###  

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

### **Washington, DC 20549**

###  

**FORM10-Q**

##  

| **ý**                 | ** ** | **Quarterly report under Section 13 or 15(d) of the  Securities Exchange Act of 1934.**                                                                                                 |
|----------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                       |       |                                                                                                                                                                                    |
| ** **                 | ** ** | **For the quarterly  period ended July 25, 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 Number** |
| **0-18369**                |

 

**BOSTON RESTAURANT 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)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 as of August 31, 2004.

 

 

----

 

BOSTONRESTAURANT ASSOCIATES, INC.

 

INDEX

 
| PART I - FINANCIAL STATEMENTS |                                                                                                                    |
|-------------------------------|-------------------------------------------------------------------------------------------------------------------------|
|                          |                                                                                                                    |   |
| Item 1.                       | Financial Statements                                                                                                    |   |
|                          |                                                                                                                    |   |
|                          | Condensed Consolidated Balance Sheets as of  July 25, 2004 (unaudited) and April 25, 2004                               |   |
|                          |                                                                                                                    |   |
|                          | Unaudited Condensed Consolidated Statements  of Operations for the thirteen weeks ended July 25, 2004 and July 27, 2003 |   |
|                          |                                                                                                                    |   |
|                          | Unaudited Condensed Consolidated Statements  of Cash Flows for the thirteen weeks ended July 25, 2004 and July 27, 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 6.                       | Exhibits and Reports on Form 8-K                                                                                        |   |
|                          |                                                                                                                    |   |
|                          | SIGNATURES                                                                                                              |   |

 

----

 

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 
| ** **                                                                           | ** ** | **JULY 25,  2004** | ** ** | **April 25,  2004** | ** ** |
|--------------------------------------------------------------------------------------|------------|--------------------|------------|---------------------|------------|
| ** **                                                                           | ** ** | **(unaudited)**    | ** ** | ** **          | ** ** |
| ASSETS                                                                               |       |               |       |                |       |
| Current:                                                                             |       |               |       |                |       |
| Cash and cash equivalents                                                            |       | $                  | 360,481    |                | $          | 651,754 |   |
| Accounts receivable                                                                  |       | 159,361            |       | 169,975             |       |
| Inventories                                                                          |       | 730,944            |       | 735,910             |       |
| Prepaid expenses and other                                                           |       | 127,628            |       | 194,303             |       |
|                                                                                 |       |               |       |                |       |
| Total current assets                                                                 |       | 1,378,414          |       | 1,751,942           |       |
|                                                                                 |       |               |       |                |       |
| Property and equipment:                                                              |       |               |       |                |       |
| Building                                                                             |       | 512,500            |       | 512,500             |       |
| Leasehold improvements                                                               |       | 8,759,993          |       | 8,480,782           |       |
| Equipment, furniture and fixtures                                                    |       | 5,959,857          |       | 5,764,996           |       |
|                                                                                 |       |               |       |                |       |
|                                                                                 |       | 15,232,350         |       | 14,758,278          |       |
|                                                                                 |       |               |       |                |       |
| Less accumulated depreciation and  amortization                                      |       | 9,993,950          |       | 9,736,890           |       |
|                                                                                 |       |               |       |                |       |
| Net property and equipment                                                           |       | 5,238,400          |       | 5,021,388           |       |
|                                                                                 |       |               |       |                |       |
| Goodwill                                                                             |       | 453,643            |       | 453,643             |       |
|                                                                                 |       |               |       |                |       |
| Other assets                                                                         |       | 496,003            |       | 513,834             |       |
|                                                                                 |       |               |       |                |       |
| Total assets                                                                         |       | $                  | 7,566,460  |                | $          | 7,740,807 |   |
|                                                                                 |       |               |       |                |       |
| LIABILITIES AND STOCKHOLDERS’ DEFICIT                                           |       |               |       |                |       |
| Current liabilities:                                                                 |       |               |       |                |       |
| Accounts payable                                                                     |       | $                  | 1,361,486  |                | $          | 1,058,469 |   |
| Accrued expenses                                                                     |       | 1,424,051          |       | 1,416,765           |       |
| Current maturities:                                                                  |       |               |       |                |       |
| Notes payable-stockholder                                                            |       | 6,189              |       | 6,114               |       |
| Long-term debt                                                                       |       | 3,203,070          |       | 3,383,158           |       |
| Obligations under capital leases                                                     |       | 198,461            |       | 191,845             |       |
|                                                                                 |       |               |       |                |       |
| Total current liabilities                                                            |       | 6,193,257          |       | 6,056,351           |       |
|                                                                                 |       |               |       |                |       |
| Long-term obligations:                                                               |       |               |       |                |       |
| Notes payable-stockholder, less current maturities                                   |       | 87,275             |       | 88,850              |       |
| Long-term debt, less current maturities                                              |       | 0                  |       | 0                   |       |
| Obligations under capital leases, less  current maturities                           |       | 9,676              |       | 61,842              |       |
| Subordinated debentures                                                              |       | 1,450,000          |       | 1,450,000           |       |
| Deferred rent                                                                        |       | 564,380            |       | 501,469             |       |
| Other long-term liabilities                                                          |       | 243,250            |       | 251,016             |       |
|                                                                                 |       |               |       |                |       |
| Total liabilities                                                                    |       | 8,547,838          |       | 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                                                           |       | 10,952,635         |       | 10,952,635          |       |
| Accumulated deficit                                                                  |       | (11,979,923        | )          | (11,667,266         | )          |
|                                                                                 |       |               |       |                |       |
| Total                                                                                |       | (956,686           | )          | (644,029            | )          |
| Less:                                                                                |       |               |       |                |       |
| Treasury stock, 25,000 shares at cost                                                |       | (24,692            | )          | (24,692             | )          |
| Total stockholders’ deficit                                                     |       | (981,378           | )          | (668,721            | )          |
|                                                                                 |       |               |       |                |       |
| Total liabilities and stockholders’ deficit                                     |       | $                  | 7,566,460  |                | $          | 7,740,807 |   |

