###  

### **U.S. SECURITIESAND 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 23,  2005.**                                                                                                                                                                                                                                              |
|       |       |                                                                                                                                                                                                                                                                                                    |
| **o**      | ** ** | **Transition report under Section 13 or 15(d) of the Securities  Exchange Act of 1934.**                                                                                                                                                                                                           |
|       |       |                                                                                                                                                                                                                                                                                                    |
| ** ** | ** ** | **For the transition period from                         to                       .** |

 

**CommissionFile Number**

**0-18369**

 

**BOSTONRESTAURANT ASSOCIATES, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

 
| **Delaware**                                                       | ** ** | **61-1162263**                   |
|--------------------------------------------------------------------|------------|----------------------------------|
| (State  or Other  Jurisdiction of  Incorporation or  Organization) |       | IRS  Employer Identification No. |
|                                                               |       |                             |
| **999  Broadway  Saugus, Massachusetts  01906**                    |
| (Address  of Principal  Executive Offices)                         |
|                                                               |
| **(781)  231-7575**                                                |
| (Registrant’s  Telephone  Number Including area  code)        |

 

Indicate by check whether the registrant: (1) 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 Exchange Act).  Yes o  No ý.

 

Indicate the number of shares outstanding of each of theregistrant classes of common stock as of the latest practical date:  Common stock $0.01 par value 7,035,170 sharesas of February 28, 2005.

 

 

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BOSTON RESTAURANTASSOCIATES, INC.

 

INDEX

 
| PART I - FINANCIAL  STATEMENTS |                                                                                                                                                     |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------|
|                           |                                                                                                                                                     |   |
| Item 1.                        | Financial Statements                                                                                                                                     |   |
|                           |                                                                                                                                                     |   |
|                           | Condensed  Consolidated Balance Sheets as of January 23, 2005 (unaudited) and April 25,  2004                                                  |   |
|                           |                                                                                                                                                     |   |
|                           | Unaudited  Condensed Consolidated Statements of Operations for the thirteen and  thirty-nine weeks ended January 23, 2005 and January 25, 2004 |   |
|                           |                                                                                                                                                     |   |
|                           | Unaudited  Condensed Consolidated Statements of Cash Flows for the thirty-nine weeks  ended January 23, 2005 and January 25, 2004              |   |
|                           |                                                                                                                                                     |   |
|                           | Notes  to Condensed Consolidated Financial Statements                                                                                                    |   |
|                           |                                                                                                                                                     |   |
| Item  2.                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                              |   |
|                           |                                                                                                                                                     |   |
| Item  3.                       | Quantitative  and Qualitative Disclosure About Market Risk                                                                                               |   |
|                           |                                                                                                                                                     |   |
| Item 4.                        | Controls and  Procedures                                                                                                                                 |   |
|                           |                                                                                                                                                     |   |
| PART II - OTHER INFORMATION    |                                                                                                                                                     |
|                           |                                                                                                                                                     |   |
| Item 6.                        | Exhibits                                                                                                                                                 |   |
|                           |                                                                                                                                                     |   |
|                           | SIGNATURES                                                                                                                                               |   |

 

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PART 1 - FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIESCONDENSED CONSOLIDATEDBALANCE SHEETS

 
| ** **                                                                              | ** ** | **January 23,  2005** | ** ** | **April 25,  2004** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------|------------|--------------------------|------------|
| ** **                                                                              | ** ** | **(unaudited)**            | ** ** | ** **               | ** ** |
| ASSETS                                                                                  |       |                       |       |                     |       |
| Current:                                                                                |       |                       |       |                     |       |
| Cash and cash equivalents                                                               |       | $                          | 1,068,621  |                     | $          | 651,754 |   |
| Accounts receivable                                                                     |       | 118,281                    |       | 169,975                  |       |
| Inventories                                                                             |       | 734,919                    |       | 735,910                  |       |
| Prepaid expenses and other                                                              |       | 170,518                    |       | 194,303                  |       |
| Property held for sale                                                                  |       | 75,420                     |       | 0                        |       |
|                                                                                    |       |                       |       |                     |       |
| Total current assets                                                                    |       | 2,167,759                  |       | 1,751,942                |       |
|                                                                                    |       |                       |       |                     |       |
| Property and equipment:                                                                 |       |                       |       |                     |       |
| Building                                                                                |       | 512,500                    |       | 512,500                  |       |
| Leasehold improvements                                                                  |       | 7,344,433                  |       | 8,480,782                |       |
| Equipment, furniture and fixtures                                                       |       | 5,120,309                  |       | 5,764,996                |       |
|                                                                                    |       |                       |       |                     |       |
|                                                                                    |       | 12,977,242                 |       | 14,758,278               |       |
|                                                                                    |       |                       |       |                     |       |
| Less accumulated depreciation and amortization                                          |       | 8,190,700                  |       | 9,736,890                |       |
|                                                                                    |       |                       |       |                     |       |
| Net property and equipment                                                              |       | 4,786,542                  |       | 5,021,388                |       |
|                                                                                    |       |                       |       |                     |       |
| Goodwill                                                                                |       | 453,643                    |       | 453,643                  |       |
|                                                                                    |       |                       |       |                     |       |
| Other assets                                                                            |       | 463,353                    |       | 513,834                  |       |
|                                                                                    |       |                       |       |                     |       |
| Total assets                                                                            |       | $                          | 7,871,297  |                     | $          | 7,740,807 |   |
|                                                                                    |       |                       |       |                     |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)                                      |       |                       |       |                     |       |
| Current liabilities:                                                                    |       |                       |       |                     |       |
| Accounts payable                                                                        |       | $                          | 1,193,284  |                     | $          | 1,058,469 |   |
| Accrued expenses                                                                        |       | 1,484,971                  |       | 1,416,765                |       |
| Current maturities:                                                                     |       |                       |       |                     |       |
| Notes payable-stockholder                                                               |       | 6,343                      |       | 6,114                    |       |
| Long-term debt                                                                          |       | 2,796,463                  |       | 3,383,158                |       |
| Obligations under capital leases                                                        |       | 112,270                    |       | 191,845                  |       |
|                                                                                    |       |                       |       |                     |       |
| Total current liabilities                                                               |       | 5,593,331                  |       | 6,056,351                |       |
|                                                                                    |       |                       |       |                     |       |
| Long-term obligations:                                                                  |       |                       |       |                     |       |
| Notes payable-stockholder, less current maturities                                      |       | 84,064                     |       | 88,850                   |       |
| Long-term debt, less current maturities                                                 |       | 0                          |       | 0                        |       |
| Obligations under capital leases, less current  maturities                              |       | 0                          |       | 61,842                   |       |
| Subordinated debentures                                                                 |       | 1,450,000                  |       | 1,450,000                |       |
| Deferred rent                                                                           |       | 405,218                    |       | 501,469                  |       |
| Other long-term liabilities                                                             |       | 225,855                    |       | 251,016                  |       |
|                                                                                    |       |                       |       |                     |       |
| Total liabilities                                                                       |       | 7,758,468                  |       | 8,409,528                |       |
|                                                                                    |       |                       |       |                     |       |
| Commitments and contingencies                                                           |       |                       |       |                     |       |
|                                                                                    |       |                       |       |                     |       |
| Stockholders’ equity(deficit) :                                                    |       |                       |       |                     |       |
| Preferred stock, $.01 par value, 10,000,000 shares  authorized, 1,147,056 shares issued |       | 946,278                    |       | 0                        |       |
| Common stock, $.01 par value, 25,000,000 shares  authorized, 7,060,170 shares issued    |       | 70,602                     |       | 70,602                   |       |
| Additional paid in capital - common                                                     |       | 10,960,396                 |       | 10,952,635               |       |
| Accumulated deficit                                                                     |       | (11,839,755                | )          | (11,667,266              | )          |
|                                                                                    |       |                       |       |                     |       |
| Total                                                                                   |       | 137,521                    |       | (644,029                 | )          |
| Less:                                                                                   |       |                       |       |                     |       |
| Treasury stock, 25,000 shares at cost                                                   |       | (24,692                    | )          | (24,692                  | )          |
| Total stockholders’ equity(deficit)                                                |       | 112,829                    |       | (668,721                 | )          |
|                                                                                    |       |                       |       |                     |       |
| Total liabilities and stockholders’ equity(deficit)                                |       | $                          | 7,871,297  |                     | $          | 7,740,807 |   |

