      |       | 826                        |       | 811 |   | 1,583 |   |
| Interest expense                                               |       | (165,068                 | )          | (112,192                   | )          | (287,531 | ) | (208,410 | ) |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Net Income(Loss)                                               |       | $                        | 135,354    |                       | $          | (295,331 | ) | $ | (177,303 | ) | $ | (452,219 | ) |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Income(Loss) per share-basic                                   |       | $                        | 0.02       |                       | $          | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| Income(Loss) per share-diluted                                 |       | $                        | 0.02       |                       | $          | (0.04 | ) | $ | (0.03 | ) | $ | (0.06 | ) |
|                                                           |       |                     |       |                       |       |   |   |   |   |
| 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 |       | 7,085,955                |       | 7,035,170                  |       | 7,035,170 |   | 7,035,170 |   |

 

See accompanying notes

 

4

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BOSTON RESTAURANT ASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OFCASH FLOWS

 

(unaudited)

 
| ** **                                            | ** ** | **Twenty-six Weeks Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------|------------|
| ** **                                            | ** ** | **October 24,  2004**      | ** ** | **October 26,  2003** | ** ** |
|                                                  |       |                       |       |   |   |
| Net cash provided by operating activities             |       | $                          | 585,262    |   | $ | 117,600 |   |
|                                                  |       |                       |       |   |   |
| Cash flows from investing activities:                 |       |                       |       |   |   |
| Capital expenditures                                  |       | (583,678                   | )          | (2,469,226 | ) |
|                                                  |       |                       |       |   |   |
| Net cash used for investing activities                |       | (583,678                   | )          | (2,469,226 | ) |
|                                                  |       |                       |       |   |   |
| Cash flows from financing activities:                 |       |                       |       |   |   |
| Repayments of long-term debt                          |       | (380,117                   | )          | (109,344 | ) |
| Repayments of capital lease obligations               |       | (92,671                    | )          | (108,766 | ) |
| Repayments of stockholder loans                       |       | (3,020                     | )          | (2,873 | ) |
| Proceeds from short-term borrowings                   |       | 200,000                    |       | 0 |   |
| Proceeds from long-term debt                          |       | 0                          |       | 2,500,000 |   |
|                                                  |       |                       |       |   |   |
| Net cash provided by (used for) financing  activities |       | (275,808                   | )          | 2,279,017 |   |
|                                                  |       |                       |       |   |   |
| Net decrease in cash and cash equivalents             |       | (274,224                   | )          | (72,609 | ) |
|                                                  |       |                       |       |   |   |
| Cash and cash equivalents at beginning of  period     |       | 651,754                    |       | 1,106,701 |   |
|                                                  |       |                       |       |   |   |
| Cash and cash equivalents at end of period            |       | $                          | 377,530    |   | $ | 1,034,092 |   |

 

See accompanying notes.

 

5

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BOSTON RESTAURANT ASSOCIATES,INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

## OCTOBER24, 2004

##  

## (unaudited)

 

**1. NATURE OF BUSINESS AND BASIS OF PRESENTATION**

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q.  Accordingly,they do not include all of the information and footnotes required by generallyaccepted accounting principles for complete financial statements.  In the opinion of management, all adjustments(consisting of normal recurring accruals) considered necessary for a fairpresentation have been included. Operating results for the thirteen-week period and twenty-six weekperiod, ended October 24, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending April 24, 2005.  For further information, refer to theconsolidated financial statements and footnotes thereto included in the Company’sannual report on Form 10-K for the year ended April 25, 2004.  The balance sheet at April 25, 2004 has beenderived from the audited financial statements at that date.

 

The accompanying statements of operations and cashflows for the fiscal 2005 period reflect the consolidated operations and cashflow of five casual dining Italian restaurant and thirteen Pizzeria Reginarestaurants for the entire period and one Pizzeria Regina restaurant for partof the period. For the fiscal 2004 period there were four casual dining Italianrestaurants for the entire period and one restaurant for part of the period,and twelve Pizzeria Regina restaurants for the entire period.

 

**2.  NETINCOME (LOSS) PER SHARE**

 

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

 

The following is a reconciliation of the denominator(number of shares) used in the computation of earnings per share.  The numerator, net income (loss), is the samefor the basic and diluted computations.

 

6

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| ** **                      | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|---------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                      | ** ** | **October 24,  2004**    | ** ** | **October 26,  2003**      | ** ** | **October 24,  2004** | ** ** | **October 26,  2003** | ** ** |
|                            |       |                     |       |                       |       |   |   |   |   |
| Basic Shares                    |       | 7,035,170                |       | 7,035,170                  |       | 7,035,170 |   | 7,035,170 |   |
|                            |       |                     |       |                       |       |   |   |   |   |
| Effect of Dilutive  Securities: |       |                     |       |                       |       |   |   |   |   |
|                            |       |                     |       |                       |       |   |   |   |   |
| Options                         |       | 50,785                   |       | 0                          |       | 0 |   | 0 |   |
| Diluted Shares                  |       | 7,085,955                |       | 7,035,170                  |       | 7,035,170 |   | 7,035,170 |   |

 