 

See accompanying notes.

 

3

----

 

BOSTONRESTAURANTS ASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OFOPERATIONS

(unaudited)

 
| ** **                                                     | ** ** | **Thirteen Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|--------------------------|------------|
| ** **                                                     | ** ** | **July 25,  2004**       | ** ** | **July 27,  2003** | ** ** |
|                                                           |       |                     |       |   |   |
| Revenues:                                                      |       |                     |       |   |   |
| Restaurant sales                                               |       | $                        | 6,526,635  |   | $ | 5,270,967 |   |
| Royalties                                                      |       | 269                      |       | 4,405 |   |
|                                                           |       |                     |       |   |   |
| Total revenues                                                 |       | 6,526,904                |       | 5,275,372 |   |
|                                                           |       |                     |       |   |   |
| Costs and expenses:                                            |       |                     |       |   |   |
| Cost of food, beverages and liquor                             |       | 1,531,820                |       | 1,046,489 |   |
| Payroll                                                        |       | 2,081,290                |       | 1,751,235 |   |
| Other operating expenses                                       |       | 2,133,102                |       | 1,746,051 |   |
| General and administrative                                     |       | 616,393                  |       | 696,580 |   |
| Depreciation and amortization                                  |       | 267,182                  |       | 256,625 |   |
| Pre-opening costs                                              |       | 89,954                   |       | 57,170 |   |
|                                                           |       |                     |       |   |   |
| Total costs and expenses                                       |       | 6,719,741                |       | 5,554,150 |   |
|                                                           |       |                     |       |   |   |
| Operating Loss                                                 |       | (192,837                 | )          | (278,778 |   |
|                                                           |       |                     |       |   |   |
| Other income                                                   |       | 2,548                    |       | 217,351 |   |
| Interest income                                                |       | 95                       |       | 757 |   |
| Interest expense                                               |       | (122,463                 | )          | (96,218 |   |
|                                                           |       |                     |       |   |   |
| Net Loss                                                       |       | $                        | (312,657   | ) | $ | (156,888 |   |
|                                                           |       |                     |       |   |   |
| Loss per share-basic                                           |       | $                        | (0.04      | ) | $ | (0.02 |   |
|                                                           |       |                     |       |   |   |
| Loss per share-diluted                                         |       | $                        | (0.04      | ) | $ | (0.02 |   |
|                                                           |       |                     |       |   |   |
| Weighted average number of common shares  outstanding-basic    |       | 7,035,170                |       | 7,035,170 |   |
|                                                           |       |                     |       |   |   |
| Weighted average number of dilutive common  shares outstanding |       | 7,035,170                |       | 7,035,170 |   |

