Washington, DC 20549

 

FORM 10-Q

 

 

Commission File Number
0-18369

 

 

Indicate by check whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during preceding 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 ý  No o.

 

Indicate by check whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No ý.

 

Indicate the number of shares outstanding of each of the registrant classes of common stock as of the latest practical date:  Common stock $0.01 par value 7,035,170 shares as of March 5, 2004.

 

 

BOSTON RESTAURANT ASSOCIATES, INC.

 

INDEX

 

PART I - FINANCIAL STATEMENTS			Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets as of January 25, 2004 (unaudited) and April 27, 2003	3
	Unaudited Condensed Consolidated Statements of Operations for the thirteen and thirty-nine weeks ended January 25, 2004 and January 26, 2003	4
	Unaudited Condensed Consolidated Statements of Cash Flows for the thirteen and thirty-nine weeks ended January 25, 2004 and January 26, 2003	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosure About Market Risk	21
Item 4.	Controls and Procedures	22
PART II - OTHER INFORMATION		23
Item 6.	Exhibits and Reports on Form 8-K	24
	SIGNATURES	25

 

2

 

PART 1 - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		January 25, 2004			April 27, 2003
		(unaudited)
ASSETS
Current:
Cash and cash equivalents		$	875,507		$	1,106,701
Accounts receivable		151,296			137,123
Inventories		678,320			541,030
Prepaid expenses and other		175,548			164,610
Total current assets		1,880,671			1,949,464
Property and equipment:
Building		512,500			512,500
Leasehold improvements		8,119,627			6,739,402
Equipment, furniture and fixtures		5,484,851			4,509,527
		14,116,978			11,761,429
Less accumulated depreciation and amortization		7,238,090			6,472,336
Net property and equipment		6,878,888			5,289,093
Goodwill		453,643			453,643
Other assets		542,098			581,545
Total assets		$	9,755,300		$	8,273,745
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	621,672		$	580,070
Accrued expenses		1,142,359			1,319,805
Current maturities:
Notes payable-stockholder		6,039			5,820
Long-term debt		733,506			220,835
Obligations under capital leases		185,451			195,365
Total current liabilities		2,689,027			2,321,895
Long-term obligations:
Notes payable-stockholder, less current maturities		90,408			94,964
Long-term debt, less current maturities		2,293,322			511,671
Obligations under capital leases, less current maturities		112,270			253,688
Subordinated debentures		1,450,000			1,450,000
Deferred rent		454,532			396,271
Other long-term liabilities		518,380			506,698
Total liabilities		7,607,939			5,535,187
Commitments and contingencies
Stockholders’ equity :
Preferred stock, $.01 par value, 10,000,000 shares authorized;  none issued		0			0
Common stock, $.01 par value, 25,000,000 shares authorized, 7,060,170 shares issued		70,602			70,602
Additional paid in capital		10,922,636			10,922,636
Accumulated deficit		(8,821,185		)	(8,229,988		)
Total		2,172,053			2,763,250
Less:
Treasury stock, 25,000 shares at cost		(24,692		)	(24,692		)
Total stockholders’ equity		2,147,361			2,738,558
Total liabilities and stockholders’ equity		$	9,755,300		$	8,273,745

 

See accompanying notes.

 

3

 

BOSTON RESTAURANTS ASSOCIATES,INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

 

		Thirteen Weeks Ended						Thirty-nine Weeks Ended
		January 25, 2004			January 26, 2003			January 25, 2004			January 26, 2003
Revenues:
Restaurant sales		$	6,182,404		$	5,828,978		$	17,291,439		$	17,205,521
Royalties		4,090			3,416			12,715			10,576
Total revenues		6,186,494			5,832,394			17,304,154			17,216,097
Costs and expenses:
Cost of food, beverages and liquor		1,277,878			1,096,759			3,535,252			3,297,104
Payroll		2,011,258			1,731,350			5,613,324			5,147,054
Other operating expenses		2,031,734			1,769,601			5,578,197			5,131,818
General and administrative		554,002			668,324			1,873,694			1,903,634
Depreciation and amortization		333,929			260,040			874,526			779,389
Pre-opening costs		2,497			0			317,665			0
Total costs and expenses		6,211,298			5,526,074			17,792,658			16,258,999
Operating Income (Loss)		(24,804		)	306,320			(488,504		)	957,098
Other income		1,495			1,660			219,804			7,967
Interest income		672			788			2,255			2,183
Interest expense		(116,342		)	(99,088		)	(324,752		)	(314,150		)
Net Income (Loss)		$	(138,979	)	$	209,680		(591,197		)	$	653,098
Income (Loss) per share-basic		$	(0.02	)	$	0.03		$	(0.08	)	$	0.09
Income (Loss) per share-diluted		$	(0.02	)	$	0.03		$	(0.08	)	$	0.09
Weighted average number of common shares outstanding-basic		7,035,170			7,035,170			7,035,170			7,035,170
Weighted average number of dilutive common shares outstanding		7,035,170			7,035,170			7,035,170			7,045,208