The following table summarizessecurities that were outstanding as of October 24, 2004 and October 26, 2003,but not included in the calculation of net income (loss) per share because suchsecurities are anti-dilutive:

 
| ** **             | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **October 24,  2004**    | ** ** | **October 26,  2003**      | ** ** | **October 24,  2004** | ** ** | **October 26,  2003** | ** ** |
|                   |       |                     |       |                       |       |   |   |   |   |
| Options                |       | 834,800                  |       | 653,800                    |       | 1,234,800 |   | 653,800 |   |
|                   |       |                     |       |                       |       |   |   |   |   |
| Warrants               |       | 601,000                  |       | 500,000                    |       | 601,000 |   | 500,000 |   |
|                   |       |                     |       |                       |       |   |   |   |   |
| Convertible Debentures |       | 1,160,000                |       | 1,160,000                  |       | 1,160,000 |   | 1,160,000 |   |

 

7

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The Company accounts for stock options using theintrinsic value method in accordance with Accounting Principles Board OpinionNo. 25, “Accounting for Stock Issued to Employees,” (“APB 25”) and relatedinterpretations.  Accordingly, theCompany has recognized no compensation cost for its stock option plans.  The Company follows the disclosure provisionsof Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”),“Accounting for Stock-Based Compensation,” and SFAS No. 148 “Accounting forStock Based Compensation Transition and Disclosure” which require thedisclosure of the effects of fair value accounting on earnings and earnings pershare of common stock on a pro forma basis.

 

  Hadcompensation cost for the Company’s stock options been determined based uponthe fair value at the grant date for awards under the plans consistent with themethodology prescribed under SFAS No. 123, the Company’s net income (loss)would have been adjusted to the pro forma amounts indicated below.

 
| ** **                                                                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty- Six Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                    | ** ** | **October 24, 2004**     | ** ** | **October 26, 2003**        | ** ** | **October 24, 2004** | ** ** | **October 26, 2003** | ** ** |
|                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Net income (loss) as reported                                                                 |       | $                        | 135,354    |                        | $          | (295,331 | ) | $ | (177,303 | ) | $ | (452,219 | ) |
| 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                  | )          | (10,762                     | )          | (79,372 | ) | (21,099 | ) |
|                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Net income (loss)-pro forma                                                                   |       | $                        | 76,351     |                        | $          | (306,093 | ) | $ | (256,675 | ) | $ | (473,318 | ) |
|                                                                                          |       |                     |       |                        |       |   |   |   |   |
| Basic and diluted earnings per share:                                                         |       |                     |       |                        |       |   |   |   |   |
| As reported                                                                                   |       | $                        | .02        |                        | $          | (.04 | ) | $ | (.03 | ) | $ | (.06 | ) |
| Pro forma                                                                                     |       | $                        | .01        |                        | $          | (.04 | ) | $ | (.04 | ) | $ | (.07 | ) |

 

8

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**3.             CREDIT FACILITY**

 

The Company accessed its line of credit with Commerce Bank and TrustCompany in the amount of $833,000, $833,000 and $834,000 on June 9, July 7 andAugust 4, 2003 respectively for a total of $2,500,000.  These funds were used for the construction ofthe new Polcari’s North End restaurant in Cambridge, Massachusetts.  On February 13, 2004, the Company accessed anadditional $535,000 for the construction of two Pizzeria Regina’s in Boston,Massachusetts.  All borrowings under thecredit facility are collateralized by substantially all of the assets of theCompany and are subject to various financial covenants.  As of April 25, 2004 the Company was not incompliance with certain financial covenants of the Credit Facility. However, onFebruary 13, 2004 the Company entered into an agreement with the bank underwhich Commerce Bank and Trust Company waived the covenants for year ended April25, 2004 in exchange for a 1% waiver fee, a modification of the interest rateon all outstanding notes issued under the Credit Agreement from the current 6%to 7% per annum until the first quarter in which the Company is once again incompliance with all financial covenants, and the grant to the bank of warrantsto purchase 76,000 shares of the Company’s common stock at a price of $.50 pershare with a life of six year.  Thewarrants are not exercisable for a period of one year from date of grant.  The warrants had a fair value of $30,000based on the Black Scholes pricing model and they were recorded in interestexpense in the consolidated statement of operations in fiscal 2004.  In August 2004, in exchange for theestablishment of new financial covenants for fiscal year 2005, the bank waivedthe covenants for the first quarter of fiscal year 2005.  The Company is required to achieve a tangiblenet worth covenant subject to certain conditions which must be met by December31, 2004.  To date the Company has notmet these conditions.  Because of theCompany’s uncertainty regarding its ability to satisfy these covenants, allbank debt has been classified as current on the balance sheets October 24, 2004and April 25, 2004. If the Company fails to comply with these covenants, thebank debt would be due on demand.

 

**4.             NEW ACCOUNTING PRONOUNCEMENTS**

 

NoneApplicable

 

**5.             MATERIAL AGREEMENT**

 

The Company has restructured its Cambridge operations by entering intoan agreement for the sale of the Polcari’s restaurant in Cambridge,Massachusetts.  Under the terms of thisagreement Polcari’s will cease operations at its Cambridge location on July 31,2005 when Technology Square Finance, LLC will be required to purchase theassets of Polcari’s of Cambridge, Inc. for three hundred thousand dollars.  In addition rent will be forgiven for theremainder of the lease.