 

See accompanying notes

 

4

----

 

BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
| ** **                                            | ** ** | **July 25,  2004** | ** ** | **July 27,  2003** | ** ** |
|-------------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                                  |       |               |       |               |       |
| Net cash provided by (used for) operating  activities |       | $                  | 409,937    |               | $          | (122,816 | ) |
|                                                  |       |               |       |               |       |
| Cash flows from investing activities:                 |       |               |       |               |       |
| Capital expenditures                                  |       | (474,072           | )          | (1,404,794         | )          |
|                                                  |       |               |       |               |       |
| Net cash used for investing activities                |       | (474,072           | )          | (1,404,794         | )          |
|                                                  |       |               |       |               |       |
| Cash flows from financing activities:                 |       |               |       |               |       |
| Repayments of long-term debt                          |       | (180,088           | )          | (54,242            | )          |
| Repayments of capital lease obligations               |       | (45,550            | )          | (58,968            | )          |
| Repayments of stockholder loans                       |       | (1,500             | )          | (1,428             | )          |
| Repayments of subordinated convertible  debentures    |       | 0                  |       | 0                  |       |
| Proceeds from long-term debt                          |       | 0                  |       | 1,666,000          |       |
|                                                  |       |               |       |               |       |
| Net cash provided by (used for) financing  activities |       | (227,138           | )          | 1,551,362          |       |
|                                                  |       |               |       |               |       |
| Net increase (decrease) in cash and cash  equivalents |       | (291,273           | )          | 23,752             |       |
|                                                  |       |               |       |               |       |
| Cash and cash equivalents at beginning of period      |       | 651,754            |       | 1,106,701          |       |
|                                                  |       |               |       |               |       |
| Cash and cash equivalents at end of period            |       | $                  | 360,481    |               | $          | 1,130,453 |   |

 

See accompanying notes.

 

5

----

 

BOSTONRESTAURANT ASSOCIATES, INC.  ANDSUBSIDIARIES

NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JULY 25, 2004

(unaudited)

 

1. NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statementshave been prepared in accordance with generally accepted accounting principlesfor interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements.  Inthe opinion of management, all adjustments (consisting of normal recurringaccruals) considered necessary for a fair presentation have been included.  Operating results for the thirteen-weekperiod ended July 25, 2004 are not necessarily indicative of the results thatmay be expected for the year ending April 24, 2005.  For further information, refer to theconsolidated financial statements and footnotes thereto included in theCompany’s annual 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 opinion of BDO Seidman, LLP on theCompany's fiscal 2004 financial statement included an explanatory paragraphexpressing concern about the Company's ability to continue as a going concern.

 

The accompanying statements of operations and cash flows for the fiscal2005 period reflects the consolidated operations and cash flow of five casualdining Italian restaurants and thirteen Pizzeria Reginas for the 13 weeks andone Pizzeria Regina for 2 days and fiscal 2004 periods reflect the consolidatedoperations and cash flow of four casual dining Italian restaurant and twelvePizzeria Regina restaurants for the entire period.

 

2.  NETINCOME (LOSS) PER SHARE

 

The Company follows Statement of FinancialAccounting 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 same for the basic and dilutedcomputations.

 

The Company accounts for stock options using the intrinsic value methodin accordance with Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees,” (“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  SFASNo. 148, “Accounting for Stock-Based Compensation - Transition andDisclosure” (“SFAS No. 148”),  whichrequire the disclosure of the effects of fair value accounting on earnings andearnings per share of common stock on a pro forma basis.

 

6

----

 

Had compensation cost for the Company’s stockoptions been determined based upon the fair value at the grant date for awardsunder the plans consistent with the methodology prescribed under SFASNo. 123, the Company’s net income (loss) would have been adjusted to thepro forma amounts indicated below along with the additional disclosuresrequired by SFAS No. 148  asfollows:

