###  

### **UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

###  

### **Washington, DC 20549**

###  

## **FORM 10-Q**

##  

**ý****                                ****Quarterly report Pursuant Section 13 or 15(d) of theSecurities Exchange Act of 1934.For the quarterly periodended January 22, 2006.**

 

**o****                                ****Transition report under Section 13 or 15(d) of the SecuritiesExchange Act of1934.**

**For the transition period from                    to                    .**

 

**Commission File Number**

**0-18369**

 

**BOSTONRESTAURANT ASSOCIATES, INC.**

(Exact Name of Registrant as Specified in itsCharter)

 

| **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)          |

 

Indicateby check whether the registrant: (1) has filed all reports required to befiled by Section 13 or 15(d) of the Securities Exchange Act of 1934during preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days. Yes ý  No o.

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated, or a non-accelerated filer. See definition of “accelerated filerand large accelerated filer” in Rule 12b-2 of the Exchange Act. (Checkone):

 

Large Accelerated Filer oAccelerated Filer o Non-AcceleratedFiler ý

 

Indicateby check mark whether the registrant is a shell company (as defined in Rule 12b-2of the Exchange Act). Yes o  No ý.

 

Indicatethe number of shares outstanding of each of the registrant classes of commonstock as of the latest practical date: Common stock $0.01 par value 7,035,170 shares as of March 3, 2006.

 

 

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BOSTON RESTAURANT ASSOCIATES, INC.

 

INDEX

 
| PART I - FINANCIAL  STATEMENTS |
|-------------------------------------|
|                                |
| Item 1.                             | Financial Statements |
|                                |
|                                | Condensed Consolidated  Balance Sheets as of January 22, 2006 (unaudited) and April 24,  2005 |
|                                |   |
|                                | Unaudited Condensed  Consolidated Statements of Operations for the thirteen and thirty-nine weeks  ended January 22, 2006 and January 23, 2005 |
|                                |   |
|                                | Unaudited Condensed  Consolidated Statements of Cash Flows for the thirty-nine weeks ended January 22,  2006 and January 23, 2005 |
|                                |   |
|                                | 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 Disclosures About Market Risk |
|                                |   |
| Item 4.                             | Controls and Procedures |
|                                |   |
| PART II - OTHER INFORMATION    |
|                                |   |
| Item 6.                             | Exhibits |
|                                |   |
|                                | SIGNATURES |

 

----

 

**ITEM 1.****     Financial Statements**

 

**PART 1 - FINANCIALINFORMATION**

**ITEM 1. FINANCIAL STATEMENTS**

**BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES**

**CONDENSED CONSOLIDATED BALANCESHEETS**

 
| ** **                                                                              | ** ** | **January 22,** | ** ** | **April 24,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------|------------|--------------------|------------|
| ** **                                                                              | ** ** | **2006**             | ** ** | **2005**           | ** ** |
| ** **                                                                              | ** ** | **(unaudited)**      | ** ** | ** **         | ** ** |
| ASSETS                                                                                  |       |                 |       |               |       |
| Current:                                                                                |       |                 |       |               |       |
| Cash and cash equivalents                                                               |       | $                    | 837,035    |               | $          | 687,207 |   |
| Accounts receivable                                                                     |       | 115,005              |       | 111,404            |       |
| Inventories                                                                             |       | 482,333              |       | 460,745            |       |
| Prepaid expenses and other                                                              |       | 150,404              |       | 161,529            |       |
| Current assets of discontinued operations                                               |       | 0                    |       | 164,597            |       |
|                                                                                    |       |                 |       |               |       |
| Total current assets                                                                    |       | 1,584,777            |       | 1,585,482          |       |
|                                                                                    |       |                 |       |               |       |
| Property and equipment:                                                                 |       |                 |       |               |       |
| Building                                                                                |       | 512,500              |       | 512,500            |       |
| Leasehold improvements                                                                  |       | 6,859,311            |       | 6,651,396          |       |
| Equipment, furniture and fixtures                                                       |       | 4,669,228            |       | 4,567,460          |       |
|                                                                                    |       |                 |       |               |       |
|                                                                                    |       | 12,041,039           |       | 11,731,356         |       |
|                                                                                    |       |                 |       |               |       |
| Less accumulated depreciation and amortization                                          |       | 8,269,819            |       | 7,598,139          |       |
|                                                                                    |       |                 |       |               |       |
| Net property and equipment                                                              |       | 3,771,220            |       | 4,133,217          |       |
|                                                                                    |       |                 |       |               |       |
| Goodwill                                                                                |       | 453,643              |       | 453,643            |       |
|                                                                                    |       |                 |       |               |       |
| Other assets                                                                            |       | 504,522              |       | 443,495            |       |
|                                                                                    |       |                 |       |               |       |
| Noncurrent assets of discontinued operations                                            |       | 0                    |       | 125,464            |       |
|                                                                                    |       |                 |       |               |       |
| Total assets                                                                            |       | $                    | 6,314,162  |               | $          | 6,741,301 |   |
|                                                                                    |       |                 |       |               |       |
| LIABILITIES AND STOCKHOLDERS’ EQUITY(DEFICIT)                                      |       |                 |       |               |       |
| Current liabilities:                                                                    |       |                 |       |               |       |
| Accounts payable                                                                        |       | $                    | 624,407    |               | $          | 715,021 |   |
| Accrued expenses                                                                        |       | 1,301,140            |       | 1,606,671          |       |
| Current maturities:                                                                     |       |                 |       |               |       |
| Notes payable-stockholder                                                               |       | 6,655                |       | 6,420              |       |
| Long-term debt                                                                          |       | 374,176              |       | 353,396            |       |
| Obligations under capital leases                                                        |       | 0                    |       | 31,152             |       |
| Current liabilities of discontinued operations                                          |       | 244                  |       | 211,335            |       |
|                                                                                    |       |                 |       |               |       |
| Total current liabilities                                                               |       | 2,306,622            |       | 2,923,995          |       |
|                                                                                    |       |                 |       |               |       |
| Long-term obligations:                                                                  |       |                 |       |               |       |
| Notes payable-stockholder, less current maturities                                      |       | 77,410               |       | 82,430             |       |
| Long-term debt, less current maturities                                                 |       | 1,663,339            |       | 1,946,604          |       |
| Subordinated debentures                                                                 |       | 1,450,000            |       | 1,450,000          |       |
| Deferred rent                                                                           |       | 351,067              |       | 367,206            |       |
| Other long-term liabilities                                                             |       | 113,215              |       | 135,046            |       |
|                                                                                    |       |                 |       |               |       |
| Total liabilities                                                                       |       | 5,961,653            |       | 6,905,281          |       |
|                                                                                    |       |                 |       |               |       |
| Commitments and contingencies                                                           |       |                 |       |               |       |
|                                                                                    |       |                 |       |               |       |
| Stockholders’ equity(deficit) :                                                    |       |                 |       |               |       |
| Preferred stock, $.01 par value, 10,000,000 shares  authorized, 1,147,056 shares issued |       |                 |       |               |       |
|                                                                                    |       | 946,278              |       | 946,278            |       |
| 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           |       | 10,960,396         |       |
| Accumulated deficit                                                                     |       | (11,600,075          | )          | (12,116,564        | )          |
|                                                                                    |       |                 |       |               |       |
| Total                                                                                   |       | 377,201              |       | (139,288           | )          |
| Less:                                                                                   |       |                 |       |               |       |
| Treasury stock, 25,000 shares at cost                                                   |       | (24,692              | )          | (24,692            | )          |
| Total stockholders’ equity(deficit)                                                |       | 352,509              |       | (163,980           | )          |
|                                                                                    |       |                 |       |               |       |
| Total liabilities and stockholders’ equity(deficit)                                |       | $                    | 6,314,162  |               | $          | 6,741,301 |   |

