**U.S. SECURITIES AND EXCHANGECOMMISSION**

**Washington, DC 20549**

 

**FORM 10-K**

 

**(Mark One)**

**ý****                                ****Annual report pursuant to Section 13 or 15(d) ofthe Securities Exchange Act of 1934.**

 

**For the fiscal year ended April 25, 2004.**

 

**o****                                ****Transition report pursuant to  Section 13 or 15(d) of the SecuritiesExchange Act of 1934**

 

**For the transition period from                to                .**

 

**Commission File Number**

**0-18369**

 

**BOSTON RESTAURANT ASSOCIATES, INC**.

(Exact Name of Registrant as Specified in its Charter)

 
| **Delaware**                                             | ** ** | **61-1162263**      |
|----------------------------------------------------------|------------|---------------------|
| (State or Other Jurisdiction of                          |       | (I.R.S. Employer    |
| Incorporation or Organization)                           |       | 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) |

 

Securitiesregistered pursuant to Section 12(b) of the Securities Exchange Act of1934:

 

| ** **                             | ** ** | **Name of Each Exchange** |
|----------------------------------------|------------|---------------------------|
| **Title of Each Class**                | ** ** | **on Which Registered**   |
|                                   |       |                      |
| Common stock, $.01 par value per share |       | Boston Stock Exchange     |

 

Securitiesregistered under Section 12(g) of the Securities Exchange Act of 1934:

 

# **Common Stock, $.01 par value per share**

(Title of Class)

 

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

 

Indicateby check mark if there is no disclosure of delinquent filers pursuant to Item405 of Regulation S-K contained herein, and will not be contained, to the bestof the registrant’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

 

Indicateby check mark whether the registrant is a accelerated filer (as defined inExchange Act Rule 12b-2)  Yes o No ý

 

Theaggregate market value of registrant’s Common Stock, $.01 par value per share,held by non-affiliates of the registrant as of the end of the second quarterfiscal year 2004 was $4,221,102 based upon the average of the closing bid andasked prices of such stock on that date as reported on the OTC BulletinBoard.  As of July 19, 2004 therewere 7,035,170 shares of the registrant’s Common Stock, $.01 par value pershare outstanding.

 

DOCUMENTS INCORPORATED BY REFERENCE

 

Portionsof the registrant’s Proxy Statement involving the election of directors, whichis expected to be filed within 120 days after the end of the registrant’sfiscal year, are incorporated by reference in Part III of the Report.

 

 

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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, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES** |
|         |       |                                                                                                                   |
| **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**                       |
|         |       |                                                                                                                   |
| **ITEM 9A.** | ** ** | **CONTROLS AND PROCEDURES**                                                                                            |
|         |       |                                                                                                                   |
| **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.** | ** ** | **PRINCIPAL ACCOUNTANT FEES AND  SERVICES**                                                                            |
|         |       |                                                                                                                   |
| **PART IV**  |       |                                                                                                                   |
|         |       |                                                                                                                   |
| **ITEM 15.** | ** ** | **EXHIBITS , FINANCIAL STATEMENT  SCHEDULES AND REPORTS ON FORM 8-K**                                                  |

 

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**FORM 10-K**

 

**CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONSOF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995**

 

*Forward-looking statements in this report,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 fromparticular sources**are made pursuant to the safe harbor provisions of the Private SecuritiesLitigation Reform Act of 1995.  Investorsare cautioned that such forward-looking statements involve risks anduncertainties, including without limitation: potential quarterly fluctuations in the Company’s operating results;seasonality of sales; competition; risks associated with expansion; the Company’sreliance on key employees; risks generally associated with the restaurantindustry; risks associated with geographic concentration of the Company’srestaurants; risks associated with serving alcoholic beverages; and other risksand uncertainties indicated from time to time in the Company’s filings with theSecurities and Exchange Commission.  Inaddition, forward-looking statements generally can be identified by the use offorward-looking terminology such as “may,” “will”, “expect,” “intend,” “estimate,”“anticipate” or “believe” or the negative thereof or variations thereon orsimilar terminology.  Although theCompany believes that the expectations reflected in such forward-lookingstatements will prove to have been correct, 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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**PART I**

 

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

 

**General**

 

During the fiscal year ended April 25, 2004(“Fiscal 2004”) Boston Restaurant Associates, Inc. (the “Company”) operated achain of eighteen restaurants – twelve fast-service, high volume pizzeriasunder the Pizzeria Regina name, four full-service family-style Italian/Americanrestaurants under the “Polcari’s North End ä“ name for the entire year, one Polcari’s North End restaurant for sevenmonths and one Pizzeria Regina kiosk opened the last month of the year.  In July, 2004 subsequent to year end theCompany opened a Pizzeria Regina kiosk in Boston, Massachusetts.  A majority of the restaurants are located inthe Boston, Massachusetts metropolitan area.

 

The Pizzeria Regina restaurants feature theCompany’s signature product, its premium Neapolitan style, thin crust pizza,prepared in gas-fired brick ovens.  Theoriginal Pizzeria Regina, located in Boston’s historic North End, has servedthe Company’s premium brick oven pizza since 1926.  The Company believes that the Pizzeria Reginabrand name and the pizza itself are local symbols of superior and distinctivepizza. Of the fourteen Pizzeria Regina restaurants, thirteen are food courtkiosks (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).  (See *“PizzeriaRegina Restaurants.”*)

 

The Polcari’s North End restaurants arefull-service Italian/American, family-style restaurants that capture thecommunity spirit of the 1940s and 1950s in Boston’s Italian North Endneighborhood.  These restaurantshighlight exposed gas-fired brick ovens in open view of diners, memorabilia andphotographs depicting 1940s and 1950s scenes in Boston’s North End, and largetables to encourage family-style dining. (See *“Polcari’s North End Restaurants.”*)

 

The first Pizzeria Regina was opened in 1926, andthe predecessor corporation was incorporated in 1986. The Company became publicin 1994 and since that date has continuously operated a restaurant chain whichhas increased over time to the present 19 operating restaurants.  The Company’s principal offices are locatedat 999 Broadway, Saugus, Massachusetts 01906 and its telephone number is (781)231-7575 and its corporate website is www.polcaris.com  As used in this Report, unless otherwiseindicated, the term “Company” refers to Boston Restaurant Associates, Inc. andits subsidiaries.  We make available,free of charge through our website, our annual report on Form 10-K, quarterlyreports on Form 10-Q and current reports on Form 8-K, and amendments to thesereports filed or furnished pursuant to Section 13(a) of the SecuritiesExchange Act of 1934 as soon as practicable after we electronically file suchmaterial with or furnish it to the Securities and Exchange Commission.

 

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The information found on our website is notpart of this or any other report we file with or furnish to the SEC.

 

Financing

 

Forthe year ended April 25, 2004, the Company has sustained net losses ofapproximately $3,437,000.  As of thatdate, the Company had a working capital deficiency of approximately $4,304,000and stockholders’ deficits of $668,721. As a result BDO Seidman, LLP the Company’s auditors, included in theiropinion on the 2004 financial statements an explanatory paragraph expressingconcern about the Company’s ability to continue as a going concern.  The long-term financial stability of theCompany will be dependent upon achieving sustained profitable operations, andobtaining additional financing, as well as the possibility of closing thePolcari’s restaurant in Cambridge, Massachusetts, selling the business of thePolcari’s restaurant in Cambridge or its assets, and or subleasing the premisesof the Cambridge restaurant.

 

Therecan be no assurance that any future additional financing will be available oncommercially reasonable terms, or at all, and the success or lack of success ofthe Company’s restaurants opened within the last year and planned to be openedwithin fiscal 2005 may have a critical effect on the Company’s ability to raisefunds through the sale of stock or otherwise. In addition, the Company may be forced to restructure its operations, byselling or subleasing the Polcari’s restaurant in Cambridge, Massachusetts.

 

On April 30, 2002, the Company entered into a$3,500,000 Credit Facility with Commerce Bank and Trust Company.  The Credit Facility permits the Company toborrow amounts to pay the costs for new restaurant openings and repay over afixed term of either four or five years. As of April 25, 2004 the Companywas not in compliance with certain financial covenants of the Credit Facility,including in particular the requirement that the Company not report twoconsecutive quarters of operating losses. However, Commerce Bank and Trust Company waived the covenants for thequarterly fiscal period ended January 25, 2004 and for fiscal year endedApril 25, 2004 in exchange for a 1% waiver fee, a modification of theinterest rate on all outstanding notes issued under the Credit Agreement fromthe current 6% to 7% per annum until the first quarter in which the Company isonce again in compliance with all financial covenants, and the grant to thebank of a six year warrant to purchase 76,000 shares of the Company’s commonstock at a price of $.50 per share. Subject to certain exceptions pursuant to which the warrant will beexercisable earlier, the warrant is not exercisable until February 13,2005.  In August 2004, in exchangefor the establishment of new financial covenants for fiscal year 2005, the bankwaived

 

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the covenants for the first quarter of fiscal year2005.  Because of the Company’suncertainty regarding its ability to satisfy these covenants, all bank debt hasbeen reclassified as current on the balance sheet for year ended April 25,2004.  If the Company fails to complywith these covenants, the bank debt would be due on demand.  See “*Item 7. Management’sDiscussion and Analysis of Financial Condition and Results of Operations*.”

 

**Pizzeria Regina Restaurants**

 

The Company currently operates fourteen PizzeriaRegina restaurants which are fast-service, high volume pizzerias that featurepremium brick oven pizza and cater primarily to the lunchtime diner (with theexception of the original North End location, which serves both the lunch anddinner markets).  Of these fourteenrestaurants, thirteen are food court kiosks and the original North End PizzeriaRegina is a wait-service restaurant.

 

The Pizzeria Regina restaurants feature theCompany’s premium Neapolitan style, thin crust, brick oven pizza.  This pizza features a proprietary dough andpizza sauce, which the Company believes combine to produce a distinct flavorand superior pizza.  These pizzas areoffered with a wide variety of fresh vegetable and cured meat toppings.  The Company believes that the premium qualityof its pizza, a result of a proprietary ingredient mix and baking process,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 thirteen food court kiosks primarilyserve pizza by the slice with multiple topping choices and operate side-by-sidewith other fast food vendors in retail malls. Menu items are presented in aself-service, take-out style designed to allow customers to order, pay for andconsume their food in a very short period of time.  Customers who desire to sit down afterpurchasing their food may join customers of other food court vendors in one ormore designated common areas within the mall. The focused menu, self-service, take-out style and common seating providefood court customers with a fast, low cost dining alternative as compared tomore traditional full-service restaurants.

 

The Company intends to seek locations foradditional Pizzeria Regina food court kiosks. Based on the Company’s own experience and articles from trade journals,the Company believes there is a trend at retail malls to retrofit and upgradefood courts to emphasize fast food as a focal point of malls.  The Company further believes that lunchtimediners who visit retail shopping malls seek high quality, quick service mealsin a food court setting, and that the premium quality of the Company’s brickoven pizza should position it to compete effectively in food court locations.

 

Management estimates that the cost of opening atypical food court kiosk currently is approximately $525,000. The Companycannot guarantee that actual

 

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costs will not significantly exceed theseestimates, that the Company will be able to obtain financing necessary toconstruct additional food courts kiosks, that the Company will be able tocomplete the construction of new kiosks on a timely basis and within budget, ifat all, or that the Company will be able to operate these kiosks successfully.

 

**Polcari’s North End Restaurants**

 

In March 1995, the Company opened its firstPolcari’s North End restaurant in Saugus, Massachusetts, recreating arestaurant similar to one that the Company’s predecessor had operated from1954-1989 in Boston’s North End.  ThePolcari’s North End restaurant concept is designed to create anItalian/American casual dining ambiance that captures the community spirit ofthe 1940s and 1950s in Boston’s Italian North End neighborhood.  The restaurant highlights exposed gas-firedbrick ovens in open view of diners.  Inaddition, memorabilia and photographs depicting scenes in Boston’s North End inthe 1940s and 1950s are used to create a neighborhood atmosphere rich withhistory.  The restaurant also featureslarge tables of six or more seats to encourage family style dining and avalue-oriented menu that includes branded Pizzeria Regina pizza, largeItalian/American pasta dishes and fresh baked breads. The Company opened a newPolcari’s North End restaurant in October of 2003 in Cambridge, Massachusetts.

 

The Company has also developed a bistro-restaurantconcept, which was inspired by the success of the Saugus-based Polcari’s NorthEndTM restaurant.  Unlike the Saugus andCambridge restaurants, the bistro restaurants are smaller in size, creating amore intimate family dining experience. In addition, the menu is a modified version of the Saugus-basedofferings, providing for a lighter dining experience.  The bistro restaurants operate under thePolcari’s North EndTM trademark in order to capitalize on that mark’srecognition for quality.  The Companycurrently operates three Polcari’s North End ä bistro Restaurants in Hyannis, Massachusetts, Woburn, Massachusetts andSalem, New Hampshire.

 

**Site Selection**

 

The Company considers the specific location of arestaurant to be critical to the restaurant’s long term success.  It devotes significant time and resources tothe investigation and evaluation of each prospective site, includingconsideration of local market demographics, population density, averagehousehold income levels and site characteristics such as visibility,accessibility and traffic.

 

The Company seeks sites for the Pizzeria Reginakiosk restaurants within high-traffic food courts or retail shopping mallslocated in metropolitan areas.  It seekssites for Polcari’s North End restaurants located near high-volume, middlemarket traffic centers, such as retail and residential areas with populationsof at least 50,000 persons within a five-mile radius.  For each type of restaurant, the

 

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Company also considers existing localcompetition and, to the extent such information is available, the sales ofother comparably priced restaurants operating in the area.

 

**Restaurant Operations**

 

The Company invests substantial time and effort inits training programs, which focus on all aspects of restaurant operations,including kitchen, bar and dining room operations, food quality andpreparation, alcoholic beverage service, liquor liability avoidance, customerservice and employee relations.  TheCompany holds regular meetings of its managers to address new products,continuing training and other aspects of business management.  Managers also attend periodic seminarsconducted by Company personnel and outside experts on a broad range of topics.

 

New employees are trained by experienced employeeswho have demonstrated their ability to implement the Company’s commitment toprovide high quality food and attentive service.  The Company has developed manuals regardingits policies and procedures for restaurant operations.  Supervisory management regularly visitsCompany restaurants and meets with their management teams to ensure compliancewith the Company’s strategies and standards of quality in all aspects ofrestaurant operations and personnel development.

 

The Company seeks to attract and retain qualityrestaurant managers by providing them with an appropriate balance of autonomyand direction.  Annual performanceobjectives and budgets for each restaurant are jointly determined by restaurantmanagers and senior management.  Toprovide incentives, the Company has implemented a cash bonus program tied toachievement of specified objectives.

 

The staff for a typical Pizzeria Regina kioskrestaurant consists of one general manager, two managers and approximately 12to 15 hourly employees.  The staff of theoriginal Pizzeria Regina consists of a general manager, two managers, andapproximately 15 to 25 hourly employees. The staff for a typical Polcari’s North End restaurant consists of onegeneral manager, two managers, one kitchen manager and approximately 40 to 60hourly employees.  Most of the Company’shourly employees are part-time personnel. The general manager of each restaurant is primarily responsible for theday-to-day operations of the entire restaurant and for maintaining standards ofquality and performance established by the Company.

 

**Purchasing and Commissary Operations**

 

The Company maintains a commissary where pizzadough is produced for the Company’s restaurants.  The dough preparation requires a high degreeof consistency that would be more difficult to maintain at the individualrestaurant locations.  The Companybelieves that close, centralized monitoring of the dough

 

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preparation ensures a more consistentpremium product.  All other foodpreparation is performed on site at the restaurant level.

 

The Company negotiates directly with wholesalesuppliers of certain high volume food ingredients such as cheese, tomato sauce,and flour to ensure consistent quality and freshness of products across itsrestaurants and to obtain competitive pricing. These ingredients are thenpurchased for the Company by a third party independent distributor at thenegotiated price and redistributed to the Company’s restaurants.  All other food ingredients and beverageproducts are purchased directly by the general manager of each restaurant inaccordance with corporate guidelines. The Company believes that essential food and beverage products areavailable from a choice of many qualified wholesale suppliers.

 

**Advertising and Marketing**

 

The Company’s target market for the Pizzeria Reginarestaurants is very broad, consisting of individuals and families who seekfast-service and high value-to-price meals during the lunch period.  The target market for the Polcari’s North Endrestaurants is adults and families who seek moderately priced Italian dinnerentrees in a comfortable environment. The Company believes that its focus on premium quality, service andvalue is the most effective approach to attracting customers.  The Company plans to rely upon localadvertising, high volume traffic flow at retail malls and word of mouthexposure 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 speed of service.  ThePolcari’s North End restaurants compete with other casual, full-servicerestaurants primarily on the basis of menu selection, quality, price, service,ambiance and location.

 

**Seasonality**

 

Certainof the Company’s restaurants are subject to seasonal fluctuations in salesvolume.  Sales at the Pizzeria Reginarestaurants are typically higher in

 

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June through August, and in November and December due toincreased volume in shopping malls during the holiday and tourist seasons andschool vacations.

 

**Employees**

 

As of July 19, 2004, the Company hadapproximately 750 employees, of whom 13 were corporate and administrativepersonnel, approximately 70 were field supervision or restaurant managers ormanagement trainees, and the remainder were hourly restaurant personnel.  Many of the Company’s hourly employees workpart-time.  The Company believes that itsrelationship with its employees is good. None of the Company’s employees are covered by a collective bargainingagreement.

 

**Trademarks and Service Marks**

 

The Company regards its trademarks and its servicemarks as having significant value and as being important factors in themarketing of its products.  These marks,which appear in its advertisements, menus and elsewhere, are widelyrecognized.  The Company’s mostsignificant trademarks are “Pizzeria Regina,” the Regina crown design logo, and“Polcari’s North End,” each of which are U.S. registered trademarks owned bythe Company.  The Company has alsoregistered with the U.S. Patent and Trade Office  “Regina,” the “Polcari’s” logo, “PizzeriaRegina 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 laws and regulations. Each of the Company’s restaurants is subject to licensing and regulationby a number of government authorities, including alcoholic beverage control,health, safety, sanitation, building and fire agencies in the state ormunicipality in which the restaurant is located.  Difficulties in obtaining or failure toobtain required licenses or approvals could delay or prevent the development ofa new restaurant in a particular area.

