**SECURITIES AND EXCHANGE COMMISSION**

**Washington,DC  20549**

 

**FORM 10-Q**

 

**ý****Quarterly Report Voluntarily Filed Pursuant toSection 13 or 15(d) of theSecurities and Exchange Act of 1934**

 

**For theQuarterly Period Ended   June 30, 2004**

 

**CommissionFile Number   333-62775**

 

**BERTUCCI’SCORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                                            | ** ** | **06-1311266**                           |
|-----------------------------------------------------------------------------------------|------------|------------------------------------------|
| (State or other  jurisdiction of  incorporation or organization)                        |       | (I.R.S. Employer  Identification Number) |
|                                                                                    |       |                                     |
| **155  Otis Street, Northborough, Massachusetts**                                       | ** ** | **01532-2414**                           |
| (Address of principal  executive offices)                                               |       | (Zip Code)                               |
|                                                                                    |       |                                     |
| Registrant’s telephone number, including area  code:  **(508) 351-2500** |

 

Indicate by check mark whether the registrant (1) hasfiled all reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months (or for suchshorter period that the registrant was required to file such reports), and (2)has been subject to the filing requirements for the past 90 days.

 

Yes   ý     No   o

 

Indicate by check mark whether the registrant is anaccelerated filer (as defined in Rule 12b-2 of the Exchange Act).

 

Yes   o     No   ý

 

2,944,579 shares of the registrant’s Common Stock wereoutstanding on August 13, 2004.

 

 

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**BERTUCCI’SCORPORATION**

**FORM10-Q**

**TABLE OFCONTENTS**

 
| PART I:    |     | FINANCIAL  INFORMATION |                                                                                                                                   |
|------------|----------|------------------------|----------------------------------------------------------------------------------------------------------------------------------------|
|       |     |                   |                                                                                                                                   |   |
|       | Item 1.  |                   | Financial Statements:                                                                                                                  |   |
|       |     |                   |                                                                                                                                   |   |
|       | 1)       |                   | Consolidated Balance Sheets  June 30, 2004 (Unaudited) and December 31, 2003                                                 |   |
|       |     |                   |                                                                                                                                   |   |
|       | 2)       |                   | Consolidated  Statements of Operations For the 13 and 26 Weeks Ended June 30, 2004  (Unaudited) and July 2, 2003 (Unaudited) |   |
|       |     |                   |                                                                                                                                   |   |
|       | 3)       |                   | Consolidated  Statement of Changes in Stockholders’ (Deficit) Equity for the 26 Weeks Ended  June 30, 2004 (Unaudited)       |   |
|       |     |                   |                                                                                                                                   |   |
|       | 4)       |                   | Consolidated Statements  of Cash Flow for the 26 Weeks Ended June 30, 2004 (Unaudited) and  July 2, 2003 (Unaudited)         |   |
|       |     |                   |                                                                                                                                   |   |
|       | 5)       |                   | Notes to  Consolidated Financial Statements (Unaudited)                                                                                |   |
|       |     |                   |                                                                                                                                   |   |
|       | Item 2.  |                   | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                                            |   |
|       |     |                   |                                                                                                                                   |   |
|       | Item  3. |                   | Qualitative  Disclosure About Market Risk                                                                                              |   |
|       |     |                   |                                                                                                                                   |   |
|       | Item 4.  |                   | Controls and Procedures                                                                                                                |   |
|       |     |                   |                                                                                                                                   |   |
| PART II:   |     | OTHER INFORMATION      |                                                                                                                                   |
|       | Item 1.  |                   | Legal Proceedings                                                                                                                      |   |
|       | Item 2.  |                   | Changes in  Securities, Use of Proceeds and Issuer Purchases of Equity Securities                                                      |   |
|       | Item  3. |                   | Defaults  Upon Senior Securities                                                                                                       |   |
|       | Item  4. |                   | Submission  of Matters to a Vote of Security Holders                                                                                   |   |
|       | Item 5.  |                   | Other Information                                                                                                                      |   |
|       | Item  6. |                   | Exhibits  and Reports on Form 8-K                                                                                                      |   |
|       |     |                   |                                                                                                                                   |   |
| SIGNATURES |     |
|       |     |                   |                                                                                                                                   |   |
| EXHIBITS   |     |

 

2

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 PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

 

**BERTUCCI’S CORPORATION**

**CONSOLIDATEDBALANCE SHEETS**

(Inthousands, except share data)

 
| ** **                                                                                                                                                                  | ** ** | **(Unaudited)**         | ** ** | ** **                  | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                  | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
| ASSETS                                                                                                                                                                      |       |                    |       |                        |       |
| Current Assets:                                                                                                                                                             |       |                    |       |                        |       |
| Cash and cash equivalents                                                                                                                                                   |       | $                       | 10,798     |                        | $          | 12,647 |   |
| Restricted cash                                                                                                                                                             |       | 3,129                   |       | 3,129                       |       |
| Accounts receivable                                                                                                                                                         |       | 705                     |       | 753                         |       |
| Inventories                                                                                                                                                                 |       | 1,424                   |       | 1,268                       |       |
| Prepaid expenses and other current assets                                                                                                                                   |       | 1,837                   |       | 1,758                       |       |
| Total current assets                                                                                                                                                        |       | 17,893                  |       | 19,555                      |       |
| Property and Equipment, at cost:                                                                                                                                            |       |                    |       |                        |       |
| Land                                                                                                                                                                        |       | 259                     |       | 259                         |       |
| Buildings                                                                                                                                                                   |       | 697                     |       | 697                         |       |
| Capital leases - land and buildings                                                                                                                                         |       | 5,764                   |       | 5,764                       |       |
| Leasehold improvements                                                                                                                                                      |       | 61,200                  |       | 63,084                      |       |
| Furniture and equipment                                                                                                                                                     |       | 45,499                  |       | 43,806                      |       |
|                                                                                                                                                                        |       | 113,419                 |       | 113,610                     |       |
| Less - accumulated depreciation and  amortization                                                                                                                           |       | (46,131                 | )          | (40,300                     | )          |
|                                                                                                                                                                        |       | 67,288                  |       | 73,310                      |       |
| Construction work in process                                                                                                                                                |       | 584                     |       | 301                         |       |
| Net property and equipment                                                                                                                                                  |       | 67,872                  |       | 73,611                      |       |
| Goodwill                                                                                                                                                                    |       | 26,127                  |       | 26,127                      |       |
| Deferred finance costs, net                                                                                                                                                 |       | 3,214                   |       | 3,559                       |       |
| Liquor licenses, net                                                                                                                                                        |       | 2,525                   |       | 2,555                       |       |
| Other assets                                                                                                                                                                |       | 491                     |       | 479                         |       |
| TOTAL ASSETS                                                                                                                                                                |       | $                       | 118,122    |                        | $          | 125,886 |   |
|                                                                                                                                                                        |       |                    |       |                        |       |
| LIABILITIES AND STOCKHOLDERS’ (DEFICIT)  EQUITY                                                                                                                        |       |                    |       |                        |       |
| Current Liabilities:                                                                                                                                                        |       |                    |       |                        |       |
| Promissory notes - current portion                                                                                                                                          |       | $                       | 39         |                        | $          | 39 |   |
| Capital lease obligations - current portion                                                                                                                                 |       | 31                      |       | 31                          |       |
| Accounts payable                                                                                                                                                            |       | 9,043                   |       | 8,443                       |       |
| Accrued expenses                                                                                                                                                            |       | 13,805                  |       | 14,026                      |       |
| Total current liabilities                                                                                                                                                   |       | 22,918                  |       | 22,539                      |       |
| Promissory notes, net of current portion                                                                                                                                    |       | 802                     |       | 821                         |       |
| Captial lease obligations, net of current  portion                                                                                                                          |       | 5,709                   |       | 5,724                       |       |
| Senior Notes                                                                                                                                                                |       | 85,310                  |       | 85,310                      |       |
| Deferred gain on sale leaseback transaction                                                                                                                                 |       | 2,080                   |       | 2,112                       |       |
| Other long-term liabilities                                                                                                                                                 |       | 4,122                   |       | 4,164                       |       |
| Total liabilities                                                                                                                                                           |       | 120,941                 |       | 120,670                     |       |
| Stockholders’ (Deficit) Equity:                                                                                                                                        |       |                    |       |                        |       |
| Common stock, $.01 par value Authorized -  8,000,000 shares Issued - 3,667,495 and 3,666,370 shares respectively;  Outstanding 2,944,579 and 2,961,552 shares, respectively |       | 37                      |       | 37                          |       |
| Less treasury shares of 722,916 and 704,818  respectively, at cost                                                                                                          |       | (8,323                  | )          | (8,190                      | )          |
| Additional paid-in capital                                                                                                                                                  |       | 29,045                  |       | 29,035                      |       |
| Accumulated deficit                                                                                                                                                         |       | (23,578                 | )          | (15,666                     | )          |
| Total stockholders’ (deficit) equity                                                                                                                                   |       | (2,819                  | )          | 5,216                       |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’  (DEFICIT) EQUITY                                                                                                                  |       | $                       | 118,122    |                        | $          | 125,886 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

