**SECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C.  20549**

 

**FORM 10-K**

 

ý  **ANNUAL REPORT VOLUNTARILYFILED PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the fiscal year ended December 29, 2004**

 

**OR**

 

**o****  TRANSITION REPORT PURSUANT TO SECTION 13OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For the transition period from              to              **

 

**Commission File Number:  333-62775**

 

**BERTUCCI’S CORPORATION**

(Exact name of registrant as specified in its charter)

 
| **Delaware**                                                    | ** ** | **06-1311266**                        |
|-----------------------------------------------------------------|------------|---------------------------------------|
| (State or other jurisdiction of  incorporation or organization) |       | (I.R.S. Employer  Identification No.) |
|                                                            |       |                                  |
| **155 Otis Street, Northborough, MA**                           | ** ** | **01532**                             |
| (Address of principal executive offices)                        |       | (Zip Code)                            |

 

**(508) 351-2500**

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 
| **Title of each class** | ** ** | **Name of each exchange on which registered** |
|-------------------------|------------|-----------------------------------------------|
| None                    |       |                                          |

 

Securities registered pursuant to Section 12(g) of the Act:

 

**None**

Title of class

 

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

 

Yes ý             No o

 

Indicate by check mark ifdisclosure of delinquent filers pursuant to Item 405 of Regulation S-K is notcontained herein, and will not be contained, to the best of registrant’sknowledge, in definitive proxy or information statements incorporated byreference in Part III of this form 10-K or any amendment to this Form 10-K.  ý

 

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

 Yes o                                                          Noý

 

Documents Incorporated ByReference

None

 

 

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**CAUTIONARY STATEMENT FOR THE PURPOSES OF THE “SAFEHARBOR” PROVISIONS OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.**

 

*All statements other than statements of historicalfacts included in this Annual Report on Form 10-K, including, withoutlimitation, statements set forth under “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-lookingstatements generally can be identified by the use of forward-lookingterminology such as “may,”  “will,” “expect,”“intend,” “estimate,” “anticipate” or “believe” or the negative thereof orvariations thereon or similar terminology. Although the Company believes that the expectations reflected in suchforward-looking statements will prove to have been correct, it can give noassurance that such expectations will prove to have been correct. Investors arecautioned not to place undue reliance on these forward-looking statements,which speak only as of the date hereof. The Company undertakes no obligation to publicly release any revisionsto these forward-looking statements to reflect events or circumstances afterthe date hereof or to reflect the occurrence of unanticipated events.  Factors that could cause or contribute tosuch differences include those discussed in the risk factors set forth in Item7 below (the “Risk Factors”) as well as those discussed elsewhere herein.*

 

**PART I**

 

**ITEM 1.  BUSINESS**

 

**Overview**

 

Bertucci’s Corporation, a Delaware corporation (the “Company”), is theowner and operator of a chain of full-service casual dining, Italian-stylerestaurants under the names Bertucci’s Brick Oven Pizzeria® and Bertucci’sBrick Oven Ristorante®.  The Company wasincorporated in 1994 as NE Restaurant Company, Inc. and formally changedits name to Bertucci’s Corporation on August 16, 2001.  As of December 29, 2004, the Companyoperated 91 restaurants located primarily in the northeastern United States.

 

In July 1998, the Company completed itsacquisition of Bertucci’s Restaurant Corp.’s parent entity, Bertucci’s, Inc.,for a purchase price, net of cash received, of approximately $89.4 million (the“Acquisition”).  The Company financed the Acquisition primarily throughthe issuance of $100 million of 10 3/4% senior notes due 2008 (the “SeniorNotes”).  The Senior Notes are stilloutstanding as to $85.3 million in principal.

 

**Concept**

 

Bertucci’s restaurants are full-service, casual dining restaurantsoffering high quality, moderately priced Italian food. Units are open sevendays a week for lunch and dinner, appealing to both families and adultmarkets.  Bertucci’s differentiatesitself from other restaurants by offering a variety of freshly prepared foodsusing high quality ingredients and brick-oven baking techniques.  Bertucci’s also distinguishes itself with acontemporary Tuscan-style, open-kitchen design. The first Bertucci’s opened in Somerville, Massachusetts in 1981.