 

The selection of new restaurant sites is affectedby federal, state and local laws and regulations regarding environmentalmatters, zoning and land use and the sale of alcoholic beverages.  Various requirements (particularly at thelocal level) may result in increases in the cost and time required for openingnew restaurants, as well as increases in the cost of operatingrestaurants.  Difficulties in obtainingnecessary licenses or permits could cause delays in or cancellations of newrestaurant openings.

 

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A significant portion of the Company’s revenues atthe Polcari’s North End restaurants and the original Pizzeria Regina locationin the North End is attributable to the sale of alcoholic beverages.  Alcoholic beverage control regulationsrequire each of the Company’s restaurants that serve alcohol to apply to both astate authority and municipal authorities for a license or permit to sellalcoholic beverages on the premises.  Typically,licenses must be renewed annually and may be revoked or suspended for cause atany time.  Alcoholic beverage controlregulations affect numerous aspects of restaurant operations, including minimumage of patrons and employees, hours of operation, advertising, wholesalepurchasing, inventory control and handling, storage and dispensing of alcoholicbeverages.  The failure of the Company toobtain or retain liquor service licenses could have a material adverse affecton the particular restaurant’s operations and the business of the Companyoverall.

 

The Company is subject to “dram shop” statutes,which generally provide a person injured by an intoxicated person the right torecover damages from an establishment that wrongfully served alcoholic beveragesto the intoxicated person.  The Companypresently carries liquor liability coverage for its restaurants, as well asexcess liability coverage.  The Companyhas never been named as a defendant in a lawsuit involving “dram shop”liability.  The Company cannot guaranteethat dram shop insurance will continue to be available to the Company atcommercially reasonable prices, if at all, or that such insurance, ifmaintained, will be sufficient to cover any claims against the Company for dramshop liability for which it may be held liable.

 

The Company’s restaurant operations are all subjectto federal and state laws governing such matters as minimum wage and healthinsurance requirements.  A significantnumber of the Company’s personnel are paid at rates related to the federalminimum wage, and increases in the minimum wage could increase the Company’slabor costs.

 

**Risk Factors**

 

In addition to the risks discussed elsewhere inthis Form 10-K, investors should consider carefully the following risk factorsin evaluating an investment in the Company.

 

*The Company’s Financial Condition And Ability ToGrow May Be Dependent On Additional Funding*

 

 For the year ended April 25, 2004, theCompany has sustained net losses of approximately $3,437,000.  As of that date, the Company had a workingcapital deficiency of approximately $4,304,000 and stockholders’ deficit of$668,721.  As a result BDO Seidman, LLPthe Company’s auditors included in their opinion on the 2004 financial statementan explanatory paragraph expressing concern about the Company’s ability tocontinue as a going concern .  Inaddition, because of the Company’s uncertainty regarding its ability to satisfybank financial covenants, all bank debt totaling approximately $3,200,000 hasbeen reclassified as current in the balance sheet for year ended April 25,2004. If

 

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the Company fails to comply with these covenants, the bank debt could bedue on demand. The long-term financial stability of the Company and compliancewith the bank covenants will be substantially dependent upon achievingsustained profitable operations, and obtaining additional financing, as well asthe possibility of closing, selling or subleasing the Polcari’s restaurantlocated in Cambridge, Massachusetts.

 

Therecan be no assurance that any future additional financing will be available oncommercially reasonable terms, or at all, and the success or lack of success ofthe Company’s restaurants opened within the last year and planned to be openedwithin fiscal 2005 may have a critical effect on the Company’s ability to raisefunds through the sale of stock or otherwise. In addition, the Company may be forced to restructure its operations, byclosing the Polcari’s restaurant in Cambridge, Massachusetts, selling thatbusiness or its assets, and or subleasing the premises of that restaurant.

 

*The Company May Be Unable to Expand As Planned*

 

The Company intends to open additional restaurantsin an orderly manner as conditions permit. The Company’s ability to open additional Company restaurants will dependupon a number of factors, such as identifying satisfactory sites, negotiatingsatisfactory leases, securing required governmental permits and approvals,obtaining of any required financing on acceptable terms, providing adequatesupervision of construction, and recruiting and training management personnel,some of which are beyond the control of the Company. The Company cannotguarantee that it will be able to open any other future restaurants withinbudget or on a timely basis, if at all, or that any of the new restaurants willoperate profitably.  If the Company isunable to expand, it may reduce the Company’s ability to increaseprofitability.

 

*AnUnfavorable Outcome Or**Prolonged**Litigation In A Charge Of Discrimination Filed Against The Company Could HarmThe Company’s Business.*

 

TheCompany, and a Company employee are respondents in a pending Charge ofDiscrimination.  The Charge alleges thatthe Company and the employee discriminated on the basis of sex against certainof the Company’s personnel, known as complainants.  The Chargefurther alleges that the Company failed to investigate complaints ofdiscrimination made by the complainants. The Charge of Discrimination does not specify the relief sought.  The Company intends to defend against theclaims vigorously.  However, the Companycould incur substantial costs defending the Charge.  Moreover, although the Company hasestablished a liability for settlement costs of $35,000, the reserve may be inadequate.  The Charge could also divert the time andattention of the Company’s management or cause the Company’s business todecline due to adverse publicity.  TheCompany cannot predict the outcome of the Charge at this time, and there can beno assurance that the Company will not have to expend a significant amount ofmoney in the course of litigation.  An

 

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unfavorable outcome or prolonged litigation in this Charge couldmaterially impact the Company’s business.

 

*The Restaurant Business Is Risky*

 

The Company’s future performance will be subject toa number of factors that affect the restaurant industry generally,including:  (i) the highly competitivenature of the  industry, (ii) general andlocal economic 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, (viii) the number of people willing to work at or near the minimumwage and (ix) weather conditions.  (See “*Competition*.”)

 

*We Are Dependent on Key Executive Officers*

 

The future success of the Company will depend inlarge part on the continued services of its President, George R. Chapdelaine,as well as on the Company’s ability to attract and retain other qualifiedsenior management personnel.  The Companycarries $2,000,000 of key man life insurance on the life of Mr. Chapdelaine.

 

*Insiders Control the Company*

 

The Company’s executive officers, directors andtheir affiliates and members of their immediate families control the vote ofapproximately 53%****of the outstanding shares of theCommon Stock. As a result, they have the practical ability to implement orblock changes in the Company’s management and direction which may or may not bein the best interest of stockholders generally.

 

*The Company’s Restaurants Are Concentrated inMassachusetts*

 

A total of fourteen of the Company’s nineteenexisting restaurants are located in eastern Massachusetts.  As a result, the Company’s results of operationsmay be materially affected by changes in the Massachusetts economy.

 

*Our Stock Is Relatively Illiquid and the Price IsVolatile*

 

Compared to many other publicly traded companies,the Company is relatively small and has a relatively low average daily tradingvolume.  Quarterly operating results ofthe Company or other restaurant companies, changes in general conditions in theeconomy, the restaurant industry, or the financial markets, or otherdevelopments affecting the Company, its competitors or the financial marketscould cause the market price of the Common Stock to fluctuate

 

13

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significantly. These broad market fluctuations mayadversely affect the market price of the Common Stock. In addition, the lowtrading volume may make it difficult for a stockholder to buy or sell asignificant amount of stock without affecting the market price.  The Company’s securities are, and will likelycontinue to be, principally traded on the OTC Bulletin Board or its successor.(See “*Item 5. Market for Registrant Common Equity,Related Stockholder Matters and Issuer Purchases of Equity Securities*.”)

 

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

 

Of the Company’s nineteencurrently operating restaurants, eighteen are located in leased space and onerestaurant, the North End Pizzeria Regina location, is owned by the Company.

 

All of the Company’sleases provide for a minimum annual rent, and most call for additional rentbased on sales volume at the particular location over a specified minimum level.  Generally, these leases are net leases, whichrequire the Company to pay the cost of insurance, taxes and a portion of thelessor’s operating costs.  Certain malllocations also require the Company to participate in upkeep of common areas andpromotional activities.

 

The following table sets forth certain informationwith respect to the Company’s restaurant properties:

 

 
| **Location**             | ** ** | **Type (1)**             |
|--------------------------|------------|--------------------------|
|                     |       |                     |
| Auburn Mall              |       | food court               |
|   Auburn, MA        |       |                     |
| North End                |       | wait service             |
|   Boston, MA (2)    |       |                     |
| Faneuil Hall Marketplace |       | food court               |
|   Boston, MA        |       |                     |
| Prudential Center        |       | food court               |
|   Boston, MA        |       |                     |
| South Station            |       | food court               |
|   Boston, MA        |       |                     |
| Burlington Mall          |       | food court               |
|   Burlington, MA    |       |                     |
| Technology Square        |       | Polcari’s North End |
|   Cambridge, MA     |       |                     |
| Holyoke Mall             |       | food court               |
|   Holyoke, MA       |       |                     |
| Cape Cod Mall            |       | Polcari’s North     |
|   Hyannis, MA       |       | End (bistro)             |
| Independence Mall        |       | food court               |
|   Kingston, MA      |       |                     |
| South Shore Plaza        |       | food court               |
|   Braintree, MA     |       |                     |
| Solomon Pond Mall        |       | food court               |
|   Marlborough, MA   |       |                     |

 

14

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| Oviedo Market Place  |   | food court                        |
|----------------------|--------|-----------------------------------|
|   Oviedo, FL    |   |                              |
| Paramus Park         |   | food court                        |
|   Paramus, NJ   |   |                              |
| Providence Place     |   | food court                        |
|  Providence, RI |   |                              |
| Regency Square       |   | food court                        |
|   Richmond, VA  |   |                              |
| Salem, NH            |   | Polcari’s North End (bistro) |
| Saugus, MA           |   | Polcari’s North End          |
| Woburn, MA           |   | Polcari’s North End (bistro) |

 

 

----

(1)                                  PizzeriaRegina food court locations have no independent seating capacity.  Seating is centralized in the common areas ofthe food courts.  The North End seatsapproximately 75 customers; the Saugus Polcari’s North End location seatsapproximately 360 customers; the Cambridge Polcari’s North End location seatsapproximately  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 *“Item 7. Management’s Discussion And Analysis Of Financial Condition and Resultsof Operations — Liquidity and Capital Resources.”*)

 

TheCompany occupies approximately 5,325 square feet of executive office space inSaugus, Massachusetts.  The lease forthis location expires on October 31, 2006. The Company also leases approximately 5,000 square feet of warehousespace located in Somerville, Massachusetts under a lease expiring onJuly 31, 2005 (including all extension options that may be exercised bythe Company in its discretion) and approximately 2,741 square feet for itscommissary located in Charlestown, Massachusetts under a lease expiring onAugust 14, 2005.

 

**ITEM 3****.****                                       ****LEGAL PROCEEDINGS**

 

ACharge of Discrimination was filed on June 15, 2004 by certain of theCompany’s personnel, known as complainants, with the Massachusetts CommissionAgainst Discrimination and with the Equal Employment Opportunity Commission.  The Charge was filed against the Company anda Company employee.  The Charge allegesthat the Company and the employee discriminated against the complainants on thebasis of sex.  The Charge further allegesthat the Company failed to investigate complaints of discrimination made by thecomplainants.  The Charge ofDiscrimination does not specify the relief sought.  The Company strongly believes that the Chargelacks merit, and the Company intends to defend against the claimsvigorously.  However, the Company couldincur substantial costs defending the Charge. The Charge could also divert the time and attention of the Company’smanagement or cause the Company’s business to decline due to adverse publicity.  The Company cannot predict the outcome of theCharge at this time, and there can be no assurance that the litigation will nothave a material adverse impact on its financial condition or results ofoperation.

 

Fromtime to time the Company has been, and expects to continue to be, subject tolegal proceedings and claims in the ordinary course of its business.

 

15

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Suchclaims, even if not meritorious, could result in the expenditure of significantfinancial and managerial resources.

 

**ITEM 4****.****                                       ****SUBMISSION OF MATTERS TO A VOTEOF SECURITY HOLDERS**

 

Duringthe fourth quarter of the fiscal year covered by this report, the election ofthe Board of Directors of the Company was submitted to a vote of securityholders of the Company at a special meeting in lieu of the annual meeting ofthe Company’s stockholders.  OnApril 23, 2004, the Company’s stockholders voted to elect the followingdirectors:

 

GeorgeR. Chapdelaine with 5,014,251 shares voting for and 55,123 shares withheld;

HughDevine with 5,035,259 shares voting for and 34,115 shares withheld;

EdwardP. Grace III with 5,055,759 shares voting for and 13,615 shares withheld;

RogerLipton with 4,409,036 shares voting for and 660,338 shares withheld;

JohnP. Polcari, Jr. with 5,035,259 shares voting for and 34,115 shares withheld;and

RobertC. Taft with 5,055,759 shares voting for and 13,615 shares withheld;

 

in each case, there were no shares abstaining andno broker nonvoting shares cast.

 

16

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

######  

**ITEM 5****.****            ****MARKET FOR REGISTRANT’S COMMONEQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES**

 

TheCompany’s Common Stock is traded publicly on the OTC Bulletin Board and on theBoston Stock Exchange (BSE symbol: “BNR”). As of July 16, 2004, there were approximately 600 holders of recordof the Company’s Common Stock.  OnJuly 21, 2004, the last bid and asked price of the Company’s Common Stockas reported on the OTC Bulletin Board were ** **$.63and $.65 per share,respectively.

 

Thetable below represents the quarterly high and low bid and asked prices for theCompany’s Common Stock for the Company’s last two fiscal years, as reported onthe OTC Bulletin Board.  The priceslisted in this table reflect quotations without adjustment for retail mark-up,mark-down or commission, and may not represent actual transactions.

 
| ** **                             | ** ** | **High Bid** | ** ** | **Low Bid** | ** ** | **High  Asked** | ** ** | **Low  Asked** | ** ** |
|----------------------------------------|------------|--------------|------------|-------------|------------|-----------------|------------|----------------|------------|
| ** **                             | ** ** | ** **   | ** ** | ** **  | ** ** | ** **      | ** ** | ** **     | ** ** |
| Fiscal  Year Ended April 25, 2004 |       |         |       |        |       |            |       |           |       |
|                                   |       |         |       |        |       |            |       |           |       |
| First  Quarter                         |       | $            | .65        |        | $          | .30             |       | $              | .95        |   | $ | .35 |   |
| Second  Quarter                        |       | $            | .94        |        | $          | .48             |       | $              | 1.01       |   | $ | .80 |   |
| Third  Quarter                         |       | $            | .65        |        | $          | .40             |       | $              | .85        |   | $ | .58 |   |
| Fourth  Quarter                        |       | $            | .55        |        | $          | .26             |       | $              | .80        |   | $ | .39 |   |
|                                   |       |         |       |        |       |            |       |           |       |
| 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 |   |

 

The Company has never paid cash dividends on itscapital stock and does not anticipate paying any cash dividends in the foreseeablefuture.  Rather, the Company intends toretain all of its future earnings to finance future growth.  The Company’s Credit Facility prohibits thepayment of cash dividends without the lender’s prior consent.

 

17

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Company Equity Compensation Plans

 

The Company presently maintains a 1994 DirectorStock Option Plan and a 1994 Employee Combination Stock Option Plan under whichoptions are no longer issued, and the Combination Stock Option and Share Award Plan(the “2002 Plan”), pursuant to which it may grant equity awards to eligiblepersons.  The following table givesinformation about those plans.

 

 

 
| ** **                                                  | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                           | ** ** | **(c)**                                                                                                                                              |
|-------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **                                                  | ** ** | ** **                                                                                         | ** ** | ** **                                                                        | ** ** | ** **                                                                                                                                           |
| **Plan  category**                                          | ** ** | **Number of securities to  be issued upon exercise  of outstanding options,  warrants and rights** | ** ** | **Weighted average  exercise price of  outstanding options,  warrant and rights** | ** ** | **Number of securities  remaining available for  future issuance under  equity compensation  plans (excluding  securities reflected in  column (a)** |
| Equity compensation plans approved by security  holders     |       | 775,800                                                                                            |       | $                                                                                 | 1.085      |                                                                                                                                                 | 440,000 |
|                                                        |       |                                                                                               |       |                                                                              |       |                                                                                                                                                 |
| Equity compensation plans not approved by  security holders |       | 0                                                                                                  |       | 0                                                                                 |       | 0                                                                                                                                                    |
|                                                        |       |                                                                                               |       |                                                                              |       |                                                                                                                                                 |
| Total                                                       |       | 775,800                                                                                            |       | $                                                                                 | 1.085      |                                                                                                                                                 | 440,000 |

 

OnFebruary 13, 2004, the Company issued Commerce Bank & Trust Company awarrant to purchase 76,000 shares of the Company’s common stock.  The warrant issued in this transaction wasissued in reliance upon the exemption from registration set forth inSection 4 (2) of the Securities Act relating to sales by an issuer notinvolving any public offering.  Thewarrant expires on February 13, 2010 and has an exercise price of $0.50per share.  The warrant becomesexercisable in full on the first to occur of February 13, 2005, a defaultunder the Company’s loan agreement with Commerce Bank & Trust Company or achange of control of the Company.  Theholder of the warrant has the right in certain circumstances to require theCompany to register with the Securities and Exchange Commission for resale theshares issuable upon exercise of the warrant. The warrant was issued in connection with a waiver by Commerce Bank andTrust Company of the Company’s failure to comply with certain financialcovenants.  (See *“Item 7.  Management’s DiscussionAnd Analysis Of Financial Condition and Results of Operations — Liquidity andCapital Resources”*).

 

18

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**ITEM 6****.****                                       ****SELECTED FINANCIAL DATA**

 

Thefollowing table sets forth selected financial data for the fiscal periodsindicated, a 52 week period for fiscal 2004, 2003, 2002, 2001, and a 53 weekperiod for fiscal 2000.

