###  

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

### ** **

### **Washington, DC 20549**

##  

## **FORM 10-Q**

##  

| **ý** |   | **Quarterly report under Section 13 or  15(d) of the Securities Exchange Act of 1934.**                                                                                                                            |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |   |                                                                                                                                                                                                               |
|       |   | **For  the quarterly period ended January 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 FileNumber0-18369**

 

| **BOSTON RESTAURANT ASSOCIATES,  INC.**                                                  |
|------------------------------------------------------------------------------------------|
| (Exact Name of Registrant as  Specified in its Charter)                                  |
|                                                                                     |   |   |
| **Delaware**                                                                             |   | **61-1162263** |
| (State or Other  Jurisdiction of  Incorporation or  Organization)                        |   | IRS Employer Identification No. |
|                                                                                     |   |   |
| **999 Broadway  Saugus, Massachusetts  01906**(Address of  Principal  Executive Offices) |
|                                                                                     |   |   |
| **(781) 231-7575**(Registrant’s  Telephone  Number Including area code)             |

 

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 March 5, 2004.

 

 

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BOSTON RESTAURANT ASSOCIATES,INC.

 

INDEX

 
| PART I - FINANCIAL STATEMENTS |                                                                                                                                          | Page   |
|-------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
|                          |                                                                                                                                          |   |
| Item 1.                       | Financial Statements                                                                                                                          |   |
|                          |                                                                                                                                          |   |
|                          | Condensed Consolidated Balance Sheets as of  January 25, 2004 (unaudited) andApril 27, 2003                                                   | 3      |
|                          |                                                                                                                                          |   |
|                          | Unaudited Condensed Consolidated Statements  of Operations for the thirteen andthirty-nine  weeks ended January 25, 2004 and January 26, 2003 | 4      |
|                          |                                                                                                                                          |   |
|                          | Unaudited Condensed Consolidated Statements  of Cash Flows for the thirteen andthirty-nine  weeks ended January 25, 2004 and January 26, 2003 | 5      |
|                          |                                                                                                                                          |   |
|                          | Notes to Condensed Consolidated Financial  Statements                                                                                         | 6      |
|                          |                                                                                                                                          |   |
| Item 2.                       | Management’s Discussion and Analysis of Financial Condition andResults of Operations                                                     | 10     |
|                          |                                                                                                                                          |   |
| Item  3.                      | Quantitative  and Qualitative Disclosure About MarketRisk                                                                                     | 21     |
|                          |                                                                                                                                          |   |
| Item 4.                       | Controls and Procedures                                                                                                                       | 22     |
|                          |                                                                                                                                          |   |
| PART II - OTHER INFORMATION   | 23                                                                                                                                            |
|                          |                                                                                                                                          |   |
| Item 6.                       | Exhibits and Reports on Form 8-K                                                                                                              | 24     |
|                          |                                                                                                                                          |   |
|                          | SIGNATURES                                                                                                                                    | 25     |

 

2

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PART 1 -FINANCIAL INFORMATION

ITEM 1.FINANCIAL STATEMENTS

BOSTONRESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

 
|                                                                                 |   | **January  25,  2004** |      | **April 27,  2003** |   |
|--------------------------------------------------------------------------------------|--------|------------------------|-----------|---------------------|--------|
|                                                                                 |   | **(unaudited)**        |      |                |   |
| ASSETS                                                                               |   |                   |      |                |   |
| Current:                                                                             |   |                   |      |                |   |
| Cash and cash equivalents                                                            |   | $                      | 875,507   |                | $      | 1,106,701 |   |
| Accounts receivable                                                                  |   | 151,296                |      | 137,123             |   |
| Inventories                                                                          |   | 678,320                |      | 541,030             |   |
| Prepaid expenses and other                                                           |   | 175,548                |      | 164,610             |   |
|                                                                                 |   |                   |      |                |   |
| Total current assets                                                                 |   | 1,880,671              |      | 1,949,464           |   |
|                                                                                 |   |                   |      |                |   |
| Property and equipment:                                                              |   |                   |      |                |   |
| Building                                                                             |   | 512,500                |      | 512,500             |   |
| Leasehold improvements                                                               |   | 8,119,627              |      | 6,739,402           |   |
| Equipment, furniture and fixtures                                                    |   | 5,484,851              |      | 4,509,527           |   |
|                                                                                 |   |                   |      |                |   |
|                                                                                 |   | 14,116,978             |      | 11,761,429          |   |
|                                                                                 |   |                   |      |                |   |
| Less accumulated depreciation and  amortization                                      |   | 7,238,090              |      | 6,472,336           |   |
|                                                                                 |   |                   |      |                |   |
| Net property and equipment                                                           |   | 6,878,888              |      | 5,289,093           |   |
|                                                                                 |   |                   |      |                |   |
| Goodwill                                                                             |   | 453,643                |      | 453,643             |   |
|                                                                                 |   |                   |      |                |   |
| Other assets                                                                         |   | 542,098                |      | 581,545             |   |
|                                                                                 |   |                   |      |                |   |
| Total assets                                                                         |   | $                      | 9,755,300 |                | $      | 8,273,745 |   |
|                                                                                 |   |                   |      |                |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                            |   |                   |      |                |   |
| Current liabilities:                                                                 |   |                   |      |                |   |
| Accounts payable                                                                     |   | $                      | 621,672   |                | $      | 580,070 |   |
| Accrued expenses                                                                     |   | 1,142,359              |      | 1,319,805           |   |
| Current maturities:                                                                  |   |                   |      |                |   |
| Notes payable-stockholder                                                            |   | 6,039                  |      | 5,820               |   |
| Long-term debt                                                                       |   | 733,506                |      | 220,835             |   |
| Obligations under capital leases                                                     |   | 185,451                |      | 195,365             |   |
|                                                                                 |   |                   |      |                |   |
| Total current liabilities                                                            |   | 2,689,027              |      | 2,321,895           |   |
|                                                                                 |   |                   |      |                |   |
| Long-term obligations:                                                               |   |                   |      |                |   |
| Notes payable-stockholder, less current  maturities                                  |   | 90,408                 |      | 94,964              |   |
| Long-term debt, less current maturities                                              |   | 2,293,322              |      | 511,671             |   |
| Obligations under capital leases, less  current maturities                           |   | 112,270                |      | 253,688             |   |
| Subordinated debentures                                                              |   | 1,450,000              |      | 1,450,000           |   |
| Deferred rent                                                                        |   | 454,532                |      | 396,271             |   |
| Other long-term liabilities                                                          |   | 518,380                |      | 506,698             |   |
|                                                                                 |   |                   |      |                |   |
| Total liabilities                                                                    |   | 7,607,939              |      | 5,535,187           |   |
|                                                                                 |   |                   |      |                |   |
| Commitments and contingencies                                                        |   |                   |      |                |   |
|                                                                                 |   |                   |      |                |   |
| Stockholders’ equity :                                                          |   |                   |      |                |   |
| Preferred stock, $.01 par value, 10,000,000  shares authorized;  none issued    |   | 0                      |      | 0                   |   |
| Common stock, $.01 par value, 25,000,000  shares authorized, 7,060,170 shares issued |   | 70,602                 |      | 70,602              |   |
| Additional paid in capital                                                           |   | 10,922,636             |      | 10,922,636          |   |
| Accumulated deficit                                                                  |   | (8,821,185             | )         | (8,229,988          | )      |
|                                                                                 |   |                   |      |                |   |
| Total                                                                                |   | 2,172,053              |      | 2,763,250           |   |
| Less:                                                                                |   |                   |      |                |   |
| Treasury stock, 25,000 shares at cost                                                |   | (24,692                | )         | (24,692             | )      |
| Total stockholders’ equity                                                      |   | 2,147,361              |      | 2,738,558           |   |
|                                                                                 |   |                   |      |                |   |
| Total liabilities and stockholders’ equity                                      |   | $                      | 9,755,300 |                | $      | 8,273,745 |   |

