**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

| **(Mark  One)** |
|-----------------|
|            |   |   |
| **ý**      |   | **Annual report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934.** |
|            |   |   |
|            |   | **For  the fiscal year ended April 27, 2003.** |
|            |
| **o**           |   | **Transition report pursuant to Section 13 or 15(d) of the  Securities Exchange Act of 1934** |
|            |
|            | **For  the transition period from                             to                          **. |

 

**CommissionFile Number**

**0-18369**

 

**BOSTON RESTAURANT ASSOCIATES, INC.**

(Exact Name ofRegistrant as Specified in its Charter)

 

| **Delaware**                                                                             |   | **61-1162263**                                 |
|------------------------------------------------------------------------------------------|--------|------------------------------------------------|
| (State or Other  Jurisdiction of  Incorporation or Organization)                         |   | (I.R.S. Employer  Identification No.)          |
|                                                                                     |   |                                           |
| **999  Broadway, Suite 400  Saugus, Massachusetts**                                      |   | **01906**                                      |
| (Address of  Principal Executive Offices)                                                |   | (Zip Code)                                     |
|                                                                                     |   |                                           |
| **(781)  231-7575**                                                                      |
| (Registrant’s  Telephone Number Including Area Code)                                |
|                                                                                     |   |                                           |
| Securities registered  pursuant to Section 12(b) of the Securities Exchange Act of 1934: |
|                                                                                     |   |                                           |
| **Title of Each Class**                                                                  |   | **Name of Each Exchange  on Which Registered** |
|                                                                                     |   |                                           |
| Common stock,  $.01 par value per share                                                  |   | Boston Stock  Exchange                         |
|                                                                                     |   |                                           |
| Securities  registered under Section 12(g) of the Securities Exchange Act of 1934:       |
|                                                                                     |   |                                           |
| **Common Stock, $.01 par value per  share**                                              |
| (Title of Class)                                                                         |

 

Indicate by checkmark whether the registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements for thepast 90 days.  Yes ýNo o

 

Indicate by checkmark if there is no disclosure of delinquent filers pursuant to Item 405 ofRegulation S-K contained herein, and will not be contained, to the best of theregistrant’s knowledge, in definitive proxy or information statementsincorporated by reference in Part III of this Form 10-K or any amendments tothis Form 10-K.   ý

 

Indicate by checkmark whether the registrant is a accelerated filer (as defined in Exchange ActRule 12b-2)  Yes oNo ý

 

The aggregatemarket value of registrant’s Common Stock, $.01 par value per share, held bynon-affiliates of the registrant as of the end of the second quarter fiscalyear 2003 was $4,783,900 based upon the average of the closing bid and askedprices of such stock on that date as reported on the OTC Bulletin Board.  As of July 23, 2003 there were 7,035,170shares of the registrant’s Common Stock, $.01 par value per share outstanding.

 

 

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**INDEX**

 
| **PART I**   |
|--------------|
|         |   |   |   |
|         | **ITEM 1.** | **BUSINESS** |   |
|         |   |   |   |
|         | **ITEM 2.** | **PROPERTIES** |   |
|         |   |   |   |
|         | **ITEM 3.** | **LEGAL PROCEEDINGS** |   |
|         |   |   |   |
|         | **ITEM 4.** | **SUBMISSION OF MATTERS TO A VOTE OF  SECURITY HOLDERS** |   |
|         |
|         |
| **PART II**  |
|         |   |   |   |
|         | **ITEM 5.** | **MARKET FOR REGISTRANT’S COMMON  EQUITY AND RELATED STOCKHOLDER MATTERS** |
|         |   |   |   |
|         | **ITEM 6.** | **SELECTED FINANCIAL DATA** |   |
|         |   |   |   |
|         | **ITEM 7.** | **MANAGEMENT’S DISCUSSION AND  ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS** |
|         |   |   |   |
|         | **ITEM 7A.** | **QUANTITATIVE AND QUALITATIVE  DISCLOSURE ABOUT MARKET RISKS.** |
|         |   |   |   |
|         | **ITEM 8.** | **FINANCIAL STATEMENTS AND SUPPLEMENTARY  DATA** |   |
|         |   |   |   |
|         | **ITEM 9.** | **CHANGES IN AND DISAGREEMENTS WITH  ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE** |
|         |
|         |
| **PART III** |
|         |
|         | **ITEM 10.** | **DIRECTORS AND EXECUTIVE OFFICERS  OF REGISTRANT** |
|         |
|         | **ITEM 11.** | **EXECUTIVE COMPENSATION** |   |
|         |
|         | **ITEM 12.** | **SECURITY OWNERSHIP OF CERTAIN  BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS** |
|         |
|         | **ITEM 13.** | **CERTAIN RELATIONSHIPS AND  RELATED TRANSACTIONS** |
|         |
|         | **ITEM 14.** | **CONTROLS AND PROCEDURES** |
|         |
|         | **ITEM 15** | **PRINCIPAL ACCOUNTANT FEES AND  SERVICES** |   |
|         |
| **PART IV**  |
|         |
|         | **ITEM 16.** | **EXHIBITS , FINANCIAL STATEMENT  SCHEDULES AND REPORTS ON FORM 8-K** |
|              |  |  |  |  |

 

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**FORM 10-K**

 

**CAUTIONARY STATEMENT FOR THE PURPOSESOF THE “SAFE HARBOR” PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACTOF 1995**

 

*Forward-looking statements in thisreport, including without limitation statements relating to the adequacy of theCompany’s working capital and other resources ability to obtain additionalfinancing, the timing of the Company’s new store openings and future**expansion, and anticipated future cash flows from particular locations are madepursuant to the safe harbor provisions of the Private Securities LitigationReform Act of 1995.  Investors arecautioned that such forward-looking statements involve risks and uncertainties,including without limitation:  potentialquarterly fluctuations in the Company’s operating results; seasonality ofsales; competition; risks associated with expansion; the Company’s reliance onkey employees; 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 be identified by the use offorward-looking terminology such as “may,” “will”, “except,” “intend,”“estimate,” “anticipate” or “believe” or the negative thereof or variationsthereon similar terminology.  Althoughthe Company believes that the expectations reflected in such forward-lookingstatements will prove to have been correct, it can give no assurance that suchexpectations will prove to have been correct. Investors are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.  . (See “Item 1. Business – Risk Factors.”)*

 

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**PARTI**

 

**ITEM 1.****                            ****BUSINESS**

 

**General**

 

During the fiscal year ended April 27, 2003 (“Fiscal 2003”) BostonRestaurant Associates, Inc. (the “Company”) operated a chain of sixteenrestaurants – twelve fast-service, high volume pizzerias under the PizzeriaRegina name, and four full-service family-style Italian/American restaurantsunder the “Polcari’s North End ä” name. Of the twelve Pizzeria Regina restaurants, eleven are food court kiosks(self-service, take-out style emphasizing pizza slices with common areaseating), while the original 1926 North End Pizzeria Regina is a wait servicerestaurant (full-service style emphasizing whole pizzas with in-restaurantseating).  A majority of the restaurantsare located in the Boston, Massachusetts metropolitan area.

 

The Pizzeria Regina restaurants feature the Company’s signature product,its premium Neapolitan style, thin crust pizza, prepared in gas-fired brickovens.  The original Pizzeria Regina,located in Boston’s historic North End, has served the Company’s premium brickoven pizza since 1926.  The Companybelieves that the Pizzeria Regina brand name and the pizza itself are localsymbols of superior and distinctive pizza. (See *“PizzeriaRegina Restaurants.”*)

 

The Polcari’s North End restaurants are full-service Italian/American,family-style restaurants that capture the community spirit of the 1940s and1950s in Boston’s Italian North End neighborhood.  These restaurants highlight exposed gas-fired brick ovens in openview of diners, memorabilia and photographs depicting 1940s and 1950s scenes inBoston’s North End, and large tables to encourage family-style dining.  (See *“Polcari’s North End Restaurants.”*)

 

The Company’s long term plan is to expand its operations by openingadditional Company-operated Pizzeria Regina food court kiosks in high volumeretail areas as the opportunities present themselves, and by opening additionalrestaurants under the Polcari’s North EndTM name.  The rate at which the Company is able to open newCompany-operated restaurants will be determined by many factors, including theCompany’s overall financial and management resources, success in obtainingadequate financing, identifying satisfactory sites, negotiating satisfactoryleases, securing requisite governmental permits and approvals, and trainingmanagement personnel.  The Company cannotbe certain that it will have the resources to expand, that actual expansioncosts will be as anticipated, or that current and future sites will operateprofitably.

 

The first Pizzeria Regina was opened in 1926, and the predecessorcorporation was incorporated in 1986. The Company became public in 1994 andsince that date has continuously operated a restaurant chain which hasincreased over time to the present 16

 

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operatingrestaurants.  The Company’s principaloffices are located at 999 Broadway, Saugus, Massachusetts 01906 and itstelephone number is (781) 231-7575.  Asused in this Report, unless otherwise indicated, the term “Company” refers toBoston Restaurant Associates, Inc. and its subsidiaries.

### ** **

### **Pizzeria Regina Restaurants**

 

The Company currently operates twelve Pizzeria Regina restaurants whichare fast-service, high volume pizzerias that feature premium brick oven pizzaand cater primarily to the lunchtime diner (with the exception of the originalNorth End location, which serves both the lunch and dinner markets).  Of these twelve restaurants, eleven are foodcourt kiosks and the original North End Pizzeria Regina is a wait-servicerestaurant. The Company currently has one franchise location in Las Vegas,Nevada.

 

The Pizzeria Regina restaurants feature the Company’s premiumNeapolitan style, thin crust, brick oven pizza.  This pizza features a proprietary dough and pizza sauce, whichthe Company believes combine to produce a distinct flavor and superiorpizza.  These pizzas are offered with awide variety of fresh vegetable and cured meat toppings.  The Company believes that the premiumquality of its pizza, a result of a proprietary ingredient mix and bakingprocess, provides appeal to both the lunch and dinner markets.  The original Pizzeria Regina, located inBoston’s historic North End, has served the Company’s premium brick oven pizzasince 1926.

 

The Company’s eleven food court kiosks primarily serve pizza by theslice with multiple topping choices and operate side-by-side with other fastfood vendors in retail malls. Menu items are presented in a self-service,take-out style designed to allow customers to order, pay for and consume theirfood in a very short period of time. Customers who desire to sit down after purchasing their food may joincustomers of other food court vendors in one or more designated common areaswithin the mall.  The focused menu,self-service, take-out style and common seating provide food court customerswith a fast, low cost dining alternative as compared to more traditionalfull-service restaurants.

 

The Company intends to open additional Pizzeria Regina food courtkiosks.  Currently, the companyanticipates opening two additional kiosks in Boston in the spring of 2004.  Based on the Company’s own experience andarticles from trade journals, the Company believes there is a trend at retailmalls to retrofit and upgrade food courts to emphasize fast food as a focalpoint of malls.  The Company furtherbelieves that lunchtime diners who visit retail shopping malls seek highquality, quick service meals in a food court setting, and that the premiumquality of the Company’s brick oven pizza should position it to competeeffectively in food court locations.

 

Management estimates that the cost of opening a typical food courtkiosk currently is approximately $400,000. The Company cannot guarantee thatactual costs

 

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willnot significantly exceed these estimates, that the Company will be able toobtain financing necessary to construct additional food courts kiosks, that theCompany will be able to complete the construction of new kiosks on a timelybasis and within budget, if at all, or that the Company will be able to operatethese kiosks successfully.

 

**Polcari’s North End Restaurants**

 

In March 1995, the Company opened its first Polcari’s North Endrestaurant in Saugus, Massachusetts, recreating a restaurant similar to onethat the Company’s predecessor had operated from 1954-1989 in Boston’s NorthEnd.  The Polcari’s North End restaurantconcept is designed to create an Italian/American casual dining ambiance thatcaptures the community spirit of the 1940s and 1950s in Boston’s Italian NorthEnd neighborhood.  The restauranthighlights exposed gas-fired brick ovens in open view of diners.  In addition, memorabilia and photographsdepicting scenes in Boston’s North End in the 1940s and 1950s are used tocreate a neighborhood atmosphere rich with history.  The restaurant also features large tables of six or more seats toencourage family style dining and a value-oriented menu that includes brandedPizzeria Regina pizza, large Italian/American pasta dishes and fresh bakedbreads. The Company anticipates opening a new Polcari’s North End restaurant inthe fall of 2003 in Cambridge, Massachusetts.

 

The Company has also developed a bistro-restaurant concept, which wasinspired by the success of the Saugus-based Polcari’s North EndTMrestaurant.  Unlike the Saugusrestaurant, the bistro restaurants are smaller in size, creating a moreintimate family dining experience.  Inaddition, the menu is a modified version of the Saugus-based offerings,providing for a lighter dining experience. The bistro restaurants operate under the Polcari’s North EndTM trademarkin order to capitalize on that mark’s recognition for quality.  The Company currently operates threePolcari’s North End ä bistro Restaurants in Hyannis,Massachusetts, Woburn, Massachusetts and Salem, New Hampshire.

 

**Site Selection**

 

The Company considers the specific location of a restaurant to becritical to the restaurant’s long term success.  It devotes significant time and resources to the investigationand evaluation of each prospective site, including consideration of local marketdemographics, population density, average household income levels and sitecharacteristics such as visibility, accessibility and traffic.

 

The Company seeks sites for the Pizzeria Regina kiosk restaurantswithin high-traffic food courts or retail shopping malls located inmetropolitan areas.  It seeks sites forPizzeria Regina wait-service restaurants in densely populated areas.  It seeks sites for Polcari’s North Endrestaurants located near high-volume, middle market traffic centers,

 

6

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suchas retail and residential areas with populations of at least 100,000 personswithin a five-mile radius.  For eachtype of restaurant, the Company also considers existing local competition and,to the extent such information is available, the sales of other comparablypriced restaurants operating in the area.

 

**Restaurant Operations**

 

The Company invests substantial time and effort in its trainingprograms, which focus on all aspects of restaurant operations, includingkitchen, bar and dining room operations, food quality and preparation,alcoholic beverage service, liquor liability avoidance, customer service andemployee relations.  The Company holdsregular meetings of its managers to address new products, continuing trainingand other aspects of business management. Managers also attend periodic seminars conducted by Company personneland outside experts on a broad range of topics.

 

New employees are trained by experienced employees who havedemonstrated their ability to implement the Company’s commitment to providehigh quality food and attentive service. The Company has developed manuals regarding its policies and proceduresfor restaurant operations.  Supervisorymanagement regularly visits Company restaurants and meets with their managementteams to ensure compliance with the Company’s strategies and standards ofquality in all aspects of restaurant operations and personnel development.

 

The Company seeks to attract and retain quality restaurant managers byproviding them with an appropriate balance of autonomy and direction.  Annual performance objectives and budgetsfor each restaurant are jointly determined by restaurant managers and seniormanagement.  To provide incentives, theCompany has implemented a cash bonus program tied to achievement of specifiedobjectives.

 

The staff for a typical Pizzeria Regina kiosk restaurant consists ofone general manager, two managers and approximately 12 to 15 hourlyemployees.  The staff of the originalPizzeria Regina consists of a general manager, two managers, and approximately15 to 25 hourly employees.  The stafffor a typical Polcari’s North End restaurant consists of one general manager,two managers, one kitchen manager and approximately 40 to 60 hourly employees.  Most of the Company’s hourly employees arepart-time personnel.  The generalmanager of each restaurant is primarily responsible for the day-to-dayoperations of the entire restaurant and for maintaining standards of qualityand performance established by the Company.

 

7

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**Purchasing and CommissaryOperations**

 

The Company maintains a commissary where pizza dough is produced forthe Company’s restaurants.  The doughpreparation requires a high degree of consistency that would be more difficultto maintain at the individual restaurant locations.  The Company believes that close, centralized monitoring of thedough preparation ensures a more consistent premium product.  All other food preparation is performed onsite at the restaurant level.

 

The Company negotiates directly with wholesale suppliers of certainhigh volume food ingredients such as cheese, tomato sauce, and flour to ensureconsistent quality and freshness of products across its restaurants and toobtain competitive pricing. These ingredients are then purchased for theCompany by a third party independent distributor at the negotiated price andredistributed to the Company’s restaurants. All other food ingredients and beverage products are purchased directlyby the general manager of each restaurant in accordance with corporateguidelines.  The Company believes thateach essential food and beverage products are available from a choice of manyqualified wholesale suppliers.

 

**Advertising and Marketing**

 

The Company’s target market for the Pizzeria Regina restaurants is verybroad, consisting of individuals and families who seek fast-service and highvalue-to-price meals during the lunch period. The target market for the Polcari’s North End restaurants is adults andfamilies who seek moderately priced Italian dinner entrees in a comfortableenvironment.  The Company believes thatits focus on premium quality, service and value is the most effective approachto attracting customers.  The Companyplans to rely upon local advertising, high volume traffic flow at retail mallsand word of mouth exposure to market its restaurants.

 

**Competition**

 

The restaurant business is highly competitive.  Price, restaurant location, food quality,service and attractiveness of facilities are important aspects of competition,and the competitive environment is often affected by factors beyond theCompany’s or a particular restaurant’s control, including changes in thepublic’s tastes and eating and drinking habits, population and traffic patternsand local economic conditions.  TheCompany’s restaurants compete with a wide variety of restaurants ranging fromnational and regional restaurant chains (some of which have substantiallygreater financial resources than the Company) to locally-ownedrestaurants.  There is also activecompetition for liquor licenses in certain markets and for advantageouscommercial real estate sites suitable for restaurants.  The Pizzeria Regina restaurants compete withother fast-service, high volume food providers on the basis of price, value,location, menu and

 

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speed of service.  The Polcari’s North End restaurants compete with other casual,full-service restaurants primarily on the basis of menu selection, quality,price, service, ambiance and location.

 

**Seasonality**

 

Certain of the Company’s restaurants are subject to seasonalfluctuations in sales volume.  Sales atthe Pizzeria Regina restaurants are typically higher in June through August,and in November and December due to increased volume in shopping malls duringthe holiday and tourist seasons and school vacations.

 

**Employees**

 

As of July 23, 2003, the Company had approximately 500 employees, ofwhom 13 were corporate and administrative personnel, 57 were field supervisionor restaurant managers or management trainees, and the remainder were hourlyrestaurant personnel.  Many of theCompany’s hourly employees work part-time. The Company believes that its relationship with its employees isgood.  None of the Company’s employeesare covered by a collective bargaining agreement.

 

**Trademarks and Service Marks**

 

The Company regards its trademarks and its service marks as havingsignificant value and as being important factors in the marketing of itsproducts.  These marks, which appear inits advertisements, menus and elsewhere, are widely recognized.  The Company’s most significant trademarksare “Pizzeria Regina,” the Regina crown design logo, and “Polcari’s North End,”each of which are U.S. registered trademarks owned by the Company.  The Company has also registered with theU.S. Patent and Trade Office  “Regina,”the “Polcari’s” logo, “Pizzeria Regina of Boston’s North End” and  “Pizzeria Regina, Boston’s Brick Oven Pizza”as service marks.

 

**Government Regulation**

 

The Company is subject to a variety of federal, state and local lawsand regulations.  Each of the Company’srestaurants is subject to licensing and regulation by a number of governmentauthorities, including alcoholic beverage control, health, safety, sanitation,building and fire agencies in the state or municipality in which the restaurantis located.  Difficulties in obtainingor failure to obtain required licenses or approvals could delay or prevent thedevelopment of a new restaurant in a particular area.

 

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The selection of new restaurant sites is affected by federal, state andlocal laws and regulations regarding environmental matters, zoning and land useand the sale of alcoholic beverages. Various requirements (particularly at the local level) may result inincreases in the cost and time required for opening new restaurants, as well asincreases in the cost of operating restaurants.  Difficulties in obtaining necessary licenses or permits couldcause delays in or cancellations of new restaurant openings.

 

A significant portion of the Company’s revenues at the Polcari’s NorthEnd restaurants and the original Pizzeria Regina location in the North End isattributable to the sale of alcoholic beverages.  Alcoholic beverage control regulations require each of theCompany’s restaurants that serve alcohol to apply to both a state authority andmunicipal authorities for a license or permit to sell alcoholic beverages onthe premises.  Typically, licenses mustbe renewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulationsaffect numerous aspects of restaurant operations, including minimum age ofpatrons and employees, hours of operation, advertising, wholesale purchasing,inventory control and handling, storage and dispensing of alcoholicbeverages.  The failure of the Companyto obtain or retain liquor service licenses could have a material adverseaffect on the particular restaurant’s operations and the business of theCompany overall.

 

The Company is subject to “dram shop” statutes, which generally providea person injured by an intoxicated person the right to recover damages from anestablishment that wrongfully served alcoholic beverages to the intoxicatedperson.  The Company presently carries$1,000,000 of liquor liability coverage for its restaurants, as well as excessliability coverage of $10,000,000 per occurrence, with a $10,000deductible.  The Company has never beennamed as a defendant in a lawsuit involving “dram shop” liability.  The Company cannot guarantee that dram shopinsurance will continue to be available to the Company at commerciallyreasonable prices, if at all, or that such insurance, if maintained, will besufficient to cover any claims against the Company for dram shop liability forwhich it may be held liable.

 

The Company’s restaurant operations are all subject to federal andstate laws governing such matters as minimum wage and health insurancerequirements.  A significant number ofthe Company’s personnel are paid at rates related to the federal minimum wage,and increases in the minimum wage could increase the Company’s labor costs.

