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SECURITIES AND EXCHANGE COMMISSION
FORM 10-KSB
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-KSB
(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act
of 1934. For the fiscal year ended April 25, 1999.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the transition period from ________ to ________.
Commission File Number
0-18369
BOSTON RESTAURANT ASSOCIATES, INC.
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(Name of Small Business Issuer as Specified in its Charter)
Delaware 61-1162263
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
999 Broadway, Suite 400 01906
Saugus, Massachusetts -----
--------------------- (Zip Code)
(Address of Principal Executive Offices)
(781)231-7575
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(Issuer's Telephone Number Including Area Code)
Securities registered pursuant to Section 12(b) of the Securities Exchange Act
of 1934:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- -------------------
Common stock, $.01 par value per share Boston Stock Exchange
Redeemable Common Stock Purchase Warrants
Securities registered under Section 12(g) of the Securities Exchange Act of
1934:
Common Stock, $.01 par value per share
--------------------------------------
(Title of Class)
Redeemable Common Stock
Purchase Warrants
-----------------
(Title of Class)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
--- ---
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of the registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendments to this Form 10-KSB. [X]
The issuer's revenues for its most recent fiscal year were $12,173,934.
The aggregate market value of registrant's Common Stock, $.01 par value
per share, held by non-affiliates of the registrant as of July 15, 1999 was
$6,398,632 based upon the average closing bid and asked prices of such stock on
that date as reported on the Nasdaq SmallCap Market on that date. As of July 15,
1999 there were 7,060,170 shares of the registrant's Common Stock, $.01 par
value per share outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement involving the election of
directors, which is expected to be filed within 120 days after the end of the
registrant's fiscal year, are incorporated by reference in Part III of this
Report.
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INDEX
PART I
ITEM 1. DESCRIPTION OF BUSINESS
ITEM 2. DESCRIPTION OF PROPERTY
ITEM 3. LEGAL PROCEEDINGS
ITEM 4. SUBMISSION OF MATTERS TO THE VOTE
OF SECURITY HOLDERS
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
ITEM 6. MANAGEMENT'S DISCUSSION AND
ANALYSIS OR PLAN OF OPERATION
ITEM 7. FINANCIAL STATEMENTS
ITEM 8. CHANGES IN AND DISAGREEMENTS
WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS,
PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF
THE EXCHANGE ACT
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS
ITEM 13. EXHIBITS AND REPORTS ON
FORM 8-K
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
Boston Restaurant Associates, Inc. (the "Company") operates a chain of
12 restaurants - eleven fast service, high volume pizzerias under the Pizzeria
Regina-Registered Trademark- name and one full service family-style
Italian/American restaurant under the Polcari's North End-TM- name. Of the
eleven Pizzeria Regina restaurants, nine are food court kiosks (self-service,
take-out style emphasizing pizza slices with common area seating), and two are
wait-service restaurants (full-service style emphasizing whole pizzas with
in-restaurant seating). A majority of the restaurants are located in the Boston,
Massachusetts metropolitan area.
The Pizzeria Regina restaurants feature the Company's signature
product, its premium Neapolitan style, thin crust pizza, prepared in gas-fired
brick ovens. The original Pizzeria Regina, located in Boston's historic North
End, has served the Company's premium brick oven pizza since 1926. The Company
believes that the Pizzeria Regina pizza and the brand name are local symbols of
superior and distinctive pizza. (See "PIZZERIA REGINA RESTAURANTS.")
The Polcari's North End restaurant is a full service Italian/American,
family-style restaurant that captures the community spirit of the 1940's and
1950's in Boston's Italian North End neighborhood. It highlights exposed
gas-fired brick ovens in open view of diners, memorabilia and photographs
depicting 1940 and 1950 scenes in Boston's North End and large tables to
encourage family style dining. (See "POLCARI'S NORTH END RESTAURANT.")
The Company plans to expand its operations by opening additional
Company-operated Pizzeria Regina food court kiosks in high volume retail malls
as the opportunities present themselves and by franchising both its Pizzeria
Regina and Polcari's North End concepts. The Company has, through a joint
venture with Italian Ventures, LLC, formed Regina Ventures, LLC to facilitate
the expansion of the Polcari's North End concept. However, the expansion of
operations will depend upon market opportunities and the Company's overall
financial and management resources. The rate at which the Company actually is
able to open new Company-operated restaurants will be determined by many
factors, including the Company's success in obtaining adequate financing,
identifying satisfactory sites, negotiating satisfactory leases, securing
requisite governmental permits and approvals, and training management personnel.
The rate at which franchised restaurants are opened also will be determined by
many factors, including site availability and qualified franchisees. There can
be no assurance that the Company will have the resources to expand, that
expansion will not be more costly than anticipated, that current and future
sites will operate profitably, or that franchising efforts will be successful.
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The Company's principal offices are located at 999 Broadway, Saugus,
Massachusetts 01906 and its telephone number is (781) 231-7575. As used in this
Report, unless otherwise indicated, the term "Company" refers to Boston
Restaurant Associates, Inc. and its subsidiaries.
PIZZERIA REGINA RESTAURANTS
The Company currently operates eleven Pizzeria Regina restaurants --
fast service, high volume pizzerias that feature premium brick oven pizza and
cater primarily to the lunchtime diner (with the exception of the original North
End location, which serves both the lunch and dinner markets). Of these eleven
restaurants, nine are food court kiosks and two are wait-service restaurants.
The Pizzeria Regina restaurants feature the Company's premium
Neapolitan style, thin crust, brick oven pizza. This pizza features a
proprietary dough and pizza sauce which the Company believes combine to produce
a distinct flavor and superior pizza. These pizzas are offered with a wide
variety of fresh vegetable and cured meat toppings. The Company believes that
the quality of its pizza, a result of a proprietary ingredient mix and baking
process, enables it to appeal to both the lunch and dinner markets. The original
Pizzeria Regina, located in Boston's historic North End, has served the
Company's premium brick oven pizza since 1926.
The Company's nine food court kiosks primarily serve pizza by the slice
with multiple topping choices and operate side-by-side with other fast food
vendors. Menu items are presented in a self-service, take-out style designed to
allow customers to order, pay for and consume their food in a very short period
of time. Customers who desire to sit down after purchasing their food may join
customers of other food court vendors in one or more designated common areas
within the mall. The focused menu, self-service, take-out style and common
seating provide food court customers with a fast, low cost dining alternative as
compared to more traditional full service restaurants.
The Company intends to open additional Pizzeria Regina food court
kiosks, primarily in retail malls. 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 upgrade food courts to emphasize fast food as a focal
point of malls. The Company further believes that lunchtime diners who visit
retail shopping malls seek high quality, quick service meals in a food court
setting, and that the premium quality of the Company's brick oven pizza should
position it to compete effectively in food court locations.
During fiscal year 1999 the Company opened one food court kiosk
operation at the Auburn Mall, Auburn, Massachusetts. In addition, the Company
opened a food court kiosk at the Independence Mall, Kingston, Massachusetts in
June of 1999. The Company has preliminarily identified other potential site
locations that it believes will become available during the next 24 months.
Management estimates that the cost of opening a typical food court kiosk
currently is approximately $350,000 to $400,000. The Company
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cannot provide any assurance, however, that actual costs will not significantly
exceed these estimates, that the Company will be able to obtain financing
necessary to construct additional food courts kiosks, that the Company will be
able to complete the construction of new kiosks on a timely basis and within
budget, if at all, or that the Company will be able to operate these kiosks
successfully.
Two of the Company's Pizzeria Regina restaurants (a food court kiosk
and a wait-service restaurant) are located in the Quincy Market/Faneuil Hall
Marketplace in Boston, Massachusetts. The Company anticipates closing the
wait-service restaurant, the lease of which has already expired, on or before
December 31, 2000. At that time it will seek to enter into a lease for
alternative space for a full service restaurant in the Quincy Market/Faneuil
Hall Marketplace. The Company believes, based upon communications with the
landlord, that it will be able to successfully negotiate a new lease for a wait
service restaurant in that location, although there can be no assurance that it
will be able to do so.
POLCARI'S NORTH END RESTAURANT
In March 1995, the Company opened its first Polcari's North End
restaurant in Saugus, Massachusetts, replacing a similar restaurant the Company
had operated from 1954-1989 in Boston's North End. The Polcari's North End
restaurant concept is designed to create an Italian/American, family-style,
casual dining ambiance that captures the community spirit of the 1940's and
1950's in Boston's Italian North End neighborhood. The restaurant highlights
exposed gas-fired brick ovens in open view of diners. In addition, memorabilia
and photographs depicting 1940 and 1950 scenes in Boston's North End are used to
create a neighborhood atmosphere rich with history. The restaurant also features
large tables of six or more seats to encourage family style dining and a
value-oriented menu that includes branded Pizzeria Regina pizza, large
Italian/American pasta dishes and fresh baked breads.
The Company, through a joint venture affiliate, plans to open
additional Polcari's North End restaurants across the country. Such expansion
will be dependent upon market opportunities and the Company's overall financial
and management resources.
FRANCHISING
In 1997, the Company formed Boston Restaurant Associates International,
Inc. ("BRAII"), a wholly owned subsidiary, for the purpose of offering Pizzeria
Regina franchise opportunities both domestically and internationally. BRAII has
filed a Uniform Franchise Offering Circular and is actively seeking franchisees
with operational experience.
In January 1998, the Company entered into an international
development agreement with Regina International, Ltd. ("Regina
International") to pursue and develop franchise territories outside the
Americas, anticipated to be principally in Europe, the Far East and the
Pacific Rim. Terrance Smith, a director with experience in international
franchising, has a controlling interest in Regina International, the
international master franchisee under the development agreement. The
agreement provides for payment of certain development fees and royalties to
Regina International after certain events to the extent of positive cash
flow. The agreement sets forth a development and operation schedule pursuant
to which Regina International is obligated to meet milestones regarding
certain minimum numbers of operational restaurants. Regina International has
failed to meet the first such milestone, and the development agreement
provides that as a result the Company may choose to redefine Regina
International's exclusive franchise development territory to make such
territory nonexclusive and limited to the area in which it has already sold
franchises. (See "ITEM 7. FINANCIAL STATEMENTS - NOTE 8 TO CONSOLIDATED
FINANCIAL STATEMENTS".)
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In December 1998, BRAII entered into a twenty-year joint venture
development agreement with Italian Ventures, LLC, a Kentucky corporation
("Italian Ventures"), for the purpose of developing and introducing a new
type of full service bistro-type restaurant in the Continental United
States. The joint venture entity, Regina Ventures, LLC ("Regina Ventures"),
currently has one franchise territory and one Company restaurant site in
Medina, Ohio under agreement. The Company has a 51% interest in Regina
Ventures and Italian Ventures holds the remaining 49% interest. Richard
Reeves and Terrance Smith, both of whom are Company directors, each have a
30% ownership interest in Italian Ventures. Under certain circumstances,
Italian Ventures may put its 49% equity interest together with certain of its
and its affiliates assets to the Company, and under certain circumstances the
Company has a call on Italian Ventures' equity interest and the related
assets. In both cases, the purchase price is based upon the earnings and net
assets of Regina Ventures, and is payable in cash, Company stock or a
combination of both at the discretion of the Company. As a result of certain
issues which have arisen over the direction of the joint venture, the Company
is currently in negotiations with Italian Ventures over the possible
restructuring of the joint venture relationship. (See "ITEM 7. FINANCIAL
STATEMENTS - NOTE 8 TO CONSOLIDATED FINANCIAL STATEMENTS".)
SITE SELECTION
The Company considers the specific location of a restaurant to be
critical to the restaurant's long term success. It devotes significant time and
resources to the investigation and evaluation of each prospective site,
including consideration of local market demographics, population density,
average household income levels and site characteristics such as visibility,
accessibility and traffic.