 

See accompanying notes.

 

3

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BOSTONRESTAURANTS ASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 
|                                                           |   | **Thirteen  Weeks Ended** |      | **Thirty-nine  Weeks Ended** |   |
|----------------------------------------------------------------|--------|---------------------------|-----------|------------------------------|--------|
|                                                           |   | **January  25,  2004**    |      | **January  26,  2003**       |   | **January  25,  2004** |   | **January  26,  2003** |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Revenues:                                                      |   |                      |      |                         |   |   |   |   |   |
| Restaurant sales                                               |   | $                         | 6,182,404 |                         | $      | 5,828,978 |   | $ | 17,291,439 |   | $ | 17,205,521 |   |
| Royalties                                                      |   | 4,090                     |      | 3,416                        |   | 12,715 |   | 10,576 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Total revenues                                                 |   | 6,186,494                 |      | 5,832,394                    |   | 17,304,154 |   | 17,216,097 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Costs and expenses:                                            |   |                      |      |                         |   |   |   |   |   |
| Cost of food, beverages and liquor                             |   | 1,277,878                 |      | 1,096,759                    |   | 3,535,252 |   | 3,297,104 |   |
| Payroll                                                        |   | 2,011,258                 |      | 1,731,350                    |   | 5,613,324 |   | 5,147,054 |   |
| Other operating expenses                                       |   | 2,031,734                 |      | 1,769,601                    |   | 5,578,197 |   | 5,131,818 |   |
| General and administrative                                     |   | 554,002                   |      | 668,324                      |   | 1,873,694 |   | 1,903,634 |   |
| Depreciation and amortization                                  |   | 333,929                   |      | 260,040                      |   | 874,526 |   | 779,389 |   |
| Pre-opening costs                                              |   | 2,497                     |      | 0                            |   | 317,665 |   | 0 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Total costs and expenses                                       |   | 6,211,298                 |      | 5,526,074                    |   | 17,792,658 |   | 16,258,999 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Operating Income (Loss)                                        |   | (24,804                   | )         | 306,320                      |   | (488,504 | ) | 957,098 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Other income                                                   |   | 1,495                     |      | 1,660                        |   | 219,804 |   | 7,967 |   |
| Interest income                                                |   | 672                       |      | 788                          |   | 2,255 |   | 2,183 |   |
| Interest expense                                               |   | (116,342                  | )         | (99,088                      | )      | (324,752 | ) | (314,150 | ) |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Net Income (Loss)                                              |   | $                         | (138,979  | )                            | $      | 209,680 |   | (591,197 | ) | $ | 653,098 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Income (Loss) per share-basic                                  |   | $                         | (0.02     | )                            | $      | 0.03 |   | $ | (0.08 | ) | $ | 0.09 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| Income (Loss) per share-diluted                                |   | $                         | (0.02     | )                            | $      | 0.03 |   | $ | (0.08 | ) | $ | 0.09 |   |
|                                                           |   |                      |      |                         |   |   |   |   |   |
| 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 |   | 7,035,170                 |      | 7,035,170                    |   | 7,035,170 |   | 7,045,208 |   |

 

See accompanying notes

 

4

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BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 
|                                                  |   | **Thirty-nine  Weeks Ended** |    |
|-------------------------------------------------------|--------|------------------------------|---------|
|                                                  |   | **January 25,  2004**        |    | **January  26,  2003** |   |
|                                                  |   |                         |    |   |   |
| Net cash provided by operating activities             |   | $                            | 28,994  |   | $ | 896,793 |   |
|                                                  |   |                         |    |   |   |
| Cash flows from investing activities:                 |   |                         |    |   |   |
| Capital expenditures                                  |   | (2,398,841                   | )       | (216,112 | ) |
|                                                  |   |                         |    |   |   |
| Net cash used for investing activities                |   | (2,398,841                   | )       | (216,112 | ) |
|                                                  |   |                         |    |   |   |
| Cash flows from financing activities:                 |   |                         |    |   |   |
| Repayments of long-term debt                          |   | (205,678                     | )       | (1,011,406 | ) |
| Repayments of capital lease obligations               |   | (151,332                     | )       | (264,199 | ) |
| Repayments of stockholder loans                       |   | (4,337                       | )       | (4,124 | ) |
| Repayments of subordinated convertible  debentures    |   | 0                            |    | (50,000 | ) |
| Proceeds from long-term debt                          |   | 2,500,000                    |    | 922,305 |   |
|                                                  |   |                         |    |   |   |
| Net cash provided by (used for) financing  activities |   | 2,138,653                    |    | (407,424 | ) |
|                                                  |   |                         |    |   |   |
| Net Increase (decrease) in cash and cash  equivalents |   | (231,194                     | )       | 273,257 |   |
|                                                  |   |                         |    |   |   |
| Cash and cash equivalents at beginning of  period     |   | 1,106,701                    |    | 932,806 |   |
|                                                  |   |                         |    |   |   |
| Cash and cash equivalents at end of period            |   | $                            | 875,507 |   | $ | 1,206,063 |   |

 

See accompanying notes.