 

**Risk Factors**

* *

In addition to the risks discussed elsewhere in this Form 10-K,investors should consider carefully the following risk factors in evaluating aninvestment in the Company.

 

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*The Company May Be Unable toExpand As Planned*

 

The Company intends to open additional Pizzeria Regina and Polcari’sNorth End restaurants in an orderly manner as conditions permit.  The Company’s ability to open additionalCompany restaurants will depend upon a number of factors, such as identifyingsatisfactory sites, negotiating satisfactory leases, securing requiredgovernmental permits and approvals, obtaining of any required financing onacceptable terms, providing adequate supervision of construction, andrecruiting and training management personnel, some of which are beyond thecontrol of the Company. The Company has leased locations for two additionalPizzeria Regina and one additional Polcari’s North End restaurants which arescheduled to open within the next 12 months. The Company cannot guarantee thatit will be able to open those restaurants or any other future restaurantswithin budget or on a timely basis, if at all, or that any of the newrestaurants will operate profitably.  Ifthe Company is unable to expand, it may reduce the Company’s ability toincrease profitability.

 

*Possible Need of AdditionalFunding*

 

The Company estimates that the cost of opening the three newrestaurants planned to open within the next 12 months will be approximately$3.5 million.  The Company’s creditarrangement with Commerce Bank & Trust Company permits the Company, subjectto certain conditions, to borrow amounts to pay the costs of new restaurantopenings under a fixed term loan sub-facility, and the Company anticipates thatthe costs of opening the planned new restaurants will be financed under thatfacility.  The Company believes that itsanticipated cash flow from operations will be sufficient to fund its workingcapital needs for at least the next 12 months, and that the bank facility willbe sufficient to fund the  capitalexpenditures  of the three newrestaurants.  However, it cannotguarantee that this will be the case or that the bank financing will actuallybe available for each restaurant when required.  Changes in the general economy, operating results, the Company’sbusiness, its business plan or the rate of expansion could affect its capitalneeds. (See “*Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations - Liquidity and Capital Resources*.”)

 

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*The Restaurant Business Is Risky*

 

The Company’s future performance will be subject to a number of factorsthat affect the restaurant industry generally, including:  (i) the highly competitive nature ofthe  industry, (ii) general and localeconomic conditions, (iii) changes in tastes and eating and drinkinghabits,  (iv) changes in food costs dueto shortages, inflation or other causes, (v) population and traffic patterns,(vi) demographic trends, (vii) general employment, and wage and benefit levelsin the restaurant industry, which may be affected by changes in federal andlocal minimum wage requirements or by federally or locally mandated healthinsurance, and (viii) the number of people willing to work at or near theminimum wage.  (See “*Competition*.”)

 

*We Are Dependent on Key ExecutiveOfficers*

 

The future success of the Company will depend in large part on thecontinued services of its President, George R. Chapdelaine, as well as on theCompany’s ability to attract and retain other qualified senior managementpersonnel.  The Company carries$2,000,000 of key man life insurance on the life of Mr. Chapdelaine.

 

*Insiders Control the Company*

 

The Company’s executive officers, directors and their affiliates andmembers of their immediate families control the vote of approximately 45.1%****ofthe outstanding shares of the Common Stock. As a result, they have thepractical ability to implement or block changes in the Company’s management anddirection which may or may not be in the best interest of stockholdersgenerally.

 

*The Company’s Restaurants AreConcentrated in Eastern Massachusetts*

 

A total of thirteen of the Company’s sixteen existing restaurants arelocated in Massachusetts. The three additional restaurants scheduled to open inthe next 12 months will also be located in Massachusetts.  As a result, the Company’s results ofoperations may be materially affected by changes in the Massachusetts economy.

 

*Our Stock Is Relatively Illiquid and the Price Is Volatile*

 

Compared to many other publicly traded companies, the Company isrelatively small and has a relatively low average daily trading volume.  Quarterly operating results of the Companyor other restaurant companies, changes in general conditions in the economy,the restaurant industry, or the financial markets, or other developmentsaffecting the Company, its competitors or the financial markets could cause themarket price of the Common Stock to fluctuate significantly. These broad marketfluctuations may adversely affect the market price of the Common Stock. Inaddition, the low trading volume may make it difficult for a stockholder to buyor sell a significant amount of stock

 

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without affecting the market price.  The Company’s securities are, and willlikely continue to be, principally traded on the OTC Bulletin Board or itssuccessor. (See “*Item 5. Market for Registrant Common Equity and Related StockholderMatters*.”)

 

**ITEM 2****.****                            ****PROPERTIES**

 

Of the Company’s sixteen currently operating restaurants, fifteen arelocated in leased space and one restaurant, the North End Pizzeria Reginalocation, is owned by the Company.  TheCompany has recently leased space for three new locations - a Polcari’s NorthEnd restaurant in Technology Square in Cambridge, MA, a Pizzeria Reginalocation in the Prudential Center, Boston, MA, and a Pizzeria Regina locationin the South Station, Boston, MA.

 

All of the Company’s leases provide for a minimum annual rent, and mostcall for additional rent based on sales volume at the particular location overa specified minimum level.  Generally,these leases are net leases, which require the Company to pay the cost ofinsurance, taxes and a portion of the lessor’s operating costs.  Certain mall locations also require theCompany to participate in upkeep of common areas and promotional activities.

 

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Thefollowing table sets forth certain information with respect to the Company’srestaurant properties:

 
| **Location**              |   | **Approx.  Sq.  Ft.** |   | **Lease  Expiration Date** |   | **Type (1)**             |
|---------------------------|--------|-----------------------|--------|----------------------------|--------|--------------------------|
|                      |   |                  |   |                       |   |                     |
| Auburn Mall               |   | 924                   |   | 1/ 31 /08                  |   | food court               |
| Auburn, MA                |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| North End                 |   | 4,300                 |   | N/A                        |   | wait service             |
| Boston, MA (2)            |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Faneuil Hall  Marketplace |   | 750                   |   | 12/31/05                   |   | food court               |
| Boston, MA                |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Prudential Center         |   | 787                   |   | 2/28/14                    |   | food court               |
| Boston, MA (3)            |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| South Station             |   | 1,495                 |   | 7/31/13                    |   | food court               |
| Boston, MA (4)            |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Burlington Mall           |   | 1,018                 |   | 11/30/05                   |   | food court               |
| Burlington, MA            |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Technology Square         |   | 11,100                |   | 7/31/13                    |   | Polcari’s North End |
| Cambridge, MA (5)         |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Holyoke Mall              |   | 749                   |   | 1/31/09                    |   | food court               |
| Holyoke, MA               |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Cape Cod Mall             |   | 5,338                 |   | 1/31/11                    |   | Polcari’s North     |
| Hyannis, MA               |   |                  |   |                       |   | End (bistro)             |
|                      |   |                  |   |                       |   |                     |
| Independence Mall         |   | 637                   |   | 1/31/09                    |   | food court               |
| Kingston, MA              |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| South Shore Plaza         |   | 700                   |   | 8/31/06                    |   | food court               |
| Braintree, MA             |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Solomon Pond Mall         |   | 1,085                 |   | 1/30/07                    |   | food court               |
| Marlborough, MA           |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Oviedo Market Place       |   | 714                   |   | 4/01/08                    |   | food court               |
| Oviedo, FL                |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Paramus Park              |   | 696                   |   | 7/31/09                    |   | food court               |
| Paramus, NJ               |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Providence Place          |   | 960                   |   | 10/30/09                   |   | food court               |
| Providence, RI            |   |                  |   |                       |   |                     |
|                      |   |                  |   |                       |   |                     |
| Regency Square            |   | 605                   |   | 11/03/04                   |   | food court               |
| Richmond, VA              |   |                  |   |                       |   |                     |

 

14

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| Salem, NH  |   | 6,430  |   | 1/18/10  |   | Polcari’s North End  (bistro) |
|------------|--------|--------|--------|----------|--------|------------------------------------|
|       |   |   |   |     |   |                               |
| Saugus, MA |   | 11,000 |   | 11/30/12 |   | Polcari’s North End           |
|       |   |   |   |     |   |                               |
| Woburn, MA |   | 12,000 |   | 4/30/10  |   | Polcari’s North               |
|       |   |   |   |     |   | End (bistro)                       |

 

----

(1)                                  PizzeriaRegina food court locations have no independent seating capacity.  Seating is centralized in the common areasof the food courts.  The North End seatsapproximately 75 customers; the Saugus Polcari’s North End location seatsapproximately 400 customers; the Cambridge Polcari’s North End location isplanned to seat approximately  300  customers; the three bistro restaurants eachseat approximately 200 customers.

 

(2)                                  Company-owned.  This property is subject to a mortgage infavor of Commerce Bank and Trust Company. (See *“Item7.  Management’s Discussion And AnalysisOf Financial Condition and Results of Operations — Liquidity and CapitalResources.”*) Includes approximately 1,000 square feet located in twoadjacent condominiums owned by the Company which have not been built-out as ofthe date of this Report.

(3)Scheduled to open approximately Spring, 2004.

(4)Scheduled to open approximately Spring, 2004.

(5)Scheduled to open approximately Fall, 2003.

 

The Companyoccupies approximately 5,325 square feet of executive office space in Saugus,Massachusetts.  The lease for thislocation expires in October 31, 2006. The Company also leases approximately 5,000 square feet of warehousespace located in Somerville, Massachusetts under a lease expiring on July 31,2004 (including all extension options that may be exercised by the Company inits discretion) and approximately 2,741 square feet for its commissary locatedin Charlestown, Massachusetts under a lease expiring on August 14, 2004.

 

**ITEM3****.****                             LEGALPROCEEDINGS**

 

The Company isinvolved in various legal matters in the ordinary course of its business.  Each of these other matters is subject tovarious uncertainties and some of these other matters may be resolvedunfavorably to the Company.  Managementbelieves that any liability that may ultimately result from these other matterswill not have a material adverse effect on the Company’s financial position.

 

**ITEM4****.****                             SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

During the fourthquarter of the fiscal year covered by this report, no matters were submitted toa vote of security holders of the Company.

######  

###### 15

###### 

######  

###### **PART II**

** **

**ITEM 5.****                             MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

The Company’sCommon Stock is traded publicly on the OTC Bulletin Board and on the BostonStock Exchange (BSE symbol: “BNR”).  Asof July 23, 2003, there were approximately 600 holders of record of theCompany’s Common Stock.  On July 23,2003, the last bid and asked price of the Company’s Common Stock as reported onthe OTC Bulletin Board were ** **$.65and $.65 per share, respectively.

 

The table belowrepresents the quarterly high and low bid and asked prices for the Company’sCommon Stock for the Company’s last two fiscal years, as reported on the OTCBulletin Board.  The prices listed inthis table reflect quotations without adjustment for retail mark-up, mark-downor commission, and may not represent actual transactions.

 
|                             |   | **High Bid** |   | **Low Bid** |   | **High Asked** |   | **Low Asked** |   |
|----------------------------------|--------|--------------|--------|-------------|--------|----------------|--------|---------------|--------|
|                             |   |         |   |        |   |           |   |          |   |
| Fiscal Year Ended April 27, 2003 |   |         |   |        |   |           |   |          |   |
|                             |   |         |   |        |   |           |   |          |   |
| First Quarter                    |   | $            | .90    |        | $      | .65            |   | $             | 1.01   |   | $ | .75 |   |
| Second Quarter                   |   | $            | .75    |        | $      | .60            |   | $             | 1.01   |   | $ | .68 |   |
| Third Quarter                    |   | $            | .70    |        | $      | .50            |   | $             | 1.01   |   | $ | .65 |   |
| Fourth Quarter                   |   | $            | .60    |        | $      | .37            |   | $             | .85    |   | $ | .60 |   |
|                             |   |         |   |        |   |           |   |          |   |
| Fiscal Year Ended April 28, 2002 |   |         |   |        |   |           |   |          |   |
|                             |   |         |   |        |   |           |   |          |   |
| First Quarter                    |   | $            | .81    |        | $      | .62            |   | $             | 1.03   |   | $ | .65 |   |
| Second Quarter                   |   | $            | .62    |        | $      | .50            |   | $             | .80    |   | $ | .55 |   |
| Third Quarter                    |   | $            | .70    |        | $      | .50            |   | $             | 1.01   |   | $ | .52 |   |
| Fourth Quarter                   |   | $            | .97    |        | $      | .55            |   | $             | 1.02   |   | $ | .60 |   |

 

 

The Company hasnever paid cash dividends on its capital stock and does not anticipate payingany cash dividends in the foreseeable future. Rather, the Company intends to retain all of its future earnings tofinance future growth.

 

**ITEM 6****.****                                  SELECTEDFINANCIAL DATA**

 

The followingtable sets forth for the fiscal periods indicated, a 52 week period for fiscal2003, 2002, 2001, 1999, and a 53 week period for fiscal 2000.

 

16

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|                                               |   | **Fiscal  Year Ended** |       |
|----------------------------------------------------|--------|------------------------|------------|
|                                               |   | **April 27,  2003**    |       | **April 28,  2002** |   | **April 29,  2001** |   | **April 30,  2000** |   | **April 25,  1999** |   |
| **Income Statement Data:**                         |   |                   |       |   |   |   |   |   |   |   |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Total Revenues                                     |   | $                      | 22,541,875 |   | $ | 23,854,439 |   | $ | 21,707,907 |   | $ | 16,013,321 |   | $ | 12,173,934 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Costs and  expenses:                               |   |                   |       |   |   |   |   |   |   |   |   |
| Cost of food,  beverages and liquor                |   | 4,348,095              |       | 4,885,952 |   | 4,644,810 |   | 3,284,015 |   | 2,546,026 |   |
| Other operating  expenses                          |   | 13,570,421             |       | 14,293,083 |   | 13,052,040 |   | 9,471,227 |   | 7,114,457 |   |
| General and  administrative                        |   | 2,610,666              |       | 2,132,756 |   | 1,837,085 |   | 1,719,071 |   | 1,663,649 |   |
| Depreciation and  amortization                     |   | 1,056,889              |       | 1,152,860 |   | 1,161,628 |   | 762,346 |   | 545,092 |   |
| Pre-opening  costs                                 |   | 8,545                  |       | — |   | 658,090 |   | 453,002 |   | 42,197 |   |
| Litigation and  settlement costs                   |   | (443,445               | )          | — |   | 1,847,487 |   | — |   | — |   |
| Charge for asset  impairment                       |   | —                 |       | — |   | 580,000 |   | — |   | — |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Total costs and  expenses                          |   | 21,151,171             |       | 22,464,651 |   | 23,781,140 |   | 15,689,661 |   | 11,911,421 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Operating income  (loss)                           |   | 1,390,704              |       | 1,389,788 |   | (2,073,233 | ) | 323,660 |   | 262,513 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Interest  expense, net                             |   | (407,243               | )          | (508,072 | ) | (456,842 | ) | (327,164 | ) | (241,973 | ) |
| Other income,  net                                 |   | 9,428                  |       | 9,015 |   | 19,771 |   | 5,171 |   | 4,963 |   |
| Income (loss)  before minority interest            |   | 992,889                |       | 890,731 |   | (2,510,304 | ) | 1,667 |   | 25,503 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Minority  interest in net loss of  subsidiary |   | —                 |       | — |   | — |   | 63,867 |   | 34,133 |   |
| Net income (loss)                                  |   | $                      | 992,889    |   | $ | 890,731 |   | $ | (2,510,304 | ) | $ | 65,534 |   | $ | 59,636 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Net income  (loss) per share of common stock:      |   |                   |       |   |   |   |   |   |   |   |   |
| Basic and  Diluted                                 |   | $                      | .14        |   | $ | .13 |   | $ | (.36 | ) | $ | .01 |   | $ | .01 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| **Balance Sheet Items:**                           |   |                   | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Total Assets                                       |   | $                      | 8,273,745  |   | $ | 8,640,734 |   | $ | 9,000,203 |   | $ | 8,307,876 |   | $ | 6,887,694 |   |
| Long Term  Obligations                             |   | $                      | 3,213,292  |   | $ | 3,750,876 |   | $ | 4,527,914 |   | $ | 2,964,630 |   | $ | 2,417,410 |   |
|                                               |   |                   |       |   |   |   |   |   |   |   |   |
| Total  Liabilities                                 |   | $                      | 5,535,187  |   | $ | 6,895,065 |   | $ | 8,145,265 |   | $ | 4,942,634 |   | $ | 3,534,285 |   |

 

17

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**ITEM 7****.****                                MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

** **

This Management’sDiscussion and Analysis describes the principal factors affecting the resultsof operations, liquidity and capital resources, as well as the criticalaccounting policies of the Company. This discussion should be read inconjunction with the accompanying audited financial statements, which includeadditional information about our significant accounting policies and practicesand the transactions that underlie our financial results.

 

The Companyreports the results of its Pizzeria Regina restaurants and its Polcari NorthEnd restaurants as one operating segment since they have similar economiccharacteristics.

 

Except asotherwise indicated, references to years mean our fiscal year ended April 27,2003, April 28, 2002 and April 29, 2001.

** **

**RESULTS OF OPERATIONS**

** **

**Overview:**

 

The key factorsthat affect our operating results are the impact of new store openings,comparable restaurant sales, which are driven by comparable customer counts andcheck average, and our ability to manage operating expenses such as food cost,labor and benefits and other costs. Changes in the number of restaurants in operation can dramaticallychange the absolute dollar amounts of revenues and expenses, and opening of newstores can dramatically affect operating profits.  Each restaurant unit’s contribution margin will vary over thelife of the restaurant.  Margins tend tobe low when a restaurant is first opened until customer traffic reaches plannedlevels.  Margins can also deteriorate atthe end of a unit’s life cycle due to a decline in customer traffic caused by avariety of factors outside the control of the Company.  These economic conditions impact both thePizzeria Regina units and the Polcari North End units.

 

There were only 14units in operation for all fiscal 2001 as two new Polcari’s North End bistrounits were added in the sixth and ninth months of that year.  There were 16 units in operation throughouteach of fiscal 2003 and 2002.

 

Our fiscal 2003results reflect the effects on consumer behavior of the economic slowdown, thewar in Iraq and harsh winter weather conditions in the Northeast. The followingtable sets forth all revenues, costs and expenses as a percentage of totalrevenues for the periods indicated for revenue and expense items included inthe consolidated statements of operations:

 

18

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|                                           |   | **April 27,  2003** |   | **April 28,****2002** |   | **April 29,****2001** |   |
|------------------------------------------------|--------|---------------------|--------|-----------------------|--------|-----------------------|--------|
|                                           |   |                |   |                  |   |                  |   |
| Revenues:                                      |   |                |   |                  |   |                  |   |
| Restaurant sales                               |   | 99.7                | %      | 99.9                  | %      | 99.5                  | %      |
| Other                                          |   | .3                  |   | .1                    |   | .5                    |   |
|                                           |   |                |   |                  |   |                  |   |
| Total revenues                                 |   | 100.0               | %      | 100.0                 | %      | 100.0                 | %      |
|                                           |   |                |   |                  |   |                  |   |
| Costs and  expenses:                           |   |                |   |                  |   |                  |   |
| Cost of food,  beverages and liquor            |   | 19.3                |   | 20.5                  |   | 21.4                  |   |
| Other operating  expenses - payroll            |   | 30.4                |   | 31.1                  |   | 30.5                  |   |
| Other operating  expenses exclusive of payroll |   | 29.8                |   | 28.8                  |   | 29.6                  |   |
| General and  administrative                    |   | 11.6                |   | 9.0                   |   | 8.5                   |   |
| Depreciation and  amortization                 |   | 4.7                 |   | 4.8                   |   | 5.4                   |   |
| Pre-opening  costs                             |   | —              |   | —                |   | 3.0                   |   |
| Litigation and  settlement costs               |   | (2.0                | )      | —                |   | 8.5                   |   |
| Charge for asset  impairment                   |   | —              |   | —                |   | 2.7                   |   |
| Operating income  (loss)                       |   | 6.2                 |   | 5.8                   |   | (9.6                  | )      |
| Interest  expense, net                         |   | (1.8                | )      | (2.1                  | )      | (2.1                  | )      |
| Other income,  net                             |   | —              |   | —                |   | 0.1                   |   |
| Net income  (loss)                             |   | 4.4                 | %      | 3.7                   | %      | (11.6                 | )%     |

 

 

**Results of Operations forthe Years Ended April 27, 2003 and April 28, 2002**

 

# **Restaurant Sales**

 

 Restaurant sales in fiscal 2003were $22,478,000 compared to $23,828,000 in fiscal 2002. Sales for therestaurants open throughout both fiscal 2003 and 2002 decreased by 5.7%.  The Company believes the decrease inrestaurant sales in fiscal 2003 compared to fiscal 2002 was attributable to theimpact on consumer behavior of the continuing economic slowdown, the war withIraq, and harsh winter weather in the Northeast.

 

19

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Net sales at the Company’s Pizzeria Regina restaurants decreased 3.9%to $11,445,000 in fiscal 2003 from $11,905,000 in fiscal 2002.  Net sales at the Company’s full servicecasual dining restaurants decreased by 7.6% to $11,005,000 in fiscal 2003 from$11,906,000 in fiscal 2002.  The Companybelieves these decreases were attributable to the same factors listed above forboth types of restaurants, but affected the slightly more expensive casualdining restaurants more.

 

Sales at the Company’s commissary were $28,000 in fiscal 2003 comparedto $17,000 in fiscal 2002.  The increasein commissary sales was primarily attributable to the Pizzeria Regina franchisein Las Vegas, Nevada being opened for the entire fiscal 2003.