 

See accompanyingnotes.

 

3

----

 

**BOSTONRESTAURANTS ASSOCIATES, INC. AND SUBSIDIARIES**

 

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(unaudited)**

 
| ** **                                                        | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|-------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                                        | ** ** | **January 22,**               | ** ** | **January 23,**                  | ** ** | **January 22,** | ** ** | **January 23,** | ** ** |
| ** **                                                        | ** ** | **2006**                           | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Revenues:                                                         |       |                               |       |                                  |       |   |   |   |   |
| Restaurant sales                                                  |       | $                                  | 6,017,693  |                                  | $          | 5,826,725 |   | $ | 17,510,069 |   | $ | 17,068,899 |   |
| Franchise fees                                                    |       | 0                                  |       | 0                                     |       | 0 |   | 269 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Total revenues                                                    |       | 6,017,693                          |       | 5,826,725                             |       | 17,510,069 |   | 17,069,168 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Costs and expenses:                                               |       |                               |       |                                  |       |   |   |   |   |
| Cost of food, beverages and liquor                                |       | 1,130,053                          |       | 1,175,598                             |       | 3,344,234 |   | 3,501,892 |   |
| Payroll                                                           |       | 1,732,541                          |       | 1,713,530                             |       | 5,048,145 |   | 4,979,721 |   |
| Other operating expenses                                          |       | 2,000,777                          |       | 1,877,900                             |       | 5,811,741 |   | 5,458,093 |   |
| General and administrative                                        |       | 637,963                            |       | 535,056                               |       | 1,852,793 |   | 1,751,199 |   |
| Depreciation and amortization                                     |       | 234,981                            |       | 239,263                               |       | 698,671 |   | 708,971 |   |
| Pre-opening costs                                                 |       | 0                                  |       | 0                                     |       | 0 |   | 93,196 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Total costs and expenses                                          |       | 5,736,315                          |       | 5,541,347                             |       | 16,755,584 |   | 16,493,072 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Operating Income                                                  |       | 281,378                            |       | 285,378                               |       | 754,485 |   | 576,096 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Other income                                                      |       | 1,519                              |       | 2,215                                 |       | 20,288 |   | 6,645 |   |
| Interest income                                                   |       | 5,495                              |       | 435                                   |       | 11,945 |   | 1,246 |   |
| Interest expense                                                  |       | (92,970                            | )          | (119,574                              | )          | (282,575 | ) | (368,990 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income from continuing operations before  discontinued operations |       | 195,422                            |       | 168,454                               |       | 504,143 |   | 214,997 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Discontinued operations :                                         |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) from operations                                     |       | 910                                |       | (163,640                              | )          | (61,376 | ) | (387,486 | ) |
| Gain (Loss) from disposal of discontinued operations              |       | 0                                  |       | 0                                     |       | 132,004 |   | 0 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) from discontinued operations                        |       | 910                                |       | (163,640                              | )          | 70,628 |   | (387,486 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Net Income (Loss)                                                 |       | 196,332                            |       | 4,814                                 |       | 574,771 |   | (172,489 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Less: preferred stock dividends                                   |       | (19,282                            | )          | 0                                     |       | (58,282 | ) | 0 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) available to common shareholders                    |       | $                                  | 177,050    |                                  | $          | 4,814 |   | $ | 516,489 |   | $ | (172,489 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) per share of common stock (Basic)                   |       |                               |       |                                  |       |   |   |   |   |
| Continuing Operations                                             |       | $                                  | 0.03       |                                  | $          | 0.02 |   | $ | 0.06 |   | $ | 0.03 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Discontinued Operations                                           |       | $                                  | 0.00       |                                  | $          | (0.02 | ) | $ | 0.01 |   | $ | (0.05 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) available to common shareholders                    |       | $                                  | 0.03       |                                  | $          | 0.00 |   | $ | 0.07 |   | $ | (0.02 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) per share of common stock (Diluted)                 |       |                               |       |                                  |       |   |   |   |   |
| Continuing Operations                                             |       | $                                  | 0.02       |                                  | $          | 0.02 |   | $ | 0.06 |   | $ | 0.03 |   |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Discontinued Operations                                           |       | $                                  | 0.00       |                                  | $          | (0.02 | ) | $ | 0.01 |   | $ | (0.05 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| Income (Loss) available to common shareholders                    |       | $                                  | 0.02       |                                  | $          | 0.00 |   | $ | 0.07 |   | $ | (0.02 | ) |
|                                                              |       |                               |       |                                  |       |   |   |   |   |
| 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    |       | 7,169,921                          |       | 7,109,237                             |       | 7,159,879 |   | 7,126,562 |   |

 

See accompanyingnotes.