 

9

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

###  

### **RESULTS OF OPERATIONS**

 

# **Overview**

 

The Company’s restaurant sales in the mostrecent quarter were $7,006,000 compared to sales of $5,838,000 in the secondquarter of fiscal 2004, an increase of 20%. The Company’s management believes that the increase in revenue isprimarily attributable to the opening of the new Polcari’s in Cambridge,Massachusetts in October 2003, the new Pizzeria Regina at the Prudential Centerin Boston, Massachusetts in April 2004, the new Pizzeria Regina at the SouthStation in Boston, Massachusetts in July 2004, and to the improved economy inthe Northeastern United States.  TheCompany had income for the second quarter of fiscal 2005 of $135,000, comparedto a net loss of $295,000 for the same quarter in fiscal 2004. Thekey factors that affect our operating results are the impact of new storeopenings, comparable restaurant sales, which are driven by customer counts andcheck average, and our ability to manage operating expenses such as food cost,labor and benefits and other costs. Changes in the number of restaurants in operation can 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.

 

In the fiscal 2005 period, there were 18 units inoperation for the entire period and one Pizzeria Regina restaurant for part ofthe period in fiscal 2004 period there were 16 units in operation for theentire period and one casual dining Italian restaurant for part of the period.  The following table sets forth all revenues,costs and expenses as a percentage for the periods indicated for revenue andexpense items included in the consolidated statements of operations:

 

10

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| ** **                                     | ** ** | **Thirteen Weeks Ended** | ** ** | **Twenty-six weeks Ended** | ** ** |
|------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                     | ** ** | **October 24,  2004**    | ** ** | **October 26,  2003**      | ** ** | **October 24,  2004** | ** ** | **October 26,  2003** | ** ** |
|                                           |       |                     |       |                       |       |   |   |   |   |
| Revenues:                                      |       |                     |       |                       |       |   |   |   |   |
| Restaurant sales                               |       | 100                      | %          | 100                        | %          | 100 | % | 100 | % |
| Other                                          |       | —                   |       | —                     |       | — |   | — |   |
|                                           |       |                     |       |                       |       |   |   |   |   |
| Total revenues                                 |       | 100                      | %          | 100                        | %          | 100 | % | 100 | % |
|                                           |       |                     |       |                       |       |   |   |   |   |
| Costs and expenses:                            |       |                     |       |                       |       |   |   |   |   |
| Cost of food, beverages and liquor             |       | 21                       |       | 21                         |       | 22 |   | 20 |   |
| Other operating expenses- payroll              |       | 31                       |       | 32                         |       | 32 |   | 32 |   |
| Other operating expenses exclusive of  payroll |       | 31                       |       | 31                         |       | 31 |   | 32 |   |
| General and administrative                     |       | 9                        |       | 10                         |       | 9 |   | 12 |   |
| Depreciation and amortization                  |       | 4                        |       | 5                          |       | 4 |   | 5 |   |
| Pre-opening costs                              |       | —                   |       | 4                          |       | 1 |   | 3 |   |
| Operating income (loss)                        |       | 4                        |       | (3                         | )          | 1 |   | (4 | ) |
| Interest expense, net                          |       | (2                       | )          | (2                         | )          | (2 | ) | (2 | ) |
| Other income                                   |       | —                   |       | —                     |       | — |   | 2 |   |
| Net income (loss)                              |       | 2                        | %          | (5                         | )%         | (1 | )% | (4 | )% |

 

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**Thirteen Weeks Ended October 24, 2004 as Compared to Thirteen Weeksended October 26, 2003 Restaurant Sales.**

 

Restaurant sales in the most recent quarter were $7,006,000 compared torestaurant sales in the prior year’s period of $5,838,000.  The Company’s management believes that theincrease in revenue was primarily attributable to the opening of the newPolcari’s in Cambridge, Massachusetts in October 2003, the new Pizzeria Reginaat the Prudential Center in Boston, Massachusetts in April 2004, the newPizzeria Regina at South Station in Boston, Massachusetts in July 2004, and tothe improved economy in the Northeastern United States.

 

Net sales at the Company’s Pizzeria Regina restaurants increased to$3,687,000 in the current period from $2,931,000 in the prior year’speriod.  The increase in restaurant saleswas principally due to the opening of the new Pizzeria Regina at the PrudentialCenter, the new Pizzeria Regina at South Station and to an increase in samestore sales of 1%.

 

Net sales at the Company’s full service casual dining restaurantsincreased to $3,310,000 in the current period from $2,894,000 in the prior year’speriod. This increase in sales was primarily attributable to the opening of thenew Polcari’s in Cambridge, Massachusetts for the entire period and in increasein same store sales of exclusive of Cambridge of 4%.

 

Net sales at the Company’s commissary were $9,000 in the current periodcompared to $13,000 in the prior year’s period.

 

# **Royalties**

# ** **

During the current year period,the Company did not recognized any royalties from a domestic Pizzeria Reginafranchise compared to $4,000 in royalties in the prior’s year’s period.  The Company’s domestic Pizzeria Reginafranchise at the Palms Casino in Las Vegas, Nevada was closed April 30, 2004.

 

**Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages and liquor as a percentage of total revenuesfor all restaurants was 21% in both the fiscal 2005 and fiscal 2004 periods.

 

The cost of food, beverage and liquor was $1,494,000 in the currentperiod compared to $1,211,000 in the prior year’s period. The dollar increasewas due in part to the Cambridge,

 

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Massachusetts Polcari’s North End restaurant operating for the entireperiod and to the opening of the new Pizzeria Regina at the Prudential Centerand the new Pizzeria Regina at South Station.

 

The cost of food, beverage and liquor as a percentage of restaurantsales at the Pizzeria Regina restaurants was 17% in both the fiscal 2005 and2004 periods.

 

The cost of food, beverage and liquor at Pizzeria Regina restaurantswas $637,000 in the current period compared to $483,000 in the prior year’speriod. The dollar increase was due to the opening of two additional PizzeriaReginas.