The Company seeks sites for the Pizzeria Regina kiosk restaurants
within high-traffic food courts or retail shopping malls located in metropolitan
areas. It seeks sites for Pizzeria Regina wait-service restaurants in densely
populated areas. A favorable Polcari's North End restaurant site will be located
near high-volume, middle market traffic centers, such as retail and residential
areas with populations of at least 100,000 persons within a five mile radius.
For all types of restaurants, the Company also considers existing local
competition and, to the extent such information is available, the sales of other
comparably priced restaurants operating in the area.
RESTAURANT OPERATIONS
The Company invests substantial time and effort in its training
programs, which focus on all aspects of restaurant operations, including
kitchen, bar and dining room operations, food quality and preparation, alcoholic
beverage service, liquor liability avoidance, customer service and employee
relations. The Company holds regular meetings of its managers to address new
products, continuing training and other aspects of business management. Managers
also attend periodic seminars, conducted by Company personnel and outside
experts on a broad range of topics.
New employees are trained by experienced employees who have
demonstrated their ability to implement the Company's commitment to provide high
quality food and
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attentive service. The Company has developed manuals regarding its policies and
procedures for restaurant operations. Senior management regularly visits Company
restaurants and meets with the respective management teams to ensure compliance
with the Company's strategies and standards of quality in all aspects of
restaurant operations and personnel development.
The Company seeks to attract and retain high caliber restaurant
managers by providing them with an appropriate balance of autonomy and
direction. Annual performance objectives and budgets for each restaurant are
jointly determined by restaurant managers and senior management. To provide
incentives, the Company has implemented a cash bonus program tied to achievement
of specified objectives.
The staff for a typical Pizzeria Regina kiosk restaurant consists of
one general manager, two managers and approximately 12 to 15 hourly employees.
The staff of a typical sit-down Pizzeria Regina consists of a general manager,
two managers, and approximately 15 to 25 hourly employees. The staff for a
Polcari's North End restaurant consists of one general manager, two managers,
one kitchen manager and approximately 40 to 60 hourly employees. Most of the
Company's hourly employees are part-time personnel. The general manager of each
restaurant is primarily responsible for the day-to-day operations of the entire
restaurant and maintaining standards of quality and performance established by
the Company.
The Company believes centralized financial and management controls are
fundamental to improving operating margins. These controls are maintained
through the use of an automated data processing system and prescribed reporting
procedures. Each restaurant has a point-of-sale system that captures restaurant
operating information. The restaurants forward daily sales reports, vendor
invoices, payroll information and other data to the Company's corporate
headquarters. Company management utilizes this data to centrally monitor costs
and sales mix and to prepare periodic financial management reports. This system
is also used for budget analysis, planning and determination of menu
composition. Restaurant managers perform daily inventories of key supplies. All
other supplies are inventoried weekly at the Pizzeria Regina restaurants and are
inventoried biweekly at the Polcari's North End restaurant. Cash is controlled
through deposits of sale proceeds in local operating accounts following each
restaurant shift with respect to the Pizzeria Regina locations and following
each business day with respect to the Polcari's North End location. The balances
in those accounts are wire transferred daily to the Company's principal
operating account.
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PURCHASING AND COMMISSARY OPERATIONS
The Company maintains a commissary where food products such as pizza
dough are produced for the Company's restaurants. These products require a high
degree of consistency that would be more difficult to maintain at the individual
restaurant locations. The Company believes that close, centralized monitoring of
the dough preparation ensures a more consistent premium product. All other food
preparation is performed on site at the restaurant level.
The Company negotiates directly with wholesale suppliers of high volume
food ingredients such as cheese, tomato sauce, and flour to ensure consistent
quality and freshness of products across its restaurants and to obtain
competitive pricing. These ingredients are then purchased by the Company's
distributor at the negotiated price and redistributed to the Company's
restaurants. All other food ingredients and beverage products are purchased
directly by the general manager of each restaurant in accordance with corporate
guidelines. The Company believes that all essential food and beverage products
are available from many qualified wholesale suppliers.
ADVERTISING AND MARKETING
The Company's target market for the Pizzeria Regina restaurants is very
broad, consisting of individuals and families who seek fast service and high
value-to-price meals during the lunch period. The target markets for the
Polcari's North End restaurant are adults and families who seek moderately
priced Italian dinner entrees in a comfortable environment. The Company believes
that its focus on premium quality, service and value is the most effective
approach to attracting customers.
The Company anticipates that it will obtain greater name recognition
from increased distribution channels for its premium Pizzeria Regina brick oven
pizza and the development of additional Pizzeria Regina food court kiosks. The
Company plans to rely upon local advertising, high-volume traffic flow at retail
malls, and word of mouth exposure.
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 the Company's or a particular restaurant's control, including
changes in the public's tastes and eating and drinking habits, population and
traffic patterns and local economic conditions. The Company's restaurants
compete with a wide variety of restaurants ranging from national and regional
restaurant chains (some of which have substantially greater financial resources
than the Company) to locally-owned restaurants. There is also active competition
for liquor licenses in certain markets and for advantageous commercial real
estate sites suitable for restaurants. The Pizzeria Regina restaurants compete
with other
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fast-service, high volume food providers on the basis of price, value, location,
and speed of service. The Polcari's North End restaurant competes with other
casual, full service restaurants primarily on the basis of menu selection,
quality, price, service, ambiance and location.
SEASONALITY
The Company's restaurants are subject to seasonal fluctuations in sales
volume. Sales at the Pizzeria Regina restaurants are typically higher in June
through August and in November and December due to increased volume in shopping
malls during the holiday and tourist seasons and school vacations.
EMPLOYEES
As of July 15, 1999, the Company had approximately 275 employees, of
whom 12 were corporate and administrative personnel, 37 were field supervision
or restaurant managers or management trainees, and the remainder were hourly
restaurant personnel. Many of the Company's hourly employees work part-time. The
Company believes that its relationship with its employees is good. None of the
Company's employees are covered by a collective bargaining agreement.
TRADEMARKS
The Company regards its service marks as having significant value and
as being an important factor in the marketing of its products. Its most
significant marks are "Pizzeria Regina," "Regina," the Regina crown design logo,
and "Polcari's." These marks, which appear in its advertisements, menus and
elsewhere, are widely recognized. "Pizzeria Regina" and the crown design logo
are registered trademarks of the Company. The Company has applied to register
the "Polcari's" logo, "Polcari's North End" and the Regina service marks with
the United States Patent and Trademark Office.
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
regulation by a number of government authorities, including alcoholic beverage
control, health, safety, sanitation, building and fire agencies in the state or
municipality in which the restaurant is located. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development of a new restaurant in a particular area.
The selection of new restaurant sites is affected by federal, state and
local laws and regulations regarding environmental matters, zoning and land use
and the sale of alcoholic beverages. Varied requirements (particularly at the
local level) may result in increases in the cost and time required for opening
new restaurants, as well as increases in
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the cost of operating restaurants. Difficulties in obtaining necessary licenses
or permits could cause delays in or cancellations of new restaurant openings.
A significant portion of the Company's revenues at the Polcari's North
End restaurant and the original Pizzeria Regina location in the North End is
attributable to the sale of alcoholic beverages. Alcoholic beverage control
regulations require each of the Company's restaurants that serve alcohol to
apply to both a state authority and municipal authorities for a license or
permit to sell alcoholic beverages on the premises. Typically, licenses must be
renewed annually and may be revoked or suspended for cause at any time.
Alcoholic beverage control regulations affect numerous aspects of restaurant
operations, including minimum age of patrons and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. The failure of the Company to obtain or
retain liquor or food service licenses could have a material adverse affect on
the particular restaurant's operations and the business of the Company
generally.
The Company is subject to "dram shop" statutes, which generally provide
a person injured by an intoxicated person the right to recover damages from an
establishment that wrongfully served alcoholic beverages to the intoxicated
person. The Company presently carries $1,000,000 of liquor liability coverage
for its restaurants, as well as excess liability coverage of $10,000,000 per
occurrence, with a $10,000 deductible. The Company has never been named as a
defendant in a lawsuit involving "dram shop" liability. There can be no
assurance that dram shop insurance will continue to be available to the Company
at commercially reasonable prices, if at all, or that such insurance, if
maintained, will be sufficient to cover any claims against the Company for dram
shop liability for which it may be held liable.
The Company's restaurant operations are all subject to federal and
state laws governing such matters as the proposed government mandated health
insurance, over which the Company has no control. A significant number of the
Company's personnel are paid at rates related to the federal minimum wage, and
increases in the minimum wage could increase the Company's labor costs.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software are coded to
accept only two digit entries in the date code fields. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, within the next year, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has been assessing the potential impact of Year 2000 on the
processing of date-sensitive information by the Company's automated information
and point-of-sale systems and computerized information systems. While there can
be no assurance that Year 2000 matters will be satisfactorily identified and
resolved, the
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Company currently believes that most of its computer hardware and software
systems are already Year 2000 compliant and that Year 2000 issues will not have
a material adverse effect on the Company.
The Company's Year 2000 initiative is being managed by an internal
staff member and is designed to ensure that there are no adverse effects on the
Company's ability to conduct business at the restaurant level and to process and
support restaurant activity at the corporate level.
Under its current Year 2000 plan, the Company has brought a number of
its systems into Year 2000 compliance, subject to additional Year 2000 testing
and responsive actions.
As part of its Year 2000 initiative, the Company is also evaluating
scenarios that may occur and developing contingency and business continuity
plans tailored for Year 2000-related occurrences. The Company believes that the
most reasonably likely, worst case scenario of failure by the Company would
result from third parties' failure to adequately resolve Year 2000 issues,
leading to a complete failure of its point-of-sale and ordering systems. This
failure would require the Company to resort to "non-computerized" means to
undertake such restaurant functions as placing customer orders, preparing
customer checks, accounting of restaurant receipts, recording and ordering
restaurant inventory and supplies, evaluating menu mix and analyzing other
operating statistics. While the Company believes that it is equipped to operate
in such a "non-computerized" mode, it could suffer lost revenues, increased
operating costs, loss of customers or other business interruptions of a material
nature. As of April 25, 1999, the estimated remaining cost for Year 2000
compliance is $50,000 to $60,000.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological advancements. Given the
complexity of these issues and possible as yet unidentified risks, actual
results may vary materially from those anticipated and discussed above.
RISK FACTORS
In addition to the risks discussed elsewhere in this Form 10-KSB,
investors should consider carefully the following risk factors in evaluating an
investment in the Company.
RISKS RELATED TO PLANNED EXPANSION
The Company's ability to open additional Company restaurants and
grant franchises as planned will depend upon a number of factors, such as
identifying satisfactory sites, negotiating satisfactory leases, securing
requisite governmental permits and approvals, adequate supervision of
construction, recruiting training management personnel, and attraction of
qualified franchisees, some of which are beyond the control of the Company.
The
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Company cannot assure that it will be able to open any of its planned new
restaurants within budget or on a timely basis, if at all, or that any of the
new restaurants will operate profitably. If the Company is unable to expand as
planned, it may reduce the Company's ability to increase profitability.
RISKS RELATED TO FRANCHISING
The Company has limited experience in franchising domestic restaurants
and franchising operations present numerous risks. The Company faces vigorous
competition from other similar type restaurant chains in attracting and
retaining suitable franchisees. A Franchisee's failure to maintain the Company's
high standards could adversely affect customer attitude towards the Company's
restaurants. Granting exclusive territory agreements may also limit future
expansion opportunities for company owned stores. Franchise developers or
franchisees may leave the franchise system at the end of the term of development
or franchisee agreements or may attempt to terminate their agreements before the
end of the term, thereby reducing royalty revenues. Further, while franchising
permits the Company to increase the geographic coverage of its restaurant system
without substantial investment capital, it also means the Company may not have
direct operational control over the Company's franchise restaurants. The Company
is also subject to regulation by the Federal Trade Commission and must comply
with certain state laws that govern the offering, sale, and termination of
franchises and the refusal to renew franchises.