 

See accompanying notes.

 

3

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BOSTON RESTAURANTS ASSOCIATES,INC. ANDSUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)

 
| ** **                                                     | ** ** | **Thirteen Weeks Ended**   | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                                     | ** ** | **January 23,  2005** | ** ** | **January 25,  2004**  | ** ** | **January 23,  2005** | ** ** | **January 25,  2004** | ** ** |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Revenues:                                                      |       |                       |       |                        |       |   |   |   |   |
| Restaurant sales                                               |       | $                          | 6,804,415  |                        | $          | 6,182,404 |   | $ | 20,337,238 |   | $ | 17,291,439 |   |
| Royalties                                                      |       | 0                          |       | 4,090                       |       | 269 |   | 12,715 |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Total revenues                                                 |       | 6,804,415                  |       | 6,186,494                   |       | 20,337,507 |   | 17,304,154 |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Costs and expenses:                                            |       |                       |       |                        |       |   |   |   |   |
| Cost of food, beverages and liquor                             |       | 1,468,827                  |       | 1,277,878                   |       | 4,495,009 |   | 3,535,252 |   |
| Payroll                                                        |       | 2,167,665                  |       | 2,011,258                   |       | 6,441,230 |   | 5,613,324 |   |
| Other operating expenses                                       |       | 2,239,082                  |       | 2,031,734                   |       | 6,513,801 |   | 5,578,197 |   |
| General and administrative                                     |       | 535,056                    |       | 554,002                     |       | 1,751,199 |   | 1,873,694 |   |
| Depreciation and amortization                                  |       | 273,460                    |       | 333,929                     |       | 817,803 |   | 874,526 |   |
| Pre-opening costs                                              |       | 0                          |       | 2,497                       |       | 93,196 |   | 317,665 |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Total costs and expenses                                       |       | 6,684,090                  |       | 6,211,298                   |       | 20,112,238 |   | 17,792,658 |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Operating Income(Loss)                                         |       | 120,325                    |       | (24,804                     | )          | 225,269 |   | (488,504 | ) |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Other income                                                   |       | 5,715                      |       | 1,495                       |       | 10,188 |   | 219,804 |   |
| Interest income                                                |       | 435                        |       | 672                         |       | 1,246 |   | 2,255 |   |
| Interest expense                                               |       | (121,661                   | )          | (116,342                    | )          | (409,192 | ) | (324,752 | ) |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Net Income(Loss)                                               |       | $                          | 4,814      |                        | $          | (138,979 | ) | $ | (172,489 | ) | $ | (591,197 | ) |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Income(Loss) per share-basic                                   |       | $                          | 0.00       |                        | $          | (0.02 | ) | $ | (0.02 | ) | $ | (0.08 | ) |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Income(Loss) per share-diluted                                 |       | $                          | 0.00       |                        | $          | (0.02 | ) | $ | (0.02 | ) | $ | (0.08 | ) |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Weighted average number of common shares  outstanding-basic    |       | 7,035,170                  |       | 7,035,170                   |       | 7,035,170 |   | 7,035,170 |   |
|                                                           |       |                       |       |                        |       |   |   |   |   |
| Weighted average number of common shares  outstanding-dilutive |       | 7,109,237                  |       | 7,035,170                   |       | 7,035,170 |   | 7,035,170 |   |

 

See accompanying notes

 

4

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BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

 

CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS

 

(unaudited)

 
| ** **                                           | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                           | ** ** | **January 23,  2005**  | ** ** | **January 25,  2004** | ** ** |
|                                                 |       |                        |       |   |   |
| Net cash provided by operating activities            |       | $                           | 831,386    |   | $ | 28,994 |   |
|                                                 |       |                        |       |   |   |
| Cash flows from investing activities:                |       |                        |       |   |   |
| Capital expenditures                                 |       | (628,128                    | )          | (2,398,841 | ) |
|                                                 |       |                        |       |   |   |
| Net cash used for investing activities               |       | (628,128                    | )          | (2,398,841 | ) |
|                                                 |       |                        |       |   |   |
| Cash flows from financing activities:                |       |                        |       |   |   |
| Repayments of long-term debt                         |       | (586,695                    | )          | (205,678 | ) |
| Repayments of capital lease obligations              |       | (141,417                    | )          | (151,332 | ) |
| Repayments of stockholder loans                      |       | (4,557                      | )          | (4,337 | ) |
| Proceeds from preferred stock subscription           |       | 946,278                     |       | 0 |   |
| Proceeds from long-term debt                         |       | 0                           |       | 2,500,000 |   |
|                                                 |       |                        |       |   |   |
| Net cash provided by financing activities            |       | 213,609                     |       | 2,138,653 |   |
|                                                 |       |                        |       |   |   |
| Net increase (decrease) in cash and cash equivalents |       | 416,867                     |       | (231,194 | ) |
|                                                 |       |                        |       |   |   |
| Cash and cash equivalents at beginning of period     |       | 651,754                     |       | 1,106,701 |   |
|                                                 |       |                        |       |   |   |
| Cash and cash equivalents at end of period           |       | $                           | 1,068,621  |   | $ | 875,507 |   |

 

See accompanying notes.

 

5

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BOSTON RESTAURANT ASSOCIATES,INC.  AND SUBSIDIARIESNOTES TO CONDENSEDCONSOLIDATED FINANCIAL STATEMENTSJanuary 23, 2005

##  

## (unaudited)

##  

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

 

The accompanying unauditedcondensed consolidated financial statements have been prepared in accordancewith generally accepted accounting principles for interim financial informationand with the instructions to Form 10-Q. Accordingly, they do not include all of the information and footnotesrequired by generally accepted accounting principles for complete financialstatements.  In the opinion ofmanagement, all adjustments (consisting of normal recurring accruals)considered necessary for a fair presentation have been included.  Operating results for the thirteen-weekperiod and thirty-nine week period, ended January 23, 2005 are notnecessarily indicative of the results that may be expected for the year ending April 24,2005.  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 25,2004.  The balance sheet at April 25,2004 has been derived from the audited financial statements at that date.