 

The cost of food, beverage and liquor as a percentage of restaurantsales at the Company’s full service casual dining restaurants was 26% in thefiscal 2005 period compared to 25% in the fiscal 2004 period. The increase as apercentage of restaurant sales was principally due to the Cambridge,Massachusetts Polcari’s North End restaurant, which is open for lunch weekdays, resulting in higher food costs generally associated with the lunchperiod.

 

The cost of food, beverage and liquor at the Company’s full servicecasual dining restaurants was $857,000 in the current period compared to$728,000 in the prior year’s period.  Thedollar increase was primarily due to the Cambridge, Massachusetts Polcari’sNorth End restaurant operating for the entire period.

 

# **Other Operating Expenses**

 

PayrollExpenses.

 

Payrollexpenses as a percentage of total revenues for all restaurants were 31% in thefiscal 2005 period compared to 32% in the fiscal 2004 period. The decrease as apercentage of total revenues was attributable to the opening of the newPizzeria Regina at the Prudential Center and the new Pizzeria Regina at SouthStation which generally have lower payroll expenses as a percentage of totalrevenues than the Company’s full service casual dining restaurants and to alesser extent reductions in payroll expenses of the Company’s Cambridge,Massachusetts Polcari’s North End Restaurant.

 

Payroll expenses were $2,192,000 in the current period, compared to$1,851,000 in the prior year’s period. The dollar increase in payroll expenses was primarily due to theCambridge, Massachusetts Polcari’s North End restaurant operating for theentire period and to the opening of the two new Pizzeria Regina restaurants.

 

Payroll expenses at the Pizzeria Regina restaurants were 26% ofrestaurant sales in the current period, compared to 25% of restaurant sales inthe prior year’s period.  The increase asa percentage of restaurant sales was primarily due to the opening of the twonew Pizzeria Regina restaurants which generally experience additional payrollexpenses associated with the opening of new units.

 

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Payroll expenses of the Pizzeria Regina restaurants were $963,000 inthe current period compared to $727,000 in the prior year’s period.  This dollar increase was primarily due to theopening of the two new Pizzeria Regina restaurants.

 

Payroll expenses at the Company’s full service casual diningrestaurants were 34% of restaurant sales in the current period compared to 35%in the prior year’s period.  The decreaseas a percentage of restaurant sales was primarily attributable to theCambridge, Massachusetts Polcari’s North End restaurant which had a reductionin payroll expenses as a percentage of restaurant sales compared to the prioryear’s initial opening.

 

Payroll expenses at the Company’s full service casual diningrestaurants were $1,125,000 in the current period compared to $1,021,000 in theprior year’s period.  This dollarincrease was primarily due to the Cambridge, Massachusetts Polcari’s North Endrestaurant operating for the entire period and an increase in employee benefitcosts.

 

Payroll expenses at the Company’s Commissary were $104,000 for thefiscal 2005 period as compared to $103,000 in the fiscal 2004 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Otheroperating expenses exclusive of payroll were 31% of total revenues in bothfiscal 2005 and 2004 periods.

 

Other operating expenses, exclusive of payroll, were $2,142,000 in thecurrent period compared to $1,800,000 in the prior year’s period. The increasein operating expenses, exclusive of payroll, as a percentage of total revenueswas primarily due to the Cambridge, Massachusetts Polcari’s North Endrestaurant operating for the entire period, the opening of the new PizzeriaRegina at the Prudential Center and the opening of the new Pizzeria Regina atSouth Station.

 

Other operating expenses exclusive of payroll, for the Pizzeria Reginarestaurants as a percentage of restaurant sales were 34% in the current periodcompared to 33% in the prior year’s period. The increase as a percentage of restaurant sales was primarily due tohigher energy costs.

 

Other operating expenses, exclusive of payroll, from the PizzeriaRegina restaurants were $1,258,000 in the current period, compared to $962,000in the prior year’s period.  This dollarincrease is primarily due to the addition of two Pizzeria Regina restaurantsand to higher energy costs.

 

Other operating expenses exclusive of payroll, for the Company’s fullservice casual dining restaurants as a percentage of restaurant sales were 26%in the current period compared to 28% in the prior years period.  The decrease as a percentage of restaurantsales was primarily due to reduced operating expenses at the Cambridge,Massachusetts Polcari’s North End restaurant.

 

Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants were $852,000 in the current period comparedto $809,000 in the prior

 

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year’s period. The dollar increase was primarily attributable to thecosts associated with the Cambridge, Massachusetts Polcari’s North End restaurantoperating for the entire period offset by the reversal of a $213,000 rentaccrual at Polcari’s of Cambridge.

 

Other operating expenses also include commissary expenses, which were$32,000 for the fiscal 2005 period as compared to $29,000 in the fiscal 2004period.

 

General and Administrative Expenses.

 

General and administrative expenses as a percentage of restaurant saleswere 9% in current fiscal 2005 period compared to 11% in the fiscal 2004period.  The decrease as a percentage oftotal revenues was attributable to a higher revenue base and lower employeeincentive costs and consulting fees.

 

General and administrative expenses were $600,000 in the currentperiod, compared to $623,000 in the prior year’s period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expenses as a percentage of restaurantsales were 4% in the current period compared to 5% in the prior year’s period.This percentage decrease was primarily the result of a higher revenue base andthe 2004 impairment of Polcari’s North End restaurant in Cambridge,Massachusetts which reduced the carrying value of the Cambridge locations fixedassets.