RISKS RELATED TO JOINT VENTURE
By engaging in a joint venture for the development of Polcari's
franchises, the Company is subject to certain roll-up provisions and put call
provisions pursuant to the development agreement between Italian Ventures and
the Company. (See "ITEM 1. BUSINESS - FRANCHISING" and "ITEM 7. FINANCIAL
STATEMENTS - NOTE 8 TO CONSOLIDATED FINANCIAL STATEMENTS.")
POSSIBLE NEED OF ADDITIONAL FUNDING
The Company believes that its anticipated cash flow from operations,
together with existing resources, will be sufficient to fund its working capital
needs and expansion plans for at least the next 12 months. However, there can be
no assurance that this will be the case. Changes in the Company's business or
its business plan could affect its capital requirements. Moreover, there can be
no assurance that the Company will have sufficient revenues after the end of
that 12-month period to continue to fund its expansion plans and other operating
requirements. In the event the Company requires additional financing, there can
be no assurance that the Company would be able to obtain financing on favorable
terms, if at all, and failure to do so could have a material adverse effect on
the Company's business. (See "ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION - LIQUIDITY AND CAPITAL RESOURCES.")
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RISKS OF RESTAURANT INDUSTRY
The Company's future performance will be subject to a number of factors
that affect the restaurant industry generally, including (i) the highly
competitive nature of the restaurant industry, (ii) general and local economic
conditions, (iii) changes in tastes and eating and drinking habits, (iv) changes
in tax laws that affect the deductibility of business related meals, (v) changes
in food costs due to shortages, inflation or other causes, (vi) population and
traffic patterns, (vii) demographic trends, (viii) general employment and wage
and benefit levels in the restaurant industry, which may be affected by changes
in federal and local minimum wage requirements or by federally or locally
mandated health insurance, and (ix) the number of people willing to work at or
near the minimum wage. (See "ITEM 1. BUSINESS - COMPETITION.")
DEPENDENCE ON KEY EXECUTIVE OFFICERS
The future success of the Company will depend in large part on the
continued services of its President, George R. Chapdelaine, as well as on the
Company's ability to attract and retain other qualified senior management
personnel. The Company also has and intends to maintain key man life insurance
in the amount of $2,000,000 on the life of Mr. Chapdelaine.
CONTROL BY MANAGEMENT
The Company's executive officers, directors and their affiliates and
members of their immediate families control the vote of approximately 45.2% of
the outstanding shares of the Common Stock.
GEOGRAPHIC CONCENTRATION
A total of nine of the Company's twelve existing restaurants are
located in Eastern Massachusetts. As a result, the Company's results of
operations may be materially affected by changes in the Massachusetts economy.
(See "ITEM 1. BUSINESS - GENERAL.")
VOLATILITY OF STOCK PRICE
Compared to many other publicly traded companies, the Company is
relatively small and has a relatively small average trading volume. Quarterly
operating results of the Company or other restaurant companies, changes in
general conditions in the economy, the restaurant industry, or the financial
markets, or other developments affecting the Company, its competitors or the
financial markets, could cause the market price of the Common Stock to
fluctuate significantly. These broad market fluctuations may adversely affect
the market price of the Common Stock. In addition, the closing bid price of
the Common Stock was less than $1.00 on twenty occasions in the thirty-day
period ending July 15, 1999. Nasdaq SmallCap Market listing requirements
include a minimum bid price of $1.
-17-
On at least two occasions in the past two fiscal years, the Company has
found it necessary to take certain corrective actions in response to
notifications from Nasdaq of potential delisting of the Company's securities.
The Company cannot assure that it will be able to continue to meet these and
other Nasdaq requirements. If the Company fails to maintain its Nasdaq
listing, the Company's securities will likely be traded on the OTC Bulletin
Board. As a result, the market value of the Common Stock could decline and
stockholders may find it more difficult to dispose of, or to obtain accurate
quotations as to the market value of the Company's Common Stock. (See "ITEM
5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.")
ITEM 2. DESCRIPTION OF PROPERTY
All of the Company's existing restaurants are located in leased space,
except for the North End Pizzeria Regina location, which is owned by the
Company. All of the Company's leases provide for a minimum annual rent, and most
call for additional rent based on sales volume at the particular location over a
specified minimum level. Generally, these leases are net leases, which require
the Company to pay the cost of insurance, taxes and a portion of the lessor's
operating costs. Certain mall locations also require the Company to participate
in upkeep of common areas and promotional activities.
-18-
The following table sets forth certain information with respect to the
Company's restaurant properties:
APPROX. SQ. LEASE
LOCATION FT. EXPIRATION DATE TYPE (1)
-------- ----------- --------------- --------
Auburn Mall 924 1/ 31 /08 food court
Auburn, MA
North End 4,300 N/A wait service
Boston, MA (2)
Faneuil Hall Marketplace 750 12/31/00 food court
Boston, MA
(Upstairs)
Faneuil Hall Marketplace(3) 2,000 12/31/99 wait service
Boston, MA
(Downstairs)
Burlington Mall 1,018 11/30/05 food court
Burlington, MA
Holyoke Mall 749 1/31/09 food court-opening
Holyoke, MA early fall 1999
Independence Mall 637 1/31/09 food court
Kingston, MA
South Shore Plaza 700 8/31/06 food court
Braintree, MA
Solomon Pond Mall 1,085 1/30/07 food court
Marlborough, MA
Oviedo Market Place 714 4/01/08 food court
Oviedo, FL
Paramus Park 696 7/31/09 food court
Paramus, NJ
Providence Place 960 Fall 2009 food court-opening
Providence, RI early fall 1999
Regency Square 605 11/03/04 food court
Richmond, VA
Saugus, MA 11,000 11/30/12 Polcari's
North End
-19-
(1) Pizzeria Regina Food court locations have no independent seating capacity.
Seating is centralized in the common areas of the food courts. The North End and
downstairs Faneuil Hall Marketplace Pizzeria Regina wait-service locations each
seat approximately 75 customers, and the Saugus Polcari's North End location has
a seating capacity of 400.
(2) Company-owned. This property is subject to a mortgage in favor of
BankBoston. (See "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION --
LIQUIDITY AND CAPITAL RESOURCES.") Includes approximately 1,000 square feet
located in two adjacent condominiums owned by the Company which have not been
built-out as of the date of this Report.
(3) The Company is currently in negotiations for a new wait service location
within the marketplace. (See ITEM 1. DESCRIPTION OF BUSINESS - PIZZERIA REGINA
RESTAURANTS.)
The Company occupies approximately 3,200 square feet of executive
office space at 999 Broadway, Saugus, Massachusetts 01906. The Company also
leases approximately 5,000 square feet of warehouse space located in Somerville,
Massachusetts under a lease expiring on July 31, 2001 (including all extension
options that may be exercised by the Company in its discretion) and
approximately 2,741 square feet for its commissary located in Charlestown,
Massachusetts under a lease expiring on August 14, 2000.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved in various legal matters in the ordinary course
of its business. Each of these matters is subject to various uncertainties and
some of these matters may be resolved unfavorably to the Company. Management
believes that any liability that may ultimately result from these matters will
not have a material adverse effect on the Company's financial position.
ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report, no
matters were submitted to a vote of security holders of the Company.
-20-
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded publicly on the Nasdaq SmallCap
Market (Nasdaq symbol: "BRAI") and the Boston Stock Exchange (BSE symbol:
"BNR"). As of July 15, 1999, there were approximately 1,130 holders of record of
the Company's Common Stock. On July 15, 1999, the last bid and asked price of
the Company's Common Stock as reported on the Nasdaq Small-Cap Market were $.875
and $.9063 per share, respectively.
The table below represents the quarterly high and low bid and asked
prices for the Company's Common Stock for the Company's last two fiscal years,
as reported on the Nasdaq SmallCap Market. The prices listed in this table
reflect quotations without adjustment for retail mark-up, markdown or
commission, and may not represent actual transactions.
HIGH BID LOW BID HIGH ASKED LOW ASKED
Fiscal Year Ended April 25, 1999
First Quarter........................ $2.19 $1.37 $2.19 $1.44
Second Quarter....................... 1.50 .72 1.56 1.13
Third Quarter........................ 1.69 .63 .84 .72
Fourth Quarter....................... 1.06 .94 1.13 1.00
Fiscal Year Ended April 26, 1998
First Quarter........................ $1.31 $1.06 $1.43 $1.18
Second Quarter....................... 2.18 1.18 2.31 1.28
Third Quarter........................ 1.62 1.25 1.87 1.37
Fourth Quarter....................... 1.75 1.25 1.81 1.31
The Company has never paid cash dividends on its capital stock and does
not anticipate paying any cash dividends in the foreseeable future. Rather, the
Company intends to retain all of its future earnings to finance future growth.
-21-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following table sets forth for the fiscal periods indicated the
percentage of total revenues, unless otherwise indicated, represented by certain
items reflected in the Company's consolidated statements of operations:
FISCAL YEAR ENDED
----------------------------------------
APRIL 25, 1999 APRIL 26, 1998
-------------- --------------
Income Statement Data:
Total Revenues 100% 100.0%
Costs and expenses:
Cost of food, beverages and liquor 20.9 20.2
Other operating expenses 58.4 60.2
General and administrative 13.7 12.2
Depreciation and amortization 4.5 4.2
Pre-opening costs .3 .3
Total costs and expenses 97.8 97.1
Operating income 2.2 2.9
Interest expense, net 2.0 2.4
Other income, net --
Minority interest (.3)
Net income .5 .5
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE YEARS ENDED APRIL 25, 1999 AND APRIL 26, 1998
RESTAURANT SALES
Restaurant sales in fiscal 1999 were $12,154,000, compared to
$11,255,000 in fiscal 1998. The increase in restaurant sales in the fiscal 1999
period, as compared to the fiscal 1998 period, was attributable to the opening
of the new Auburn, Massachusetts Pizzeria Regina food court kiosk in May of 1998
and a full year of operations for three food court kiosks opened in fiscal 1998.
Comparable sales for the restaurants open throughout both fiscal 1999 and 1998
increased by approximately 7.1%.
Net sales at the Company's Pizzeria Regina restaurants increased to
$9,136,000 in fiscal 1999 from $7,952,000 in fiscal 1998, principally due to the
addition of sales from the new Pizzeria Regina food court kiosks and an increase
in aggregate same store sales
-22-
for existing Pizzeria Regina restaurants.
Net sales at the Company's full service casual dining restaurants decreased
to $3,005,000 in fiscal 1999 from $3,286,000 in fiscal 1998. The decrease was
primarily attributable to closure of the Lexington Bel Canto Restaurant in
December 1997, which was partially offset by increased sales at the Polcari's
North End Restaurant.
FRANCHISE FEES
During fiscal 1999, the Company recognized $20,000 in franchise fees
related to the opening of a domestic Pizzeria Regina franchise controlled by a
Company director.
COSTS AND EXPENSES
COST OF FOOD, BEVERAGES AND LIQUOR
Cost of food, beverages and liquor as a percentage of net sales for all
restaurants was 21% in fiscal 1999, compared to 20% in fiscal 1998.