 

4

----

 

BOSTON RESTAURANTASSOCIATES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATEDSTATEMENTS OF CASH FLOWS

 

(unaudited)

 
| ** **                                           | ** ** | **Thirty-nine Weeks Ended** | ** ** |
|------------------------------------------------------|------------|---------------------------------------|------------|
| ** **                                           | ** ** | **January 22,**                  | ** ** | **January 23,** | ** ** |
| ** **                                           | ** ** | **2006**                              | ** ** | **2005** | ** ** |
|                                                 |       |                                  |       |   |   |
| Net cash provided by operating activities            |       | $                                     | 734,501    |   | $ | 831,386 |   |
|                                                 |       |                                  |       |   |   |
| Cash flows from investing activities:                |       |                                  |       |   |   |
| Capital expenditures                                 |       | (309,683                              | )          | (628,128 | ) |
| Proceeds from sale of assets                         |       | 81,714                                |       | 0 |   |
|                                                 |       |                                  |       |   |   |
| Net cash used for investing activities               |       | (227,969                              | )          | (628,128 | ) |
|                                                 |       |                                  |       |   |   |
| Cash flows from financing activities:                |       |                                  |       |   |   |
| Repayments of long-term debt                         |       | (262,485                              | )          | (586,695 | ) |
| Repayments of capital lease obligations              |       | (31,152                               | )          | (141,417 | ) |
| Repayments of stockholder loans                      |       | (4,785                                | )          | (4,557 | ) |
| Proceeds from preferred stock subscription           |       | 0                                     |       | 946,278 |   |
| Payments of preferred dividends                      |       | (58,282                               | )          | 0 |   |
|                                                 |       |                                  |       |   |   |
| Net cash provided by (used for) financing activities |       | (356,704                              | )          | 213,609 |   |
|                                                 |       |                                  |       |   |   |
| Net increase in cash and cash equivalents            |       | 149,828                               |       | 416,867 |   |
|                                                 |       |                                  |       |   |   |
| Cash and cash equivalents at beginning of period     |       | 687,207                               |       | 651,754 |   |
|                                                 |       |                                  |       |   |   |
| Cash and cash equivalents at end of period           |       | $                                     | 837,035    |   | $ | 1,068,621 |   |

 

See accompanyingnotes.

 

5

----

 

 

BOSTON RESTAURANT ASSOCIATES, INC. ANDSUBSIDIARIES

NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

##  

## JANUARY 22, 2006

##  

## (unaudited)

 

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

 

The accompanying unaudited condensed consolidatedfinancial statements have been prepared in accordance with generally acceptedaccounting principles for interim financial information and with theinstructions to Form 10-Q. Accordingly, they do not include all of theinformation and footnotes required by generally accepted accounting principlesfor complete financial statements. In the opinion of management, alladjustments (consisting of normal recurring accruals) considered necessary fora fair presentation have been included. Operating results for the thirteen-weekperiod and thirty-nine week period ended January 22, 2006 are notnecessarily indicative of the results that may be expected for the yearending April 30, 2006. For further information, refer to the consolidatedfinancial statements and footnotes thereto included in the Company’s annualreport on Form 10-K for the year ended April 24, 2005. The balancesheet at April 24, 2005 has been derived from the audited financialstatements at that date.

 

The accompanying statements of operations and cashflows for the fiscal 2006 period reflect the consolidated operations and cashflows of three casual dining Italian restaurants and, thirteen Pizzeria Reginarestaurants for the entire period. For the fiscal 2005 period there were fivecasual dining Italian restaurants and thirteen Pizzeria Regina restaurants forthe entire period and one Pizzeria Regina for part of the period.

 

In fiscal 2005, the Company completed the assetsale of Polcari’s of Hyannis, Inc. and closed the Pizzeria Regina inRichmond, Virginia at the end of the lease term. The sale of Polcari’s ofCambridge, Inc. was completed on July 22, 2005. The accompanyingfinancial statements have been reclassified to reflect Polcari’s of Hyannis, Inc.,Polcari’s of Cambridge, Inc. and Pizzeria Regina at Richmond, Virginia asdiscontinued operations.

 

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

 

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

 

6

----

 

The following is a reconciliation of the denominator(number of shares) used in the computation of earnings per share. Thenumerator, income (loss) available to common shareholders, is the same for thebasic and diluted computations.

 
| ** **  | ** ** | **Thirteen weeks ended ** | ** ** | **Thirty-nine weeks ended** | ** ** |
|-------------|------------|------------------------------------------|------------|---------------------------------------|------------|
| ** **  | ** ** | **January 22,**                     | ** ** | **January 23,**                  | ** ** | **January 22,** | ** ** | **January 23,** | ** ** |
| ** **  | ** ** | **2006**                                 | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Basic       |       | 7,035,170                                |       | 7,035,170                             |       | 7,035,170 |   | 7,035,170 |   |
| Shares      |       |                                     |       |                                  |       |   |   |   |   |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Effect of   |       |                                     |       |                                  |       |   |   |   |   |
| Dilutive    |       |                                     |       |                                  |       |   |   |   |   |
| Securities: |       |                                     |       |                                  |       |   |   |   |   |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Options     |       | 134,751                                  |       | 74,067                                |       | 124,709 |   | 91,392 |   |
| Diluted     |       |                                     |       |                                  |       |   |   |   |   |
| Shares      |       | 7,169,921                                |       | 7,109,237                             |       | 7,159,879 |   | 7,126,562 |   |

 

The following table summarizes securities that were outstanding as of January 22,2006 and January 23, 2005, 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 22,**                     | ** ** | **January 23,**                  | ** ** | **January 22,** | ** ** | **January 23,** | ** ** |
| ** **  | ** ** | **2006**                                 | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| ** **  | ** ** | ** **                               | ** ** | ** **                            | ** ** | ** ** | ** ** | ** ** | ** ** |
| Options     |       | 819,800                                  |       | 834,800                               |       | 819,800 |   | 834,800 |   |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Warrants    |       | 601,000                                  |       | 601,000                               |       | 601,000 |   | 601,000 |   |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Convertible |       |                                     |       |                                  |       |   |   |   |   |
| Debentures  |       | 1,160,000                                |       | 1,160,000                             |       | 1,160,000 |   | 1,160,000 |   |
|        |       |                                     |       |                                  |       |   |   |   |   |
| Convertible |       |                                     |       |                                  |       |   |   |   |   |
| Preferred   |       |                                     |       |                                  |       |   |   |   |   |
| Stock       |       | 1,147,056                                |       | 1,147,056                             |       | 1,147,056 |   | 1,147,056 |   |

 

7

----

 

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

 

Had compensation cost for the Company’s stock optionsbeen determined based upon the fair value at the grant date for awards underthe plans consistent with the methodology prescribed under SFAS No. 123,the Company’s income (loss) available to common shareholders would have beenadjusted to the pro forma amounts indicated below.