 

Depreciation and amortization expense was $277,000 in the currentperiod, compared to $284,000 in the prior year’s period.  This dollar decrease was attributable to the2004 impairment of Polcari’s North End restaurant in Cambridge, Massachusetts,partially offset by the opening of two new Pizzeria Regina restaurants.

 

Pre-Opening Costs

 

Pre-opening costs consisting primarily of labor, rent and trainingmaterials for the current period were $3,000 compared to $258,000 in the prioryear’s period.   The costs for thecurrent period are primarily attributable to the opening of the new PizzeriaRegina restaurant at South Station in Boston, Massachusetts.

 

**Other Income**

 

Other income was $2,000 in the current fiscal period compared to $1,000in the prior year’s fiscal period.

 

**Interest Expense and Interest Income.**

 

Interest expense was $165,000 in the current period as compared to$112,000 in the prior year’s period. This dollar increase was primarily due toan increase in borrowing costs under the Company’s credit facility.

 

Interest income was $1,000 in both fiscal periods.

 

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**Twenty-six weeks Ended October 24, 2004**

 

Restaurant sales for the twenty-six weeks ended October 24, 2004 were$13,533,000 compared to restaurant sales in the prior year’s period of$11,109,000.  The increase in revenue wasprimarily attributable to the Polcari’s North End restaurant in Cambridge,Massachusetts operating for the entire period and the opening of the newPizzeria Regina at the Prudential Center in Boston, Massachusetts in April2004, the new Pizzeria Regina at South Station in Boston, Massachusetts in July2004, and to the improved economy in the Northeast United States.

 

Net sales at the Company’s Pizzeria Regina restaurants increased to$6,980,000 in the current twenty- six week period from $5,510,000 in the prioryear’s period.  The increase inrestaurant sales was principally due to the opening of two new Pizzeria Reginalocations and to the Faneuil Hall Pizzeria Regina location which was open forthe entire current period compared to its temporary closing from May 9, 2003 toJuly 2003 in the prior year’s period. The same store sales for the Pizzeria Regina restaurant increased 1% inthe current period.

 

Net sales at the Company’s full service casual dining restaurantsincreased to $6,538,000 in the twenty-six week current period from $5,574,000in the prior year’s period.  Thisincrease was primarily attributable to the Polcari’s North End Restaurant inCambridge, Massachusetts operating for the entire period and by the economy inthe Northeastern United States.  The samestore sales for the full service casual dining restaurants increased 4% in thecurrent period.

 

Net sales at the Company’s commissary were $15,000 in the currentperiod compared to $25,000 in the prior year’s period.

 

# **Royalties**

 

During the current year period, the Company did not recognize anyroyalties from Pizzeria Regina franchises compared to $9,000 in royalties inthe prior year’s period.

 

# **Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost offood, beverages, liquor as a percentage of total revenues for all restaurantswas 22% in the current period compared to 20% in the prior year’s period.  The increase as a percentage of totalrevenues was primarily attributable to the Cambridge, Massachusetts Polcari’sNorth End restaurant and the two additional Pizzeria Regina locations whichhave higher food costs than the other Pizzeria Regina units due to the additionof food items to their menus and to an increase in costs from suppliers ingeneral.

 

The cost of food, beverage and liquor was $3,026,000 in the currenttwenty-six week period compared to $2,257,000 in the prior year’s period. Thedollar increase was due in

 

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part to the opening of the Cambridge, Massachusetts Polcari’s North Endrestaurant operating for the entire period and two additional Pizzeria Reginalocations and to an increase in cost from suppliers in general.

 

The cost as a percentage of restaurant sales at the Pizzeria Reginarestaurants was 18% in the fiscal 2005 period compared to 16% in the fiscal2004 period.  The increase as apercentage of restaurant sales was principally due to the opening of the twonew Pizzeria Regina restaurants which have higher food costs due to theaddition of food items to their menus.

 

The cost of food, beverage and liquor at Pizzeria Regina restaurantswas $1,264,000 in the current period compared to $883,000 in the prior year’speriod.  The dollar increase was due tothe opening of two additional Pizzeria Regina restaurants.

 

The cost as a percentage of restaurant sales at the Company’s fullservice casual dining restaurants was 27% in the fiscal 2005 period compared to25% in the fiscal 2004 period.  Theincrease as a percentage of sales was principally due to the new Cambridge,Massachusetts Polcari’s North End restaurant which is open for lunch five daysa week resulting in higher food cost and increases in costs from suppliers ingeneral.

 

The cost of food, beverage and liquor at the Company’s full servicecasual dining restaurants was $1,762,000 in the current twenty-six week periodcompared to $1,374,000 in the prior year’s period.  The dollar increase was primarily due to thenew Cambridge, Massachusetts Polcari’s North End restaurant operating for theentire period.

 

# **Other Operating Expenses**

 

Payroll Expenses.

 

Payrollexpenses as a percentage of the total revenues for all restaurants were 32% inboth fiscal 2005 and fiscal 2004 periods.

 

Payroll expenses were $4,274,000 in the current period, compared to$3,602,000 in the prior year’s twenty-six week period.  The dollar increase in payroll expenses wasprimarily due to the Cambridge, Massachusetts Polcari’s North End restaurantoperating for the entire period and the two new Pizzeria Regina restaurants inBoston, Massachusetts.