The cost of food, beverages, and liquor as a percentage of net sales at
the Pizzeria Regina restaurants was 18% in fiscal 1999, compared to 16% in
fiscal 1998. The cost of food, beverages, and liquor as a percentage of net
sales increased at the Pizzeria Regina Restaurants, principally due to higher
cheese costs and increased sales of gourmet pizzas, which have a higher selling
price and higher food costs than traditional pizza.
The cost of food, beverages and liquor as a percentage of net sales at
the Company's full service casual dining restaurants increased to 31% in fiscal
1999 from 29% in fiscal 1998. The increase in cost of food, beverages and liquor
as a percentage of net sales was principally due to the closure of the Bel Canto
restaurant, which had lower food and beverage costs.
OTHER OPERATING EXPENSES
PAYROLL EXPENSES. Payroll expenses were $3,457,000 (28% of total
revenues) in fiscal 1999, compared to of $3,380,000 (30% of total revenues) in
fiscal 1998.
Payroll expenses at the Pizzeria Regina restaurants increased to
$2,402,000 (26% of net sales) in fiscal 1999 from $2,167,000 (27% of net sales)
in fiscal 1998. The increase in payroll expenses at the Pizzeria Regina
restaurants was primarily attributable to the opening of the new Auburn,
Massachusetts Pizzeria Regina food court kiosk in May 1998 and a full year of
operations for the three food court kiosks opened in fiscal 1998.
Payroll expenses at the Company's full service casual dining
restaurants decreased to $872,000 (29% of net sales) in fiscal 1999 from
$1,056,000 (32% net sales) in fiscal 1998. The decrease in payroll expenses is
primarily attributable to the closure of the Lexington Bel Canto restaurant in
December of 1997. Payroll expenses at the
-23-
Company's Commissary were $183,000 for the fiscal 1999 period as compared to
$157,000 in fiscal 1998 period. The increase is primarily due to the
reclassification of the purchasing director's salary to the Commissary's payroll
expense.
OTHER OPERATING EXPENSES, EXCLUSIVE OF PAYROLL. Other operating
expenses, exclusive of payroll were $3,658,000 (30% of total revenues) in fiscal
1999, compared to $3,401,000 (30% of total revenues) in fiscal 1998.
Other operating expenses exclusive of payroll from the Pizzeria Regina
restaurants increased to $2,675,000 (29% of net sales) in fiscal 1999 from
$2,372,000 (30% of net sales) in fiscal 1998. The increase is primarily
attributable to the opening of the new Auburn, Massachusetts Pizzeria Regina
food court kiosk in May 1998 and a full year of operation for the three food
court kiosks opened in fiscal 1998.
Other operating expenses, exclusive of payroll from the Company's full
service casual dining restaurants, decreased to $826,000 (27% of net sales) in
fiscal 1999 from $972,000 (30% of net sales) in fiscal 1998. This decrease was
primarily attributable to the closure of the Bel Canto restaurant in December of
1997. Other operating expenses also include commissary expenses, which were
$53,000 in fiscal 1999 and $57,000 in fiscal 1998, respectively. In addition the
Company realized other operating expenses of $104,000 in the current fiscal
year, which included franchising costs and joint venture costs.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses were $1,664,000 (14% of total
revenues) in fiscal 1999, compared to $1,377,000 (12% of total revenues) in
fiscal 1998. The increase in general and administrative expenses in fiscal 1999
compared to fiscal 1998 was due principally to an increase in development costs,
legal costs, and real estate site selection consulting fees.
DEPRECIATION AND AMORTIZATION EXPENSES
Depreciation and amortization expense was $545,000 (4% of total
revenues) in fiscal 1999, as compared to $470,000 (4% of total revenues) in
fiscal 1998. The increase in depreciation and amortization expense in fiscal
1999 compared to fiscal 1998 was attributable to the opening of the new Auburn,
Massachusetts Pizzeria Regina food court kiosk in May 1998 and to a full year of
operation for the three Pizzeria Regina food court kiosks opened in fiscal 1998.
PRE-OPENING COSTS
Pre-opening costs were $42,000 in fiscal 1999 compared to $34,000 in
fiscal 1998. Pre-opening costs for fiscal 1999 consisted primarily of costs
associated with the new food court kiosk at the Independence Mall, Kingston, MA,
which opened in June of
-24-
1999, and costs associated with Regina Ventures' Medina, Ohio Polcari's North
End restaurant, which is scheduled for opening in fiscal 2000.
INTEREST EXPENSE AND INTEREST INCOME
Interest expense increased to $314,000 in fiscal 1999, compared to
$305,000 in fiscal 1998. This increase in interest expense is due to additional
equipment leases associated with the new Pizzeria Regina food court kiosks.
Interest income increased to $72,000 in fiscal 1999 as compared to
interest income in fiscal 1998 of $25,000. The increase in interest income was
attributable to the proceeds from the March 1998 rights offering.
LIQUIDITY AND CAPITAL RESOURCES
At April 25, 1999 the Company had net working capital of $1,044,000 and
cash equivalents of $1,863,000.
During fiscal 1999, the Company had a net increase in cash and cash
equivalents of $75,000 reflecting net cash provided by operating activities
of $716,000, net cash used for investing activities of $486,000 and net cash
used for financing activities of $155,000. Net cash provided by operating
activities includes a decrease in accounts receivable of $15,000, an increase
in deferred rent of $21,000 and an increase in accrued expenses of $161,000,
partially offset by an increase in inventory of $3,000, an increase in
prepaid expenses of $2,000, a reduction in accounts payable of $77,000 and an
increase in other assets of $44,000. Net cash used for investing activities
reflects costs associated with the opening of the new Auburn, MA Pizzeria
Regina location and site expansion costs incurred to date. Net cash used for
financing activities of $155,000 consists of net repayments of long-term
debt, lease obligations and stockholder loans in the aggregate amount of
$220,000, offset by Italian Ventures' minority interest contribution to
Regina Ventures of $63,000 and proceeds from stock option exercises of $2,000.
At April 25, 1999, the Company had current liabilities of $1,117,000,
including $237,000 of accounts payable, $651,000 of accrued expenses and current
maturities of long-term obligations in the amount of $229,000. At April 25,
1999, the Company had long-term obligations, less current maturities, in the
amount of $2,417,000, including $363,000 due under its new credit facility with
BankBoston, $117,000 of notes payable to a stockholder, $331,000 due under
capital lease obligations, $1,500,000 of convertible subordinated debentures,
and $107,000 of deferred rent. On November 23, 1998, the Company discharged its
credit facility with Haymarket Bank and entered into a new two million dollar
($2,000,000) line of credit facility with BankBoston. As of April 25, 1999, the
Company has accessed this line in the amount of $538,000.
The Company believes that its existing resources, cash flow from
operations, borrowings under its credit facility and the net proceeds from the
March 1998 rights offering will be sufficient to allow it to meet its
obligations over the next twelve months.
-25-
The Company intends to fund its current obligations and operating expenses
through cash generated from operations. The net proceeds of the March 1998
rights offering will be used for repayment of indebtedness, to finance its
expansion plans and for other working capital requirements. There can be no
assurance that cash flows will improve in an amount sufficient to allow the
Company to fund its current obligations and operating expenses, or that the
Company will be able to obtain additional financing upon favorable terms, if at
all. Failure of the Company to do so could result in the Company's failure to be
able to meet its cash flow requirements.
YEAR 2000 READINESS DISCLOSURE
Many currently installed computer systems and software are coded to
accept only two digit entries in the date code fields. Beginning in the year
2000, these date code fields will need to accept four digit entries to
distinguish twenty-first century dates from twentieth century dates. As a
result, within the next year, computer systems and/or software used by many
companies may need to be upgraded to comply with such "Year 2000" requirements.
The Company has been assessing the potential impact of Year 2000 on the
processing of date-sensitive information by the Company's automated information
and point-of-sale systems and computerized information systems. While there can
be no assurance that Year 2000 matters will be satisfactorily identified and
resolved, the Company currently believes that most of its computer hardware and
software systems are already Year 2000 compliant and that Year 2000 issues will
not have a material adverse effect on the Company.
The Company's Year 2000 initiative is being managed by an internal
staff member and is designed to ensure that there are no adverse effects on the
Company's ability to conduct business at the restaurant level and to process and
support restaurant activity at the corporate level.
Under its current Year 2000 plan, the Company has brought a number of
its systems into Year 2000 compliance, subject to additional Year 2000 testing
and responsive actions.
As part of its Year 2000 initiative, the Company is also evaluating
scenarios that may occur and developing contingency and business continuity
plans tailored for Year 2000-related occurrences. The Company believes that the
most reasonably likely, worst case scenario of failure by the Company would
result from third parties failure to adequately resolve Year 2000 issues,
leading to a complete failure of its point-of-sale and ordering systems. This
failure would require the Company to resort to "non-computerized" means to
undertake such restaurant functions as placing customer orders, preparing
customer checks, accounting of restaurant receipts, recording and ordering
restaurant inventory and supplies, evaluating menu mix and analyzing other
operating statistics. While the Company believes that it is equipped to operate
in such a "non-computerized" mode, it could suffer lost revenues, increased
operating costs, loss of
-26-
customers or other business interruptions of a material nature. As of April 25,
1999, the estimated remaining costs for Year 2000 compliance is $50,000 to
$60,000.
The above information is based on the Company's current best estimates,
which were derived using numerous assumptions of future events, including the
availability and future costs of certain technological advancements. Given the
complexity of these issues and possible as yet unidentified risks, actual
results may vary materially from those anticipated and discussed above.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133"). SFAS No. 133 requires
companies to recognize all derivative contracts as either assets or liabilities
in the balance sheet and to measure them at their fair values. If certain
conditions are met, a derivative may be specifically designated as a hedge, the
objective of which is to match the timing of gain or loss recognition on the
hedging derivative with the recognition of (i) the changes in the fair value of
the hedged assets or liability, or (ii) the earnings effect of the hedged
forecasted transaction. For a derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the period of change. SFAS No. 133,
as amended, is effective for all fiscal quarters of fiscal years beginning after
June 15, 2000.
Historically, the Company has not entered into derivative contracts
either to hedge existing risks or for speculative purposes. Accordingly, the
Company does not expect adoption of the new standard to affect its financial
statements.
"SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Forward-looking statements in this report, including without limitation
statements relating to the adequacy of the Company's resources, and the timing
of the Company's expansion are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995. Investors are cautioned
that such forward-looking statements involve risks and uncertainties, including
without limitations: potential quarterly fluctuations in the Company's operating
results; seasonality of sales; competition; risks associated with expansion; the
Company's reliance on key employees; risks generally associated with the
restaurant industry; risks associated with geographic concentration of the
Company's restaurants; risks associated with serving alcoholic beverages; and
other risks and uncertainties indicated from time to time in the Company's
filings with the Securities and Exchange Commission. (See "ITEM 1. BUSINESS -
RISK FACTORS")
-27-
ITEM 7. FINANCIAL STATEMENTS
BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Boston Restaurant Associates, Inc. and Subsidiaries
Index to Financial Statements........................... F-1
Report of Independent Certified Public Accountants. F-2
Consolidated Financial Statements
Balance Sheets..................................... F-3 - F-4
Statements of operations........................... F-5
Statements of stockholders' equity................. F-6
Statements of cash flows........................... F-7
Summary of accounting policies..................... F-8 - F-12
Notes to consolidated financial statements......... F-13 - F-31
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-28-
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION 16 (A) OF
THE EXCHANGE ACT
The information required by this Item 9 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its 1999 fiscal year.
ITEM 10. EXECUTIVE COMPENSATION
The information required by this Item 10 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its 1999 fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The information required by this Item 11 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close if its 1999 fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item 12 is hereby incorporated by
reference to the Company's definitive proxy statement to be filed by the Company
within 120 days after the close of its 1999 fiscal year.