 

 
| ** **                                           | ** ** | **April 25,  2004** | ** ** | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** | **April 29,  2001** | ** ** | **April 30,  2000** | ** ** |
|------------------------------------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
| **Income Statement Data:**                           |       |                     |       |                     |       |                     |       |                     |       |                     |       |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Total  revenues                                      |       | $                        | 23,290,256 |                     | $          | 22,541,875               |       | $                        | 23,854,439 |                     | $          | 21,707,907 |   | $ | 16,013,321 |   |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Costs  and expenses:                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Cost  of food, beverages and liquor                  |       | 4,847,294                |       | 4,348,095                |       | 4,885,952                |       | 4,644,810                |       | 3,284,015                |       |
| Other  operating expenses                            |       | 15,310,776               |       | 13,570,421               |       | 14,293,083               |       | 13,052,040               |       | 9,471,227                |       |
| General  and administrative                          |       | 2,738,690                |       | 2,610,666                |       | 2,132,756                |       | 1,837,085                |       | 1,719,071                |       |
| Depreciation  and amortization                       |       | 1,231,399                |       | 1,056,889                |       | 1,152,860                |       | 1,161,628                |       | 762,346                  |       |
| Pre-opening  costs                                   |       | 392,308                  |       | 8,545                    |       | —                   |       | 658,090                  |       | 453,002                  |       |
| Litigation  and settlement costs (credits)           |       | (246,228                 | )          | (443,445                 | )          | —                   |       | 1,847,487                |       | —                   |       |
| Charge  for asset impairment                         |       | 2,162,584                |       | —                   |       | —                   |       | 580,000                  |       | —                   |       |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Total  costs and expenses                            |       | 26,436,823               |       | 21,151,171               |       | 22,464,651               |       | 23,781,140               |       | 15,689,661               |       |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Operating  income (loss)                             |       | (3,146,567               | )          | 1,390,704                |       | 1,389,788                |       | (2,073,233               | )          | 323,660                  |       |
| Interest  expense, net                               |       | (512,668                 | )          | (407,243                 | )          | (508,072                 | )          | (456,842                 | )          | (327,164                 | )          |
| Other  income, net                                   |       | 221,957                  |       | 9,428                    |       | 9,015                    |       | 19,771                   |       | 5,171                    |       |
| Income  (loss) before minority interest              |       | (3,437,278               | )          | 992,889                  |       | 890,731                  |       | (2,510,304               | )          | 1,667                    |       |
| Minority  interest in net loss of subsidiary         |       | —                   |       | —                   |       | —                   |       | —                   |       | 63,867                   |       |
| Net  income (loss)                                   |       | $                        | (3,437,278 | )                        | $          | 992,889                  |       | $                        | 890,731    |                     | $          | (2,510,304 | ) | $ | 65,534 |   |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Net  income (loss) per share of  common  stock: |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Basic  and Diluted                                   |       | $                        | (.49       | )                        | $          | .14                      |       | $                        | .13        |                     | $          | (.36 | ) | $ | .01 |   |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| **Balance Sheet Items:**                             | ** ** | ** **               | ** ** | ** **               | ** ** | ** **               | ** ** | ** **               | ** ** | ** **               | ** ** |
| Total  Assets                                        |       | $                        | 7,740,807  |                     | $          | 8,273,745                |       | $                        | 8,640,734  |                     | $          | 9,000,203 |   | $ | 8,307,876 |   |
| Long  Term Obligations                               |       | $                        | 2,353,177  |                     | $          | 3,213,292                |       | $                        | 3,750,876  |                     | $          | 4,527,914 |   | $ | 2,964,630 |   |
|                                                 |       |                     |       |                     |       |                     |       |                     |       |                     |       |
| Total  Liabilities                                   |       | $                        | 8,409,528  |                     | $          | 5,535,187                |       | $                        | 6,895,065  |                     | $          | 8,145,265 |   | $ | 4,942,634 |   |

 

19

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**ITEM 7****.****            ****MANAGEMENT’S DISCUSSION ANDANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

This Management’s Discussion and Analysis describesthe principal factors affecting the results of operations, liquidity and capitalresources, as well as the critical accounting policies of the Company. Thisdiscussion should be read in conjunction with the accompanying auditedfinancial statements, which include additional information about oursignificant accounting policies and practices and the transactions thatunderlie 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 as otherwise indicated, references to yearsmean our fiscal year ended April 25, 2004, April 27, 2003 andApril 28, 2002.

 

**RESULTS OF OPERATIONS**

 

**Overview:**

 

The key factors that affect our operating resultsare the impact of new store openings, comparable restaurant sales, which aredriven by comparable customer counts and check average, and our ability tomanage operating expenses such as food cost, labor and benefits and othercosts.  Changes in the number of restaurantsin operation can dramatically change the absolute dollar amounts of revenuesand expenses, and opening of new stores can dramatically affect operatingprofits.  Each restaurant unit’scontribution margin will vary over the life of the restaurant.  Margins tend to be low when a restaurant isfirst opened until customer traffic reaches planned levels.  Margins can also deteriorate at the end of aunit’s life cycle due to a decline in customer traffic caused by a variety offactors outside the control of the Company. These economic conditions impact both the Pizzeria Regina units and thePolcari North End units.

 

There were 16 units in operation throughout each offiscal 2003 and 2002.  There were 16units in operation for all fiscal 2004, one new Polcari’s North End unit wasadded in the sixth month and one new Pizzeria Regina was added in the twelfthmonth of fiscal 2004.

 

Our fiscal 2004 results reflect the effects ofopening a new Polcari’s North End in Cambridge, Massachusetts and theimpairment of this location, a new Pizzeria Regina at the Prudential Center inBoston, Massachusetts and consumer behavior during the economic slowdown.  The following table sets forth all revenues,costs and expenses as a percentage of total revenues for the periods indicatedfor revenue and expense items included in the consolidated statements ofoperations:

 

20

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| ** **                                     | ** ** | **April 25,** | ** ** | **April 27,** | ** ** | **April 28,** | ** ** |
|------------------------------------------------|------------|--------------------|------------|--------------------|------------|--------------------|------------|
| ** **                                     | ** ** | **2004**           | ** ** | **2003**           | ** ** | **2002**           | ** ** |
| Revenues:                                      |       |               |       |               |       |               |       |
| Restaurant  sales                              |       | 99.9               | %          | 99.7               | %          | 99.9               | %          |
| Other                                          |       | .1                 |       | .3                 |       | .1                 |       |
| Total  revenues                                |       | 100.0              |       | 100.0              |       | 100.0              |       |
| Costs  and expenses:                           |       |               |       |               |       |               |       |
| Cost  of food, beverages and liquor            |       | 20.8               |       | 19.3               |       | 20.5               |       |
| Other  operating expenses- payroll             |       | 32.8               |       | 30.4               |       | 31.1               |       |
| Other  operating expenses exclusive of payroll |       | 32.9               |       | 29.8               |       | 28.8               |       |
| General  and administrative                    |       | 11.8               |       | 11.6               |       | 9.0                |       |
| Depreciation  and amortization                 |       | 5.3                |       | 4.7                |       | 4.8                |       |
| Pre-opening  costs                             |       | 1.7                |       | —             |       | —             |       |
| Litigation  and settlement costs (credits)     |       | (1.1               | )          | (2.0               | )          | —             |       |
| Charge  for asset impairment                   |       | 9.3                |       | —             |       | —             |       |
| Operating  income (loss)                       |       | (13.5              | )          | 6.2                |       | 5.8                |       |
| Interest  expense, net                         |       | (2.2               | )          | (1.8               | )          | (2.1               | )          |
| Other  income, net                             |       | 1.0                |       | —             |       | —             |       |
| Net  income (loss)                             |       | (14.7              | )%         | 4.4                | %          | 3.7                | %          |

 

**Results of Operations forthe Years Ended April 25, 2004 and April 27, 2003**

** **

# RestaurantSales

#  

 Restaurantsales in fiscal 2004 were $23,274,000 compared to $22,478,000 in fiscal 2003.Sales for the restaurants open throughout both fiscal 2004 and 2003 decreasedby 1.8%.  The Company believes thedecrease in restaurant sales in fiscal 2004 compared to fiscal 2003 was attributableto the impact on consumer behavior of the economic slowdown in the Northeast.

 

Net sales at the Company’s Pizzeria Reginarestaurants decreased 1.4% to $11,281,000 in fiscal 2004 from $11,445,000 infiscal 2003.  The decrease in restaurantsales was principally due to the temporary closing of the Faneuil Hall locationfrom May 9, 2003 to July 2, 2003. The loss of revenue from that location was partially compensated bypayments under the Company’s insurance policies, which are included in otherincome.

 

Net sales at the Company’s full service casualdining restaurants increased by 8.6% to $11,947,000 in fiscal 2004 from$11,005,000 in fiscal 2003.  The increasein restaurant sales was primarily attributable to the opening of the new

 

21

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Polcari’s in Cambridge, Massachusetts in October,2003 partially offset by the continued economic slow down in the Northeast .

 

Sales at the Company’s commissary were $46,000 infiscal 2004 compared to $28,000 in fiscal 2003. The increase in commissary sales was primarily attributable to anincrease in product shipments to our distributors for the out-of-state PizzeriaReginas and the Pizzeria Regina franchise in Las Vegas, Nevada.

 

# FranchiseFees and Royalties

#  

During fiscal 2004, the Company recognized $17,000in royalties from a domestic Pizzeria Regina franchise at the Palms CasinoResort in Las Vegas, Nevada which closed on April 30, 2004.  During fiscal 2003, the Company recognized$50,000 in franchise fee revenues and $14,000 related to royalties.

 

**Costs and Expenses**

 

**Cost of Food, Beverages and Liquor**

 

Cost of food, beveragesand liquor as a percentage of total revenues for all restaurants was 21% infiscal 2004 compared to 19% in fiscal 2003. The increase as a percentage of total revenues was primarilyattributable to increases in costs from suppliers in general.

 

The cost of food,beverages and liquor was $4,847,000 in fiscal 2004 compared to $4,348,000 infiscal 2003. The dollar increase was due in part to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant.

 

The cost of food, beverages, and liquor as apercentage of restaurant sales at the Pizzeria Regina restaurants was 16% infiscal 2004 compared to 15% in fiscal 2003. The increase as a percentage of restaurant sales was primarily due tohigher cheese costs.

 

The cost of food, beverages and liquor atthe Pizzeria Regina restaurants was $1,810,000 in fiscal 2004 compared to$1,752,000 in fiscal 2003.  The dollarincrease was primarily due to higher cheese costs and increases in costs fromsuppliers in general, which werepartially offset by the Company’s lower consumption of these supplies due tolower sales from these restaurants.

 

The cost of food, beverages and liquor as apercentage of restaurant sales at the Company’s full service casual diningrestaurants increased to 25% in fiscal 2004 from 24% in fiscal 2003.  The increase as a percentage of restaurantsales was principally due to the opening of the new Cambridge, MassachusettsPolcari’s North End restaurant which is open for lunch seven days a weekresulting in higher food costs and increases in costs from suppliers in generaland weak revenue generation by the Cambridge location compared to the Company’sother full service casual dining restaurants.

 

22

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The cost of food, beverages and liquor atthe Company’s full service casual dining restaurants was $3,037,000 in fiscal2004 compared to $2,596,000 in fiscal 2003. The dollar increase was primarily due to the opening of the newCambridge, Massachusetts Polcari’s North End restaurant.

 

**Other Operating Expenses**

 

**Payroll Expenses**.  Payroll expenses as a percentage of totalrevenues for all restaurants were 33% in fiscal 2004 compared to 30% in fiscal2003.  The increase as a percentage oftotal revenues was attributable to the opening of the new Cambridge,Massachusetts Polcari’s North End restaurant, as well as to the fact thatduring the temporary closing of the Faneuil Hall location the Company continuedto incur payroll costs associated with that location and to the increasedemployee health benefit costs.

 

Payroll expenses for all the restaurantswere $7,639,000 in fiscal 2004 compared to $6,860,000 in fiscal 2003.  The dollar increase in payroll expenses wasprimarily due to the opening of the new Cambridge, Massachusetts Polcari’sNorth End restaurant.

 

Payroll expenses at the Pizzeria Reginarestaurants were 26% of restaurant sales in fiscal 2004 compared to 25% ofrestaurant sales in fiscal 2003.  Theincrease as a percentage of restaurant sales was primarily due to the temporaryclosing of the Faneuil Hall location and to an increase in employee benefitcosts.

 

Payroll expenses at the Pizzeria Reginarestaurants were $2,945,000 in fiscal 2004 compared to $2,893,000 in fiscal2003.  This dollar increase was primarilydue to an increased cost in employee health benefits.

 

Payroll expenses at the Company’s fullservice casual dining restaurants increased to 36% of restaurant sales infiscal 2004 from 33% of restaurant sales in fiscal 2003. The increase as apercentage of restaurant sales was primarily attributable to the opening of thenew Polcari’s North End restaurant in Cambridge, Massachusetts and to anincrease in employee health benefit costs.

 

Payroll expenses at the Company’s fullservice casual dining restaurants were $4,291,000 in fiscal 2004 compared to$3,595,000 in fiscal 2003.  This dollarincrease was primarily due to the opening of the new Polcari’s North End restaurantin Cambridge, Massachusetts and an increase in employee health benefit costs.

 

Payroll expenses at the Company’s Commissarywere $403,000 for fiscal 2004 as compared to $372,000 in fiscal 2003.

 

**Other Operating Expenses,Exclusive of Payroll. **Other operatingexpenses, exclusive of payroll, were 33% of total revenues in fiscal 2004

 

23

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compared to 30% in fiscal 2003.  The increase in operating expenses, exclusiveof payroll, as a percentage of total revenues was primarily due to the openingof the new Cambridge, Massachusetts Polcari’s North End restaurant and to areduction in revenue.

 

Other operating expenses, exclusive ofpayroll were $7,672,000 in fiscal 2004 compared to $6,710,000 in fiscal 2003.  This dollar increase is primarilyattributable to the opening of the new Cambridge, Massachusetts Polcari’s NorthEnd restaurant.

 

Other operating expenses, exclusive ofpayroll, from the Pizzeria Regina restaurants were 34% of restaurant sales infiscal 2004 compared to 33% in fiscal 2003. The increase as a percentage ofsales was primarily attributable to the temporary closing of the Faneuil Halllocation, where the Company nonetheless continued to incur some of such costswithout any corresponding revenue.

 

Other operating expenses, exclusive ofpayroll from the Pizzeria Regina restaurants were $3,858,000 in fiscal 2004compared to $3,775,000 in fiscal 2003. This dollar increase was primarily attributable to the temporary closingof the Faneuil Hall location which resulted in additional operating expenses.

 

Other operating expenses, exclusive ofpayroll, from the Company’s full service casual dining restaurants increased to31% of total revenues in fiscal 2004 from 26% of total revenues in fiscal 2003.  The increase as a percentage of restaurantsales was primarily attributable to the opening of the new Polcari’s North Endrestaurant in Cambridge, Massachusetts, increased rent expenses, and the reduction in same stores revenue.

 

Other operating expenses, exclusive ofpayroll, from the Company’s full service casual dining restaurants were$3,688,000 in fiscal 2004 compared to $2,826,000 in fiscal 2003. The dollarincrease was primarily due to a $618,000 increase attributable to Cambridge anda $126,000 increase in rent expenses.

 

Other operating expenses also includecommissary expenses, which were $126,000 in fiscal 2004 and $109,000 in fiscal2003.

 

**General and AdministrativeExpenses**

 

General and administrative expenses were 12%of total revenues in both fiscal 2004 and fiscal 2003 periods.

 

General and administrative expenses were$2,739,000 in fiscal 2004, compared to $2,611,000 in fiscal 2003.  The dollar increase were primarilyattributable to consulting costs.

 

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**Depreciation and AmortizationExpenses**

 

Depreciation and amortization expense was$1,231,000 in fiscal 2004, as compared to $1,057,000 in fiscal 2003, amountingto 5% of total revenues in both fiscal years.

 

**Pre-Opening Costs**

 

 Pre-opening expenses in fiscal 2004 were$392,000 compared to $9,000 in fiscal 2003. The pre-opening expenses were related to the new Cambridge,Massachusetts Polcari’s North End restaurant which consisted of labor,advertising, rent and training materials, the new Pizzeria Regina restaurant atthe Prudential Center in Boston, Massachusetts and the planned opening of thenew Pizzeria Regina restaurant at South Station in Boston, Massachusetts.

 

**Litigation and Settlement Costs**

 

In 1998 the Company formed a joint venture withItalian Ventures, LLC, a Kentucky limited liability company (“ItalianVentures”), and entered into a development agreement with it.  Approximately eight months after the jointventure and development agreement were entered into, the Company filed alawsuit against Italian Ventures and certain related parties seekingdissolution of the joint venture.  Infiscal 2001, the Company reached a settlement of the dispute with ItalianVentures, LLC in which it agreed to pay royalties on future revenues from certain“Bistro restaurants”, as defined in the settlement agreement.  The Company accrued a liability of $955,000in the fourth quarter of fiscal 2001 as the estimated cost of the obligation topay the future royalties, based upon a forecast of Bistro restaurant grosssales for the period May 2001 through April 2008 using historicalinformation and estimates of growth of existing Bistro units, as well asanticipated future Bistro unit openings and closings.  In the fourth quarter of fiscal 2003, theCompany reduced the accrual by $443,000 to reflect the Company’s revisedestimate of its remaining obligation under the settlement agreement withItalian Ventures.  In 2004, the Companyexperienced the opening of an under performing Polcari’s in Cambridge, Massachusetts,which caused the Company to reassess its expansion plans due to financialconstraints.  As a result of thisreassessment in fiscal 2004 the amount of accrual was reduced by $246,000 to$258,000 to reflect the Company’s revised estimates of the remainingobligations under the settlement agreement with Italian Ventures.

 

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**Loss or Impairment of Long-Lived Assets**

 

The Company recorded an impairment charge of$2,163,000 in the fourth quarter of fiscal 2004 which is included in theconsolidated statements of operations related to the write-down of certainlong-lived assets.  The Company reviewedthe carrying value of its long-lived assets and noted that the expected futurecash flows for the Polcari’s North End in Cambridge, Massachusetts were notsufficient to recover the recorded carrying value of long-lived assets at thislocation.  Accordingly, the Companyrecognized an impairment charge to reduce the carrying value of leaseholdimprovements to zero and restaurant equipment to an estimated fair market valuebased on the estimated residual value of the equipment.