 

See accompanying notes

 

4

 

BOSTON RESTAURANT ASSOCIATES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

 

		Thirty-nine Weeks Ended
		January 25, 2004			January 26, 2003
Net cash provided by operating activities		$	28,994		$	896,793
Cash flows from investing activities:
Capital expenditures		(2,398,841		)	(216,112		)
Net cash used for investing activities		(2,398,841		)	(216,112		)
Cash flows from financing activities:
Repayments of long-term debt		(205,678		)	(1,011,406		)
Repayments of capital lease obligations		(151,332		)	(264,199		)
Repayments of stockholder loans		(4,337		)	(4,124		)
Repayments of subordinated convertible debentures		0			(50,000		)
Proceeds from long-term debt		2,500,000			922,305
Net cash provided by (used for) financing activities		2,138,653			(407,424		)
Net Increase (decrease) in cash and cash equivalents		(231,194		)	273,257
Cash and cash equivalents at beginning of period		1,106,701			932,806
Cash and cash equivalents at end of period		$	875,507		$	1,206,063

 

See accompanying notes.

 

5

 

BOSTON RESTAURANT ASSOCIATES, INC.  AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JANUARY 25, 2004

 

(unaudited)

 

1.  NATURE OF BUSINESS AND BASIS OF PRESENTATION

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q.  Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included.  Operating results for the thirteen-week period, and thirty-nine week period, ended January 25, 2004 are not necessarily indicative of the results that may be expected for the year ending April 25, 2004.  For further information, refer to the consolidated financial statements and footnotes thereto included in the Company’s annual report on Form 10-K for the year ended April 27, 2003.  The balance sheet at April 27, 2003 has been derived from the audited financial statements at that date.

 

The accompanying statements of operations and cash flows for the fiscal 2004 and fiscal 2003 periods reflect the consolidated operations and cash flow of four casual dining Italian restaurant and twelve Pizzeria Regina restaurants for the entire period and one additional casual dining Italian restaurants for part of the fiscal 2004 period.

 

2.  NET INCOME (LOSS) PER SHARE

 

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

 

The following is a reconciliation of the denominator (number of shares) used in the computation of earnings per share.  The numerator, net income (loss), is the same for the basic and diluted computations.

 

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

 

6

 

Had compensation cost for the Company’s stock options been determined based upon the fair value at the grant date for awards under the plans consistent with the methodology prescribed under SFAS No. 123, the Company’s net income (loss) would have been adjusted to the pro forma amounts indicated below along with the additional disclosures required by SFAS No. 148 are as follows:

 

		Thirteen Weeks Ended						Thirty Nine Weeks Ended
		January 25, 2004			January 26, 2003			January 25, 2004			January 26, 2003
Net income (loss) as reported		$	(138,979	)	$	209,680		$	(591,197	)	$	653,098
Add:
Stock-based employee compensation expense included in reported net income (loss), net of tax		—			—			—			—
Deduct:
Total stock-based Compensation expense determined under fair value based method		(11,095		)	(50,860		)	(32,194		)	(113,749		)
Net income (loss) - pro forma		$	(150,074	)	$	158,820		$	(622,391	)	$	539,349
Basic and diluted earnings per share:
As reported		$	(.02	)	$	.03		$	(.08	)	$	.09
Pro forma		$	(.02	)	$	.02		$	(.09	)	$	.08

 

7

 

		Thirteen weeks ended				Thirty-nine weeks ended
		January 25, 2004		January 26, 2003		January 25, 2004		January 26, 2003
Basic Shares		7,035,170		7,035,170		7,035,170		7,035,170
Effect of Dilutive Securities:
Options		0		0		0		10,038
Diluted Shares		7,035,170		7,035,170		7,035,170		7,045,208

 

The following table summarizes securities that were outstanding as of January 25, 2004 and January 26, 2003, but not included in the calculation of net income (loss) per share because such securities are anti-dilutive:

 

		Thirteen weeks ended				Thirty-nine weeks ended
		January 25, 2004		January 26, 2003		January 25, 2004		January 26, 2003
Options		773,800		910,146		773,800		790,146
Warrants		500,000		500,000		500,000		500,000
Convertible Debentures		1,160,000		1,160,000		1,160,000		1,160,000

 

8

 

3.                                      CREDIT FACILITY

 

The Company accessed its line of credit with Commerce Bank and Trust Company in the amount of $833,000, $833,000 and $834,000 on June 9, July 7 and August 4, 2003 respectively for a total of $2,500,000.  These funds were used for the construction of the new

Polcari’s North End restaurant in Cambridge, Massachusetts.  On February 13, 2004, the Company accessed an additional $535,000 for the construction of two Pizzeria Reginas in Boston, Massachusetts.