3

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**BERTUCCI’S CORPORATION**

**CONSOLIDATEDSTATEMENTS OF OPERATIONS**

(Inthousands, except share and per share data)

(Unaudited)

 
| ** **                                                          | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|---------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                          | ** ** | **June 30,  2004**  | ** ** | **July 2,  2003**     | ** ** | **June 30,  2004** | ** ** | **July 2,  2003** | ** ** |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Net sales                                                           |       | $                        | 51,754     |                       | $          | 47,587 |   | $ | 101,180 |   | $ | 90,261 |   |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Cost of sales and expenses:                                         |       |                     |       |                       |       |   |   |   |   |
| Cost of sales                                                       |       | 12,883                   |       | 11,019                     |       | 24,439 |   | 20,480 |   |
| Operating expenses                                                  |       | 33,480                   |       | 28,418                     |       | 63,119 |   | 54,893 |   |
| General and administrative expenses                                 |       | 3,478                    |       | 2,856                      |       | 6,571 |   | 6,035 |   |
| Asset impairment charge                                             |       | 3,338                    |       | —                     |       | 3,338 |   | — |   |
| Depreciation, amortization, deferred rent  and pre-opening expenses |       | 3,112                    |       | 3,272                      |       | 6,345 |   | 6,235 |   |
| Total cost of sales and expenses                                    |       | 56,291                   |       | 45,565                     |       | 103,812 |   | 87,643 |   |
| (Loss) income from operations                                       |       | (4,537                   | )          | 2,022                      |       | (2,632 | ) | 2,618 |   |
| Interest expense, net                                               |       | (2,652                   | )          | (2,498                     | )          | (5,280 | ) | (4,896 | ) |
| Loss before income tax benefit                                      |       | (7,189                   | )          | (476                       | )          | (7,912 | ) | (2,278 | ) |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Income tax benefit                                                  |       | —                   |       | —                     |       | — |   | — |   |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Net loss                                                            |       | $                        | (7,189     | )                          | $          | (476 | ) | $ | (7,912 | ) | $ | (2,278 | ) |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Basic and diluted loss per share                                    |       | $                        | (2.44      | )                          | $          | (0.16 | ) | $ | (2.68 | ) | $ | (0.77 | ) |
|                                                                |       |                     |       |                       |       |   |   |   |   |
| Weighted average shares outstanding - basic  and diluted            |       | 2,945,040                |       | 2,977,560                  |       | 2,951,738 |   | 2,977,166 |   |

 

The accompanying notes are anintegral part of these consolidated financial statements.

 

4

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**BERTUCCI’S CORPORATION**

**CONSOLIDATEDSTATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY**

(Inthousands, except share data)

(Unaudited)

 
| ** **                                     | ** ** | **Common Stock**      | ** ** | **Treasury Stock** | ** ** | **Additional Paid-In  Capital** | ** ** | ** ** | ** ** | **Total Stockholders’   (Deficit)  Equity** | ** ** |
|------------------------------------------------|------------|-----------------------|------------|--------------------|------------|---------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| ** **                                     | ** ** | **Number of  Shares** | ** ** | **Amount**         | ** ** | **Number of  Shares**           | ** ** | **Amount** | ** ** | **Accumulated  Deficit**                                   | ** ** | ** ** |
|                                           |       |                  |       |               |       |                            |       |       |       |                                                       |       |   |   |   |   |
| Balance December 31, 2003                 |       | 3,666,370             |       | $                  | 37         |                            | (704,818   | )          | $          | (8,190                                                     | )          | $ | 29,035 |   | $ | (15,666 | ) | $ | 5,216 |   |
| Purchase of common stock for treasury          |       | —                |       | —             |       | (18,098                         | )          | (133       | )          | —                                                     |       | — |   | (133 | ) |
| Sale of common stock from exercise of  options |       | 1,125                 |       |               |       | —                          |       | —     |       | 10                                                         |       | — |   | 10 |   |
| Net loss                                       |       | —                |       | —             |       | —                          |       | —     |       | —                                                     |       | (7,912 | ) | (7,912 | ) |
|                                           |       |                  |       |               |       |                            |       |       |       |                                                       |       |   |   |   |   |
| Balance June 30, 2004                     |       | 3,667,495             |       | $                  | 37         |                            | (722,916   | )          | $          | (8,323                                                     | )          | $ | 29,045 |   | $ | (23,578 | ) | $ | (2,819 | ) |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

5

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**BERTUCCI’S CORPORATION**

**CONSOLIDATEDSTATEMENTS OF CASH FLOW**

(Inthousands)