 

**Other Income**

 

Other income was $222,000 in fiscal 2004 comparedto $9,000 in fiscal 2003.  The increasein other income is attributable to insurance proceeds of $184,000 related tothe temporary closing of the Faneuil Hall Pizzeria Regina.

 

**Interest Expense and InterestIncome**

 

Interest expense increased to $516,000 infiscal 2004, compared to $410,000 in fiscal 2003.  This increase was primarily due to anincrease in interest expense under the Company’s credit facility due toadditional borrowing.

 

Interest income was $3,000 in both fiscal2004 and fiscal 2003 years.

 

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

** **

# RestaurantSales

#  

 Restaurantsales in fiscal 2003 were $22,478,000 compared to $23,828,000 in fiscal 2002.Sales for the restaurants open throughout both fiscal 2003 and 2002 decreasedby 5.7%.  The Company believes thedecrease in restaurant sales in fiscal 2003 compared to fiscal 2002 wasattributable to the impact on consumer behavior of the continuing economicslowdown, the war with Iraq, and harsh winter weather in the Northeast.

 

Net sales at the Company’s Pizzeria Reginarestaurants decreased 3.9% to $11,445,000 in fiscal 2003 from $11,905,000 infiscal 2002.  Net sales at the Company’sfull service casual dining restaurants decreased by 7.6% to $11,005,000 infiscal 2003 from $11,906,000 in fiscal 2002. The Company believes these decreases were attributable to the samefactors listed above for both types of restaurants, but affected the slightlymore expensive casual dining restaurants more.

 

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Sales at the Company’s commissary were $28,000 infiscal 2003 compared to $17,000 in fiscal 2002. The increase in commissary sales was primarily attributable to thePizzeria Regina franchise in Las Vegas, Nevada being opened for the entirefiscal 2003.

 

Franchise Fees and Royalties

 

During fiscal 2003, the Company recognized $50,000in franchise fee revenues and $14,000 in royalties from a domestic PizzeriaRegina franchise at the Palms Casino Resort in Las Vegas, Nevada.  During fiscal 2002, the Company recognized$20,000 in franchise fee revenues and $6,000 related to royalties.

 

**Costs and Expenses**

 

**Cost of Food, Beverages and Liquor**

 

Cost of food, beveragesand liquor as a percentage of total revenues for all restaurants was 19% infiscal 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 2003 compared to $4,886,000 infiscal 2002. The dollar decrease was due in part to the reduction in the amountof product sold for fiscal 2003 and in part to improved cost control systems.

 

The cost of food, beverages, and liquor as apercentage of total revenues at the Pizzeria Regina restaurants was 15% forboth fiscal 2003 and fiscal 2002.

 

The cost of food, beverages and liquor atthe Pizzeria Regina restaurants was $1,752,000 in fiscal 2003 compared to$1,790,000 in fiscal 2002.  The dollardecrease was principally due to the reduction in the amount of product sold.

 

The cost of food, beverages and liquor as apercentage of total revenues at the Company’s full service casual diningrestaurants decreased to  24% in fiscal2003 from 26% in fiscal 2002, primarily due to improved cost controls.

 

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

 

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**Other Operating 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 restaurantswere $6,860,000 in fiscal 2003 compared to $7,424,000 in fiscal 2002.  The dollar decrease in payroll expenses wasprimarily due to a reduction in hours worked as a result of diminished sales,and improved labor efficiency.

 

Payroll expenses at the Pizzeria Reginarestaurants were 25% of total revenues in fiscal 2003 compared to 26% of totalrevenues in fiscal 2002.  The decrease asa percentage of total revenues was primarily attributable to improved laborefficiency.

 

Payroll expenses at the Pizzeria Reginarestaurants were $2,893,000 in fiscal 2003 compared to $3,041,000 in fiscal2002.  This dollar decrease was primarilydue to a reduction in man-hours as a result of diminished sales and improved laborefficiency.

 

Payroll expenses at the Company’s fullservice casual dining restaurants decreased to 33% of total revenues in fiscal2003 from 34% of total revenues in fiscal 2002. The percentage decrease wasprimarily attributable to improved labor efficiency.

 

Payroll expenses at the Company’s fullservice casual dining restaurants were $3,595,000 in fiscal 2003 compared to$4,001,000 in fiscal 2002.  This dollardecrease was primarily due to a reduction in man-hours due to diminished salesand improved labor efficiency.

 

Payroll expenses at the Company’s Commissarywere $372,000 for fiscal 2003 as compared to $382,000 in fiscal 2002.

 

**Other Operating Expenses,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.

 

Other operating expenses, exclusive ofpayroll were $6,710,000 in fiscal 2003 compared to $6,869,000 in fiscal2002.  This dollar decrease is primarilydue to a reduction in costs as a result of diminished sales.

 

Other operating expenses, exclusive ofpayroll, from the Pizzeria Regina restaurants were 33% of total revenues infiscal 2003 compared to 32% in fiscal

 

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2002. The increase as a percentage of restaurantsales is a reflection of the reduced revenue base.

 

Other operating expenses, exclusive ofpayroll from the Pizzeria Regina restaurants were $3,775,000 in fiscal 2003compared to $3,798,000 in fiscal 2002. This dollar decrease was primarily the result of diminished sales.

 

Other operating expenses, exclusive ofpayroll, from the Company’s full service casual dining restaurants increased to26% of total revenues in fiscal 2003 from 25% of total revenues in fiscal 2002.The increase as a percentage of restaurant sales is a reflection of the reducedrevenue base.

 

Other operating expenses, exclusive ofpayroll, from the Company’s full service casual dining restaurants were$2,826,000 in fiscal 2003 compared to $2,958,000 in fiscal 2002.  This dollar decrease was primarilyattributable to diminished sales.

 

Other operating expenses also includecommissary expenses, which were $109,000 in fiscal 2003 and $107,000 in fiscal2002, respectively, and franchise costs of $6,000 in fiscal 2002.

 

**General and AdministrativeExpenses**

 

General and administrative expenses were 12%of total revenues in fiscal 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 wereprimarily attributable to consulting costs and employee incentives.

 

**Depreciation and AmortizationExpenses**

 

Depreciation and amortization expense was$1,057,000 in fiscal 2003, as compared to $1,153,000 in fiscal 2002, amountingto 5% of total revenues in both fiscal years.

 

**Pre-Opening Costs**

 

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

 

**Litigation and Settlement Costs**

 

In 1998 the Company formed a joint venture withItalian Ventures, LLC, a

 

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Kentucky limited liability company (“ItalianVentures”), and entered into a development agreement with it.  Approximately eight months after the jointventure and development agreement were entered into, the Company filed alawsuit against Italian Ventures and certain related parties seekingdissolution of the joint venture.  Infiscal 2001, the Company reached a settlement of the dispute with ItalianVentures LLC in which it agreed to pay royalties on future revenues fromcertain “Bistro restaurants”, as defined in the settlement agreement.  The Company accrued a liability of $955,000in the fourth quarter of fiscal 2001 as the estimated cost of the obligation topay the future royalties, based upon a forecast of Bistro restaurant gross salesfor the period May 2001 through April 2008 using historical informationand estimates of growth of existing Bistro units, as well as anticipated futureBistro unit openings and closings.  Inthe fourth quarter of fiscal 2003, the Company reviewed the estimate of futureroyalties based upon changes in anticipated future growth of existing Bistrounit sales and future Bistro unit openings and closings. As a result the amountof the accrual was reduced by $443,000 to $524,000 to reflect the Company’s revisedestimate of its remaining obligation under the settlement agreement withItalian Ventures.

 

**Interest Expense and InterestIncome**

 

Interest expense decreased to $410,000 infiscal 2003, compared to $508,000 in fiscal 2002.  This decrease was primarily due to a decreasein interest expense under the Company’s credit facility and the expiration ofsome equipment leases.

 

Interest income was $3,000 in fiscal 2003 ascompared to $0 in fiscal 2002.

 

# **LIQUIDITYAND CAPITAL RESOURCES**

#  

Our primary sources of funding during fiscal 2004were cash provided by operations and borrowings under a $3,500,000 creditfacility with Commerce Bank and Trust Company entered into April 30, 2002(the “Credit Facility”).

 

At April 25, 2004, the Company had a workingcapital deficit of $4,304,000 compared to a deficit of $372,000 at the end offiscal 2003, and cash and cash equivalents of approximately $652,000, comparedto $1,107,000 at the end of fiscal 2003. The principal reasons for the increase in the working capital deficit werethe reclassification of the bank debt and the loss incurred in fiscal2004.  The Company’s financial conditionand growth will be dependent upon obtaining adequate additional financing untilprofitable operations are achievable. The Company cannot guarantee that it will be successful in obtainingadditional financing.

 

On April 30, 2002, the Company entered intoits $3,500,000 Credit Facility

 

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with Commerce Bank and Trust Company.  The Credit Facility has permitted the Companyto borrow amounts to pay the costs for new restaurant openings and repay over afixed term of either four or five years. Each borrowing under the Credit Facility bears interest at the bank’sbase rate plus 1.75% until the conversion date, subject to an annual adjustmentto the bank’s then current base rate plus 2.0%. The Company borrowed $922,000 under the Credit Facility onApril 30, 2002 to pay off the prior bank facility.  The note for that borrowing bore interest at6.75% for the first year, 6.25% as of April 30, 2003 and 7.25%  as of April 25, 2004 and is payable overfour years.  All borrowings under theCredit Facility are collateralized by substantially all of the assets of theCompany and are subject to various financial covenants.  On June 6, 2003, the Company committedto borrow an additional $2.5 million under the Credit Facility to finance thecosts of the new Cambridge, MA Polcari’s North End restaurant.  The note for that borrowing has a term offive years and currently bears interest at 7% for the first year.  On February 13, 2004 the Companycommitted to borrow an additional $535,000 under the Credit Facility topartially finance the cost of opening two new Pizzeria Regina Kiosks.  As of April 25, 2004 the Company was notin compliance with the certain financial covenants of the Credit Facility.  However, Commerce Bank and Trust Companywaived the covenants for the quarterly fiscal period ended January 25,2004 and for fiscal year ended April 25, 2004 in exchange for a 1% waiver fee, amodification of the interest rate on all outstanding notes issued under theCredit Agreement from the current 6% to 7% per annum until the first quarter inwhich the Company is once again in compliance with all financial covenants, andthe grant to the bank of a six year warrant to purchase 76,000 shares of theCompany’s common stock at a price of $.50 per share.  Subject to certain exceptions pursuant towhich the warrant will be exercisable earlier, the warrant is not exercisableuntil February 13, 2005. In August 2004, in exchange for theestablishment of new financial covenants for fiscal year 2005, the bank waivedthe covenants for the first quarter of fiscal year 2005.  Because of the Company’s uncertaintyregarding its ability to satisfy these covenants, all bank debt has beenreclassified as current on the balance sheet for year ended April 25,2004.  If the Company fails to complywith these covenants, the bank debt would be due on demand.

 

During fiscal 2004, the Company had a net decreasein cash and cash equivalents of $455,000, reflecting net cash provided byoperating activities of $136,000, net cash used for investing activities of$3,040,000 and net cash provided by financing activities of $2,449,000.

 

Net cash provided by operating activities of$136,000 included depreciation and amortization expense of $1,231,000, warrantsgranted in exchange for the bank’s waiver of $30,000, a charge for an asset impairment of $2,163,000, an increasein accounts payable of $478,000, an increase of accrued expenses of $97,000 andan increase of deferred rent of $105,000. This was partially offset by a net loss of $3,437,000, an increase inaccounts receivables of $33,000, an increase of inventories of $195,000, anincrease of prepaid expenses of $27,000, an increase of other assets of$18,000, a decrease in other long-term liabilities of $9,000 and a reduction ofthe litigation

 

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settlement of $246,000.  Net cash used for investing activities of$3,040,000 reflects capital expenditures associated with the new Cambridge,Massachusetts Polcari’s North End restaurant, the new Pizzeria Regina at thePrudential Center in Boston, Massachusetts, the new Pizzeria Regina at SouthStation in Boston, Massachusetts and various other Pizzeria Regina restaurantsand Polcari’s North End bistro restaurants. Net cash provided by financing activities of $2,449,000 consisted ofproceeds from the Credit Facility partially offset by net repayments forlong-term debt, capital lease obligations and stockholder loans.

 

At April 25, 2004, the Company had currentliabilities of $6,056,000, including $1,059,000 of accounts payable, $1,417,000of accrued expenses and current maturities of long term obligations in theamount of $3,581,000.  At April 25,2004, the Company had long-term obligations, less current maturities, in theamount of $2,353,000, including  $89,000of notes payable to a stockholder, $62,000 due under the capital leaseobligations, $1,450,000 of convertible subordinated debentures, $501,000 ofdeferred rent, and $251,000 of other long-term liabilities primarily related tothe litigation settlement agreement with Italian Ventures, LLC.

 

Theopinion of BDO Seidman, LLP on the Company’s fiscal 2004 financial statementincluded an explanatory paragraph expressing concern about the Company’sability to continue as a going concern. In addition, because of the Company’s concern regarding its ability tosatisfy bank financial covenants, all bank debt totaling approximately$3,200,000 has been reclassified as current in the balance sheet for year endedApril 25, 2004. If the Company fails to comply with these covenants, thebank debt could be due on demand.  TheCompany’s financial condition and compliance with the bank covenants will besubstantially dependent upon obtaining adequate additional financing andachieving l profitable operations.  TheCompany cannot guarantee that it will be able to raise the necessary capital tocontinue in operation or that it will be able to achieve profitableoperations.  In addition, the Company maybe forced to restructure its operations by closing the Polcari’s restaurant inCambridge, Massachusetts, selling that business or its assets, and/orsubleasing the premises of that restaurant. Public financing would be subject to market conditions and otheruncertainties, and no assurance can be given that the Company could obtainpublic financing at any time.  Eitherpublic or private equity financing would likely result in dilution of theCompany’s existing stockholders.

 

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**Loss of Impairment of Long Lived Assets**

 

The Company recorded an impairment charge of$2,163,000 in the fourth quarter of fiscal 2004 which is included in the consolidatedstatements of operations related to the write-down of certain long-livedassets.  The Company reviewed thecarrying value of its long-lived assets and noted that the expected future cashflows for the Polcari’s North End in Cambridge, Massachusetts were  not sufficient to recover the recordedcarrying value of long-lived assets at that location.  Accordingly, theCompany recognized an impairment charge to reduce the carrying value ofleasehold improvements to zero and restaurant equipment to an estimated fairmarket value.

 

**Contractual Obligations**

 

The Company has long-term contractual obligationsprimarily in the form of leases and debt obligations.  The following table summarizes the Company’scontractual obligations and their aggregate maturities as of April 25,2004. (See discussions of cash flows, financial position and capital resourcesas well as the Notes to the April 25, 2004 consolidated financialstatements for further details).

 

 
| **Contractual  Obligations**   | ** ** | **Total**  | ** ** | **Less than 1 year** | ** ** | **1-3 years** | ** ** | **3-5 years** | ** ** | **More than 5  years** | ** ** |
|--------------------------------|------------|------------|------------|----------------------|------------|---------------|------------|---------------|------------|------------------------|------------|
| Long term debt obligations (1) |       | $          | 4,833,158  |                 | $          | 3,383,158     |       | —        |       | —                 |       | $ | 1,450,000 |   |
| Capital lease obligations (2)  |       | 253,687    |       | 191,847              |       | 61,840        |       | —        |       | —                 |       |
| Operating lease obligations    |       | 19,089,730 |       | 3,436,742            |       | 5,919,636     |       | 4,663,883     |       | 5,069,469              |       |
| Purchase obligations           |       | —     |       | —               |       | —        |       | —        |       | —                 |       |
| Shareholder Note (3)           |       | 94,964     |       | 6,114                |       | 13,155        |       | 14,440        |       | 61,255                 |       |
| Total                          |       | 24,271,539 |       | 7,017,861            |       | 5,994,631     |       | 4,678,323     |       | 6,580,724              |       |
|                                |            |            |            |                      |            |               |            |               |            |                        |            |  |  |  |

 

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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 Company requires cash to pay itsoperating expenses and to service the obligations listed above.  The Company’s principal sources of funds areits operations.  The Company cannotguarantee that its operations will generate cash in future periods.

 

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The Credit Facility requires compliance withvarious financial covenants, of which the most restrictive are cash to debtratio and profitability.  If the Companydefaults under any of the provisions of the Credit Facility, all amounts outstandingunder each of the term facilities become due and payable, and the bank mayproceed against its collateral, which includes substantially all of theCompany’s assets. As of April 25, 2004 the Company was not in compliancewith  certain financial covenants of theCredit Facility.  However, Commerce Bankand Trust Company waived the covenants violations for the quarterly fiscalperiod ended January 25, 2004 and for fiscal year ended 2004 in exchangefor a 1% waiver fee, a modification of the interest rate on all outstandingnotes issued under the Credit Agreement from the current 6% to 7% per annumuntil the first quarter in which the Company is once again in compliance withall financial covenants, and the grant to the bank of a six year warrant topurchase 76,000 shares of the Company’s common stock at a price of $.50 pershare.  Subject to certain exceptionspursuant to which the warrant will be exercisable earlier, the warrant is not exercisable until February 13,2005.  In August 2004, in exchange for theestablishment of new financial covenants for fiscal year 2005, the bank waivedthe covenants for the first quarter of fiscal year 2005.  Because of the Company’s uncertaintyregarding its ability to satisfy these covenants, all bank debt has been reclassifiedas current on the balance sheet for year ended April 25, 2004.  If the Company fails to comply with thesecovenants, the bank debt would be due on demand.