 
| ** **                                                                           | ** ** | **Thirteen Weeks  Ending  July 25, 2004** | ** ** | **Thirteen Weeks  Ending  July 27, 2003** | ** ** |
|--------------------------------------------------------------------------------------|------------|-------------------------------------------|------------|-------------------------------------------|------------|
|                                                                                 |       |                                      |       |                                      |       |
| Net loss as reported                                                                 |       | $                                         | (312,657   | )                                         | $          | (156,888 | ) |
| Add:                                                                                 | * *   | * *                                  | * *   | * *                                  | * *   |
| Stock-based employee compensation expense  included in reported net loss, net of tax |       | —                                    |       | —                                    |       |
| Deduct:                                                                              | * *   | * *                                  | * *   | * *                                  | * *   |
| Total stock-based compensation expense  determined under fair value based method     |       | (20,369                                   | )          | (10,337                                   | )          |
| Net loss - pro forma                                                                 |       | $                                         | (333,026   | )                                         | $          | (167,225 | ) |
| Basic and diluted loss per share:                                                    |       |                                      |       |                                      |       |
| As reported                                                                          |       | $                                         | (.04       | )                                         | $          | (.02 | ) |
| Pro forma                                                                            |       | $                                         | (.05       | )                                         | $          | (.02 | ) |

 

7

----

 

 
| ** **                     | ** ** | **Thirteen weeks ended** | ** ** |
|--------------------------------|------------|--------------------------|------------|
| ** **                     | ** ** | **July 25,  2004**       | ** ** | **July 27,  2003** | ** ** |
|                           |       |                     |       |   |   |
| Basic Shares                   |       | 7,035,170                |       | 7,035,170 |   |
|                           |       |                     |       |   |   |
| Effect of Dilutive Securities: |       |                     |       |   |   |
|                           |       |                     |       |   |   |
| Options                        |       | 0                        |       | 0 |   |
|                           |       |                     |       |   |   |
| Diluted Shares                 |       | 7,035,170                |       | 7,035,170 |   |

###  

The following table summarizes securitiesthat were outstanding as of July 25, 2004 and July 27, 2003, but not includedin the calculation of net loss per share because such securities areanti-dilutive:

 
| ** **             | ** ** | **Thirteen weeks ended** | ** ** |
|------------------------|------------|--------------------------|------------|
| ** **             | ** ** | **July 25,  2004**       | ** ** | **July 27,  2003** | ** ** |
|                   |       |                     |       |   |   |
| Options                |       | 834,800                  |       | 713,800 |   |
|                   |       |                     |       |   |   |
| Warrants               |       | 576,000                  |       | 500,000 |   |
|                   |       |                     |       |   |   |
| Convertible Debentures |       | 1,160,000                |       | 1,160,000 |   |

 

3.  NEWACCOUNTING PRONOUNCEMENTS

 

None

 

8

----

 

ITEM 2.  Management’sDiscussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

 

Overview

 

The Company’s restaurant sales in the mostrecent quarter were $6,527,000 compared to sales of $5,271,000 in the firstquarter of fiscal 2004, an increase of 23.8%. 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 PrudentialCenter in Boston, Massachusetts in April 2004, and the new Pizzeria Regina atthe South Station in Boston, Massachusetts in July 2004. The Company had a netloss for the first quarter of fiscal 2005 of $313,000, compared to a net lossof $157,000 for the same quarter of fiscal 2004.  The Company’s management believes that thedecrease in profit is the result of operating losses incurred by the Polcari’sNorth End restaurant in Cambridge, Massachusetts and of an increase inpre-opening expenses related to the new Pizzeria Regina at the South Station inBoston, Massachusetts.

 

The key factors that affect our operating results are the impact of newstore openings, comparable restaurant sales, which are driven by comparablecustomer counts and check average, and our ability to manage operating expensessuch as food cost, labor and benefits and other costs.  Changes in the number of restaurants inoperation can change the absolute dollar amounts of revenues and expenses, andthe build out and opening of new stores can affect operating profits.  Each restaurant unit’s contribution marginwill vary over the life of the restaurant. Margins tend to be low when a restaurant is first opened until customertraffic reaches planned levels.  Marginscan also deteriorate at the end of a unit’s life cycle due to a decline incustomer traffic caused by a variety of factors outside the control of theCompany.  These economic conditionsimpact both the Pizzeria Regina units and the Polcari’s North End units.

