###  

### **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  October 26, 2003.**                                                                                                                                                                                                                        |
|       |   |                                                                                                                                                                                                                                                                         |
| **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 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 filedall reports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during preceding 12 months (or for such shorter periodthat 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 is anaccelerated filer (as defined in Rule 12b-2 of the ExchangeAct).  Yes   o    No  ý.

 

Indicate the number of shares outstanding of each of theregistrant classes of common stock as of the latest practical date:  Common stock $0.01 par value 7,035,170shares as of December 2, 2003.

 

 

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BOSTON RESTAURANT ASSOCIATES, INC.

 

INDEX

 
| PART I -  FINANCIAL STATEMENTS |                                                                                                                                          |
|--------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                                          |
| Item 1.                        | Financial  Statements                                                                                                                         |   |
|                           |                                                                                                                                          |   |
|                           | Condensed Consolidated Balance Sheets as  of October 26, 2003 (unaudited) and April 27, 2003                                                  |   |
|                           |                                                                                                                                          |   |
|                           | Unaudited Condensed Consolidated  Statements of Operations for the thirteen and twenty-six weeks ended October  26, 2003 and October 27, 2002 |   |
|                           |                                                                                                                                          |   |
|                           | Unaudited  Condensed Consolidated Statements of Cash Flows for the thirteen and twenty-six  weeks ended October 26, 2003 and October 27, 2002 |   |
|                           |                                                                                                                                          |   |
|                           | Notes to Condensed Consolidated  Financial Statements                                                                                         |   |
|                           |                                                                                                                                          |   |
| Item 2.                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                   |   |
|                           |                                                                                                                                          |   |
| Item  3.                       | Quantitative  and Qualitative Disclosure About Market Risk                                                                                    |   |
|                           |                                                                                                                                          |   |
| Item  4.                       | Controls  and Procedures                                                                                                                      |   |
|                           |                                                                                                                                          |
| PART  II - OTHER INFORMATION   |                                                                                                                                          |
|                           |                                                                                                                                          |
| Item 6.                        | Exhibits  and Reports on Form 8-K                                                                                                             |   |
|                           |                                                                                                                                          |
|                           | SIGNATURES                                                                                                                                    |   |

 

2

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PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIES

CONDENSEDCONSOLIDATED BALANCE SHEETS

 
|                                                                                 |   | **October 26,  2003** |       | **April 27,  2003** |   |
|--------------------------------------------------------------------------------------|--------|-----------------------|------------|---------------------|--------|
|                                                                                 |   | **(unaudited)**       |       |                |   |
| ASSETS                                                                               |   |                  |       |                |   |
| Current:                                                                             |   |                  |       |                |   |
| Cash and cash  equivalents                                                           |   | $                     | 1,034,092  |                | $      | 1,106,701 |   |
| Accounts  receivable                                                                 |   | 160,407               |       | 137,123             |   |
| Inventories                                                                          |   | 658,147               |       | 541,030             |   |
| Prepaid expenses  and other                                                          |   | 182,850               |       | 164,610             |   |
|                                                                                 |   |                  |       |                |   |
| Total current  assets                                                                |   | 2,035,496             |       | 1,949,464           |   |
|                                                                                 |   |                  |       |                |   |
| Property and  equipment:                                                             |   |                  |       |                |   |
| Building                                                                             |   | 512,500               |       | 512,500             |   |
| Leasehold  improvements                                                              |   | 8,225,360             |       | 6,739,402           |   |
| Equipment,  furniture and fixtures                                                   |   | 5,449,505             |       | 4,509,527           |   |
|                                                                                 |   |                  |       |                |   |
|                                                                                 |   | 14,187,365            |       | 11,761,429          |   |
|                                                                                 |   |                  |       |                |   |
| Less accumulated  depreciation and amortization                                      |   | 6,926,478             |       | 6,472,336           |   |
|                                                                                 |   |                  |       |                |   |
| Net property and  equipment                                                          |   | 7,260,887             |       | 5,289,093           |   |
|                                                                                 |   |                  |       |                |   |
| Goodwill                                                                             |   | 453,643               |       | 453,643             |   |
|                                                                                 |   |                  |       |                |   |
| Other assets                                                                         |   | 546,497               |       | 581,545             |   |
|                                                                                 |   |                  |       |                |   |
| Total assets                                                                         |   | $                     | 10,296,523 |                | $      | 8,273,745 |   |
|                                                                                 |   |                  |       |                |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                           |   |                  |       |                |   |
| Current  liabilities:                                                                |   |                  |       |                |   |
| Accounts payable                                                                     |   | $                     | 873,697    |                | $      | 580,070 |   |
| Accrued expenses                                                                     |   | 1,182,853             |       | 1,319,805           |   |
| Current  maturities:                                                                 |   |                  |       |                |   |
| Notes payable-stockholder                                                            |   | 5,965                 |       | 5,820               |   |
| Long-term debt                                                                       |   | 399,948               |       | 220,835             |   |
| Obligations  under capital leases                                                    |   | 179,271               |       | 195,365             |   |
|                                                                                 |   |                  |       |                |   |
| Total current  liabilities                                                           |   | 2,641,734             |       | 2,321,895           |   |
|                                                                                 |   |                  |       |                |   |
| Long-term  obligations:                                                              |   |                  |       |                |   |
| Notes  payable-stockholder, less current maturities                                  |   | 91,946                |       | 94,964              |   |
| Long-term debt,  less current maturities                                             |   | 2,723,214             |       | 511,671             |   |
| Obligations  under capital leases, less current maturities                           |   | 161,016               |       | 253,688             |   |
| Subordinated  debentures                                                             |   | 1,450,000             |       | 1,450,000           |   |
| Deferred rent                                                                        |   | 414,280               |       | 396,271             |   |
| Other long-term  liabilities                                                         |   | 527,994               |       | 506,698             |   |
|                                                                                 |   |                  |       |                |   |
| Total  liabilities                                                                   |   | 8,010,184             |       | 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                                                                 |   | (8,682,207            | )          | (8,229,988          | )      |
|                                                                                 |   |                  |       |                |   |
| Total                                                                                |   | 2,311,031             |       | 2,763,250           |   |
| Less:                                                                                |   |                  |       |                |   |
| Treasury stock,  25,000 shares at cost                                               |   | (24,692               | )          | (24,692             | )      |
| Total  stockholders’ equity                                                     |   | 2,286,339             |       | 2,738,558           |   |
|                                                                                 |   |                  |       |                |   |
| Total  liabilities and stockholders’ equity                                     |   | $                     | 10,296,523 |                | $      | 8,273,745 |   |

 

See accompanying notes.