 

5

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BOSTON RESTAURANT ASSOCIATES,INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS

## JANUARY 25, 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, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the thirteen-week period, and thirty-nine weekperiod, ended January 25, 2004 are not necessarily indicative of the resultsthat may be expected for the year ending April 25, 2004.  For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended April 27, 2003.  The balance sheet at April 27, 2003 has beenderived from the audited financial statements at that date.

 

The accompanying statements of operations and cashflows for the fiscal 2004 and fiscal 2003 periods reflect the consolidatedoperations and cash flow of four casual dining Italian restaurant and twelvePizzeria Regina restaurants for the entire period and one additional casualdining Italian restaurants for part of the fiscal 2004 period.

 

**2.  NET INCOME (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 thesame for the basic and diluted computations.

 

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 disclosureprovisions of Statement of Financial Accounting Standards No. 123 (“SFASNo. 123”), “Accounting for Stock-Based Compensation,” and SFAS No. 148“Accounting for Stock Based Compensation Transition and Disclosure” whichrequire the disclosure of the effects of fair value accounting on earnings andearnings per share of common stock on a pro forma basis.

 

6

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Had compensation cost forthe Company’s stock options been determined based upon the fair value at thegrant date for awards under the plans consistent with the methodologyprescribed under SFAS No. 123, the Company’s net income (loss) would havebeen adjusted to the pro forma amounts indicated below along with theadditional disclosures required by SFAS No. 148 are as follows:

 
|                                                                                          |   | **Thirteen  Weeks Ended** |     | **Thirty  Nine Weeks Ended** |     |
|-----------------------------------------------------------------------------------------------|--------|---------------------------|----------|------------------------------|----------|
|                                                                                          |   | **January  25, 2004**     |     | **January  26, 2003**        |     | **January  25, 2004** |   | **January  26, 2003** |   |
|                                                                                          |   |                      |     |                         |     |   |   |   |   |
| Net income (loss) as reported                                                                 |   | $                         | (138,979 | )                            | $        | 209,680 |   | $ | (591,197 | ) | $ | 653,098 |   |
| 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              |   | (11,095                   | )        | (50,860                      | )        | (32,194 | ) | (113,749 | ) |
|                                                                                          |   |                      |     |                         |     |   |   |   |   |
| Net income (loss) - pro forma                                                                 |   | $                         | (150,074 | )                            | $        | 158,820 |   | $ | (622,391 | ) | $ | 539,349 |   |
|                                                                                          |   |                      |     |                         |     |   |   |   |   |
|                                                                                          |   |                      |     |                         |     |   |   |   |   |
| Basic and diluted earnings per share:                                                         |   |                      |     |                         |     |   |   |   |   |
| As reported                                                                                   |   | $                         | (.02     | )                            | $        | .03 |   | $ | (.08 | ) | $ | .09 |   |
| Pro forma                                                                                     |   | $                         | (.02     | )                            | $        | .02 |   | $ | (.09 | ) | $ | .08 |   |

#### ** **

7

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|                           |   | **Thirteen  weeks ended** |   | **Thirty-nine  weeks ended** |   |
|--------------------------------|--------|---------------------------|--------|------------------------------|--------|
|                           |   | **January 25,  2004**     |   | **January 26,  2003**        |   | **January 25,  2004** |   | **January 26,  2003** |   |
|                           |   |                      |   |                         |   |   |   |   |   |
| Basic Shares                   |   | 7,035,170                 |   | 7,035,170                    |   | 7,035,170 |   | 7,035,170 |   |
|                           |   |                      |   |                         |   |   |   |   |   |
| Effect of Dilutive Securities: |   |                      |   |                         |   |   |   |   |   |
|                           |   |                      |   |                         |   |   |   |   |   |
| Options                        |   | 0                         |   | 0                            |   | 0 |   | 10,038 |   |
|                           |   |                      |   |                         |   |   |   |   |   |
| Diluted Shares                 |   | 7,035,170                 |   | 7,035,170                    |   | 7,035,170 |   | 7,045,208 |   |

 

Thefollowing table summarizes securities that were outstanding as of January 25,2004 and January 26, 2003, but not included in the calculation of net income(loss) per share because such securities are anti-dilutive:

 
|                   |   | **Thirteen  weeks ended** |   | **Thirty-nine  weeks ended** |   |
|------------------------|--------|---------------------------|--------|------------------------------|--------|
|                   |   | **January 25,  2004**     |   | **January 26,  2003**        |   | **January 25,  2004** |   | **January 26,  2003** |   |
|                   |   |                      |   |                         |   |   |   |   |   |
| Options                |   | 773,800                   |   | 910,146                      |   | 773,800 |   | 790,146 |   |
|                   |   |                      |   |                         |   |   |   |   |   |
| Warrants               |   | 500,000                   |   | 500,000                      |   | 500,000 |   | 500,000 |   |
|                   |   |                      |   |                         |   |   |   |   |   |
| Convertible Debentures |   | 1,160,000                 |   | 1,160,000                    |   | 1,160,000 |   | 1,160,000 |   |

 

8

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**3.**                                      **CREDITFACILITY**

 

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 constructionof the new

Polcari’s North End restaurant in Cambridge, Massachusetts.  On February 13, 2004, the Company accessedan additional $535,000 for the construction of two Pizzeria Reginas in Boston,Massachusetts.