 

# **Franchise Fees and Royalties**

 

During fiscal 2003, the Company recognized $50,000 in franchise feerevenues and $14,000 in royalties from a domestic Pizzeria Regina franchise atthe Palms Casino Resort in Las Vegas, Nevada. During fiscal 2002, the Company recognized $20,000 in franchise feerevenues and $6,000 related to royalties.

 

**Costs andExpenses**

 

**Cost ofFood, Beverages and Liquor**

 

###### Cost of food,beverages and liquor as a percentage of total revenues for all restaurants was19% in fiscal 2003 compared to 20% in fiscal 2002.  The decrease as a percentage of total revenues was primarilyattributable to improved cost control systems and lower cheese costs.

 

###### The cost of food, beverages and liquor was $4,348,000 in fiscal 2003compared to $4,886,000 in fiscal 2002. The dollar decrease was due in part tothe reduction in the amount of product sold for fiscal 2003 and in part toimproved cost control systems.

 

The cost of food, beverages, and liquor as a percentage of totalrevenues at the Pizzeria Regina restaurants was 15% for both fiscal 2003 andfiscal 2002.

 

The cost of food, beverages and liquor at the Pizzeria Reginarestaurants was $1,752,000 in fiscal 2003 compared to $1,790,000 in fiscal2002.  The dollar decrease wasprincipally due to the reduction in the amount of product sold.

 

20

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The cost of food, beverages and liquor as a percentage of totalrevenues at the Company’s full service casual dining restaurants decreasedto  24% in fiscal 2003 from 26% infiscal 2002, primarily due to improved cost controls.

 

The cost of food, beverages and liquor at the Company’s full servicecasual dining restaurants was $2,596,000 in fiscal 2003 compared to $3,096,000in fiscal 2002.  This dollar decreasewas primarily due to the reduction in the amount of product sold for fiscal2003 and in part to improved cost control systems.

 

**OtherOperating Expenses**

 

**Payroll Expenses**.                              Payroll expenses as a percentage of totalrevenues for all restaurants were 30% in fiscal 2003 compared to 31% in fiscal2002.

 

Payroll expenses for all the restaurants were $6,860,000 in fiscal 2003compared to $7,424,000 in fiscal 2002. The dollar decrease in payroll expenses was primarily due to a reductionin hours worked as a result of diminished sales, and improved labor efficiency

 

Payroll expenses at the Pizzeria Regina restaurants were 25% of totalrevenues in fiscal 2003 compared to 26% of total revenues in fiscal 2002.  The decrease as a percentage of totalrevenues was primarily attributable to improved labor efficiency.

 

Payroll expenses at the Pizzeria Regina restaurants were $2,893,000 infiscal 2003 compared to $3,041,000 in fiscal 2002.  This dollar decrease was primarily due to a reduction inman-hours as a result of diminished sales and improved labor efficiency.

 

Payroll expenses at the Company’s full service casual diningrestaurants decreased to 33% of total revenues in fiscal 2003 from 34% of totalrevenues in fiscal 2002. The percentage decrease was primarily attributable toimproved labor efficiency.

 

Payroll expenses at the Company’s full service casual diningrestaurants were $3,595,000 in fiscal 2003 compared to $4,001,000 in fiscal2002.  This dollar decrease wasprimarily due to a reduction in man-hours due to diminished sales and improvedlabor efficiency.

 

Payroll expenses at the Company’s Commissary were $372,000 for fiscal2003 as compared to $382,000 in fiscal 2002.

 

**Other OperatingExpenses, Exclusive of Payroll. **Other operating expenses, exclusive ofpayroll, were 30% of total revenues in fiscal 2003 compared to 29% in fiscal2002.  The increase as a percentage ofrestaurant sales is a reflection of the reduced revenue base.

 

21

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Other operating expenses, exclusive of payroll were $6,710,000 infiscal 2003 compared to $6,869,000 in fiscal 2002.  This dollar decrease is primarily due to a reduction in costs asa result of diminished sales.

 

Other operating expenses, exclusive of payroll, from the PizzeriaRegina restaurants were 33% of total revenues in fiscal 2003 compared to 32% infiscal 2002. The increase as a percentage of restaurant sales is a reflectionof the reduced revenue base.

 

Other operating expenses, exclusive of payroll from the Pizzeria Reginarestaurants were $3,775,000 in fiscal 2003 compared to $3,798,000 in fiscal2002.  This dollar decrease wasprimarily the result of diminished sales.

 

Other operating expenses, exclusive of payroll, from the Company’s fullservice casual dining restaurants increased to 26% of total revenues in fiscal2003 from 25% of total revenues in fiscal 2002. The increase as a percentage ofrestaurant sales is a reflection of the reduced revenue base.

 

Other operating expenses, exclusive of payroll, from the Company’s fullservice casual dining restaurants were $2,826,000 in fiscal 2003 compared to$2,958,000 in fiscal 2002.  This dollardecrease was primarily attributable to diminished sales.

 

Other operating expenses also include commissary expenses, which were$109,000 in fiscal 2003 and $107,000 in fiscal 2002, respectively, andfranchise costs of $6,000 in fiscal 2002.

 

**General and Administrative Expenses**

 

General and administrative expenses were 12% of total revenues infiscal 2003 compared to 9% in fiscal 2002.

 

General and administrative expenses were $2,611,000 in fiscal 2003,compared to $2,133,000 in fiscal 2002. Both the percentage and dollar increase were primarily attributable toconsulting costs and employee incentives.

 

**Depreciation and Amortization Expenses**

 

Depreciation and amortization expense was $1,057,000 in fiscal 2003, ascompared to $1,153,000 in fiscal 2002, amounting to 5% of total revenues inboth fiscal years.

 

22

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**Pre-Opening Costs**

 

Pre-opening expenses in fiscal 2003 were $9,000 compared to none infiscal 2002.  The pre-opening expenseswere related to the new Cambridge, Massachusetts Polcari’s North End restaurantprojected to open in the second quarter of fiscal 2004.

 

**Litigation and Settlement Costs**

 

In 1998 the Company formed a joint venture with Italian Ventures, LLC,a Kentucky limited liability company (“Italian Ventures”), and entered into adevelopment agreement with it. Approximately eight months after the joint venture and developmentagreement were entered into, the Company filed a lawsuit against ItalianVentures and certain related parties seeking dissolution of the jointventure.  In fiscal 2001, the Companyreached a settlement of the dispute with Italian Ventures LLC in which itagreed to pay royalties on future revenues from certain “Bistro restaurants”,as defined in the settlement agreement. The Company accrued a liability of $955,000 in the fourth quarter offiscal 2001 as the estimated cost of the obligation to pay the futureroyalties, based upon a forecast of Bistro restaurant gross sales for theperiod May 2001 through April 2008 using historical information and estimatesof growth of existing Bistro units, as well as anticipated future Bistro unitopenings and closings.  In the fourthquarter of fiscal 2003, the Company reviewed the estimate of future royaltiesbased upon changes in anticipated future growth of existing Bistro unit sales andfuture Bistro unit openings and closings. As a result the amount of the accrualwas reduced by $443,000 to $524,000 to reflect the Company’s revised estimateof its remaining obligation under the settlement agreement with ItalianVentures.

 

**Interest Expense and InterestIncome**

 

Interest expense decreased to $410,000 in fiscal 2003, compared to$508,000 in fiscal 2002.  This decreasewas primarily due to a decrease in interest expense under the Company’s creditfacility and the expiration of some equipment leases.

 

Interest income was $3,000 in fiscal 2003 as compared to $0 in fiscal2002.

 

**Results of Operations forthe Years Ended April 28, 2002 and April 29, 2001**

 

# **Restaurant Sales**

 

Restaurant sales in fiscal 2002 were $23,828,000 compared to$21,610,000 in fiscal 2001. The dollar increase in restaurant sales wasprimarily attributable to a full year of operations of two new bistrorestaurants (the new Woburn, Massachusetts Polcari’s North End bistrorestaurant in October of 2000, and the new Hyannis, Massachusetts

 

23

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Polcari’sNorth End bistro restaurant in January of 2001).

 

Net sales at the Company’s Pizzeria Regina restaurants decreased to$11,905,000 in fiscal 2002 from $12,241,000 in fiscal 2001, principally due tothe closing of a Pizzeria Regina restaurant at the end of its lease and adecrease in same-store sales for existing Pizzeria Regina restaurants in foodcourts currently undergoing renovation. Sales for the Pizzeria Regina restaurants open throughout both fiscal2002 and fiscal 2001 decreased by .6 of 1%.

 

Net sales at the Company’s full service casual dining restaurantsincreased to $11,906,000 in fiscal 2002 from $9,329,000 in fiscal 2001.  The increase was primarily attributable tothe additional sales of two new bistro restaurants opened for the entire periodof fiscal 2002.  Sales for the Company’sfull service casual dining restaurants open throughout both fiscal 2002 andfiscal 2001 decreased by .3 of 1%.

 

Sales at the Company’s commissary were $17,000 in fiscal 2002 comparedto $40,000 in fiscal 2001.  The decreasein commissary sales was primarily attributable to the closure of a franchiserestaurant in the prior year.

 

# **Franchise Fees and Royalties**

 

During fiscal 2002, the Company recognized $20,000 in franchise feerevenues and $6,000 in royalties from a domestic Pizzeria Regina franchiseopened at the Palms Casino Resort in Las Vegas, Nevada.  During fiscal 2001, the Company recognized$98,000 in franchise fee revenues, $35,000 relating to the opening of aninternational Polcari’s North End franchise, and $63,000 related to royalties.

 

**Costs andExpenses**

 

**Cost ofFood, Beverages and Liquor**

 

###### Cost of food, beverages and liquor as a percentage of total revenuesfor all restaurants was 20% in fiscal 2002 compared to 21% in fiscal 2001.

 

###### The cost of food, beverages and liquor was $4,886,000 in fiscal 2002compared to $4,645,000 in fiscal 2001. The dollar increase was due to the twonew bistro restaurants opened for a full year in fiscal 2002.

 

The cost of food, beverages, and liquor as a percentage of totalrevenues at the Pizzeria Regina restaurants was 15% in fiscal 2002, compared to16% in fiscal 2001.  The decrease in thecost of food, beverages and liquor as a percentage of total sales wasprincipally due to lower cheese costs and cost control systems.

 

24

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The cost of food, beverages and liquor at the Pizzeria Reginarestaurants was $1,790,000 in fiscal 2002 compared to $1,989,000 in fiscal2001.  The dollar decrease wasprincipally due to the closing of a Pizzeria Regina restaurant at the end ofits lease, as well as lower cheese costs and improved cost control systems.

 

The cost of food, beverages and liquor as a percentage of total revenuesat the Company’s full service casual dining restaurants decreased to 26% infiscal 2002 from 28% in fiscal 2001, primarily due to improved cost controls.

 

The cost of food, beverages and liquor at the Company’s full servicecasual dining restaurants was $3,096,000 in fiscal 2002 compared to $2,656,000in fiscal 2001.  This dollar increasewas primarily due to two Polcari’s North End bistro restaurants opened for anentire year in fiscal 2002.

 

**Other Operating Expenses**

 

**Payroll Expenses**.                    Payroll expenses as a percentage of totalrevenues for all restaurants were 31% in both fiscal 2002 and fiscal 2001.

 

Payroll Expenses for all the restaurants were $7,424,000 in fiscal 2002compared to $6,627,000 in fiscal 2001. The dollar increase in payroll expenses was primarily due to the openingof two new Polcari’s North End bistro restaurants, partially offset by theclosing of a Pizzeria location in fiscal 2001.

 

Payroll expenses at the Pizzeria Regina restaurants were 26% of totalrevenues in fiscal 2002 compared to 25% of total revenues in fiscal 2001.

 

Payroll Expenses at the Pizzeria Regina restaurants were $3,041,000 infiscal 2002 compared to $3,046,000 in fiscal 2001.  This dollar decrease was primarily due to the closure of aPizzeria Regina restaurant in September, 2000 at the termination of its lease.

 

Payroll expenses at the Company’s full service casual diningrestaurants decreased to 34% of total revenues in fiscal 2002 from 35% of totalrevenues in fiscal 2001. The percentage decrease was primarily attributable tolower labor costs associated with the staffing of the bistro restaurants.

 

Payroll Expenses at theCompany’s full service casual dining restaurants were $4,001,000 in fiscal 2002compared to $3,311,000 in fiscal 2001. This dollar increase was primarily due to a full year of labor costsassociated with the two additional Polcari’s North End bistro restaurantsopened in fiscal 2001.

 

Payroll expenses at the Company’s Commissary were $382,000 for fiscal2002 as compared to $270,000 in fiscal 2001. The dollar increase in payroll expenses was

 

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primarily due to an increase in personnel atthe Commissary to meet the added production requirements of the new Polcari’sNorth End bistro restaurants.

 

**OtherOperating Expenses, Exclusive of Payroll.** Other operating expenses, exclusive of payroll, were 29% of totalrevenues in fiscal 2002 compared to 30% in fiscal 2001.

 

Other operating expenses, exclusive of payroll were $6,869,000 infiscal 2002 compared to $6,425,000 in fiscal 2001.  This dollar increase was primarily due to the addition of two newPolcari North End bistro restaurants and costs associated with increased sales.

 

Other operating expenses, exclusive of payroll, from the PizzeriaRegina restaurants were 32% of total revenues in both fiscal 2002 and fiscal2001.

 

Other operating expenses, exclusive of payroll from the Pizzeria Reginarestaurants were $3,798,000 in fiscal 2002 compared to $3,939,000 in fiscal2001.  This dollar decrease was principallydue to the closure of a Pizzeria Regina restaurant at the end of its lease.

 

Other operating expenses, exclusive of payroll, from the Company’s fullservice casual dining restaurants increased to 25% of total revenues in fiscal2002 from 24% of total revenues in fiscal 2001.

 

Other operating expenses, exclusive of payroll from the Company’s fullservice casual dining restaurants were $2,958,000 in fiscal 2002 compared to$2,266,000 in fiscal 2001.  This dollarincrease was principally due to two bistro restaurants opened the entire yearin fiscal 2002.

 

Other operating expenses also include commissary expenses, which were$107,000 in fiscal 2002 and $103,000 in fiscal 2001, respectively.  In addition, other operating expensesincluded $6,000 in fiscal 2002 and $117,000 in fiscal 2001, which includedcosts associated with joint venture and franchising activities.

 

**General and Administrative Expenses**

 

General and administrative expenses were 9% of total revenues in bothfiscal 2002 and fiscal 2001.

 

General and administrative expenses were $2,133,000 in fiscal 2002,compared to $1,837,000 in fiscal 2001. This dollar increase was primarily attributable to employee incentives,state excise taxes, consulting costs and rent.

 

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**Depreciation and Amortization Expenses**

 

Depreciation and amortization expense was 5% of total revenues in bothfiscal 2002 and fiscal 2001.

 

Depreciation and amortization expense was $1,153,000 in fiscal 2002, ascompared to $1,162,000 in fiscal 2001. The dollar decrease in depreciation and amortization expense wasprimarily attributable to the asset impairment charge related to three PizzeriaRegina locations taken in the fourth quarter of fiscal 2001, partially offsetby the opening of the two new Polcari’s North End bistro restaurants in fiscal2001.

 

**Pre-Opening Costs**

 

There were no pre-opening expenses in fiscal 2002 compared to $658,000in fiscal 2001.

 

**Interest Expense and InterestIncome**

 

Interest expense increased to $508,000 in fiscal 2002, compared to$492,000 in fiscal 2001.  This increasewas primarily due to the interest expense associated with the amortization ofthe discount to present value of a litigation settlement, partially offset by adecrease in interest expense under the Company’s credit facility.

 

Interest income was $0 in fiscal 2002 as compared to $36,000 in fiscal2001.  The decrease in interest incomewas attributable to a decrease in cash reserves.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Our primary sources of funding during fiscal 2003 were cash provided byoperations and borrowings under a new $3,500,000 credit facility with CommerceBank and Trust Company entered into April 30, 2002 (the “Credit Facility”) topay off the prior bank loan. The principal uses of cash during the year werepayment of principal and interest on debt.

 

Our capital budget for fiscal 2004 is $3.5 million, including thecost to open three new Company restaurants. The primary source of funding forthese expenditures is expected to be borrowings under the Company’s CreditFacility and cash provided by operations. Capital spending could varysignificantly from planned amounts as certain of these expenditures arediscretionary in nature.

 

At April 27, 2003, the Company had a working capital deficit of$372,000, compared to a deficit of $1,423,000 at the end of fiscal 2002, andcash and cash equivalents of approximately $1,107,000, compared to $933,000 atthe end of fiscal 2002.  The principalreason for the decrease in the working capital deficit was the reduction of

 

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current liabilities which included currentmaturities of debt, accounts payable and accrued expenses.  It is common for companies in the restaurantindustry to operate with net working capital deficits.  We are able to operate with a substantialworking capital deficit because (1) restaurant operations and most foodservice operations are conducted primarily on a cash (and cash equivalent)basis with a low level of accounts receivable, (2) rapid turnover allows alimited investment in inventories, and (3) accounts payable for food,beverages and supplies usually become due after the receipt of cash from therelated sales.

 

Accordingly, the Company believes that its existing resources,including the cash flow from operations and borrowings under the CreditFacility, will be sufficient to allow it to meet its existing obligations overthe next twelve months, notwithstanding that it may have a net working capitaldeficit.

 

On April 30, 2002, the Company entered into its new $3,500,000Credit Facility with Commerce Bank and Trust Company.  The Credit Facility permits the Company to borrow amounts to paythe costs for new restaurant openings and repay over a fixed term of eitherfour or five years.  No new borrowingsmay be made under the Credit Facility after April 30, 2004.  Each borrowing under the Credit Facilitybears interest at the bank’s base rate plus 1.75%, subject to an annualadjustment to the bank’s then current base rate plus 1.75%.  The Company borrowed $922,000 under theCredit Facility on April 30, 2002 to pay off the prior bank facility.  The note for that borrowing bore interest at6.75% for the first year, and 6.25% as of April 30, 2003 and is payable overfour years.  At April 27, 2003, theamount available for borrowing under the Credit Facility was $2,767,000.  All borrowings under the Credit Facility arecollateralized by substantially all of the assets of the Company and are subjectto various financial covenants.  TheCompany was in compliance with the various financial covenants of the CreditFacility at April 27, 2003.

 

After fiscal 2003 year-end, on June 6, 2003, the Company committed toborrow an additional $2.5 million under the Credit Facility to finance the costsof the new Cambridge, MA Polcari’s North End restaurant.  The note for that borrowing has a term offive years and bears interest at 6% for the first year.

 

The Company estimates that the cost of opening the three newrestaurants planned to open within the next 12 months will be approximately$3.5 million.  The Company believes thatits anticipated cash flow from operations, together with the Credit Facility,will be sufficient to fund its working capital needs for at least the next 12months and to fund the addition of three new restaurants.  However, it cannot guarantee that this willbe the case or that the bank financing will actually be available, under theCredit Facility or otherwise, for each restaurant when required.

 

During fiscal 2003, the Company had a net increase in cash and cashequivalents of $174,000, reflecting net cash provided by operating activitiesof $1,138,000, net cash used for investing activities of $402,000 and net cashused for financing activities of $562,000.

 

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Net cash provided by operating activities included net income of$993,000, a decrease in inventories of $6,000, an increase in deferred rent of$19,000, and depreciation and amortization expense of $1,057,000, partiallyoffset by an increase in prepaid expenses of $46,000, an increase in otherassets of $60,000, a decrease in accounts payable of $226,000  a reduction in accrued expenses of $120,000,an increase in accounts receivables of $13,000, a decrease in other long-termliabilities of $28,000 and a reduction of the litigation settlement of$443,000.  Net cash used for investingactivities of $402,000 reflects capital expenditures associated with thevarious Pizzeria Regina restaurants and the Polcari’s North End bistrorestaurants.  Net cash used forfinancing activities of $562,000 consisted of net repayments of long-term debt,capital lease obligations and stockholder loans.

 

At April 27, 2003, the Company had current liabilities of $2,322,000,including $580,000 of accounts payable, $1,320,000 of accrued expenses andcurrent maturities of long term obligations in the amount of $422,000.  At April 27, 2003, the Company had long-termobligations, less current maturities, in the amount of $3,213,000, including$512,000 due under the Credit Facility, $95,000 of notes payable to astockholder, $254,000 due under the capital lease obligations, $1,450,000 ofconvertible subordinated debentures, $396,000 of deferred rent, and $506,000 ofother long-term liabilities primarily related to the litigation settlementagreement with Italian Ventures, LLC.

 

**Contractual Obligations**

 

The Company has long-term contractual obligations primarily in the formof leases and debt obligations. Cash provided by operations plus the bank creditfacility will be used to satisfy the obligations. The following tablesummarizes the Company’s contractual obligations and their aggregate maturitiesas of April 27, 2003. (See discussions of cash flows, financial position andcapital resources as well as the Notes to the April 27, 2003 consolidatedfinancial statements for further details).