(Unaudited)

 
| ** **                                                                       | ** ** | **Twenty-Six Weeks Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|
| ** **                                                                       | ** ** | **June 30, 2004**     | ** ** | **July 2, 2003** | ** ** |
|                                                                             |       |                       |       |   |   |
| Cash flows from operating activities                                             |       |                       |       |   |   |
| Net loss                                                                         |       | $                          | (7,912     | ) | $ | (2,278 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                       |       |   |   |
| Depreciation and amortization                                                    |       | 6,206                      |       | 5,226 |   |
| Asset impairment charge                                                          |       | 3,338                      |       | — |   |
| Deferred rent                                                                    |       | 284                        |       | 221 |   |
| Amortization of gain on sale-leaseback                                           |       | (31                        | )          | (29 | ) |
| Changes in operating assets and liabilities                                      |       |                       |       |   |   |
| Inventories                                                                      |       | (156                       | )          | (360 | ) |
| Prepaid expenses, receivables and other                                          |       | (31                        | )          | 784 |   |
| Other accrued expenses                                                           |       | (549                       | )          | (1,750 | ) |
| Accounts payable                                                                 |       | 600                        |       | 336 |   |
| Other operating assets and liabilities                                           |       | (11                        | )          | (150 | ) |
| Total adjustments                                                                |       | 9,650                      |       | 4,278 |   |
|                                                                             |       |                       |       |   |   |
| Net cash provided by operating activities                                        |       | 1,738                      |       | 2,000 |   |
|                                                                             |       |                       |       |   |   |
| Cash flows from investing activities                                             |       |                       |       |   |   |
| Additions to property and equipment                                              |       | (3,430                     | )          | (10,178 | ) |
| Acquisition of liquor licenses                                                   |       | —                     |       | (133 | ) |
|                                                                             |       |                       |       |   |   |
| Net cash used in investing activities                                            |       | (3,430                     | )          | (10,311 | ) |
|                                                                             |       |                       |       |   |   |
| Cash flows from financing activities                                             |       |                       |       |   |   |
| Net proceeds from sale leaseback  transactions                                   |       | —                     |       | 7,177 |   |
| Decrease in restricted cash                                                      |       | —                     |       | 239 |   |
| Purchase common stock for treasury                                               |       | (133                       | )          | (90 | ) |
| Sale of common stock from exercise of  options                                   |       | 10                         |       | — |   |
| Payment on promissory note                                                       |       | (19                        | )          | (40 | ) |
| Principal payments under capital lease  obligations                              |       | (15                        | )          | (3 | ) |
|                                                                             |       |                       |       |   |   |
| Net cash (used in) provided by financing  activities                             |       | (157                       | )          | 7,283 |   |
|                                                                             |       |                       |       |   |   |
| Net decrease in cash and cash equivalents                                        |       | (1,849                     | )          | (1,028 | ) |
| Cash and cash equivalents, beginning of year                                     |       | 12,647                     |       | 13,133 |   |
| Cash and cash equivalents, end of period                                         |       | $                          | 10,798     |   | $ | 12,105 |   |
|                                                                             |       |                       |       |   |   |
| Supplemental disclosure of cash flow information:                                |       |                       |       |   |   |
| Cash paid for interest                                                           |       | $                          | 5,042      |   | $ | 4,809 |   |
| Cash paid (refunds received) for income  taxes                                   |       | $                          | 354        |   | $ | (26 | ) |
| Capital leases entered into during period                                        |       | $                          | —     |   | $ | 3,821 |   |
| Promissory note issued in exchange for  liquor license rights                    |       | $                          | —     |   | $ | 555 |   |
| Promissory note issued in exchange for  settlement of lease liability            |       | $                          | —     |   | $ | 386 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

6

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**BERTUCCI’SCORPORATION**

**Notes ToConsolidated Financial Statements**

June 30, 2004

(Unaudited)

 

*1.  Basis of Presentation*

 

The unaudited consolidated condensed financialstatements (the “Unaudited Financial Statements”) presented herein have beenprepared by Bertucci’s Corporation and include all of its subsidiaries(collectively, the “Company”) after elimination of inter-company accounts andtransactions, without audit, and, in the opinion of management, reflect alladjustments (consisting of normal recurring adjustments) necessary for a fairstatement of the interim periods presented.  The accompanying unauditedinterim consolidated financial statements have been prepared in accordance withaccounting principles generally accepted in the United States of America forinterim financial information and pursuant to the rules and regulations of theSecurities and Exchange Commission for reporting on Form 10-Q. Accordingly, certain information and footnote disclosures required for completefinancial statements are not included herein.  It is suggested theUnaudited Financial Statements be read in conjunction with the consolidatedfinancial statements and notes included in the Company’s Annual Report on Form 10-Kfor the year ended December 31, 2003.  The operating results for thetwenty-six weeks ended June 30, 2004 may not be indicative of the resultsexpected for any succeeding interim period or for the entire year endingDecember 29, 2004.

 

*2.  Recent Accounting Pronouncements*

 

In May 2003, the Financial Accounting Standards Board(“FASB”) issued Statement of Financial Accounting Standard No. 150, Accountingfor Certain Financial Instruments with Characteristics of both Liabilities andEquity (“SFAS No. 150”).  The Statementrequires an issuer to classify financial instruments within its scope as aliability. Many of those instruments were previously classified as equity underprior accounting guidelines. SFAS No. 150 is effective for all such financialinstruments entered into or modified after May 31, 2003. Otherwise, it waseffective on July 3, 2003, with the exception of mandatory redeemablefinancial instruments of non-public entities, for which the provisions of thisstatement were applicable in the first quarter of 2004.  The Company does not use such financialinstruments, and therefore, the adoption of the applicable portions of thisstatement in the third quarter of 2003 and the first quarter of 2004 did nothave a material impact on the Company’s financial position or results ofoperations.

 

*3. Liquor Licenses*

 

Transferable liquor licenses purchased are accountedfor at the lower of cost or fair market value and are not amortized. Annual renewal fees are expensed as incurred.  Non-transferable liquorlicenses are amortized on a straight-line basis over the contractual life ofthe license.  The carrying value of transferable liquor licenses was $2.0million at December 31, 2003 and June 30, 2004.  Accumulatedamortization at December 31, 2003 and June 30, 2004 for anon-transferable liquor license acquired in fiscal 2003 was $40,000 and$70,000, respectively.  Amortization expense for the twenty-six weeksended June 30, 2004 was $30,000 and is expected to be $60,000 per yearthrough fiscal 2013.

 

*4.  Restaurant Closing Reserves*

 

Restaurant closing reserves were established as partof the acquisition of Bertucci’s, Inc. in July 1998.  These reserveswere related to estimated future lease commitments and exit costs to close 18Bertucci’s locations.  In 2001, the Company accrued an additional $4.2million related to selected locations (all of which had been closed),consisting of estimated lease commitments and certain exit costs.  It wasoriginally expected the Company would be able to exit these locations, subleasethe locations or otherwise be released from the related leases. However, due to market conditions, the Company has been unable to subleaseor exit certain of these leases.  In June 2002, the Company closedone restaurant and recorded a charge of $236,000 primarily related to estimatedlease termination costs.  In March 2003, the Company terminated a

 

7

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lease for one of its closed locations in exchange forissuing a promissory note of $455,000 payable in varying installments through2010.  The note does not bear interest. Accordingly, the Company imputedinterest on the note and recorded the obligation at its then present value of$386,000 in other long-term obligations in the accompanying balance sheet.