 
| ** **                                                                       | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty- Nine Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------------------|------------|---------------------------------------------|------------|
| ** **                                                                       | ** ** | **January 22, 2006**     | ** ** | **January 23, 2005**              | ** ** | **January 22, 2006** | ** ** | **January 23, 2005** | ** ** |
|                                                                             |       |                               |       |                                        |       |   |   |   |   |
| Net income (loss) as reported                                                    |       | $                                  | 196,332    |                                        | $          | 4,814 |   | $ | 574,771 |   | $ | (172,489 | ) |
| Less:dividends                                                                   |       | (19,282                            | )          | —                                      |       | (58,282 | ) | — |   |
| Income (loss) available to common stockholders as  reported                      |       | 177,050                            |       | 4,814                                       |       | 516,489 |   | (172,489 | ) |
| 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 |       | —                             |       | (64,747                                     | )          | (3,709 | ) | (144,119 | ) |
| Income available to common shareholders (loss)-pro  forma                        |       | $                                  | 177,050    |                                        | $          | (59,933 | ) | $ | 512,780 |   | $ | (316,608 | ) |
|                                                                             |       |                               |       |                                        |       |   |   |   |   |
| Basic earnings per share:                                                        |       |                               |       |                                        |       |   |   |   |   |
| As reported                                                                      |       | $                                  | .03        |                                        | $          | — |   | $ | .07 |   | $ | (.02 | ) |
| Pro forma                                                                        |       | $                                  | .03        |                                        | $          | (.01 | ) | $ | .07 |   | $ | (.05 | ) |
|                                                                             |       |                               |       |                                        |       |   |   |   |   |
| Diluted earnings per share:                                                      |       |                               |       |                                        |       |   |   |   |   |
| As reported                                                                      |       | $                                  | .02        |                                        | $          | — |   | $ | .07 |   | $ | (.02 | ) |
| Pro forma                                                                        |       | $                                  | .02        |                                        | $          | (.01 | ) | $ | .07 |   | $ | (.04 | ) |

 

8

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**3.****                                     ****NEW ACCOUNTINGPRONOUNCEMENTS**

 

None Applicable

 

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

###  

### **RESULTS OF OPERATIONS**

###  

# **Overview**

 

In fiscal 2005, the Company completed the assetsale of Polcari’s of Hyannis, Inc. in March, 2005 and closed the PizzeriaRegina in Richmond, Virginia at the end of the lease term in November, 2004. Thesale of Polcari’s of Cambridge, Inc. was completed in fiscal 2006 on July 22,2005. The accompanying financial statements have been reclassified to reflectPolcari’s of Hyannis, Inc., Polcari’s of Cambridge, Inc. and PizzeriaRegina at Richmond, Virginia as discontinued operations.

 

TheCompany’s restaurant sales in the most recent quarter were $6,018,000 comparedto sales of $5,827,000 in the third quarter of fiscal 2005, an increase of 3.3%.The Company believes the increase in revenue is primarily attributable to anincrease in sales for the Pizzeria Regina restaurants which benefited from an unseasonablymild winter in the Northeastern United States. The Company had income for thethird quarter of fiscal 2006 of $196,000, compared to net income of $5,000 forthe same quarter in fiscal 2005. This increase in income is the result ofincreased sales from Pizzeria Regina restaurants as a percentage of total salesand lower costs of food, beverages and liquor expenses and payroll expenses atthe Company’s Pizzeria Regina restaurants. The key factors that affectour operating results are the impact of new store openings, comparablerestaurant sales, which are driven by customer counts and check average, andour ability to manage operating expenses such as food cost, labor and benefitsand other costs. Changes in the number of restaurants in operation can increaseor decrease total Company revenues and expenses, and the build out and openingof new stores can affect operating profits. Each restaurant unit’s contributionmargin will vary over the life of the restaurant. Margins tend to be low when arestaurant is first opened until customer traffic reaches planned levels. Marginscan also deteriorate at the end of a unit’s life cycle due to a decline incustomer traffic caused by a variety of factors outside the control of the Company.These economic conditions impact both the Pizzeria Regina units and the Polcari’sNorth End units.

 

In the fiscal 2006 period, there were 16 units inoperation for the entire period. In this fiscal 2005 period there were 18 unitsin operation for the entire period and one Pizzeria Regina restaurant for part ofthe period. The following table sets forth all revenues, costs and expenses asa percentage for the periods indicated for revenue and expense items includedin the consolidated statements of operations:

 

9

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| ** **                                    | ** ** | **Thirteen Weeks Ended** | ** ** | **Thirty-nine weeks Ended** | ** ** |
|-----------------------------------------------|------------|------------------------------------|------------|---------------------------------------|------------|
| ** **                                    | ** ** | **January 22,**               | ** ** | **January 23,**                  | ** ** | **January 22,** | ** ** | **January 23,** | ** ** |
| ** **                                    | ** ** | **2006**                           | ** ** | **2005**                              | ** ** | **2006** | ** ** | **2005** | ** ** |
| (1)                                           |       |                               |       |                                  |       |   |   |   |   |
| Revenues:                                     |       |                               |       |                                  |       |   |   |   |   |
| Restaurant sales                              |       | 100                                | %          | 100                                   | %          | 100 | % | 100 | % |
| Other                                         |       | —                             |       | —                                |       | — |   | — |   |
|                                          |       |                               |       |                                  |       |   |   |   |   |
| Total revenues                                |       | 100                                | %          | 100                                   | %          | 100 | % | 100 | % |
|                                          |       |                               |       |                                  |       |   |   |   |   |
| Costs and expenses:                           |       |                               |       |                                  |       |   |   |   |   |
| Cost of food, beverages and liquor            |       | 18.8                               |       | 20.2                                  |       | 19.1 |   | 20.5 |   |
| Other operating expenses- payroll             |       | 28.8                               |       | 29.4                                  |       | 28.8 |   | 29.2 |   |
| Other operating expenses exclusive of payroll |       | 33.2                               |       | 32.2                                  |       | 33.2 |   | 32.0 |   |
| General and administrative                    |       | 10.6                               |       | 9.2                                   |       | 10.6 |   | 10.3 |   |
| Depreciation and amortization                 |       | 3.9                                |       | 4.1                                   |       | 4.0 |   | 4.1 |   |
| Pre-opening costs                             |       | —                             |       | —                                |       | — |   | .5 |   |
| Operating income (loss)                       |       | 4.7                                |       | 4.9                                   |       | 4.3 |   | 3.4 |   |
| Interest expense, net                         |       | (1.4                               | )          | (2.0                                  | )          | (1.5 | ) | (2.1 | ) |
| Other income                                  |       | —                             |       | —                                |       | .1 |   | — |   |
| Income from continuing operations             |       | 3.3                                |       | 2.9                                   |       | 2.9 |   | 1.3 |   |
| Income (loss) from discontinued operations    |       | —                             |       | (2.8                                  | )          | .4 |   | (2.3 | ) |
| Net income (loss)                             |       | 3.3                                | %          | .1                                    | %          | 3.3 | % | (1.0 | )% |

 

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(1) In fiscal 2005, the Company completedthe asset sale of Polcari’s of Hyannis, Inc. in March 2005 and closedthe Pizzeria Regina in Richmond, Virginia at the end of the lease term in November 2004.The sale of Polcari’s of Cambridge, Inc. was completed on July 22,2005. The financial statements included with this report have been reclassifiedto reflect Polcari’s of Hyannis, Inc. Polcari’s of Cambridge, Inc.,and Pizzeria Regina at Richmond, Virginia as discontinued operations.