 

**CRITICAL ACCOUNTING POLICIES**

 

The Companyconsiders its accounting policies with respect to the use of

 

estimates, long-lived assets and goodwill,and revenue recognition as the most critical to its results of operations andfinancial condition.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities, and disclosure of contingentassets and liabilities at the date of the financial statements, and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.  For example, in fiscal 2001the Company recorded a non-recurring charge for a litigation settlementagreement.  This estimate was based onprojected sales of current and future bistro restaurants, which assumed thenumber and timing of new Bistro Restaurants as defined in the settlementagreement. The actual royalty payments ultimately required to be paid may varysignificantly from both the Company’s original and its revised estimates.

 

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**Long-Lived Assets**

 

The Company evaluates itslong-lived assets under the provisions of Statement of Financial AccountingStandards No. 144 (“SFAS No. 144”). SFAS No. 144 establishes accounting standards for the impairment oflong-lived assets and certain identifiable intangibles to be held and used andfor long-lived assets, and certain identifiable intangibles to be disposed of.

 

Whenever events orchanges in circumstances indicate that the carrying amounts of the assets maynot be recoverable, the Company reviews the carrying values of its long-livedand identifiable intangible assets for possible impairment, as appropriate. Infiscal 2004, the Company recorded an impairment charge of $2,163,000 related tothe write-down of certain long-lived assets. The Company determined that the future cash flows which the Companyestimated would be received from Polcari’s North End located in Cambridge,Massachusetts would not be sufficient to recover the recorded carrying value ofthe long-lived assets applicable to that location.

 

**Goodwill**

 

Goodwill resultingfrom the excess of cost over fair value of net assets acquired is being testedfor impairment in accordance with the guidelines in SFAS No. 142.  SFAS No. 142 requires among other things,that companies no longer amortize goodwill but test goodwill for impairment atleast annually.  As of April 27,2003, the Company’s goodwill of $453,643 was associated with the acquisition ofCapucino’s, Inc. in 1994.  No adjustmentto the $453,643 balance of goodwill was deemed necessary during the yearended  April 25, 2004.  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 allrestaurant sales represent retail sales to the general public throughCompany-owned restaurants.  Such amountsare recognized as revenue at the point of sale.

 

Franchise fees resultingfrom the sale of individual franchise locations are recognized as revenue uponthe commencement of franchise operations. Revenues from the sale of area development rights are recognizedproportionately as the franchised restaurants commence operations.  Franchise royalties, which are based on a percentageof franchised restaurants’ sales are recognized when revenue is earned.

 

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**RecentlyIssued Accounting Standards**

 

InApril 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 onDerivative Instruments and Hedging Activities”.  SFAS No. 149 amends andclarifies financial accounting and reporting for derivative instruments,including certain derivative instruments embedded in other contracts(collectively referred to as derivatives) and for hedging activities under SFASNo. 133.  SFAS No. 149 is effective for contracts entered into or modifiedafter June 30, 2003, and hedging relations designated after June 30,2003, except for those provisions of SFAS No. 149 which relate to SFAS No. 133implementation issues that have been effective for fiscal quarters that beganprior to June 15, 2003.  For those issues, the provisions that arecurrently in effect should continue to be applied in accordance with theirrespective effective dates.  In addition, certain provisions of SFAS No.149, which relate to forward purchases or sales of when-issued securities orother securities that do not yet exist, should be applied to both existingcontracts and new contracts entered into after June 30, 2003.  The adoptionof SFAS No. 149 did not have a material effect on the Company’s financialstatements.

 

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

 

**ITEM****7A****.****                              ****QUANTITATIVEAND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.**

 

**InterestRate Risk.**

 

We have exposure to interest rate risk related tocertain instruments entered into for other than trading purposes.  Specifically, borrowings under the Credit Facilitydescribed in Item 7 bear interest at a variable rate based on the bank’s primerate. A 100 basis point change in the Credit Facility interest rate(approximately 7% at April 25, 2004) would cause the interest expense forfiscal 2005 to change by approximately $34,000. This computation is determinedby considering the impact of hypothetical interest rates on our variablelong-term debt at April 25, 2004. However, the nature and amount of ourborrowings under the Credit Facility may vary as a result of future businessrequirements, market conditions covenant compliance and other factors.

 

Our other outstanding long-term debt bears fixedrates of interest. The

 

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Company believes there is no material exposure to amarket interest rate risk that could affect future results of operations orfinancial conditions.

 

**Commodity Price Risk.**

 

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

 

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**ITEM 8****.****                                       ****FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

BOSTONRESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

 

INDEXTO FINANCIAL STATEMENTS

 
| Index to Financial Statements                              |   |
|------------------------------------------------------------|--------|
| Report of  Independent Registered Public Accounting Firm . |   |
| 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                |   |

 

TheCompany’s Financial Statements, together with the Report of IndependentCertified Public Accountants have been included at Item 15 and appear at PagesF-1 through F-34.

 

**ITEM 9****.****            ****CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM9A****.****                              ****CONTROLS AND PROCEDURES**

 

Asof the end of the period covered by this report, the Company’s Chief ExecutiveOfficer and Chief Financial Officer performed an evaluation of theeffectiveness of the Company’s disclosure controls and procedures (as definedin SEC Rule 13a-15 or 15d-15), which have been designed to ensure that materialinformation related to the Company is timely disclosed.  Based upon that evaluation, they concludedthat the disclosure controls and procedures were effective and remainedvirtually unchanged in the fourth quarter of year ended April 25, 2004.

 

38

----

 

PART III

#  

**ITEM10****.****                                ****DIRECTORS AND EXECUTIVE OFFICERSOF THE REGISTRANT**

 

Theinformation required by this Item 10 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its 2004 fiscal year.

 

**ITEM11****.****                                ****EXECUTIVE COMPENSATION**

 

Theinformation required by this Item 11 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its 2004 fiscal year.

 

**ITEM12****.****          ****SECURITY OWNERSHIP OF CERTAINBENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS**

 

Theinformation required by this Item 12 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 saysafter close if its 2004 fiscal year.

 

**ITEM13****.****          ****CERTAIN RELATIONSHIPS AND RELATEDTRANSACTIONS**

 

Theinformation required by this Item 13 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its 2004 fiscal year.

 

**ITEM14****.****          ****PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Theinformation required by this Item 14 is hereby incorporated by reference to theCompany’s definitive proxy statement to be filed by the Company within 120 daysafter the close of its 2004 fiscal year.

 

**PART IV**

 

**ITEM15****.****                                ****EXHIBITS, FINANCIAL STATEMENTSCHEDULES AND REPORTS ON FORM 8-K**

 

(a)                                  FINANCIAL STATEMENTS AND SCHEDULES

(1)            Financial Statements listed under Part II,Item 8

(2)            Financial Statement Schedules have beenomitted because the required information is not applicable or required, orbecause the required information is shown either in the Financial Statements orthe notes thereto.

 

(b)                                 REPORTS ON FORM 8-K

 

TheCompany filed a Current Report on Form 8-K on March 29, 2004.

 

39

----

 

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)*               |
|                  |       |                                                                                                                                            |       |                  |
| 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)            |
|                  |       |                                                                                                                                            |       |                  |
| 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                 |       | 2002 Combination Stock Option and Share Award Plan**                                                                                            |       | J-10(h)*              |
|                  |       |                                                                                                                                            |       |                  |
| 10.07                 |       | Charter of the Audit Committee of Boston Restaurant Associates, Inc.,  as adopted December 6, 2002 as amended March 5, 2004           |       | I-99*                 |
|                  |       |                                                                                                                                            |       |                  |
| 10.09                 |       | Second Allonge to Loan Agreement between Boston Restaurant Associates,  Inc. and Commerce Bank & Trust Company dated February 13, 2004 |       | Filed herewith        |
|                  |       |                                                                                                                                            |       |                  |
| 10.10                 |       | First Allonges to Notes from Boston Restaurant Associates, Inc. to  Commerce Bank & Trust Company dated February 13, 2004              |       | Filed herewith        |

 

 

40

----

 
| 10.11  |   | Stock Purchase Warrant issued by Boston Restaurant Associates, Inc. in  favor of Commerce Bank & Trust Company dated February 13, 2004                                   |   | Filed herewith       |
|--------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------|
|   |   |                                                                                                                                                                              |   |                 |
| 10.12  |   | Employment agreement between Boston Restaurant Associates, Inc. and  George R. Chapdelaine dated April 23, 2004                                                              |   | Filed  herewith |
|   |   |                                                                                                                                                                              |   |                 |
| 14     |   | Code of Ethics                                                                                                                                                                    |   | L-14*                |
|   |   |                                                                                                                                                                              |   |                 |
| 21     |   | Subsidiaries of the Registrant                                                                                                                                                    |   | A-21*                |
|   |   |                                                                                                                                                                              |   |                 |
| 23     |   | Consent of BDO Seidman, LLP                                                                                                                                                       |   | Filed herewith       |
|   |   |                                                                                                                                                                              |   |                 |
| 31.01  |   | Certification of Chief Executive Officer pursuant to Section 302  of the Sarbanes Oxley Act of 2002                                                                          |   | Filed herewith       |
|   |   |                                                                                                                                                                              |   |                 |
| 31.02  |   | Certification of Chief Financial Officer pursuant to Section 302  of the Sarbanes-Oxley Act of 2002                                                                          |   | Filed herewith       |
|   |   |                                                                                                                                                                              |   |                 |
| 32.01  |   | Certifications of Chief Executive Officer and Chief Financial Officer  to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002 |   | 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                                                                                                                                                                                         |

 

41

----

 
| 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 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.                  |

 

42

----

 
| 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.    |
|   |   |                                                                                                                                                                                                       |
| L      |   | Incorporated by reference to the Company’s quarterly report on Form  10-Q for period ended January 25, 2004. The number set forth herein is  the number of the Exhibit in said quarterly report. |

 

(d)                                 FINANCIAL STATEMENT SCHEDULES

 

TheFinancial Statement Schedules required by this item, if any, are listed underItem 14(a)(2).

 

43

----

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

 

**Consolidated Financial Statements**

**Years Ended April 25, 2004 andApril 27, 2003**

 

----

 
| **Report  of Independent Registered Public Accounting Firm** |   |
|--------------------------------------------------------------|--------|
|                                                         |   |
| **Consolidated  financial statements:**                      |   |
|                                                         |   |
| Balance sheets                                               |   |
|                                                         |   |
| Statements of operations                                     |   |
|                                                         |   |
| Statements  of stockholders’ equity (deficit)           |   |
|                                                         |   |
| Statements of cash flows                                     |   |
|                                                         |   |
| Summary of accounting policies                               |   |
|                                                         |   |
| Notes to  consolidated financial statements                  |   |

 

F-1

----

 

**Reportof Independent Registered Public****Accounting Firm**

 

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 25, 2004 and April 27, 2003, and therelated consolidated statements of operations, stockholders’ equity (deficit),and cash flows for each of the three years in the period ended April 25,2004.  These financial statements arethe responsibility 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 the standards of the Public Company Accounting OversightBoard (United States).  Those standardsrequire that we plan and perform the audit to obtain reasonable assurance aboutwhether the 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, the consolidatedfinancial statements referred to above present fairly, in all materialrespects, the financial position of Boston Restaurant Associates, Inc. andsubsidiaries at April 25, 2004 and April 27, 2003, and the results oftheir operations and their cash flows for each of the three years in the periodended April 25, 2004, in conformity with U.S. generally acceptedaccounting principles.

 

The accompanyingconsolidated financial statements have been prepared assuming that the Companywill continue as a going concern.  Asdiscussed in Note 1 to the consolidated financial statements, the Company hassuffered losses from operations and has working capital and stockholderdeficits as of April 25, 2004. These matters raise substantial doubt about its ability to continue as agoing concern.  Management’s plans inregard to these matters are also described in Note 1.  The consolidated financial statements do not include any adjustmentsthat might result from the outcome of this uncertainty.

 

 
|                                       |   | BDO Seidman, LLP |
|--------------------------------------------|--------|------------------|
|                                       |   |             |
|                                       |   |             |
| Boston, Massachusetts                      |   |             |
| July 15, 2004                         |   |             |
| except for Note 1 and  the fifth paragraph |   |             |
| of Note 6 which are as  of                 |   |             |
| August 2, 2004                        |   |             |

 

F-2

----

 

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

 

**Consolidated BalanceSheets**

 
|                                            |   | **April 25,  2004** |       | **April 27,  2003** | ** ** |
|-------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                            |   |                     |       |                     |       |
| **Assets** (Note 6)                             |   |                     |       |                     |       |
|                                            |   |                     |       |                     |       |
| **Current:**                                    |   |                     | ** ** |                     | ** ** |
| Cash  and cash equivalents                      |   | $                        | 651,754    |                     | $          | 1,106,701 |   |
| Accounts  receivable                            |   | 169,975                  |       | 137,123                  |       |
| Inventories  (Note 2)                           |   | 735,910                  |       | 541,030                  |       |
| Prepaid  expenses and other                     |   | 194,303                  |       | 164,610                  |       |
|                                            |   |                     |       |                     |       |
| Total  current assets                           |   | 1,751,942                |       | 1,949,464                |       |
|                                            |   |                     |       |                     |       |
| **Property and equipment**(Notes 10 and 14):    |   |                     |       |                     |       |
| Building                                        |   | 512,500                  |       | 512,500                  |       |
| Leasehold  improvements                         |   | 8,480,782                |       | 6,739,402                |       |
| Equipment,  furniture and fixtures              |   | 5,764,996                |       | 4,509,527                |       |
|                                            |   |                     |       |                     |       |
|                                            |   | 14,758,278               |       | 11,761,429               |       |
|                                            |   |                     |       |                     |       |
| Less  accumulated depreciation and amortization |   | 9,736,890                |       | 6,472,336                |       |
|                                            |   |                     |       |                     |       |
| Net  property and equipment                     |   | 5,021,388                |       | 5,289,093                |       |
|                                            |   |                     |       |                     |       |
| **Other assets,** net (Note 3)                  |   | 513,834                  |       | 581,545                  |       |
|                                            |   |                     |       |                     |       |
| **Goodwill** (Note 4)                           |   | 453,643                  |       | 453,643                  |       |
|                                            |   |                     |       |                     |       |
|                                            |   | $                        | 7,740,807  |                     | $          | 8,273,745 |   |

 

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

 

F-3

----

 
|                                                                                                               |   | **April 25,  2004** |      | **April 27,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------|--------|--------------------------|-----------|--------------------------|------------|
|                                                                                                               |   |                     |      |                     |       |
| **Liabilities and Stockholders’ Equity (Deficit)**                                                            |   |                     |      |                     |       |
|                                                                                                               |   |                     |      |                     |       |
| **Current liabilities:**                                                                                           |   |                     |      |                     |       |
| Accounts  payable                                                                                                  |   | $                        | 1,058,469 |                     | $          | 580,070 |   |
| Accrued  expenses (Note 5)                                                                                         |   | 1,416,765                |      | 1,319,805                |       |
| Current  maturities (Notes 6, 7 and 10):                                                                           |   |                     |      |                     |       |
| Long-term  debt                                                                                                    |   | 3,383,158                |      | 220,835                  |       |
| Notes  payable - stockholder                                                                                       |   | 6,114                    |      | 5,820                    |       |
| Obligations  under capital leases                                                                                  |   | 191,845                  |      | 195,365                  |       |
|                                                                                                               |   |                     |      |                     |       |
| Total  current liabilities                                                                                         |   | 6,056,351                |      | 2,321,895                |       |
|                                                                                                               |   |                     |      |                     |       |
| **Long-term obligations:**                                                                                         |   |                     |      |                     |       |
| Long-term  debt, less current maturities (Note 6)                                                                  |   | —                   |      | 511,671                  |       |
| Notes  payable - stockholder, less current maturities (Note 7)                                                     |   | 88,850                   |      | 94,964                   |       |
| Obligations  under capital leases, less current maturities (Note 10)                                               |   | 61,842                   |      | 253,688                  |       |
| Deferred  rent (Note 10)                                                                                           |   | 501,469                  |      | 396,271                  |       |
| Subordinated  debentures (Notes 8 and 11)                                                                          |   | 1,450,000                |      | 1,450,000                |       |
| Other  long-term liabilities (Note 10)                                                                             |   | 251,016                  |      | 506,698                  |       |
|                                                                                                               |   |                     |      |                     |       |
| Total  liabilities                                                                                                 |   | 8,409,528                |      | 5,535,187                |       |
|                                                                                                               |   |                     |      |                     |       |
| **Commitments and contingencies** (Notes 10  and 11)                                                               |   |                     |      |                     |       |
|                                                                                                               |   |                     |      |                     |       |
| **Stockholders’ equity (deficit)** (Notes 8  and 11):                                                         |   |                     |      |                     |       |
| 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                                                                                        |   | 10,952,635               |      | 10,922,636               |       |
| Accumulated  deficit                                                                                               |   | (11,667,266              | )         | (8,229,988               | )          |
|                                                                                                               |   |                     |      |                     |       |
|                                                                                                               |   | (644,029                 | )         | 2,763,250                |       |
|                                                                                                               |   |                     |      |                     |       |
| Less  treasury stock, 25,000 shares at cost                                                                        |   | (24,692                  | )         | (24,692                  | )          |
|                                                                                                               |   |                     |      |                     |       |
| Total  stockholders’ equity (deficit)                                                                         |   | (668,721                 | )         | 2,738,558                |       |
|                                                                                                               |   | $                        | 7,740,807 |                     | $          | 8,273,745 |   |

 

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

 

F-4

----

 

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

 