 

The accompanying statementsof operations and cash flows for the fiscal 2005 period reflect theconsolidated operations and cash flow of five casual dining Italian restauranstand thirteen Pizzeria Regina restaurants for the entire period and one PizzeriaRegina restaurant for part of the period. For the fiscal 2004 period there werefour casual dining Italian restaurants for the entire period and one restaurantfor part of the period, and twelve Pizzeria Regina restaurants for the entireperiod.

 

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

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

 

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

 

6

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| ** **                     | ** ** | **Thirteen weeks ended**   | ** ** | **Thirty-nine weeks ended** | ** ** |
|--------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                     | ** ** | **January 23,  2005** | ** ** | **January 25,  2004**  | ** ** | **January 23,  2005** | ** ** | **January 25,  2004** | ** ** |
|                           |       |                       |       |                        |       |   |   |   |   |
| Basic Shares                   |       | 7,035,170                  |       | 7,035,170                   |       | 7,035,170 |   | 7,035,170 |   |
|                           |       |                       |       |                        |       |   |   |   |   |
| Effect of Dilutive Securities: |       |                       |       |                        |       |   |   |   |   |
|                           |       |                       |       |                        |       |   |   |   |   |
| Options                        |       | 74,067                     |       | 0                           |       | 0 |   | 0 |   |
|                           |       |                       |       |                        |       |   |   |   |   |
| Diluted Shares                 |       | 7,109,237                  |       | 7,035,170                   |       | 7,035,170 |   | 7,035,170 |   |

 

Thefollowing table summarizes securities that were outstanding as of January 23,2005 and January 25, 2004, but not included in the calculation of netincome (loss) per share because such securities are anti-dilutive:

 
| ** **                  | ** ** | **Thirteen  weeks ended**  | ** ** | **Thirty-nine  weeks ended** | ** ** |
|-----------------------------|------------|----------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **January 23,  2005** | ** ** | **January 25,  2004**   | ** ** | **January 23,  2005** | ** ** | **January 25,  2004** | ** ** |
|                        |       |                       |       |                         |       |   |   |   |   |
| Options                     |       | 834,800                    |       | 773,800                      |       | 1,274,800 |   | 773,800 |   |
|                        |       |                       |       |                         |       |   |   |   |   |
| Warrants                    |       | 601,000                    |       | 500,000                      |       | 601,000 |   | 500,000 |   |
|                        |       |                       |       |                         |       |   |   |   |   |
| Convertible Debentures      |       | 1,160,000                  |       | 1,160,000                    |       | 1,160,000 |   | 1,160,000 |   |
|                        |       |                       |       |                         |       |   |   |   |   |
| Convertible Preferred Stock |       | 1,147,056                  |       | **—**                   |       | 1,147,056 |   | **—** |   |

 

7

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

 

Had compensation cost 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.

 
| ** **                                                                                    | ** ** | **Thirteen Weeks Ended**  | ** ** | **Thirty Nine Weeks Ended** | ** ** |
|-----------------------------------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                                                    | ** ** | **January 23, 2005** | ** ** | **January 25, 2004**   | ** ** | **January 23, 2005** | ** ** | **January 25, 2004** | ** ** |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Net income (loss) as reported                                                                 |       | $                         | 4,814      |                        | $          | (138,979 | ) | $ | (172,489 | ) | $ | (591,197 | ) |
| 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              |       | (64,747                   | )          | (11,095                     | )          | (144,119 | ) | (32,194 | ) |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Net loss-pro forma                                                                            |       | $                         | (59,933    | )                           | $          | (150,074 | ) | $ | (316,608 | ) | $ | (622,391 | ) |
|                                                                                          |       |                      |       |                        |       |   |   |   |   |
| Basic and diluted earnings per share:                                                         |       |                      |       |                        |       |   |   |   |   |
| As reported                                                                                   |       | $                         | .00        |                        | $          | (.02 | ) | $ | (.02 | ) | $ | (.08 | ) |
| Pro forma                                                                                     |       | $                         | (.01       | )                           | $          | (.02 | ) | $ | (.05 | ) | $ | (.09 | ) |

 

8

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**3.****                                     ****CREDIT FACILITY**

 

The Company accessed itsline of credit with Commerce Bank and Trust Company in the amount of $833,000,$833,000 and $834,000 on June 9, July 7 and August 4, 2003 respectivelyfor a total of $2,500,000.  These fundswere used for the construction of the new Polcari’s North End restaurant inCambridge, Massachusetts.  On February 13,2004, the Company accessed an additional $535,000 for the construction of twoPizzeria Regina’s in Boston, Massachusetts. All borrowings under the credit facility are collateralized bysubstantially all of the assets of the Company and are subject to variousfinancial covenants.   As of April 25,2004 the Company was not in compliance with certain financial covenants of theCredit Facility. However, on February 13, 2004 the Company entered into anagreement with the bank under which Commerce Bank and Trust Company waived thecovenants for the year ended April 25, 2004 in exchange for a 1% waiverfee, a modification of the interest rate on all outstanding notes issued underthe Credit Agreement from the current 6% to 7% per annum until the firstquarter in which the Company is once again in compliance with all financialcovenants, and the grant to the bank of warrants to purchase 76,000 shares ofthe Company’s common stock at a price of $.50 per share with a life of six years.  The warrants are not exercisable for a periodof one year from the date of grant.  Thewarrants had a fair value of $30,000 based on the Black Scholes pricing modeland they were recorded in interest expense in the consolidated statement ofoperations in fiscal 2004.  As of January 23,2005 the Company was not in compliance with certain financial covenants of theCredit Facility however, the bank has waived all financial covenants for thecurrent period.  Because of the Company'suncertainty regarding its ability to satisfy these covenants, all bank debt hasbeen classified as current on the balance sheets January 23, 2005 and April 25,2004.  If the Company fails to complywith these covenants, the bank debt would be due on demand.

 

**4.****                                     ****MATERIAL AGREEMENT**

 

TheCompany has restructured its Cambridge operations by entering into an agreementfor the sale of the Polcari’s restaurant in Cambridge, Massachusetts.  Under the terms of this agreement Polcari’s willcease operations at its Cambridge location on July 31, 2005 whenTechnology Square Finance, LLC will be required to purchase the assets ofPolcari’s of Cambridge, Inc. for three hundred thousand dollars.  In addition rent will be forgiven for the remainderof the lease.