 

**Restaurant Overview and Menu**

 

Bertucci’srestaurants offer a distinctive menu and a contemporary Tuscan-style designthat offers a unique dining experience at a reasonable price.  Bertucci’s specializes in a wide assortment of Italian regional pasta,chicken, veal and seafood dishes, salads, and premium brick oven pizza. Thechain’s signature pizza is prepared in brick ovens that bake at unusually hightemperatures, enabling the production of a light crust and preservation ofnatural flavors and moisture of toppings. Natural fresh ingredients are used toensure high quality and freshness. The Company makes its own dough, sauces andtoppings in each unit, thus preparing its menu fresh each day.  In addition, Bertucci’s menu featuresa variety of appetizers, soups, and calzones. Management believes Bertucci’s original recipes and brick-oven bakingtechniques combine to produce superior products that are difficult toduplicate.  Wine and beer are availableat all Bertucci’s locations and full bar service is available at most Bertucci’srestaurants.  Price points generallyrange from $6.99 to $9.99 for lunch entrees and $8.99 to $15.99 for dinnerentrees.  Most items on the menu may bepurchased for take-out service or delivery, which together accounted forapproximately 23% of net sales in fiscal 2004.

 

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**Restaurant Design**

 

Bertucci’srestaurants are freestanding or in-line buildings averaging approximately 6,020square feet in size with a seating capacity of approximately 160 people.  Each Bertucci’s restaurant features acontemporary Tuscan-style, open-kitchen design centered around brick ovens.  Ingredients are displayed and food isprepared on polished granite counters located in front of the brick ovens, inplain view of diners.  Bertucci’srestaurants historically have been built in varying sizes and designs, with notwo interior decors exactly alike.  Mostrestaurants were re-imaged in recent years and feature a relaxing Tuscanatmosphere with similar and consistent elements.  Because management believes uniteconomics benefit from a standardized design, in 2000 the Company developed a prototypedesign incorporating approximately 5,400 square feet and 170 seats.  The first restaurant with this prototypicaldesign opened in Danbury, Connecticut in late January 2001.  The Company has since modified the prototypedesign which currently envisions approximately 5,800 square feet and 200 seatsper location. The first restaurant with the modified prototypical design openedin Christiana, Delaware in December 2003. Key features of the prototype design are a separate carryoutdesignation, a bar/waiting area and modification of interior elements,including new floor and ceiling materials and new furniture.

 

**Restaurant Development**

 

*Expansion. *The Companyexpects to grow through the opening of new Bertucci’s restaurants over the nextseveral years, although it is anticipated there will be only one opening infiscal 2005.  The Company expects tofinance the development of Bertucci’s through a combination of cash on hand andcash from operations.  See Item 7.Management’s Discussion and Analysis of Financial Condition and Results ofOperations - Liquidity and Capital Resources.

 

*Site Selection and Construction. *Management’s site selection strategy fornew restaurants focuses on high-density, high-traffic, high-visibility siteswhich are, for the most part, positioned within existing markets to takeadvantage of certain operational efficiencies. Management seeks out sites with a mixture of retail, office, residentialand entertainment concentration which promote both lunch and dinnerbusiness.  Management devotes significanttime and resources to identify and analyze potential sites, as it believes thatsite selection is crucial to its success. Management also believes that multiple locations focused in defined geographicareas will result in increased market penetration and brand recognition, andwill permit advertising, management, purchasing and administrative efficiencies.  The typical time period required to select asite and build and open a full-service restaurant averages 15 to 18 months.

 

*Franchising. *Management believes franchising can be an efficient vehicleto develop restaurants in markets far from the Company’s currentlocations.   However, there are currently no franchisees orcurrent plans to develop a franchise program.

 

**Quality Control**

 

EachBertucci’s restaurant typically has a general manager and two to threeassistant managers who are responsible for assuring compliance with Bertucci’soperating procedures and for the training and supervision of restaurantemployees.  The general managers reportto district managers who oversee, on average, between five and eight Bertucci’srestaurants.  The Company believesquality control operations of Bertucci’s are enhanced by the work of regionalchefs who provide support to restaurant management and ensure quality of foodpreparation.

 

**Training**

 

TheCompany places significant emphasis on the proper training of itsemployees.  Training is designed toincrease product quality, operational safety, overall productivity and guestsatisfaction and to foster the concept of ‘‘continuous improvement.’’  The Company requires new non-managementemployees to undergo extensive training administered by restaurant-levelmanagers to improve the confidence, productivity, proficiency level andcustomer relations skills of such employees. The Company also requires all of its managers to complete acomprehensive management training program developed by the Company.  This program instructs management trainees indetailed, concept-specific food preparation standards and procedures as well asadministrative and human resource functions. This training is largely conducted at specified restaurants which aredesignated as ‘‘training restaurants’’ and also incorporates training manualsand other written guides.  At the end ofthe process, trainee skills are tested by a variety of means including afull-day written examination.  Initialinstruction is typically followed up by periodic supplemental training.  When the Company opens a new restaurant,management positions are typically staffed with personnel who have had previousexperience in a management position at another Bertucci’s restaurant.  In addition, a highly experienced trainingteam assists in opening the restaurant. Prior to opening, all hourly staff personnel undergo a week of intensivetraining conducted by the restaurant training team.