 

4.                                      NEW ACCOUNTING PRONOUNCEMENTS

 

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities.  EITF 00-21 was effective for periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position and results of operations.

 

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

 

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

 

9

 

ITEM 2.     Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

RESULTS OF OPERATIONS

 

Overview

 

The Company’s restaurant sales in the most recent quarter were $6,182,000 compared to sales of $5,829,000 in the third quarter of fiscal 2003, an increase of 6.0%.  This increase in sales was primarily attributable to the opening of a Polcari’s restaurant in Cambridge during the second quarter. The key factors that affect our operating results are the impact of new store openings, comparable restaurant sales, which are driven by customer counts and check average, and as well as our ability to manage operating expenses such as food cost, labor and benefits and other costs.  Changes in the number of restaurants in operation can increase or decrease total Company revenues and expenses, and the build out and opening of new stores can affect operating profits.  The opening of a new Cambridge, Massachusetts Polcari’s North End restaurant in October 2003 illustrates this fact. The net loss in the most recent quarter was $138,979 compared to net income of $209,680 in the third quarter of fiscal 2003.

 

Each restaurant unit’s contribution margin will vary over the life of the restaurant.  Margins tend to be low when a restaurant is first opened until customer traffic reaches planned levels.  Margins can also deteriorate at the end of a unit’s life cycle due to a decline in customer traffic caused by a variety of factors outside the control of the Company.  These economic conditions impact both the Pizzeria Regina units and the Polcari’s North End units.

 

There were 17 units in operation for the third quarter and part of the second quarter of fiscal 2004 and 16 units in operation for the first quarter of fiscal 2004 and the first, second, and third quarters of fiscal 2003.  The Company anticipates it will open two new Pizzeria Regina’s at the Prudential Center, Boston, Massachusetts and South Station, Boston, Massachusetts in late April or early May.   The following table sets forth all revenues, costs and expenses as a percentage for the periods indicated for revenue and expense items included in the consolidated statements of operations:

 

10

 

		Thirteen Weeks Ended				Thirty-nine weeks Ended
		January 25, 2004		January 26, 2003		January 25, 2004		January 26, 2003
Revenues:
Restaurant sales		100	%	100	%	100	%	100	%
Other		—		—		—		—
Total revenues		100	%	100	%	100	%	100	%
Costs and expenses:
Cost of food, beverages and liquor		21		19		20		19
Other operating expenses-payroll		32		30		32		30
Other operating expenses exclusive of payroll		33		30		32		30
General and administrative		9		11		10		11
Depreciation and amortization		5		4		5		4
Pre-opening costs		—		—		2		—
Operating income (loss)		0		6		(1	)	6
Interest expense, net		2		2		2		2
Other income		—		—		—		—
Net income (loss)		(2	)%	4	%	(3	)%	4	%

 

11

 

Thirteen Weeks Ended January 25, 2004 as Compared to Thirteen Weeks ended January 26, 2003 Restaurant Sales.

 

Restaurant sales in the most recent quarter were $6,182,000 compared to restaurant sales in the prior year’s period of $5,829,000.  The Company’s management believes that the increase in revenue was primarily attributable to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts in October 1, 2004.

 

Net sales at the Company’s Pizzeria Regina restaurants decreased to $3,069,000 in the current period from $3,118,000 (1.6%) in the prior year’s period.  The decrease in restaurant sales was principally due a major snow storm the weekend of December 6, 2003.

 

Net sales at the Company’s full service casual dining restaurants increased to $3,103,000 in the current period from $2,702,000 in the prior year’s period. This increase in sales was primarily attributable to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts offset by a 2.4 % decrease in same store sales.

 

Net sales at the Company’s commissary were $10,000 in the current period compared to $9,000 in the prior year’s period.

 

Royalties

 

The Company recognized $4,000 in royalties in the current period compared to $3,000 in the prior year’s period.