 

In the fiscal 2005 period, there were 18 units in operation for theentire period and 1 Pizzeria Regina in operation for 2 days, and in fiscal 2004period there were 16 units in operation for the entire period.  Thefollowing table sets forth all revenues, costs and expenses as a percentage oftotal revenues for the periods indicated for revenue and expense items includedin the consolidated statements of operations:

 

9

----

 
| ** **                                     | ** ** | **July 25,  2004** | ** ** | **July 27,  2003** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------------|------------|
|                                           |       |               |       |               |       |
| Revenues:                                      |       |               |       |               |       |
| Restaurant sales                               |       | 100                | %          | 100                | %          |
| Other                                          |       | —             |       | —             |       |
|                                           |       |               |       |               |       |
| Total revenues                                 |       | 100                | %          | 100                | %          |
|                                           |       |               |       |               |       |
| Costs and expenses:                            |       |               |       |               |       |
| Cost of food, beverages and liquor             |       | 23                 |       | 20                 |       |
| Other operating expenses- payroll              |       | 32                 |       | 33                 |       |
| Other operating expenses exclusive of  payroll |       | 33                 |       | 33                 |       |
| General and administrative                     |       | 10                 |       | 13                 |       |
| Depreciation and amortization                  |       | 4                  |       | 5                  |       |
| Pre-opening costs                              |       | 1                  |       | 1                  |       |
| Operating income (loss)                        |       | (3                 | )          | (5                 | )          |
| Interest expense, net                          |       | (2                 | )          | (2                 | )          |
| Other income                                   |       | —             |       | 4                  |       |
| Net income (loss)                              |       | (5                 | )%         | (3                 | )%         |

 

Thirteen Weeks Ended July 25, 2004 asCompared to Thirteen Weeks ended July 27, 2003

Restaurant Sales.

 

Restaurant sales in the most recent quarter were $6,527,000 compared torestaurant sales in the prior year’s period of $5,271,000.  The Company’s management believes that theincrease in revenue is primarily attributable to the opening of the new Polcari’sin Cambridge, Massachusetts in October, 2003, the new Pizzeria Regina at thePrudential

 

10

----

 

Center in Boston, Massachusetts in April 2004, and the new PizzeriaRegina at the South Station in Boston, Massachusetts in July 2004.

 

Net sales at the Company’s Pizzeria Regina restaurants increased to$3,293,000 in the current period from $2,580,000 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 the Faneuil Hall PizzeriaRegina location which was open for the entire current period compared to itstemporary closing from May 9, 2003 to July 2, 2003 in the prior year’s period.

 

Net sales at the Company’s full service casual dining restaurantsincreased to $3,228,000 in the current period from $2,680,000 in the prioryear’s period.  This increase wasprimarily attributable to the opening of the new Polcari’s in Cambridge,Massachusetts and an increase in same store sales of 2.0%.

 

Net sales at the Company’s commissary were $6,000 in the current periodcompared to $11,000 in the prior year’s period.

 

# Royalties

 

During the current year period, the Company recognized $0 in royaltiesfrom a domestic Pizzeria Regina franchise compared to $4,000 in royalties inthe prior year’s period.  The Company’sdomestic Pizzeria Regina franchise at the Palms Casino in Las Vegas, Nevada wasclosed on 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 23% in the fiscal 2005 period compared to 20% in thefiscal 2004 period.  The increase as apercentage of total revenues was primarily attributable to increase in costsfrom suppliers in general.

 

The cost of food, beverage and liquor was $1,532,000 in the fiscal 2005period compared to $1,046,000 in the fiscal 2004 period. The dollar increasewas due in part to the opening of a new Pizzeria Regina kiosk in Boston, the Cambridge, Massachusetts Polcari’sNorth End restaurant, and  an increase incosts from suppliers in general.

 

The cost of food, beverages and liquor as a percentage of restaurantsales at the Pizzeria Regina restaurants was 19% in the current period comparedto 16% in the prior year’s period.  Theincrease as a percentage of restaurant sales was primarily due to higher cheesecosts.

 

11

----

 

The cost of food, beverage and liquor at Pizzeria Regina restaurantswas $627,000 in the current period compared to $400,000 in the prior year’speriod.  The dollar increase wasprimarily due to the opening of the new Pizzeria Regina at the PrudentialCenter in Boston, Massachusetts, the new Pizzeria Regina at South Station inBoston, Massachusetts, Pizzeria Regina at Fanueil Hall Marketplace open for theentire period,  and to higher cheesecosts.

 

Thecost of food, beverages and liquor as a percentage of restaurant sales at theCompany’s full service casual dining restaurants increased to 28% in the periodcompared to 24% in the prior year’s period. The increase as a percentage of current sales was principally due to theopening of the new Cambridge, Massachusetts Polcari’s North End restaurantwhich is open for lunch 5 days a week resulting in higher food costs, andincrease in costs from suppliers in general.