ITEM 13. EXHIBITS, LISTS AND REPORTS ON FORM 8-K
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
3.01 Amended Certificate of Incorporation of the Registrant Filed
Herewith
3.02 Amended By-Laws of the Registrant A-3(b)*
4.01 Description of Stock (contained in the Amended Filed
Certificate of Incorporation of the Registrant, filed as Herewith
Exhibit 3.01).
-29-
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
4.02 Form of Certificate evidencing shares of Common Stock F-4(b)*
4.03 Stock Purchase Warrant issued to Corning Partners IV, A-10(z)*
L.P. on April 29, 1994
4.13 Guaranty of Lease of George R. Chapdelaine and John P. 0-4.01*
Polcari, Jr. dated March 17, 1998 in favor of H.C.B.
Corporation.
4.14 Guaranty of Lease of George R. Chapdelaine and John P. 0-4.02*
Polcari, Jr. dated March 17, 1998 in favor of H.C.B.
Corporation.
4.15 Guaranty of Lease of George R. Chapdelaine and John P. 0-4.03*
Polcari Jr. dated March 17, 1998 in favor of H.C.B.
Corporation
4.16 Form of Option granted to Mr. Chapdelaine and Mr. Polcari 0-4.04*
in consideration of their guaranties of Boston Restaurant
Associates, Inc. obligations under the H.C.B. Corporation
leases.
10.02 Lease dated August 19, 1992 between Polcari's Inc. and A-10(k)*
the Yen H. Tow Realty Trust regarding a location in
Saugus, Massachusetts
10.03 Lease dated August 1, 1993 between Polcari Enterprises, A-10(n)*
Inc. and the E.J.H. Realty Trust regarding Registrant's
warehouse located in Somerville, Massachusetts
10.04 Lease dated October 14, 1986 between Polcari Enterprises, A-10(o)*
Inc., and Costa Fruit & Produce Co., Inc. regarding the
Registrant's commissary located in Charlestown,
Massachusetts
10.05 Lease dated June 30, 1995 between Berlin Properties G-10(p)*
Limited Partnership and Ocean, Inc. regarding a Pizzeria
Regina location in the Solomon Pond Mall, Berlin and
Marlborough, Massachusetts
-30-
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
10.06 Lease dated May 10, 1994 between Bellwether Properties of G-10(q)*
Massachusetts, L.P. and Ocean, Inc. regarding a Pizzeria
Regina in the Burlington Mall, Burlington, Massachusetts
10.08 Form of 1994 Non-employee Director Stock Option Plan** A-10(q)*
10.09 Form of 1994 Combination Stock Option Plan** A-10(r)*
10.10 Form of Indemnification Agreement with each of the A-10(bb)*
directors and certain officers of the Registrant**
10.11 Incentive Stock Option Plan** B-(10)h*
10.12 Non-employee Director Stock Option Plan** C-10(h)*
10.14 Lease dated July 24, 1996 between Faneuil Hall I-10.08*
Marketplace, Inc. and Fantail Restaurant, Inc. regarding a
Pizzeria Regina location in the Faneuil Hall Marketplace
Area, Boston, Massachusetts
10.15 Equipment Lease dated July 26, 1996 between HCB I-10.11*
Corporation and Ocean, Inc. regarding certain equipment
at a Pizzeria Regina location in the Solomon Pond Mall,
Berlin and Marlborough, Massachusetts
10.16 Lease dated June 30, 1995 between Berlin Properties J-10.01*
Limited Partnership and Ocean, Inc. regarding a Pizzeria
Regina Location in Solomon Pond Mall, Berlin and
Marlborough, Massachusetts
10.17 Lease dated July 7, 1997 between One Federal Street Joint K-10.01*
Venture and Pizzeria Regina of
Virginia, Inc. regarding a Pizzeria Regina
located in Regency Square Mall, Richmond , Virginia
-31-
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
10.18 Lease dated December 10, 1997 between Rouse-Orlando, Inc. L-10.01*
and Pizzeria Regina of Florida, Inc. regarding a Pizzeria
Regina location in the Oviedo Marketplace, Oviedo, Florida
10.19 International Development Agreement dated as of January M-10.01*
1, 1998 between Boston Restaurant Associates, Inc. and
Regina International, Ltd.
10.20 Equipment Lease dated March 17, 1998 between H.C.B. N-10.01*
Corporation and Pizzeria Regina of Virginia, Inc.
regarding certain equipment located in the Regency Square
Mall, Richmond Virginia
10.21 Equipment Lease dated March 17, 1998 between H.C.B. O-10.01*
Corporation and Pizzeria Regina of Florida, Inc.
regarding certain equipment located in the Oviedo
Marketplace, Oviedo, Florida.
10.22 Equipment Lease dated March 17, 1998 between H.C.B. O-10.02*
Corporation and Ocean, Inc. regarding certain equipment
at a Pizzeria Regina location in the Auburn Mall, Auburn,
Massachusetts.
10.23 Equipment Lease dated March 17, 1998 between H.C.B. O-10.03*
Corporation and Ocean, Inc. regarding certain equipment
at a Pizzeria Regina location in the Regency Square Mall,
Richmond, VA.
10.24 Form of Franchise Agreement dated as of January 22, 1999 P-10.24*
between Boston Restaurant Associates, Inc. and Shining
Sea, LLC.
10.25 Joint Venture Agreement dated as of December 23, 1998 P-10.25*
between Boston Restaurant Associates, Inc. and Italian
Ventures, LLC
21 Subsidiaries of the Registrant A-21*
23 Consent of BDO Seidman, LLP Filed
Herewith
-32-
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
27 Financial Schedule Filed
Herewith
* In accordance with Rule 12b-32 under the Securities
Exchange Act of 1934, as amended, reference is made to
the documents previously filed with the Securities and
Exchange Commission, which documents are hereby
incorporated by reference.
** Management Contract or Compensatory Plan or Arrangement
A Incorporated by reference to the Company's Registration
Statement on Form SB-2 (Registration No. 33-81068). The
number set forth herein is the number of the Exhibit in
said registration statement.
B Incorporated by reference to the Company's registration
statement on Form S-1 (File No. 33-31748). The number
set forth herein is the number of the Exhibit in said
registration statement.
C Incorporated by reference to the Company's annual report
on 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 transition
report on Form 10K for the seven months ended April 30,
1990. The number set forth herein is the number of the
Exhibit in said transition report.
E Incorporated by reference to the Company's annual report
on Form 10-K for the year ended April 30, 1993. The
number set forth herein is the number of the Exhibit in
said annual report.
F 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.
G Incorporated by reference to the Company's annual report
on Form 10-K for the year ended April 30, 1995. 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 the period ended January 28,
1996. The number set forth herein is the number of the
Exhibit in said quarterly report.
I Incorporated by reference to the Company's annual report
on Form 10-KSB for the year ended April 28, 1996. The
number set forth herein is the number of the Exhibit in
said annual report.
-33-
EXHIBIT REFERENCE
NUMBER NUMBER
- ------ ------
J Incorporated by reference to the Company's annual report on
Form 10-KSB for the year ended April 27, 1997. 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-QSB for the period ended July 26,
1997. 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-QSB for the period ended October 26,
1997. The number set forth herein is the number of the
Exhibit in said quarterly report.
M Incorporated by reference to the Company's Form S-2
Registration Statement dated February 26, 1998. The
number set forth herein is the number of the Exhibit in
said Registration Statement.
N 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.
O 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.
P Incorporated by reference to the Company's quarterly
report on Form 10-QSB for period ending January 24,
1999. The number set forth herein is the number of the
Exhibit in said quarterly report.
(a) REPORTS ON FORM 8-K
1. Boston Restaurant Associates, Inc. filed a report on Form 8-K dated 25
January 1999 reporting third quarter sales results for Polcari's
restaurant.
2. Boston Restaurant Associates, Inc. filed a report on Form 8-K dated 27
January 1999 reporting the Board of Directors' authorization to purchase
500,000 shares of common stock over the next twenty-four months.
-34-
SIGNATURES
In accordance with section 13 or 15 (d) of the Securities Exchange Act
of 1934, the registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
BOSTON RESTAURANT ASSOCIATES, INC.
Date: 21 July, 1999 By: /S/GEORGE R. CHAPDELAINE
----------------------------------
George R. Chapdelaine, President
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated.
SIGNATURES DATE
- ---------- ----
/S/GEORGE R. CHAPDELAINE 21 July, 1999
- ------------------------------------------
George R. Chapdelaine, Chief
Executive Officer, President and
Director (principal executive officer)
/S/ FRAN V. ROSS 21 July, 1999
- ------------------------------------------
Fran V. Ross, Chief Financial Officer
(principal financial and accounting officer)
/S/JOSEPH J. CARUSO 21 July, 1999
- ------------------------------------------
Joseph J. Caruso, Director
/S/ROGER LIPTON 21 July, 1999
- ------------------------------------------
Roger Lipton, Director
/S/KATHLEEN MASON 21 July, 1999
- -----------------
Kathleen Mason, Director
/S/JOHN P. POLCARI, JR. 21 July, 1999
- ------------------------------------------
John P. Polcari, Jr., Director
/S/RICHARD J. REEVES 21 July, 1999
- -------------------------------------------
Richard J. Reeves, Director
LUCILLE SALHANY 21 July, 1999
- -------------------------------------------
Lucille Salhany, Director
/S/TERRANCE A. SMITH 21 July, 1999
- -------------------------------------------
Terrance A. Smith, Director
-35-
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONTENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
CONSOLIDATED FINANCIAL STATEMENTS:
Balance sheets F-3 to F-4
Statements of income F-5
Statements of stockholders' equity F-6
Statements of cash flows F-7
Summary of accounting policies F-8 to F-12
Notes to consolidated financial statements F-13 to F-31
F-1
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders of
Boston Restaurant Associates, Inc.
We have audited the accompanying consolidated balance sheets of Boston
Restaurant Associates, Inc. and subsidiaries as of April 25, 1999 and April 26,
1998, and the related consolidated statements of income, stockholders' equity
and cash flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Boston Restaurant
Associates, Inc. and subsidiaries at April 25, 1999 and April 26, 1998, and the
results of their operations and their cash flows for the years then ended, in
conformity with generally accepted accounting principles.