 

Costs and Expenses

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage and liquor was $1,278,000 in the current period compared to $1,097,000 in the prior year’s period. The dollar increase was due in part to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant.  The increase as a percentage of total revenues was primarily attributable to increases in costs from suppliers generally.

 

The cost of food, beverage and liquor at Pizzeria Regina restaurants was $478,000 in the current period compared to $469,000 in the prior year’s period due to an increase in the cost from suppliers.

 

The cost of food, beverage and liquor as a percentage of restaurant sales at the Pizzeria Regina restaurants was 16% in the fiscal 2004 period compared to 15% in the fiscal 2003 period.  The increase as a percentage of restaurant sales was principally due to increases in costs from suppliers in general.

 

The cost of food, beverage and liquor at the Company’s full service casual dining restaurants was $800,000 in the current period compared to $628,000 in the prior year’s period.  The dollar increase

 

12

 

was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant. The cost as a percentage of restaurant sales was 26% in the fiscal 2004 period compared to 23% in the fiscal 2003 period. The increase as a percentage of restaurant sales was principally due to the opening of the Cambridge, Massachusetts Polcari’s North End restaurant, which is open for lunch daily, resulting in higher food costs generally associated with the lunch period, a re-engineered menu at Polcari’s of Salem, New Hampshire and due to increases in costs from suppliers in general.

 

Other Operating Expenses

 

Payroll Expenses.

 

Payroll expenses were $2,011,000 in the current period, compared to $1,731,000 in the prior year’s period.  The dollar increase in payroll expenses was primarily due to opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and an increase in employee benefit health care costs.

 

Payroll expenses of the Pizzeria Regina restaurants were $726,000 in the current period compared to $737,000 in the prior year’s period.  This dollar decrease was primarily due to a reduction in hours worked due to increased efficiency. Payroll expenses at these restaurants were 24% of restaurant sales in both fiscal 2004 and fiscal 2003 periods.

 

Payroll expenses at the Company’s full service casual dining restaurants were $1,183,000 in the current period compared to $902,000 in the prior year’s period.  This dollar increase was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and an increase in employee benefit costs. Payroll expenses at these restaurants were 38% of restaurant sales in the current period compared to 33% in the prior year’s period.  The increase as a percentage of restaurant sales was primarily attributable to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant which is open for lunch seven days a week and to an increase in employee benefit costs.

 

Payroll expenses at the Company’s Commissary were $102,000 for the fiscal 2004 period as compared to $92,000 in the fiscal 2003 period.

 

13

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses, exclusive of payroll, were $2,032,000 in the current period compared to $1,770,000 in the prior year’s period. The increase in operating expenses, exclusive of payroll, as a percentage of total revenues was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant.

 

Other operating expenses, exclusive of payroll, from the Pizzeria Regina restaurants were $966,000 in the current period, compared to $979,000 in the prior year’s period.  This dollar decrease is primarily due to a reduction in costs as a result of decreased sales.  Other operating expenses, exclusive of payroll, for the Pizzeria Regina restaurants as a percentage of restaurant sales were 31% in both fiscal 2004 and fiscal 2003 periods.

 

Other operating expenses, exclusive of payroll, for the Company’s full service casual dining restaurants were $1,029,000 in the current period compared to $762,000 in the prior year’s period. The dollar increase was primarily attributable to the costs associated with the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant.  Other operating expenses, exclusive of payroll, for the Company’s full service casual dining restaurants as a percentage of restaurant sales were 33% in the current period compared to 28% in the prior year’s period.  The increase as a percentage of restaurant sales was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and to the advertising costs associated with this restaurant.

 

Other operating expenses also include commissary expenses, which were $37,000 for the fiscal 2004 period as compared to $29,000 in the fiscal 2003 period.

 

General and Administrative Expenses.

 

General and administrative expenses were $554,000 in the current period, compared to $668,000 in the prior year’s period.  This $114,000 dollar decrease was primarily attributable to a reduction in employee incentives and consulting costs.

 

General and administrative expenses as a percentage of restaurant sales were 9% in current fiscal 2004 period compared to 11% in the fiscal 2003 period.

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expense was $334,000 in the current period, compared to $260,000 in the prior year’s period.  This dollar increase was attributable to the opening of a new Polcari’s North End restaurant in Cambridge, Massachusetts.   Depreciation and amortization expenses as a percentage of restaurant sales were 5% in the current period compared to 4% in the prior year’s period.

 

Pre-Opening Costs

 

Pre-opening costs consisting primarily of advertising for the current period were $2,000.  These costs are attributable to the forthcoming opening of two new Pizzeria Regina restaurants one at the

 

14

 

Prudential Center in Boston, Massachusetts, and the other one at South Station in Boston, Massachusetts.