 

The cost of food, beverage and liquor at the Company’s full servicecasual dining restaurants was $905,000 in the current period compared to$646,000 in the prior year’s period.  Thedollar increase was primarily due to the opening of the new Cambridge,Massachusetts Polcari’s North End restaurant and increase in costs fromsuppliers in general.

 

# Other Operating Expenses

 

Payroll Expenses.

 

Payroll expenses as a percentage of totalrevenues for all restaurants were 32% in the fiscal 2005 period compared to 33%in the fiscal 2004 period.  The decreaseas a percentage of total revenues was attributable to the opening of the newPizzeria Regina at the Prudential Center in Boston, Massachusetts whichgenerally have lower payroll expenses as a percentage of total revenues thanthe Company’s full service casual dining restaurants and to the temporaryclosing of the Faneiul Hall location in the fiscal 2004 period in which theCompany continued to incur payroll costs without any corresponding revenue.

 

Payroll expenses were $2,081,000 in the fiscal 2005 period, compared to$1,751,000 in the fiscal 2004 period. The dollar increase in payroll expenses was primarily due to the openingof the new Cambridge, Massachusetts Polcari’s North End restaurant, the newPizzeria Regina a the Prudential Center in Boston, Massachusetts and the newPizzeria Regina at South Station in Boston, Massachusetts.

 

Payroll expenses at the Pizzeria Regina restaurants were 26% ofrestaurant sales in the current period compared to 29% of restaurant sales inthe prior year’s period.  The decrease asa percentage of restaurant sales was primarily due to the temporary closing

 

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of the Faneuil Hall location in the prior year’s period which incurredpayroll costs without any corresponding revenue.

 

Payroll expenses of the Pizzeria Regina restaurants were $842,000 inthe current period compared to $745,000 in the prior year’s period.  This dollar increase was primarily due to theopening of the new Pizzeria Regina at the Prudential Center in Boston,Massachusetts and the new Pizzeria Regina at South Station in Boston, Massachusetts

 

Payroll expenses at the Company’s full service casual diningrestaurants increased to 35% of restaurant sales in the current period comparedto 34% of restaurant sales in the prior year’s period.  The increase as a percentage of restaurantsales was primarily attributable to the opening of the new Polcari’s North Endrestaurant in Cambridge, Massachusetts.

 

Payroll expenses at the Company’s full service casual diningrestaurants were $1,140,000 in the current period compared to $909,000 in theprior year’s period.  This dollarincrease was primarily due to the opening of the new Polcari’s North Endrestaurant in Cambridge, Massachusetts.

 

Payroll expenses at the Company’s Commissary were $99,000 for thecurrent period as compared to $97,000 in the prior year’s period.

 

Other Operating Expenses, Exclusive ofPayroll.

 

Other operating expenses, exclusive ofpayroll, were 33% of total revenues in both fiscal 2005 and fiscal 2004periods.

 

Other operating expenses, exclusive of payroll, were $2,133,000 in thefiscal 2005 period compared to $1,746,000 in the fiscal 2004 period. Theincrease in operating expenses, exclusive of payroll, was primarily due to theopening of the new Cambridge, Massachusetts Polcari’s North End restaurant, thenew Pizzeria Regina at Prudential Center in Boston, Massachusetts and the newPizzeria Regina at South Station in Boston, Massachusetts.

 

Other operating expenses, exclusive of payroll, for the Pizzeria Reginarestaurants as a percentage of restaurant sales were 33% in the current periodcompared to 37% 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 such costs without anycorresponding revenue.

 

Other operating expenses, exclusive of payroll, from the PizzeriaRegina restaurants were $1,100,000 in the current period, compared to $951,000in the prior year’s period

 

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 Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantsas a percentage of restaurant sales were 31% in the current period compared to29% in the prior year’s period.  Theincrease as a percentage of restaurant sales was primarily due to the openingof the new Polcari’s North End restaurant in Cambridge, Massachusetts.

 

Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants were $1,006,000 in the current periodcompared to $771,000 in the prior year’s period.  The dollar increase was primarilyattributable to the opening of the new Polcari’s North End restaurant inCambridge, Massachusetts.

 

Other operating expenses, exclusive of payroll, also include commissaryexpenses which were $27,000 in the current period compared to $24,000 in theprior years period.