 

**5.****                                     ****PREFERRED STOCK**

 

OnJanuary 20, 2005, the Company sold 1,147,056 shares of its Series A ParticipatingPreferred Stock, $.01 par value per share, to 11 accredited investors in aprivate transaction pursuant to subscription agreements between each suchinvestor and the Company.  Each share ofSeries A Participating Preferred Stock may be converted at any time at theoption of the holder of such share into one share of its Common Stock, $.01 parvalue per share at a conversion price of $.85. The investors paid $0.85 per share, for aggregate gross proceeds of$975,000.

 

TheCompany agreed pursuant to a rights agreement between the Company and theinvestors to (i) register the resale of the shares of Common Stock issuableupon the conversion of the shares of Series A Participating Preferred Stockupon demand of a

 

9

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sufficientnumber of the holders of the Series A Participating Preferred Stock and (ii)include such shares of Common Stock in any registration statement for thebenefit of the Company or any third party upon request of a sufficient numberof the holders of the Series A Participating Preferred Stock.

 

TheCompany sold the shares of Series A Participating Preferred Stock pursuant tocertain exemptions from registration provided by Rule 506 of Regulation D and Section 4(2)of the Securities Act of 1933, as amended.

 

**6.****                                     ****NEW ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued aStatement, “Share-Based Payments”, that addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.The statement eliminates the ability to account for share-basedcompensation transactions using APB Opinion No.25, “Accounting for Stock Issuedto Employees”, and generally requires that such transactions be accountedfor using a fair value-based method. As discussed in Note 2, the Companycurrently accounts for share-based compensation transactions using APB OpinionNo. 25. The adoption of this statement is effective for fiscal periodsbeginning after June 15, 2005 and will have an impact on the Company’sconsolidated financial position and results of operations, the level of whichthe Company is currently assessing.

 

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

 

### **RESULTS OF OPERATIONS**

###  

# **Overview**

 

The Company’s restaurant sales in the most recentquarter were $6,804,000 compared to sales of $6,182,000 in the third quarter offiscal 2004, an increase of 10%.  TheCompany’s management believes that the increase in revenue is primarilyattributable to the opening of the new Pizzeria Regina at the Prudential Centerin Boston, Massachusetts in April 2004 and the new Pizzeria Regina at theSouth Station in Boston, Massachusetts in July 2004, and to the improvedeconomy in the Northeastern United States. The Company had income for the third quarter of fiscal 2005 of $5,000,compared to a net loss of $139,000 for the same quarter in fiscal 2004. The key factors that affect our operatingresults are the impact of new store openings, comparable restaurant sales,which are driven by customer counts and check average, and our ability tomanage operating expenses such as food cost, labor and benefits and othercosts.  Changes in the number ofrestaurants in operation can increase or decrease total Company revenues andexpenses, and the build out and opening of new restaurants can affect operatingprofits.  Each restaurant unit’scontribution margin will vary over the life of the restaurant.  Margins tend to be low when a restaurant isfirst opened until customer traffic reaches planned levels.  Margins can also deteriorate at the end of aunit’s life cycle due to a decline in customer traffic caused by a variety offactors outside the control of the Company. These economic conditions impact both the Pizzeria Regina units and thePolcari’s North End units.

 

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

 

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| ** **                                    | ** ** | **Thirteen Weeks Ended**   | ** ** | **Thirty-nine weeks Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------|------------|-----------------------------|------------|
| ** **                                    | ** ** | **January 23,  2005** | ** ** | **January 25,  2004**  | ** ** | **January 23,  2005** | ** ** | **January 25,  2004** | ** ** |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Revenues:                                     |       |                       |       |                        |       |   |   |   |   |
| Restaurant sales                              |       | 100                        | %          | 100                         | %          | 100 | % | 100 | % |
| Other                                         |       | —                     |       | —                      |       | — |   | — |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Total revenues                                |       | 100                        | %          | 100                         | %          | 100 | % | 100 | % |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Costs and expenses:                           |       |                       |       |                        |       |   |   |   |   |
| Cost of food, beverages and liquor            |       | 22                         |       | 21                          |       | 22 |   | 20 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Other operating expenses- payroll             |       | 32                         |       | 33                          |       | 32 |   | 32 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Other operating expenses exclusive of payroll |       | 33                         |       | 33                          |       | 32 |   | 32 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| General and administrative                    |       | 7                          |       | 8                           |       | 8 |   | 10 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Depreciation and amortization                 |       | 4                          |       | 5                           |       | 4 |   | 5 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Pre-opening costs                             |       | —                     |       | —                      |       | 1 |   | 2 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Operating income (loss)                       |       | 2                          |       | (0                          | )          | 1 |   | (1 | ) |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Interest expense, net                         |       | (2                         | )          | 2                           |       | (2 | ) | 2 |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Other income                                  |       | —                     |       | —                      |       | — |   | — |   |
|                                          |       |                       |       |                        |       |   |   |   |   |
| Net income (loss)                             |       | 0                          | %          | (2                          | )%         | (1 | )% | (3 | )% |

 

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**Thirteen Weeks Ended January 23,2005 as Compared to Thirteen Weeks ended January 25, 2004****.**

 

**Restaurant Sales**

 

Restaurant sales in the mostrecent quarter were $6,804,000 compared to restaurant sales in the prior year’speriod of $6,182,000.  The Company’smanagement believes that the increase in revenue was primarily attributable tothe opening of the new Pizzeria Regina at the Prudential Center in Boston,Massachusetts in April 2004 and the new Pizzeria Regina at South Stationin Boston, Massachusetts in July 2004, and to the improved economy in theNortheastern United States partially offset by the closing of a Pizzeria Reginain Richmond, Virginia at the end of its lease in November 2004.

 

Net sales at the Company’sPizzeria Regina restaurants increased to $3,690,000 in the current period from$3,069,000 in the prior year’s period. The increase in restaurant sales was principally due to the opening ofthe new Pizzeria Regina at the Prudential Center, the new Pizzeria Regina atSouth Station and to an increase in same store sales of 1%.

 

Net sales at the Company’sfull service casual dining restaurants decreased to $3,102,000 in the currentperiod from $3,103,000 in the prior year’s period. This decrease in sales wasprimarily attributable to the reduction in sales at the Cambridge location.  Exclusive of Cambridge, same store sales wereunchanged.

 

Net sales at the Company’scommissary were $12,000 in the current period compared to $10,000 in the prioryear’s period.

 

# **Royalties**

# ** **

Duringthe current year period, the Company did not recognize any royalties from adomestic Pizzeria Regina franchise compared to $4,000 in royalties in the prior’syear’s period.  The Company’s domesticPizzeria Regina franchise at the Palms Casino in Las Vegas, Nevada was closed April 30,2004.

 

**Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages andliquor as a percentage of total revenues for all restaurants was 22 % in thefiscal 2005 period compared to 21% in the fiscal 2004 period.  This increase as a percentage of totalrevenue was attributable to the opening of two new Pizzeria Regina’s in Boston,Massachusetts which have a higher food cost than the other

 

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Pizzeria Regina units due tothe addition of food items to their menus and to an increase in costs fromsuppliers in general.