 

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| **Contractual  Obligations**    |   | **Total**  |   | **Less than 1  year** |   | **1-3 years** |   | **3-5 years** |   | **More than 5  years** |   |
|---------------------------------|--------|------------|--------|-----------------------|--------|---------------|--------|---------------|--------|------------------------|--------|
| Long term debt  obligations (1) |   | 2,182,506  |   | 220,835               |   | 489,776       |   | 21,895        |   | 1,450,000              |   |
| Capital lease  obligations (2)  |   | 449,053    |   | 195,365               |   | 253,688       |   | —        |   | —                 |   |
| Operating lease  obligations    |   | 17,980,700 |   | 3,072,400             |   | 5,851,400     |   | 4,353,600     |   | 4,703,300              |   |
| Purchase  obligations           |   | —     |   | —                |   | —        |   | —        |   | —                 |   |
| Shareholder Note  (3)           |   | 100,784    |   | 5,820                 |   | 12,533        |   | 13,785        |   | 68,646                 |   |
| Total                           |   | 20,713,043 |   | 3,393,420             |   | 6,607,397     |   | 4,389,280     |   | 6,221,946              |   |

 

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(1) Consists principally of bank borrowings under the Credit Facilityand the $1,450,000 principal amount of long term convertible debentures.

(2) Consists principally of equipment leases.

(3) Consists principally of shareholder note.

 

The CreditFacility requires compliance with various financial covenants, of which themost restrictive are cash to debt ratio and profitability.  If the Company defaults under any of theprovisions of the Credit Facility, all amounts outstanding under each of theterm facilities become due and payable, and the bank may proceed against itscollateral, which includes substantially all of the Company’s assets. As ofApril 27, 2003 the Company was in compliance with all financial covenants andwas not in default under the Credit Facility.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Company considers its accounting policies with respect to the useof estimates, long-lived assets and goodwill, and revenue recognition as themost critical to its results of operations and financial condition.

 

**Use of Estimates**

 

The preparation of financial statements in conformity with generallyaccepted accounting principles requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, anddisclosure of contingent assets and liabilities at the date of the financialstatements, and reported amounts of revenues and expenses during the reportingperiod.  Actual results could differfrom those estimates.  For example, infiscal 2001 the Company recorded a non-recurring charge of approximately$955,000 which represented the Company’s best estimate of total royalty paymentsexpected to be made pursuant to a litigation settlement agreement.  This estimate was based on projected salesof current and future bistro restaurants, which assumed the number and timingof new Bistro Restaurants as defined in the settlement agreement.  In fiscal 2003, the Company recorded areversal of $443,000 of that non-recurring 

 

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chargebased upon revised estimates of projected sales.  The actual royalty payments ultimately required to be paid mayvary significantly from both the Company’s original and its revisedestimate.  Similarly, the impairmentcharge taken in fiscal 2001 and discussed below was based upon estimates offuture cash flows from certain restaurants which may differ significantly fromactual cash flows.

 

**Long-Lived Assets and Goodwill**

 

The Company evaluates its long-lived assets under the provisions ofStatement of Financial Accounting Standards No. 144 (“SFASNo. 144”).  SFAS No. 144establishes accounting standards for the impairment of long-lived assets andcertain identifiable intangibles to be held and used and for long-lived assets,and certain identifiable intangibles to be disposed of.

 

Whenever events or changes in circumstances indicate that the carryingamounts of the assets may not be recoverable, the Company reviews the carryingvalues of its long-lived and identifiable intangible assets for possibleimpairment, as appropriate. In fiscal 2001, the Company recorded an impairmentcharge of $580,000 related to the write-down of certain long-lived assets.  The Company determined that the future cashflows which the Company estimated would be received from three of the Company’sPizzeria Regina locations would not be sufficient to recover the recordedcarrying value of the long-lived assets applicable to those locations.

 

**Goodwill**

 

Goodwill resulting from the excess of cost over fair value of netassets acquired is being tested for impairment in accordance with theguidelines in SFAS No. 142.  SFAS No.142 requires among other things, that companies no longer amortize goodwill buttest goodwill for impairment at least annually.  As of April 29, 2002, the Company’s goodwill of $453,643 wasassociated with the acquisition of Capucino’s, Inc. in 1994.  No adjustment to the $453,643 balance ofgoodwill was deemed necessary during the year ending April 27, 2003.  Prior to the adoption of SFAS 142, theCompany amortized goodwill over twenty years, which resulted in amortization of$37,806 in both 2002 and 2001.

 

**Revenue Recognition**

 

Substantially all restaurant sales represent retail sales to thegeneral public through Company-owned restaurants.  Such amounts are recognized as revenue at the point of sale.

 

Franchise fees resulting from the sale of individual franchise locationsare recognized as revenue upon the commencement of franchise operations.  Revenues from the sale of area developmentrights are recognized proportionately as the franchised restaurants commenceoperations.  Franchise royalties, whichare based on a percentage of franchised restaurants’ sales are recognized whenrevenue is earned.

 

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**Recently Issued Accounting Standards**

 

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASStatements SFAS Nos. 4, 44 and 64, Amendment of FASB Statement No. 13 andTechnical Corrections”. SFAS No. 145 rescinds Statement No. 4, “Reporting Gainsand Losses from Extinguishments of Debt” and an amendment of that Statement,FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy Sinking-FundRequirements”.  SFAS No. 145 alsorescinds FASB Statement No. 44, “Accounting for Intangible Assets of MotorCarriers”. SFAS No. 145 amends FASB Statement No. 13, “Accounting for Leases”to eliminate an inconsistency between the required accounting forsale-leaseback transactions and the required accounting for certain leasemodifications that have economic effects that are similar to sale-leasebacktransactions. SFAS No. 145 also amends other existing authoritative pronouncementsto make various technical corrections, clarify meanings, or describe theirapplicability under changed conditions. The provision of SFAS No.145 related tothe rescission of Statement No. 4 shall be applied in fiscal years beginningafter May 15, 2002.  The provisions ofSFAS No. 145 related to Statement No. 13 should be for transactions occurringafter May 15, 2002.  Early applicationof the provisions of this Statement is encouraged.  The Company does not expect that the adoption of SFAS No. 145will have a significant impact on its consolidated results of operations,financial position or cash flows.

 

In June 2002, the FASB issued SFAS No. 146 “Accounting for CostsAssociated with Exit or Disposal Activities.” This statement superseded EITF No. 94-3, “Liability Recognition forCertain Employee Termination Benefits and Other Costs to Exit an Activity”.Under this statement, a liability or a cost associated with a disposal or exitactivity is recognized at fair value when the liability is incurred rather thanat the date of an entity’s commitment to an exit plan as required under EITF94-3.  The provisions of this statementare effective for exit or disposal activities that are initiated after December31, 2002, with early adoption permitted. The Company does not believe the adoption of SFAS No. 146 will have anyeffect on its consolidated financial position or results of operations.

 

In November 2002, the FASB issued FIN 45, *Guarantor’s Accounting and DisclosureRequirements for Guarantees, Including Guarantees of Indebtedness ofOthers. *Among other things,FIN 45 requires guarantors to recognize, at fair value, their obligations tostand ready to perform under certain guarantees. FIN 45 is effective forguarantees issued or modified on or after January 1, 2003.  The Company does not believe the adoption ofFIN 45 will have any effect on its financial position or results of operations.

 

In December 2002, the Financial Accounting Standards Board issuedStatement of Financial Accounting Standards No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure” (“FAS 148”), which (i)amends FAS Statement No. 123,

 

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“Accountingfor Stock-Based Compensation,” to provide alternative methods of transition foran entity that voluntarily changes to the fair value based method of accountingfor stock-based employee compensation (ii) amends the disclosureprovisions of FAS 123 to require prominent disclosure about the effects onreported net income of an entity’s accounting policy decisions with respect tostock-based employee compensation and (iii) amends APB OpinionNo. 28, “Interim Financial Reporting,” to require disclosure about thoseeffects in interim financial information. Items (ii) and (iii) of the newrequirements in FAS 148 are effective for financial statements for fiscal yearsending after December 15, 2002. The Company has adopted items (ii) and(iii) of FAS 148 for the fiscal year ended April 27, 2003.

 

In January 2003, the FASBissued FIN 46, *Consolidation of Variable Interest Entities. *FIN 46 requires that the criteria for consolidationsbe based upon analysis of risks and rewards, not control, and represents asignificant and complex modification of previous accounting principles.  FIN 46 represents an accounting change, nota change in the underlying economics of asset sales.  FIN 46 is effective for consolidated financial statements issuedafter June 30, 2003.  The Company doesnot believe the adoption of FIN 46 will have an effect on its financialposition or results of operations.

 

In May 2003, the FASB issuedSFAS No. 150, *Accounting for Certain Financial Instruments with Characteristics ofBoth Liabilities and Equity*. SFAS No. 150 is the first phase of the FASB’s project on liabilities andequity.  SFAS No. 150 provides guidanceon how an entity classifies and measures certain financial instruments withcharacteristics of both liabilities and equity.  Many of these instruments were previously classified asequity.  For example, if an employer’sissuance of its shares to a key employee requires the employer to redeem theshares upon the employee’s death, then those shares must be classified as aliability, not as equity.  Forpublicly-held companies, SAFS No. 150 is effective for financial instrumentsentered into or modified after May 31, 2003. SFAS No. 150 requires companies to record the cumulative effect offinancial instruments existing at the adoption date.  The Company does not believe the adoption of SFAS 150 will have asignificant effect on the Company’s operations, financial position or cashflows.

 

**ITEM 7A****.****                   ****QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.**

 

**InterestRate Risk.**

 

We have exposureto interest rate risk related to certain instruments entered into for otherthan trading purposes.  Specifically,borrowings under the Credit Facility described in Item 7 bear interest at avariable rate based on the bank’s prime rate. A 100 basis point change inthe Credit Facility interest rate (approximately 6.75% at April 27, 2003) wouldcause the interest expense for fiscal 2004 to change by approximately $5,000.This computation is determined by considering the impact of hypotheticalinterest rates on our variable long-term debt at April 27, 2003. However, thenature and amount

 

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of our borrowings underthe Credit Facility may vary as a result of future business requirements,market conditions covenant compliance and other factors.

 

Our other outstanding long-term debt bears fixed rates of interest. TheCompany believes there is no material exposure to a market interest rate riskthat could affect future results of operations or financial conditions.

 

**CommodityPrice Risk.**

 

Many of the food products and other operating essentials purchased byus are affected by commodity pricing and are, therefore, subject to pricevolatility caused by weather, production problems, delivery difficulties andother factors that are beyond our control. Our supplies and raw materials are available from several sources and weare not dependent upon any single source for these items. The Companynegotiates directly with wholesale suppliers of certain high volume foodingredients such as cheese, tomato sauce, and flour to ensure consistent qualityand competitive pricing. These ingredients are then purchased for the Companyby a third party independent distributor at the negotiated price andredistributed to the Company’s restaurants. All other food ingredients and beverage products are purchased directlyby the general manager of each restaurant in accordance with corporateguidelines.  Certain significant itemsthat could be subject to price fluctuations are cheese and flour products. TheCompany believes that it will be able to pass through increased commodity costsby adjusting menu pricing in most cases. However, we believe that any changesin commodity pricing that cannot be offset by changes in menu pricing or otherproduct delivery strategies would not be material.

 

**ITEM8****.****                             FINANCIALSTATEMENTS AND SUPPLEMENTARY DATA**

 

BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

 

INDEX TO FINANCIAL STATEMENTS

 
| Index to Financial  Statements                       |
|------------------------------------------------------|
| Report  of Independent Certified Public Accountants. |
| Consolidated Financial  Statements                   |
| Balance sheets                                       |
| Statements of  operations                            |
| Statements  of stockholders’ equity             |
| Statements of  cash flows                            |
| Summary of accounting  policies                      |
| Notes to  consolidated financial statements          |

 

The Company’s Financial Statements, together with the Report ofIndependent Certified Public Accountants have been included at Item 14 andappear at Pages F-1 through F-34

 

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**ITEM 9****.****                                CHANGESIN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

# **PARTIII**

 

**ITEM 10****.****                      DIRECTORSAND EXECUTIVE OFFICERS OF THE REGISTRANT**

 

**Directors and Executive Officers ofthe Registrant**

 

Mr. Chapdelainewas elected President, Chief Executive Officer and a director of the Company inApril 1994.  Mr. Chapdelaine served asPresident, Chief Executive Officer and a director of Pizzeria Regina, Inc., apredecessor of the Company, from 1982 until it was acquired by the Company inApril 1994.  Prior to 1982, Mr.Chapdelaine worked in the food service industry in various capacities,including as an independent marketing consultant, a general manager of the FoodService division for H.P. Hood, Inc. and a sales manager for Chiquita Brands, asubsidiary of United Brands.  Mr.Chapdelaine holds an MBA from Clark University and graduated with a B.S. inHotel and Restaurant Management from Oklahoma State University.  He currently serves on the Board of theMassachusetts Restaurant Association.

 

Mr. Devine hasbeen the President of Devine & Pearson Advertising, Inc. (an advertisingand communications agency with 26 years experience marketing to the foodservice industry) since 1976.  Mr.Devine is nationally recognized for identifying marketing opportunities forclients, both food service operators and manufacturers of food, beverages,equipment and supplies.  He serves onthe boards of directors of the YMCA, American Association of AdvertisingAgencies and Advertising Club of Greater Boston.

 

Mr. Karam has been the President of Karam Financial Group since1987.  In addition, he is a co-owner ofSNE Broadcasting, Bristol County Broadcasting and O’Jornal, LLC.  He is currently Chairman of the Board ofTrustees of Commonwealth Protection Assurance Corp. (CPAC), and a Director ofUMass Memorial Health Care System, Worcester, MA.

 

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Mr. Lipton hasbeen President of Lipton Financial Services, Inc. (a money management andinvestment banking firm, specializing in restaurant, franchising and retailingindustries) since 1993.  Since February1995, he has also been a Managing Director of Axiom Capital Management, Inc., aNASD broker/dealer.  From 1981 untilFebruary 1995, he was Managing Director of Ladenburg, Thalmann & Co., Inc.,a broker/dealer and investment banking firm.

 

Mr. Polcari was afounder of Pizzeria Regina, Inc. and employed by the Company and itspredecessor in various capacities from its inception.  He is a recipient of the National Restaurant Association’s staterestaurateur of the year award for the Commonwealth of Massachusetts.  Mr. Polcari is the spouse of Ms. Salhany.

 

Ms. Salhany iscurrently a media consultant and President of JHMedia, Inc.  She served as the CEO, Co-President and adirector of Lifef/x, Inc., a publicly traded software company, from December1999 until 2002.  In March 2002, sheresigned as CEO and Co-President of Lifef/x. In May 2002 Lifef/x filed a voluntary petition in bankruptcy under theFederal Bankruptcy Code, and in June 2002 Ms. Salhany resigned as a director ofLifef/x.  Ms. Salhany was President ofJH Media, Ltd., an advisory company with offices in Boston and Los Angeles,from 1997 until December 1999.  From1994 through 1997, Ms Salhany was the President and Chief Executive Officer ofthe United Paramount Network.  Sheserves on the boards of directors of Hewlett Packard Corporation and AmericanMedia.  Ms. Salhany is the spouse of Mr.Polcari.

 

Fran Ross, 54, wasappointed the Company’s Vice President in February 1995 and Chief FinancialOfficer in October 1995.

 

Anthony A.Buccieri, 48, was appointed Vice President of Operations in April 1994.  Mr. Buccieri joined a predecessor of theCompany in 1974 and has served in various capacities since that date, includingas operations supervisor, assisting in the opening of all Pizzeria Reginarestaurants since 1983.

 

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**ITEM11****.****                      EXECUTIVECOMPENSATION**

 

The followingSummary Compensation Table sets forth the compensation during each of the lastthree fiscal years of the Chief Executive Office and of each executive officerwhose annual salary and bonus exceeded $100,000 for services in all capacitiesto the Company during the fiscal 2003 (collectively, the “Named ExecutiveOfficers”).

 

 

##### SUMMARY COMPENSATION TABLE

 
|                                      |   |                    |   |            |   | **Annual Compensation** |   | **Long -Term  Compensation  Awards**    |   |
|-------------------------------------------|--------|-------------------------|--------|-----------------|--------|-------------------------|--------|-----------------------------------------|--------|
| **Name  other  and  Principal  Positons** |   | **Fiscal  Year  Ended** |   | **Salary  ($)** |   | **Bonus  ($)**          |   | **Other  Annual  Compen-  sation  ($)** |   | **Restricted  Stock  Awards  ($)** |   | **Securities  Under-  Lying  Options  ($)** |   | **LTIP  Payouts  ($)** |   | **All  Compen  sation  ($)** |   |
|                                      |   |                    |   |            |   |                    |   |                                    |   |   |   |   |   |   |   |   |   |
| George R. Chapdelaine                     |   | 4/27/2003               |   | 215,000         |   | 73,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
| President and CEO                         |   | 4/28/2002               |   | 205,000         |   | 61,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
|                                      |   | 4/29/2001               |   | 195,000         |   | 0                       |   |                                    |   |   |   |   |   |   |   |   |   |
|                                      |   |                    |   |            |   |                    |   |                                    |   |   |   |   |   |   |   |   |   |
| Anthony Buccieri                          |   | 4/27/2003               |   | 123,000         |   | 42,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Vice President Operations                 |   | 4/28/2002               |   | 117,000         |   | 35,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
|                                      |   | 4/29/2001               |   | 111,000         |   | 0                       |   |                                    |   |   |   |   |   |   |   |   |   |
|                                      |   |                    |   |            |   |                    |   |                                    |   |   |   |   |   |   |   |   |   |
| Fran V. Ross                              |   | 4/27/2003               |   | 119,000         |   | 40,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
| Vice President  Administration            |   | 4/28/2002               |   | 114,000         |   | 34,000                  |   |                                    |   |   |   |   |   |   |   |   |   |
| and Chief Financial Officer               |   | 4/29/2001               |   | 109,000         |   | 0                       |   |                                    |   |   |   |   |   |   |   |   |   |

 

**Employment Contract**

 

The Company andMr. Chapdelaine, the Chief Executive Officer and President of the Company,entered into a one year employment agreement dated July 1, 1999, whichautomatically renews annually unless terminated by either party.  Mr. Chapdelaine was

 

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also provided with anautomobile plus the cost of annual insurance and with such other employeebenefits as were generally available to employees or officers of the Company.

 

Under the terms ofthe employment agreement, if Mr. Chapdelaine’s employment with the Company isterminated by the Company upon 30 days notice without cause, or if Mr.Chapdelaine terminates his employment with the Company for good reason (eithera material reduction in his overall level of responsibility or the relocationof the Company’s executive offices to a location that is more than 35 milesfrom Boston, Massachusetts, in each case without his consent) or due to achange in control of the Company, then the Company must continue to pay Mr.Chapdelaine his then-current base salary, payable monthly, during a one-yearseverance period, and Mr. Chapdelaine may not compete with the Company duringthat period.

 

Mr. Chapdelaine’semployment agreement also contains a non-competition provision thatprohibits  Mr. Chapdelaine from directlyor indirectly competing with the Company as long as he is an employee of theCompany and, in the case of his voluntarily termination or his termination bythe Company for cause, for a period of two years thereafter.  The agreement also contains confidentialityprovisions that provide that Mr. Chapdelaine may not disclose proprietaryinformation of the Company, other than in furtherance of the business of theCompany or in response to a court order.

 

**Bonus Program**

 

The Company hasadopted an incentive program under which key contributors, selected by theCompensation Committee, will be paid cash bonuses.  The aggregate amount of these bonuses will be based upon aformula related to the financial performance of the Company.  Bonuses, if any, will be allocated by theCompensation Committee among the individual employees based upon theirperformance during the year.

 

**ITEM 12****.****                         SECURITYOWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS**

 

The followingtable sets forth certain information regarding the beneficial ownership of theCompany’s Common Stock as of July 7, 2003 by (i) each person who is known bythe Company to own beneficially more than five percent of the outstandingshares of Common Stock, (ii) each director and nominee for director of theCompany, (iii) each of the Named Executive Officers listed in the SummaryCompensation Table under Item 11, and (iv) all current executive officers anddirectors of the Company, as a group. Except where otherwise indicated, this information is based uponinformation provided to the Company by the named person.