 

10

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**Thirteen Weeks Ended January 22, 2006 as Compared to ThirteenWeeks ended January 23, 2005 Restaurant Sales**

 

Restaurant sales in the most recent quarter were$6,018,000 compared to restaurant sales in the prior year’s period of $5,827,000.The Company believes that the increase in revenue was primarily attributable toan increase in sales from the Pizzeria Regina restaurants which benefited froman unseasonably mild winter in the Northeastern United States. Sales volume forthe restaurants open throughout the quarterly periods in both fiscal 2006 and2005 increased by 3.3%.

 

Net sales at the Company’s Pizzeria Regina restaurantsincreased to $3,878,000 in the current period from $3,662,000 in the prior year’speriod. The Company believes the increase in sales was primarily attributableto milder weather in the Northeastern United States. Same store sales increased5.9% for the current period.

 

Net sales at the Company’s full service casual diningrestaurants decreased to $2,115,000 in the current period from $2,153,000 inthe prior year’s period. The Company believes the decrease in sales wasprimarily attributable to an increase in gas prices resulting in a decrease indiscretionary spending. Same store sales decreased 1.8% for the current period.

 

Net sales to third parties at the Company’s commissarywere $25,000 in the current period compared to $12,000 in the prior year’speriod.

 

**Costs and Expenses**

 

Cost of Food, Beverages and Liquor.

 

Cost of food, beverages and liquor as a percentage oftotal revenues for all restaurants was 19% in the fiscal 2006 period comparedto 20% in the fiscal 2005 period. The decrease as a percentage of totalrevenues was primarily attributable to two pizzeria Regina locations thateliminated certain food items from their menus and to a decrease in cheesecosts.

 

The cost of food, beverage and liquor for allrestaurants was $1,130,000 in the current period compared to $1,176,000 in theprior year’s period. The dollar decrease was due in part to theelimination of certain food items at two Pizzeria Regina locations and to adecrease in cheese costs.

 

The cost of food, beverage and liquor as a percentageof restaurant sales at the Pizzeria Regina restaurants was 16% in the fiscal2006 period compared to 17% in the fiscal 2005 period. The decrease as apercentage of restaurant sales was primarily due to the elimination of fooditems at two Pizzeria Regina locations and to a decrease in cheese costs.

 

11

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The cost of food, beverage and liquor at PizzeriaRegina restaurants was $605,000 in the current period compared to $640,000 inthe prior year’s period. The dollar decrease was primarily due to two PizzeriaRegina locations which eliminated food items from their menus and reducedcheese costs.

 

The cost of food, beverage and liquor as a percentageof restaurant sales at the Company’s full service casual dining restaurants was25% in both fiscal 2006 and fiscal 2005 periods.

 

The cost of food, beverage and liquor at the Company’sfull service casual dining restaurants was $525,000 in the current periodcompared to $536,000 in the prior year’s period. The dollar decrease is aresult of lower revenues.

 

# **OtherOperating Expenses**

# ** **

Payroll Expenses.

 

Payrollexpenses as a percentage of total revenues for all restaurants were 29% in boththe fiscal 2006 and the fiscal 2005 periods.

 

Payroll expenses for all restaurants were $1,733,000in the current period, compared to $1,714,000 in the prior year’s period. Thedollar increase in payroll expenses was primarily due to higher employeeincentive costs partially offset by the eliminations of food items at twoPizzeria Regina locations which had additional personnel.

 

Payroll expenses at the Pizzeria Regina restaurantswere 24% of restaurant sales in the current period compared to 26% ofrestaurant sales in the prior year’s period. The decrease as a percentage ofrestaurant sales was primarily due to the elimination of food items at twoPizzeria Regina locations which resulted in a labor reduction.

 

Payroll expenses of the Pizzeria Regina restaurantswere $922,000 in the current period compared to $949,000 in the prior year’speriod. This dollar decrease was primarily due to the reduction in personnel attwo Pizzeria Regina restaurants due to the elimination of food items from theirmenus.

 

Payroll expenses at the Company’s full service casualdining restaurants were 33% of restaurant sales in the current period comparedto 31% in the prior year’s period. The increase as a percentage of restaurantsales was primarily attributable to higher employee incentive costs.

 

Payroll expenses at the Company’s full service casualdining restaurants were $702,000 in the current period compared to $657,000 inthe prior year’s period. This dollar increase was primarily due to higheremployee incentive costs.

 

Payroll expenses at the Company’s Commissary were $109,000for the fiscal 2006 period as compared to $108,000 in the fiscal 2005 period.

 

12

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Other Operating Expenses, Exclusive of Payroll.

 

Otheroperating expenses for all restaurants exclusive of payroll were 33% of totalrevenues in the fiscal 2006 period compared to 32% in the fiscal 2005 period. Theincrease as a percentage of total revenues was primarily attributable to legalcosts associated with the Pizzeria Regina at Burlington Mall, Burlington,Massachusetts relating to the negotiation and extension of the Company’s leasethere.

 

Other operating expenses for all restaurants,exclusive of payroll, were $2,001,000 in the current period compared to $1,878,000in the prior year’s period. The increase in operating expenses, exclusive ofpayroll, was primarily attributable to legal costs associated with the PizzeriaRegina at Burlington, Mall.

 

Other operating expenses exclusive of payroll, for thePizzeria Regina restaurants as a percentage of restaurant sales were 33% in thecurrent period compared to 32% in the prior year’s period. The increase as apercentage of restaurant sales was primarily due to legal costs associated withthe Pizzeria Regina at the Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses, exclusive of payroll, fromthe Pizzeria Regina restaurants were $1,274,000 in the current period, comparedto $1,188,000 in the prior year’s period. This dollar increase is primarily dueto the legal costs associated with the Pizzeria Regina at the Burlington Mall,Burlington, Massachusetts.

 

Other operating expenses exclusive of payroll, for theCompany’s full service casual dining restaurants as a percentage of restaurantsales were 33% in the current period compared to 30% in the prior years period.This increase as a percentage of restaurant sales was primarily attributable toa lower revenue base and higher energy costs.

 

Other operating expenses, exclusive of payroll, forthe Company’s full service casual dining restaurants were $693,000 in thecurrent period compared to $653,000 in the prior year’s period. The dollar increasewas primarily attributable higher energy costs.

 

Other operating expenses also include commissaryexpenses, which were $34,000 for the fiscal 2006 period as compared to $37,000in the fiscal 2005 period.

 

General and Administrative Expenses.

 

General and administrative expenses were 11% of totalrevenues in fiscal 2006 compared to 9% in fiscal 2005 period. The increase as apercentage of total revenues was primarily attributable to this year’s state excisetaxes compared to the prior year’s state excise tax credit and consultingcosts.