 

The cost of food, beverageand liquor was $1,469,000 in the current period compared to $1,278,000 in theprior year’s period. The dollar increase was due in part to the opening of thenew Pizzeria Regina at the Prudential Center and the new Pizzeria Regina atSouth Station partially offset by the closing of a Pizzeria Regina location inRichmond, Virginia at the end of its lease.

 

The cost of food, beverageand liquor as a percentage of restaurant sales at the Pizzeria Reginarestaurants was 18% in the fiscal 2005 period compared to 16% in the fiscal2004 periods.  This increase as apercentage of total revenue was attributable to the opening of two new PizzeriaReginas in Boston, Massachusetts which have a higher food cost and an increasein costs from suppliers in general.

 

The cost of food, beverageand liquor at Pizzeria Regina restaurants was $658,000 in the current periodcompared to $478,000 in the prior year’s period. The dollar increase was due tothe opening of two additional Pizzeria Reginas partially offset by the closingof a Pizzeria Regina location in Richmond, Virginia at the end of its lease.

 

The cost of food, beverageand liquor as a percentage of restaurant sales at the Company’s full servicecasual dining restaurants was 26% in both the fiscal 2005 period and in thefiscal 2004 period.

 

The cost of food, beverageand liquor at the Company’s full service casual dining restaurants was $811,000in the current period compared to $800,000 in the prior year’s period.  The dollar increase was primarily due to theCambridge, Massachusetts Polcari’s North End restaurant operating for theentire period.

 

# **Other Operating Expenses**

 

Payroll Expenses.

 

Payroll expenses as a percentage of total revenues forall restaurants were 32% in the fiscal 2005 period compared to 33% in thefiscal 2004 period. The decrease as a percentage of total revenues wasattributable to the opening of the new Pizzeria Regina at the Prudential Centerand the new Pizzeria Regina at South Station which generally have lower payrollexpenses as a percentage of total revenues than the Company’s full servicecasual dining restaurants and to a lesser extent reductions in payroll expensesof the Company’s Cambridge, Massachusetts Polcari’s North End Restaurant.

 

Payroll expenses were $2,168,000in the current period, compared to $2,011,000 in the prior year’s period.  The dollar increase in payroll expenses wasprimarily due to the two new Pizzeria Regina restaurants partially offset bythe closing of a Pizzeria Regina location in Richmond, Virginia at the end ofits lease.

 

Payroll expenses at thePizzeria Regina restaurants were 27% of restaurant sales in the current period,compared to 24% of restaurant sales in the prior year’s period.  The increase as a percentage of restaurant saleswas primarily due to the opening of the two new Pizzeria Regina restaurantswhich generally experience additional payroll expenses

 

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associated with the openingof new units partially offset by the closing of a Pizzeria Regina location inRichmond, Virginia at the end of its lease.

 

Payroll expenses of thePizzeria Regina restaurants were $983,000 in the current period compared to $726,000in the prior year’s period.  This dollarincrease was primarily due to the opening of the two new Pizzeria Reginarestaurants partially offset by the closing of a Pizzeria Regina location inRichmond, Virginia at the end of its lease.

 

Payroll expenses at theCompany’s full service casual dining restaurants were 35% of restaurant salesin the current period compared to 38% in the prior year’s period.  The decrease as a percentage of restaurantsales was primarily attributable to the Cambridge, Massachusetts Polcari’sNorth End restaurant which had a reduction in payroll expenses as a percentageof restaurant sales compared to the prior year’s initial opening.

 

Payroll expenses at theCompany’s full service casual dining restaurants were $1,078,000 in the currentperiod compared to $1,183,000 in the prior year’s period.  This dollar decrease was primarily due to areduction in payroll expenses at the Cambridge, Massachusetts Polcari’s NorthEnd Restaurant.

 

Payroll expenses at the Company’sCommissary were $107,000 for the fiscal 2005 period as compared to $102,000 inthe fiscal 2004 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses exclusive of payroll were 33%of total revenues in both the fiscal 2005 period and in fiscal the 2004 period.

 

Other operating expenses,exclusive of payroll, were $2,239,000 in the current period compared to $2,032,000in the prior year’s period. The increase in operating expenses, exclusive ofpayroll, as a percentage of total revenues was primarily due to the opening ofthe new Pizzeria Regina at the Prudential Center and the opening of the newPizzeria Regina at South Station partially offset by the closing of a PizzeriaRegina location in Richmond, Virginia at the end of its lease.

 

Other operating expensesexclusive of payroll, for the Pizzeria Regina restaurants as a percentage ofrestaurant sales were 33% in the current period compared to 31% in the prioryear’s period.  The increase as apercentage of restaurant sales was primarily due to higher energy and paper costs.

 

Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $1,205,000 inthe current period, compared to $966,000 in the prior year’s period.  This dollar increase is primarily due to theaddition of two Pizzeria Regina restaurants partially offset by the closing ofa Pizzeria Regina location in Richmond, Virginia at the end of its lease and tohigher energy and paper costs.

 

Other operating expensesexclusive of payroll, for the Company’s full service casual dining restaurantsas a percentage of restaurant sales were 32% in the current period compared to33% in the prior years period.  Thedecrease as percentage of restaurant sales was 

 

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primarily due to reducedoperating expenses at the Cambridge, Massachusetts Polcari’s North Endrestaurant.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $997,000 in the current period compared to $1,029,000 in the prior year’speriod. The dollar decrease was primarily attributable to the reduced costsassociated with the Cambridge, Massachusetts Polcari’s North End restaurant.

 

Other operating expensesalso include commissary expenses, which were $37,000 for both the fiscal 2005period and the fiscal 2004 period.

 

General and Administrative Expenses.

 

General and administrativeexpenses as a percentage of restaurant sales were 7% in current fiscal 2005period compared to 8% in the fiscal 2004 period.  The decrease as a percentage of totalrevenues was attributable to a higher revenue base and lower employee incentivecosts and consulting fees.

 

General and administrativeexpenses were $535,000 in the current period, compared to $554,000 in the prioryear’s period.

 

Depreciation and Amortization Expenses.

 

Depreciation andamortization expenses as a percentage of restaurant sales were 4% in thecurrent period compared to 5% in the prior year’s period. This percentage decreasewas primarily the result of a higher revenue base and the 2004 impairment ofPolcari’s North End restaurant in Cambridge, Massachusetts which reduced the carryingvalue of the Cambridge location’s fixed assets.

 

Depreciation and amortizationexpense was $273,000 in the current period, compared to $334,000 in the prioryear’s period.  This dollar decrease wasattributable to the 2004 impairment of Polcari’s North End restaurant inCambridge, Massachusetts, partially offset by the opening of two new PizzeriaRegina restaurants.

 

Pre-Opening Costs

 

Pre-opening costs consistingprimarily of labor, rent and training materials for the current period were $0 comparedto $2,000 in the prior year’s period.

 

**Other Income**

 

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

 

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

 

Interest expense was $122,000in the current period as compared to $116,000 in the prior year’s period. Thisdollar increase was primarily due to an increase in borrowing costs under theCompany’s credit facility.