 

3

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BOSTON RESTAURANTSASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OFINCOME

(unaudited)

 
|                                                           |   | **Thirteen  Weeks Ended** |      | **Twenty-six  Weeks Ended** |   |
|----------------------------------------------------------------|--------|---------------------------|-----------|-----------------------------|--------|
|                                                           |   | **October  26,  2003**    |      | **October  27,  2002**      |   | **October  26,  2003** |   | **October  27,  2002** |   |
| Revenues:                                                      |   |                      |      |                        |   |   |   |   |   |
| Restaurant sales                                               |   | $                         | 5,838,068 |                        | $      | 5,750,002 |   | $ | 11,109,035 |   | $ | 11,376,543 |   |
| Royalties                                                      |   | 4,220                     |      | 3,723                       |   | 8,625 |   | 7,160 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Total revenues                                                 |   | 5,842,288                 |      | 5,753,725                   |   | 11,117,660 |   | 11,383,703 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Costs and  expenses:                                           |   |                      |      |                        |   |   |   |   |   |
| Cost of food,  beverages and liquor                            |   | 1,210,885                 |      | 1,110,854                   |   | 2,257,374 |   | 2,200,345 |   |
| Payroll                                                        |   | 1,850,831                 |      | 1,721,012                   |   | 3,602,066 |   | 3,415,704 |   |
| Other operating  expenses                                      |   | 1,800,413                 |      | 1,659,164                   |   | 3,546,464 |   | 3,362,217 |   |
| General and  administrative                                    |   | 623,112                   |      | 609,749                     |   | 1,319,692 |   | 1,235,310 |   |
| Depreciation and  amortization                                 |   | 283,972                   |      | 265,159                     |   | 540,597 |   | 519,349 |   |
| Pre-opening  costs                                             |   | 257,998                   |      | 0                           |   | 315,168 |   | 0 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Total costs and  expenses                                      |   | 6,027,211                 |      | 5,365,938                   |   | 11,581,361 |   | 10,732,925 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Operating Income  (Loss)                                       |   | (184,923                  | )         | 387,787                     |   | (463,701 | ) | 650,778 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Other income                                                   |   | 958                       |      | 1,105                       |   | 218,309 |   | 6,307 |   |
| Interest income                                                |   | 826                       |      | 780                         |   | 1,583 |   | 1,395 |   |
| Interest expense                                               |   | (112,192                  | )         | (105,414                    | )      | (208,410 | ) | (215,062 | ) |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Net Income  (Loss)                                             |   | $                         | (295,331  | )                           | $      | 284,258 |   | (452,219 | ) | $ | 443,418 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Income (Loss)  per share-basic                                 |   | $                         | (0.04     | )                           | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.06 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Income (Loss)  per share-diluted                               |   | $                         | (0.04     | )                           | $      | 0.04 |   | $ | (0.06 | ) | $ | 0.06 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Weighted average  number of common shares outstanding-basic    |   | 7,035,170                 |      | 7,035,170                   |   | 7,035,170 |   | 7,035,170 |   |
|                                                           |   |                      |      |                        |   |   |   |   |   |
| Weighted average  number of dilutive common shares outstanding |   | 7,041,617                 |      | 7,041,358                   |   | 7,039,011 |   | 7,042,553 |   |

 

See accompanying notes

 

4

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BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
|                                                  |   | **Twenty-six  Weeks Ended** |      |
|-------------------------------------------------------|--------|-----------------------------|-----------|
|                                                  |   | **October  26,  2003**      |      | **October  27,  2002** |   |
|                                                  |   |                        |      |   |   |
| Net cash  provided by (used for) operating activities |   | $                           | 117,600   |   | $ | 465,857 |   |
|                                                  |   |                        |      |   |   |
| Cash flows  from  investing activities:          |   |                        |      |   |   |
| Capital  expenditures                                 |   | (2,469,226                  | )         | (165,856 | ) |
|                                                  |   |                        |      |   |   |
| Net cash used  for investing activities               |   | (2,469,226                  | )         | (165,856 | ) |
|                                                  |   |                        |      |   |   |
| Cash flows from  financing activities:                |   |                        |      |   |   |
| Repayments of  long-term debt                         |   | (109,344                    | )         | (959,337 | ) |
| Repayments of  capital lease obligations              |   | (108,766                    | )         | (173,338 | ) |
| Repayments of  stockholder loans                      |   | (2,873                      | )         | (2,732 | ) |
| Proceeds from  long-term debt                         |   | 2,500,000                   |      | 922,305 |   |
|                                                  |   |                        |      |   |   |
| Net cash  provided by (used for) financing activities |   | 2,279,017                   |      | (213,102 | ) |
|                                                  |   |                        |      |   |   |
| Net Increase  (decrease) in cash and cash equivalents |   | (72,609                     | )         | 86,899 |   |
|                                                  |   |                        |      |   |   |
| Cash and cash  equivalents at beginning of period     |   | 1,106,701                   |      | 932,806 |   |
|                                                  |   |                        |      |   |   |
| Cash and cash  equivalents at end of period           |   | $                           | 1,034,092 |   | $ | 1,019,705 |   |

 

See accompanyingnotes.