 

**4.**                                      **NEW ACCOUNTINGPRONOUNCEMENTS**

 

In November 2002, the EITF reached a consensuson Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. EITF00-21 addresses certain aspects of the accounting by a vendor for arrangementsunder which the vendor will perform multiple revenue generatingactivities.  EITF 00-21 was effective for periods beginning afterJune 15, 2003. The adoption of EITF 00-21 did not have a material impacton the Company’s financial position and results of operations.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts (collectively referred to as derivatives) and forhedging activities under SFAS No. 133.  SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003, and hedgingrelations designated after June 30, 2003, except for those provisions ofSFAS No. 149 which relate to SFAS No. 133 implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003.  Forthose issues, the provisions that are currently in effect should continue to beapplied in accordance with their respective effective dates.  In addition,certain provisions of SFAS No. 149, which relate to forward purchases or salesof when-issued securities or other securities that do not yet exist, should beapplied to both existing contracts and new contracts entered into afterJune 30, 2003.  The adoption of SFAS No. 149 did not have a materialeffect on the Company’s financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Instruments with Characteristics of both Liabilitiesand Equity”.  SFAS No. 150 establishes standards for how an issuerclassifies and measures certain financial instruments with characteristics ofboth liabilities and equity.  SFAS No. 150 requires that an issuerclassify a financial instrument that is within the scope of SFAS No. 150 as aliability.  SFAS No. 150 is effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective beginningSeptember 1, 2003.  The adoption of SFAS No. 150 did not have a materialeffect on the Company’s financial statements.

 

9

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**ITEM 2****.**     **Management’s Discussion andAnalysis of Financial Condition and Results of****Operations**

 

### **RESULTS OF OPERATIONS**

 

# **Overview**

 

The Company’s restaurant sales in the mostrecent quarter were $6,182,000 compared to sales of $5,829,000 in the thirdquarter of fiscal 2003, an increase of 6.0%. This increase in sales was primarily attributable to the opening of aPolcari’s restaurant in Cambridge during the second quarter. 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 as well as our ability to manage operating expenses such asfood cost, labor and benefits and other costs. Changes in the number of restaurants in operation can increase ordecrease total Company revenues and expenses, and the build out and opening ofnew stores can affect operating profits. The opening of a new Cambridge, Massachusetts Polcari’s North Endrestaurant in October 2003 illustrates this fact. The net loss in the mostrecent quarter was $138,979 compared to net income of $209,680 in the thirdquarter of fiscal 2003.

 

Each restaurant unit’s contribution margin will varyover the life of the restaurant. Margins tend to be low when a restaurant is first opened until customertraffic reaches planned levels.  Marginscan also deteriorate at the end of a unit’s life cycle due to a decline incustomer traffic caused by a variety of factors outside the control of theCompany.  These economic conditionsimpact both the Pizzeria Regina units and the Polcari’s North End units.

 

There were 17 units in operation for the thirdquarter and part of the second quarter of fiscal 2004 and 16 units in operationfor the first quarter of fiscal 2004 and the first, second, and third quartersof fiscal 2003.  The Company anticipatesit will open two new Pizzeria Regina’s at the Prudential Center, Boston,Massachusetts and South Station, Boston, Massachusetts in late April or earlyMay.   The following table sets forthall revenues, costs and expenses as a percentage for the periods indicated forrevenue and expense items included in the consolidated statements ofoperations:

 

10

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|                                           |   | **Thirteen  Weeks Ended** |   | **Thirty-nine  weeks Ended** |   |
|------------------------------------------------|--------|---------------------------|--------|------------------------------|--------|
|                                           |   | **January  25,  2004**    |   | **January  26,  2003**       |   | **January  25,  2004** |   | **January  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                        |   | 19                           |   | 20 |   | 19 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Other operating expenses-payroll               |   | 32                        |   | 30                           |   | 32 |   | 30 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Other operating expenses exclusive of  payroll |   | 33                        |   | 30                           |   | 32 |   | 30 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| General and administrative                     |   | 9                         |   | 11                           |   | 10 |   | 11 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Depreciation and amortization                  |   | 5                         |   | 4                            |   | 5 |   | 4 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Pre-opening costs                              |   | —                    |   | —                       |   | 2 |   | — |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Operating income (loss)                        |   | 0                         |   | 6                            |   | (1 | ) | 6 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Interest expense, net                          |   | 2                         |   | 2                            |   | 2 |   | 2 |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Other income                                   |   | —                    |   | —                       |   | — |   | — |   |
|                                           |   |                      |   |                         |   |   |   |   |   |
| Net income (loss)                              |   | (2                        | )%     | 4                            | %      | (3 | )% | 4 | % |

 

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**ThirteenWeeks Ended January 25, 2004 as Compared to Thirteen Weeks ended January 26,2003 Restaurant Sales.**

 

Restaurant sales in the most recent quarter were$6,182,000 compared to restaurant sales in the prior year’s period of$5,829,000.  The Company’s managementbelieves that the increase in revenue was primarily attributable to the openingof the new Polcari’s North End restaurant in Cambridge, Massachusetts inOctober 1, 2004.

 

Net sales at the Company’s Pizzeria Reginarestaurants decreased to $3,069,000 in the current period from $3,118,000(1.6%) in the prior year’s period.  Thedecrease in restaurant sales was principally due a major snow storm the weekendof December 6, 2003.

 

Net sales at the Company’s full service casualdining restaurants increased to $3,103,000 in the current period from$2,702,000 in the prior year’s period. This increase in sales was primarilyattributable to the opening of the new Polcari’s North End restaurant inCambridge, Massachusetts offset by a 2.4 % decrease in same store sales.

 

Net sales at the Company’s commissary were $10,000in the current period compared to $9,000 in the prior year’s period.

 

# **Royalties**

 

The Company recognized $4,000 in royalties in thecurrent period compared to $3,000 in the prior year’s period.

 

**Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage and liquor was $1,278,000in the current period compared to $1,097,000 in the prior year’s period. Thedollar increase was due in part to the opening of the new Cambridge,Massachusetts Polcari’s North End restaurant. The increase as a percentage of total revenues was primarilyattributable to increases in costs from suppliers generally.

 

The cost of food, beverage and liquor at PizzeriaRegina restaurants was $478,000 in the current period compared to $469,000 inthe prior year’s period due to an increase in the cost from suppliers.