**Consolidated Statements of Operations**

 
| **Years ended**                                                                                             |   | **April 25,  2004** | ** ** | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|------------|--------------------------|------------|
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Revenues:**                                                                                               |   |                     |       |                     |       |                     |       |
| Restaurant  sales                                                                                           |   | $                        | 23,273,656 |                     | $          | 22,477,600               |       | $ | 23,827,993 |   |
| Franchise  fees (Note 10)                                                                                   |   | 16,600                   |       | 64,275                   |       | 26,446                   |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| Total  revenues                                                                                             |   | 23,290,256               |       | 22,541,875               |       | 23,854,439               |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Costs and expenses:**                                                                                     |   |                     |       |                     |       |                     |       |
| Cost  of food, beverages and liquor                                                                         |   | 4,847,294                |       | 4,348,095                |       | 4,885,952                |       |
| Other  operating expenses                                                                                   |   | 15,310,776               |       | 13,570,421               |       | 14,293,083               |       |
| General  and administrative                                                                                 |   | 2,738,690                |       | 2,610,666                |       | 2,132,756                |       |
| Depreciation  and amortization                                                                              |   | 1,231,399                |       | 1,056,889                |       | 1,152,860                |       |
| Pre-opening  costs                                                                                          |   | 392,308                  |       | 8,545                    |       | —                   |       |
| Litigation  credits (Note 10)                                                                               |   | (246,228                 | )          | (443,445                 | )          | —                   |       |
| Charge  for asset impairment (Note 14)                                                                      |   | 2,162,584                |       | —                   |       | —                   |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| Total  costs and expenses                                                                                   |   | 26,436,823               |       | 21,151,171               |       | 22,464,651               |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Operating income (loss)**                                                                                 |   | (3,146,567               | )          | 1,390,704                |       | 1,389,788                |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Interest expense,** net of interest income  of $2,890, $2,987 and $0 in 2004, 2003 and 2002, respectively |   | (512,668                 | )          | (407,243                 | )          | (508,072                 | )          |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Other income, net**                                                                                       |   | 221,957                  |       | 9,428                    |       | 9,015                    |       |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Net income (loss)**                                                                                       |   | $                        | (3,437,278 | )                        | $          | 992,889                  |       | $ | 890,731 |   |
|                                                                                                        |   |                     |       |                     |       |                     |       |
| **Net income (loss) per share of common stock**  (Note 13):                                                 |   |                     |       |                     |       |                     |       |
| Basic  and diluted                                                                                          |   | $                        | (.49       | )                        | $          | .14                      |       | $ | .13 |   |

 

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

 

F-5

----

 

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

 

**Consolidated Statements of Stockholders’ Equity(Deficit)**

 
|                                             |   | **Common  Stock  $.01 Par Value** |   | **Additional  Paid-in  Capital** |       | **Accumulated  Deficit** |   | **Treasury  Stock** | ** ** | **Total  Stockholders’  Equity (Deficit)** |        |
|--------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|------------|--------------------------|--------|---------------------|------------|-------------------------------------------------|-------------|
|                                             |   | **Shares**                        |   | **Amount**                       | ** ** |                     |   | **Shares**          | ** ** | **Amount**                                      | ** **  |   |
| **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 |   |
|                                             |   |                              |   |                             |       |                     |   |                |       |                                            |        |   |   |   |   |
| Issuance of warrants in exchange for bank waiver |   | —                            |   | —                           |       | 29,999                   |   | —              |       | —                                          |        | — |   | 29,999 |   |
|                                             |   |                              |   |                             |       |                     |   |                |       |                                            |        |   |   |   |   |
| Net loss for the year                            |   | —                            |   | —                           |       | —                   |   | (3,437,278          | )          | —                                          |        | — |   | (3,437,278 | ) |
|                                             |   |                              |   |                             |       |                     |   |                |       |                                            |        |   |   |   |   |
| **Balance**, April 25, 2004                 |   | 7,060,170                         |   | $                                | 70,062     |                     | $      | 10,952,635          |       | $                                               | (11,667,266 | ) | 25,000 |   | $ | (24,692 | ) | $ | (668,721 | ) |

 

*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 12)**

 
| **Years ended**                                                                           |   | **April 25,  2004** |       | **April 27,  2003** |   | **April 28,  2002** |   |
|-------------------------------------------------------------------------------------------|--------|--------------------------|------------|--------------------------|--------|--------------------------|--------|
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Cash flows from operating activities:**                                                 |   |                     |       |                     |   |                     |   |
| Net  income (loss)                                                                        |   | $                        | (3,437,278 | )                        | $      | 992,889                  |   | $ | 890,731 |   |
| Adjustments  to reconcile net income (loss) to net cash provided by operating activities: |   |                     |       |                     |   |                     |   |
| Depreciation  and amortization                                                            |   | 1,231,399                |       | 1,056,889                |   | 1,152,860                |   |
| Litigation  credits                                                                       |   | (246,228                 | )          | (443,445                 | )      | —                   |   |
| Warrants  granted in exchange for the bank’s waiver                                  |   | 29,999                   |       |                     |   |                     |   |
| Charge  for asset impairment                                                              |   | 2,162,584                |       | —                   |   | —                   |   |
| Changes  in operating assets and liabilities:                                             |   |                     |       |                     |   |                     |   |
| Accounts  receivable                                                                      |   | (32,852                  | )          | (13,283                  | )      | 472                      |   |
| Inventories                                                                               |   | (194,880                 | )          | 5,658                    |   | 32,582                   |   |
| Prepaid  expenses and other                                                               |   | (29,693                  | )          | (46,421                  | )      | (78,924                  | )      |
| Other  assets                                                                             |   | (18,429                  | )          | (59,760                  | )      | (20,024                  | )      |
| Accounts  payable                                                                         |   | 478,399                  |       | (225,649                 | )      | (413,705                 | )      |
| Accrued  expenses                                                                         |   | 96,960                   |       | (120,432                 | )      | (61,507                  | )      |
| Deferred  rent                                                                            |   | 105,198                  |       | 19,446                   |   | 94,466                   |   |
| Other  long-term liabilities                                                              |   | (9,454                   | )          | (27,883                  | )      | 20,026                   |   |
|                                                                                      |   |                     |       |                     |   |                     |   |
| Net  cash provided by operating activities                                                |   | 135,725                  |       | 1,138,009                |   | 1,616,977                |   |
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Cash flows from investing activities:**                                                 |   |                     |       |                     |   |                     |   |
| Capital  expenditures                                                                     |   | (3,040,138               | )          | (402,199                 | )      | (127,739                 | )      |
|                                                                                      |   |                     |       |                     |   |                     |   |
| Net  cash used for investing activities                                                   |   | (3,040,138               | )          | (402,199                 | )      | (127,739                 | )      |
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Cash flows from financing activities:**                                                 |   |                     |       |                     |   |                     |   |
| Repayments  of long-term debt                                                             |   | (384,348                 | )          | (1,064,509               | )      | (536,374                 | )      |
| Repayments  of capital lease obligations                                                  |   | (195,366                 | )          | (364,178                 | )      | (347,846                 | )      |
| Repayments  of stockholder loans                                                          |   | (5,820                   | )          | (5,533                   | )      | (5,260                   | )      |
| Repayments  of subordinated convertible debentures                                        |   | —                   |       | (50,000                  | )      | —                   |   |
| Proceeds  from issuance of long-term debt                                                 |   | 3,035,000                |       | 922,305                  |   | —                   |   |
|                                                                                      |   |                     |       |                     |   |                     |   |
| Net  cash provided by (used for) financing activities                                     |   | 2,449,466                |       | (561,915                 | )      | (889,480                 | )      |
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Net increase (decrease) in cash and cash equivalents**                                  |   | (454,947                 | )          | 173,895                  |   | 599,758                  |   |
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Cash and cash equivalents,** beginning of  year                                         |   | 1,106,701                |       | 932,806                  |   | 333,048                  |   |
|                                                                                      |   |                     |       |                     |   |                     |   |
| **Cash and cash equivalents,** end of year                                                |   | $                        | 651,754    |                     | $      | 1,106,701                |   | $ | 932,806 |   |

 

*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 (see also Note1)**

 

The Company is engaged inthe restaurant business.  As ofApril 25, 2004, the Company operated thirteen pizza restaurants and fivecasual Italian dining restaurants. As of April 27, 2003 and April 28,2002, the Company operated twelve pizza restaurants and four casual Italiandining restaurants.

 

The consolidatedfinancial statements include the accounts of the Company and its majority-ownedsubsidiaries.  All significantintercompany balances and transactions have been eliminated.

 

**Fiscal Year**

 

The Company’s fiscal yearends on the last Sunday in April. Fiscal years 2004, 2003 and 2002 included 52 weeks.

 

**Use of Estimates**

 

The preparation offinancial statements in conformity with generally accepted accountingprinciples requires management to make estimates and assumptions that affectthe reported amounts of assets and liabilities and disclosure of contingentassets and liabilities at the date of the financial statements and reportedamounts of revenues and expenses during the reporting period.  Actual results could differ from thoseestimates.

 

**Cash Equivalents**

 

For purposes of thestatements of cash flows, the Company considers all highly liquid debtinstruments purchased with maturities of three months or less to be cashequivalents.  As of April 25, 2004and April 27, 2003, cash equivalents were not material.

 

**Financial Instruments**

 

The estimated fair valuesof the Company’s financial instruments, which consist of cash and cashequivalents, accounts receivable, accounts payable, accrued expenses, andcertain long-term obligations, approximate their carrying values based on theirmaturity dates and prevailing market interest rates.

 

**Inventories**

 

Inventories are valued atthe lower of cost (first-in, first-out) or market.

 

F-8

----

 

**Property and Equipment**

 

Property and equipmentare stated at cost.  Depreciationis computed using accelerated and straight-line methods over the estimateduseful lives of the assets.  Leaseholdimprovements are amortized over the estimated useful lives of the improvementsor the length of the related lease, including anticipated renewal periods,whichever is shorter.

 

**Other Assets**

 

*Deferred Financing Costs*

 

Costs incurred inconnection with obtaining financing are amortized over the terms of the relateddebt.

 

*Lease Acquisition Rights*

 

Costs incurred inconnection with the purchases of leases are being amortized over the terms ofthe leases.

 

**Goodwill**

 

Goodwill resulting fromthe excess of cost over the fair value of net assets acquired is being testedfor impairment in accordance with the guidelines in SFAS No. 142.

 

**Revenue Recognition**

 

*Restaurant Sales*

 

Substantially allrestaurant sales represent retail sales to the general public throughCompany-owned restaurants.  Such amountsare recognized as revenue at the point of sale.

 

*Franchise Fees*

 

Franchise fees resultingfrom the sale of individual franchise locations are recognized as revenue uponthe commencement of franchise operations. Revenues from the sale of area development rights are recognizedproportionately as the franchised restaurants, subject to the area developmentagreements, commence operations. Franchise royalties, which are based on a percentage of franchisedrestaurants’ sales, are recognized as earned.

 

**Advertising Costs**

 

Advertising costs areexpensed when incurred.  Advertisingexpense amounted to approximately $507,000, $380,000 and $385,000 in 2004, 2003and 2002, respectively.

 

F-9

----

 

**Pre-Opening Costs**

 

All nonrecurring costs,such as recruiting, training pre-opening rent and other initial directadministrative expenses associated with the opening of new restaurantlocations, are expensed as incurred.

 

**Taxes on Income**

 

The Company accounts forincome taxes under the asset and liability method pursuant to Statement ofFinancial Accounting Standards No. 109 (“SFAS No. 109”), “Accountingfor Income Taxes.”  UnderSFAS No. 109, deferred income taxes are recognized for the future taxconsequences attributable to differences between the financial statementcarrying amounts of existing assets and liabilities and their respective taxbasis.  Deferred tax assets andliabilities are measured using enacted tax rates expected to apply to taxableincome in the years in which those temporary differences are expected to berecovered or settled.  The effect of anytax rate change on deferred taxes is recognized in income in the period thatincludes the enactment date of the tax rate change.

 

**Stock Options**

 

The Company accounts forstock options using the intrinsic value method in accordance with AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued toEmployees,” (“APB 25”) and related interpretations.  Accordingly, the Company has recognized no compensation cost forits stock option plans.  The Companyfollows the disclosure provisions of Statement of Financial AccountingStandards No. 123 (“SFAS No. 123”), “Accounting for Stock-BasedCompensation,” which require the disclosure of the effects of fair valueaccounting on earnings and earnings per share of common stock on a pro formabasis.

 

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

 

F-10

----

 

“Interim FinancialReporting,” to require disclosure about those effects in interim financialinformation.  Items (ii) and (iii) ofthe new requirements in SFAS No. 148 are effective for financialstatements for fiscal years ending after December 15, 2002.  The Company adopted items (ii) and (iii) ofSFAS No. 148 for the fiscal year ended April 27, 2003 and continuesto account for stock-based compensation utilizing the intrinsic valuemethod.  Had compensation cost for theCompany’s stock options been determined based upon the fair value at the grantdate for awards under the plans consistent with the methodology prescribedunder SFAS No. 123, the Company’s net income (loss) would have beenadjusted to the pro forma amounts indicated below along with the additionaldisclosures required by SFAS No. 148 are as follows:

 
| **Years ended April**                                                                          |   | **2004** |       | **2003** |   | **2002** |   |
|------------------------------------------------------------------------------------------------|--------|----------|------------|----------|--------|----------|--------|
| Net  income (loss) as reported                                                                 |   | **$**    | (3,437,278 | )        | $      | 992,889  |   | $ | 890,731 |   |
| Add:                                                                                           |   |     |       |     |   |     |   |
| Stock-based  employee compensation expense included in reported net income (loss), net of  tax |   | —   |       | —   |   | —   |   |
| Deduct:                                                                                        |   |     |       |     |   |     |   |
| Total  stock-based compensation expense   determined under fair value based method        |   | 11,429   |       | 53,853   |   | 58,870   |   |
|                                                                                           |   |     |       |     |   |     |   |
| Net  income (loss) - pro forma                                                                 |   | **$**    | (3,448,707 | )        | $      | 939,036  |   | $ | 831,861 |   |
|                                                                                           |   |     |       |     |   |     |   |
| Basic  and diluted earnings per share:                                                         |   |     |       |     |   |     |   |
| As  reported                                                                                   |   | **$**    | (.49       | )        | $      | 0.14     |   | $ | 0.13 |   |
| Pro  forma                                                                                     |   | $        | (.49       | )        | $      | 0.13     |   | $ | 0.12 |   |

 

F-11

----

 

**Net Income (Loss) Per Share of Common Stock**

 

The Company followsStatement of Financial Accounting Standards No. 128 (“SFAS No. 128”),“Earnings per Share.”  Under SFASNo. 128, basic earnings per share excludes the effect of any dilutiveoptions, warrants or convertible securities and is computed by dividing the netincome (loss) available to common shareholders by the weighted average numberof common shares 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 ofcommon shares and common share equivalents computed using the average marketprice for the period under the treasury stock method.

 

**Long-Lived Assets**

 

The Company followsStatement of Financial Accounting Standards No 144 (“SFAS 144”)“Accounting for the Impairment or Disposal of Long-Lived Assets”, whichaddresses financial accounting and reporting for the impairment or disposal oflong-lived assets.  AlthoughSFAS 144 supersedes Statement of Financial Accounting StandardNo. 121 (“SFAS 121”), “Accounting for the Impairment of Long-LivedAssets To Be Disposed Of”, it retains many of the fundamental provisions ofSFAS 121.  SFAS 144 alsosupersedes the accounting and reporting provisions of Accounting PrinciplesBoard Opinion No. 30 (“APB 30”), “Reporting the Results of Operations-Reportingthe Effects of Disposal of a Segment of a Business, and Extraordinary, Unusualand Infrequently Occurring Events and Transactions” for the disposal of asegment of a business.  However, itretains the requirement of ABP 30 to report separately discontinuedoperations and extends that reporting to a component of an entity that eitherhas been disposed of, by sale, abandonment, or in a distribution to owners, oris classified as held for sale.

 

The Company reviews thecarrying values of its long-lived and identifiable intangible assets forpossible impairment whenever events or changes in circumstances indicate thatthe carrying amounts of the assets may not be recoverable.  In fiscal 2004, the Company recorded animpairment charge related to the write-down of certain long-lived assets (seeNote 14).

 

F-12

----

 

**New Accounting Pronouncements**

 

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

 

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

 

F-13

----

 

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

 

**Notes to Consolidated FinancialStatements**

 

**1.  Going Concern**

 

The Company’sconsolidated financial statements have been presented on the basis that it is agoing concern, which contemplates the realization of assets and the satisfactionof liabilities in the normal course of business.  In fiscal 2004 the Company has experienced significant lossesfrom operations and has a net working capital deficit  totaling  $4,304,000 andstockholders' deficit of $668,700 as of April 25, 2004. As furtherexplained, the Company is exploring raising additional capital.  As of April 25, 2004 the Company wasnot in compliance with certain financial covenants of the Credit Facility withCommerce Bank and Trust Company. However the bank waived the covenants for fiscal year endedApril 25, 2004 in exchange for a 1% waiver fee, a modification on theinterest rate on all outstanding notes issued under the Credit Agreement from6% to 7% per annum until the first quarter in that the Company is once again incompliance with all financial covenants and a grant to the bank of a six yearwarrant to purchase 76,000 shares of the Company’s common stock at a price of$.50 per share.  In addition the bankhas established new financial covenants for fiscal year 2005. InAugust 2004, in exchange for the establishment of new financial covenantsfor fiscal year 2005, the bank waived the covenants for the first quarter offiscal year 2005.  Because of theCompany’s uncertainty regarding its ability to satisfy these covenants, allbank debt has been reclassified as current on the balance sheet for year endedApril 25, 2004.  If the Companyfails to comply with these covenants, the bank debt would be due on demand. The Company may be forced to restructure its operations byselling, closing, or sublease the Polcari’s restaurant in Cambridge,Massachusetts.

 

In August 2004, theCompany completed a $400,000 bridge financing, provided bythe spouse of adirector, to fund its capital improvements. This financing is in the form of a note due in August of 2005 andbears interest at 14% payable every two months in arrears.  In addition, the Company issued a warrant topurchase 50,000 shares of the Company’s common stock with an exercise price of$.70 per share exercisable over a five year period.