 

Other Income

 

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

 

Interest Expense and Interest Income.

 

Interest expense was $116,000 in the current period as compared to $99,000 in the prior year’s period. This dollar increase was primarily due to an increase in borrowing under the Company’s credit facility.

 

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

 

Thirty-nine weeks Ended January 25, 2004

 

Restaurant sales for the thirty-nine weeks ended January 25, 2004 were $17,291,000 compared to restaurant sales in the prior year’s period of $17,206,000.  The increase in revenue was primarily attributable to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts in October, 2003 partially offset by the loss of revenue due to the temporary closing of the Faneuil Hall Pizzeria Regina location from May 9, 2003 to July 2, 2003.

 

Net sales at the Company’s Pizzeria Regina restaurants decreased to $8,580,000 in the current thirty- nine week period from $8,889,000 in the prior year’s period.  The decrease in restaurant sales was principally due to the temporary closing of the Faneuil Hall location from May 9, 2003 to July 2, 2003 and a major snowstorm in December.  The loss of revenue from that location was partially compensated by payments under the Company’s insurance policies, which are included in Other Income.

 

Net sales at the Company’s full service casual dining restaurants increased to $8,677,000 in the thirty-nine week current period from $8,298,000 in the prior year’s period.  This increase was primarily attributable to the opening of the new Polcari’s North End Restaurant in Cambridge, Massachusetts in October, 2003 partially offset by the continued economic slow down in the Northeast.

 

Net sales at the Company’s commissary were $34,000 in the current period compared to $19,000 in the prior year’s period.

 

Royalties

 

During the current year period, the Company recognized $13,000 in royalties from a domestic Pizzeria Regina franchise compared to $11,000 in royalties in the prior year’s period.

 

15

 

Costs and Expenses

 

Cost of Food, Beverages and Liquor.

 

The cost of food, beverage and liquor was $3,535,000 in the current thirty-nine week period compared to $3,297,000 in the prior year’s period. The dollar increase was due in part to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant. The increase as a percentage of total revenues was primarily attributable to increases in costs from suppliers generally.

 

The cost of food, beverage and liquor at Pizzeria Regina restaurants was $1,361,000 in the current period compared to $1,350,000 in the prior year’s period.

 

The cost as a percentage of restaurant sales at the Pizzeria Regina restaurants was 16% in the fiscal 2004 period compared to 15% in the fiscal 2003 period.  The increase as a percentage of restaurant sales was principally due to increases in costs from suppliers in general.

 

The cost of food, beverage and liquor at the Company’s full service casual dining restaurants was $2,174,000 in the current thirty-nine week period compared to $1,947,000 in the prior year’s period.  The dollar increase was primarily due to opening of the new Cambridge, Massachusetts Polcari’s North End restaurant. The cost as a percentage of restaurant sales at these restaurants was 25% in the fiscal 2004 period compared to 23% in the fiscal 2003 period.  The increase as a percentage of sales was principally due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant which is open for lunch seven days week resulting in higher food cost and increases in costs from suppliers in general.

 

Other Operating Expenses

 

Payroll Expenses.

 

Payroll expenses were $5,613,000 in the current period, compared to $5,147,000 in the prior year’s thirty-nine week period.  The dollar increase in payroll expenses was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and to an increase in employee health care costs. The increase as a percentage of total revenues was attributable to the fact that during the temporary closing of the Faneuil Hall location the Company continued to incur payroll costs associated with that location, as well as to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and to the increased employee benefit costs.

 

Payroll expenses of the Pizzeria Regina restaurants were $2,198,000 in the current thirty-nine week period compared to $2,185,000 in the prior year’s period.  This dollar increase was primarily due to an increased cost in employee health benefits. Payroll expenses at these restaurants were 26% of restaurant sales in the current period compared to 25% in the prior year’s period.  The increase as a percentage of restaurant sales was primarily due to the temporary closing of the Faneuil Hall location and to an increase in employee benefit costs.

 

16

 

Payroll expenses at the Company’s full service casual dining restaurants were $3,113,000 in the current thirty-nine week period compared to $2,683,000 in the prior year’s period.  This dollar increase was primarily due to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts and an increase in employee benefit costs. Payroll expenses at these restaurants were 36% of restaurant sales in the current period compared to 32% in the prior year’s period.  The increase as a percentage of restaurant sales was primarily attributable to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts and to an increase in employee benefit costs.  Payroll expenses at the Company’s Commissary were $302,000 for the fiscal 2004 period as compared to $279,000 in the fiscal 2003 period.