/s/ BDO Seidman, LLP
-------------------
BDO Seidman, LLP
Boston, Massachusetts
June 18, 1999
F-2
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
APRIL 25, April 26,
1999 1998
- --------------------------------------------------------------------------------
ASSETS (Note 4)
CURRENT:
Cash and cash equivalents $1,863,299 $1,788,361
Accounts receivable 32,121 46,958
Inventories (Note 1) 214,657 212,071
Prepaid expenses and other 51,085 49,152
- --------------------------------------------------------------------------------
Total current assets 2,161,162 2,096,542
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT (Note 8):
Building 512,500 512,500
Leasehold improvements 3,220,587 2,977,315
Equipment, furniture and fixtures 2,290,488 1,974,473
- --------------------------------------------------------------------------------
6,023,575 5,464,288
Less accumulated depreciation and amortization 2,567,084 2,119,015
- --------------------------------------------------------------------------------
Net property and equipment 3,456,491 3,345,273
- --------------------------------------------------------------------------------
OTHER ASSETS (Note 2) 1,270,041 1,323,160
- --------------------------------------------------------------------------------
$6,887,694 $6,764,975
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-3
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(CONTINUED)
APRIL 25, April 26,
1999 1998
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 236,770 $ 314,124
Accrued expenses (Note 3) 651,089 490,525
Current maturities (Notes 4, 5, and 8):
Long-term debt 122,076 200,000
Notes payable - stockholder 4,740 4,495
Obligations under capital leases 102,200 74,206
- -------------------------------------------------------------------------------------------------------------------
Total current liabilities 1,116,875 1,083,350
LONG-TERM OBLIGATIONS:
Long-term debt, less current maturities (Note 4) 362,925 425,000
Notes payable - stockholder, less current maturities (Note 5) 116,569 121,336
Obligations under capital leases, less current maturities (Note 8) 331,403 361,548
Deferred rent (Note 8) 106,513 85,662
Subordinated debentures (Note 6) 1,500,000 1,500,000
- -------------------------------------------------------------------------------------------------------------------
Total liabilities 3,534,285 3,576,896
- -------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 29,009 -
- -------------------------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (Notes 6, 9, 10, and 12):
Preferred stock, $.01 par value, 10,000,000 shares authorized
in 1999; none issued - -
Common stock, $.01 par value, 25,000,000 shares authorized;
shares issued 7,060,170 and 7,021,970 70,602 70,220
Additional paid-in capital 10,922,636 10,846,333
Accumulated deficit (7,668,838) (7,728,474)
- -------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 3,324,400 3,188,079
- -------------------------------------------------------------------------------------------------------------------
$ 6,887,694 $ 6,764,975
- -------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-4
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
APRIL 25, April 26,
YEARS ENDED 1999 1998
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
REVENUES:
Restaurant sales $ 12,153,934 $ 11,255,049
Franchise fees (Note 8) 20,000 --
- -----------------------------------------------------------------------------------------
Total revenues 12,173,934 11,255,049
- -----------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of food, beverages and liquor 2,546,026 2,267,331
Other operating expenses 7,114,457 6,780,778
General and administrative 1,663,649 1,377,464
Depreciation and amortization 545,092 469,559
Pre-opening costs 42,197 33,787
- -----------------------------------------------------------------------------------------
Total costs and expenses 11,911,421 10,928,919
- -----------------------------------------------------------------------------------------
OPERATING INCOME 262,513 326,130
INTEREST EXPENSE, net of interest income of $72,013 and
$25,215 in 1999 and 1998, respectively (241,973) (279,645)
OTHER INCOME, net 4,963 6,395
- -----------------------------------------------------------------------------------------
Income before minority interest 25,503 52,880
MINORITY INTEREST IN NET LOSS OF SUBSIDIARY 34,133 --
- -----------------------------------------------------------------------------------------
NET INCOME $ 59,636 $ 52,880
- -----------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------
NET INCOME PER SHARE OF COMMON STOCK (Note 11):
Basic $ 0.01 $ 0.01
Diluted $ 0.01 $ 0.01
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-5
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Stock Additional Total
YEARS ENDED APRIL 25, 1999 AND $.01 Par Value Paid-In Accumulated Stockholders'
--------------------------
APRIL 26, 1998 Shares Amount Capital Deficit Equity
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, April 27, 1997 5,015,693 $ 50,157 $ 9,043,199 $(7,781,354) $1,312,002
Proceeds from sale of common stock,
net of expenses of $250,240 (Note 12) 2,006,277 20,063 1,735,974 - 1,756,037
Issuance of options and warrants in
exchange for services (Note 10) - - 67,160 - 67,160
Net income for the year - - - 52,880 52,880
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, April 26, 1998 7,021,970 70,220 10,846,333 (7,728,474) 3,188,079
Exercise of employee stock options 2,200 22 2,178 - 2,200
Issuance of common stock in exchange
for services (Note 10) 36,000 360 17,816 - 18,176
Issuance of options in exchange
for services (Note 10) - - 56,309 - 56,309
Net income for the year - - - 59,636 59,636
- --------------------------------------------------------------------------------------------------------------------------
BALANCE, April 25, 1999 7,060,170 $ 70,602 $10,922,636 $(7,668,838) $3,324,400
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-6
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(NOTE 10)
APRIL 25, April 26,
YEARS ENDED 1999 1998
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 59,636 $ 52,880
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 545,092 469,559
Options granted in exchange for services 56,309 37,704
Common stock issued in exchange for services 18,176 -
Minority interest in net loss of subsidiary (34,133) -
Changes in operating assets and liabilities:
Accounts receivable 14,837 22,771
Inventories (2,586) (2,776)
Prepaid expenses and other (1,933) (21,620)
Other assets (43,901) (113,787)
Accounts payable (77,354) (68,170)
Accrued expenses 160,564 (137,752)
Deferred rent 20,851 18,638
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 715,558 257,447
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (485,960) (796,716)
Purchase of lease acquisition rights - (290,700)
Proceeds from sales of fixed assets - 22,908
- -----------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (485,960) (1,064,508)
- -----------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt 538,472 -
Repayments of long-term debt (678,471) (200,000)
Repayments of capital lease obligations (75,481) (36,711)
Repayments of stockholder loans (4,522) (4,240)
Minority interest investment in subsidiary 63,142 -
Proceeds from exercise of stock options 2,200 -
Net proceeds from sale of common stock - 1,756,037
Proceeds from issuance of subordinated debentures - 381,250
Debt issuance costs - (26,968)
- -----------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (154,660) 1,869,368
- -----------------------------------------------------------------------------------------------------------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 74,938 1,062,307
CASH AND CASH EQUIVALENTS, beginning of year 1,788,361 726,054
- -----------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS, end of year $1,863,299 $1,788,361
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
SEE ACCOMPANYING SUMMARY OF ACCOUNTING POLICIES AND NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS.
F-7
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NATURE OF BUSINESS The Company is engaged in the restaurant business.
AND BASIS OF As of April 25, 1999, the Company operated ten
PRESENTATION pizza restaurants and one casual Italian dining
restaurant. As of April 26, 1998, the Company
operated nine pizza restaurants and one casual
Italian dining restaurant.
The consolidated financial statements include the
accounts of the Company and its majority-owned
subsidiaries. All significant intercompany balances
and transactions have been eliminated.
FISCAL YEAR The Company's fiscal year ends on the last Sunday
in April. Fiscal years 1999 and 1998 both included
52 weeks.
USE OF ESTIMATES The preparation of financial statements in
conformity with generally accepted accounting
principles requires management to make estimates
and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial
statements and reported amounts of revenues and
expenses during the reporting period. Actual
results could differ from those estimates.
RECLASSIFICATIONS Certain reclassifications have been made to the
1998 financial statements to conform to the 1999
presentation.
CASH EQUIVALENTS For purposes of the statements of cash flows, the
Company considers all highly liquid debt
instruments purchased with maturities of three
months or less to be cash equivalents. Cash
equivalents were approximately $1,415,000 and
$1,646,000 at April 25, 1999 and April 26, 1998,
respectively.
FINANCIAL INSTRUMENTS The estimated fair values of the Company's
financial instruments, which consist of cash and
cash equivalents, accounts receivable, accounts
payable, accrued expenses and certain long-term
obligations, approximate their carrying values
based on their maturity dates and prevailing market
interest rates.
F-8
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
INVENTORIES Inventories are valued at the lower of cost
(first-in, first-out) or market.
PROPERTY AND Property and equipment are stated at cost.
EQUIPMENT Depreciation is computed using accelerated and
straight-line methods over the estimated useful
lives of the assets. Leasehold improvements are
amortized over the estimated useful lives of the
improvements or the length of the related lease,
including anticipated renewal periods, whichever is
shorter.
OTHER ASSETS
GOODWILL Goodwill resulting from the excess of cost over the
fair value of net assets acquired is being
amortized on a straight-line basis over 20 years.
DEFERRED FINANCING Costs incurred in connection with obtaining
COSTS financing are amortized over the terms of the
related debt.
LEASE ACQUISITION Costs incurred in connection with the purchase of a
RIGHTS lease are being amortized over the term of the
lease.
REVENUE RECOGNITION
RESTAURANT SALES Substantially all restaurant sales represent retail
sales to the general public through Company-owned
restaurants. Such amounts are recognized as revenue
at the point of sale.
FRANCHISE FEES Franchise fees resulting from the sale of
individual franchise locations are recognized as
revenue upon the commencement of franchise
operations. Revenues from the sale of area
development rights are recognized proportionately
as the franchised restaurants subject to the area
development agreements commence operations.
Franchise royalties, which are based on a
percentage of franchised restaurants' sales, are
recognized as earned.
F-9
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
ADVERTISING COSTS Advertising costs are expensed when incurred.
Advertising expense amounted to approximately
$203,000 in 1999 and $118,000 in 1998.
PRE-OPENING COSTS All nonrecurring costs, such as recruiting,
training and other initial direct administrative
expenses associated with the opening of new
restaurant locations are expensed as incurred.
TAXES ON INCOME The Company accounts for income taxes under the
asset and liability method pursuant to Statement of
Financial Accounting Standards No. 109 ("SFAS No.
109"), "Accounting for Income Taxes." Under SFAS
No. 109, deferred income taxes are recognized for
the future tax consequences attributable to
differences between the financial statement
carrying amounts of existing assets and liabilities
and their respective tax basis. Deferred tax assets
and liabilities are measured using enacted tax
rates expected to apply to taxable income in the
years in which those temporary differences are
expected to be recovered or settled. The effect of
any tax rate change on deferred taxes is recognized
in income in the period that includes the enactment
date of the tax rate change.
STOCK OPTIONS The Company follows the provisions of Statement of
Accounting Standards No. 123, "Accounting for
Stock-Based Compensation." The Company has elected
to continue to account for stock options at their
intrinsic value with disclosure of the effects of
fair value accounting on earnings and earnings per
share of common stock on a pro forma basis.
F-10
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NET INCOME PER SHARE The Company follows Statement of Financial
OF COMMON STOCK Accounting Standards No. 128 ("SFAS No. 128"),
"Earnings per Share." Under SFAS No. 128, basic
earnings per share excludes the effect of any
dilutive options, warrants or convertible
securities and is computed by dividing the net
income (loss) available to common shareholders by
the weighted average number of common shares
outstanding for the period. Diluted earnings per
share is computed by dividing the net income (loss)
available to common shareholders by the sum of the
weighted average number of common shares and common
share equivalents computed using the average market
price for the period under the treasury stock
method.
LONG-LIVED ASSETS The Company evaluates its long-lived assets under
the provisions of Statement of Financial Accounting
Standards No. 121 ("SFAS No. 121"), "Accounting for
the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed of". SFAS No. 121
establishes accounting standards for the impairment
of long-lived assets and certain identifiable
intangibles to be held and used and for long-lived
assets and certain identifiable intangibles to be
disposed of.
The Company reviews the carrying values of its
long-lived and identifiable intangible assets for
possible impairment whenever events or changes in
circumstances indicate that the carrying amounts of
the assets may not be recoverable.
F-11
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
SUMMARY OF ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NEW ACCOUNTING In June 1998, the Financial Accounting Standards
STANDARD Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities"
("SFAS No. 133"). SFAS No. 133 requires companies
to recognize all derivative contracts as either
assets or liabilities in the balance sheet and to
measure them at their fair values. If certain
conditions are met, a derivative may be
specifically designated as a hedge, the objective
of which is to match the timing of gain or loss
recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of
the hedged assets or liability or (ii) the earnings
effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the
period of change. SFAS No. 133, as amended, is
effective for all fiscal quarters of fiscal years
beginning after June 15, 2000.
Historically, the Company has not entered into
derivative contracts either to hedge existing risks
or for speculative purposes. Accordingly, the
Company does not expect adoption of the new
standard to affect its financial statements.