 

38

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| **Name and Address**                                                                                             |   | **Number of  Shares  Beneficially Owned(1) (2)** |   | **Percentage  of Outstanding  Shares** |   |
|------------------------------------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|----------------------------------------|--------|
| George R. Chapdelaine (3)  c/o Boston Restaurant Associates, Inc.  999 Broadway  Saugus, MA 01906                |   | 810,390                                          |   | 11.3                                   | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Hugh Devine (4)                                                                                                  |   | 60,000                                           |   | *                                      |   |
|                                                                                                             |   |                                             |   |                                   |   |
| Robert Karam (5)                                                                                                 |   | 30,000                                           |   | *                                      |   |
|                                                                                                             |   |                                             |   |                                   |   |
| Roger Lipton (5)  983 Park Avenue  New York, NY  10028                                                      |   | 1,561,090                                        |   | 22.1                                   | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| John P. Polcari, Jr.  (6) (7)  c/o Boston Restaurant Associates, Inc.  999 Broadway  Saugus, MA 01906       |   | 897,745                                          |   | 12.7                                   | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Lucille Salhany (5) (6)                                                                                          |   | 166,399                                          |   | 2.4                                    | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Anthony Buccieri (8)                                                                                             |   | 75,000                                           |   | 1.1                                    | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Fran V. Ross  (8)                                                                                           |   | 94,801                                           |   | 1.3                                    | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Dolphin Management, Inc.  (9)  129 East 17th Street  New York, NY  10003                                    |   | 1,115,000                                        |   | 15.8                                   | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| Jordan American Holdings,  Inc. (10)  1875 Ski Time Square Dr., Suite 1  Steamboat, Springs, CO  80487-9015 |   | 703,186                                          |   | 9.3                                    | %      |
|                                                                                                             |   |                                             |   |                                   |   |
| All directors and executive officers as a group (8 persons) (11)                                                 |   | 3,559,026                                        |   | 47.9                                   | %      |

 

----

*Less than one percent

 
| (1)    |   | Unless otherwise indicated  in other footnotes, to the knowledge of the Company, all persons listed have  sole voting and investment power with respect to shares of Common Stock,  except to the extent shared with spouses under applicable law. |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                               |
| (2)    |   | In computing the number of  shares beneficially owned and the percentage of ownership of that person, shares  of Common Stock subject to options or warrants exercisable within 60 days  after the date of the information in the table are deemed |

 

39

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|   |   | outstanding.  However, such shares are not deemed  outstanding for the purpose of computing percentage ownership of any other  person.                                                                   |
|--------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                          |
| (3)    |   | Includes 80,000 shares  issuable pursuant to stock options.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                          |
| (4)    |   | Includes 60,000 shares  issuable pursuant to stock options.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                          |
| (5)    |   | Based upon information  contained in Schedule 13D, as filed with the Securities and Exchange  Commission on July 8, 2003 and includes 30,000 shares issuable pursuant to  stock options.                      |
|   |   |                                                                                                                                                                                                          |
| (6)    |   | Includes 123,658 shares  issued to Lucille Salhany and Mr. Polcari jointly with rights of survivorship  and 12,741 shares held by Ms. Salhany for the benefit of certain family  members.                     |
|   |   |                                                                                                                                                                                                          |
| (7)    |   | Includes 30,000 shares  issuable pursuant to stock options.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                          |
| (8)    |   | Includes 69,900 shares  issuable pursuant to stock options.                                                                                                                                                   |
|   |   |                                                                                                                                                                                                          |
| (9)    |   | Based upon information  contained in a Schedule 13D, as amended, as filed with the Securities and  Exchange Commission on March 31, 1998, and written information provided by  Dolphin Management, Inc.       |
|   |   |                                                                                                                                                                                                          |
| (10)   |   | Based upon information  contained in a Schedule 13G as filed with the Securities and Exchange  Commission on February 13, 1998. Includes 500,000 shares issuable pursuant to  currently exercisable warrants. |
|   |   |                                                                                                                                                                                                          |
| (11)   |   | Includes 339,800 shares  issuable pursuant to stock options.                                                                                                                                                  |

 

 

**ITEM13****.****                      CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

The Company hadsubordinated debentures outstanding at April 27, 2003 consisted of convertiblesubordinated debentures in the amount of $1,450,000 bearing interest at 8%through 31 December, 1997; 10% through 31 December, 1998; 12% through 31December 1999; and 14% through 2011, equivalent to a blended rate of at 13.2%annually, payable semi-annually and convertible into the Company’s Common Stockat a conversion rate of $1.25 per share. The Company can redeem the convertible debentures under certain conditions.  The debentures are due December 2011. Amember of the board of directors of the Company received a fee equal to 5% ofthe proceeds as compensation for services in connection with this transaction.

 

40

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**ITEM14****.****                      CONTROLS ANDPROCEDURES**

 

**Evaluation of the Company’sDisclosure Controls**

 

The Securities andExchange Commission has recently adopted new rules requiring public companiesto establish disclosure controls and procedures, as described below (“DisclosureControls”) and then quarterly evaluate the effectiveness of the design andoperation of those Disclosure Controls. Within the 90 days prior to the date of this Annual Report on Form 10-K,the Company performed an evaluation under the supervision and with theparticipation of management, including our Chief Executive Officer (CEO) andChief Financial Officer (CFO). Appearing immediately following the Signatures section of this AnnualReport are the certifications of the CEO and the CFO as to our DisclosureControls required in accord with Section 302 of the Sarbanes-Oxley Act of2002.  The information concerning theevaluation referred to in those certifications should be read in conjunctionwith this section.

 

**Disclosure Controls**

 

Disclosure Controlsare procedures that****are designed with the objective ofensuring that information required to be disclosed in our reports filed underthe Exchange Act is recorded, processed, summarized and reported within thetime periods specified in the Securities and Exchange Commission’s rules andforms.  Disclosure Controls are alsodesigned with the objective of ensuring that such information is accumulatedand communicated to our management, including the CEO and CFO, as appropriateto allow timely decisions regarding required disclosure.

** **

**InternalControls.**

 

The Securities andExchange Commission has also recently adopted new rules with respect tointernal controls over financial reporting (“Internal Controls”).  In future years, the Company management willbe required to perform an assessment of the Company’s Internal Controls, andits independent auditors will be required to audit that assessment.  However, those rules will not be applicableto the Company until its fiscal year ending April 30, 2005.

 

Internal Controls are defined as a process designed toprovide reasonable assurance regarding the reliability of financial reportingand preparation of financial statements for external purposes, and includespolicies and procedures that (1) pertain to the maintenance of records that inreasonable detail accurately and fairly reflect the transactions anddispositions of our assets, (2) provide reasonable assurance that transactionsare recorded as necessary to permit the preparation of our financial statementsin conformity with generally accepted accounting principles, and that receiptsand expenditures are made only in accordance with proper authorizations, and(3) provide reasonable assurance regarding prevention or timely detection ofunauthorized acquisition, use or disposal of assets that could have a materialeffect on our financial statements.

 

41

----

 

While there is substantial overlap between Disclosure Controls andInternal Controls, they are two separate concepts.

 

In the Company’sspecific case, it maintains Internal Controls through the use of an automateddata processing system and prescribed reporting procedures.  Each restaurant has a point-of-sale systemthat captures restaurant operating information. The restaurants forward dailysales reports, vendor invoices, payroll information and other data to theCompany’s corporate headquarters. Company management uses this data to centrally monitor costs and salesmix, and to prepare periodic financial management reports.  This system is also used for budgetanalysis, planning and  determination ofmenu composition.  Restaurant managersperform daily inventories of key supplies. All other supplies are inventoried weekly at the Pizzeria Reginarestaurants and monthly at the Polcari’s North End restaurants.  Cash is controlled through deposits of salesproceeds in local operating accounts following each restaurant shift withrespect to the Pizzeria Regina locations and following each business day withrespect to the Polcari’s North End locations. The balances in those accounts are wire transferred daily to theCompany’s principal operating account.

 

During fiscal year2003 there were no significant changes in Internal Controls or in other factorsthat could significantly affect Internal Controls, including any correctiveactions with regard to significant deficiencies or material weaknesses.

 

**Limitations on the Effectiveness ofControls**

 

The Company’smanagement, including the CEO and CFO, does not expect that our DisclosureControls or our Internal Controls will prevent all error and all fraud. Acontrol 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 a control system must reflect the fact thatthere are resource constraints, and the benefits of controls must be consideredrelative to their costs. Because of the inherent limitations in all controlsystems, no evaluation of controls can provide absolute assurance that allcontrols issues and instances of fraud, if any, within the company have beendetected.  Additionally, controls can becircumvented by the individual acts of some persons, by collusion of two ormore people, or by management override of the control.

 

**Scope of the Disclosure ControlsEvaluation**

 

The CEO/CFO evaluation of our Disclosure Controlsincluded a review of the controls’ objectives and design, the controls’implementation by the Company and the effect of the controls on the informationgenerated for use in this Annual Report. In the course of the evaluation, we sought to identify data errors,controls problems or acts of fraud and to confirm that appropriate correctiveactions, including process improvements, were being undertaken.  The overall goals of these variousevaluation activities are to monitor our Disclosure Controls and our Internal

 

42

----

 

Controls and to make modifications as necessary.

 

Based upon the evaluation, our CEO and CFO haveconcluded, subject to the limitations noted above, that our Disclosure Controlsare effective to provide a reasonable level of assurance that materialinformation relating to the Company is accumulated and communicated to ourmanagement, including the CEO and CFO, as appropriate to allow timely decisionsregarding required disclosure.

 

**ITEM15****                         PRINCIPALACCOUNTANT FEES AND SERVICES**

 

As noted, theAudit Committee appointed BDO Seidman, LLP as independent public accountants toaudit the consolidated financial statements of the Company and its subsidiariesfor the fiscal year ending April 27, 2003. BDO Seidman, LLP has audited the Company’s financial statements annuallysince 1994, and has served either the Company or its predecessor as independentpublic accountants for more than 19 years. The Audit Committee believes it is desirable and in the best interest ofthe Company to continue employment of that firm.  A representative of BDO Seidman, LLP will be at the Meeting andwill have an opportunity to make a statement, if so desired.  The representative will be available torespond to appropriate questions.

 

*Audit Fees*.  BDO Seidman, LLP billed the Company anaggregate of $106,000 and $112,200 for the fiscal years ended April 28, 2002and April 27, 2003, respectively, for professional services rendered by BDOSeidman, LLP in connection with its audit of the Company’s financialstatements, its review of the Company’s quarterly reports on Form 10-QSB, andservices normally provided in connection with statutory or regulatory filingsor engagements.

* *

*Audit Related Fees*.  BDO Seidman, LLP billed the Company anaggregate of $0 and $10,600 in the fiscal years ended April 28, 2002 and April27, 2003, respectively, for professional services rendered by BDO Seidman, LLPfor assurance and related services reasonably related to the performance of anaudit or review.

* *

*Tax Fees*.  BDO Seidman, LLP billed the Company anadditional $39,700 and $30,000 in the fiscal years ended April 28, 2002 andApril 27, 2003, respectively for tax compliance, tax advice and tax planning.

* *

*All Other Fees*.  BDO Seidman, LLP did not bill the Companyfor professional services not otherwise described above in the fiscal yearsended April 28, 2002 and April 27, 2003, respectively.

 

Commencing January1, 2003, in each case where approval was sought for the provision of non-auditservices, the Audit Committee considered whether the independent auditors’provision of such services to the Company is compatible with maintaining theauditors’ independence and determined that they were.

 

43

----

 

**PART IV**

 

**ITEM16****                         EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

(a)                                  FINANCIALSTATEMENTS AND SCHEDULES

(1)            Financial Statementslisted under Part II, Item 8

(2)            Financial StatementSchedules have been omitted because the required information is not applicableor required, or because the required information is shown either in theFinancial Statements or the notes thereto.

 

(b)                                 REPORTSON FORM 8-K

 

(i)  None

 

EXHIBITS

 

 
| **Exhibit  Number** |   |                                                                                                                                                                                    |   | **Reference  Number** |
|---------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|-----------------------|
| 3.01                |   | Amended Certificate of  Incorporation of the Registrant                                                                                                                                 |   | G-3.01*               |
|                |   |                                                                                                                                                                                    |   |                  |
| 3.02                |   | Amended By-Laws of the  Registrant                                                                                                                                                      |   | A-3(b)*               |
|                |   |                                                                                                                                                                                    |   |                  |
| 4.01                |   | Description of Stock  (contained in the Amended Certificate of Incorporation of the Registrant,  filed as Exhibit 3.01).                                                                |   | G-4.01*               |
|                |   |                                                                                                                                                                                    |   |                  |
| 4.02                |   | Form of Certificate  evidencing shares of Common Stock                                                                                                                                  |   | D-4(b)*               |
|                |   |                                                                                                                                                                                    |   |                  |
| 4.03                |   | Form of Option granted  to Mr. Chapdelaine and Mr. Polcari in consideration of their guaranties of  Boston Restaurant Associates, Inc. obligations under the H.C.B. Corporation  leases |   | F-4.04*               |
|                |   |                                                                                                                                                                                    |   |                  |
| 10.01               |   | Loan Agreement between  Boston Restaurant Associates, Inc. and Commerce Bank & Trust Company  dated April 30, 2002                                                                  |   | K—6(a)(i)        |
|                |   |                                                                                                                                                                                    |   |                  |
| 10.02               |   | Note from Boston  Restaurant Associates, Inc. to Commerce Bank & Trust Company dated April  30, 2002                                                                                |   | K—6(a)(ii)       |

 

44

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| 10.03  |   | Security Agreement  between Boston Restaurant Associates, Inc. and Commerce Bank & Trust  Company dated April 30, 2002 |   | K—6(a)(iii) |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------|--------|------------------|
| 10.04  |   | Form of Indemnification  Agreement with each of the directors and certain officers of the Registrant**                     |   | A-10(bb)*        |
|   |   |                                                                                                                       |   |             |
| 10.05  |   | Incentive Stock Option  Plan**                                                                                             |   | B-10(h)*         |
|   |   |                                                                                                                       |   |             |
| 10.06  |   | Employment Contract of  George R. Chapdelaine dated July 1, 1999**                                                         |   | H-99.A*          |
|   |   |                                                                                                                       |   |             |
| 10.07  |   | 2002 Combination Stock  Option and Share Award Plan**                                                                      |   | J-10(h)*         |
|   |   |                                                                                                                       |   |             |
| 10.08  |   | Charter of the Audit  Committee of Boston Restaurant Associates, Inc., as adopted December 6, 2002                         |   | I-99*            |
| 21     |   | Subsidiaries of the  Registrant                                                                                            |   | A-21*            |
|   |   |                                                                                                                       |   |             |
| 23     |   | Consent of BDO Seidman,  LLP                                                                                               |   | Filed Herewith   |
| 99.1   |   | Sarbanes-Oxley Section  302 Certification                                                                                  |   | Filed herewith   |
|   |   |                                                                                                                       |   |             |
| 99.2   |   | Sarbanes-Oxley Section  906 Certification                                                                                  |   | Filed herewith   |

 

----

| *      |   | In accordance with Rule  12b-32 under the Securities Exchange Act of 1934, as amended, reference is  made to the documents previously filed with the Securities and Exchange  Commission, which documents are hereby incorporated by reference. |
|--------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |   |                                                                                                                                                                                                                                            |
| **     |   | Management Contract or  Compensatory Plan or Arrangement                                                                                                                                                                                        |
|   |   |                                                                                                                                                                                                                                            |
| A      |   | Incorporated by  reference to the Company’s Registration Statement on Form SB-2 (Registration  No. 33-81068).  The number set forth  herein is the number of the Exhibit in said registration statement.                              |
|   |   |                                                                                                                                                                                                                                            |
| B      |   | Incorporated by reference  to the Company’s registration statement on Form S-1 (File No. 33-31748).  The number set forth herein is the number  of the Exhibit in said registration statement.                                        |
|   |   |                                                                                                                                                                                                                                            |
| C      |   | Incorporated by  reference to the Company’s annual report on                                                                                                                                                                               |

 

45

----

 
|   |   | Form 10-K for the year  ended April 30, 1991. The number set forth herein is the number of the  Exhibit in said annual report.                                                                                     |
|--------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| D      |   | Incorporated by  reference to the Company’s annual report on Form 10-K for the year ended April  30, 1994. The number set forth herein is the number of the Exhibit in said  annual report.                   |
|   |   |                                                                                                                                                                                                               |
| E      |   | Incorporated by  reference to the Company’s quarterly report on Form 10-QSB for the period  ended January 25, 1998.  The number  set forth herein is the number of the Exhibit in said quarterly report. |
|   |   |                                                                                                                                                                                                               |
| F      |   | Incorporated by  reference to the Company’s annual report on Form 10-KSB for the year ended  April 26, 1998.  The number set forth  herein is the number of the Exhibit in said annual report.           |
|   |   |                                                                                                                                                                                                               |
| G      |   | Incorporated by  reference to the Company’s annual report on Form 10-KSB for the year ended  April 25, 1999.  The number set forth  herein is the number of the Exhibit in said annual report.           |
|   |   |                                                                                                                                                                                                               |
| H      |   | Incorporated by  reference to the Company’s quarterly report on Form 10-QSB for period ended  July 25, 1999. The number set forth herein is the number of the Exhibit in  said quarterly report.              |
|   |   |                                                                                                                                                                                                               |
| I      |   | Incorporated by  reference to the Company’s quarterly report on Form 10-QSB for period ending  January, 2001. The number set forth herein is the number of the Exhibit in  said quarterly report.             |
|   |   |                                                                                                                                                                                                               |
| J      |   | Incorporate by  reference to the Company’s Annual report on Form 10-K for the year ended  April 28, 2002.  The number set forth  herein is the number of the Exhibit in said annual report.              |
|   |   |                                                                                                                                                                                                               |
| K      |   | Incorporated by  reference to the Company’s quarterly report on Form 10-Q for period ended  July 28, 2002. The number set forth herein is the number of the Exhibit in  said quarterly report.                |

 

 
| (d)    |   | FINANCIAL STATEMENT  SCHEDULES                                                                    |
|--------|--------|---------------------------------------------------------------------------------------------------|
|   |   |                                                                                              |
|   |   | The Financial Statement  Schedules required by this item, if any, are listed under Item 14(a)(2). |

 

46

----

 

**Boston RestaurantAssociates, Inc. andSubsidiaries**

 

 

**Consolidated Financial StatementsYears Ended April 27, 2003 and April 28, 2002**

 

----

 

**Contents**

 
| **Report  of Independent Certified Public Accountants** |
|---------------------------------------------------------|
|                                                    |
| **Consolidated financial statements:**                  |
|                                                    |
| Balance sheets                                          |
|                                                    |
| Statements of  operations                               |
|                                                    |
| Statements  of stockholders’ equity                |
|                                                    |
| Statements of  cash flows                               |
|                                                    |
| Summary of accounting  policies                         |
|                                                    |
| Notes to  consolidated financial statements             |

 

F-1

----

 

**Reportof Independent Certified Public Accountants**

 

 

To the Board of Directorsand Stockholders of

Boston RestaurantAssociates, Inc.

 

We have audited theaccompanying consolidated balance sheets of Boston Restaurant Associates, Inc.and subsidiaries as of April 27, 2003 and April 28, 2002, and therelated consolidated statements of operations, stockholders’ equity, and cash flowsfor each of the three years in the period ended April 27, 2003.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.

 

We conducted our auditsin accordance with auditing standards generally accepted in the United Statesof America.  Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement.  An audit includes examining, on a testbasis, evidence supporting the amounts and disclosures in the financialstatements.  An audit also includesassessing the accounting principles used and significant estimates made bymanagement, as well as evaluating the overall financial statementpresentation.  We believe that ouraudits provide a reasonable basis for our opinion.

 

In our opinion, theconsolidated financial statements referred to above present fairly, in allmaterial respects, the financial position of Boston Restaurant Associates, Inc.and subsidiaries at April 27, 2003 and April 28, 2002, and theresults of their operations and their cash flows for each of the three years inthe period ended April 27, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

 

BDO Seidman, LLP

 

 

Boston, Massachusetts

June 20, 2003

 

F-2

----

 

**Boston Restaurant Associates, Inc.and Subsidiaries**

 

**ConsolidatedBalance Sheets**

 
|                                            |   | **April 27,  2003** |          | **April 28,  2002** |   |
|-------------------------------------------------|--------|---------------------|---------------|---------------------|--------|
|                                            |   |                |          |                |   |
| **Assets**(Note 5)                              |   |                |          |                |   |
|                                            |   |                |          |                |   |
| **Current:**                                    |   |                |          |                |   |
| Cash  and cash equivalents                      |   | **$**               | **1,106,701** | ** **          | $      | 932,806 |   |
| Accounts  receivable                            |   | **137,123**         | ** **    | 123,840             |   |
| Inventories  (Note 1)                           |   | **541,030**         | ** **    | 546,688             |   |
| Prepaid  expenses and other                     |   | **164,610**         | ** **    | 118,189             |   |
|                                            |   |                | ** **    |                |   |
| Total  current assets                           |   | **1,949,464**       | ** **    | 1,721,523           |   |
|                                            |   |                | ** **    |                |   |
| **Property  and equipment**(Note 9):            |   |                | ** **    |                |   |
| Building                                        |   | **512,500**         | ** **    | 512,500             |   |
| Leasehold  improvements                         |   | **6,739,402**       | ** **    | 6,517,055           |   |
| Equipment,  furniture and fixtures              |   | **4,509,527**       | ** **    | 4,329,675           |   |
|                                            |   |                | ** **    |                |   |
|                                            |   | **11,761,429**      | ** **    | 11,359,230          |   |
|                                            |   |                | ** **    |                |   |
| Less  accumulated depreciation and amortization |   | **6,472,336**       | ** **    | 5,508,234           |   |
|                                            |   |                | ** **    |                |   |
| Net  property and equipment                     |   | **5,289,093**       | ** **    | 5,850,996           |   |
|                                            |   |                | ** **    |                |   |
| **Other  assets**, net****(Note 2)              |   | **581,545**         | ** **    | 614,572             |   |
|                                            |   |                | ** **    |                |   |
| **Goodwill**,  net (Note 3)                     |   | **453,643**         | ** **    | 453,643             |   |
|                                            |   |                | ** **    |                |   |
|                                            |   | **$**               | **8,273,745** | ** **          | $      | 8,640,734 |   |

 

*See accompanying summary ofaccounting policies and notes to consolidated financial statements.*

 