 

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

 

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**Thirty-nine weeks Ended January 23,2005 as Compared to Thirty-Nine Weeks ended January 25, 2004.**

 

**Restaurant Sales**

 

Restaurant sales for thethirty-nine weeks ended January 23, 2005 were $20,337,000 compared torestaurant sales in the prior year’s period of $17,291,000.  The increase in revenue was primarily attributableto the opening of the new Pizzeria Regina at the Prudential Center in Boston,Massachusetts in April 2004, the new Pizzeria Regina at South Station inBoston, Massachusetts in July 2004, and to the improved economy in theNortheast United States partially offset by the closing of a Pizzeria Reginalocation in Richmond, Virginia at the end of its lease.

 

Net sales at the Company’sPizzeria Regina restaurants increased to $10,670,000 in the current thirty-nine week period from $8,580,000 in the prior year’s period.  The increase in restaurant sales wasprincipally due to the opening of two new Pizzeria Regina locations and a thirdlocation open for the entire period this year compared to a partial period infiscal 2004 partially offset by the closing of a Pizzeria Regina location inRichmond, Virginia at the end of its lease. The same store sales for the Pizzeria Regina restaurant increased 1% inthe current period.

 

Net sales at the Company’sfull service casual dining restaurants increased to $9,640,000 in the thirty-nineweek current period from $8,677,000 in the prior year’s period.  This increase was primarily attributable tothe Polcari’s North End Restaurant in Cambridge, Massachusetts operating forthe entire period and by the improved economy in the Northeastern United States.  The same store sales for the full servicecasual dining restaurants increased 3% in the current period.

 

Net sales at the Company’scommissary were $27,000 in the current period compared to $34,000 in the prioryear’s period.

 

# **Royalties**

# ** **

During the current yearperiod, the Company did not recognize any royalties from Pizzeria Reginafranchises compared to $13,000 in royalties in the prior year’s period.

 

# **Costs and Expenses**

# ** **

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages, liquor as a percentage of totalrevenues for all restaurants was 22% in the current period compared to 20% inthe prior year’s period.  The increase asa percentage of total revenues was primarily attributable to the two additionalPizzeria Regina locations which have higher food costs than the other PizzeriaRegina units due to the addition of food items to their menus and to anincrease in costs from suppliers in general.

 

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The cost of food, beverage andliquor was $4,495,000 in the current thirty-nine week period compared to $3,535,000in the prior year’s period. The dollar increase was due in part to the twoadditional Pizzeria Regina locations partially offset by the closing of aPizzeria Regina location in Richmond, Virginia at the end of its lease and toan increase in cost from suppliers in general.

 

The cost as a percentage ofrestaurant sales at the Pizzeria Regina restaurants was 18% in the fiscal 2005period compared to 16% in the fiscal 2004 period.  The increase as a percentage of restaurantsales was principally due to the opening of the two new Pizzeria Reginarestaurants which have higher food costs due to the addition of food items totheir menus and from an increase in cost from suppliers in general.

 

The cost of food, beverageand liquor at Pizzeria Regina restaurants was $1,922,000 in the current periodcompared to $1,361,000 in the prior year’s period.  The dollar increase was due to the opening oftwo additional Pizzeria Regina restaurants partially offset by the closing of aPizzeria Regina location in Richmond, Virginia at the end of its lease.

 

The cost as a percentage ofrestaurant sales at the Company’s full service casual dining restaurants was27% in the fiscal 2005 period compared to 25% in the fiscal 2004 period.  The increase as a percentage of sales wasprincipally due to the new Cambridge, Massachusetts Polcari’s North Endrestaurant which is open for lunch five days a week resulting in higher foodcost and increases in costs from suppliers in general.

 

The cost of food, beverageand liquor at the Company’s full service casual dining restaurants was $2,573,000in the current thirty-nine week period compared to $2,174,000 in the prior year’speriod.  The dollar increase wasprimarily due to the new Cambridge, Massachusetts Polcari’s North Endrestaurant operating for the entire period.

 

# **Other Operating Expenses**

# ** **

Payroll Expenses.

 

Payroll expenses as a percentage of the total revenuesfor all restaurants were 32% in both fiscal 2005 and fiscal 2004 periods.

 

Payroll expenses were $6,441,000in the current period, compared to $5,613,000 in the prior year’s thirty-nineweek period.  The dollar increase inpayroll expenses was primarily due to the two new Pizzeria Regina restaurants inBoston, Massachusetts, partially offset by the closing of a Pizzeria Reginalocation in Richmond, Virginia at the end of its lease.

 

Payroll expenses at thePizzeria Regina restaurants were 26% of restaurant sales in both the currentperiod and in the prior year’s period.  .

 

Payroll expenses of thePizzeria Regina restaurants were $2,788,000 in the current thirty-nine week periodcompared to $2,198,000 in the prior year’s period.  This dollar increase was primarily due to theopening of two new Pizzeria Regina locations and to increased

 

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costs in employee healthbenefits partially offset by the closing of a Pizzeria Regina location inRichmond, Virginia at the end of its lease.

 

Payroll expenses as apercentage of restaurant sales at the Company’s full service casual diningrestaurants were 35% of restaurant sales in the current period compared to 36%in the prior year’s period.  Thisdecrease as a percentage of sales was primarily attributable to the CambridgeMassachusetts Polcari’s North End restaurant which had a reduction in payrollexpenses as a percentage of restaurant sales compared to prior year’s initialopening.

 

Payroll expenses at theCompany’s full service casual dining restaurants were $3,343,000 in the currentthirty-nine week period compared to $3,113,000 in the prior year’s period.  This dollar increase was primarily due to thePolcari’s North End restaurant in Cambridge, Massachusetts operating for theentire period and an increase in employee benefit costs.

 

Payroll expenses at the Company’sCommissary were $310,000 for the fiscal 2005 period as compared to $302,000 inthe fiscal 2004 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses, exclusive of payroll, were 32%of total revenues in both fiscal 2005 period and in the fiscal 2004 period.

 

Other operating expenses,exclusive of payroll, were $6,514,000 in the current thirty-nine week periodcompared to $5,578,000 in the prior year’s period. The dollar increase in operatingexpenses, exclusive of payroll, was primarily due to the new Pizzeria Regina atPrudential Center in Boston, Massachusetts, the new Pizzeria Regina at SouthStation in Boston, Massachusetts, the Polcari’s North End restaurant inCambridge, Massachusetts operating for the entire period and higher energycosts.        .

 

Other operating expenses,exclusive of payroll, for the Pizzeria Regina restaurants as a percentage ofrestaurant sales were 33% in the current period compared to 34% in the prioryear’s period.  The decrease as apercentage of sales was primarily attributable to the temporary closing of theFaneuil Hall location in the prior year’s period, where the Company nonethelesscontinued to incur some of the costs without any corresponding revenue.