 

Other Operating Expenses, Exclusive of Payroll.

 

Other operating expenses, exclusive of payroll, were $5,578,000 in the current thirty-nine week period compared to $5,132,000 in the prior year’s period. The increase in operating expenses, exclusive of payroll, as a percentage of total revenues was primarily due to the opening of the new Cambridge, Massachusetts Polcari’s North End restaurant and to a reduction in revenue.

 

Other operating expenses, exclusive of payroll, from the Pizzeria Regina restaurants were $2,879,000 in the current thirty-nine week period, compared to $2,884,000 in the prior year’s period.  Other operating expenses, exclusive of payroll, for the Pizzeria Regina restaurants as a percentage of restaurant sales were 34% in the current period compared to 32% in the prior year’s period.  The increase as a percentage of sales was primarily attributable to the temporary closing of the Faneuil Hall location, where the Company nonetheless continued to incur some of such costs without any corresponding revenue.

 

Other operating expenses, exclusive of payroll, for the Company’s full service casual dining restaurants were $2,609,000 in the current thirty-nine week period compared to $2,167,000 in the prior year’s period. The dollar increase was primarily attributable to the opening of the new Polcari’s North End restaurant in Cambridge, Massachusetts, as well as advertising costs and increased rent expenses.  Other operating expenses, exclusive of payroll, for the Company’s full service casual dining restaurants as a percentage of restaurant sales were 30% in the current period compared to 26% in the prior year’s period.  The increase as a percentage of restaurant sales was primarily due to those same factors and to the reduction in revenue.

 

Other operating expenses also include commissary expenses, which were $90,000 in fiscal 2004 period compared to $81,000 in fiscal 2003 period

 

General and Administrative Expenses.

 

General and administrative expenses were $1,874,000 in the current period, compared to $1,904,000 in the prior year’s period.  This dollar decrease was primarily attributable to a reduction in employee incentives. General and administrative expenses as a percentage of restaurant sales were 10% in both fiscal 2004 and fiscal 2003 periods.

 

17

 

Depreciation and Amortization Expenses.

 

Depreciation and amortization expense was $875,000 in the current period, compared to $779,000 in the prior year’s period. Depreciation and amortization expense as a percentage of restaurant sales were 4% in both fiscal 2004 and fiscal 2003 periods.

 

Pre-Opening Costs

 

Pre-opening costs for the current period were $318,000.  These costs are attributable to the opening of a new Polcari’s North End restaurant in Cambridge, Massachusetts which consist of labor, advertising, rent and training materials and to the forthcoming opening of two new Pizzeria Regina restaurants, one at the Prudential Center in Boston, Massachusetts and the other at South Station in Boston, Massachusetts.

 

Other Income

 

Other income was $220,000 in the current period compared to $8,000 in the prior year’s period.  The increase in other income is attributable to insurance proceeds related to the temporary closing of Faneuil Hall Pizzeria Regina.

 

Interest Expense and Interest Income.

 

Interest expense was $325,000 in the current period as compared to $314,000 in the prior year’s period.

 

Interest income was $2,000 in both fiscal 2004 and 2003 periods.

 

LIQUIDITY AND CAPITAL RESOURCES

 

At January 25, 2004, the Company had negative net working capital of $808,000 compared to negative net working capital of $372,000 at April 27, 2003.  It is common for companies in the restaurant industry to operate with net working capital deficits.  We are able to operate with a substantial working capital deficit because (1) restaurant operations and most food service operations are conducted primarily on a cash (and cash equivalent) basis with a low level of accounts receivable, (2) rapid turnover allows a limited investment in inventories, and (3) accounts payable for food, beverages and supplies usually become due after the receipt of cash from the related sales.  Accordingly, the Company believes that its existing resources described below will be sufficient to allow it to meet its existing obligations over the next twelve months, notwithstanding that it may have a net working capital deficit.

 

During the thirty-nine weeks ended January 25, 2004, the Company had a net decrease in cash and cash equivalents of $231,000, reflecting net cash provided by operating activities of $29,000, net cash used for investing activities of $2,399,000 and net cash provided by financing activities of $2,139,000.