 

The cost of food, beverage and liquor as apercentage of restaurant sales at the Pizzeria Regina restaurants was 16% inthe fiscal 2004 period compared to 15% in the fiscal 2003 period.  The increase as a percentage of restaurantsales was principally due to increases in costs from suppliers in general.

 

The cost of food, beverage and liquor at theCompany’s full service casual dining restaurants was $800,000 in the currentperiod compared to $628,000 in the prior year’s period.  The dollar increase

 

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was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant. The cost as apercentage of restaurant sales was 26% in the fiscal 2004 period compared to23% in the fiscal 2003 period. The increase as a percentage of restaurant saleswas principally due to the opening of the Cambridge, Massachusetts Polcari’sNorth End restaurant, which is open for lunch daily, resulting in higher foodcosts generally associated with the lunch period, a re-engineered menu atPolcari’s of Salem, New Hampshire and due to increases in costs from suppliersin general.

 

# **Other OperatingExpenses**

 

Payroll Expenses.

 

Payroll expenses were $2,011,000 in the currentperiod, compared to $1,731,000 in the prior year’s period.  The dollar increase in payroll expenses wasprimarily due to opening of the new Cambridge, Massachusetts Polcari’s NorthEnd restaurant and an increase in employee benefit health care costs.

 

Payroll expenses of the Pizzeria Regina restaurantswere $726,000 in the current period compared to $737,000 in the prior year’speriod.  This dollar decrease wasprimarily due to a reduction in hours worked due to increased efficiency.Payroll expenses at these restaurants were 24% of restaurant sales in bothfiscal 2004 and fiscal 2003 periods.

 

Payroll expenses at the Company’s full servicecasual dining restaurants were $1,183,000 in the current period compared to$902,000 in the prior year’s period. This dollar increase was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant and an increase inemployee benefit costs. Payroll expenses at these restaurants were 38% ofrestaurant sales in the current period compared to 33% in the prior year’speriod.  The increase as a percentage ofrestaurant sales was primarily attributable to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant which is open for lunchseven days a week and to an increase in employee benefit costs.

 

Payroll expenses at the Company’s Commissary were$102,000 for the fiscal 2004 period as compared to $92,000 in the fiscal 2003period.

 

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OtherOperating Expenses, Exclusive of Payroll.

 

Other operating expenses, exclusive of payroll, were$2,032,000 in the current period compared to $1,770,000 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.

 

Other operating expenses, exclusive of payroll, fromthe Pizzeria Regina restaurants were $966,000 in the current period, comparedto $979,000 in the prior year’s period. This dollar decrease is primarily due to a reduction in costs as aresult of decreased sales.  Otheroperating expenses, exclusive of payroll, for the Pizzeria Regina restaurantsas a percentage of restaurant sales were 31% in both fiscal 2004 and fiscal2003 periods.

 

Other operating expenses, exclusive of payroll, forthe Company’s full service casual dining restaurants were $1,029,000 in thecurrent period compared to $762,000 in the prior year’s period. The dollarincrease was primarily attributable to the costs associated with the opening ofthe new Cambridge, Massachusetts Polcari’s North End restaurant.  Other operating expenses, exclusive ofpayroll, for the Company’s full service casual dining restaurants as apercentage of restaurant sales were 33% in the current period compared to 28%in the prior year’s period.  Theincrease as a percentage of restaurant sales was primarily due to the openingof the new Cambridge, Massachusetts Polcari’s North End restaurant and to theadvertising costs associated with this restaurant.

 

Other operating expenses also include commissaryexpenses, which were $37,000 for the fiscal 2004 period as compared to $29,000in the fiscal 2003 period.

 

General and Administrative Expenses.

 

General and administrative expenses were $554,000 inthe current period, compared to $668,000 in the prior year’s period.  This $114,000 dollar decrease was primarilyattributable to a reduction in employee incentives and consulting costs.

 

General and administrative expenses as a percentageof restaurant sales were 9% in current fiscal 2004 period compared to 11% inthe fiscal 2003 period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expense was $334,000 inthe current period, compared to $260,000 in the prior year’s period.  This dollar increase was attributable to theopening of a new Polcari’s North End restaurant in Cambridge, Massachusetts.   Depreciation and amortization expenses as apercentage of restaurant sales were 5% in the current period compared to 4% inthe prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs consisting primarily ofadvertising for the current period were $2,000.  These costs are attributable to the forthcoming opening of twonew Pizzeria Regina restaurants one at the

 

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Prudential Center in Boston, Massachusetts, and theother one at South Station in Boston, Massachusetts.

 

**Other Income**

 

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

 

**InterestExpense and Interest Income.**

 

Interest expense was $116,000 in the current periodas compared to $99,000 in the prior year’s period. This dollar increase wasprimarily due to an increase in borrowing under the Company’s credit facility.

 

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

 

**Thirty-nine weeks Ended January 25, 2004**

 

Restaurant sales for the thirty-nine weeks endedJanuary 25, 2004 were $17,291,000 compared to restaurant sales in the prioryear’s period of $17,206,000.  Theincrease in revenue was primarily attributable to the opening of the newPolcari’s North End restaurant in Cambridge, Massachusetts in October, 2003 partiallyoffset by the loss of revenue due to the temporary closing of the Faneuil HallPizzeria Regina location from May 9, 2003 to July 2, 2003.

 

Net sales at the Company’s Pizzeria Reginarestaurants decreased to $8,580,000 in the current thirty- nine week periodfrom $8,889,000 in the prior year’s period. The decrease in restaurant sales was principally due to the temporaryclosing of the Faneuil Hall location from May 9, 2003 to July 2, 2003 and amajor snowstorm in December.  The lossof revenue from that location was partially compensated by payments under theCompany’s insurance policies, which are included in Other Income.

 

Net sales at the Company’s full service casualdining restaurants increased to $8,677,000 in the thirty-nine week currentperiod from $8,298,000 in the prior year’s period.  This increase was primarily attributable to the opening of thenew Polcari’s North End Restaurant in Cambridge, Massachusetts in October, 2003partially offset by the continued economic slow down in the Northeast.