 

The closed restaurant reserve was calculated net ofsublease income at 14 locations that are partially or fully subleased as ofJune 30, 2004.  The Company remains primarily liable for theremaining lease obligations should the sublessee default.  Total subleaseincome excluded from the reserve is approximately $7.9 million for subleasesexpiring at various dates through 2017.  There have been no defaults bysublessors to date.

 

Activity within thereserve was as follows (in thousands):

 
| ** **                                      | ** ** | **Twenty-six weeks ended** | ** ** |
|-------------------------------------------------|------------|----------------------------|------------|
| ** **                                      | ** ** | **June 30,  2004**    | ** ** | **July 2,  2003** | ** ** |
|                                            |       |                       |       |   |   |
| Balance, beginning of the year                  |       | $                          | 1,449      |   | $ | 2,499 |   |
| Payments charged against reserve                |       | (328                       | )          | (396 | ) |
| Promissory note issued                          |       | —                     |       | (386 | ) |
| Balance, end of period                          |       | $                          | 1,121      |   | $ | 1,717 |   |
|                                            |       |                       |       |   |   |   |   |
| Current portion (included in accrued  expenses) |       | $                          | 615        |   | $ | 621 |   |
| Noncurrent portion                              |       | 506                        |       | 1,096 |   |
|                                            |       | $                          | 1,121      |   | $ | 1,717 |   |

 

*5.  Loss per Share*

 

The number of shares used to calculate diluted lossper share for the periods ended June 30, 2004 and July 2, 2003exclude the effect of 560,146 and 671,244 shares of Common Stock subject tooutstanding stock options, respectively, as the options are anti-dilutive.

 

*6.  Income Taxes*

 

The Company recognizes deferred tax assets andliabilities for the expected future tax consequences of events that have beenincluded in the financial statements or tax returns.  Additionally, theCompany is required to consider both negative and positive evidence indetermining if a valuation allowance is required on a quarterly basis.  Managementrecorded a full valuation allowance for its deferred tax assets in fiscal 2002and continues to record an allowance quarterly for the tax benefits associatedwith the current period’s losses.

 

*7.  Stock-Based Compensation*

 

The Company has elected to account for stock-basedcompensation using the intrinsic value method with disclosure of the effects offair value accounting on net loss and loss per share on a pro formabasis.  No stock-based employee compensation cost related to stock optionsis reflected in the reported net loss, as all options granted had an exerciseprice equal to, or in excess of, the market value of the underlying commonstock on the date of grant.  The following table illustrates the effect onnet loss and loss per share if the Company had applied the fair value method.

 

8

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| ** **                                                                                                                                    | ** ** | **Thirteen weeks ended** | ** ** | **Twenty-six weeks ended** | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|----------------------------|------------|
| ** **                                                                                                                                    | ** ** | **June 30,  2004**  | ** ** | **July 2,  2003**     | ** ** | **June 30,  2004** | ** ** | **July 2,  2003** | ** ** |
| Net loss, as reported                                                                                                                         |       | $                        | (7,189     | )                          | $          | (476 | ) | $ | (7,912 | ) | $ | (2,278 | ) |
| Add: Stock-based employee compensation  expense included in reported net income, net of related tax effects                                   |       | —                   |       | —                     |       | — |   | — |   |
|                                                                                                                                          |       |                     |       |                       |       |   |   |   |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based method for all awards,  net of related tax effects |       | (78                      | )          | (161                       | )          | (156 | ) | (321 | ) |
|                                                                                                                                          |       |                     |       |                       |       |   |   |   |   |
| Pro forma net loss                                                                                                                            |       | $                        | (7,267     | )                          | $          | (637 | ) | $ | (8,068 | ) | $ | (2,599 | ) |
|                                                                                                                                          |       |                     |       |                       |       |   |   |   |   |   |   |   |   |
| Loss per share:                                                                                                                               |       |                     |       |                       |       |   |   |   |   |
| Basic and diluted—as reported                                                                                                            |       | $                        | (2.44      | )                          | $          | (0.16 | ) | $ | (2.68 | ) | $ | (0.77 | ) |
| Basic and diluted—pro forma                                                                                                              |       | $                        | (2.46      | )                          | $          | (0.21 | ) | $ | (2.73 | ) | $ | (0.87 | ) |

 

8.  *Sale of Properties*

 

During 2003, the Company completed two sale-leasebacktransactions on four restaurant properties.  In the first transaction(which occurred in the second quarter of 2003), the Company sold threeproperties for $7.2 million in cash (net of fees of approximately $320,000),resulting in a gain of $2.2 million.  The gain has been deferred and willbe amortized into income over the lease term. The properties sold included landand buildings at each location which the Company agreed to lease back for a20-year period. The portion of the contractual obligation relating to thebuildings is recorded at its net present value of $3.8 million (at inception)as an obligation under a capital lease. The land portion of the obligation isclassified as an operating lease, requiring future payments to be classified asoperating expenses.  In the second transaction (which occurred in thefourth quarter of 2003), the Company sold a property consisting of land and abuilding for $1.8 million in cash (net of fees of approximately$210,000).  In connection with this transaction the Company recorded acharge of $60,000 representing the excess of the property’s carrying value overits fair market value.  The fair value of the land is less than 25% of thetransaction value and therefore the entire contractual obligation is recordedat its net present value of $1.9 million (at inception) as a capital leaseobligation.  The Company agreed to lease back the property for a 20-yearperiod. All leases entered into in connection with these transactions includetwo five-year renewal terms, which the Company may exercise at itsoption.  The Company is required to maintain the properties for the termof the leases and to pay all taxes, insurance, utilities and other costsassociated with those properties.  Under the leases, the Company agreed tocustomary indemnities and, in the event the Company defaults on any lease, thelandlord may terminate the lease, accelerate rental payments and collectliquidated damages.

 

9.  *Asset Impairment Charge*

 

The Company’s long-lived assets consist primarily ofgoodwill and leasehold improvements related to its restaurant operations. Statement of Financial Accounting StandardNo. 144, Accounting for theImpairment or Disposal of Long-Lived Assets, requires management to test therecoverability of long-lived assets (excluding goodwill) by comparing estimatedundiscounted future operating cash flows expected to be generated from theseassets to the carrying amounts of the assets whenever events or changes incircumstances indicate the carrying value may not be recoverable.  If cashflows are not sufficient to recover the carrying amount of the assets,impairment has occurred and the assets are written down to fair value. Significant estimates and assumptions regarding future sales, cost trends,productivity and market maturity are required to be made by management in orderto test for impairment under this standard.

 

During the second quarter of 2004, the Companyassessed certain non-performing restaurants for recoverability and determinedan impairment of fixed assets existed at seven restaurant locations.  TheCompany estimated the fair value of these assets based on the net present valueof the expected cash flows of the seven restaurants.  The carrying amountof the assets exceeded the fair value of the assets by

 

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approximately $3.3 million.  The Company hasrecorded an impairment charge during the quarter to reflect the write down ofthe affected assets to fair value.