 

5

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BOSTON RESTAURANT ASSOCIATES, INC.  AND SUBSIDIARIESNOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTSOCTOBER 26, 2003

 

(unaudited)

 

1.  NATURE OFBUSINESS 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, and twenty-six week period, ended October 26, 2003 are not necessarilyindicative of the results that may be expected for the year ending April 25,2004.  For further information, refer tothe consolidated financial statements and footnotes thereto included in theCompany’s annual report on Form 10-K for the year ended April 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 cash flows for the fiscal2004 and fiscal 2003 periods reflect the consolidated operations and cash flowof four casual dining Italian restaurant and twelve Pizzeria Regina restaurantsfor the entire period and one additional casual dining Italian restaurant forpart of the fiscal 2004 period.

 

2.  NET INCOME(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,” which require the disclosure of the effects of fairvalue accounting on earnings and earnings per share of common stock on a proforma basis.

 

6

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In December 2002, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 148, “Accounting for Stock-Based Compensation - Transitionand Disclosure (“SFAS No. 148”), which (i) amends SFAS No. 123,“Accounting for Stock-Based Compensation,” to provide alternative methods oftransition for an entity that voluntarily changes to the fair value basedmethod of accounting for stock-based employee compensation (ii) amends thedisclosure provisions of SFAS No. 123 to require prominent disclosureabout the effects on reported net income of an entity’s accounting policydecisions with respect to stock-based employee compensation and (iii) amendsAPB Opinion No. 28, “Interim Financial Reporting,” to require disclosureabout those effects in interim financial information.  Items (ii) and (iii) of the new requirements in SFAS No. 148are effective for financial statements for fiscal years ending afterDecember 15, 2002.  The Companyadopted items (ii) and (iii) of SFAS No. 148 for the fiscal year endedApril 27, 2003 and continues to account for stock-based compensationutilizing the intrinsic value method. Had compensation cost for the Company’s stock options been determinedbased upon the fair value at the grant date for awards under the plansconsistent with the methodology prescribed under SFAS No. 123, theCompany’s net income (loss) would have been adjusted to the pro forma amountsindicated below along with the additional disclosures required by SFASNo. 148 are as follows:

 
|                                                                             |   | **Thirteen Weeks Ended** |     | **Twenty Six Weeks Ended** |     |
|----------------------------------------------------------------------------------|--------|--------------------------|----------|----------------------------|----------|
|                                                                             |   | **October 26, 2003**     |     | **October 27, 2002**       |     | **October  26, 2003** |   | **October  27, 2003** |   |
|                                                                             |   |                     |     |                       |     |   |   |   |   |
| Net income (loss) as reported                                                    |   | $                        | (295,331 | )                          | $        | 284,258 |   | $ | (452,219 | ) | 443,418 |   |
| Add:                                                                             |   |                     | * * |                       | * * |   | * * |   | * * |
| Stock-based employee compensation expense included  in income (loss), net of tax |   | —                   |     | —                     |     | — |   | — |   |
| Deduct:                                                                          |   |                     | * * |                       | * * |   | * * |   | * * |
| Total stock-based Compensation expense determined  under fair value based method |   |                     | * * |                       | * * |   | * * |   | * * |
|                                                                             |   |                     |     |                       |     |   |   |   |   |
| Net income (loss) - pro forma                                                    |   | (10,762                  | )        | (41,926                    | )        | (21,099 | ) | (62,989 | ) |
|                                                                             |   | $                        | (306,093 | )                          | $        | 242,332 |   | $ | (473,318 | ) | $ | 380,429 |   |
|                                                                             |   |                     |     |                       |     |   |   |   |   |
| Basic and diluted earnings per share:                                            |   |                     |     |                       |     |   |   |   |   |   |   |
| As reported                                                                      |   | $                        | (.04     | )                          | $        | .04 |   | $ | (.06 | ) | $ | .06 |   |
| Pro forma                                                                        |   | $                        | (.04     | )                          | $        | .03 |   | $ | (.07 | ) | $ | .05 |   |

####  

#### 7

#### 

####  

####  

|                            |   | **Thirteen weeks ended** |   | **Twenty-six weeks ended** |   |
|---------------------------------|--------|--------------------------|--------|----------------------------|--------|
|                            |   | **October 26,2003**      |   | **October 27,2002**        |   | **October 26,2003** |   | **October 27,2002** |   |
|                            |   |                     |   |                       |   |   |   |   |   |
| Basic                           |   | 7,035,170                |   | 7,035,170                  |   | 7,035,170 |   | 7,035,170 |   |
| Shares                          |   |                     |   |                       |   |   |   |   |   |
|                            |   |                     |   |                       |   |   |   |   |   |
| Effect of Dilutive  Securities: |   |                     |   |                       |   |   |   |   |   |
|                            |   |                     |   |                       |   |   |   |   |   |
| Options                         |   | 0                        |   | 6,188                      |   | 0 |   | 7,383 |   |
| Diluted                         |   |                     |   |                       |   |   |   |   |   |
| Shares                          |   | 7,035,170                |   | 7,041,358                  |   | 7,035,170 |   | 7,042,553 |   |

 

The following table summarizes securities thatwere outstanding as of October 26, 2003 and October 27, 2002, but not includedin the calculation of net income (loss) per share because such securities areanti-dilutive:

 

 
|                   |   | **Thirteen weeks ended** |   | **Twenty-six weeks ended** |   |
|------------------------|--------|--------------------------|--------|----------------------------|--------|
|                   |   | **October 26,2003**      |   | **October 27,2002**        |   | **October 26,2003** |   | **October 27,2002** |   |
|                   |   |                     |   |                       |   |   |   |   |   |
| Options                |   | 773,800                  |   | 792,146                    |   | 773,800 |   | 792,146 |   |
|                   |   |                     |   |                       |   |   |   |   |   |
| Warrants               |   | 500,000                  |   | 500,000                    |   | 500,000 |   | 500,000 |   |
|                   |   |                     |   |                       |   |   |   |   |   |
| Convertible Debentures |   | 1,160,000                |   | 1,160,000                  |   | 1,160,000 |   | 1,200,000 |   |

 

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.  Thesefunds were used for the construction of the new Polcari’s North End restaurantin Cambridge, Massachusetts.