 

General and Administrative Expenses.

 

General and administrative expenses were 9%of total revenues in fiscal 2005 period compared to 13% 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 $616,000 in the currentperiod, compared to $697,000 in the prior year’s period.  This dollar decrease was primarilyattributable to lower employee incentive costs and consulting costs.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expenses was 4%of total revenues in the fiscal 2005 period compared to 5% of total revenues inthe fiscal 2004 period.  This percentagedecrease was primarily the result of a higher revenue base.

 

Depreciation and amortization expense was $267,000 in the currentperiod, compared to $257,000 in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs were $90,000 in the fiscal 2005 period compared to$57,000 in the fiscal 2004 period. The pre-opening expenses, which consists oflabor, advertising, rent

 

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and training materials, relates primarily to the opening of the newPizzeria Regina at South Station in Boston, Massachusetts.

 

Other Income

 

Other income was $3,000 in the fiscal 2005 period compared to $217,000in the fiscal 2004 period.  The prioryear’s other income mainly consisted of insurance proceeds related to thetemporary closing of Faneuil Hall Pizzeria Regina.

 

Interest Expense and Interest Income.

 

Interest expense was $122,000 in the current period as compared to $96,000in the prior year’s period. This dollar increase was primarily due to anincrease in borrowing and related interest expense under the Company’s creditfacility.

 

Interest income was $0 in the current period compared to $1,000 in theprior year’s period.

 

### LIQUIDITY AND CAPITALRESOURCES

###  

At July 25, 2004, the Companyhad negative net working capital of $4,815,000 compared to negative workingcapital of $4,304,000 at April 25, 2004. It is common for companies in the restaurant industry to operate with networking capital deficits.  We are able tooperate with 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) accounts payablefor food, beverages and supplies usually become due after the receipt of cashfrom the related sales.  The Company’s financialcondition and growth will be dependent upon obtaining adequate additionalfinancing until profitable operations are achievable.  The Company cannot guarantee that it will besuccessful in obtaining additional financing. The opinion of BDO Seidman, LLP on the Company’s fiscal 2004 financialstatement included an explanatory paragraph expressing concern about theCompany’s ability to continue as a going concern.

 

During the thirteen weeks endedJuly 25, 2004, the Company had a net decrease in cash and cash equivalentsof  $291,000 reflecting net cash providedby  operating activities of $410,000, netcash used for investing activities of $474,000 and net cash used for  financing activities of $227,000.

 

Net cash provided by operating activities included a decrease inaccounts receivables of $11,000, a decrease in inventories of $5,000, adecrease in prepaid expenses of $67,000, a decrease in other assets of $8,000,an increase in accounts payables of $303,000, an

 

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increase in accrued expenses of $7,000, an increase in deferred rent of$63,000 and depreciation and amortization expenses of $267,000, which werepartially offset by a net loss of $313,000 and a decrease in other long-termliabilities of $8,000.  Net cash used forinvesting activities reflects costs associated with leasehold improvements andwith the purchase of equipment, furniture and fixtures for the new PizzeriaRegina at the Prudential Center in Boston, Massachusetts, the new PizzeriaRegina at South Station in Boston, Massachusetts and the other Companyrestaurants.  Net cash used for financingactivities of $227,000 consisted of net repayments of long term debt, leaseobligations and stockholders loans.

 

At July 25, 2004, the Company had currentliabilities of $6,193,000, including $1,361,000 of accounts payable, $1,424,000of accrued liabilities and current maturities of long term obligations in theamount of $3,408,000.  At July 25, 2004,the Company had long-term obligations, less current maturities, in the amountof $2,355,000, including $87,000 of notes payable to a stockholder, $10,000 dueunder capital lease obligations, $1,450,000 of convertible subordinateddebentures, $565,000 of deferred rent, and $243,000 of other long-termliabilities.

 

 All borrowings under the Credit Facility arecollateralized by substantially all of the assets of the Company and aresubject 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 incompliance with all financial covenants, and the grant to the bank of a sixyear warrant to purchase 76,000 shares of the Company’s common stock at a priceof $.50 per share.  Subject to certainexceptions pursuant to which the warrant will be exercisable earlier, thewarrant is not exercisable until February 13, 2005.  In August, 2004 the bank established newcovenants for fiscal 2005.  Because ofthe Company’s uncertainty regarding its ability to satisfy these covenants, allbank debt has been reclassified as current on the balance sheet for periodended July 25, 2004.  If the Companyfails to comply with these covenants, the bank debt would be due on demand.