 

**Item 2.****  MANAGEMENT’S DISCUSSIONAND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**Forward-Looking Statements**

 

All statements other than statements of historicalfacts included in this Report on Form 10-Q, including, without limitation,statements set forth under this “Management’s Discussion and Analysis ofFinancial Condition and Results of Operations” regarding the Company’s futurefinancial position, business strategy, budgets, projected costs and plans andobjectives of management for future operations, are forward-lookingstatements.  In addition, forward-looking statements generally can beidentified by the use of forward-looking terminology such as “may,” “will,”“expect,” “intend,” “estimate,” “anticipate” or “believe” or the negativethereof or variations thereon or similar terminology.  Although theCompany believes that the expectations reflected in such forward-lookingstatements will prove to have been correct, it can give no assurance that suchexpectations will prove to be correct.  Factors that could cause actualresults to materially differ include, without limitation: (a) the Company’shigh degree of leverage which could, among other things, reduce the Company’sability to obtain financing for operations and expansion, place the Company ata competitive disadvantage and limit the Company’s flexibility to adjust tochanging market conditions; (b) the challenges of managing geographic expansion;(c) changes in food costs, supplies and key supplier relationships; and (d) thepossible adverse impact of government regulation on the Company.  Otherfactors that could adversely affect the Company's business and prospects aredescribed in their filings with the Securities and Exchange Commission. Investors are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof.  The Companyundertakes no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.

 

The following discussion should be read in conjunctionwith the consolidated financial statements of Bertucci’s Corporation, (the“Company”) and the notes thereto included herein.

 

**General**

 

The Company’s wholly owned subsidiary, Bertucci’sRestaurant Corp., owns and operates a full-service, casual dining,Italian-style restaurant concept under the name Bertucci’s Brick OvenPizzeria®. As of June 30, 2004, the Company owned and operated 90such restaurants located primarily in the northeastern United States.

 

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**Results of Operations**

 

The following table sets forth the percentagerelationship to net sales, unless otherwise indicated, of certain itemsincluded in the Company’s consolidated statements of operations, as well ascertain operating data, for the periods indicated:

 

**STATEMENTSOF OPERATIONS DATA**

(Percentage of Net Sales)

 
| ** **                                                           | ** ** | **Thirteen weeks  ended** | ** ** | **Twenty-six weeks  ended** | ** ** |
|----------------------------------------------------------------------|------------|---------------------------|------------|-----------------------------|------------|
| ** **                                                           | ** ** | **June 30,  2004**   | ** ** | **July 2,  2003**      | ** ** | **June 30,  2004** | ** ** | **July 2,  2003** | ** ** |
| Net sales                                                            |       | 100.0                     | %          | 100.0                       | %          | 100.0 | % | 100.0 | % |
|                                                                 |       |                      |       |                        |       |   |   |   |   |
| Cost of sales and expenses:                                          |       |                      |       |                        |       |   |   |   |   |
| Cost of sales                                                        |       | 24.9                      | %          | 23.2                        | %          | 24.2 | % | 22.7 | % |
| Operating expenses                                                   |       | 64.7                      | %          | 59.7                        | %          | 62.4 | % | 60.8 | % |
| General and administrative expenses                                  |       | 6.7                       | %          | 6.0                         | %          | 6.5 | % | 6.7 | % |
| Asset impairment charge                                              |       | 6.4                       | %          | —                      |       | 3.2 | % | — |   |
| Depreciation, amortization, deferred rent,  and pre-opening expenses |       | 6.0                       | %          | 6.9                         | %          | 6.3 | % | 6.9 | % |
| Total cost of sales and expenses                                     |       | 108.7                     | %          | 95.8                        | %          | 102.6 | % | 97.1 | % |
|                                                                 |       |                      |       |                        |       |   |   |   |   |
| (Loss) income from operations                                        |       | (8.7                      | )%         | 4.2                         | %          | (2.6 | )% | 2.9 | % |
| Interest expense, net                                                |       | (5.1                      | )%         | (5.2                        | )%         | (5.2 | )% | (5.4 | )% |
| Loss before income tax benefit                                       |       | (13.8                     | )%         | (1.0                        | )%         | (7.8 | )% | (2.5 | )% |
|                                                                 |       |                      |       |                        |       |   |   |   |   |
| Income tax benefit                                                   |       | —                    |       | —                      |       | — |   | — |   |
|                                                                 |       |                      |       |                        |       |   |   |   |   |
| Net loss                                                             |       | (13.8                     | )%         | (1.0                        | )%         | (7.8 | )% | (2.5 | )% |
|                                                                 |       |                      |       |                        |       |   |   |   |   |
| **Restaurant  Operating Data:**                                      |       |                      |       |                        |       |   |   |   |   |
| Increase in comparable restaurant sales (a)                          |       | 1.0                       | %          | 4.0                         | %          | 2.9 | % | 5.2 | % |
| Number of restaurants:                                               |       |                      |       |                        |       |   |   |   |   |
| Restaurants open, beginning of period                                |       | 90                        |       | 82                          |       | 89 |   | 80 |   |
| Restaurants opened                                                   |       | —                    |       | 4                           |       | 1 |   | 6 |   |
| Total restaurants open, end of period                                |       | 90                        |       | 86                          |       | 90 |   | 86 |   |

 

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(a)                The Company defines comparable restaurant sales as netsales from restaurants open at least one full fiscal year prior to thebeginning of the current reported period.

 

**Thirteen Weeks Ended June 30,2004 Compared to Thirteen Weeks Ended July 2, 2003**

 

*Net Sales*.  Total net sales increased by $4.2million, or 8.8%, to $51.8 million during the second quarter of 2004 from $47.6million during the second quarter of 2003.  The increase was primarily dueto a $450,000 (1.0%) increase in comparable restaurant sales, a $4.1 millionincrease in sales due to 89.4 incremental restaurant weeks from elevenrestaurants opened since January 2003, and an offset of approximately$340,000 from one restaurant closing in the fourth quarter of 2003. Comparable Bertucci’s restaurant dine-in guest counts decreased 5.1% for thesecond quarter of 2004 as compared to the second quarter of 2003. Bertucci’s comparable restaurant dine-in sales increased 1.2% and comparablecarry-out and delivery sales increased .2% for the quarter as compared to thesecond quarter of 2003. The Company believes the increase in comparable saleswas primarily due to an aggregate 3.5% increase in menu prices inMarch 2003 and February 2004 and a menu mix shift to higher priceditems, partially offset by the aforementioned guest countdecreases.  For the 79 comparable restaurants, average weekly salesincreased from $44,100 per restaurant in the second quarter 2003 to $44,600 perrestaurant during the second quarter of 2004.  For the eleven restaurantsopened since January 2003, average weekly sales were $44,700 per restaurantduring the second quarter of 2004.