 

General and administrative expenses were $638,000 inthe current period compared to $535,000 in the prior year’s period. The dollarincrease was primarily due to this year’s state excise taxes compared to theprior year’s state excise tax credit and consulting costs.

 

13

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Depreciation and Amortization Expenses.

 

Depreciation and amortization expenses were 4% oftotal revenues in both fiscal 2006 and fiscal 2005 periods.

 

Depreciation and amortization expense was $235,000 inthe current period compared to $239,000 in the prior year’s period.

 

**Other Income**

 

Other income was $2,000 in both fiscal 2006 and fiscal2005 periods.

 

**Interest Expense and Interest Income.**

 

Interest expense was $93,000 in the current period ascompared to $120,000 in the prior year’s period. This dollar decrease wasprimarily due to a restructuring of the Company’s credit facility.

 

Interest income was $5,000 in the fiscal 2006 periodcompared to $0 in the fiscal 2005 period.

 

**Discontinued Operations**

 

In the fiscal 2006 period, the sale of Polcari’sof Cambridge, Inc. was completed on July 22, 2005. In fiscal 2005,the Company completed the asset sale of Polcari’s of Hyannis, Inc. in March 2005and closed the Pizzeria Regina in Richmond, Virginia at the end of the leaseterm in November. The Company has reclassified its financial results to reflectPolcari’s of Hyannis, Inc., Polcari’s of Cambridge, Inc. and PizzeriaRegina in Richmond, Virginia as discontinued operations.

 

Income from discontinued operations was $1,000in the fiscal 2006 period compared to a loss of $164,000 in fiscal 2005 period.In the fiscal 2006 period the income from discontinued operations isattributable to the Polcari’s North End restaurant in Cambridge, Massachusettspartially offset by operating losses form the Polcari’s bistro restaurantin Hyannis, Massachusetts. In the fiscal 2005 period, the loss of $164,000operations represents operating losses from the Polcari’s bistro restaurant inHyannis, Massachusetts, the Polcari’s North End restaurant in Cambridge,Massachusetts, and the Pizzeria Regina restaurant in Richmond, Virginia.

 

14

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**Thirty-nine weeks Ended January 22, 2006**

 

Restaurant sales for the thirty-nine weeks ended January 22,2006 were $17,510,000 compared to restaurant sales in the prior year’s periodof $17,069,000. The increase in revenue was primarily attributable to thePizzeria Regina at South Station in Boston, Massachusetts operating for theentire period, and to an unseasonably mild winter in the Northeastern UnitedStates, partially offset by an increase in gas prices resulting in a decreasein discretionary spending at our Polcari’s restaurants. Sales volume for therestaurants open throughout both fiscal 2006 and 2005 periods increased by 2.6%

 

Net sales at the Company’s Pizzeria Regina restaurantsincreased to $10,980,000 in the current thirty- nine week period from $10,501,000in the prior year’s period. The increase in restaurant sales was principallydue to the Pizzeria Regina at South Station being opened for the entire period,and to milder weather in the Northeastern United States. The same store salesfor the Pizzeria Regina restaurants increased 2.9% in the current period.

 

Net sales at the Company’s full service casual diningrestaurants decreased to $6,470,000 in the thirty-nine week current period from$6,540,000 in the prior year’s period. This decrease was primarily attributableto an increase in gas prices resulting in a decrease in discretionary spending.The same store sales for the full service casual dining restaurants decreased1.1% in the current period.

 

Net sales at the Company’s commissary were $60,000 inthe current period compared to $28,000 in the prior year’s period.

 

# **Costsand Expenses**

# ** **

Cost of Food, Beverages and Liquor.

 

Costof food, beverages, liquor as a percentage of total revenues for allrestaurants was 19% in the current period compared to 21% in the prior year’speriod. The decrease as a percentage of total revenues was primarilyattributable to the elimination of food items at two Pizzeria Regina locationsand to a decrease in cheese costs.

 

The cost of food, beverage and liquor for allrestaurants was $3,344,000 in the current thirty-nine week period compared to$3,502,000 in the prior year’s period. The dollar decrease was due in part totwo Pizzeria Regina locations that eliminated certain food items from theirmenus and to a decrease in cheese costs.

 

The cost as a percentage of restaurant sales at thePizzeria Regina restaurants was 16% in the fiscal 2006 period compared to 18%in the fiscal 2005 period. The decrease as a percentage of restaurant sales wasprincipally due to the elimination of food items at two Pizzeria Reginalocations and to a decrease in cheese costs.

 

15

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The cost of food, beverage and liquor at PizzeriaRegina restaurants was $1,726,000 in the current period compared to $1,847,000in the prior year’s period. The dollar decrease was due to two Pizzeria Reginalocations that eliminated certain food items from their menus and to a decreasein cheese costs.

 

The cost as a percentage of restaurant sales at theCompany’s full service casual dining restaurants was 25% in both the fiscal2006 and the fiscal 2005 periods.

 

The cost of food, beverage and liquor at the Company’sfull service casual dining restaurants was $1,618,000 in the current thirty-nineweek period compared to $1,655,000 in the prior year’s period. The dollardecrease is a result of lower revenues.

 

# **OtherOperating Expenses**

# ** **

Payroll Expenses.

 

Payrollexpenses as a percentage of the total revenues for all restaurants were 29% inboth fiscal 2006 and fiscal 2005 periods.

 

Payroll expenses for all restaurants were $5,048,000in the current period, compared to $4,980,000 in the prior year’s thirty-nineweek period. The dollar increase in payroll expenses was primarily due to thePizzeria Regina at South Station in Boston, Massachusetts being open for the entireperiod and to higher employee incentive costs.

 

Payroll expenses at the Pizzeria Regina restaurantswere 24% of restaurant sales in the current period compared to 26% in the prioryear’s period. The decrease as a percentage of restaurant sales was primarilydue to the reduction in personnel at two Pizzeria Regina restaurants due to theelimination of food items from their menus.

 

Payroll expenses of the Pizzeria Regina restaurantswere $2,649,000 in the current thirty-nine week period compared to $2,680,000in the prior year’s period. This dollar decrease was primarily due to theelimination of food items at two Pizzeria Regina locations which resulted in alabor reduction.

 

Payroll expenses as a percentage of restaurant salesat the Company’s full service casual dining restaurants were 32% of restaurantsales in the current period compared to 30% in the prior year’s period. Theincrease as a percentage of restaurant sales was primarily attributable tohigher employee incentive costs.

 

Payroll expenses at the Company’s full service casualdining restaurants were $2,075,000 in the current thirty-nine week periodcompared to $1,989,000 in the prior year’s period. This dollar increase wasprimarily due to higher employee incentive costs.