 

4              NEW ACCOUNTINGPRONOUNCEMENTS

 

In November 2002, the EITF reached a consensus on Issue No. 00-21,“Revenue

 

Arrangements with Multiple Deliverables”. EITF 00-21 addresses certainaspects of the accounting by a vendor for arrangements under which the vendorwill perform multiple revenue generating activities.  EITF 00-21 was  effective for periods beginning afterJune 15, 2003. The adoption of EITF 00-21 did  not  have a materialimpact on the Company’s financial position and results of operations.

 

In April 2003, the FASB issued SFAS No. 149, “Amendment ofStatement 133 on Derivative Instruments and Hedging Activities”.  SFAS No.149 amends and clarifies financial accounting and reporting for derivativeinstruments, including certain derivative instruments embedded in othercontracts (collectively referred to as derivatives) and for hedging activitiesunder SFAS No. 133.  SFAS No. 149 is effective for contracts entered intoor modified after June 30, 2003, and hedging relations designated afterJune 30, 2003, except for those provisions of SFAS No. 149 which relate toSFAS No. 133 implementation issues that have been effective for fiscal quartersthat began prior to June 15, 2003.  For those issues, the provisions thatare currently in effect should continue to be applied in accordance with theirrespective effective dates.  In addition, certain provisions of SFAS No.149, which relate to forward purchases or sales of when-issued securities orother securities that do not yet exist, should be applied to both existingcontracts and new contracts entered into after June 30, 2003.  Theadoption of SFAS No. 149  did not  have a material effect on the Company’sfinancial statements.

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for CertainInstruments with Characteristics of both Liabilities and Equity”.  SFASNo. 150 establishes standards for how an issuer classifies and measures certainfinancial instruments with characteristics of both liabilities and equity. SFAS No. 150 requires that an issuer classify a financial instrument that iswithin the scope of SFAS No. 150 as a liability.  SFAS No. 150 iseffective for financial instruments entered into or modified after May 31,2003, and otherwise is effective beginning September 1, 2003.  Theadoption of SFAS No. 150 did not   havea material effect on the Company’s financial statements.

 

9

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

 

### RESULTSOF OPERATIONS

 

 

# Overview

 

TheCompany’s restaurant sales in the most recent quarter were $5,838,000 comparedto sales of $5,750,000 in the first quarter of fiscal 2003, an increase of1.5%.  This increase in sales was primarilyattributable to the opening of a Polcari’s restaurant in Cambridge in October2003.  The key factors thataffect our operating results are the impact of new store openings, comparablerestaurant sales, which are driven by customer counts and check average, and as well as our ability to manageoperating expenses such as food cost, labor and benefits and other costs.  Changes in the number of restaurants inoperation can increase or decrease total company revenues and expenses, and thebuild out and opening of new stores can affect operating profits.  The opening of a new Cambridge,Massachusetts Polcari’s North End restaurant in October 2003 illustrates thisfact.  The Company’s restaurant sales in the most recent quarter were $5,838,000compared to sales of $5,271,000 in the first quarter of fiscal 2004, asequential increase of 11%, but net loss per share increased from $.02 pershare in the first quarter of fiscal 2004 to $.04 per share in the secondquarter of fiscal 2004, both primarily attributable to the impact of opening ofthe new restaurant..

 

Each restaurant unit’s contribution margin will vary over the life ofthe restaurant.  Margins tend to be lowwhen a restaurant is first opened until customer traffic reaches plannedlevels.  Margins can also deteriorate atthe end of a unit’s life cycle due to a decline in customer traffic caused by avariety of factors outside the control of the Company.  These economic conditions impact both thePizzeria Regina units and the Polcari’s North End units.

 

There were 17 units in operation for part of the second quarter offiscal 2004 and 16 units in operation for the balance of the first and secondquarters of fiscal 2003 and the first and second quarters of fiscal 2003.   The following table sets forth all revenues,costs and expenses as a percentage for the periods indicated for revenue andexpense items included in the consolidated statements of operations:

 

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|                                          |   | **Thirteen Weeks Ended** |   | **Twenty-Six Weeks Ended**  |   |
|-----------------------------------------------|--------|--------------------------|--------|-----------------------------|--------|
|                                          |   | **October 26,  2003**    |   | **October  27,  2002** |   | **October 26,  2003** |   | **October 27,  2002** |   |
|                                          |   |                     |   |                        |   |   |   |   |   |
| 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 |   | 31                       |   | 29                          |   | 32 |   | 29 |   |
| General and administrative                    |   | 10                       |   | 10                          |   | 12 |   | 11 |   |
| Depreciation and amortization                 |   | 5                        |   | 5                           |   | 5 |   | 5 |   |
| Pre-opening costs                             |   | 4                        |   | —                      |   | 3 |   | — |   |
| Operating income (loss)                       |   | (3                       | )      | 7                           |   | (4 | ) | 6 |   |
| Interest expense, net                         |   | (2                       | )      | (2                          | )      | (2 | ) | (2 | ) |
| Other income                                  |   | —                   |   | —                      |   | 2 |   | — |   |
| Net income (loss)                             |   | (5                       | )%     | 5                           | %      | (4 | )% | 4 | % |

 

Thirteen Weeks Ended October 26, 2003 as Compared toThirteen Weeks ended October 27, 2002 Restaurant Sales.

 

Restaurant sales in the most recent quarter were $5,838,000 compared torestaurant sales in the prior year’s period of $5,750,000.  The Company’s management believes that theincrease in revenue was primarily attributable to the opening of the newPolcari’s North End restaurant in Cambridge, Massachusetts on September 30,2003.