 

Payroll expenses at the Pizzeria Regina restaurants were 26% ofrestaurant sales in the current period compared to 27% in the prior year’speriod.  The decrease as a percentage ofrestaurant sales was primarily due to the temporary closing of the Faneuil Halllocation in the prior year’s period which incurred payroll costs without anycorresponding revenue.

 

Payroll expenses of the Pizzeria Regina restaurants were $1,805,000 inthe current twenty-six week period compared to $1,472,000 in the prior year’speriod.  This dollar increase was primarilydue to the opening of two new Pizzeria Regina locations and to increased costsin employee health benefits.

 

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Payroll expenses as a percentage of restaurant sales at the Company’sfull service casual dining restaurants were 35% of restaurant sales in both thecurrent period and in the prior year’s period.

 

Payroll expenses at the Company’s full service casual diningrestaurants were $2,265,000 in the current twenty-six week period compared to$1,929,000 in the prior year’s period. This dollar increase was primarily due to the Polcari’s North Endrestaurant in Cambridge, Massachusetts operating for the entire period and anincrease in employee benefit costs.

 

Payroll expenses at the Company’s Commissary were $204,000 for thefiscal 2005 period as compared to $201,000 in the fiscal 2004 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Otheroperating expenses, exclusive of payroll, were 32% of total revenues in bothfiscal 2005 and fiscal 2004 periods.

 

Other operating expenses, exclusive of payroll, were $4,275,000 in thecurrent twenty-six week period compared to $3,546,000 in the prior year’speriod. The increase in operating expenses, exclusive of payroll, as apercentage of total revenues was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant, the new PizzeriaRegina at Prudential Center in Boston, Massachusetts, and the new PizzeriaRegina at South Station in Boston, Massachusetts and higher energy costs.         .

 

Other operating expenses, exclusive of payroll, for the Pizzeria Reginarestaurants as a percentage of restaurant sales were 34% in the current periodcompared to 35% in the prior year’s period. The decrease as a percentage of sales was primarily attributable to thetemporary closing of the Faneuil Hall location in the prior year’s period,where the Company nonetheless continued to incur some of the costs without anycorresponding revenue.

 

Other operating expenses, exclusive of payroll, from the PizzeriaRegina restaurants were $2,358,000 in the current twenty-six week period,compared to $1,913,000 in the prior year’s period.  This dollar increase is primarily due to theaddition of two new Pizzeria Regina restaurants and higher energy costs.

 

Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants as a percentage of restaurant sales were 28%in both the current and in the prior year’s period offset by the reversal of a$213,000 rent accrual at Polcari’s of Cambridge.

 

Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants were $1,858,000 in the current twenty-sixweek period compared to $1,579,000 in the prior year’s period. The dollar increasewas primarily attributable to the

 

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Polcari’s North End restaurant in Cambridge, Massachusetts operatingfor the entire period.

 

Other operating expenses also include commissary expenses, which were $59,000in fiscal 2005 period compared to $54,000 in fiscal 2004 period.

 

General and Administrative Expenses.

 

General and Administrative expenses were 9% oftotal revenues in fiscal 2005 period compared to 12% in the fiscal 2004period.  The decrease as a percentage oftotal revenues was attributable to a higher revenue base and lower employeeincentive costs and consulting costs.

 

General and administrative expenses were $1,216,000 in the currentperiod, compared to $1,320,000 in the prior year’s period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expense as a percentage of restaurantsales were 4% in the fiscal 2005 period compared to 5% in the fiscal 2004period.  The decrease as a percentage oftotal revenue was attributable to a higher revenue base and the 2004 impairmentof Polcari’s North End restaurant in Cambridge, Massachusetts.

 

Depreciation and amortization expense was $544,000 in the currentperiod, compared to $541,000 in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs for the current period were $93,000 in the fiscal2005 period compared to $315,000 in the fiscal 2004 period.  These costs which consist of labor, rent andtraining materials are attributable to the opening of the new Pizzeria Reginarestaurant at South Station in Boston, Massachusetts in the current period

 

Other Income

 

Other income was $4,000 in the current period compared to $218,000 inthe prior year’s period.  The prior year’sother income mainly consisted of insurance proceeds related to the temporaryclosing of Faneuil Hall Pizzeria Regina restaurant.

 

Interest Expense and Interest Income.

 

Interest expense was $288,000 in the current period as compared to$208,000 in the prior year’s period. This dollar increase was primarily due toan increase in borrowing and related interest expense under the Company’scredit facility.

 

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Interest income was $1,000 in the current period compared to $2,000 inthe prior year’s period.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

At October 24, 2004, the Company had negative networking capital of $4,592,000 compared to negative net working capital of $4,304,000 at April 25,2004.  It is common for companies in therestaurant industry to operate with net working capital deficits.  We are able to operate with a substantialworking capital deficit because (1) restaurant operations and most foodservice operations are conducted primarily on a cash (and cash equivalent) basiswith a low level of accounts receivable, (2) rapid turnover allows alimited investment in inventories, and (3) accounts payable for food,beverages and supplies usually become due after the receipt of cash from therelated sales.  However given the extentof the Company’s negative net working capital the Company’s financial conditionand growth will be dependent upon obtaining adequate additional financing untilprofitable operations are achievable. The Company cannot guarantee that it will be successful in obtainingadditional financing.  The opinion of BDOSeidman, LLP on the Company’s fiscal 2004 financial statement included anexplanatory paragraph expressing concern about the Company’s ability tocontinue as a going concern.