F-3

----

 
|                                                                                                               |   | **April 27,  2003** |          | **April 28,  2002** |   |
|--------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------------|---------------------|--------|
|                                                                                                               |   |                |          |                |   |
| **Liabilities  and Stockholders’ Equity**                                                                     |   |                |          |                |   |
|                                                                                                               |   |                |          |                |   |
| **Current  liabilities:**                                                                                          |   |                |          |                |   |
| Accounts  payable                                                                                                  |   | **$**               | **580,070**   | ** **          | $      | 805,719 |   |
| Accrued  expenses (Note 4)                                                                                         |   | **1,319,805**       | ** **    | 1,440,237           |   |
| Current  maturities (Notes 5, 6 and 9):                                                                            |   |                | ** **    |                |   |
| Long-term  debt                                                                                                    |   | **220,835**         | ** **    | 528,623             |   |
| Notes  payable - stockholder                                                                                       |   | **5,820**           | ** **    | 5,533               |   |
| Obligations  under capital leases                                                                                  |   | **195,365**         | ** **    | 364,077             |   |
|                                                                                                               |   |                | ** **    |                |   |
| Total  current liabilities                                                                                         |   | **2,321,895**       | ** **    | 3,144,189           |   |
|                                                                                                               |   |                | ** **    |                |   |
| **Long-term  obligations:**                                                                                        |   |                | ** **    |                |   |
| Long-term  debt, less current maturities (Note 5)                                                                  |   | **511,671**         | ** **    | 346,087             |   |
| Notes  payable - stockholder, less current maturities (Note 6)                                                     |   | **94,964**          | ** **    | 100,784             |   |
| Obligations  under capital leases, less current maturities (Note 9)                                                |   | **253,688**         | ** **    | 449,154             |   |
| Deferred  rent (Note 9)                                                                                            |   | **396,271**         | ** **    | 376,825             |   |
| Subordinated  debentures (Notes 7 and 10)                                                                          |   | **1,450,000**       | ** **    | 1,500,000           |   |
| Other  long-term liabilities (Note 9)                                                                              |   | **506,698**         | ** **    | 978,026             |   |
|                                                                                                               |   |                | ** **    |                |   |
| Total  liabilities                                                                                                 |   | **5,535,187**       | ** **    | 6,895,065           |   |
|                                                                                                               |   |                | ** **    |                |   |
| **Commitments  and contingencies**(Notes 9 and 10)                                                                 |   |                | ** **    |                |   |
|                                                                                                               |   |                | ** **    |                |   |
| **Stockholders’  equity** (Notes 7 and 10):                                                                   |   |                | ** **    |                |   |
| Preferred  stock, $.01 par value, 10,000,000 shares authorized; none issued                                        |   | **—**          | ** **    | —              |   |
| Common  stock, $.01 par value 25,000,000 shares authorized; issued 7,060,170 shares;  outstanding 7,035,170 shares |   | **70,602**          | ** **    | 70,602              |   |
| Additional  paid-in capital                                                                                        |   | **10,922,636**      | ** **    | 10,922,636          |   |
| Accumulated  deficit                                                                                               |   | **(8,229,988**      | **)**         | (9,222,877          | )      |
|                                                                                                               |   |                | ** **    |                |   |
|                                                                                                               |   | **2,763,250**       | ** **    | 1,770,361           |   |
|                                                                                                               |   |                | ** **    |                |   |
| Less  treasury stock, 25,000 shares at cost                                                                        |   | **(24,692**         | **)**         | (24,692             | )      |
|                                                                                                               |   |                | ** **    |                |   |
| Total  stockholders’ equity                                                                                   |   | **2,738,558**       | ** **    | 1,745,669           |   |
|                                                                                                               |   |                | ** **    |                |   |
|                                                                                                               |   | **$**               | **8,273,745** | ** **          | $      | 8,640,734 |   |

 

*See accompanying summary ofaccounting policies and notes to consolidated financial statements.*

 

F-4

----

 

**BostonRestaurant Associates, Inc.and Subsidiaries**

 

**ConsolidatedStatements of Operations**

 
| **Years  ended**                                                                                              |   | **April 27,  2003** |           | **April 28,  2002** |   | **April 29,  2001** |   |
|---------------------------------------------------------------------------------------------------------------|--------|---------------------|----------------|---------------------|--------|---------------------|--------|
|                                                                                                          |   |                |           |                |   |                |   |
| **Revenues:**                                                                                                 |   |                |           |                |   |                |   |
| Restaurant  sales                                                                                             |   | **$**               | **22,477,600** | ** **          | $      | 23,827,993          |   | $ | 21,609,893 |   |
| Franchise  fees (Note 9)                                                                                      |   | **64,275**          | ** **     | 26,446              |   | 98,014              |   |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| Total  revenues                                                                                               |   | **22,541,875**      | ** **     | 23,854,439          |   | 21,707,907          |   |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Costs  and expenses:**                                                                                      |   |                | ** **     |                |   |                |   |
| Cost  of food, beverages and liquor                                                                           |   | **4,348,095**       | ** **     | 4,885,952           |   | 4,644,810           |   |
| Other  operating expenses                                                                                     |   | **13,570,421**      | ** **     | 14,293,083          |   | 13,052,040          |   |
| General  and administrative                                                                                   |   | **2,610,666**       | ** **     | 2,132,756           |   | 1,837,085           |   |
| Depreciation  and amortization                                                                                |   | **1,056,889**       | ** **     | 1,152,860           |   | 1,161,628           |   |
| Pre-opening  costs                                                                                            |   | **8,545**           | ** **     | —              |   | 658,090             |   |
| Litigation  and settlement costs (Note 9)                                                                     |   | **(443,445**        | **)**          | —              |   | 1,847,487           |   |
| Charge  for asset impairment (Note 13)                                                                        |   | **—**          | ** **     | —              |   | 580,000             |   |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| Total  costs and expenses                                                                                     |   | **21,151,171**      | ** **     | 22,464,651          |   | 23,781,140          |   |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Operating  income (loss)**                                                                                  |   | **1,390,704**       | ** **     | 1,389,788           |   | (2,073,233          | )      |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Interest  expense**, net of interest income of $2,987, $0 and $35,509  in 2003, 2002 and 2001, respectively |   | **(407,243**        | **)**          | (508,072            | )      | (456,842            | )      |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Other  income**, net                                                                                        |   | **9,428**           | ** **     | 9,015               |   | 19,771              |   |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Net  income (loss)**                                                                                        |   | **$**               | **992,889**    | ** **          | $      | 890,731             |   | $ | (2,510,304 | ) |
|                                                                                                          |   |                | ** **     |                |   |                |   |
| **Net  income (loss) per share of common stock**(Note 12):                                                    |   |                | ** **     |                |   |                |   |
| Basic  and diluted                                                                                            |   | **$**               | **.14**        | ** **          | $      | .13                 |   | $ | (.36 | ) |

 

*See accompanying summary ofaccounting policies and notes to consolidated financial statements.*

 

F-5

----

 

**Boston Restaurant Associates, Inc.**

**and Subsidiaries**

 

**Consolidated Statements ofStockholders’ Equity**

 
|                        |   | **Common  Stock  $ .01 Par Value** |   | **Additional  Paid-in  Capital** |   | **Accumulated  Deficit** |   | **Treasury  Stock** |   | **Total  Stockholders’  Equity** |       |
|-----------------------------|--------|------------------------------------|--------|----------------------------------|--------|--------------------------|--------|---------------------|--------|---------------------------------------|------------|
|                        |   | **Shares**                         |   | **Amount**                       |   |                     |   | **Shares**          |   | **Amount**                            |       |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| **Balance**, April 30, 2000 |   | 7,060,170                          |   | $                                | 70,602 |                     | $      | 10,922,636          |   | $                                     | (7,603,304 | ) | 25,000 |   | $ | (24,692 | ) | $ | 3,365,242 |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| Net loss for the year       |   | —                             |   | —                           |   | —                   |   | (2,510,304          | )      | —                                |       | — |   | (2,510,304 | ) |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| **Balance**, April 29, 2001 |   | 7,060,170                          |   | 70,602                           |   | 10,922,636               |   | (10,113,608         | )      | 25,000                                |       | (24,692 | ) | 854,938 |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| Net income for the year     |   | —                             |   | —                           |   | —                   |   | 890,731             |   | —                                |       | — |   | 890,731 |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| **Balance**, April 28, 2002 |   | 7,060,170                          |   | 70,602                           |   | 10,922,636               |   | (9,222,877          | )      | 25,000                                |       | (24,692 | ) | 1,745,669 |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| Net income for the year     |   | —                             |   | —                           |   | —                   |   | 992,889             |   | —                                |       | — |   | 992,889 |   |
|                        |   |                               |   |                             |   |                     |   |                |   |                                  |       |   |   |   |   |
| **Balance**, April 27, 2003 |   | 7,060,170                          |   | $                                | 70,602 |                     | $      | 10,922,636          |   | $                                     | (8,229,988 | ) | 25,000 |   | $ | (24,692 | ) | $ | 2,738,558 |   |

 

*See accompanying summary ofaccounting policies and notes to consolidated financial statements.*

 

F-6

----

 

**Boston Restaurant Associates, Inc.and Subsidiaries**

 

**Consolidated Statements of Cash Flows****(Note 11)**

 
| **Years  ended**                                                                          |   | **April 27,  2003** |          | **April 28,  2002** |   | **April 29,  2001** |   |
|-------------------------------------------------------------------------------------------|--------|---------------------|---------------|---------------------|--------|---------------------|--------|
|                                                                                      |   |                |          |                |   |                |   |
| **Cash  flows from operating activities:**                                                |   |                |          |                |   |                |   |
| Net  income (loss)                                                                        |   | **$**               | **992,889**   | ** **          | $      | 890,731             |   | $ | (2,510,304 | ) |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                | ** **    |                |   |                |   |
| Depreciation  and amortization                                                            |   | **1,056,889**       | ** **    | 1,152,860           |   | 1,161,628           |   |
| Litigation  settlement                                                                    |   | **(443,445**        | **)**         | —              |   | 955,000             |   |
| Charge  for asset impairment                                                              |   | **—**          | ** **    | —              |   | 580,000             |   |
| Changes  in operating assets and liabilities:                                             |   |                | ** **    |                |   |                |   |
| Accounts  receivable                                                                      |   | **(13,283**         | **)**         | 472                 |   | (75,036             | )      |
| Inventories                                                                               |   | **5,658**           | ** **    | 32,582              |   | (208,598            | )      |
| Prepaid  expenses and other                                                               |   | **(46,421**         | **)**         | (78,924             | )      | 7,650               |   |
| Other  assets                                                                             |   | **(59,760**         | **)**         | (20,024             | )      | (52,450             | )      |
| Accounts  payable                                                                         |   | **(225,649**        | **)**         | (413,705            | )      | 823,087             |   |
| Accrued  expenses                                                                         |   | **(120,432**        | **)**         | (61,507             | )      | 407,134             |   |
| Deferred  rent                                                                            |   | **19,446**          | ** **    | 94,466              |   | 133,622             |   |
| Other  long-term liabilities                                                              |   | **(27,883**         | **)**         | 20,026              |   | 65,000              |   |
|                                                                                      |   |                | ** **    |                |   |                |   |
| Net  cash provided by operating activities                                                |   | **1,138,009**       | ** **    | 1,616,977           |   | 1,286,733           |   |
|                                                                                      |   |                | ** **    |                |   |                |   |
| **Cash  flows from investing activities:**                                                |   |                | ** **    |                |   |                |   |
| Capital  expenditures                                                                     |   | **(402,199**        | **)**         | (127,739            | )      | (1,944,929          | )      |
|                                                                                      |   |                | ** **    |                |   |                |   |
| Net  cash used for investing activities                                                   |   | **(402,199**        | **)**         | (127,739            | )      | (1,944,929          | )      |
|                                                                                      |   |                | ** **    |                |   |                |   |
| **Cash  flows from financing activities:**                                                |   |                | ** **    |                |   |                |   |
| Repayments  of long-term debt                                                             |   | **(1,064,509**      | **)**         | (536,374            | )      | (456,446            | )      |
| Repayments  of capital lease obligations                                                  |   | **(364,178**        | **)**         | (347,846            | )      | (294,702            | )      |
| Repayments  of stockholder loans                                                          |   | **(5,533**          | **)**         | (5,260              | )      | (4,994              | )      |
| Repayments  of subordinated convertible debentures                                        |   | **(50,000**         | **)**         | —              |   | —              |   |
| Proceeds  from issuance of long-term debt                                                 |   | **922,305**         | ** **    | —              |   | 800,000             |   |
|                                                                                      |   |                | ** **    |                |   |                |   |
| Net  cash provided by (used for) financing activities                                     |   | **(561,915**        | **)**         | (889,480            | )      | 43,858              |   |
|                                                                                      |   |                | ** **    |                |   |                |   |
| **Net  increase (decrease) in cash and cash equivalents**                                 |   | **173,895**         | ** **    | 599,758             |   | (614,338            | )      |
|                                                                                      |   |                | ** **    |                |   |                |   |
| **Cash  and cash equivalents**, beginning of year                                         |   | **932,806**         | ** **    | 333,048             |   | 947,386             |   |
|                                                                                      |   |                | ** **    |                |   |                |   |
| **Cash  and cash equivalents**, end of year                                               |   | **$**               | **1,106,701** | ** **          | $      | 932,806             |   | $ | 333,048 |   |

 

*See accompanying summary ofaccounting policies and notes to consolidated financial statements.*

 

F-7

----

 

**Boston Restaurant Associates, Inc.and Subsidiaries**

 

**Summaryof Accounting Policies**

 
| **Nature of Business**

**And Basis of**

**Presentation**

  | The Company is engaged  in the restaurant business.  As of  April 27, 2003, April 28, 2002 and April 29, 2001, the Company  operated twelve pizza restaurants and four casual Italian dining restaurants.

  The consolidated financial statements include the accounts of the Company and  its majority-owned subsidiaries.  All  significant intercompany balances and transactions have been eliminated.                      |
|--------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Fiscal Year**                                                    | The Company’s fiscal  year ends on the last Sunday in April.   Fiscal years 2003, 2002 and 2001 included 52 weeks.                                                                                                                                                                                                                                                                                                                              |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Use of Estimates**                                               | The preparation of  financial statements in conformity with generally accepted accounting  principles requires management to make estimates and assumptions that affect  the reported amounts of assets and liabilities and disclosure of contingent  assets and liabilities at the date of the financial statements and reported  amounts of revenues and expenses during the reporting period.  Actual results could differ from those  estimates. |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Cash Equivalents**                                               | For purposes of the  statements of cash flows, the Company considers all highly liquid debt  instruments purchased with maturities of three months or less to be cash  equivalents.  As of April 27,  2003 and April 28, 2002, cash equivalents were not material.                                                                                                                                                                         |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Financial Instruments**                                          | The estimated fair  values of the Company’s financial instruments, which consist of cash and cash  equivalents, accounts receivable, accounts payable, accrued expenses, and  certain long-term obligations, approximate their carrying values based on  their maturity dates and prevailing market interest rates.                                                                                                                                  |
|                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Inventories**                                                    | Inventories are valued  at the lower of cost (first-in, first-out) or market.                                                                                                                                                                                                                                                                                                                                                                             |

 

F-8

----

 
| **Property and**

**Equipment** | Property and equipment  are stated at cost.  Depreciation  is computed using accelerated and straight-line methods over the  estimated useful lives of the assets.   Leasehold improvements are amortized over the estimated useful lives  of the improvements or the length of the related lease, including anticipated  renewal periods, whichever is shorter.                                                                                           |
|---------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Other Assets**                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Deferred Financing  Costs*     | Costs incurred in  connection with obtaining financing are amortized over the terms of the  related debt.                                                                                                                                                                                                                                                                                                                                                                 |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Lease Acquisition  Rights*     | Costs incurred in connection  with the purchases of leases are being amortized over the terms of the  leases.                                                                                                                                                                                                                                                                                                                                                             |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Goodwill**                    | Goodwill resulting from  the excess of cost over the fair value of net assets acquired is being tested  for impairment in accordance with the guidelines in SFAS No. 142.                                                                                                                                                                                                                                                                                            |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Revenue Recognition**         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Restaurant Sales*              | Substantially all  restaurant sales represent retail sales to the general public through  Company-owned restaurants.  Such  amounts are recognized as revenue at the point of sale.                                                                                                                                                                                                                                                                                  |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| *Franchise Fees*                | Franchise fees  resulting from the sale of individual franchise locations are recognized as  revenue upon the commencement of franchise operations.  Revenues from the sale of area development  rights are recognized proportionately as the franchised restaurants, subject  to the area development agreements, commence operations.  Franchise royalties, which are based on a  percentage of franchised restaurants’ sales, are recognized as earned. |
|                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
| **Advertising Costs**           | Advertising costs are  expensed when incurred.  Advertising  expense amounted to approximately $380,000, $385,000 and $243,000 in 2003,  2002 and 2001, respectively.                                                                                                                                                                                                                                                                                                |

 

F-9

----

 
| **Pre-Opening Costs**     | All nonrecurring costs,  such as recruiting, training and other initial direct administrative expenses  associated with the opening of new restaurant locations, are expensed as  incurred.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|---------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Taxes on Income**       | The Company accounts  for income taxes under the asset and liability method pursuant to Statement  of Financial Accounting Standards No. 109 (“SFAS No. 109”),  “Accounting for Income Taxes.”  Under  SFAS No. 109, deferred income taxes are recognized for the future  tax consequences attributable to differences between the financial statement  carrying amounts of existing assets and liabilities and their respective tax  basis.  Deferred tax assets and  liabilities are measured using enacted tax rates expected to apply to taxable  income in the years in which those temporary differences are expected to be  recovered or settled.  The effect of  any tax rate change on deferred taxes is recognized in income in the period  that includes the enactment date of the tax rate change.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
| **Stock Options**

  | The Company accounts  for stock options using the intrinsic value method in accordance with  Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued  to Employees,” (“APB 25”) and related interpretations.  Accordingly, the Company has recognized no  compensation cost for its stock option plans.  The Company follows the disclosure provisions of Statement of  Financial Accounting Standards No. 123 (“SFAS No. 123”),  “Accounting for Stock-Based Compensation,” which require the disclosure of  the effects of fair value accounting on earnings and earnings per share of  common stock on a pro forma basis.

  In December 2002, the Financial Accounting Standards Board (“FASB”) issued  SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and  Disclosure (“SFAS No. 148”), which (i) amends SFAS No. 123,  “Accounting for Stock-Based Compensation,” to provide alternative methods of  transition for an entity that voluntarily changes to the fair value based  method of accounting for stock-based employee compensation (ii) amends the  disclosure provisions of SFAS No. 123 to require prominent disclosure about  the effects on reported net income of an entity’s accounting policy decisions  with respect to stock-based employee compensation and (iii) amends APB  Opinion No. 28, “Interim |

 

F-10

----

 
|   | Financial Reporting,”  to require disclosure about those effects in interim financial  information.  Items (ii) and (iii) of  the new requirements in SFAS No. 148 are effective for financial  statements for fiscal years ending after December 15, 2002.  The Company adopted items (ii) and (iii)  of SFAS No. 148 for the fiscal year ended April 27, 2003 and  continues to account for stock-based compensation utilizing the intrinsic  value method.  Had compensation cost  for the Company’s stock options been determined based upon the fair value at  the grant date for awards under the plans consistent with the methodology  prescribed under SFAS No. 123, the Company’s net income (loss) would  have been adjusted to the pro forma amounts indicated below along with the  additional disclosures required by SFAS No. 148 are as follows: |
|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
|   | **Years ended April**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | **2003** |   | **2002** |   | **2001** |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
|   | Net income (loss) as  reported                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **$** | ** 992,889** |   | $ |  890,731 |   | $ | (2,510,304 | ) |
|   | 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                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | **53,853** |   | 58,870 |   | (82,618 | ) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
|   | Net income (loss) - pro  forma                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **$** | ** 939,036** |   | $ | 831,861 |   | $ |  (2,592,922 | ) |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |   |   |   |   |   |   |   |
|   | Basic and diluted  earnings per share:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |
|   | As  reported                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **$** | ** 0.14** |   | $ |  0.13 |   | $ |  (0.36 | ) |
|   | Pro  forma                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **$** | ** 0.13** |   | $ |  0.12 |   | $ |  (0.37 | ) |

 

F-11

----

 
| **Net Income (Loss) Per**

**Share of Common Stock**

  | The Company follows  Statement of Financial Accounting Standards No. 128 (“SFAS  No. 128”), “Earnings per Share.”   Under SFAS No. 128, basic earnings per share excludes the effect  of any dilutive options, warrants or convertible securities and is computed  by dividing the net income (loss) available to common shareholders by the  weighted average number of common shares and dilutive common shares  equivalent outstanding for the period.   Diluted earnings per share is computed by dividing the net income  (loss) available to common shareholders by the sum of the weighted average  number of common shares and dilutive common share equivalents computed using  the average market price for the period under the treasury stock method.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| **Long-Lived Assets**                                        | In Fiscal 2003, the  Company adopted Statement of Financial Accounting Standards No 144  (“SFAS 144”) “Accounting for the Impairment or Disposal of Long-Lived  Assets”, which addresses financial accounting and reporting for the  impairment or disposal of long-lived assets, other than goodwill.  Although SFAS 144 supersedes  Statement of Financial Accounting Standard No. 121 (“SFAS 121”),  “Accounting for the Impairment of Long-Lived Assets To Be Disposed Of”, it  retains many of the fundamental provisions of SFAS 121.  SFAS 144 also supersedes the  accounting and reporting provisions of Accounting Principles Board Opinion  No. 30 (“APB 30”), “Reporting the Results of Operations-Reporting  the Effects of Disposal of a Segment of a Business, and Extraordinary,  Unusual and Infrequently Occurring Events and Transactions” for the disposal  of a segment of a business.  However,  it retains the requirement of ABP 30 to report separately discontinued  operations and extends that reporting to a component of an entity that either  has been disposed of, by sale, abandonment, or in a distribution to owners,  or is classified as held for sale.   The adoption of SFAS 144 did not have a material effect on the  Company’s consolidated financial statements.