 

Other operating expenses,exclusive of payroll, from the Pizzeria Regina restaurants were $3,563,000 inthe current thirty-nine week period, compared to $2,879,000 in the prior year’speriod.  This dollar increase isprimarily due to the addition of two new Pizzeria Regina restaurants and higherenergy costs.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantsas a percentage of restaurant sales were 30% in both the current period and inthe prior year’s period.

 

Other operating expenses,exclusive of payroll, for the Company’s full service casual dining restaurantswere $2,855,000 in the current thirty-nine week period compared to $2,609,000in the prior year’s period. The dollar increase was primarily attributable toPolcari’s North End in Cambridge operating for the entire period partiallyoffset by the

 

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reversal of a $213,000 rentaccrual at this location due to the landlord forgiving rent for the remainderof the lease.

 

Other operating expensesalso include commissary expenses, which were $96,000 in fiscal 2005 periodcompared to $90,000 in fiscal 2004 period.

 

Generaland Administrative Expenses.

 

Generaland Administrative expenses were 8% of total revenues in fiscal 2005 periodcompared to 10% in the fiscal 2004 period. The decrease as a percentage of total revenues was attributable to ahigher revenue base and lower employee incentive costs and consulting costs.

 

General and administrative expenseswere $1,751,000 in the current period, compared to $1,874,000 in the prior year’speriod.

 

Depreciation and Amortization Expenses.

 

Depreciation andamortization expense as a percentage of restaurant sales were 4% in the fiscal2005 period compared to 5% in the fiscal 2004 period.  The decrease as a percentage of total revenuewas attributable to a higher revenue base and the 2004 impairment of Polcari’sNorth End restaurant in Cambridge, Massachusetts.

 

Depreciation and amortizationexpense was $818,000 in the current period, compared to $875,000 in the prioryear’s period.

 

Pre-Opening Costs

 

Pre-opening costs for the currentperiod were $93,000 in the fiscal 2005 period compared to $318,000 in thefiscal 2004 period.  These costs whichconsist of labor, rent and training materials are attributable to the openingof the new Pizzeria Regina restaurant at South Station in Boston, Massachusettsin the current period.

 

Other Income

 

Other income was $10,000 inthe current period compared to $220,000 in the prior year’s period.  The prior year’s other income mainlyconsisted of insurance proceeds related to the temporary closing of the FaneuilHall Pizzeria Regina restaurant.

 

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Interest Expense and Interest Income.

 

Interest expense was $409,000in the current period as compared to $325,000 in the prior year’s period. Thisdollar increase was primarily due to an increase in borrowing and relatedinterest expense under the Company’s credit facility.

 

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

 

### **LIQUIDITY AND CAPITALRESOURCES**

###  

At January 23,2005, the Company had negative net working capital of $3,426,000 compared to negative net working capital of$4,304,000 at April 25, 2004.  It iscommon for companies in the restaurant industry to operate with net workingcapital deficits.  We are able to operatewith a substantial working capital deficit because (1) restaurantoperations and most food service operations are conducted primarily on a cash(and cash equivalent) basis with a low level of accounts receivable,(2) 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.  However given the extent of the Company’snegative net working capital the Company’s financial condition and growth willbe dependent upon obtaining adequate additional financing until profitableoperations are achievable.  The Companycannot guarantee that it will be successful in obtaining additionalfinancing.  The opinion of BDO Seidman,LLP on the Company’s fiscal 2004 financial statements included an explanatoryparagraph expressing concern about the Company’s ability to continue as a goingconcern.

 

During the thirty-nine weeksended January 23, 2005, the Company had a net increase in cash and cashequivalents of $417,000, reflecting net cash provided by operating activitiesof $831,000, net cash used for investing activities of $628,000 and net cashprovided by financing activities of $214,000.

 

Net cash provided byoperating activities included a decrease in inventories of $1,000, an increasein accounts payable of $135,000, an increase in accrued expenses of $68,000,  a decrease in other assets of $20,000,non-cash items consisting of warrants granted in exchange for short-termborrowings of $8,000, a decrease in accounts receivables of $51,000, a decreasein prepaid expenses of $24,000 and depreciation and amortization expense of $818,000which were partially offset by a decrease in deferred rent of $97,000, adecrease in other long-term liabilities of $25,000 and a net loss of $172,000.  Net cash used for investing activitiesreflects costs associated with leasehold improvements and with the purchase ofequipment, furniture and fixtures for the two new Pizzeria Regina restaurantsin Boston, Massachusetts and for other operating Company restaurants.  Net cash provided by financing activities of$214,000 consisted of repayments of long-term debt, lease obligations andstockholders loans offset by proceeds from the sale of participating preferredstock.

 

OnJanuary 20, 2005, the Company sold 1,147,056 shares of its Series AParticipating Preferred Stock, $.01 par value per share, to 11 accreditedinvestors in a private transaction pursuant to subscription agreements betweeneach such investor and the Company.  Eachshare of Series A Participating Preferred Stock may be converted at theconversion rate of $.85 at any time at the option of the holder of such shareinto one share of its Common Stock, $.01 par value per share.  The investors paid $0.85 per share, for

 

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aggregategross proceeds of $975,000.  Theinvestors included two of the Company’s directors and the spouse of a directorwho together purchased 205,881 shares of the Series A Participating PreferredStock.

 

TheCompany agreed pursuant to a rights agreement between the Company and theinvestors to (i) register the resale of the shares of Common Stock issuableupon the conversion of the shares of Series A Participating Preferred Stockupon demand of a sufficient number of the holders of the Series A ParticipatingPreferred Stock and (ii) include such shares of Common Stock in anyregistration statement for the benefit of the Company or any third party uponrequest of a sufficient number of the holders of the Series A ParticipatingPreferred Stock.

 

At January 23,2005, the Company had current liabilities of $5,593,000, including $1,193,000of accounts payable, $1,485,000 of accrued liabilities, and current maturitiesof long-term obligations in the amount of $2,915,000.  At January 23, 2005 the Company hadlong-term obligations, less current maturities, in the amount of $2,165,000,including, $84,000 of notes payable to a stockholder, $1,450,000 of convertiblesubordinated debentures, $405,000 of deferred rent, and $226,000 of otherlong-term liabilities.

 

Allborrowings under the Credit Facility are collateralized by substantially all ofthe assets of the Company and are subject to various financial covenants.  As of April 25, 2004 the Company was notin compliance with certain financial covenants of the Credit Facility.  However, Commerce Bank and Trust Companywaived the covenants for the quarterly fiscal period ended July 25, 2004and for fiscal year ended April 25, 2004 in exchange for a 1% waiver fee,a modification of the interest rate on all outstanding notes issued under theCredit Agreement from the current 6% to 7% per annum until the first quarter inwhich the Company is once again in compliance with all financial covenants, andthe grant to the bank of a six year warrant to purchase 76,000 shares of theCompany’s common stock at a price of $.50 per share.  Subject to certain exceptions pursuant towhich the warrant will be exercisable earlier, the warrant is not exercisableuntil February 13, 2005.  As of January 23,2005 the Company was not in compliance with certain financial covenants of theCredit Facility however, the bank has waived all financial covenants for thecurrent period and has established new covenants for fiscal 2006.