 

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Net sales at the Company’s Pizzeria Regina restaurants increased to$2,930,000 in the current period from $2,912,000 in the prior year’speriod.  The increase in restaurantsales was principally due to the improving economy.

 

Net sales at the Company’s full service casual dining restaurantsincreased to $2,894,000 in the current period from $2,833,000 in the prioryear’s period.  This increase wasprimarily attributable to the opening of the new Polcari’s North End restaurantin Cambridge, Massachusetts.

 

Net sales at the Company’s commissary were $14,000 in the currentperiod compared to $5,000 in the prior year’s period.

 

# Royalties

 

During both periods in fiscal 2004 and fiscal 2003, the Companyrecognized $4,000 in royalties from a domestic Pizzeria Regina franchise.

#  

# Costsand Expenses

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage and liquor was $1,211,000 in the currentperiod compared to $1,111,000 in the prior year’s period. The dollar increasewas due in part to the opening of the new Cambridge, Massachusetts Polcari’sNorth End restaurant and in part to an increase in the amount of product soldat existing restaurants.  The increaseas a percentage of total revenues was primarily attributable to increases incosts from suppliers generally.

 

The cost of food, beverage and liquor at Pizzeria Regina restaurantswas $483,000 in the current period compared to $444,000 in the prior year’speriod due to an increase in the amount of product sold and increases in costfrom suppliers.

 

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

 

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The cost of food, beverage and liquor at the Company’s full servicecasual dining restaurants was $728,000 in the current period compared to$667,000 in the prior year’s period. The dollar increase was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant. The cost as apercentage of restaurant sales was 25% in the fiscal 2004 period compared to24% in the fiscal 2003 period.  Theincrease as a percentage of restaurant sales was principally due to the openingof the Cambridge, Massachusetts Polcari’s North End restaurant, which generallyincurs higher costs in the beginning of operations, and due to increases incosts from suppliers in general.

 

# OtherOperating Expenses

 

Payroll Expenses.

 

Payroll expenses were $1,851,000 in the current period, compared to$1,721,000 in the prior year’s period. The dollar increase in payroll expenses was primarily due to opening ofthe new Cambridge, Massachusetts Polcari’s North End restaurant and an increasein employee benefit health care costs. The increase as a percentage of totalrevenues was attributable to the same two factors.

 

Payroll expenses of the Pizzeria Regina restaurants were $727,000 inthe current period compared to $718,000 in the prior year’s period.  This dollar increase was primarily due to anincreased cost in employee health benefits. Payroll expenses at theserestaurants were 25% of restaurant sales in both fiscal 2004 and fiscal 2003periods.

 

Payroll expenses at the Company’s full service casual diningrestaurants were $1,021,000 in the current period compared to $907,000 in theprior year’s period.  This dollarincrease was primarily due to the opening of the new Cambridge, MassachusettsPolcari’s North End restaurant and an increase in employee benefit costs.Payroll expenses at these restaurants were 35% of restaurant sales in thecurrent period compared to 32% in the prior year’s period.  The increase as a percentage of restaurantsales was primarily attributable to the opening of the new Cambridge,Massachusetts Polcari’s North End restaurant and to an increase in employeebenefit costs.

 

Payroll expenses at the Company’s Commissary were $103,000 for thefiscal 2004 period as compared to $96,000 in the fiscal 2003 period.

 

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Other Operating Expenses,Exclusive of Payroll.

 

Other operating expenses,exclusive of payroll, were $1,800,000 in the current period compared to$1,659,000 in the prior year’s period. The increase in operating expenses,exclusive of payroll, as a percentage of total revenues was primarily due tothe opening of the new Cambridge, Massachusetts Polcari’s North End restaurant.

 

Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $962,000 in thecurrent period, compared to $948,000 in the prior year’s period.  This dollar increase is primarilyattributable to the additional cost of goods. Other operating expenses, exclusive of payroll, for the Pizzeria Reginarestaurants as a percentage of restaurant sales were 33% in both fiscal 2004and fiscal 2003 periods.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $809,000 in the current period compared to $683,000 in the prior year’speriod. The dollar increase was primarily attributable to the costs associatedwith the opening of the new Cambridge, Massachusetts Polcari’s North Endrestaurant and to a $20,000 increase in advertising costs.  Other operating expenses, exclusive ofpayroll, for the Company’s full service casual dining restaurants as apercentage of restaurant sales were 28% in the current period compared to 24%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 toadvertising costs.

 

Other operating expensesalso include commissary expenses, which were $29,000 for the fiscal 2004 periodas compared to $28,000 in the fiscal 2003 period.

 

Generaland Administrative Expenses.

 

General andadministrative expenses were $623,000 in the current period, compared to$610,000 in the prior year’s period. This $13,000 dollar increase was primarily attributable to consultingcosts and legal fees.

 

General andadministrative expenses as a percentage of restaurant sales were 11% in bothfiscal 2004 and fiscal 2003 periods.

 

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Depreciationand Amortization Expenses.

 

Depreciation andamortization expense was $284,000 in the current period, compared to $265,000in the prior year’s period.  This dollarincrease was attributable to the opening of a new Polcari’s North End restaurantin Cambridge, Massachusetts.  Depreciation and amortization expenses as a percentage of restaurantsales were 5% in both fiscal 2004 and fiscal 2003 periods.

 

Pre-Opening Costs

 

Pre-opening costsconsisting primarily of labor, advertising, rent and training for the current periodwere $258,000.  These costs areattributable to the opening of a new Polcari’s North End restaurant inCambridge, Massachusetts.

 

Other Income

 

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

 

InterestExpense and Interest Income.

 

Interest expense was$112,000 in the current period as compared to $105,000 in the prior year’speriod. This dollar decrease was primarily due to an increase in borrowingunder the Company’s credit facility.