 

Net sales at the Company’s commissary were $34,000in the current period compared to $19,000 in the prior year’s period.

 

# **Royalties**

 

During the current year period, the Companyrecognized $13,000 in royalties from a domestic Pizzeria Regina franchisecompared to $11,000 in royalties in the prior year’s period.

# ** **

15

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# **Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage and liquor was $3,535,000in the current thirty-nine week period compared to $3,297,000 in the prioryear’s period. The dollar increase was due in part to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant. The increase as apercentage of total revenues was primarily attributable to increases in costsfrom suppliers generally.

 

The cost of food, beverage and liquor at PizzeriaRegina restaurants was $1,361,000 in the current period compared to $1,350,000in the prior year’s period.

 

The cost as a percentage of restaurant sales at thePizzeria Regina restaurants was 16% in the fiscal 2004 period compared to 15%in the fiscal 2003 period.  The increaseas a percentage of restaurant sales was principally due to increases in costsfrom suppliers in general.

 

The cost of food, beverage and liquor at theCompany’s full service casual dining restaurants was $2,174,000 in the currentthirty-nine week period compared to $1,947,000 in the prior year’s period.  The dollar increase was primarily due toopening of the new Cambridge, Massachusetts Polcari’s North End restaurant. Thecost as a percentage of restaurant sales at these restaurants was 25% in thefiscal 2004 period compared to 23% in the fiscal 2003 period.  The increase as a percentage of sales wasprincipally due to the opening of the new Cambridge, Massachusetts Polcari’sNorth End restaurant which is open for lunch seven days week resulting inhigher food cost and increases in costs from suppliers in general.

 

# **Other OperatingExpenses**

 

Payroll Expenses.

 

Payroll expenses were $5,613,000 in the currentperiod, compared to $5,147,000 in the prior year’s thirty-nine weekperiod.  The dollar increase in payrollexpenses was primarily due to the opening of the new Cambridge, MassachusettsPolcari’s North End restaurant and to an increase in employee health carecosts. The increase as a percentage of total revenues was attributable to thefact that during the temporary closing of the Faneuil Hall location the Companycontinued to incur payroll costs associated with that location, as well as tothe opening of the new Cambridge, Massachusetts Polcari’s North End restaurantand to the increased employee benefit costs.

 

Payroll expenses of the Pizzeria Regina restaurantswere $2,198,000 in the current thirty-nine week period compared to $2,185,000in the prior year’s period.  This dollarincrease was primarily due to an increased cost in employee health benefits.Payroll expenses at these restaurants were 26% of restaurant sales in thecurrent period compared to 25% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily due to the temporary closing of the Faneuil Hall locationand to an increase in employee benefit costs.

 

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Payroll expenses at the Company’s full servicecasual dining restaurants were $3,113,000 in the current thirty-nine weekperiod compared to $2,683,000 in the prior year’s period.  This dollar increase was primarily due tothe opening of the new Polcari’s North End restaurant in Cambridge, Massachusettsand an increase in employee benefit costs. Payroll expenses at theserestaurants were 36% of restaurant sales in the current period compared to 32%in the prior year’s period.  Theincrease as a percentage of restaurant sales was primarily attributable to theopening of the new Polcari’s North End restaurant in Cambridge, Massachusettsand to an increase in employee benefit costs. Payroll expenses at the Company’s Commissary were $302,000 for thefiscal 2004 period as compared to $279,000 in the fiscal 2003 period.

 

Other Operating Expenses, Exclusive ofPayroll.

 

Other operating expenses, exclusive of payroll, were$5,578,000 in the current thirty-nine week period compared to $5,132,000 in theprior year’s period. The increase in operating expenses, exclusive of payroll,as a percentage of total revenues was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant and to a reduction inrevenue.

 

Other operating expenses, exclusive of payroll, fromthe Pizzeria Regina restaurants were $2,879,000 in the current thirty-nine weekperiod, compared to $2,884,000 in the prior year’s period.  Other operating expenses, exclusive ofpayroll, for the Pizzeria Regina restaurants as a percentage of restaurantsales were 34% in the current period compared to 32% in the prior year’speriod.  The increase as a percentage ofsales was primarily attributable to the temporary closing of the Faneuil Halllocation, where the Company nonetheless continued to incur some of such costswithout any corresponding revenue.

 

Other operating expenses, exclusive of payroll, forthe Company’s full service casual dining restaurants were $2,609,000 in thecurrent thirty-nine week period compared to $2,167,000 in the prior year’speriod. The dollar increase was primarily attributable to the opening of thenew Polcari’s North End restaurant in Cambridge, Massachusetts, as well asadvertising costs and increased rent expenses. Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants as a percentage of restaurant sales were 30%in the current period compared to 26% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily due to those same factors and to the reduction in revenue.

 

Other operating expenses also include commissaryexpenses, which were $90,000 in fiscal 2004 period compared to $81,000 infiscal 2003 period

 

General and AdministrativeExpenses.

 

General and administrative expenses were $1,874,000in the current period, compared to $1,904,000 in the prior year’s period.  This dollar decrease was primarilyattributable to a reduction in employee incentives. General and administrativeexpenses as a percentage of restaurant sales were 10% in both fiscal 2004 andfiscal 2003 periods.

 

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Depreciation and Amortization Expenses.

 

Depreciation and amortization expense was $875,000in the current period, compared to $779,000 in the prior year’s period.Depreciation and amortization expense as a percentage of restaurant sales were4% in both fiscal 2004 and fiscal 2003 periods.

 

Pre-Opening Costs

 

Pre-opening costs for the current period were$318,000.  These costs are attributableto the opening of a new Polcari’s North End restaurant in Cambridge, Massachusettswhich consist of labor, advertising, rent and training materials and to theforthcoming opening of two new Pizzeria Regina restaurants, one at thePrudential Center in Boston, Massachusetts and the other at South Station inBoston, Massachusetts.

 

Other Income

 

Other income was $220,000 in the current periodcompared to $8,000 in the prior year’s period. The increase in other income is attributable to insurance proceedsrelated to the temporary closing of Faneuil Hall Pizzeria Regina.

 

Interest Expense and Interest Income.

 

Interest expense was $325,000 in the current periodas compared to $314,000 in the prior year’s period.