 

*Cost of Sales*.  Cost of sales increased byapproximately $1.9 million, or 17.3%, to $12.9 million during the secondquarter of 2004 from $11.0 million during the second quarter 2003. Expressed as a percentage of net sales, overall cost of sales increased to24.9% during the second quarter of 2004 from 23.2% during the second quarter of2003.  Increased sales accounted for approximately $742,000 of theincrease, approximately $646,000 resulted from increases in selected ingredientcosts, primarily cheese and oil, and

 

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approximately $496,000 was due to a menu mix shift tohigher cost items.  The Company believes the higher ingredient costs andthe shift in menu emphasis will continue during 2004.

 

*Operating Expenses.*  Operating expenses increased by$5.1 million, or 20.4%, to $33.5 million during the second quarter of 2004 from$28.4 million during the second quarter of 2003.  Expressed as apercentage of net sales, operating expenses increased to 64.7% in the secondquarter of 2004 from 59.7% during the second quarter of 2003.  The dollarincrease was primarily due to the opening and operation of restaurants thatwere opened after the second quarter of 2003 and advertising expenditures of$2.9 million more in the second quarter of 2004 as compared to the secondquarter of 2003, primarily due to the timing of marketing campaigns. The firstmarketing campaign of fiscal 2004 began in April and was concentrated overthe second quarter of 2004; the first marketing campaign of 2003 began inMarch 2003 and continued through the last quarter of 2003.

 

*General and Administrative Expenses.*  General and administrativeexpenses increased by approximately $622,000, or 21.4%, to $3.5 million duringthe second quarter of 2004 from $2.9 million during the second quarter of2003.  Expressed as a percentage of net sales, general and administrativeexpenses increased to 6.7% in the second quarter of 2004 from 6.0% during thesecond quarter of 2003.  The dollar increase was primarily due to higherpayroll and related expenses due to open positions being filled and higherprofessional fees due to outsourcing services prior to filling the positions.

 

*Asset Impairment Charge.* As discussed in Note 9 of Notes toConsolidated Financial Statements, the Company recorded a charge ofapproximately $3.3 million in the second quarter 2004 to recognize theestimated impairment of depreciable long-lived assets in seven restaurants.Impairment of three restaurants opened in 2003 comprised all but $80,000 of thetotal charge.

 

*Depreciation, Amortization, DeferredRent and Pre-opening Expenses*.  Depreciation, amortization, deferred rent andpre-opening expenses decreased by approximately $160,000, or 4.8%, to $3.1million during the second quarter of 2004 from $3.3 million during the secondquarter of 2003.  Expressed as a percentage of net sales, depreciation,amortization, deferred rent and pre-opening expenses decreased to 6.0% in thesecond quarter of 2004 from 6.9% during the second quarter of 2003.  Thedollar variance was primarily the result of a $664,000 decrease in pre-openingcosts as there were no openings in the second quarter of 2004 partially offsetby a $463,000 increase in depreciation costs due to restaurants open sinceJuly 2003.

 

*Interest Expense.*  Net interest expense increased byapproximately $154,000, or 6.2%, to $2.7 million during the second quarter of2004 from $2.5 million during the second quarter of 2003 primarily as a resultof reduced construction costs capitalized and capitalized leases recorded in2003.

 

*Income Taxes*.  The Company has an historicaltrend of recurring pre-tax losses since 1998 excluding the sale of 40 Chili’sand seven On The Border restaurants to Brinker International, Inc. inApril 2001.  The Company anticipates that its current plan forcontinued development of Company owned Bertucci’s restaurants will burdenpre-tax profits because of the recognition of pre-opening costs and initialyear inefficiencies associated with new restaurants.  During the fourthquarter of 2002, the Company recorded a full valuation allowance for its netdeferred tax asset.  The Company has also provided a full valuationallowance relating to the tax benefits subsequently generated (primarily from itsoperating losses).

 

**Twenty-Six Weeks Ended June 30,2004 Compared to Twenty-Six Weeks Ended July 2, 2003**

 

*Net Sales*.  Total net sales increased by$10.9 million, or 12.1%, to $101.2 million during the first two quarters of2004 from $90.3 million during the first two quarters of 2003.  Theincrease was primarily due to a $2.5 million, or 2.9%, increase in comparablerestaurant sales, a $9.0 million increase in sales due to 199.0 incrementalrestaurant weeks from eleven restaurants opened since January 2003, and anoffset of approximately $634,000 from one restaurant closing in the fourthquarter of 2003.  Comparable Bertucci’s restaurant dine-in guest countsdecreased 3.8% for the first two quarters of 2004 as compared to the first twoquarters of 2003.  Bertucci’s comparable restaurant dine-in salesincreased 3.2% and comparable carry-out and delivery sales increased 1.8% forthe period as compared to the first two quarters of 2003. The

 

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Company believes the increase in comparable sales wasprimarily due to an aggregate 3.2% increase in menu prices in March 2003and February 2004 and a menu mix shift to higher priced items, partiallyoffset by the aforementioned guest count decreases.  For the 79comparable restaurants, average weekly sales increased from $42,500 perrestaurant in the first two quarters 2003 to $43,700 per restaurant during thefirst two quarters of 2004.  For the eleven restaurants opened sinceJanuary 2003, average weekly sales were $41,500 per restaurant during thefirst two quarters of 2004.

 

*Cost of Sales*.  Cost of sales increased byapproximately $3.9 million, or 19.0%, to $24.4 million during the first twoquarters of 2004 from $20.5 million during the first two quarters 2003. Expressed as a percentage of net sales, overall cost of sales increased to24.2% during the first two quarters of 2004 from 22.7% during the first twoquarters of 2003.  Increased sales accounted for approximately $1.9million of the increase, approximately $1.0 million resulted from increases inselected ingredient costs, primarily cheese and oil, and approximately $1.1million was due to a menu mix shift to higher cost items.  The Companybelieves the higher ingredient costs and the shift in menu emphasis willcontinue during 2004.

 

*Operating Expenses.*  Operating expenses increased by$8.2 million, or 14.9%, to $63.1 million during the first two quarters of 2004from $54.9 million during the first two quarters of 2003.  Expressed as apercentage of net sales, operating expenses increased to 62.4% in the first twoquarters of 2004 from 60.8% during the first two quarters of 2003. Advertising expenditures were $2.4 million more in the first two quarters of2004 as compared to the first two quarters of 2003, primarily due to the timingof marketing campaigns each year. Expenses in new restaurants, exclusive ofadvertising, were responsible for $5.0 million of the increase. Utilities inexisting restaurants were primarily responsible for the balance of the increase.

 

*General and Administrative Expenses.*  General and administrativeexpenses increased by approximately $536,000, or 8.9%, to $6.6 million duringthe first two quarters of 2004 from $6.0 million during the first two quartersof 2003.  Expressed as a percentage of net sales, general andadministrative expenses decreased to 6.5% in the first two quarters of 2004from 6.7% during the first two quarters of 2003.  The dollar increase wasprimarily due to higher payroll and related expenses due to open positions beingfilled and higher professional fees due to outsourcing services prior tofilling the positions.

 

*Asset Impairment Charge.* As discussed in Note 9 of Notes toConsolidated Financial Statements, the Company recorded a charge ofapproximately $3.3 million in the second quarter 2004 to recognize theestimated impairment of depreciable long-lived assets in seven restaurants.Impairment of three restaurants opened in 2003 comprised all but $80,000 of thetotal charge.