 

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

 

Twenty-Six Weeks EndedOctober 26, 2003

 

Restaurant sales for thetwenty-six weeks ended October 26, 2003 were $11,109,000 compared to restaurantsales in the prior year’s period of $11,377,000.  The Company’s management believes that the decrease in revenuewas primarily attributable to the economic slow down in the Northeast whichbegan to turn around in the second quarter of fiscal 2004 and to the loss ofrevenue due to the temporary closing of the Faneuil Hall Pizzeria Reginalocation from May 9, 2003 to July 2, 2003.

 

Net sales at theCompany’s Pizzeria Regina restaurants decreased to $5,510,000 in the currenttwenty- six week period from $5,771,000 in the prior year’s period.  The decrease in restaurant sales wasprincipally due to the economic slow down in the Northeast and the temporaryclosing of the Faneuil Hall location from May 9, 2003 to July 2, 2003.  The loss of revenue from that location waspartially compensated by payments under the Company’s insurance policies, whichare included in   Other Income.

 

Net sales at theCompany’s full service casual dining restaurants decreased to $5,574,000 in thetwenty-six week current period from $5,596,000 in the prior year’s period.  This decrease was

 

15

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primarily attributable tothe economic slow down in the Northeast partially offset by the opening of thenew Polcari’s North End restaurant in Cambridge, Massachusetts on September 30,2003.

 

Net sales at theCompany’s commissary were $25,000 in the current period compared to $10,000 inthe prior year’s period.

 

# Royalties

 

During the current yearperiod, the Company recognized $9,000 in royalties from a domestic PizzeriaRegina franchise compared to $7,000 in royalties in the prior year’s period.

#  

# Costs and Expenses

 

Costof Food, Beverages and Liquor.

 

The cost of food,beverage and liquor was $2,257,000 in the current twenty-six week periodcompared to $2,200,000 in the prior year’s period. The dollar increase was duein part to the opening of the new Cambridge, Massachusetts Polcari’s North Endrestaurant .  The increase as apercentage of total revenues was primarily attributable to increases in costsfrom suppliers generally.

 

The cost of food,beverage and liquor at Pizzeria Regina restaurants was $883,000 in the currentperiod compared to $881,000 in the prior year’s period.

 

The cost as a percentageof restaurant sales at the Pizzeria Regina restaurants was 16% in the fiscal2004 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 the Company’s full service casual dining restaurants was$1,374,000 in the current twenty-six week period compared to $1,319,000 in theprior year’s period.  The dollarincrease was primarily due to opening of the new Cambridge, MassachusettsPolcari’s North End restaurant. The cost as a percentage of restaurant sales atthese restaurants was 25% in the fiscal 2004 period compared to 24% in thefiscal 2003 period.  The increase as apercentage of sales was principally due to the opening of the new Cambridge,Massachusetts Polcari’s North End

 

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restaurant whichgenerally incurs higher costs in the beginning of operations and increases incosts from suppliers in general.

 

# Other Operating Expenses

 

PayrollExpenses.

 

Payroll expenses were$3,602,000 in the current period, compared to $3,416,000 in the prior year’stwenty-six week period.  The dollarincrease in payroll expenses was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant and to an increase inemployee health care costs. The increase as a percentage of total revenues wasattributable to the fact that during the temporary closing of the Faneuil Halllocation the Company continued to incur payroll costs associated with thatlocation, as well as to the opening of the new Cambridge, MassachusettsPolcari’s North End restaurant and to the increased employee benefit costs.

 

Payroll expenses of thePizzeria Regina restaurants were $1,472,000 in the current twenty-six weekperiod compared to $1,448,000 in the prior year’s period.  This dollar increase was primarily due to anincreased cost in employee health benefits. Payroll expenses at theserestaurants were 27% of restaurant sales in the current period compared to 25%in the prior year’s period.  Theincrease as a percentage of restaurant sales was primarily due to the temporaryclosing of the Faneuil Hall location and to an increase in employee benefitcosts.

 

Payroll expenses at theCompany’s full service casual dining restaurants were $1,929,000 in the currenttwenty-six week period compared to $1,781,000 in the prior year’s period.  This dollar increase was primarily due tothe opening of the new Polcari’s North End restaurant in Cambridge,Massachusetts and an increase in employee benefit costs. Payroll expenses atthese restaurants were 35% of restaurant sales in the current period comparedto 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 theCompany’s Commissary were $201,000 for the fiscal 2004 period as compared to$187,000 in the fiscal 2003 period.

 

OtherOperating Expenses, Exclusive of Payroll.

 

Other operating expenses,exclusive of payroll, were $3,546,000 in the current twenty-six week periodcompared to $3,362,000 in the prior year’s period. The increase in operatingexpenses, exclusive of payroll, as a percentage of total revenues was primarilydue to the reduction in revenue.

 

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Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $1,913,000 inthe current twenty-six week period, compared to $1,905,000 in the prior year’speriod.  Other operating expenses,exclusive of payroll, for the Pizzeria Regina restaurants as a percentage ofrestaurant sales were 35% in the current period compared to 33% in the prioryear’s period.  The increase as apercentage of sales was primarily attributable to the temporary closing of theFaneuil Hall location, where the Company nonetheless continued to incur some ofsuch costs without any corresponding revenue.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $1,579,000 in the current twenty-six week period compared to $1,405,000 inthe prior year’s period. The dollar increase was primarily attributable to theopening of the new Cambridge, Massachusetts Polcari’s North End restaurant, aswell as advertising costs and rent expenses. Other operating expenses, exclusive of payroll, for the Company’s fullservice casual dining restaurants as a percentage of restaurant sales were 28%in the current period compared to 25% 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 expensesalso include commissary expenses, which were $54,000 in fiscal 2004 periodcompared to $52,000 in fiscal 2003 period

 

Generaland Administrative Expenses.