 

To finance capital expenditures, subsequent to July 25, 2004 theCompany entered into an unsecured loan agreement with the spouse of a Companydirector in the amount of $200,000. Under the terms of the agreement the Company is obligated to payinterest at the rate of 14% on the outstanding balance.  The Company granted the lender a five yearwarrant to purchase 25,000 shares of the Company’s common stock at a price of$.70 per share.  The principal balance ispayable on or before December 31, 2004.

 

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The opinion of BDO Seidman, LLP on the Company’s fiscal 2004 financialstatement included an explanatory paragraph expressing concern about theCompany’s ability to continue as a going concern.  In addition, because of the Company’s concernregarding its ability to satisfy bank financial covenants, all bank debttotaling approximately $3,200,000 has been reclassified as current in thebalance sheet for year ended April 25, 2004 and period ended July 25,2004. Ifthe Company fails to comply with these covenants, the bank debt could be due ondemand.  The Company’s financialcondition and compliance with the bank covenants will be substantially dependentupon obtaining adequate additional financing  andachieving profitable operations.  The Company cannot guaranteethat it will be able to raise the necessary capital to continue in operation orthat it will be able to achieve profitable operations.  In addition, the Company may be forced to restructureits operations by closing the Polcari’s restaurant in Cambridge, Massachusetts,selling that business or its assets, and/or subleasing the premises of thatrestaurant.  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.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

None

 

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

 

*Forward-looking statements in this report,including without limitation statements relating to the adequacy of theCompany’s working capital and other resources ability to obtain additionalfinancing, the timing of the Company’s new store 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:  potential quarterlyfluctuations in the Company’s operating results; seasonality of sales; competition;risks associated with expansion; the Company’s reliance on key employees; risksgenerally associated with the restaurant industry; risks associated withgeographic concentration of the Company’s restaurants; risks associated withserving alcoholic beverages; and other risks and uncertainties indicated fromtime to time in the Company’s filings with the Securities and ExchangeCommission.  In addition, forward-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,” “will”, “expect,” “intend,” “estimate,” “anticipate”or “believe” or the negative thereof or variations thereon similar terminology.*

 

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*Although the Company believes that theexpectations reflected in such forward-looking statements will prove to havebeen correct, it can give no assurance that such expectations will prove tohave been correct.  Investors arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof.*

 

Item 3.  Quantitativeand Qualitative 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 3%. A100 basis point change in the Credit Facility interest rate (approximately7% at July 25, 2004) would cause the interest expense for fiscal 2005 to changeby approximately $31,000. This computation is determined by considering theimpact of hypothetical interest rates on our variable long-term debt at July25, 2004. However, the nature and amount of our borrowings under the CreditFacility may vary as a result of future business requirements, marketconditions, covenant compliance and other factors.

 

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.

 

Commodity Price 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.

 

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ITEM  4.  Controls and Procedures

 

As of July 25, 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 errors 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 inherentlimitations in all control systems, no evaluation of controls can provideabsolute assurance that all control issues and instances of fraud, if any,within the company have been detected. Notwithstanding the foregoing, however,based upon their evaluations, our CEO and CFO concluded that the Company’sdisclosure controls are effective to provide a reasonable level of assurancethat material information relating to the Company is accumulated andcommunicated to management, including the CEO and CFO, as appropriate, to allowtimely decisions regarding required disclosure.

 

There have been no changes in 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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## PART II

##  

## OTHER INFORMATION

##  

ITEM 1. Legal Proceedings.

 

None

 

ITEM 2. Unregistered Sales of EquitySecurities and Use of Proceeds.

 

None.

 

ITEM 3. Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

ITEM 5. Other Information.

 

### None.

###  

ITEM 6. Exhibits and Reports On Form 8-k

 

Exhibit 31: Sarbanes-Oxley Section 302 Certification

 

Exhibit 32: Sarbanes-Oxley Section 906 Certification

 

None.

 

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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: September 1, 2004 | By:                                | /s/ George R. Chapdelaine |   |
|                    |                               | George R. Chapdelaine, President and  Chief Executive Officer |
|                         |                                    |  |  |  |  |

 

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