F-12
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1. INVENTORIES Inventories consist of the following:
APRIL 25, April 26,
1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Food, beverages and liquor $ 105,643 $ 102,943
Paper goods and supplies 109,014 109,128
--------------------------------------------------------------------------------------
Total $ 214,657 $ 212,071
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
2. OTHER ASSETS Other assets consist of the following:
APRIL 25, April 26,
1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Goodwill $ 765,133 $ 765,133
Lease acquisition rights 290,700 290,700
Deferred financing costs 288,775 268,524
Deposits and other 243,848 213,646
--------------------------------------------------------------------------------------
1,588,456 1,538,003
Less accumulated amortization 318,415 214,843
--------------------------------------------------------------------------------------
Other assets, net $ 1,270,041 $ 1,323,160
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-13
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
3. ACCRUED EXPENSES Accrued expenses consist of the following:
APRIL 25, April 26,
1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Compensation $ 222,464 $ 160,315
Interest 168,207 127,412
Taxes other than income taxes 44,944 71,073
Professional fees 87,176 64,000
Gift certificates 51,207 36,465
Accrued rent 24,114 22,209
Other 52,977 9,051
--------------------------------------------------------------------------------------
Total $ 651,089 $ 490,525
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
4. REVOLVING CREDIT
FACILITY AND
LONG-TERM DEBT
In November 1998, the Company obtained a $2,000,000
revolving credit facility with a bank which expires
on October 1, 1999. At the Company's option,
borrowings used to repay existing bank debt or to
finance construction of new restaurant locations
may be in the form of a term loan, payable over a
four year period with variable interest rate
options. Borrowings used to fund short-term working
capital needs bear interest at the bank's base
lending rate plus 1%. Such borrowings plus accrued
interest are due in full within 30 days of
issuance. The Revolving Credit Facility Agreement
requires compliance with various covenants
including leverage ratio, debt service ratio,
certain earnings ratios, and maximum capital
expenditures. Outstanding borrowings against this
credit facility amounted to $485,001 at April 25,
1999 and consisted of term notes payable. All
borrowings under the revolving credit facility are
collateralized by substantially all of the
Company's assets.
F-14
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. REVOLVING CREDIT
FACILITY AND
LONG-TERM DEBT
(Continued)
LONG-TERM DEBT Long-term debt consists of the following:
APRIL 25, April 26,
1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Notes payable to a bank bearing interest at 7.84%,
representing borrowings against the Company's
revolving credit facility, payable in aggregate
monthly installments of $12,984 through November 2002. $485,001 $ -
Note payable to a bank, interest at prime plus 2%,
repaid in full during fiscal 1999. - $300,000
Note payable to a bank, interest at 12.0%, repaid
in full during fiscal 1999. - $325,000
-------------------------------------------------------------------------------------
Total 485,001 625,000
Less current maturities 122,076 200,000
-------------------------------------------------------------------------------------
Long-term debt $362,925 $425,000
-------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------
F-15
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
4. REVOLVING CREDIT
FACILITY AND
LONG-TERM DEBT
(Continued)
LONG-TERM DEBT Maturities of long-term debt are as
(Continued) follows:
FISCAL YEAR ENDING Amount
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
2000 $122,076
2001 131,998
2002 142,727
2003 88,200
--------------------------------------------------------------------------------------
Total $485,001
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
5. NOTES PAYABLE - Notes payable - stockholder consists of
STOCKHOLDER two notes, with interest at 7.18% and 8%,
payable in aggregate monthly installments
of principal and interest of $810,
maturing January, 2017. Maturities of
notes payable - stockholder are as
follows:
FISCAL YEAR ENDING Amount
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
2000 $ 4,740
2001 4,996
2002 5,274
2003 5,567
2004 5,820
Thereafter 94,912
--------------------------------------------------------------------------------------
Total $121,309
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-16
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
6. SUBORDINATED Subordinated debentures outstanding at
DEBENTURES April 25, 1999 and April 26, 1998 consist
of convertible debentures bearing interest
at variable rates of 8% through December
31, 1997, 10% through December 31, 1998,
12% through December 31, 1999 and 14%
through December 31, 2011, payable
semi-annually and convertible into the
Company's common stock at a conversion
rate of $1.25 per share. The Company has
recorded interest costs related to these
debentures at a straight-lined rate of
13.2%. The convertible debentures are
convertible at the option of the holder,
at any time, and automatically convert
into shares of common stock at the
conversion rate if the average bid price
of the Company's common stock for any
sixty consecutive trading days is equal to
or greater than $3.00. The debentures are
due on December 31, 2011.
7. TAXES ON INCOME At April 25, 1999, the Company has the
following net operating loss
carryforwards, subject to review by the
Internal Revenue Service, available to
offset future federal taxable income:
Expiration
Amount Dates
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Net operating losses purchased in a 1994
acquisition, whose use is limited. $2,908,000 2004-2009
Net operating losses incurred before and
after acquisition and available for
immediate offset against taxable
income. $4,422,000 2000-2013
F-17
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
7. TAXES ON INCOME Deferred tax assets are comprised of the
(Continued) following:
APRIL 25, April 26,
1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Deferred tax assets:
Net operating loss carryforwards $ 2,932,000 $ 3,212,000
Depreciation 374,000 452,000
Valuation allowance (3,306,000) (3,664,000)
--------------------------------------------------------------------------------------
Net deferred tax assets $ - $ -
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
The Company has provided a valuation
allowance equal to 100% of its total
deferred tax assets in recognition of the
uncertainty regarding the ultimate amount
of the deferred tax assets that will be
realized.
A reconciliation of the statutory federal
income tax rate and the effective tax rate
as a percentage of income before taxes on
income is as follows:
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Statutory rate 34.0% 34.0%
Utilization of net operating loss carryforward
generating no current or deferred tax effect. (34.0) -
Operating income offset by current tax loss
generating no current or deferred tax effect. - (34.0)
--------------------------------------------------------------------------------------
Effective tax rate - % - %
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-18
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. COMMITMENTS AND
CONTINGENCIES
LEASES The Company is obligated under
noncancellable operating leases for its
leased restaurant locations, office,
commissary and warehouse space. Lease
terms range from five to twenty years and,
in certain instances, include options to
extend the original terms. Generally, the
Company is required to pay its
proportionate share of real estate taxes,
insurance, common area and other operating
costs in addition to annual base rent.
Substantially all restaurant leases
provide for contingent rent based on sales
in excess of specified amounts. The
Company also leases equipment under
capital leases.
The following is an analysis of equipment
held under capital leases, included in
property and equipment in the accompanying
consolidated balance sheets:
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Equipment $566,095 $492,765
Less: accumulated amortization 94,021 65,868
--------------------------------------------------------------------------------------
Net leased property under capital leases $472,074 $426,897
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-19
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. COMMITMENTS AND
CONTINGENCIES
(Continued)
LEASES Aggregate minimum rental requirements
under capital leases and operating leases
as of April 25, 1999, are approximately
as follows:
Capital Operating
FISCAL YEAR ENDING Leases Leases
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
2000 $149,782 $ 2,041,000
2001 149,782 1,987,000
2002 128,102 1,961,000
2003 107,241 1,881,000
2004 - 1,795,000
Thereafter - 6,997,000
--------------------------------------------------------------------------------------
Total minimum lease payments 534,907 $16,662,000
-----------
-----------
Amount representing interest 101,304
--------------------------------------------------------------
Present value of net minimum
lease payments 433,603
Less current maturities 102,200
--------------------------------------------------------------
Long-term maturities $331,403
--------------------------------------------------------------
--------------------------------------------------------------
Deferred rent liabilities of $106,513 and
$85,662 as of April 25, 1999 and April 26,
1998, respectively, were recorded in order
to recognize lease escalation provisions
on a straight-line basis for certain
operating leases.
Rent expense under all operating leases
amounted to approximately $1,668,000 and
$1,499,000 during fiscal 1999 and 1998,
respectively, which included contingent
rent of approximately $34,000 and $17,000,
respectively.
F-20
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. COMMITMENTS AND
CONTINGENCIES
(Continued)
LEASE GUARANTEES In connection with the sale of a
restaurant to a non-affiliated
third-party, the Company is a guarantor of
certain lease payments required under a
lease assumed by the buyer which expires
in fiscal 2001. At April 25, 1999, the
Company is contingently liable for
approximately $335,000 under the guaranty.
The Company's management believes that the
buyer of the location will be able to
perform under the terms of the lease and
that no payments will be required and no
losses will be incurred by the Company
under the guaranty.
LITIGATION The Company is involved in various legal
matters in the ordinary course of its
business. Each of these matters is subject
to various uncertainties, and some of
these matters may be resolved unfavorably
to the Company. Management believes that
any liability that may ultimately result
from the resolution of these matters will
not have a material adverse effect on the
financial position of the Company.
CONSTRUCTION OF NEW At April 25, 1999, the Company had
RESTAURANT FACILITIES commitments amounting to approximately
$849,000 to fund the construction of three
Pizzeria Regina restaurants, which are
expected to open in fiscal 2000.
FRANCHISING In December 1997, the Company formed
Boston Restaurant Associates
International, Inc. ("BRAII"), a wholly
owned subsidiary, for the purpose of
offering Pizzeria Regina franchise
opportunities both domestically and
internationally. During fiscal 1999, the
Company recognized $20,000 in franchise
fee revenues related to the opening of a
domestic Pizzeria Regina franchise
controlled by a Company director.
F-21
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. COMMITMENTS AND
CONTINGENCIES
(Continued)
INTERNATIONAL In January 1998, the Company entered into
DEVELOPMENT an International Development Agreement
AGREEMENT ("Development Agreement") with
Regina International, Ltd ("Regina
International"), a corporation
controlled by a Company director, to
pursue and develop franchise territories
outside the Americas, anticipated to be
principally in Europe, the Far East and
the Pacific Rim.
The Development Agreement, which is for an
initial term of five and a half years,
requires the Company to pay a monthly
development fee of $7,000 beginning the
month after the first territory fee has
been received and continuing for sixty
months, provided the Development Agreement
has not been earlier terminated. The
Development Agreement provides that either
party may re-negotiate the agreement
pursuant to a written notice prior to the
end of the initial term. If the parties
are unable to re-negotiate this agreement
on mutually satisfactory terms, the
Company and Regina International have the
right to cause the Company to pay Regina
International a one-time buy-out fee equal
to the aggregate gross revenues of BRAII
for the 5 years immediately preceding the
buy-out or such shorter period, if 5 years
have not elapsed less certain
international expenses, as defined.
The Company is also required to pay Regina
International during the term of the
agreement a royalty equal to 40% of the
gross revenues of BRAII less international
expenses. The royalty payment is subject
to reduction, if certain levels of
international expenses in relation to
revenues are not achieved by BRAII. As of
April 25, 1999, no development fees or
royalties have been earned.
F-22
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
8. COMMITMENTS AND
CONTINGENCIES
(Continued)
JOINT VENTURE AND In December 1998, the Company formed a
DEVELOPMENT joint venture with Italian Ventures, LLC
AGREEMENT ("Italian Ventures"), a Kentucky
corporation controlled by two Company
directors and entered into a Development
Agreement (the "Agreement") for the
purpose of developing domestic casual
Italian dining restaurants. The Company
has a 51% equity interest in the joint
venture entity, Regina Ventures, LLC
("Regina Ventures").
The Agreement, which has an initial term
of 20 years, provides for a "Put Option",
which may be exercised by Italian Ventures
and a "Call Option", which may be
exercised by the Company. After the first
60 months of the Agreement, Italian
Ventures may exercise its Put Option and
cause the Company to purchase its 49%
equity interest in Regina Ventures plus
the assets (excluding cash, cash
equivalents and accounts receivable) of
Italian Ventures and its affiliates used
in any Regina Ventures restaurants
developed under the Agreement (the
"Italian Ventures Equity Interest"). After
the first 36 months of the Agreement, the
Company may exercise its Call Option and
thereby elect to purchase the Italian
Ventures Equity Interest. Under certain
limited circumstances, as defined in the
Agreement, the Put and Call Options may
be exercised prior to the respective
initial 36 and 60 months of the Agreement.