 

During the twenty-six weeks ended October 24, 2004, the Company had anet decrease in cash and cash equivalents of $274,000, reflecting net cash provided by operating activities of$585,000, net cash used for investing activities of $583,000 and net cash usedfor financing activities of $276,000.

 

Net cash provided by operating activities included a decrease ininventories of $26,000, an increase in accounts payable of $198,000, anincrease in accrued expenses of $98,000, a decrease in other assets of $15,000, non-cash items consisting ofwarrants granted in exchange for short-term borrowings of $8,000 anddepreciation and amortization expense of $544,000 which were partially offsetby an increase in prepaid expenses of $23,000, a decrease in deferred rent of$87,000, a decrease in other long-term liabilities of $17,000 and a net loss of$177,000.  Net cash used for investingactivities reflects costs associated with leasehold improvements and with thepurchase of equipment, furniture and fixtures for the two new Pizzeria Reginarestaurants in Boston, Massachusetts and for other operating Companyrestaurants.  Net cash used for financingactivities of $276,000 consisted of repayments of long term debt, leaseobligations and stockholders loans offset by proceeds from short –termborrowings.

 

At October 24, 2004, the Company had currentliabilities of $6,141,000, including $1,257,000 of accounts payable, $1,514,000of accrued liabilities, $200,000 of short-term borrowings and currentmaturities of long term obligations in the amount of $3,170,000.  At October 24, 2004, the Company hadlong-term obligations, less current maturities, in the amount of $2,184,000,including, $86,000 of notes payable to a stockholder, $161,000 due

 

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under capital lease obligations, $1,450,000 of convertiblesubordinated debentures, $414,000 of deferred rent, and $234,000 of otherlong-term liabilities.

 

All borrowings under the CreditFacility are collateralized by substantially all of the assets of the Companyand are subject to various financial covenants. As of April 25, 2004 the Company was not in compliance with the certainfinancial covenants of the Credit Facility. However, Commerce Bank and Trust Company waived the covenants for thequarterly fiscal period ended July 25, 2004 and for fiscal year ended April 25,2004 in exchange for a 1% waiver fee, a modification of the interest rate onall outstanding notes issued under the Credit Agreement from the current 6% to7% per annum until the first quarter in which the Company is once again in compliancewith all financial covenants, and the grant to the bank of a six year warrantto purchase 76,000 shares of the Company’s common stock at a price of $.50 pershare.  Subject to certain exceptionspursuant to which the warrant will be exercisable earlier, the warrant is notexercisable until February 13, 2005.  InAugust, 2004 the bank established new covenants for fiscal 2005.  The Company is required to achieve a tangiblenet worth covenant subject to certain conditions which must be met by December31, 2004.  To date the Company has notmet these conditions   Because of theCompany’s uncertainty regarding its ability to satisfy these covenants, allbank debt has been classified as current on the balance sheet as of October 25,2004 and April 25, 2004.  If the Companyfails to comply with these covenants, the bank debt would be due on demand.

 

To finance capitalexpenditures, the Company entered into an unsecured loan agreement with thespouse of a Company director in the amount of $200,000.  Under the terms of the agreement the Companyis obligated to pay interest at the rate of 14% on the outstandingbalance.  The Company granted the lendera five year warrant to purchase 25,000 shares of the Company’s common stock ata price of $.70 per share.  The principalbalance is payable on or before December 31, 2004.  In addition, the Company has restructured itsCambridge operations by entering into an agreement for the sale of the Polcari’srestaurant in Cambridge, Massachusetts. Under the terms of this agreement Polcari’s will cease operations at itsCambridge location on July 31, 2005 when Technology Square Finance, LLC will berequired to purchase the assets of Polcari’s of Cambridge, In. for threehundred thousand dollars.  In additionrent will be forgiven for the remaining of the lease.

 

The opinion of BDO Seidman, LLPon the Company’s fiscal 2004 financial statement included an explanatoryparagraph expressing concern about the Company’s ability to continue as a goingconcern.  In addition, because of theCompany’s concern regarding its ability to satisfy bank financial covenants,all bank debt totaling approximately $3,003,000   was classified as current in the balancesheet as of April 25, 2004 and as of October 25, 2004. If the Company fails tocomply with these covenants, the bank debt could be due on demand.  The Company’s financial condition andcompliance with the bank covenants will be substantially dependent uponobtaining adequate additional financing  and achieving profitable operations.  The Company cannot guarantee that it will be able to raise the necessarycapital to continue in operation or that it will be able to achieve profitableoperations.    Public financing would besubject to market conditions and other uncertainties, and no assurance can begiven that the Company could obtain public financing at any time.  Either public or private equity financingwould likely result in dilution of the Company’s existing stockholders.

 

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**NEW ACCOUNTING PRONOUNCEMENTS**

 

None Applicable

 

# **“SAFE HARBOR” STATEMENT UNDER THE PRIVATESECURITIES LITIGATION REFORM ACT OF 1995**

 

*Forward-looking statements in this report, including without limitationstatements relating to the adequacy of the Company’s working capital and otherresources the Company’s ability to obtain additional financing, Company’s newstore openings and future expansion, and anticipated future cash flows fromparticular locations are made pursuant to the safe harbor provisions of thePrivate Securities Litigation Reform Act of 1995.  Investors are cautioned that suchforward-looking statements involve risks and uncertainties, including withoutlimitation: risks associated with the Company’s financial condition and needfor additional funding risks associated with the illiquidity of the Company’scommon stock, risks associated with the Company’s litigation potentialquarterly fluctuations in the Company’s operating results; seasonality ofsales; competition; risks associated with expansion; the Company’s reliance onkey employees; risks generally associated with the restaurant industry; risksassociated with geographic concentration of the Company’s restaurants; risksassociated with serving alcoholic beverages; and other risks and uncertaintiesindicated from time to time in the Company’s filings with the Securities andExchange Commission.  In addition,forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will”, “except,” “intend,” “estimate,”“anticipate” or “believe” or the negative thereof or variations thereon orsimilar terminology.  Although theCompany 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 theseforward-looking statements, which speak only as of the date hereof.*

 

**Item 3.  Quantitative andQualitative Disclosure about Market Risk**

 

Interest Rate Risk.