 

Payroll expenses at the Company’s Commissary were $324,000for the fiscal 2006 period as compared to $311,000 in the fiscal 2005 period.

 

16

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Other Operating Expenses, Exclusive of Payroll.

 

Otheroperating expenses for all restaurants, exclusive of payroll, were 33% of totalrevenues in the fiscal 2006 period compared to 32% in the fiscal 2005 period. Theincrease as a percentage of total revenues was primarily attributable to legalcosts associated with the Pizzeria Regina at Burlington Mall, Burlington,Massachusetts relating to the negotiation and extension of the Company’s leasethere.

 

Other operating expenses for all restaurants,exclusive of payroll, were $5,812,000 in the current thirty-nine week periodcompared to $5,458,000 in the prior year’s period. The increase in operatingexpenses, exclusive of payroll, as a percentage of total revenues was primarilydue to the Pizzeria Regina at South Station in Boston, Massachusetts being openfor the entire period and to legal costs associated with the Pizzeria Regina atthe Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses, exclusive of payroll, forthe Pizzeria Regina restaurants as a percentage of restaurant sales were 34% inthe current period compared to 33% in the prior year’s period. The increase asa percentage of sales was primarily attributable to the Pizzeria Regina atSouth Station being open for the entire period and legal costs associated withthe Pizzeria Regina at Burlington Mall, Burlington, Massachusetts .

 

Other operating expenses, exclusive of payroll, fromthe Pizzeria Regina restaurants were $3,747,000 in the current thirty-nine weekperiod, compared to $3,442,000 in the prior year’s period. This dollar increaseis primarily due to the addition of a new Pizzeria Regina restaurant at SouthStation operating for the entire period and legal costs associated with thePizzeria Regina at the Burlington Mall, Burlington, Massachusetts.

 

Other operating expenses, exclusive of payroll, forthe Company’s full service casual dining restaurants as a percentage ofrestaurant sales were 30% in the current period compared to 29% in the prioryear’s period. The increase as a percentage of restaurant sales is primarilyattributable to a lower revenue base and higher energy costs.

 

Other operating expenses, exclusive of payroll, forthe Company’s full service casual dining restaurants were $1,965,000 in thecurrent thirty-nine week period compared to $1,921,000 in the prior year’speriod. The dollar increase is primarily due to higher energy costs.

 

Other operating expenses also include commissaryexpenses, which were $100,000 in fiscal 2006 period compared to $95,000 infiscal 2005 period.

 

General and AdministrativeExpenses.

 

General and Administrative expenseswere 11% of total revenues in the fiscal 2006 period compared to 10% in fiscal2005 period. The increase as a percentage of total revenues was primarilyattributable to this year’s state excise taxes compared to the prior year’sstate excise tax credit and consulting costs.

 

17

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General and administrative expenses were $1,853,000 inthe current period, compared to $1,751,000 in the prior year’s period. Thedollar increase was primarily due to thisyear’s state excise taxes compared to the prior year’s state excise tax creditand consulting costs.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expense were 4% of totalrevenues in both fiscal 2006 and fiscal 2005 periods.

 

Depreciation and amortization expense was $699,000 inthe current period, compared to $709,000 in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs were $0 in the fiscal 2006 periodcompared to $93,000 in the fiscal 2005 period. These costs which consist oflabor, rent and training materials are attributable to the opening of the newPizzeria Regina restaurant at South Station in Boston, Massachusetts in thefiscal 2005 period.

 

Other Income

 

Other income was $20,000 in the current periodcompared to $7,000 in the prior year’s period. The increase was primarily dueto an insurance reimbursement for the Pizzeria Regina restaurant in Paramus,New Jersey.

 

Interest Expense and Interest Income.

 

Interest expense was $283,000 in the current period ascompared to $369,000 in the prior year’s period. This dollar decrease wasprimarily due to a restructuring of the Company’s credit facility.

 

Interest income was $12,000 in the current periodcompared to $1,000 in the prior year’s period.

 

Discontinued Operations

 

In the fiscal 2006 period, the sale of Polcari’sof Cambridge, Inc. was completed on July 22, 2005. In fiscal 2005,the Company completed the asset sale of Polcari’s of Hyannis, Inc. inMarch, 2005 and closed the Pizzeria Regina in Richmond, Virginia at the end ofthe lease term in November, 2004. The Company has reclassified its financialresults to reflect Polcari’s of Hyannis, Inc., Polcari’s of Cambridge, Inc.and Pizzeria Regina in Richmond, Virginia as discontinued operations.

 

The income from discontinued operations was $71,000in the fiscal 2006 period compared to a loss of $387,000 in fiscal 2005 period.In the fiscal 2006 period the income from discontinued operations representsoperating losses from the Polcari’s 

 

18

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bistro restaurant in Hyannis, Massachusetts, thePolcari’s North End restaurant in Cambridge, Massachusetts and a gain of$132,000 from the disposal of certain assets of the Polcari’s North EndRestaurant in Cambridge, Massachusetts. In the fiscal 2005 period, the loss of$387,000 from discontinued operations represents operating losses from thePolcari’s bistro restaurant in Hyannis, Massachusetts, the Polcari’s North Endrestaurant in Cambridge, Massachusetts, and the Pizzeria Regina restaurant inRichmond, Virginia.

 

### **LIQUIDITY AND CAPITALRESOURCES**

###  

At January 22, 2006, theCompany had negative net working capital of $722,000 compared tonegative net working capital of $1,339,000 at April 24, 2005. It is commonfor companies in the restaurant industry to operate with net working capitaldeficits. We are able to operate with a substantial working capital deficitbecause (1) restaurant operations and most food service operations areconducted primarily on a cash (and cash equivalent) basis with a low level ofaccounts receivable, (2) rapid turnover allows a limited investment ininventories, and (3) accounts payable for food, beverages and suppliesusually become due after the receipt of cash from the related sales. During thethirty-nine weeks ended January 22, 2006, the Company had a net increasein cash and cash equivalents of $150,000, reflecting net cash provided by operatingactivities of $735,000, net cash used for investing activities of $228,000 andnet cash used for financing activities of $357,000.

 

Net cash provided by operating activities includedincome of $575,000, a decrease in inventories of $114,000, a decrease inaccounts receivables of $25,000, a decrease in prepaid expenses of $11,000, anddepreciation and amortization expense of $699,000 which were partially offsetby a decrease in accounts payable of $157,000, a decrease in deferred rent of$16,000, a decrease in other long-term liabilities of $22,000, a decrease inaccrued expenses of $450,000 and an increase in other assets of $44,000. Netcash used for investing activities includes capital expenditures of $310,000related to Polcari’s North End restaurant, Polcari’s North End bistrorestaurants and various Pizzeria Regina restaurants partially offset by theasset sale of Polcari’s North End in Cambridge, Massachusetts of $82,000. Netcash used for financing activities of $357,000 consisted of repayments of longterm debt, lease obligations, stockholders loans and payments of preferreddividends.