 

*Depreciation, Amortization, DeferredRent and Pre-opening Expenses*.  Depreciation, amortization, deferred rent andpre-opening expenses increased by approximately $110,000, or 1.8%, to $6.3million during the first two quarters of 2004 from $6.2 million during thefirst two quarters of 2003.  Expressed as a percentage of net sales,depreciation, amortization, deferred rent and pre-opening expenses decreased to6.3% in the first two quarters of 2004 from 6.9% during the first two quartersof 2003.  The dollar variance was primarily the result of a $1.0 millionincrease in depreciation costs and deferred rent due to new restaurantspartially offset by a $926,000 decrease in pre-opening costs.

 

*Interest Expense.*  Net interest expense increased byapproximately $384,000, or 7.8%, to $5.3 million during the first two quartersof 2004 from $4.9 million during the first two quarters of 2003. Incremental interest expense of approximately $190,000 was incurred in thefirst two quarters of 2004 as a result of capitalized leases recorded in 2003.  Fewer restaurant openings contributed toapproximately $112,000 less interest capitalized to construction costs. Reducedinterest income, due to both lower interest rates and lower cash balancesavailable, were primarily responsible for the balance of the net increase.

 

*Income Taxes*.  The Company has an historicaltrend of recurring pre-tax losses since 1998 excluding the sale of 40 Chili’sand seven On The Border restaurants to Brinker International, Inc. inApril 2001.  The Company anticipates that its current plan forcontinued development of Company owned Bertucci’s restaurants will burdenpre-tax profits because of the recognition of pre-opening costs and initialyear inefficiencies associated with new restaurants.  During the fourthquarter of 2002, the Company recorded a

 

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full valuation allowance for its net deferred taxasset.  The Company has also provided a full valuation allowance relatingto the tax benefits subsequently generated (primarily from its operatinglosses).

 

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**Liquidity and Capital Resources**

 

The Company has historically met its capitalexpenditures and working capital needs through a combination of operating cashflow, bank and mortgage borrowings and, in fiscal 2003, two sale leasebacktransactions.  Future capital and working capital needs are expected to befunded from net cash flows provided by operating activities.

 

Net cash flows provided by operating activities were$1.7 million for the first two quarters of 2004, $300,000 less than the $2.0million provided during the first two quarters of 2003.  As ofJune 30, 2004, the Company had cash and cash equivalents of $10.8 million.

 

The Company’s capital expenditures were $3.4 millionduring the first two quarters of 2004 compared to $10.3 million for thecomparable prior year period.  The capital expenditures were primarilycomprised of $1.8 million for new Bertucci’s restaurants and $1.6 million forremodeling and maintenance capital.  The Company anticipates capitalexpenditures for the remainder of 2004 will be approximately $4.6 million.

 

As of June 30, 2004, the Company had $91.9million in consolidated indebtedness: $85.3 million in outstanding principalamount of 10 3⁄4% senior notes (the “Senior Notes”), $5.7 million related to thecapital lease portion of the sale-leaseback transactions, and $842,000 ofpromissory notes.  The Company has a $4.0 million (maximum) Letter ofCredit Facility.  As of June 30, 2004, this facility was collateralizedwith $3.1 million of cash restricted from general use in support of $3.1million of outstanding letters of credit. In August 2004, the Companyfunded an $820,000 Letter of Credit increase with an equivalent increase inrestricted cash. The Company does not have a line of credit or other similarborrowing facility.

 

The Company believes the cash flow generated fromoperations and current cash on hand will be sufficient to fund its plannedoperations, including debt service, lease commitments and capital expenditures,for the next twelve months.  The Company expects that it will experiencesignificant liquidity demands in 2008 when its Senior Notes must be paidin full.  Currently, the Company is only required to pay semi-annualinterest payments on the Senior Notes.

 

The Company’s future operating performance and abilityto service or refinance the Senior Notes will be subject to future economicconditions and to financial, business and other factors, many of which arebeyond the Company’s control.

 

**Impact of Inflation**

 

Inflationary factors such as increases in labor, foodor other operating costs could adversely affect the Company’s operations. The Company does not believe inflation has had a material impact on itsfinancial position or results of operations for the periods discussedabove.  Management believes through the proper leveraging of purchasingsize, labor scheduling, and restaurant development analysis, inflation will nothave a material adverse effect on operations during the foreseeable future. There can be no assurance inflation will not materially adversely affect theCompany.

 

**Seasonality**

 

The Company’s quarterly results of operations havefluctuated and are expected to continue to fluctuate depending on a variety offactors, including the timing of new restaurant openings and relatedpre-opening and other startup expenses, net sales contributed by newrestaurants, increases or decreases in comparable restaurant sales, competitionand overall economic conditions.  The Company’s business is also subjectto seasonal influences of consumer spending, dining out patterns andweather.  As is the case with many restaurant companies, the Companytypically experiences lower net sales and net income during the first andfourth quarters.  Because of these fluctuations in net sales and net loss,the results of operations of any quarter are not necessarily indicative of theresults that may be achieved for a full year or any future quarter.

 

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**Critical Accounting Policies andEstimates**

 

The discussion and analysis of the Company’sfinancial condition and results of operations are based upon their consolidatedfinancial statements, which have been prepared in accordance with accountingprinciples generally accepted in the United States of America.  Thepreparation of these financial statements required the Company to makeestimates and judgments affecting the reported amounts of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities.  On an on-going basis, the Company evaluates their estimates,including those related to impairment of long-lived assets, self-insurance, andclosed restaurants reserve. The Company bases their estimates on historicalexperience and on various other assumptions believed to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities not readily apparent from othersources. Actual results may differ from these estimates under differentassumptions or conditions.

 

The Company believes thefollowing critical accounting policies affect the more significant judgmentsand estimates used in the preparation of the consolidated financial statements.

 

*Impairment of Long-Lived Assets*

 

The Company evaluates property and equipment held andused in the business for impairment whenever events or changes in circumstancesindicate that the carrying amount of a restaurant’s assets may not berecoverable.  An impairment is determined by comparing estimatedundiscounted future operating cash flows (which the Company estimates usinghistorical cash flows and other relevant facts and circumstances) for arestaurant to the carrying amount of its assets.  If an impairment exists,the amount of impairment is measured as the excess of the carrying amount overthe estimated discounted future operating cash flows of the asset and theexpected proceeds upon sale of the asset.  The estimates and assumptionsused during this process are subject to a high degree of judgment.

 

During the second quarter of 2004, the Companyassessed certain non-performing restaurants for recoverability and determinedan impairment of fixed assets existed at seven restaurant locations.  TheCompany estimated the fair value of these assets based on the net present valueof the expected cash flows of the seven restaurants.  The carrying amountof the assets exceeded the fair value of the assets by approximately $3.3million. In the second quarter of 2004, the Company recorded an impairmentcharge to reflect the write down of the affected assets to fair value.Impairment of three restaurants opened in 2003 comprised all but $80,000 of thetotal charge.