 

We have exposure to interest rate risk related to certain instrumentsentered into for other than trading purposes. Specifically, borrowings under the Credit Facility described in Item 2bear interest at a variable rate based on the bank’s prime rate plus 2%. A100 basis point change in the Credit Facility interest rate would causethe interest expense for fiscal 2005 to change by approximately $16,000 fromfiscal 2004. This computation is determined by considering the impact of hypotheticalinterest rates on our variable long-term debt at October 24, 2004. However, thenature and amount of our borrowings under the Credit Facility may vary as aresult of future business requirements, market conditions, covenant complianceand other factors.

 

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Our other outstanding long-term debt bears fixed rates of interest. TheCompany believes there is no material exposure to a market interest rate riskthat could affect future results of operations or financial conditions.

 

CommodityPrice Risk.

 

Many of the food products and other operating essentials purchased byus are affected by commodity pricing and are, therefore, subject to pricevolatility caused by weather, production problems, delivery difficulties andother factors that are beyond our control. Our supplies and raw materials are available from several sources and weare not dependent upon any single source for these items. The Companynegotiates directly with wholesale suppliers of certain high volume foodingredients such as cheese, tomato sauce, and flour to ensure consistentquality and competitive pricing. These ingredients are then purchased for theCompany by a third party independent distributor at the negotiated price andredistributed to the Company’s restaurants. All other food ingredients and beverage products are purchased directlyby the general manager of each restaurant in accordance with corporateguidelines.  Certain significant itemsthat could be subject to price fluctuations are cheese and flour products. TheCompany believes that it will be able to pass through increased commodity costsby adjusting menu pricing in most cases. However, we believe that any changesin commodity pricing that cannot be offset by changes in menu pricing or otherproduct delivery strategies would not be material.

 

**ITEM 4.  Controls andProcedures**

 

As of October 24, 2004, our Chief ExecutiveOfficer 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 timelydisclosed.  The Company’s management,including the CEO and CFO, does not expect that the Company’s disclosurecontrols or internal controls will prevent all error and all fraud. A controlsystem, no matter how well 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 inherent limitationsin all control systems, no evaluation of controls can provide absoluteassurance that all control issues and instances of fraud, if any, within thecompany have been detected. Notwithstanding the foregoing, however, based upontheir evaluations, our CEO and CFO concluded that the Company’s disclosurecontrols are effective to provide a reasonable level of assurance that materialinformation relating to the Company is accumulated and communicated tomanagement, including the CEO and CFO, as appropriate, to allow timelydecisions regarding required disclosure.

 

There have been no changes in the Company’sinternal control over financial reporting that occurred during the periodcovered by this report that have materially affected, or are reasonably likelyto materially affect, the Company’s internal control over financial reporting.

 

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## Section1.01  PART II

 

## Section1.02  OTHER INFORMATION

 

**ITEM 1. Legal Proceedings.**

None.

 

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

None.

 

**ITEM 3. Defaults Upon Senior Securities.**

None.

 

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

 

Duringthe second quarter of the fiscal year covered by this report, the election ofthe Board of Directors of the Company was submitted to a vote of securityholders of the Company at the annual meeting of the Company’sstockholders.  On September 10, 2004 theCompany’s stockholders voted to elect the following directors:

 

George R.Chapdelaine with 4,398,891 shares voting for and 25,409 shares withheld;

Hugh Devinewith 4,408,566 shares voting for and 15,734 shares withheld;

Edward P.Grace III with 4,408,566 shares voting for and 15,734 shares withheld;

Roger Liptonwith 4,408,366 shares voting for and 15,934shares withheld;

John P.Polcari, Jr. with 4,407,391 shares voting for and 16,909 shares withheld; and

Robert C. Taftwith 4,408,366 shares voting for and 15,934 shares withheld;

 

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

 

**ITEM 5. Other Information.**

None.

 

**ITEM 6. Exhibits .**

(a)                        Exhibits

 

Exhibit 10 Polcari’s Cambridge Agreement

Exhibit 31.1 and 32.2: Sarbanes-Oxley Section 302Certification

Exhibit 32.132.2: Sarbanes-Oxley Section 906 Certification

 

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#### **SIGNATURES**

 

In accordance with the requirements of theSecurities Exchange Act of 1934, the registrant caused this report to be signedon its behalf by the undersigned, thereunto duly authorized.

 
|                    |   | BOSTON RESTAURANT ASSOCIATES, INC. |
|-------------------------|--------|------------------------------------|
|                    |   |                               |   |   |
|                    |   |                               |   |   |
| Date: November 30, 2004 |   |                               | By: | /s/ George R. Chapdelaine |   |
|                    |   |                               |   | George R. Chapdelaine, President and |
|                    |   |                               |   | Chief Executive Officer |

 

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