 

Interest income was $2,000 in both fiscal 2004 and2003 periods.

 

### **LIQUIDITY AND CAPITAL RESOURCES**

 

At January 25, 2004, the Companyhad negative net working capital of $808,000 compared to negative net working capital of$372,000 at April 27, 2003.  It iscommon for companies in the restaurant industry to operate with net workingcapital 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) rapid turnover allows a limited investment in inventories, and(3) accounts payable for food, beverages and supplies usually become dueafter the receipt of cash from the related sales.  Accordingly, the Company believes that its existing resourcesdescribed below will be sufficient to allow it to meet its existing obligationsover the next twelve months, notwithstanding that it may have a net workingcapital deficit.

 

During the thirty-nine weeks ended January 25, 2004,the Company had a net decrease in cash and cash equivalents of $231,000,reflecting net cash provided by operating activities of $29,000, net cash usedfor investing activities of $2,399,000 and net cash provided by financingactivities of $2,139,000.

 

Net cash provided by operating activities includedan increase in accounts payables of $42,000, and increase in deferred rent of$58,000, an increase in other long-term liabilities of $12,000 and

 

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depreciation and amortization expense of $875,000which were partially offset by an increase in accounts receivables of $14,000an increase in prepaid expenses of $11,000, an increase in inventories of$138,000, an increase in other assets of $26,000,a decrease in accrued expensesof $178,000 and a net loss of $591,000. Net cash used for investing activities reflects costs associated withleasehold improvements and with the purchase of equipment, furniture andfixtures for the new Cambridge, Massachusetts Polcari’s North End Restaurant,the two new Pizzeria Regina restaurants in Boston, Massachusetts and for otheroperating Company restaurants.  Net cashprovided by financing activities of $2,139,000 consisted of amounts drawn downunder the Company’s credit facility with Commerce Bank and Trust, offset by thenet repayments of long term debt, lease obligations and stockholders loans.

 

At January 25, 2004, theCompany had current liabilities of $2,689,000, including $622,000 of accountspayable, $1,142,000 of accrued liabilities and current maturities of long termobligations in the amount of $925,000. At January 25, 2004, the Company had long-term obligations, less currentmaturities, in the amount of $4,919,000, including $2,293,000 due under itscredit facility with Commerce Bank and Trust, $90,000 of notes payable to astockholder, $112,000 due under capital lease obligations, $1,450,000 ofconvertible subordinated debentures, $455,000 of deferred rent, and $518,000 ofother long-term liabilities.

 

On April 30, 2002, the Company entered into itsnew $3,500,000 credit facility with Commerce Bank and Trust Company (the“Credit Facility”).  The Credit Facilitypermits the Company to borrow amounts to pay the costs for new restaurantopenings and repay over a fixed term of either four or five years.   No new borrowings may be made under theCredit Facility after April 30, 2005. Each borrowing under the Credit Facility bears interest at the bank’sbase rate plus 2.0%, subject to an annual adjustment to the bank’s then currentbase rate.  The Company borrowed$922,000 under the Credit Facility on April 30, 2002 to pay off the prior bankfacility.  During the first quarter offiscal 2004, the Company borrowed an additional $2,500,000 under the CreditFacility to finance the construction of a Polcari’s North End restaurant inCambridge, Massachusetts. Subsequent to the end of the third quarter onFebruary 13, 2004 the Company borrowed an additional $535,000 under the CreditFacility to finance the construction of a Pizzeria Regina restaurants inBoston, Massachusetts. All the notes are payable over four and five years as ofJanuary 25, 2004.

 

All borrowings under the Credit Facility arecollateralized by substantially all of the assets of the Company and aresubject to various financial covenants. As of January 25, 2004 the Company was not in compliance with thecertain financial covenants of the Credit Facility, including in particular,the requirement that the Company not report two consecutive quarters ofoperating losses. However, on February 13, 2004 the Company entered into anagreement with the bank under which Commerce Bank and Trust Company waived thecovenants for fiscal period ended January 25, 2004 and for fiscal year end 2004in exchange for a 1% waiver fee, a modification of the interest rate on alloutstanding 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 six yearwarrants to purchase 76,000 shares of the Company’s common stock at a price of$.50 per share.  The warrants are notexercisable for a period of one year from date of grant.

 

In addition to the Polcari’s North End restaurantwhich opened in October, 2003, the Company has entered into leases for twoadditional Pizzeria Regina restaurants, at South Station and Prudential

 

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Center in Boston, both of which are scheduled toopen within the next three months.  TheCompany estimates that the cost of opening those two units will be approximately$900,000.

 

The Company believes that its anticipated cash flowfrom operations, together with moneys available under the Credit Facility, willbe sufficient to fund its working capital needs for at least the next 12 monthsand the financing of the costs of opening the additional two units.  The Company may pursue additionalfinancing.  The Company cannot guaranteethat any such additional financing will be available upon terms acceptable tothe Company, or at all.

 

**NEWACCOUNTING PRONOUNCEMENTS**

 

In November 2002, the EITF reached a consensuson Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. EITF00-21 addresses certain aspects of the accounting by a vendor for arrangementsunder which the vendor will perform multiple revenue generatingactivities.  EITF 00-21 was effective for periods beginning afterJune 15, 2003. The adoption of EITF 00-21 did not have a material impacton the Company’s financial position and results of operations.

 

In April 2003, the FASB issued SFAS No. 149,“Amendment of Statement 133 on Derivative Instruments and HedgingActivities”.  SFAS No. 149 amends and clarifies financial accounting andreporting for derivative instruments, including certain derivative instrumentsembedded in other contracts (collectively referred to as derivatives) and forhedging activities under SFAS No. 133.  SFAS No. 149 is effective forcontracts entered into or modified after June 30, 2003, and hedgingrelations designated after June 30, 2003, except for those provisions ofSFAS No. 149 which relate to SFAS No. 133 implementation issues that have beeneffective for fiscal quarters that began prior to June 15, 2003.  Forthose issues, the provisions that are currently in effect should continue to beapplied in accordance with their respective effective dates.  In addition,certain provisions of SFAS No. 149, which relate to forward purchases or salesof when-issued securities or other securities that do not yet exist, should beapplied to both existing contracts and new contracts entered into afterJune 30, 2003.  The adoption of SFAS No. 149 did not have a materialeffect on the Company’s financial statements.