 

A similar assessment by the Company during the third quarterof 2003 determined an impairment of fixed assets existed at eleven restaurantlocations. The carrying amount of the assets exceeded the estimated fairvalue of the assets by approximately $4.7 million.  The Company recordedan impairment charge of that amount in the third quarter of 2003 to reflect thewrite down of the affected assets to fair value.

 

In addition, at least annually, the Company assessesthe recoverability of goodwill and other intangible assets related to itsrestaurant concepts. These impairment tests require the Company to estimatefair values of its restaurant concepts by making assumptions regarding futurecash flows and other factors.  If these assumptions change in the future,the Company may be required to record impairment charges for these assets. Todate, such analysis has indicated no impairment of goodwill and otherintangible assets has occurred.

 

*Self-Insurance*

 

The Company is self-insured for certain losses relatedto general liability, group health insurance, and workers’ compensation. The Company maintains stop loss coverage with third party insurers to limit itstotal exposure.  The self-insurance liability represents an estimate ofthe ultimate cost of claims incurred as of the balance sheet date.  Theestimated liability is not discounted and is established based upon analysis ofhistorical data and estimates of the ultimate costs of claims incurred, whichis reviewed by the Company on a quarterly basis to ensure that the liability isappropriate.  If actual trends, including the severity or

 

16

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frequency of claims, differ from the Company’sestimates, the Company’s financial results could be impacted. To date, noactivity has occurred requiring significant adjustments to these reserves.

 

*Closed Restaurants Reserve*

 

The Company remains primarily liable on leases for 14closed locations. Management reviews the specifics of each site on a quarterlybasis to estimate the Company’s net remaining liability over the remaininglease term. Certain locations have subtenants in place while others remainvacant. Estimates must be made of future sublease income or lease assignmentpossibilities. If subtenants default on their subleases or projected futuresubtenants are not obtained, actual results could differ from the Company’sestimates, thereby impacting the Company’s financial results. All activity infiscal 2003 and 2004 has been consistent with reserves and no increases in thereserve have been necessary.

 

**Item3.  QUANTITATI****VE ANDQUALITATIVE DISCLOSURE ABOUT MARKET RISK**

 

The Company has no exposure to specific risks relatedto derivatives or other “hedging” types of financial instruments.

 

**Item 4. CONTROLS AND PROCEDURES**

 

The Company maintains disclosure controls and proceduresdesigned to ensure information required to be disclosed in the Company’sSecurities Exchange Act reports is recorded, processed, summarized and reportedwithin the time periods specified in the SEC’s rules and forms, and suchinformation is accumulated and communicated to our management, including ourChief Executive Officer and Chief Financial Officer, as appropriate, to allowtimely decisions regarding required disclosure. In designing and evaluating thedisclosure controls and procedures, management recognized controls andprocedures, no matter how well designed and operated, can provide onlyreasonable assurance of achieving the desired control objectives, as ours aredesigned to do, and management necessarily was required to apply its judgmentin evaluating the cost-benefit relationship of possible controls andprocedures.

 

As of June 30, 2004, the Company carried out anevaluation, under the supervision and with the participation of our management,including our Chief Executive Officer and Chief Financial Officer, of theeffectiveness of the design and operation of our disclosure controls andprocedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of1934.  Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded our disclosure controls and procedures areeffective in enabling us to record, process, summarize and report informationrequired to be included in our periodic SEC filings within the required timeperiod.

 

No changes in our internal control over financialreporting occurred during the first twenty-six weeks of fiscal 2004 whichmaterially affected, or were reasonably likely to materially affect, ourinternal control over financial reporting.

 

PART II: OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

 

The Company is involved in various legal proceedingsfrom time to time incidental to the conduct of its business. In the opinion ofmanagement, any ultimate liability arising out of such proceedings will nothave a material adverse effect on the financial condition or results ofoperations of the Company.

 

Management is not aware of any litigation to which theCompany is currently a party that is likely to have a material adverse effecton the Company.

 

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Item 2.  CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OFEQUITY SECURITIES

 

On April 10, 2004, the Company issued 1,125shares of Common Stock to Gregory A. Pastore, the Company’s former VicePresident – General Counsel, in connection with Mr. Pastore’s exercise of stock options. In consideration of the issuance of these shares, Mr. Pastore paid theCompany an aggregate of $10,672 in cash. When issuing these shares, the Company relied upon the exemption fromregistration under the Securities Act of 1933, as amended (the “Act”), providedby Section 4(2) of the Act.  Nocommissions were paid to any underwriter in connection with the shares issuedto Mr. Pastore.

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

 

None

 

Item 4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS

 

None

 

Item 5.  OTHER INFORMATION

 

On August 11, 2004, Benjamin R. Jacobson,Chairman of the Company’s Board of Directors and the Chief Executive Officerand Treasurer of the Company resigned from the office of Chief ExecutiveOfficer.  Mr. Jacobson remains theChairman of the Company’s Board of Directors and the Company’s Treasurer.

 

Also, on August 11, 2004, the Board of Directorsof the Company elected Stephen V. Clark as the Company’s Chief ExecutiveOfficer.  Mr. Clark has served as adirector of the Company since April 2002.   Mr. Clark has been the President and ChiefExecutive Officer of Taco Bueno, a quick service Mexican restaurant chain ofover 120 stores, since June 2001. He will retain those positions in additionto his duties with the Company.  Hepreviously served as Taco Cabana Inc.’s Chief Executive Officer fromNovember 1996 through June 2001 and was previously the President,Chief Operating Officer, and Director at Taco Cabana from April 1995through November 1996.  Prior to that, Mr. Clark held variouspositions with Church’s Chicken, a division of America’s Favorite Chicken, overseventeen years, the last having been Senior Vice President and Concept GeneralManager.

 

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

 

Exhibits

 

31.1        Certification of Stephen V. Clark pursuant to Item601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002 (*).

 

31.2        Certification of Kurt J. Schnaubelt pursuant to Item601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of theSarbanes-Oxley Act of 2002 (*).

 

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(*) – Included with thisreport.

 

Reports on Form 8-K

 

The Company did not fileany Current Reports on Form 8-K during the period covered by this report.

 

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SIGNATURES

 

Pursuant to the requirements of the SecuritiesExchange Act of 1934, the registrant has duly caused this report to be signedon its behalf by the undersigned thereunto duly authorized.

 

 
|                              | BERTUCCI’S CORPORATION                 |                        |
|-----------------------------------|---------------------------------------------|-----------------------------|
|                              | (Registrant)                                |                        |
|                              |                                        |                        |
| Date:   August 13, 2004 |                                        | By: /s/ Stephen V.  Clark   |   |   |
|                              | Chief Executive Officer                     |                        |
|                              | (Principal Executive  Officer)              |                        |
|                              |                                        |                        |
| Date:   August 13, 2004 |                                        | By: /s/ Kurt J.  Schnaubelt |   |   |
|                              | Chief Financial  Officer,                   |                        |
|                              | Senior Vice President –  Finance and   |                        |
|                              | Administration (Chief  Accounting  Officer) |                        |

 

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