  The Company reviews the carrying values of its long-lived and identifiable  intangible assets for possible impairment whenever events or changes in  circumstances indicate that the carrying amounts of the assets may not be  recoverable.  In fiscal 2001, the  Company recorded an impairment charge related to the write-down of certain  long-lived assets (see Note 12). |

 

F-12

----

 
| **New Accounting**

**Pronouncements** | In April 2002, the  Financial Accounting Standards Board (“FASB”) issued SFAS No. 145,  “Rescission of FASB Statements Nos. 4, 44 and 64, Amendment of FASB Statement  No. 13 and Technical Corrections.”   SFAS No. 145 rescinds Statement No. 4, “Reporting Gains and  Losses from Extinguishments of Debt,” and an amendment of that Statement,  FASB Statement No. 64, “Extinguishments of Debt Made to Satisfy  Sinking-Fund Requirements.”  SFAS  No. 145 also rescinds FASB Statement No. 44, “Accounting for  Intangible Assets of “Motor Carriers.”   SFAS No. 145 amends FASB Statement No. 13, “Accounting for  Leases” to eliminate an inconsistency between the required accounting for  sale-leaseback transactions and the required accounting for certain lease  modifications that have economic effects that are similar to sale-leaseback  transactions.  SFAS No. 145 also  amends other existing authoritative pronouncements to make various technical  corrections, clarify meanings, or describe their applicability under changed  conditions.  The provision of SFAS  No.145 related to the rescission of Statement No. 4 shall be applied in  fiscal years beginning after May 15, 2002.  The provisions of SFAS No. 145 related to Statement  No. 13 should be for transactions occurring after May 15,  2002.  Early application of the  provisions of this Statement is encouraged. The Company does not expect that  the adoption of SFAS No. 145 will have a significant impact on its  consolidated results of operations, financial position or cash flows.

  In June 2002, the FASB issued SFAS No. 146 “Accounting for Costs  Associated with Exit or Disposal Activities.”  This statement superseded EITF No. 94-3, “Liability Recognition  for Certain Employee Termination Benefits and Other Costs to Exit an  Activity”.  Under this statement, a  liability or a cost associated with a disposal or exit activity is recognized  at fair value when the liability is incurred rather than at the date of an entity’s  commitment to an exit plan as required under EITF 94-3.  The provisions of this statement are  effective for exit or disposal activities that are initiated after  December 31, 2002, with early adoption permitted.  The Company does not believe the adoption  of SFAS No. 146 will have an impact on its consolidated financial  position and results of operations. |
|----------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-13

----

 
|   | In November 2002, the  FASB issued FIN 45, “Guarantor’s Accounting and Disclosure Requirements  for Guarantees, Including Guarantees of Indebtedness of Others.”  Among other things, FIN 45 requires  guarantors to recognize, at fair value, their obligations to stand ready to  perform under certain guarantees.   FIN 45 is effective for guarantees issued or modified on or after  January 1, 2003. The Company does not believe the adoption of  FIN 45 will have any effect on its financial position or results of  operations.

  In January 2003, the FASB issued FIN 46, “Consolidation of Variable  Interest Entities.”  FIN 46  requires that the criteria for consolidations be based upon analysis of risks  and rewards, not control, and represents a significant and complex  modification of previous accounting principles.  FIN 46 represents an accounting change, not a change in  the underlying economics of asset sales. FIN 46 is effective for  consolidated financial statements issued after June 30, 2003.  The Company does not believe the adoption  of FIN 46 will have an effect on its financial position or results of  operations.

  In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial  Instruments with Characteristics of Both Liabilities and Equity.” SFAS  No. 150 is the first phase of the FASB’s project on liabilities and  equity.  SFAS No. 150 provides  guidance on how an entity classifies and measures certain financial  instruments with characteristics of both liabilities and equity.  Many of these instruments were previously  classified as equity.  For example, if  an employer’s issuance of its shares to a key employee requires the employer  to redeem the shares upon the employee’s death, then those shares must be  classified as a liability, not as equity.   For publicly-held companies, SFAS No. 150 is effective for financial  instruments entered into or modified after May 31, 2003.  SFAS No. 150 requires companies to  record the cumulative effect of financial instruments existing at the  adoption date. The Company does not believe the adoption of SFAS No. 150  will have a significant effect on the Company’s operations, financial  position or cash flows. |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-14

----

 
| **1.****                                      Inventories**   | Inventories consist of  the following:  |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------|
|                                                                                                                                                                                                                                                   |                                    |
|                                                                                                                                                                                                                                                   |                                    |   | **April 27,  2003** |   | **April 28,  2002** |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   | Food, beverages, and  liquor            |   | **$** | **198,599** |   | $ | 212,678 |   |
|                                                                                                                                                                                                                                                   | Paper goods and  supplies               |   | **342,431** |   | 334,010 |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   | Total                                   |   | **$** | **541,030** |   | $ | 546,688 |   |
|                                                                                                                                                                                                                                                   |                                    |
| **2.****                                      Other  Assets** | Other assets  consist of the following: |
|                                                                                                                                                                                                                                                   |                                    |
|                                                                                                                                                                                                                                                   |                                    |   | **April 27,  2003** |   | **April 28,  2002** |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   | Deposits  and other                     |   | **$** | **276,165** |   | $ | 254,195 |   |
|                                                                                                                                                                                                                                                   | Lease  acquisition rights               |   | **290,700** |   | 290,700 |   |
|                                                                                                                                                                                                                                                   | Deferred  financing costs               |   | **342,198** |   | 298,007 |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   |                                    |   | **909,063** |   | 842,902 |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   | Less  accumulated amortization          |   | **327,518** |   | 228,330 |   |
|                                                                                                                                                                                                                                                   |                                    |   |   |   |   |   |
|                                                                                                                                                                                                                                                   | Other  assets, net                      |   | **$** | **581,545** |   | $ | 614,572 |   |
|                                                                                                                                                                                                                                                        |                                         |  |  |  |  |  |  |  |  |  |  |  |

 

F-15

----

 
| **3.****                                      Goodwill** | Effective  April 29, 2002 the Company adopted FASB Statement No. 141, Business  Combinations (“SFAS 141”) and No. 142, “Goodwill and Other  Intangible Assets” (“SFAS 142”). SFAS 141 requires the use of the  purchase method of accounting and prohibits the use of the  pooling-of-interest method of accounting for business combinations initiated  after June 30, 2001.   SFAS 141 also requires that the Company recognize acquired  intangible assets apart from goodwill if the acquired intangible assets meet  certain criteria.  SFAS 141  applies to all business combinations initiated after June 30, 2001 and  for purchase business combinations completed on or after July 1,  2001.  It also requires, upon adoption  of SFAS 142, that the Company reclassify the carrying amounts of  intangible assets and goodwill based on the criteria in SFAS 141.                                                                                                                                                                                                                                       |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                              |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                              | SFAS 142 requires,  among other things, that companies no longer amortize goodwill, but test  goodwill for impairment at least annually.   In addition, SFAS 142, requires that the Company identify  reporting units for the purpose of assessing potential future impairments of  goodwill, reassess the useful lives of other existing recognized intangible  assets, and cease amortization of intangible assets with an indefinite useful  life.  An intangible asset with an  indefinite useful life should be tested for impairment in accordance with the  guidelines in SFAS 142.   SFAS 142 is required to be applied to all goodwill and other  intangible assets regardless of when those assets were initially recognized.

  As of April 29, 2002, the Company’s goodwill of $453,643 was associated  with the acquisition of Capucino’s, Inc. in 1994.   No adjustment to the $453,643 balance of goodwill was deemed  necessary during the year ended April 27, 2003.  Prior to the adoption of SFAS 142, the  Company amortized goodwill over twenty years which resulted in amortization  of $37,806 in both fiscal years 2002 and 2001. |

 

F-16

----

 
|                                                                                                                                                                                                                                                       | The effect on  reported net income (loss) due to the discontinuance of goodwill amortization  is as follows: |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                       |                                                                                                         |
|                                                                                                                                                                                                                                                       |                                                                                                         |   | **2003** |   | **2002** |   | **2001** |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Reported  net income (loss)                                                                                  |   | **$** | **992,889** |   | $ | 890,731 |   | $ | (2,510,304 | ) |
|                                                                                                                                                                                                                                                       | Goodwill  amortization                                                                                       |   | **—** |   | 37,806 |   | 37,806 |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Adjusted  net income (loss) after discontinuance of goodwill amortization                                    |   | **$** | **992,889** |   | $ | 928,537 |   | $ | (2,472,498 | ) |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Basic  earnings per share as reported                                                                        |   | **$** | **.14** |   | $ | .13 |   | $ | (.36 | ) |
|                                                                                                                                                                                                                                                       | Goodwill  amortization                                                                                       |   | **—** |   | — |   | — |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Basic  earnings per share after discontinuance of goodwill amortization                                      |   | **$** | **.14** |   | $ | .13 |   | $ | (.35 | ) |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Diluted  earnings per share as reported                                                                      |   | **$** | **.14** |   | $ | .13 |   | $ | (.36 | ) |
|                                                                                                                                                                                                                                                       | Goodwill  amortization                                                                                       |   | **—** |   | — |   | — |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Diluted  earnings per share after discontinuance of goodwill amortization                                    |   | **$** | **.14** |   | $ | .13 |   | $ | (.35 | ) |
|                                                                                                                                                                                                                                                       |                                                                                                         |
| **4.****                                      Accrued  Expenses** | Accrued expenses  consist of the following:                                                                  |
|                                                                                                                                                                                                                                                       |                                                                                                         |
|                                                                                                                                                                                                                                                       |                                                                                                         |   | **April 27,  2003** |   | **April 28,  2002** |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   |   |   |   |
|                                                                                                                                                                                                                                                       | Professional  fees                                                                                           |   | **$** | **195,250** | ** ** | $ | 222,639 |   |
|                                                                                                                                                                                                                                                       | Compensation                                                                                                 |   | **568,241** | ** ** | 554,704 |   |
|                                                                                                                                                                                                                                                       | Interest                                                                                                     |   | **153,712** | ** ** | 170,164 |   |
|                                                                                                                                                                                                                                                       | Accrued  rent                                                                                                |   | **45,266** | ** ** | 138,306 |   |
|                                                                                                                                                                                                                                                       | Gift  certificates                                                                                           |   | **171,759** | ** ** | 159,674 |   |
|                                                                                                                                                                                                                                                       | Other                                                                                                        |   | **96,156** | ** ** | 102,491 |   |
|                                                                                                                                                                                                                                                       | Taxes  other than income taxes                                                                               |   | **89,421** | ** ** | 92,259 |   |
|                                                                                                                                                                                                                                                       |                                                                                                         |   |   | ** ** |   |   |
|                                                                                                                                                                                                                                                       | Total                                                                                                        |   | **$** | **1,319,805** | ** ** | $ | 1,440,237 |   |
|                                                                                                                                                                                                                                                            |                                                                                                              |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-17

----

 
| **5.****                            Revolving  Credit Facility and Long-Term Debt**

  | On April 30, 2002, the  Company entered into a new $3,500,000 credit facility with Commerce Bank and  Trust Company.  The credit facility  permits the Company to borrow amounts to pay the costs for new restaurant  openings and repay over a fixed term of either four or five years.  No new borrowings may be made under the  credit facility after April 30, 2004.   Each borrowing under the credit facility bears interest at the bank’s  base rate plus 1.75%, subject to an annual adjustment to the bank’s then  current base rate plus 1.75%.  The  Company borrowed $922,000, under the facility on April 30, 2002 to pay  off the term notes under the prior bank facility.  The note for that borrowing bore interest at 6.75% for the  first year through April 27, 2003, and was adjusted to 6.25% after the  annual adjustment on April 30, 2003.   The note is payable in monthly installments over four years.  At April 27, 2003, the amount  available for borrowing under the credit facility was $2,767,000.  All borrowings under the credit facility  are collateralized by substantially all of the assets of the Company and are  subject to various financial covenants.   The Company was in compliance with the various financial covenants of  the credit facility at April 27, 2003. |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
| *Long-Term Debt*                                                                                                                                                                                                                   | Long-term debt consists  of the following:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **April 27,  2003** |   | **April 28,  2002** |   |
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |
|                                                                                                                                                                                                                               | Notes  payable to a bank bearing interest at 6.75% (subject to adjustment each year  to the bank’s base rate plus 2%), representing borrowings against the  Company’s revolving credit facility, payable in aggregate monthly  installments of $22,022 through April 2006.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | $ | 732,506 |   | $ | — |   |
|                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |
|                                                                                                                                                                                                                               | Notes  payable to a bank bearing interest at 9.68%, repaid in fiscal 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | — |   | 306,726 |   |
|                                                                                                                                                                                                                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |  |  |  |  |  |  |  |

 

F-18

----

 
|   |                                                                       |   | **April 27,  2003** |        | **April 28,  2002** |   |
|--------|----------------------------------------------------------------------------|--------|---------------------|-------------|---------------------|--------|
|   |                                                                       |   |                |        |                |   |
|   | Notes  payable to a bank bearing interest at 9.68%, repaid in fiscal 2003. |   | **—**          | ** **  | 184,037             |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Notes  payable to a bank bearing interest at 7.84%, repaid in fiscal 2003. |   | **—**          | ** **  | 89,409              |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Notes  payable to a bank bearing interest at 8.89%, repaid in fiscal 2003. |   | **—**          | ** **  | 112,956             |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Notes  payable to a bank bearing interest at 9.12%, repaid in fiscal 2003. |   | **—**          | ** **  | 115,138             |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Notes  payable to a bank bearing interest at 8.89%, repaid in fiscal 2003. |   | **—**          | ** **  | 66,444              |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Total                                                                      |   | **732,506**         | ** **  | 874,710             |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Less  current maturities                                                   |   | **220,835**         | ** **  | 528,623             |   |
|   |                                                                       |   |                | ** **  |                |   |
|   | Long-term  debt                                                            |   | **$**               | **511,671** | ** **          | $      | 346,087 |   |
|        |                                                                            |        |                     |             |                     |        |  |  |

 

F-19

----

 
|                                                                                                                                                                                                      | Maturities of  long-term debt are as follows:                                                                                                                                                                                                             |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                      | **Fiscal  year ending**                                                                                                                                                                                                                                   |   | **Amount** |   |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |   |   |   |
|                                                                                                                                                                                                      | 2004                                                                                                                                                                                                                                                      |   | $ | 220,835 |   |
|                                                                                                                                                                                                      | 2005                                                                                                                                                                                                                                                      |   | 236,535 |   |
|                                                                                                                                                                                                      | 2006                                                                                                                                                                                                                                                      |   | 253,241 |   |
|                                                                                                                                                                                                      | 2007                                                                                                                                                                                                                                                      |   | 21,895 |   |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |   |   |   |
|                                                                                                                                                                                                      | Total                                                                                                                                                                                                                                                     |   | $ | 732,506 |   |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |
| **6.****                            Notes  Payable - Stockholder** | Notes payable -  stockholder consists of two notes, with interest at 7.18% and 8%, payable in  aggregate monthly installments of principal and interest of $810, maturing  January 2017.  Maturities of notes  payable - stockholder are as follows: |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |
|                                                                                                                                                                                                      | **Fiscal  year ending**                                                                                                                                                                                                                                   |   | **Amount** |   |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |   |   |   |
|                                                                                                                                                                                                      | 2004                                                                                                                                                                                                                                                      |   | $ | 5,820 |   |
|                                                                                                                                                                                                      | 2005                                                                                                                                                                                                                                                      |   | 6,114 |   |
|                                                                                                                                                                                                      | 2006                                                                                                                                                                                                                                                      |   | 6,419 |   |
|                                                                                                                                                                                                      | 2007                                                                                                                                                                                                                                                      |   | 6,736 |   |
|                                                                                                                                                                                                      | 2008                                                                                                                                                                                                                                                      |   | 7,049 |   |
|                                                                                                                                                                                                      | Thereafter                                                                                                                                                                                                                                                |   | 68,646 |   |
|                                                                                                                                                                                                      |                                                                                                                                                                                                                                                      |   |   |   |
|                                                                                                                                                                                                      | Total                                                                                                                                                                                                                                                     |   | $ | 100,784 |   |
|                                                                                                                                                                                                           |                                                                                                                                                                                                                                                           |  |  |  |  |  |  |  |  |

 

F-20

----

 
| **7.****                            Subordinated  Debentures** | Subordinated debentures  with an outstanding balance of $1,450,000 at April 27, 2003 and  $1,500,000 at April 28, 2002 consist of convertible debentures bearing  interest at variable rates of 8% through December 31, 1997, 10% through  December 31, 1998, 12% through December 31, 1999 and 14% through  December 31, 2011, payable semi-annually and convertible into the  Company’s common stock at a conversion rate of $1.25 per share.  The Company has recorded interest costs  related to these debentures at a straight-lined rate of 13.2%.  The convertible debentures are convertible  at the option of the holder, at any time, and automatically convert into  shares of common stock at the conversion rate if the average bid price of the  Company’s common stock for any sixty consecutive trading days is equal to or  greater than $3.00.  The debentures  are due on December 31, 2011.

  |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
| **8.****                            Taxes  on Income (Loss)**  | At April 27, 2003,  the Company has the following net operating loss carryforwards, subject to  review by the Internal Revenue Service, available to offset future federal  taxable income:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | **Amount** |   | **Expiration  Dates** |   |
|                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|                                                                                                                                                                                                  | Net  operating losses purchased in a 1994 acquisition, whose use is limited.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        |   | $ | 1,094,000 |   | 2005 - 2009 |   |
|                                                                                                                                                                                                  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|                                                                                                                                                                                                  | Net operating  losses incurred before and after acquisition and available for immediate  offset against taxable income.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | $ | 3,644,000 |   | 2008 - 2017 |   |

 

F-21

----

 
|   | Deferred tax assets are comprised of the following:                                                                                                                                                                                                                                                                        |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                       |   | **April 27,  2003** |   | **April 28,  2002** |   |
|   |                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |
|   | Deferred  tax assets:                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Net  operating loss carryforwards                                                                                                                                                                                                                                                                                          |   | **$** | **1,895,000** | ** ** | $ | 2,272,000 |   |
|   | Fixed  assets                                                                                                                                                                                                                                                                                                              |   | **791,000** | ** ** | 690,000 |   |
|   | Pre-opening  costs                                                                                                                                                                                                                                                                                                         |   | **172,000** | ** ** | 240,800 |   |
|   | Accruals  and other reserves                                                                                                                                                                                                                                                                                               |   | **223,000** | ** ** | 411,700 |   |
|   | Valuation  allowance                                                                                                                                                                                                                                                                                                       |   | **(3,081,000** | **)** | (3,614,500 | ) |
|   |                                                                                                                                                                                                                                                                                                                       |   |   | ** ** |   |   |
|   | Net deferred tax  assets                                                                                                                                                                                                                                                                                                   |   | **$** | **—** | ** ** | $ | — |   |
|   |                                                                                                                                                                                                                                                                                                                       |
|   | The Company has  provided a valuation allowance equal to 100% of its total deferred tax assets  in recognition of the uncertainty regarding the ultimate amount of the  deferred tax assets that will be realized.   Pre-opening costs have been capitalized and amortized over a five year  period for tax purposes. |
|   |                                                                                                                                                                                                                                                                                                                       |
|   | A reconciliation of the  statutory federal income tax rate and the effective tax rate as a percentage  of income (loss) before taxes on income (loss) is as follows:                                                                                                                                                       |
|   |                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |
|   |                                                                                                                                                                                                                                                                                                                       |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|   |                                                                                                                                                                                                                                                                                                                       |   |   |   |   |   |   |   |
|   | Statutory  rate                                                                                                                                                                                                                                                                                                            |   | **34.0** | **%** | 34.0 | % | (34.0 | )% |
|   |                                                                                                                                                                                                                                                                                                                       |   |   | ** ** |   |   |   |   |
|   | Change  in valuation allowance                                                                                                                                                                                                                                                                                             |   | **(34.0** | **)** | (34.0 | ) | 34.0 |   |
|   |                                                                                                                                                                                                                                                                                                                       |   |   | ** ** |   |   |   |   |
|   | Effective tax  rate                                                                                                                                                                                                                                                                                                        |   | **—** | **%** | — | % | — | % |
|        |                                                                                                                                                                                                                                                                                                                            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-22

----

 
| **9.****                            Commitments  and Contingencies** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
| *Leases*                                                                                                                                                                                                    | The Company is obligated under noncancellable  operating leases for its leased restaurant locations, office, commissary and  warehouse space.  Lease terms range  from five to twenty years and, in certain instances, include options to  extend the original terms.  Generally,  the Company is required to pay its proportionate share of real estate taxes,  insurance, common area, and other operating costs in addition to annual base  rent.  Substantially all restaurant  leases provide for contingent rent based on sales in excess of specified  amounts.  The Company also leases  equipment under capital leases. |
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                        | The following is an  analysis of equipment held under capital leases, included in property and  equipment in the accompanying consolidated balance sheets:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   | **April 27,  2003** |   | **April 28,  2002** |   |
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   |   |   |   |
|                                                                                                                                                                                                        | Equipment                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **$** | **1,739,896** | ** ** | $ | 1,739,896 |   |
|                                                                                                                                                                                                        | Less  accumulated amortization                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |   | **1,017,897** | ** ** | 797,965 |   |
|                                                                                                                                                                                                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |   |   | ** ** |   |   |
|                                                                                                                                                                                                        | Net leased  property under capital leases                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **$** | **721,999** | ** ** | $ | 941,931 |   |

 

F-23

----

 
|   | Aggregate  minimum rental requirements under capital leases and operating leases as of  April 27, 2003, are approximately as follows:                                                                                                                                                                                                                                                                                                                                                                |
|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | **Fiscal  year ending**                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |   | **Capital  Leases** |   | **Operating  Leases** |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | 2004                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | $ | 240,469 |   | $ | 3,072,000 |   |
|   | 2005                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 214,701 |   | 3,032,000 |   |
|   | 2006                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | 63,457 |   | 2,820,000 |   |
|   | 2007                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | — |   | 2,333,000 |   |
|   | 2008                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | — |   | 2,021,000 |   |
|   | Thereafter                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |   | — |   | 4,703,000 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Total  minimum lease payments                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | 518,627 |   | $ | 17,981,000 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Amount  representing interest                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |   | (69,574 | ) |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Present  value of net minimum lease payments                                                                                                                                                                                                                                                                                                                                                                                                                                                              |   | 449,053 |   |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Less  current maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |   | 195,365 |   |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   |   |   |   |   |
|   | Long-term  maturities                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |   | $ | 253,688 |   |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   | Deferred rent  liabilities of $396,271 and $376,825 as of April 27, 2003 and  April 28, 2002, respectively, were recorded in order to recognize lease  escalation provisions on a straight-line basis for certain operating leases.