If neither the Put nor the Call Option is
exercised and, at the end of the initial
term, the Company and Italian Ventures do
not agree to extend the Agreement, the
Company shall purchase the Italian
Ventures Equity Interest. In all
scenarios, the purchase price for the
Italian Ventures Equity Interest shall be
based on the earnings and net assets of
Regina Ventures, as defined in the
Agreement, and payable in cash, Company
common stock, or a combination of both, at
the discretion of the Company.
During fiscal 1999, one franchise
territory and one Company restaurant site
were established under the Agreement. No
franchise revenues were recognized during
fiscal 1999, as both locations are
expected to commence operations during
fiscal 2000.
F-23
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
PREFERRED STOCK In September 1998, the Company's
shareholders authorized the Company to
issue up to 10,000,000 shares of
preferred stock, $.01 par value per
share. The preferred stock may be issued
in one or more series. The terms of the
issuances will be determined by the Board
of Directors on the dates of the issuances
and may include provisions for voting
rights, preferences, conversion and
redemption rights and other limitations or
restrictions.
STOCK OPTIONS In July 1994, the Company's stockholders
AND WARRANTS approved the 1994 Combination Stock
Option Plan (the "1994 Combination
Plan") and the 1994 Non-Employee
Director Stock Option Plan (the "1994
Director Plan").
The 1994 Combination Plan provides for the
granting of incentive stock options
intended to qualify under the requirements
of the Internal Revenue Code and options
not qualified as incentive stock options.
Incentive stock options may only be
granted to employees of the Company.
Non-employees contributing to the success
of the Company are eligible to receive
non-qualified stock options. The 1994
Combination Plan is to be administered by
a Committee designated by the Board of
Directors. Options under the 1994
Combination Plan may not be granted after
July 2004 and the exercise price shall be
at least equal to the fair market value of
the common stock at the grant date.
F-24
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS Incentive stock options may be granted to
AND WARRANTS holders of more than 10% of the Company's
(Continued) common stock at an exercise price of at
least 110% of the fair market value of the
Company's common stock at the grant date.
The terms of the options granted are to
be determined by the Committee, but
in no event shall the term of any
incentive stock option extend beyond
three months after the time a
participant ceases to be an employee of
the Company. No options may be exercised
more than five years after the date of
the grant for 10% stockholders, or ten
years after the date of grant for all
other participants. A total of 500,000
shares of common stock have been reserved
for issuance under the 1994 Combination
Plan.
The 1994 Director Plan, as amended,
provides for the granting to each eligible
non-employee director of the Company
options to purchase shares of the
Company's common stock. Options granted
under the 1994 Director Plan become
exercisable over a ten year period at an
exercise price equal to the fair market
value of the Company's common stock at the
grant date and expire ten years from the
grant date. A total of 500,000 shares have
been reserved for issuance under the 1994
Director Plan.
During fiscal 1998, the Company issued
options to the Company's President and
Treasurer to purchase an aggregate of
108,346 shares of the Company's common
stock in connection with their guarantees
of certain equipment leases. The options
are exercisable at $1.27 per share and
expire March 17, 2003.
F-25
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS Changes in options outstanding under the
AND WARRANTS 1994 Plans, options issued in connection
(Continued) with the guarantees of certain leases and
debt by the Company's President and
Treasurer, and options issued under
prior plans which have expired are
summarized as follows:
Weighted-
Average
Exercise
Shares Price
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
BALANCE, April 27, 1997 753,600 $ 1.01
Granted 237,846 1.34
Cancelled or expired (3,500) 4.38
--------------------------------------------------------------------------------------
BALANCE, April 26, 1998 987,946 1.08
Granted 145,000 1.13
Exercised (2,200) 1.00
--------------------------------------------------------------------------------------
BALANCE, April 25, 1999 1,130,746 $ 1.08
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
As of April 25, 1999, options for 902,846
shares were exercisable at prices ranging
from $0.88 to $2.38. As of April 26, 1998,
options for 660,800 shares were
exercisable at prices ranging from $0.88
to $2.38.
F-26
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS The following table summarizes stock
AND WARRANTS options outstanding at April 25, 1999:
(Continued)
OPTIONS OUTSTANDING
------------------------------------------------------
Weighted-
Number Average Weighted-
Range of Outstanding at Remaining Average
Exercise April 25, Contractual Exercise
Prices 1999 Life (years) Price
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
$ 2.38 5,000 6.3 $ 2.38
1.88 42,000 6.9 1.88
1.24 - 1.56 183,346 4.9 1.32
0.88 - 1.17 900,400 4.1 .98
--------------------------------------------------------------------------------------
$ 0.88- $2.38 1,130,746 4.3 $ 1.08
--------------------------------------------------------------------------------------
OPTIONS EXERCISABLE
----------------------------------------------
Weighted-
Range of Number Average
Exercise Exercisable at Exercise
Prices April 25, 1999 Price
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
$ 2.38 3,000 $ 2.38
1.88 35,200 1.88
1.24 - 1.56 153,346 1.29
0.88 - 1.17 711,300 .97
--------------------------------------------------------------------------------------
$ 0.88 - $2.38 902,846 $ 1.06
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
F-27
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS At April 25, 1999, warrants and units
AND WARRANTS outstanding, all of which are exercisable,
(Continued) consist of the following:
(a) Warrants for the purchase of 210,000
shares of common stock at an exercise
price of $2.00 per share, expiring
April 29, 1999.
(b) Warrants to purchase 1,708,000 shares
of common stock at a purchase price of
$3.20 per share, expiring September 7,
1999, issued in connection with the
Company's September 7, 1994 public
offering.
(c) Warrants to purchase 75,000 units
(375,000 shares of common stock) at a
purchase price of $3.20 per share,
expiring September 7, 1999, issued in
connection with the Company's
September 7, 1994 public offering.
(d) Warrants to purchase 25,000 shares of
common stock at a purchase price of
$2.80 per share, expiring December 28,
2000 and warrants to purchase 25,000
shares of common stock at a purchase
price of $2.80 per share, expiring
April 19, 2001, granted to a bank in
connection with the issuance of
certain notes payable.
(e) Warrants to purchase 350,000 and
150,000 shares of common stock at an
exercise price of $3.00 per share,
expiring December 31, 2006 and January
25, 2008, respectively, granted in
consideration for brokerage services
related to the issuance of convertible
subordinated debentures.
The convertible subordinated debentures
with an outstanding balance of $1,500,000
as of April 25, 1999 are convertible into
common shares at $1.25 per share.
Accordingly, 1,200,000 shares have been
reserved for conversion of the
subordinated debentures.
F-28
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS At April 25, 1999, 5,623,846 shares of
AND WARRANTS common stock were reserved with respect to
(Continued) outstanding options, warrants and
convertible debentures.
No units, warrants or options expired
during fiscal 1999. During fiscal 1998,
options to purchase 3,500 shares of
common stock at $4.38 per share expired.
The Company accounts for its stock-based
compensation plans using the intrinsic
value method. Accordingly, no compensation
cost has been recognized for its stock
option plans. Had compensation cost for
the Company's two stock option plans and
options issued in connection with the
guarantee of certain debt been determined
based on the fair value at the grant dates
for awards under those plans consistent
with the method of FASB Statement 123,
"Accounting for Stock-Based Compensation,"
the Company's net income (loss) and
earnings (loss) per share would have been
adjusted to the pro forma amounts
indicated below:
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
Net income (loss) As reported $ 59,636 $ 52,880
Pro forma $ (12,644) $ (20,182)
Basic income (loss) As reported 0.01 0.01
per share Pro forma (0.00) (0.00)
Diluted income (loss) As reported 0.01 0.01
per share Pro forma (0.00) (0.00)
F-29
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
9. STOCKHOLDERS'
EQUITY
(Continued)
STOCK OPTIONS In determining the pro forma amounts
AND WARRANTS above, the Company estimated the fair
(Continued) value of each option granted using the
Black-Scholes option pricing model with
the following weighted-average
assumptions used for grants in 1999 and
1998, respectively: dividend yield of 0%
for both years, expected volatility of 49%
and 46% for 1999 and 1998, respectively,
risk free rates ranging from 4.6% to 5.3%
for 1999, and 5.1% to 6.6% for 1998, and
expected lives ranging from 5 to 10 years
for both 1999 and 1998. The weighted
average per share fair value of options
granted in fiscal 1999 and 1998 was $0.60
and $0.58, respectively.
10. SUPPLEMENTAL Cash paid for interest and income taxes
CASH FLOW are as follows:
INFORMATION
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Interest $266,638 $212,763
Income taxes $ - $ -
Noncash investing and financing activities
are as follows:
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Common stock and options issued in
exchange for services $ 74,485 $ 37,704
Common stock warrants issued in
exchange for debt placement services $ - $ 29,456
Capital leases entered into during the year $ 73,330 $302,765
F-30
BOSTON RESTAURANT ASSOCIATES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
11. NET INCOME The following is a reconciliation of the
PER SHARE OF denominator (number of shares) used in the
COMMON computation of earnings per share. The
STOCK numerator (net income) is the same for the
basic and diluted computations.
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Basic shares 7,038,314 5,175,096
Effect of dilutive securities:
Options 145,815 278,059
--------------------------------------------------------------------------------------
Diluted shares 7,184,129 5,453,155
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
The following table summarizes securities
that were outstanding as of April 25, 1999
and April 26, 1998, but not included in
the calculations of net income per share
because such securities are antidilutive:
APRIL 25, April 26,
YEARS ENDED 1999 1998
--------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------
Options 230,346 57,000
Warrants 2,843,000 2,843,000
Convertible debentures 1,200,000 1,200,000
12. RIGHTS OFFERING During fiscal 1998, the Company completed
a rights offering registration under the
Securities Act of 1933. Pursuant to the
offering, 2,006,277 shares of common stock
were issued and sold by the Company at a
price of $1.00 per share. The Company
received net proceeds after expenses of
approximately $1,756,000.
F-31
Dear Shareholders:
Boston Restaurant Associates continued to make significant progress toward
financial security and corporate growth in fiscal 1999.
Early in the third quarter of this fiscal year, we entered into a new two
million-dollar line of credit facility with BankBoston. This added to our cash
reserves from an earlier rights offering and has strengthened our ability to
build new restaurants.
We opened one new Pizzeria Regina at the Auburn Mall, Auburn, Massachusetts in
May 1998 and signed new leases to build three more Pizzeria Reginas this summer
and fall. Independence Mall, Kingston, Massachusetts is now opened, Ingleside
Mall, Holyoke, Massachusetts opens in September and Providence Mall, Providence,
Rhode Island will open in October 1999.
Our first franchise Pizzeria Regina opened in Louisville, Kentucky in the Spring
of 1999 and a second will open in Las Vegas this winter.
On another front, we are moving expeditiously to grow the Polcari's North-End
restaurant concept. Our Saugus, Massachusetts facility posted another
double-digit sales gain in fiscal 1999. Presently, we have scheduled a new
Polcari's opening this fall with others scheduled to open in the third
quarter. In addition, we have signed one franchise agreement to build a
Polcari's North-End restaurant this winter.
The pace at Boston Restaurant Associates is quickening. We have a solid
financial, operational and conceptual base, and are moving rapidly to achieve
the growth expected by our stockholders.
I believe that fiscal 2000 will see Pizzeria Regina and Polcari's North-End
restaurants come into their own. I appreciate the continued support of our
stockholders and employees and look forward to a promising fiscal 2000.
Sincerely,
--------------------------------
George R. Chapdelaine
President and Chief
Executive Officer