 

At January 22, 2006, theCompany had current liabilities of $2,307,000, including $625,000 of accountspayable, $1,301,000 of accrued liabilities and current maturities of long termobligations in the amount of $381,000. At January 22, 2006, the Companyhad long-term obligations, less current maturities, in the amount of $3,655,000including, $1,663,000 due under its credit facility with Commerce Bank andTrust Company, $78,000 of notes payable to a stockholder, $1,450,000 ofconvertible subordinated debentures, $351,000 of deferred rent, and $113,000 ofother long-term liabilities.

 

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On April 21, 2005 the Company refinancedits debt with Commerce Bank and Trust Company and a new $2,300,000 CreditFacility was established. This Credit Facility consists of a $1,500,000 4 yearterm note bearing interest at the bank base rate plus 2% and an $800,000mortgage in favor of Commerce bank and Trust Company at a fixed rate of 7%. Themortgage has a twenty year amortization schedule with a complete paymentof principal due at the end of five years. All borrowing under the CreditFacility are collateralized by substantially all of the assets of the Companyand are subject to various financial covenants. At January 22, 2006 theCompany was in compliance with all financial covenants.

 

The Company has no additional significantcapital commitments in fiscal 2006. The Company believes that its existingresources, including its loan facility, together with cash flow generated fromoperations, will be sufficient to fund its cash flow requirements and maintaindebt covenant compliance for the next twelve months. However, the Company’sgrowth will be dependent upon obtaining additional financing. There can be noassurance that any future additional financing will be available oncommercially reasonable terms, or at all, and the success or lack of success ofthe Company’s restaurants opened within the last year and planned to be openedin the future may have a critical effect on the Company’s ability to raisefunds through the sale of stock or otherwise.

 

**NEW ACCOUNTING PRONOUNCEMENTS**

 

None Applicable.

 

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

# ** **

*Forward-looking statements inthis report, including without limitation statements relating to the adequacyof the Company’s working capital and other resources; the Company’s ability toobtain additional financing, the Company’s ability to comply with its financialcovenants, the Company’s new store openings and future expansion, and anticipatedfuture cash flows from particular locations are made pursuant to the safeharbor provisions of the Private Securities Litigation Reform Act of 1995.Investors are cautioned that such forward-looking statements involve risks anduncertainties, including without limitation: risks associated with the Company’sfinancial condition and possible need for additional funding; risks associatedwith the illiquidity of the Company’s common stock;; potential quarterlyfluctuations in the Company’s operating results; seasonality of sales;competition; risks associated with expansion; the Company’s reliance on keyemployees; risks generally associated with the restaurant industry; risksassociated with geographic concentration of the Company’s restaurants; risksassociated with serving alcoholic beverages; and other risks and uncertaintiesindicated from time to time in the Company’s filings with the Securities andExchange Commission. In addition, forward-looking statements generally can beidentified by the use of forward-looking terminology such as “may,” “will”, “except,”“intend,” “estimate,”*

 

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*“anticipate” or “believe” or the negative thereofor variations thereon or similar terminology. Although the Company believesthat the expectations reflected in such forward-looking statements will proveto have been correct, it can give no assurance that such expectations willprove to have been correct. Investors are cautioned not to place undue relianceon these forward-looking statements, which speak only as of the date hereof.*

 

**Item 3. Quantitativeand Qualitative Disclosures about Market Risk**

 

Interest Rate Risk.

 

We have exposure to interest rate risk related tocertain instruments entered into for other than trading purposes. Specifically,borrowings under the 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 9.25% at January 22,2006) would cause the interest expense for fiscal 2006 to change byapproximately $13,000. This computation is determined by considering the impactof hypothetical interest rates on our variable long-term debt at January 22,2006. However, the nature and amount of our borrowings under the CreditFacility may vary as a result of future business requirements, marketconditions, covenant compliance and other factors.

 

Our other outstanding long-term debt bears fixed ratesof interest. The Company believes there is no material exposure to a marketinterest rate risk that could affect future results of operations or financialconditions.

 

CommodityPrice Risk.

 

Many of the food products and other operatingessentials purchased by us are affected by commodity pricing and are,therefore, subject to price volatility caused by weather, production problems,delivery difficulties and other factors that are beyond our control. Oursupplies and raw materials are available from several sources and we are notdependent upon any single source for these items. The Company negotiatesdirectly with wholesale suppliers of certain high volume food ingredients suchas cheese, tomato sauce, and flour to ensure consistent quality and competitivepricing. These ingredients are then purchased for the Company by a third partyindependent distributor at the negotiated price and redistributed to theCompany’s restaurants. All other food ingredients and beverage products arepurchased directly by the general manager of each restaurant in accordance withcorporate 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.

 

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**ITEM 4. Controls andProcedures**

 

As of January 22, 2006, ourChief Executive Officer and Chief Financial Officer performed an evaluation ofthe effectiveness of the Company’s disclosure controls and procedures (asdefined in SEC Rule 13a-15(e)), which have been designed to ensure thatmaterial information related to the Company is made known to them and timelydisclosed. The Company’s management, including the CEO and CFO, does not expectthat the Company’s disclosure controls or internal controls will prevent allerror and all fraud. A control system, no matter how well conceived andoperated, can provide only reasonable, not absolute, assurance that theobjectives of the control system are met. Further, the design of a controlsystem must reflect the fact that there are resource constraints, and thebenefits of controls must be considered relative to their costs. Because of theinherent 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.

 

There have been no changes inthe Company’s internal control over financial reporting that occurred duringthe period covered by this report that have materially affected, or arereasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

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## PART II

##  

## OTHER INFORMATION

##  

**ITEM 1. Legal Proceedings.**

 

None.

 

**ITEM 1A. Risk Factors**

 

None.

 

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

 

None.

 

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

 

None.

 

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

 

None.

 

**ITEM 5. Other Information.**

 

None.

 

**ITEM 6. Exhibits .**

 

Exhibit 31.1 and 32.2: Sarbanes-Oxley Section 302Certification

Exhibit 32.1and 32.2: Sarbanes-Oxley Section 906 Certification

 

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#### **SIGNATURES**

#### ** **

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned, thereunto duly authorized.

 

 
|                     | BOSTON RESTAURANT ASSOCIATES, INC. |
|--------------------------|-----------------------------------------|
|                     |                                    |   |   |
|                     |                                    |   |   |
| Date: March 6, 2006 |                                    | By: | /s/ George R. Chapdelaine |   |
|                     |                                    |   | George R. Chapdelaine, President and |
|                     |                                    |   | Chief Executive Officer |

 

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