 

Tofinance capital expenditures, the Company entered into an unsecured loanagreement with the spouse of a Company director in the amount of $200,000.  Under the terms of the agreement the Companywas obligated to pay interest at the rate of 14% on the outstandingbalance.  The Company granted the lendera five year warrant to purchase 25,000 shares of the Company’s common stock ata price of $.70 per share.  The principalbalance was paid in full on or about December 31, 2004.  In addition, the Company has restructured itsCambridge operations by entering into an agreement for the sale of the Polcari’srestaurant in Cambridge, Massachusetts. Under the terms of this agreement Polcari’s will cease operations at itsCambridge location on July 31, 2005 when Technology Square Finance, LLCwill be required to purchase the assets of Polcari’s of Cambridge, In. forthree hundred thousand dollars.  Inaddition rent will be forgiven for the remaining of the lease.

 

Theopinion of BDO Seidman, LLP on the Company’s fiscal 2004 financial statementincluded an explanatory paragraph expressing concern about the Company’sability to

 

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continueas a going concern.  In addition, becauseof the Company’s concern regarding its ability to satisfy bank financialcovenants, all bank debt totaling approximately $3,383,000   was classifiedas current in the balance sheet as of April 25, 2004. The Company’sfinancial condition and compliance with the bank covenants will besubstantially dependent upon obtaining adequate additional financing and/orachieving profitable operations.   TheCompany cannot guarantee that it will be able to raise the necessary capital tocontinue in operation or that it will be able to achieve profitableoperations.  Public financing would besubject to market conditions and other uncertainties, and no assurance can begiven that the Company could obtain public financing at any time.  Either public or private equity financingwould likely result in dilution of the Company’s existing stockholders.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

InDecember 2004, the Financial Accounting Standards Board (“FASB”) issued aStatement, “Share-Based Payments”, that addresses the accounting forshare-based payment transactions in which an enterprise receives employeeservices in exchange for (a) equity instruments of the enterprise or (b)liabilities that are based on the fair value of the enterprise’s equityinstruments or that may be settled by the issuance of such equity instruments.The statement eliminates the ability to account for share-basedcompensation transactions using APB Opinion No.25, “Accounting for Stock Issuedto Employees”, and generally requires that such transactions be accountedfor using a fair value-based method. As discussed in Note 2, the Companycurrently accounts for share-based compensation transactions using APB OpinionNo. 25. The adoption of this statement is effective for fiscal periodsbeginning after June 15, 2005 and will have an impact on the Company’sconsolidated financial position and results of operations, the level of whichthe Company is currently assessing. 

 

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

# ** **

*Forward-lookingstatements in this report, including without limitation statements relating tothe adequacy of the Company’s working capital and other resources the Company’sability to obtain additional financing ,the Company’s 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.  Investorsare cautioned that such forward-looking statements involve risks anduncertainties, including without limitation: risks associated with the Company’sfinancial condition and need for additional funding risks associated with theilliquidity of the Company’s common stock, risks associated with the Company’slitigation potential quarterly fluctuations in the Company’s operating results;seasonality of sales; competition; risks associated with expansion; the Company’sreliance on key employees; risks generally associated with the restaurantindustry; risks associated with geographic concentration of the Company’srestaurants; risks associated with serving alcoholic beverages; and other risksand uncertainties indicated from time to time in the Company’s filings with theSecurities and Exchange Commission.  Inaddition, forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will”, “expect”, “intend,” “estimate,”“anticipate” or “believe” or the negative thereof or variations thereon orsimilar terminology.  Although theCompany believes that the expectations reflected in such forward-lookingstatements will prove to have been correct,*

 

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*it can give no assurance that such expectations will prove to have beencorrect.  Investors are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof.*

 

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

 

Interest Rate Risk.

 

We have exposure to interestrate risk related to certain instruments entered into for other than tradingpurposes.  Specifically, borrowings underthe Credit Facility described in Item 2 bear interest at a variable rate basedon the bank’s prime rate plus 2%. A 100 basis point change in the CreditFacility interest rate would cause the interest expense for fiscal 2005 tochange by approximately $16,000 from fiscal 2004. This computation isdetermined by considering the impact of hypothetical interest rates on ourvariable long-term debt at January 23, 2005. However, the nature andamount of our borrowings under the Credit Facility may vary as a result offuture business requirements, market conditions, covenant compliance and otherfactors.

 

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

 

Commodity Price Risk.

 

Many of the food productsand other operating essentials purchased by us are affected by 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 besubject to price fluctuations are cheese and flour products. The Companybelieves that it will be able to pass through increased commodity costs byadjusting menu pricing in most cases. However, we believe that any changes incommodity pricing that cannot be offset by changes in menu pricing or otherproduct delivery strategies would not be material.

 

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**ITEM 4.  Controls andProcedures**

 

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

 

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

 

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## PARTII

##  

## OTHER INFORMATION

##  

**ITEM 1. Legal Proceedings.**

None.

 

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

OnJanuary 20, 2005, the Company sold 1,147,056 shares of its Series AParticipating Preferred Stock, $.01 par value per share, to 11 accreditedinvestors in a private transaction pursuant to subscription agreements betweeneach such investor and the Company.  Eachshare of Series A Participating Preferred Stock may be converted at any time atthe option of the holder of such share into one share of its Common Stock, $.01par value per share at a conversion price of $.85.  The investors paid $0.85 per share, foraggregate gross proceeds of $975,000. The investors included two of the Company’s directors and the spouse ofa director who together purchased 205,881 shares of the Series A ParticipatingPreferred Stock.

 

TheCompany agreed pursuant to a rights agreement between the Company and theinvestors to (i) register the resale of the shares of Common Stock issuableupon the conversion of the shares of Series A Participating Preferred Stockupon demand of a sufficient number of the holders of the Series A ParticipatingPreferred Stock and (ii) include such shares of Common Stock in anyregistration statement for the benefit of the Company or any third party uponrequest of a sufficient number of the holders of the Series A ParticipatingPreferred Stock.

 

TheCompany sold the shares of Series A Participating Preferred Stock pursuant tocertain exemptions from registration provided by Rule 506 of Regulation D and Section 4(2)of the Securities Act of 1933, as amended.

 

**ITEM 3. Defaults Upon SeniorSecurities.**

None.

 

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

None

 

**ITEM 5. Other Information.**

None.

 

**ITEM6. Exhibits****.**

Exhibits

 

Exhibit 31.1 and 32.2: Sarbanes-Oxley Section 302 Certification

Exhibit 32.1 32.2: Sarbanes-Oxley Section 906Certification

 

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#### **SIGNATURES**

#### ** **

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

 

 
|                     | BOSTON RESTAURANT ASSOCIATES, INC. |
|--------------------------|------------------------------------|
|                     |                               |   |
|                     |                               |   |
| Date: March 7, 2005 | By:                                | /s/ George R. Chapdelaine |   |
|                     |                               | George R. Chapdelaine, President and  Chief Executive Officer |

 

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