 

In May 2003, the FASB issued SFAS No. 150,“Accounting for Certain Instruments with Characteristics of both Liabilities andEquity”.  SFAS No. 150 establishes standards for how an issuer classifiesand measures certain financial instruments with characteristics of bothliabilities and equity.  SFAS No. 150 requires that an issuer classify afinancial instrument that is within the scope of SFAS No. 150 as aliability.  SFAS No. 150 is effective for financial instruments enteredinto or modified after May 31, 2003, and otherwise is effective beginningSeptember 1, 2003.  The adoption of SFAS No. 150 did not have amaterial effect on the Company’s financial statements.

 

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

 

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

 

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*PrivateSecurities Litigation Reform Act of 1995. Investors are cautioned that such forward-looking statements involverisks and uncertainties, including without limitation:  potential quarterly fluctuations in theCompany’s operating results; seasonality of sales; competition; risksassociated 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-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 variationsthereon similar terminology.  Althoughthe Company believes that the expectations reflected in such forward-lookingstatements will prove to have been correct, it can give no assurance that suchexpectations will prove to have been correct. Investors are cautioned not to place undue reliance on theseforward-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 tocertain instruments entered into for other than trading purposes.  Specifically, borrowings under the CreditFacility described in Item 2 bear interest at a variable rate based on thebank’s prime rate plus 2%. A 100 basis point change in the Credit Facilityinterest rate would cause the interest expense for fiscal 2004 to change byapproximately $16,000 from fiscal 2003. This computation is determined byconsidering the impact of hypothetical interest rates on our variable long-termdebt at January 25, 2004. However, the nature and amount of our borrowingsunder the Credit Facility may vary as a result of future business requirements,market conditions, covenant compliance and other factors.

 

Our other outstanding long-term debt bears fixedrates of interest. The Company believes there is no material exposure to amarket interest rate risk that could affect future results of operations orfinancial conditions.

 

CommodityPrice Risk.

 

Many of the food products and other operatingessentials purchased by us are affected by commodity pricing and are,therefore, subject to price volatility caused by weather, production problems,delivery difficulties and other factors that are beyond our control.  Our supplies and raw materials are availablefrom several sources and we are not dependent upon any single source for theseitems. The Company negotiates directly with wholesale suppliers of certain highvolume food ingredients such as cheese, tomato sauce, and flour to ensureconsistent quality and competitive pricing. These ingredients are thenpurchased for the Company by a third party independent distributor at thenegotiated price and redistributed to the Company’s restaurants.  All other food ingredients and beverageproducts are purchased directly by the general manager of each restaurant in accordancewith corporate guidelines.  Certainsignificant items that could be subject to price fluctuations are cheese andflour products. The Company believes that it will be able to pass throughincreased commodity costs by adjusting menu pricing in most cases. However, webelieve

 

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that any changes in commodity pricing that cannot beoffset by changes in menu pricing or other product delivery strategies wouldnot be material.

 

**ITEM 4.  Controls and Procedures**

 

As of January 25, 2004, ourChief Executive Officer and Chief Financial Officer performed an evaluation ofthe effectiveness of the Company’s disclosure controls and procedures (asdefined in SEC Rule 13a-15(e)), which have been designed to ensure thatmaterial information 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 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 inthe Company’s internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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## PART II

##  

## OTHER INFORMATION

##  

**ITEM1. Legal Proceedings.**

 

On February 11, 2004, Mr. Roger Lipton, a directorof the Company, filed a complaint against the Company in the Delaware Court ofChancery of the State of Delaware. (According to the most recent amendment to his Schedule 13D filed onFebruary 11, 2004, Mr. Lipton, together with certain affiliates, is thebeneficial owner of approximately 25.7% of the Company’s common stock.)  The complaint seeks an order of that courtpursuant to 8 Delaware Code Section 211(c) to compel the Company to conduct astockholder meeting since no stockholder meeting has been held for over 13months, and to assess the Company the plaintiff’s legal costs.

 

At a special meeting of the Board of Directors heldon March 5, 2004, the Board of Directors voted to call a special meeting inlieu of annual meeting of the stockholder for Friday April 23,2004 at 10 AMEST, and set March 8, 2004 as the record date for persons entitled to vote atthat meeting.  Mr. Lipton was present atthe Board meeting and voted in favor of the call of the meeting.

 

Therefore, the Company will file an answer in theDelaware proceeding, advising the Chancery Court that a a stockholder meetinghas been called for April 23, 2004. . The Company also is involved in various other legal matters in theordinary course of its business.  Eachof these other matters is subject to various uncertainties and some of thesematters may be resolved unfavorably to the Company.  Management believes that any liability that may ultimately resultfrom these matters will not have a material adverse effect on the Company’sfinancial position.

 

**ITEM2. Changes in Securities and Use of Proceeds.**

 

None.

 

**ITEM3. Defaults Upon Senior Securities.**

 

None.

 

**ITEM4. Submission of Matters to a Vote of Security Holders.**

 

None.

 

**ITEM5. Other Information.**

 

None.

 

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**ITEM 6. Exhibitsand Reports On Form 8-K.**

 

(a)                                  Exhibits

 

Exhibit 31.1 and 31.2: Sarbanes-OxleySection 302 Certification

 

Exhibit 32.1 and 32.2: Sarbanes-Oxley Section 906 Certification

 

 

(b)                                 Reports On Form 8-K.

 

None.

 

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#### **SIGNATURES**

#### ** **

 

In accordance with therequirements of the Securities Exchange Act of 1934, the registrant caused thisreport to be signed on its behalf by the undersigned, thereunto dulyauthorized.

 

 
|                | BOSTON RESTAURANT ASSOCIATES, INC. |
|---------------------|------------------------------------|
|                |                               |   |
|                |                               |   |
| Date: March 8, 2004 | By:                                | /s/ George R. Chapdelaine |   |
|                |                               | George R. Chapdelaine, President and  Chief Executive Officer |
|                     |                                    |  |  |  |

 

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