 

**2.****                                      Inventories**

 

Inventories consist ofthe following:

 
|                         |   | **April 25,  2004** |    | **April 27,  2003** | ** ** |
|------------------------------|--------|--------------------------|---------|--------------------------|------------|
|                         |   |                     |    |                     |       |
| Food,  beverages, and liquor |   | $                        | 323,268 |                     | $          | 198,599 |   |
| Paper goods and supplies     |   | 412,642                  |    | 342,431                  |       |
|                         |   |                     |    |                     |       |
| Total                        |   | $                        | 735,910 |                     | $          | 541,030 |   |

 

F-14

----

 

**3.****                                      OtherAssets**

 

Other assets consist ofthe following:

 
|                           |   | **April 25,  2004** |    | **April 27,  2003** | ** ** |
|--------------------------------|--------|--------------------------|---------|--------------------------|------------|
|                           |   |                     |    |                     |       |
| Deposits  and other            |   | $                        | 297,926 |                     | $          | 276,165 |   |
| Lease  acquisition rights      |   | 290,700                  |    | 290,700                  |       |
| Deferred  financing costs      |   | 346,882                  |    | 342,198                  |       |
|                           |   |                     |    |                     |       |
|                           |   | 935,508                  |    | 909,063                  |       |
|                           |   |                     |    |                     |       |
| Less  accumulated amortization |   | 421,674                  |    | 327,518                  |       |
|                           |   |                     |    |                     |       |
| Other  assets, net             |   | $                        | 513,834 |                     | $          | 581,545 |   |

 

**4.****                                      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 ofaccounting and prohibits the use of the pooling-of-interest method ofaccounting for business combinations initiated after June 30, 2001.  SFAS 141 also requires that the Companyrecognize acquired intangible assets apart from goodwill if the acquiredintangible assets meet certain criteria. SFAS 141 applies to all business combinations initiated afterJune 30, 2001 and for purchase business combinations completed on or afterJuly 1, 2001.  It also requires,upon adoption of SFAS 142, that the Company reclassify the carryingamounts of intangible assets and goodwill based on the criteria in SFAS 141.

 

SFAS 142 requires, amongother things, that companies no longer amortize goodwill, but test goodwill forimpairment at least annually.  Inaddition, SFAS 142, requires that the Company identify reporting units forthe purpose of assessing potential future impairments of goodwill, reassess theuseful lives of other existing recognized intangible assets, and ceaseamortization of intangible assets with an indefinite useful life.  An intangible asset with an indefiniteuseful life should be tested for impairment in accordance with the guidelinesin SFAS 142.  SFAS 142 isrequired to be applied to all goodwill and other intangible assets regardlessof when those assets were initially recognized.

 

As of April 29,2002, the Company’s goodwill of $453,643 was associated with the acquisition ofCapucino’s, Inc. in 1994.   Noadjustment to the $453,643 balance of goodwill was deemed necessary throughApril 25, 2004.

 

F-15

----

 

The effect on reportednet income (loss) due to the discontinuance of goodwill amortization is asfollows:

 
|                                                                             |   | **2004** |             | **2003** |    | **2002** |   |
|----------------------------------------------------------------------------------|--------|----------|------------------|----------|---------|----------|--------|
|                                                                             |   |     |             |     |    |     |   |
| Reported  net income (loss)                                                      |   | $        | (3,437,278       | )        | 992,889 |     | $      | 890,731 |   |
| Goodwill  amortization                                                           |   | —   |             | —   |    | 37,806   |   |
|                                                                             |   |     |             |     |    |     |   |
| Adjusted  net income (loss) after discontinuance of goodwill amortization        |   | $        | (3,437,278  | )        | $       | 992,889  |   | $ | 928,537 |   |
|                                                                             |   |     |             |     |    |     |   |
| Basic  earnings (loss) per share as                                              |   | $        | (.49             | )        | $       | .14      |   | $ | .13 |   |
| reported  Goodwill amortization                                                  |   | —   |             | —   |    | —   |   |
|                                                                             |   |     |             |     |    |     |   |
| Basic  earnings (loss) per share after discontinuance of goodwill amortization   |   | $        | (.49             | )        | $       | .14      |   | $ | .13 |   |
|                                                                             |   |     |             |     |    |     |   |
| Diluted  earnings (loss) per share as reported                                   |   | $        | (.49             | )        | $       | .14      |   | $ | .13 |   |
| Goodwill  amortization                                                           |   | —   |             | —   |    | —   |   |
|                                                                             |   |     |             |     |    |     |   |
| Diluted  earnings (loss) per share after discontinuance of goodwill amortization |   | $        | (.49             | )        | $       | .14      |   | $ | .13 |   |

 

**5.****                                      AccruedExpenses**

 

Accrued expenses consistof the following:

 
|                          |   | **April 25,  2004** |      | **April 27,  2003** | ** ** |
|-------------------------------|--------|--------------------------|-----------|--------------------------|------------|
|                          |   |                     |      |                     |       |
| Professional  fees            |   | $                        | 187,935   |                     | $          | 195,250 |   |
| Compensation                  |   | 663,299                  |      | 568,241                  |       |
| Interest                      |   | 150,421                  |      | 153,712                  |       |
| Accrued rent                  |   | 24,992                   |      | 45,266                   |       |
| Gift certificates             |   | 158,638                  |      | 171,759                  |       |
| Other                         |   | 139,675                  |      | 96,156                   |       |
| Taxes other than income taxes |   | 91,805                   |      | 89,421                   |       |
|                          |   |                     |      |                     |       |
| Total                         |   | $                        | 1,416,765 |                     | $          | 1,319,805 |   |

 

F-16

----

 

**6.****                                      RevolvingCredit Facility and Long-Term Debt**

 

On April 30, 2002,the Company entered into a $3,500,000 credit facility with Commerce Bank andTrust Company.  The credit facilitypermits the Company to borrow amounts to pay the costs for new restaurantopenings and repay over a fixed term of either four or five years.  No new borrowings may be made under thecredit facility after April 30, 2005. Each borrowing under the credit facility bears interest at the bank’sbase rate plus 1.75% until the conversion date, subject to an annual adjustmentto the bank’s then current base rate plus 2.0%.

 

The Company borrowed$922,000, under the facility on April 30, 2002 to pay off the term notesunder the prior bank facility.  The notefor that borrowing bore interest at 6.75% for the first year throughApril 27, 2003, was adjusted to 6.25% after the annual adjustment onApril 30, 2003.  It was furtheradjusted to 7.25% on February 13, 2004 and 7.00% after the annualadjustment on April 30, 2004.

 

During the first quarterof fiscal 2004 the Company borrowed $2,500,000 under the facility for thecapital expenses associated with the construction of Polcari’s North End inCambridge, Massachusetts, at an interest rate of 6% adjusted to 7% inFebruary 13, 2004.

 

On February 13, 2004the Company borrowed $535,000 for further expansion at in an interest rate of5.75% adjusted to 6.75% in February 13, 2004.  The note is payable in monthly installments over four years.

 

At April 25, 2004,the amount available for borrowing under the credit facility was $117,000.  All borrowings under the credit facility arecollateralized by substantially all of the assets of the Company and aresubject to various financial covenants.   As of April 25, 2004 the Company was not in compliance with certainfinancial covenants of the Credit Facility. However, on February 13, 2004the Company entered into an agreement with the bank under which Commerce Bankand Trust Company waived the covenants for year ended April 25, 2004 inexchange for a 1% waiver fee, a modification of the interest rate on alloutstanding notes issued under the Credit Agreement from the current 6% to 7%per annum until the first quarter in which the Company is once again incompliance with all financial covenants, and the grant to the bank of warrantsto purchase 76,000 shares of the Company’s common stock at a price of $.50 pershare with a life of six year.  Thewarrants are not exercisable for a period of one year from date of grant.  The warrants had a fair value of $30,000based on the Black Scholes pricing model and they were recorded in interestexpense in the consolidated statement of operations in fiscal 2004. (see note11).  In August 2004, in exchangefor the establishment of new financial covenants for fiscal year 2005, the bankwaived the covenants for the first quarter of fiscal year 2005.  Because of the Company’s uncertaintyregarding its ability to satisfy these covenants, all bank debt has beenreclassified as current on the balance sheet for year ended April 25,2004. If the Company fails to comply with these covenants, the bank debt would be due on demand.

 

F-17

----

 

*Long-Term Debt*

 

Long-term debt consistsof the following:

 
|                                                                                                                                                                                                                                                                                                                                                                 |   | **April 25,  2004** |    | **April 27,  2003** |    |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|--------------------------|---------|
| Notes  payable to a bank bearing interest at 7.25% (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 $22,108 through April 2006.                                                                            |   | **$**                    | 509,471 |                     | $       | 732,506 |   |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                     |    |                     |    |
| Notes  payable to a bank bearing interest at 7.00%, (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 $54,187 through June 2008                                                                              |   | 2,338,687                |    | —                   |    |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                     |    |                     |    |
| Notes  payable to a bank bearing interest at 6.75% (subject to adjustment at the  conversion date of the note to the bank’s base rate plus 2%) representing  borrowings against the Company’s revolving credit facility, payable of  interest only payments until August 13, 2004 and then in monthly  installments of $10,767 through February, 2009 |   | $                        | 535,000 |                     | —  |   |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                     |    |                     |    |
| Total                                                                                                                                                                                                                                                                                                                                                                |   | 3,383,158                |    | 732,506                  |    |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                     |    |                     |    |
| Less  current maturities                                                                                                                                                                                                                                                                                                                                             |   | 3,383,158                |    | 220,835                  |    |
|                                                                                                                                                                                                                                                                                                                                                                 |   |                     |    |                     |    |
| Long-term  debt                                                                                                                                                                                                                                                                                                                                                      |   | —                   |    | $                        | 511,671 |   |

 

F-18

----

 

 

Maturities of long-termdebt are as follows:

 
| **Fiscal year ending** |   | **Amount** |      |
|------------------------|--------|------------|-----------|
|                   |   |       |      |
| 2005                   |   | $          | 3,383,158 |   |
| 2006                   |   | —     |      |
| 2007                   |   | —     |      |
| 2008                   |   | —     |      |
| 2009                   |   | —     |      |
| Thereafter             |   |       |      |
|                   |   |       |      |
| Total                  |   | $          | 3,383,158 |   |

 

**7.****                                      NotesPayable - Stockholder**

 

Notes payable -stockholder consists of two notes, with an aggregate principal amount of$94,964 and interest at 7.18% and 8%, payable in aggregate monthly installmentsof principal and interest of $810, maturing January 2017.  Maturities of notes payable - stockholderare as follows:

 
| **Fiscal year ending** |   | **Amount** |   |
|------------------------|--------|------------|--------|
| 2005                   |   | $          | 6,114  |   |
| 2006                   |   | 6,419      |   |
| 2007                   |   | 6,736      |   |
| 2008                   |   | 7,049      |   |
| 2009                   |   | 7,391      |   |
| Thereafter             |   | 61,255     |   |
|                   |   |       |   |
| Total                  |   | $          | 94,964 |   |

 

F-19

----

 

**8.****                                      SubordinatedDebentures**

 

Subordinated debentureswith an outstanding balance of $1,450,000 at April 25, 2004 andApril 27, 2003 consist of convertible debentures bearing interest atvariable rates of 8% through December 31, 1997, 10% throughDecember 31, 1998, 12% through December 31, 1999 and 14% throughDecember 31, 2011, payable semi-annually and convertible into theCompany’s common stock at a conversion rate of $1.25 per share.  The Company has recorded interest costsrelated to these debentures at a straight-lined rate of 13.2%.  The convertible debentures are convertibleat the option of the holder, at any time, and automatically convert into sharesof common stock at the conversion rate if the average bid price of theCompany’s common stock for any sixty consecutive trading days is equal to orgreater than $3.00.  The debentures aredue on December 31, 2011.

 

**9.****                                      Taxeson Income (Loss)**

 

At April 25, 2004,the Company has the following net operating loss carryforwards, subject toreview by the Internal Revenue Service, available to offset future federaltaxable income:

 
|                                                                                                                    |   | **Amount** |      | **Expiration  Dates** | ** **  |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------|-----------|-----------------------|-------------|
|                                                                                                                    |   |       |      |                  |        |
| Net  operating losses purchased in a 1994 acquisition, whose use is limited.                                            |   | $          | 911,650   |                  | 2005 - 2009 |   |
|                                                                                                                    |   |       |      |                  |        |
| Net  operating losses incurred before and after acquisition and available for  immediate offset against taxable income. |   | $          | 3,096,000 |                  | 2008 - 2024 |   |

 

F-20

----

 

Deferred tax assets arecomprised of the following:

 
|                              |   | **April 25,  2004** |      | **April 27,  2003** | ** ** |
|-----------------------------------|--------|--------------------------|-----------|--------------------------|------------|
|                              |   |                     |      |                     |       |
| Deferred  tax assets:             |   |                     |      |                     |       |
| Net  operating loss carryforwards |   | $                        | 1,603,000 |                     | $          | 1,895,000 |   |
| Fixed  assets                     |   | 1,780,000                |      | 791,000                  |       |
| Pre-opening  costs                |   | 238,000                  |      | 172,000                  |       |
| Accruals  and other reserves      |   | 117,000                  |      | 223,000                  |       |
| Valuation  allowance              |   | (3,738,000               | )         | (3,081,000               | )          |
|                              |   |                     |      |                     |       |
| Net  deferred tax assets          |   | $                        | —    |                     | $          | — |   |

 

The Company has provideda valuation allowance equal to 100% of its total deferred tax assets inrecognition of the uncertainty regarding the ultimate amount of the deferredtax assets that will be realized. Pre-opening costs have been capitalized and amortized over a five yearperiod for tax purposes.

 

A reconciliation of thestatutory federal income tax rate and the effective tax rate as a percentage ofincome (loss) before taxes on income (loss) is as follows:

 
|                          |   | **April 25,  2004** |   | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|-------------------------------|--------|--------------------------|--------|--------------------------|------------|--------------------------|------------|
|                          |   |                     |   |                     |       |                     |       |
| Statutory  rate               |   | (34.0                    | )%     | 34.0                     | %          | 34.0                     | %          |
|                          |   |                     |   |                     |       |                     |       |
| Change in valuation allowance |   | 34.0                     |   | (34.0                    | )          | (34.0                    | )          |
|                          |   |                     |   |                     |       |                     |       |
| Effective tax rate            |   | —                   | %      | —                   | %          | —                   | %          |

 

F-21

----

 

**10.****                               Commitmentsand Contingencies**

 

*Leases*

 

The Company is obligatedunder 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 ofreal estate taxes, insurance, common area, and other operating costs inaddition to annual base rent. Substantially all restaurant leases provide for contingent rent based onsales in excess of specified amounts. The Company also leases equipment under capital leases.

 

The following is ananalysis of equipment held under capital leases, included in property andequipment in the accompanying consolidated balance sheets:

 
|                                     |   | **April 25,  2004** |      | **April 27,  2003** | ** ** |
|------------------------------------------|--------|--------------------------|-----------|--------------------------|------------|
|                                     |   |                     |      |                     |       |
| Equipment                                |   | $                        | 1,739,896 |                     | $          | 1,739,896 |   |
| Less accumulated amortization            |   | 1,266,454                |      | 1,017,897                |       |
|                                     |   |                     |      |                     |       |
| Net leased property under capital leases |   | $                        | 473,442   |                     | $          | 721,999 |   |

 

F-22

----

 

 

Aggregate minimum rentalrequirements under capital leases and operating leases as of April 25,2004, are approximately as follows:

 
| **Fiscal year ending**                       |   | **Capital  Leases** | ** ** | **Operating  Leases** | ** ** |
|----------------------------------------------|--------|---------------------|------------|-----------------------|------------|
|                                         |   |                |       |                  |       |
| 2005                                         |   | $                   | 214,702    |                  | $          | 3,437,000 |   |
| 2006                                         |   | 63,457              |       | 3,207,000             |       |
| 2007                                         |   | —              |       | 2,712,000             |       |
| 2008                                         |   | —              |       | 2,417,000             |       |
| 2009                                         |   | —              |       | 2,247,000             |       |
| Thereafter                                   |   | —              |       | 5,069,000             |       |
|                                         |   |                |       |                  |       |
| Total  minimum lease payments                |   | 278,159             |       | $                     | 19,089,000 |   |
|                                         |   |                |       |                  |       |
| Amount  representing interest                |   | (24,472             | )          |                  |       |
|                                         |   |                |       |                  |       |
| Present  value of net minimum lease payments |   | 253,687             |       |                  |       |
|                                         |   |                |       |                  |       |
| Less  current maturities                     |   | 191,845             |       |                  |       |
|                                         |   |                |       |                  |       |
| Long-term  maturities                        |   | $                   | 61,842     |                  |       |   |

 

Deferred rent liabilitiesof $ 501,469 and $396,271 as of April 25, 2004 and April 27, 2003,respectively, were recorded in order to recognize lease escalation provisionson a straight-line basis for certain operating leases.

 

Rent expense under alloperating leases amounted to approximately $3,015,000, $2,810,000 and$2,790,000 during fiscal 2004, 2003 and 2002, respectively, which includedcontingent rent of approximately $60,000, $69,000 and $95,000, respectively.

 

F-23

----

 

*Franchising*

 

In December 1997,the Company formed Boston Restaurant Associates International, Inc. (“BRAII”),a wholly-owned subsidiary, for the purpose of offering Pizzeria Regina andPolcari’s franchise opportunities both domestically and internationally.  During fiscal 2004, the Company recognizedapproximately $17,000 in royalties. During fiscal 2003, the Company recognizedapproximately $64,000 in franchise fee revenues, $50,000 related to territoryfees and $14,000 related to royalties. During fiscal 2002, the Company recognized approximately $26,000 infranchise fee revenues, $20,000 relating to the opening of a domestic PizzeriaRegina franchise and approximately $6,000 related to royalties.

 

*International Development Agreement*

 

In January 1998, theCompany entered into an International Development Agreement (“DevelopmentAgreement”) with Regina International, Ltd (“Regina International”), acorporation controlled by a then Company director, to pursue and developfranchise territories outside the Americas, anticipated to be principally inEurope, the Far East, and the Pacific Rim.

 

The DevelopmentAgreement, which was for an initial term of five and a half years, required theCompany to pay a monthly development fee of $7,000 beginning the month afterthe first territory fee had been received and for sixty months, provided theDevelopment Agreement had not been earlier terminated.  Pursuant to this agreement, a Polcari’sNorth End Restaurant opened in Saudi Arabia in September 2000.  The Development Agreement was terminatedduring fiscal 2001 due to the relocation of Regina International’s ChiefExecutive Officer.  For fiscal 2004,2003, and 2002 no development fees or royalties had been earned.