  Rent expense under all operating leases amounted to approximately $2,810,000,  $2,790,000 and $2,720,000 during fiscal 2003, 2002 and 2001, respectively,  which included contingent rent of approximately $69,000, $95,000 and  $108,000, respectively. |

 

F-24

----

 
| *Franchising*                           | In December 1997, the  Company formed Boston Restaurant Associates International, Inc. (“BRAII”), a  wholly-owned subsidiary, for the purpose of offering Pizzeria Regina and  Polcari’s franchise opportunities both domestically and internationally.  During fiscal 2003, the Company recognized  $64,000 in franchise fee revenues, $50,000 related to territory fees and  $14,000 related to royalties.  During  fiscal 2002, the Company recognized $26,446 in franchise fee revenues,  $20,000 relating to the opening of a domestic Pizzeria Regina franchise and  $6,446 related to royalties.  During  fiscal 2001, the Company recognized $98,014 in franchise fee revenues, $35,000  relating to the opening of an international Polcari’s North End franchise,  and $63,014 related to royalties.                                                                                                                                                                                                                                                                                                                                                                        |
|-----------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                    |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
| *International  Development  Agreement* | In January 1998, the  Company entered into an International Development Agreement (“Development  Agreement”) with Regina International, Ltd (“Regina International”), a  corporation controlled by a then Company director, to pursue and develop  franchise territories outside the Americas, anticipated to be principally in  Europe, the Far East, and the Pacific Rim.  The Development Agreement, which was for an initial term of five and a half  years, required the Company to pay a monthly development fee of $7,000  beginning the month after the first territory fee had been received and for  sixty months, provided the Development Agreement had not been earlier terminated.  Pursuant to this agreement, a Polcari’s  North End Restaurant opened in Saudi Arabia in September 2000.  The Development Agreement was terminated  during fiscal 2001 due to the relocation of Regina International’s Chief  Executive Officer.  The Company recorded approximately $57,000 in development fees during fiscal  2001, prior to the termination of the Development Agreement.  For fiscal 2003 and 2002, no development  fees or royalties had been earned. |

 

F-25

----

 
| *Joint Venture and  Development  Agreements* | In December 1998, the  Company formed a joint venture with Italian Ventures, LLC (“Italian  Ventures”), a Kentucky corporation controlled by two then Company directors,  and entered into a Development Agreement (the “Agreement”) for the purpose of  developing domestic casual Italian dining restaurants.  The Company had a 51% equity interest in  the joint venture entity, Regina Ventures, LLC (“Regina Ventures”).  The relationship fell apart shortly after formation of the joint  venture.  Despite the fact that no  restaurant development ever took place, Italian Ventures made a series of  claims against the Company.  During  fiscal 2000, the Company became involved in legal proceedings with Italian  Ventures, LLC.  On May 10, 2001  the parties entered into a settlement agreement resolving their  disputes.  As part of the settlement,  the Company and Italian Ventures terminated the development agreement and  operating agreement among the parties and also terminated the lawsuit and  arbitration proceeding between them.  Under the terms of the settlement agreement, commencing with the month of May  2001 and ending with the month of April 2008, Italian Ventures shall be  entitled to receive from the Company, in exchange for any and all ownership  interest held by Italian Ventures, a royalty equal to seven tenths of one  percent (0.7%) of the monthly gross sales of each Polcari’s Bistro restaurant  (as specifically defined therein); provided, however, that Italian Ventures  shall not be entitled to receive any additional royalties from the Company  once the total of all royalties paid to Italian Ventures by the Company on a  cumulative basis during the seven year period equals $1,700,000.  The settlement payments do not reflect any  transfer of rights from Italian Ventures to the Company nor did the Company  derive or receive any on-going benefit to its operations as a result of the  settlement.  The Company determined  that a loss had been incurred in settlement of litigation. |
|----------------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-26

----

 
|            | Accordingly, the Company recorded a non-recurring  charge of approximately $955,000 in the fourth quarter of fiscal 2001 which  is included in litigation and settlement costs in the consolidated statements  of operations.  The corresponding  settlement liability was recorded on the Company’s balance sheet for $955,000  at April 29, 2001.  The  settlement liability represented the Company’s best estimate of the total  royalty payments expected to be made during the seven year settlement  period.  This estimate was based on  0.7% of the projected sales of current and future Polcari’s Bistro  Restaurants of approximately $1,250,000 discounted to reflect the present  value of $955,000.  During fiscal 2003, the Company made royalty payments of approximately  $62,000 and recorded interest expense of approximately $59,000 related to the  amortization of the discount to present value.  In the fourth quarter of fiscal 2003, the Company reviewed the  estimate of future royalties based upon changes in anticipated future growth  of existing Bistro unit sales and future Bistro unit openings and  closings.  As a result, the accrual  related to the settlement liability was reduced by $443,000 to reflect the Company’s  revised estimate of its remaining obligation under the settlement agreement  with Italian Ventures.  The $443,000  reduction in the settlement liability is recorded as income in litigation and  settlement costs in the consolidated statements of operations for fiscal  2003.  During fiscal 2002, the Company  made royalty payments of approximately $42,000 and recorded interest expense  of $57,100 related to the amortization of the discount to present value.  The liability outstanding as of  April 27, 2003 was $524,000 of which $454,000 was recorded in other  long-term liabilities.  Additionally,  legal fees and other costs related to the litigation of approximately  $892,000 were recorded during fiscal 2001. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
| *Legal Matters* | The Company is involved in various legal matters in  the ordinary course of its business.   Each of these other matters is subject to various uncertainties and  some of these other matters may be resolved unfavorably to the Company.  Management believes that any liability  that may ultimately result from these other matters will not have a material  adverse effect on the Company’s financial position.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |

 

F-27

----

 
| **10.****                     Stockholders’  Equity** |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *Preferred Stock*                                                                                                                                              | In September 1998, the  Company’s stockholders authorized the Company to issue up to 10,000,000  shares of preferred stock, $.01 par value per share.  The preferred stock may be issued in one  or more series.  The terms of the  issuances will be determined by the Board of Directors on the dates of the  issuances and may include provisions for voting rights, preferences,  conversion and redemption rights, and other limitations or restrictions.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                           |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
| *Stock Options  and Warrants*                                                                                                                                  | In September 2002, the  Company’s stockholders approved the 2002 Combination Stock Option and Share  Award Plan.  The 2002 Combination Plan provides for the granting of incentive stock  options intended to qualify under the requirements of the Internal Revenue  Code and options not qualified as incentive stock options.  Incentive stock options may only be  granted to employees of the Company.   Non-employees contributing to the success of the Company are eligible  to receive non-qualified stock options.   The 2002 Combination Plan is to be administered by a committee  designated by the Board of Directors.   Options under the 2002 Combination Plan may not be granted after  September 19, 2012 and the exercise price shall be at least equal to the  fair market value of the common stock at the grant date.  Incentive stock options may be granted to holders of more than 10% of the  Company’s common stock at an exercise price of at least 110% of the fair  market value of the Company’s common stock at the grant date.  The terms of the options granted are to be  determined by the committee, but in no event shall the term of any incentive  stock option extend beyond three months after the time a participant ceases  to be an employee of the Company.  No  options may be exercised more than five years after the date of the grant for  10% stockholders, or ten years after the date of grant for all other  participants.  A total of 500,000  shares of common stock have been reserved for issuance under the 2002  Combination Plan. |

 

F-28

----

 
|   | Changes in options  outstanding under the 2002 Plan, options issued in connection with the guarantees  of certain leases and debt by the Company’s President and Treasurer, and  options issued under prior plans are summarized as follows:                                                                                                                   |
|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|   |                                                                                                                                                                                                                                                                                                                                                                |   | **Shares** |   | **Weighted-  Average  Exercise  Price** |   |
|   | **Balance**,  April 30, 2000                                                                                                                                                                                                                                                                                                                                        |   | 1,267,246 |   | $ | 1.07 |   |
|   | Granted                                                                                                                                                                                                                                                                                                                                                             |   | 80,000 |   | 0.89 |   |
|   | Expired                                                                                                                                                                                                                                                                                                                                                             |   | (411,500 | ) | (0.93 | ) |
|   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|   | **Balance**,  April 29, 2001                                                                                                                                                                                                                                                                                                                                        |   | 935,746 |   | 1.11 |   |
|   | Granted                                                                                                                                                                                                                                                                                                                                                             |   | 120,000 |   | 0.71 |   |
|   | Expired                                                                                                                                                                                                                                                                                                                                                             |   | (193,600 | ) | (0.98 | ) |
|   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|   | **Balance**,  April 28, 2002                                                                                                                                                                                                                                                                                                                                        |   | 862,146 |   | 1.08 |   |
|   | Granted                                                                                                                                                                                                                                                                                                                                                             |   | 60,000 |   | 0.62 |   |
|   | Expired                                                                                                                                                                                                                                                                                                                                                             |   | (148,346 | ) | 1.36 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                |   |   |   |   |   |
|   | **Balance**,  April 27, 2003                                                                                                                                                                                                                                                                                                                                        |   | 773,800 |   | $ | 1.00 |   |
|   |                                                                                                                                                                                                                                                                                                                                                                |
|   | As of April 27,  2003, options for 766,000 shares were exercisable at prices ranging from  $0.62 to $2.38.  As of April 28,  2002, options for 840,346 shares were exercisable at prices ranging from  $0.62 to $2.38.  As of April 29,  2001, options for 821,066 shares were exercisable at prices ranging from  $0.81 to $2.38.

  |

 

F-29

----

 

 
|   | The following tables  summarizes stock options outstanding and exercisable at April 27, 2003: |
|--------|----------------------------------------------------------------------------------------------------|
|   |                                                                                               |
|   |                                                                                               |   | **Options  Outstanding** |   |
|   | **Range of  Exercise  Prices**                                                                     |   | **Number  Outstanding** |   | **Weighted-  Average  Remaining  Contractual  Life (years)** |   | **Weighted-  Average  Exercise  Price** |   |
|   |                                                                                               |   |   |   |   |   |   |   |
|   | $   .62                                                                             | - | $  1.17 |   | 698,800 |   | 5.9 |   | $ | .93 |   |
|   | 1.24                                                                                               | - |     1.56 |   | 40,000 |   | 4.4 |   | 1.32 |   |
|   | 1.88                                                                                               | - |     2.38 |   | 35,000 |   | 4.0 |   | 1.95 |   |
|   |                                                                                               |   |   |   |   |   |   |   |   |   |
|   | $  .62                                                                                   | - | $  2.38 |   | 773,800 |   | 5.8 |   | $ | 1.00 |   |
|   |                                                                                               |   |   |   |   |   |   |   |
|   |                                                                                               |   | **Options  Exercisable** |   |
|   | **Range of  Exercise  Prices**                                                                     |   | **Number  Exercisable** |   | **Weighted-  Average  Exercise  Price** |   |
|   |                                                                                               |   |   |   |   |   |
|   | $    .62                                                                       | - | $   1.17 |   | 691,000 |   | $ | .93 |   |
|   | 1.24                                                                                               | - |      1.56 |   | 40,000 |   | 1.32 |   |
|   | 1.88                                                                                               | - |      2.38 |   | 35,000 |   | 1.95 |   |
|   |                                                                                               |   |   |   |   |   |   |   |
|   | $    .62                                                                       | - | $   2.38 |   | 766,000 |   | $ | 1.00 |   |
|        |                                                                                                    |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-30

----

 
|   | At April 27, 2003,  warrants outstanding, all of which are exercisable, consist of warrants to  purchase 350,000 and 150,000 shares of common stock at an exercise price of  $3.00 per share, expiring December 31, 2006 and January 25, 2008,  respectively, granted in consideration for brokerage services related to the  issuance of convertible subordinated debentures.  The convertible subordinated debentures with an outstanding balance of  $1,450,000 as of April 27, 2003 are convertible into common shares at  $1.25 per share.  Accordingly,  1,160,000 shares have been reserved for conversion of the subordinated  debentures.  At April 27, 2003, 2,873,800 shares of common stock were reserved with  respect to outstanding options, warrants and convertible debentures.  During fiscal 2003 and fiscal 2002, there were no warrants issued and no  warrants expired.  During fiscal 2001, warrants to purchase 50,000 shares of common stock at  $2.80 per share expired.

  |
|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

 

F-31

----

 
|                                                                                                                                                                     | In determining the pro  forma amounts, the Company estimated the fair value of each option granted  using the Black-Scholes option pricing model with the following  weighted-average assumptions: |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                     |                                                                                                                                                                                               |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     | Risk  free interest rate                                                                                                                                                                           |   | **4.0** | **%** | 4.6 - 5.4 | % | 4.8 - 5.8 | % |
|                                                                                                                                                                     | Expected  dividend yield                                                                                                                                                                           |   | **—** | ** ** | — |   | — |   |
|                                                                                                                                                                     | Expected  lives                                                                                                                                                                                    |   | **9.6 years** | ** ** | 9.2 years |   | 9.5 years |   |
|                                                                                                                                                                     | Expected  volatility                                                                                                                                                                               |   | **75** | **%** | 75 | % | 75 | % |
|                                                                                                                                                                     | Fair  value of options granted                                                                                                                                                                     |   | **$0.50** | ** ** | $0.59 |   | $0.71 |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |
| **11.****                     Supplemental  Cash Flow  Information** | Cash paid for  interest and income taxes as is as follows:                                                                                                                                         |
|                                                                                                                                                                     |                                                                                                                                                                                               |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     | Interest                                                                                                                                                                                           |   | **$** | **361,340** |   | $ | 462,970 |   | $ | 504,124 |   |
|                                                                                                                                                                     | Income  taxes                                                                                                                                                                                      |   | **$** | **—** |   | $ | — |   | $ | — |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     | Noncash  investing and financing activities are as follows:                                                                                                                                        |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|                                                                                                                                                                     |                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                     | Capital  leases entered into during the year                                                                                                                                                       |   | **$** | — |   | $ | — |   | $ | 774,930 |   |

 

F-32

----

 
| **12.****                     Net  Income (Loss)  Per Share of  Common  Stock** | The following is a  reconciliation of the denominator (number of shares) used in the computation  of earnings per share.  The numerator  (net income or loss) is the same for the basic and diluted computations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                | Basic  shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |   | **7,035,170** |   | 7,035,170 |   | 7,035,170 |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                | Effect  of dilutive securities: Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **5,784** |   | 3,206 |   | — |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                | Diluted  shares                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |   | **7,040,954** |   | 7,038,376 |   | 7,035,170 |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                | The following table  summarizes securities that were outstanding as of April 27, 2003,  April 28, 2002 and April 29, 2001, but not included in the  calculations of net income (loss) per share because such securities are  antidilutive:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   | **April 27,  2003** |   | **April 28,  2002** |   | **April 29,  2001** |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
|                                                                                                                                                                                | Options                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **653,800** |   | 802,146 |   | 935,746 |   |
|                                                                                                                                                                                | Warrants                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |   | **500,000** |   | 500,000 |   | 500,000 |   |
|                                                                                                                                                                                | Convertible  debentures                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |   | **1,160,000** |   | 1,200,000 |   | 1,200,000 |   |
|                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |   |   |   |   |   |   |   |
| **13.****                     Asset  Impairment  Charge**                       | The Company recorded an  impairment charge of $580,000 in the fourth quarter of fiscal 2001 which is  included in the consolidated statements of operations related to the  write-down of certain long-lived assets.   The Company reviewed the carrying value of its long-lived assets and  noted that the expected future cash flows for three of its Pizzeria Regina  locations were not sufficient to recover the recorded carrying value of  long-lived assets at those locations.   Accordingly, the Company recognized an impairment charge to reduce the  carrying value of leasehold improvements to zero and restaurant equipment at  those three locations to their estimated fair market value.  The Company currently plans to continue to  operate these restaurants for their remaining lease terms. |

 

F-33

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| **14.****                               Quarterly** | The following  table sets forth selected quarterly financial data for fiscal 2003 and 2002:                                                                    |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|
| **Financial Data**                                                                                                                                                                                        |                                                                                                                                                           |
| **(Unaudited)**                                                                                                                                                                                           |                                                                                                                                                           |
|                                                                                                                                                                                                      | **Year  ended April 27, 2003**                                                                                                                                 |   | **1st  Quarter** |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   |
|                                                                                                                                                                                                      |                                                                                                                                                           |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                      | Revenues                                                                                                                                                       |   | $ | 5,630,000 |   | $ | 5,754,000 |   | $ | 5,832,000 |   | $ | 5,326,000 |   |
|                                                                                                                                                                                                      | Operating  income                                                                                                                                              |   | 263,000 |   | 388,000 |   | 306,000 |   | 434,000 |   |
|                                                                                                                                                                                                      | Net  income                                                                                                                                                    |   | 159,000 |   | 284,000 |   | 210,000 |   | 340,000 |   |
|                                                                                                                                                                                                      | Basic  income per share                                                                                                                                        |   | .02 |   | .04 |   | .03 |   | .05 |   |
|                                                                                                                                                                                                      | Diluted  income per share                                                                                                                                      |   | .02 |   | .04 |   | .03 |   | .05 |   |
|                                                                                                                                                                                                      |                                                                                                                                                           |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                      | **Year  ended April 28, 2002**                                                                                                                                 |   | **1st  Quarter** |   | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |   |
|                                                                                                                                                                                                      |                                                                                                                                                           |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                      | Revenues                                                                                                                                                       |   | $ | 5,986,000 |   | $ | 5,990,000 |   | $ | 6,243,000 |   | $ | 5,636,000 |   |
|                                                                                                                                                                                                      | Operating  income                                                                                                                                              |   | 208,000 |   | 427,000 |   | 553,000 |   | 201,000 |   |
|                                                                                                                                                                                                      | Net  income                                                                                                                                                    |   | 94,000 |   | 285,000 |   | 430,000 |   | 81,000 |   |
|                                                                                                                                                                                                      | Basic  income per share                                                                                                                                        |   | .01 |   | .04 |   | .06 |   | .01 |   |
|                                                                                                                                                                                                      | Diluted  income per share                                                                                                                                      |   | .01 |   | .04 |   | .06 |   | .01 |   |
|                                                                                                                                                                                                      |                                                                                                                                                           |   |   |   |   |   |   |   |   |   |
|                                                                                                                                                                                                      | In the fourth quarter  of fiscal 2003, the Company recorded $443,000 in income related to its  revised estimate of the settlement liability (see Note 9). |
|                                                                                                                                                                                                           |                                                                                                                                                                |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

F-34

----

 

Signatures

 

Pursuant to therequirements of Section 13 or 15(d) 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: July 25, 2003 | By:                                | /s/George R. Chapdelaine |   |
|                |                               | George R. Chapdelaine, President |

 

Pursuant to therequirements of the Securities Exchange Act of 1934, this report has beensigned below by the following persons on behalf of the registrant and in thecapacities and on the dates indicated.

 
| **SIGNATURES**                         |   | **DATE** |
|----------------------------------------|--------|----------|
|                                   |   |     |
| /s/George R. Chapdelaine               |   |     | July 25, 2003 |
| George R. Chapdelaine, Chief           |   |     |
| Executive Officer, President and       |   |     |
| Director (principal executive officer) |   |     |
|                                   |   |     |
| /s/ Fran V. Ross                       |   |     | July 25, 2003 |
| Fran V. Ross, Chief Financial Officer  |   |     |
| (principal financial officer)          |   |     |
|                                   |   |     |
| /s/Hugh Devine                         |   |     | July 25, 2003 |
| Hugh Devine, Director                  |   |     |
|                                   |   |     |
| /s/Robert Karam                        |   |     | July 25, 2003 |
| Robert Karam, Director                 |   |     |
|                                   |   |     |
| /s/Roger Lipton                        |   |     | July 25, 2003 |
| Roger Lipton, Director                 |   |     |
|                                   |   |     |
| /s/John P. Polcari, Jr.                |   |     | July  25,  2003 |
| John P. Polcari, Jr., Director         |   |     |
|                                   |   |     |
| /s/Lucille Salhany                     |   |     | July 25, 2003 |
| Lucille Salhany, Director              |   |     |

 

F-35

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