 

General andadministrative expenses were $1,320,000 in the current period, compared to$1,235,000 in the prior year’s period. This dollar increase was primarily attributable to a $72,000 increase inconsulting costs and legal fees. General and administrative expenses as apercentage of restaurant sales were 12% in the fiscal 2004 period compared to11% in the fiscal 2003 period.

 

Depreciationand Amortization Expenses.

 

Depreciation andamortization expense was $541,000 in the current period, compared to $519,000in the prior year’s period. Depreciation and amortization expense as apercentage of restaurant sales were 5% in both fiscal 2004 and fiscal 2003periods.

 

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Pre-Opening Costs

 

Pre-opening costs for thecurrent period were $315,000.  Thesecosts are attributable to the opening of a new Polcari’s North End restaurantin Cambridge, Massachusetts which consist of labor, advertising, rent andtraining materials.

 

Other Income

 

Other income was $218,000in the current period compared to $6,000 in the prior year’s period.  The increase in other income is attributableto insurance proceeds related to the temporary closing of Faneuil Hall PizzeriaRegina.

 

InterestExpense and Interest Income.

 

Interest expense was$208,000 in the current period as compared to $215,000 in the prior year’speriod.

 

Interest income was$2,000 in fiscal 2004 compared to $1,000 in fiscal 2003 period.

 

### LIQUIDITY AND CAPITAL RESOURCES

 

AtOctober 26, 2003, the Company had negative net working capital of $606,000compared to negative net working capital of $372,000 at April 27, 2003.  It is common for companies in the restaurantindustry to operate with net working capital deficits.  We are able to operate with a substantialworking capital deficit because (1) restaurant operations and most foodservice operations are conducted primarily on a cash (and cash equivalent)basis with a low level of accounts receivable, (2) rapid turnover allows alimited investment in inventories, and (3) accounts payable for food,beverages and supplies usually become due after the receipt of cash from therelated sales.  Accordingly, the Companybelieves that its existing resources described below will be sufficient toallow it to meet its existing obligations over the next twelve months,notwithstanding that it may have a net working capital deficit.

 

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During the twenty-sixweeks ended October 26, 2003, the Company had a net decrease in cash and cashequivalents of  $73,000, reflecting netcash provided by  operating activitiesof $118,000, net cash used for investing activities of $2,469,000 and net cashprovided by financing activities of $2,279,000.

 

Net cash used foroperating activities included a reduction in accrued expenses of $137,000, anincrease in accounts receivables of $23,000, an increase in inventories of$117,000, an increase in prepaid expenses of $18,000 an increase in otherassets of $9,000, and a net loss of $452,000, which were partially offset by anincrease in deferred rent of $18,000, an increase in accounts payable of$294,000, an increase in other long-term liabilities of $21,000 anddepreciation and amortization expense of $541,000.  Net cash used for investing activities reflects costs associatedwith leasehold improvements and with the purchase of equipment, furniture andfixtures for the new Cambridge, Massachusetts Polcari’s North End Restaurantand for other Company restaurants.  Netcash provided by financing activities of $2,279,000 consisted of amounts drawndown under the Company’s credit facility with Commerce Bank and Trust, offsetby the net repayments of long term debt, lease obligations and stockholdersloans.

 

AtOctober 26, 2003, the Company had current liabilities of $2,642,000, including$874,000 of accounts payable, $1,183,000 of accrued liabilities and currentmaturities of long term obligations in the amount of $585,000.  At October 26, 2003, the Company hadlong-term obligations, less current maturities, in the amount of $5,368,000,including $2,723,000 due under its credit facility with Commerce Bank andTrust, $92,000 of notes payable to a stockholder, $161,000 due under capitallease obligations, $1,450,000 of convertible subordinated debentures, $414,000of deferred rent, and $528,000 of other long-term liabilities.

 

On April 30, 2002,the Company entered into its new $3,500,000 credit facility with Commerce Bankand Trust Company (the “Credit Facility”). The Credit Facility permits the Company to borrow amounts to pay thecosts for new restaurant openings and repay over a fixed term of either four orfive years.   No new borrowings may bemade under the Credit Facility after April 30, 2005.  Each borrowing under the Credit Facility bears interest at thebank’s base rate plus 2.0%, subject to an annual adjustment to the bank’s thencurrent base 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.  Both notesbear interest at 6% and are payable over four and five years as of October 26,2003.

 

All borrowings under theCredit Facility are collateralized by substantially all of the assets of theCompany and are subject to various financial covenants.  The Company was not in compliance with thecertain financial covenants of the Credit Facility at October 26, 2003, howeverCommerce Bank and Trust Company has waived the covenants for fiscal periodended October 26, 2003.

 

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The Company plans to opentwo additional Pizzeria Regina restaurants in the next 12 months and estimatesthat the cost of opening the two new restaurants will be approximately$900,000.  The Company believes that itsanticipated cash flow from operations, together with the Credit Facility, willbe sufficient to fund its working capital needs for at least the next 12 monthsand to fund the addition of two new restaurants.  The Company may pursue additional debt or equity financing if theBoard of Directors determines this to be necessary or appropriate.  However, it cannot guarantee that this willbe the case or that the bank financing will actually be available, under theCredit Facility or otherwise, for each restaurant when required.

 

NEW ACCOUNTINGPRONOUNCEMENTS

 

In November 2002,the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements withMultiple Deliverables”. EITF 00-21 addresses certain aspects of the accountingby a vendor for arrangements under which the vendor will perform multiplerevenue generating activities.  EITF 00-21 was effective for periods beginningafter June 15, 2003. The adoption of EITF 00-21 did not have a materialimpact on the Company’s financial position and results of operations.