 

F-24

----

 

*Joint Venture and Development Agreements*

 

In December 1998,the Company formed a joint venture with Italian Ventures, LLC (“ItalianVentures”), a Kentucky corporation controlled by two then Company directors,and entered into a Development Agreement (the “Agreement”) for the purpose ofdeveloping domestic casual Italian dining restaurants.  The Company had a 51% equity interest in thejoint venture entity, Regina Ventures, LLC (“Regina Ventures”).

 

The relationship fellapart 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 becameinvolved in legal proceedings with Italian Ventures, LLC.  On May 10, 2001 the parties entered intoa settlement agreement resolving their disputes.  As part of the settlement, the Company and Italian Venturesterminated the development agreement and operating agreement among the partiesand also terminated the lawsuit and arbitration proceeding between them.

 

Under the terms of thesettlement agreement, commencing with the month of May 2001 and ending with themonth of April 2008, Italian Ventures shall be entitled to receive fromthe Company, in exchange for any and all ownership interest held by ItalianVentures, a royalty equal to seven tenths of one percent (0.7%) of the monthlygross sales of each Polcari’s Bistro restaurant (as specifically definedtherein); provided, however, that Italian Ventures shall not be entitled toreceive any additional royalties from the Company once the total of allroyalties paid to Italian Ventures by the Company on a cumulative basis duringthe seven year period equals $1,700,000. The settlement payments do not reflect any transfer of rights fromItalian Ventures to the Company nor did the Company derive or receive anyon-going benefit to its operations as a result of the settlement.  The Company determined that a loss had beenincurred in settlement of litigation.

 

F-25

----

 

Accordingly, the Companyrecorded a non-recurring charge of approximately $955,000 in the fourth quarterof fiscal 2001.  The correspondingsettlement liability was recorded on the Company’s balance sheet for $955,000at April 29, 2001.  The settlementliability represented the Company’s best estimate of the total royalty paymentsexpected to be made during the seven year settlement period.  This estimate was based on 0.7% of theprojected sales of current and future Polcari’s Bistro Restaurants ofapproximately $1,250,000 discounted to reflect the present value of $955,000.

 

During fiscal 2004, theCompany made royalty payments of approximately $48,000 and recorded interestexpense of approximately $28,000 related to the amortization of the discount topresent value.  In the fourth quarter offiscal 2004, the Company reviewed the estimate of future royalties based uponchanges in anticipated future growth of existing Bistro unit sales and futureBistro unit openings and closings.  As aresult, the accrual related to the settlement liability was reduced byapproximately $246,000 to reflect the Company’s revised estimate of itsremaining obligation under the settlement agreement with Italian Ventures.  This change in estimate took into accountrecent events (see Note 1) which resulted in the Company’s revised estimate offuture bistro openings as well as the expected performance of existingunits.  The $246,000 reduction in the settlementliability is recorded as income in the consolidated statements of operationsfor fiscal 2004.  During fiscal 2003,the Company made royalty payments of approximately $62,000 and recordedinterest expense of $59,000 related to the amortization of the discount topresent value.   The Company alsoreduced the settlement reserve by approximately $443,000 based on a revisedexpansion plan which is recorded in the consolidated statement of operations infiscal 2003.  During fiscal 2002, theCompany made royalty payments of approximately $42,000 and recorded interestexpense of $57,000 related to the amortization of the discount to presentvalue.  The liability outstanding as ofApril 25, 2004 was $258,000 of which $198,000 was recorded in other long-termliabilities.

 

*LegalMatters*

 

A Charge ofDiscrimination was filed on June 15, 2004 by certain of the Company’spersonnel, known as complainants, with the Massachusetts Commission AgainstDiscrimination and with the Equal Employment Opportunity Commission.  The Charge was filed against the Company anda Company employee.  The Charge allegesthat the Company and the employee discriminated against the complainants on thebasis of sex.  The Charge furtheralleges that the Company failed to investigate complaints of discriminationmade by the complainants.  The Charge ofDiscrimination does not specify the relief sought.  The Company strongly believes that the Charge lacks merit, andthe Company intends to defend against the claims vigorously.  However, the Company could incur substantialcosts defending the Charge.  Moreover,although the

 

F-26

----

 

Company has established areserve of $35,000 for legal costs, the amount of that reserve may beinadequate.  The Charge could alsodivert the time and attention of the Company’s management or cause theCompany’s business to decline due to adverse publicity.  The Company cannot predict the outcome ofthe Charge at this time, and there can be no assurance that the litigation willnot have a material adverse impact on its financial condition or results ofoperation.

 

From time to time theCompany has been, and expects to continue to be, subject to legal proceedingsand claims in the ordinary course of its business.  Such claims, even if not meritorious, could result in theexpenditure of significant financial and managerial resources.

 

**11.****                               Stockholders’Equity (Deficit)**

 

*Preferred Stock*

 

In September 1998,the Company’s stockholders authorized the Company to issue up to 10,000,000shares 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 bedetermined by the Board of Directors on the dates of the issuances and mayinclude provisions for voting rights, preferences, conversion and redemptionrights, and other limitations or restrictions.

 

*Stock Options and Warrants*

 

In September 2002,the Company’s stockholders approved the 2002 Combination Stock Option and ShareAward Plan.

 

The 2002 Combination Planprovides for the granting of incentive stock options intended to qualify underthe requirements of the Internal Revenue Code and options not qualified asincentive stock options.  Incentivestock options may only be granted to employees of the Company.  Non-employees contributing to the success ofthe Company are eligible to receive non-qualified stock options.  The 2002 Combination Plan is to beadministered by a committee designated by the Board of Directors.  Options under the 2002 Combination Plan maynot be granted after September 19, 2012 and the exercise price shall be atleast equal to the fair market value of the common stock at the grant date.

 

Incentive stock optionsmay be granted to holders of more than 10% of the Company’s common stock at anexercise price of at least 110% of the fair market value of the Company’scommon stock at the grant date.  Theterms of the options granted are to be determined by the committee, but in noevent shall the term of any incentive stock option extend beyond three monthsafter the time a participant ceases to be an employee of the Company.  No options may be exercised more than fiveyears after the date of the grant for 10% stockholders, or ten years after thedate of grant for all other participants. A total of 500,000 shares of common stock have been reserved forissuance under the 2002 Combination Plan of which, 440,000 are available forfuture grants.

 

F-27

----

 

Changes in optionsoutstanding under the 2002 Plan, options issued in connection with the guaranteesof certain leases and debt by the Company’s President and Treasurer, andoptions issued under prior plans are summarized as follows:

 
|                              |   | **Shares** |   | **Weighted-  Average  Exercise  Price** | ** ** |
|-----------------------------------|--------|------------|--------|-----------------------------------------|------------|
|                              |   |       |   |                                    |       |
| **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                                    |       |
| Granted                           |   | 100,000    |   | 0.70                                    |       |
| Expired                           |   | —     |   | —                                  |       |
|                              |   |       |   |                                    |       |
| **Balance**,  April 25, 2004 |   | 873,800    |   | $                                       | 0 .96      |   |

 

As of April 25,2004, options for 773,800 shares were exercisable at prices ranging from $.62to $2.38.

 

F-28

----

 

The following tablessummarizes stock options outstanding and exercisable at April 25, 2004:

 

 
|                           |   | **Options  Outstanding** |       |
|--------------------------------|--------|--------------------------|------------|
| **Range of  Exercise  Prices** |   | **Number  Outstanding**  | ** ** | **Weighted-  Average  Remaining  Contractual  Life (years)** |   | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.62- $1.17                   |   | 798,800                  |       | 5.6 |   | $ | 0 .90 |   |
| 1.24-  1.56               |   | 40,000                   |       | 3.4 |   | 1.32 |   |
| 1.88- 2.38                     |   | 35,000                   |       | 3.0 |   | 1.95 |   |
|                           |   |                     |       |   |   |   |   |
| $0.62- $2.38                   |   | 873,800                  |       | 5.4 |   | $ | 0 .96 |   |

 
|                           |   | **Options  Exercisable** | ** ** |
|--------------------------------|--------|--------------------------|------------|
| **Range of  Exercise  Prices** |   | **Number  Exercisable**  | ** ** | **Weighted-  Average  Exercise  Price** | ** ** |
| $0.62- $1.17                   |   | 698,880                  |       | $ | 0 .93 |   |
| 1.24-  1.56               |   | 40,000                   |       | 1.32 |   |
| 1.88- 2.38                     |   | 35,000                   |       | 1.95 |   |
|                           |   |                     |       |   |   |
| $0.62 - $2.38                  |   | 773,800                  |       | $ | 1.00 |   |

 

In determining the proforma amounts, the Company estimated the fair value of each option grantedusing the Black-Scholes option pricing model with the followingweighted-average assumptions:

 

 

 
|                           |   | **April 25,  2004** |   | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|--------------------------------|--------|--------------------------|--------|--------------------------|------------|--------------------------|------------|
|                           |   |                     |   |                     |       |                     |       |
| Risk  free interest rate       |   | 1.0                      | %      | 4.0                      | %          | 4.6 – 5.4           | %          |
| Expected  dividend yield       |   | —                   |   | —                   |       | —                   |       |
| Expected  lives                |   | 10.0 years               |   | 9.6 years                |       | 9.2 years                |       |
| Expected  volatility           |   | 75                       | %      | 75                       | %          | 75                       | %          |
| Fair  value of options granted |   | $                        | 0.54   |                     | $          | 0.50                     |       | $ | 0.59 |   |
|                                |        |                          |        |                          |            |                          |            |  |  |  |

 

F-29

----

 

At April 25, 2004,warrants outstanding, consist of warrants to purchase 350,000 and 150,000shares of common stock at an exercise price of $3.00 per share, expiringDecember 31, 2006 and January 25, 2008, respectively, granted inconsideration for brokerage services related to the issuance of convertiblesubordinated debentures and warrants to purchase 76,000 shares of common stockat an exercise price of  $.50 per share,expiring February 13, 2010, granted in consideration of covenant waiverfees by Commerce Bank & Trust Company. All warrants are exercisable except 76,000 issued in fiscal 2004.

 

The convertible subordinateddebentures with an outstanding balance of $1,450,000 as of April 25, 2004are convertible into common shares at $1.25 per share.  Accordingly, 1,160,000 shares have beenreserved for conversion of the subordinated debentures.

 

At April 25, 2004,2,609,800 shares of common stock were reserved with respect to outstandingoptions, warrants and convertible debentures.

 

During fiscal 2004 nowarrants expired and warrants to purchase 76,000 shares of common stock at anexercise price of $0.50 per share expiring February 12, 2011 were grantedin consideration of covenant waiver fees by Commerce Bank and TrustCompany.  These warrants were valuedusing the Black-Scholes option pricing model which resulted in a fair value ofapproximately $30,000 recorded in interest expense in the consolidatedstatement of operations for fiscal 2004.

 

During fiscal 2003 andfiscal 2002, there were no warrants issued and no warrants expired.

 

F-30

----

 

**12.****                               SupplementalCash Flow Information**

 

Cash paid for interestand income taxes as is as follows:

 
|         |   | **April 25,  2004** |    | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|--------------|--------|--------------------------|---------|--------------------------|------------|--------------------------|------------|
|         |   |                     |    |                     |       |                     |       |
| Interest     |   | $                        | 453,957 |                     | $          | 361,340                  |       | $ | 462,970 |   |
| Income taxes |   | $                        | —  |                     | $          | —                   |       | $ | — |   |

 

Noncash investing andfinancing activities are as follows:

 
|                                    |   | **April 25,  2004** |   | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|-----------------------------------------|--------|--------------------------|--------|--------------------------|------------|--------------------------|------------|
|                                    |   |                     |   |                     |       |                     |       |
| Warrants  issued in exchange for waiver |   | $                        | 29,999 |                     | $          | —                   |       | $ | — |   |
|                                         |        |                          |        |                          |            |                          |            |  |  |  |

 

F-31

----

 

**13.****                               NetIncome (Loss) Per Share of Common Stock**

 

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

 
|                            |   | **April 25,  2004** |   | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|---------------------------------|--------|--------------------------|--------|--------------------------|------------|--------------------------|------------|
|                            |   |                     |   |                     |       |                     |       |
| Basic  shares                   |   | 7,035,170                |   | 7,035,170                |       | 7,035,170                |       |
|                            |   |                     |   |                     |       |                     |       |
| Effect  of dilutive securities: |   |                     |   |                     |       |                     |       |
| Warrants                        |   | -0-                      |   | 5,784                    |       | 3,206                    |       |
|                            |   |                     |   |                     |       |                     |       |
| Diluted  shares                 |   | 7,035,170                |   | 7,040,954                |       | 7,038,376                |       |

 

The following tablesummarizes securities that were outstanding as of April 25, 2004,April 27, 2003 and April 28, 2002, but not included in thecalculations of net income (loss) per share because such securities areantidilutive:

 
|                    |   | **April 25,  2004** |   | **April 27,  2003** | ** ** | **April 28,  2002** | ** ** |
|-------------------------|--------|--------------------------|--------|--------------------------|------------|--------------------------|------------|
|                    |   |                     |   |                     |       |                     |       |
| Options                 |   | 873,800                  |   | 653,800                  |       | 802,146                  |       |
| Warrants                |   | 576,000                  |   | 500,000                  |       | 500,000                  |       |
| Convertible  debentures |   | 1,160,000                |   | 1,160,000                |       | 1,200,000                |       |

 

**14.****                               AssetImpairment Charge**

 

The Company recorded animpairment charge in the fourth quarter of fiscal 2004 which is included in theconsolidated statements of operations related to the write-down of certainlong-lived assets.  The Company reviewedthe carrying value of its long-lived assets and noted that the expected futurecash flows for Polcari’s in Cambridge, Massachusetts was  not sufficient to recover the recordedcarrying value of long-lived assets at this location.  Accordingly, the Company recognized an impairment charge toreduce the carrying value of leasehold improvements to zero and restaurant equipmentto the fair market value based on the estimated residual value of the equipmentwhich was determined to be $81,714.

 

F-32

----

 

**15.****                               QuarterlyFinancial Data (Unaudited)**

 

The following table setsforth selected quarterly financial data for fiscal 2004 and 2003:

 
| **Year ended April 25, 2004** |   | **1st  Quarter** |      | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |      |
|------------------------------------|--------|------------------|-----------|------------------|--------|------------------|--------|------------------|-----------|
|                               |   |             |      |             |   |             |   |             |      |
| Revenues                           |   | $                | 5,271,000 |             | $      | 5,838,000        |   | $                | 6,182,000 |   | $ | 5,999,000 |   |
| Operating  loss                    |   | (279,000         | )         | (185,000         | )      | (25,000          | )      | (2,658,000       | )         |
| Net  loss                          |   | (157,000         | )         | (295,000         | )      | (139,000         | )      | (2,846,000       | )         |
| Basic  loss  per share        |   | (.02             | )         | (.04             | )      | (.02             | )      | (.41             | )         |
| Diluted  loss  per share      |   | (.02             | )         | (.04             | )      | (.02             | )      | (.41             | )         |
|                                    |        |                  |           |                  |        |                  |        |                  |           |  |  |  |  |

 
| **Year ended April 27, 2004** |   | **1st  Quarter** |      | **2nd  Quarter** |   | **3rd  Quarter** |   | **4th  Quarter** |     |
|------------------------------------|--------|------------------|-----------|------------------|--------|------------------|--------|------------------|----------|
|                               |   |             |      |             |   |             |   |             |     |
| Revenues$                          |   | $                | 5,630,000 |             | $      | 5,754,000        |   | $                | 5,832,00 |   | $ | 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              |     |
|                                    |        |                  |           |                  |        |                  |        |                  |          |  |  |  |  |

 

In the fourth quarter offiscal 2004, the Company recorded $246,000 in income related to its revisedestimate of the settlement liability (see Note 10) and a $2,163,000 assetimpairment charge for assets at the Cambridge, Massachusetts location (see Note14).

 

F-33

----

 

Signatures

 

Pursuantto the requirements of Section 13 or 15(d) of the Securities Exchange Actof 1934, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                      | BOSTON RESTAURANT ASSOCIATES, INC. |
|---------------------------|------------------------------------|
|                      |                               |   |
| Date: August 3, 2004 |                               | By: | /s/George R. Chapdelaine |   |
|                      |                               | George R. Chapdelaine, President |

 

Pursuantto the requirements of the Securities Exchange Act of 1934, this report hasbeen signed below by the following persons on behalf of the registrant and inthe capacities and on the dates indicated.

 
| **SIGNATURES**                                                                                         |   | **DATE**            |   |
|--------------------------------------------------------------------------------------------------------|--------|---------------------|--------|
|                                                                                                   |   |                |   |
| /s/George R. Chapdelaine                                                                               |   | August 3, 2004 |   |
| George R. Chapdelaine, Chief  Executive Officer, President and  Director (principal executive officer) |   |                |   |
|                                                                                                   |   |                |   |
|                                                                                                   |   |                |   |
| /s/Fran V. Ross                                                                                        |   | August 3, 2004 |   |
| Fran V. Ross, Chief Financial Officer                                                                  |   |                |   |
|                                                                                                   |   |                |   |
| /s/Robert Fabrizio                                                                                     |   | August 3, 2004 |   |
| Robert Fabrizio, Chief Accounting Officer                                                              |   |                |
|                                                                                                   |   |                |   |
| /s/Hugh Devine                                                                                         |   | August 3, 2004 |   |
| Hugh Devine, Director                                                                                  |   |                |   |
|                                                                                                   |   |                |   |
| /s/Edward P. Grace, III                                                                                |   | August 3, 2004 |   |
| Edward P. Grace, III, Director                                                                         |   |                |   |
|                                                                                                   |   |                |   |
| /s/Roger Lipton                                                                                        |   | August 3, 2004 |   |
| Roger Lipton, Director                                                                                 |   |                |   |
|                                                                                                   |   |                |   |
| /s/John P. Polcari, Jr.                                                                                |   | August 3, 2004 |   |
| John P. Polcari, Jr., Director                                                                         |   |                |   |
|                                                                                                   |   |                |   |
| /s/Robert C. Taft                                                                                      |   | August 3, 2004 |   |
| Robert C. Taft, Director                                                                               |   |                |   |
|                                                                                                        |        |                     |        |  |

 

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