 

Net cash provided by operating activities included an increase in accounts payables of $42,000, and increase in deferred rent of $58,000, an increase in other long-term liabilities of $12,000 and

 

18

 

depreciation and amortization expense of $875,000 which were partially offset by an increase in accounts receivables of $14,000 an increase in prepaid expenses of $11,000, an increase in inventories of $138,000, an increase in other assets of $26,000,a decrease in accrued expenses of $178,000 and a net loss of $591,000.  Net cash used for investing activities reflects costs associated with leasehold improvements and with the purchase of equipment, furniture and fixtures for the new Cambridge, Massachusetts Polcari’s North End Restaurant, the two new Pizzeria Regina restaurants in Boston, Massachusetts and for other operating Company restaurants.  Net cash provided by financing activities of $2,139,000 consisted of amounts drawn down under the Company’s credit facility with Commerce Bank and Trust, offset by the net repayments of long term debt, lease obligations and stockholders loans.

 

At January 25, 2004, the Company had current liabilities of $2,689,000, including $622,000 of accounts payable, $1,142,000 of accrued liabilities and current maturities of long term obligations in the amount of $925,000.  At January 25, 2004, the Company had long-term obligations, less current maturities, in the amount of $4,919,000, including $2,293,000 due under its credit facility with Commerce Bank and Trust, $90,000 of notes payable to a stockholder, $112,000 due under capital lease obligations, $1,450,000 of convertible subordinated debentures, $455,000 of deferred rent, and $518,000 of other long-term liabilities.

 

On April 30, 2002, the Company entered into its new $3,500,000 credit facility with Commerce Bank and Trust Company (the “Credit Facility”).  The Credit Facility permits the Company to borrow amounts to pay the costs for new restaurant openings and repay over a fixed term of either four or five years.   No new borrowings may be made under the Credit Facility after April 30, 2005.  Each borrowing under the Credit Facility bears interest at the bank’s base rate plus 2.0%, subject to an annual adjustment to the bank’s then current base rate.  The Company borrowed $922,000 under the Credit Facility on April 30, 2002 to pay off the prior bank facility.  During the first quarter of fiscal 2004, the Company borrowed an additional $2,500,000 under the Credit Facility to finance the construction of a Polcari’s North End restaurant in Cambridge, Massachusetts. Subsequent to the end of the third quarter on February 13, 2004 the Company borrowed an additional $535,000 under the Credit Facility to finance the construction of a Pizzeria Regina restaurants in Boston, Massachusetts. All the notes are payable over four and five years as of January 25, 2004.

 

All borrowings under the Credit Facility are collateralized by substantially all of the assets of the Company and are subject to various financial covenants.  As of January 25, 2004 the Company was not in compliance with the certain financial covenants of the Credit Facility, including in particular, the requirement that the Company not report two consecutive quarters of operating losses. However, on February 13, 2004 the Company entered into an agreement with the bank under which Commerce Bank and Trust Company waived the covenants for fiscal period ended January 25, 2004 and for fiscal year end 2004 in exchange for a 1% waiver fee, a modification of the interest rate on all outstanding notes issued under the Credit Agreement from the current 6% to 7% per annum until the first quarter in which the Company is once again in compliance with all financial covenants, and the grant to the bank of six year warrants to purchase 76,000 shares of the Company’s common stock at a price of $.50 per share.  The warrants are not exercisable for a period of one year from date of grant.

 

In addition to the Polcari’s North End restaurant which opened in October, 2003, the Company has entered into leases for two additional Pizzeria Regina restaurants, at South Station and Prudential

 

19

 

Center in Boston, both of which are scheduled to open within the next three months.  The Company estimates that the cost of opening those two units will be approximately $900,000.

 

The Company believes that its anticipated cash flow from operations, together with moneys available under the Credit Facility, will be sufficient to fund its working capital needs for at least the next 12 months and the financing of the costs of opening the additional two units.  The Company may pursue additional financing.  The Company cannot guarantee that any such additional financing will be available upon terms acceptable to the Company, or at all.

 

NEW ACCOUNTING PRONOUNCEMENTS

 

In November 2002, the EITF reached a consensus on Issue No. 00-21, “Revenue Arrangements with Multiple Deliverables”. EITF 00-21 addresses certain aspects of the accounting by a vendor for arrangements under which the vendor will perform multiple revenue generating activities.  EITF 00-21 was effective for periods beginning after June 15, 2003. The adoption of EITF 00-21 did not have a material impact on the Company’s financial position and results of operations.