 

In April 2003, theFASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instrumentsand Hedging Activities”.  SFAS No. 149 amends and clarifies financialaccounting and reporting for derivative instruments, including certainderivative instruments embedded in other contracts (collectively referred to asderivatives) and for hedging activities under SFAS No. 133.  SFAS No. 149is effective for contracts entered into or modified after June 30, 2003,and hedging relations designated after June 30, 2003, except for thoseprovisions of SFAS No. 149 which relate to SFAS No. 133 implementation issuesthat have been effective for fiscal quarters that began prior to June 15,2003.  For those issues, the provisions that are currently in effectshould continue to be applied in accordance with their respective effectivedates.  In addition, certain provisions of SFAS No. 149, which relate toforward purchases or sales of when-issued securities or other securities thatdo not yet exist, should be applied to both existing contracts and newcontracts entered into after June 30, 2003.  The adoption of SFAS No.149 did not   have a material effect onthe Company’s financial statements.

 

In May 2003, theFASB issued SFAS No. 150, “Accounting for Certain Instruments withCharacteristics of both Liabilities and Equity”.  SFAS No. 150 establishesstandards for how an issuer classifies and measures certain financialinstruments with characteristics of both liabilities and equity.  SFAS No.150 requires that an issuer classify a financial instrument that is within thescope of SFAS No. 150 as a liability.  SFAS No. 150 is effective forfinancial instruments entered into or modified after May 31, 2003, andotherwise is effective beginning September 1, 2003.  The adoption ofSFAS No. 150 did not have a material effect on the Company’s financialstatements.

 

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# “SAFE HARBOR” STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORMACT 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 Private SecuritiesLitigation 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.  Quantitative and QualitativeDisclosure about Market Risk

 

Interest Rate Risk.

 

We have exposure tointerest rate risk related to certain instruments entered into for other thantrading purposes.  Specifically,borrowings under the Credit Facility described in Item 2 bear interest at avariable rate based on the bank’s prime rate plus 2%. A 100 basis pointchange in the Credit Facility interest rate (approximately 6% at October 26,2003) 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 October 26, 2003. 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.

 

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

 

CommodityPrice Risk.

 

Many of the food productsand other operating essentials purchased by us are affected by commoditypricing and are, therefore, subject to price volatility caused by weather,production problems, delivery difficulties and other factors that are beyondour control.  Our supplies and rawmaterials are available from several sources and we are not dependent upon anysingle source for these items. The Company negotiates directly with wholesalesuppliers of certain high volume food ingredients such as cheese, tomato sauce,and flour to ensure consistent quality and competitive pricing. Theseingredients are then purchased for the Company by a third party independentdistributor at the negotiated price and redistributed to the Company’srestaurants.  All other food ingredientsand beverage products are purchased directly by the general manager of eachrestaurant in accordance with corporate guidelines.  Certain significant items that could be subject to pricefluctuations are cheese and flour products. The Company believes that it willbe able to pass through increased commodity costs by adjusting menu pricing inmost cases. However, we believe that any changes in commodity pricing thatcannot be offset by changes in menu pricing or other product deliverystrategies would not be material.

 

ITEM  4.  Controlsand Procedures

 

Asof October 26, 2003, our Chief Executive Officer and Chief Financial Officerperformed an evaluation of the effectiveness of the Company’s disclosurecontrols and procedures (as defined in SEC Rule 13a-15(e)), which have beendesigned to ensure that material information related to the Company is madeknown to them and timely disclosed.  TheCompany’s management, including the CEO and CFO, does not expect that theCompany’s disclosure controls or internal controls will prevent all error andall fraud. A control system, no matter how well conceived and operated, canprovide only reasonable, not absolute, assurance that the objectives of thecontrol system are met.  Further, thedesign of a control system must reflect the fact that there are resourceconstraints, and the benefits of controls must be considered relative to theircosts. Because of the inherent limitations in all control systems, noevaluation of controls can provide absolute assurance that all control issuesand instances of fraud, if any, within the company have been detected.Notwithstanding the foregoing, however, based upon their evaluations, our CEOand CFO concluded that the Company’s disclosure controls are effective toprovide a reasonable level of assurance that material information relating tothe Company is accumulated and communicated to management, including the CEOand CFO, as appropriate, to allow timely decisions regarding requireddisclosure.

 

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Therehave been no changes in the Company’s internal control over financial reportingthat occurred during the period covered by this report that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.

 

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## PART II

 

## OTHER INFORMATION

 

ITEM1. Legal Proceedings.

 

The Company is involvedin various legal matters in the ordinary course of its business.  Each of these matters is subject to variousuncertainties and some of these matters may be resolved unfavorably to theCompany.  Management believes that anyliability that may ultimately result from these matters will not have amaterial adverse effect on the Company’s financial 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.

###  

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

 
| (a)    | Exhibits                                               |
|--------|--------------------------------------------------------|
|   |                                                   |
|   | Exhibit  31.1 Sarbanes-Oxley Section 302 Certification |
|   |                                                   |
|   | Exhibit  31.2 Sarbanes-Oxley Section 302 Certification |
|   |                                                   |
|   | Exhibit  32.1 Sarbanes-Oxley Section 906 Certification |
|   |                                                   |
|   | Exhibit 32.2  Sarbanes-Oxley Section 906 Certification |
|   |                                                   |
| (b)    | Reports  On Form 8-K.                                  |

 

None.

 

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#### SIGNATURES

 

 

Inaccordance with the requirements of the Securities Exchange Act of 1934, theregistrant caused this report to be signed on its behalf by the undersigned,thereunto duly authorized.

 

 
|                    |   |   | BOSTON  RESTAURANT ASSOCIATES, INC. |
|-------------------------|--------|--------|-------------------------------------|
|                    |   |   |                                |   |
|                    |   |   |                                |   |
| Date:  December 3, 2003 |   |   | By:                                 | /s/  George R. Chapdelaine |   |
|                    |   |   |                                | George  R. Chapdelaine, President and |
|                    |   |   |                                | Chief  Executive Officer |
|                         |        |        |                                     |  |  |  |

 

26

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