 

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

 

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Instruments with Characteristics of both Liabilities and Equity”.  SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity.  SFAS No. 150 requires that an issuer classify a financial instrument that is within the scope of SFAS No. 150 as a liability.  SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective beginning September 1, 2003.  The adoption of SFAS No. 150 did not have a material effect on the Company’s 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 working capital and other resources ability to obtain additional financing, the timing of the Company’s new store openings and future expansion, and anticipated future cash flows from particular locations are made pursuant to the safe harbor provisions of the

 

20

 

Private Securities Litigation Reform Act of 1995.  Investors are cautioned that such forward-looking statements involve risks and uncertainties, including without limitation:  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.  In addition, forward-looking statements generally can be identified by the use of forward-looking terminology such as “may,” “will”, “except,” “intend,” “estimate,” “anticipate” or “believe” or the negative thereof or variations thereon similar terminology.  Although the Company believes that the expectations reflected in such forward-looking statements will prove to have been correct, it can give no assurance that such expectations will prove to have been correct.  Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

 

Interest Rate Risk.

 

We have exposure to interest rate risk related to certain instruments entered into for other than trading purposes.  Specifically, borrowings under the Credit Facility described in Item 2 bear interest at a variable rate based on the bank’s prime rate plus 2%. A 100 basis point change in the Credit Facility interest rate would cause the interest expense for fiscal 2004 to change by approximately $16,000 from fiscal 2003. This computation is determined by considering the impact of hypothetical interest rates on our variable long-term debt at January 25, 2004. However, the nature and amount of our borrowings under the Credit Facility may vary as a result of future business requirements, market conditions, covenant compliance and other factors.

 

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

 

Commodity Price Risk.

 

Many of the food products and other operating essentials purchased by us are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors that are beyond our control.  Our supplies and raw materials are available from several sources and we are not dependent upon any single source for these items. The Company negotiates directly with wholesale suppliers of certain high volume food ingredients such as cheese, tomato sauce, and flour to ensure consistent quality and competitive pricing. These ingredients are then purchased for the Company by a third party independent 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.  Certain significant items that could be subject to price fluctuations are cheese and flour products. The Company believes that it will be able to pass through increased commodity costs by adjusting menu pricing in most cases. However, we believe

 

21

 

that any changes in commodity pricing that cannot be offset by changes in menu pricing or other product delivery strategies would not be material.

 

ITEM 4.  Controls and Procedures

 

As of January 25, 2004, our Chief Executive Officer and Chief Financial Officer performed an evaluation of the effectiveness of the Company’s disclosure controls and procedures (as defined in SEC Rule 13a-15(e)), which have been designed to ensure that material information related to the Company is made known to them and timely disclosed.  The Company’s management, including the CEO and CFO, does not expect that the Company’s disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.  Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the company have been detected. Notwithstanding the foregoing, however, based upon their evaluations, our CEO and CFO concluded that the Company’s disclosure controls are effective to provide a reasonable level of assurance that material information relating to the Company is accumulated and communicated to management, including the CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure.

 

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

 

22

 

PART II

 

OTHER INFORMATION

 

ITEM 1. Legal Proceedings.

 

On February 11, 2004, Mr. Roger Lipton, a director of the Company, filed a complaint against the Company in the Delaware Court of Chancery of the State of Delaware.  (According to the most recent amendment to his Schedule 13D filed on February 11, 2004, Mr. Lipton, together with certain affiliates, is the beneficial owner of approximately 25.7% of the Company’s common stock.)  The complaint seeks an order of that court pursuant to 8 Delaware Code Section 211(c) to compel the Company to conduct a stockholder meeting since no stockholder meeting has been held for over 13 months, and to assess the Company the plaintiff’s legal costs.

 

At a special meeting of the Board of Directors held on March 5, 2004, the Board of Directors voted to call a special meeting in lieu of annual meeting of the stockholder for Friday April 23,2004 at 10 AM EST, and set March 8, 2004 as the record date for persons entitled to vote at that meeting.  Mr. Lipton was present at the Board meeting and voted in favor of the call of the meeting.

 

Therefore, the Company will file an answer in the Delaware proceeding, advising the Chancery Court that a a stockholder meeting has been called for April 23, 2004. .  The Company also is involved in various other legal matters in the ordinary course of its business.  Each of these other 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 2. Changes in Securities and Use of Proceeds.

 

None.

 

ITEM 3. Defaults Upon Senior Securities.

 

None.

 

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

 

None.

 

ITEM 5. Other Information.

 

None.

 

23

 

ITEM 6. Exhibits and Reports On Form 8-K.

 

(a)                                  Exhibits

 

Exhibit 31.1 and 31.2: Sarbanes-Oxley Section 302 Certification

 

Exhibit 32.1 and 32.2: Sarbanes-Oxley Section 906 Certification

 

 

(b)                                 Reports On Form 8-K.

 

None.

 

24

 

SIGNATURES

 

 

In accordance with the requirements 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: March 8, 2004	By:	/s/ George R. Chapdelaine
		George R. Chapdelaine, President and Chief Executive Officer

 

25