 

3

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During2001, the Company implemented the Bertucci’s University program for restaurantmanagers.  The Bertucci’s Universityprogram consists of a one-week training session at the Company’s headquarterswhere new managers are taught, among other things, safety and security,computers and information systems, responsible alcohol service and appliedfoodservice sanitation.  Management believesthe testing during Bertucci’s University is rigorous and the managers whograduate from this program are better prepared for running Bertucci’srestaurants.

 

**Advertising and Marketing**

 

TheCompany’s overall marketing objective is to grow brand recognition, therebyincreasing revenues and profitability. Management utilizes strategies that create customer trial of newproducts so as to increase the share of visits and average guest check, yetmaintain a unique dining experience and brand personality.  The Company recognizes the need to buildbrand awareness in order to increase market share.  Its advertising plan is designed to increasebrand awareness, trial and share of visits from its target market by providingmedia coverage in markets where the Company has sufficient penetration tosupport media, primarily radio, at competitive levels. In 2005, the Companyintends to only use radio in these markets. In its secondary markets, the Company utilizes more cost-effectivelocalized marketing vehicles including newspaper inserts and direct mail.

 

**Purchasing**

 

TheCompany negotiates directly with suppliers of food and beverage products andother restaurant supplies to ensure consistent quality and freshness ofproducts and to obtain competitive prices. Although the Company believes essential restaurant supplies and productsare available on short notice from several sources, the Company uses onefull-service distributor for a substantial portion of its restaurant suppliesand product requirements, with such distributor charging the Company fixedmark-ups over prevailing wholesale prices. The Company has a six-year contract with its full-service distributorwhich terminates in 2011. There are no required quantity purchases under thisagreement. The Company also has arrangements with several smaller and regionaldistributors for the balance of its purchases. These distribution arrangements have allowed the Company to benefit fromeconomies of scale and resulting lower commodity costs.  Smaller day-to-day purchasing decisions aremade at the individual restaurant level. The Company has not experienced any significant delays in receiving foodand beverage inventories or restaurant supplies.

 

**Information Systems and Restaurant Reporting**

 

*Information Systems.*  The Company’s information systems providedetailed monthly financial statements for each restaurant, bi-monthlyrestaurant inventories, menu mix, cash management and payroll analysis.  Preliminary financial reports are availablewithin two days of the period close and the restaurant-level information isconsolidated at the Company’s headquarters. Restaurant managers are able to respond to changes in their businessdaily, weekly or monthly, as necessary. Sales, menu mix, cash management and basic operating information areeach processed daily and reported on the Company’s internal system. The othervarying levels of systems data are consolidated and processed by the Company atits headquarters daily, weekly or monthly, as management deems appropriate.

 

*Point of Sale (“POS”). *Allrestaurants use the Micros 3700 POS system. Management believes the consistency and reliability of the POS system isthe backbone of the technical infrastructure. The consistency between restaurants provides efficiencies for multi-restaurantoperations, training and support.  ThePOS data is retrieved from each restaurant daily and processed at the Company’sheadquarters.

 

*Data Warehouse. *The Company manages a data warehouse,tracking information as minute as guest check detail.  Management believes the data warehouseprovides multiple views of operational data which enables the Company to identifytrends, evaluate price sensitivity and track new menu items/combinations.

 

## **Trademarks,Service Marks and Other Intellectual Property**

 

Bertucci’shas registered, among others, the names “‘Bertucci’s®”, “‘Bertucci’s Brick OvenPizzeria®”, and “‘Bertucci’s Brick Oven Ristorante®” as service marks andtrademarks with the United States Patent and Trademark Office.

 

Managementis aware of names similar to that of Bertucci’s used by third parties incertain limited geographical areas.  Suchthird-party use may prevent the Company from licensing the use of the Bertucci’smark for restaurants in such areas. Except for these areas, management is not aware of any infringing usesthat could materially affect the Company’s business.

 

4

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## **Competition**

 

TheCompany’s business, and the restaurant industry in general, is highlycompetitive and is often affected by changes in consumer tastes and diningpreferences, by local and national economic conditions and by population andtraffic patterns.  The Company competesdirectly or indirectly with all restaurants, from national and regional chainsto local establishments, as well as with other foodservice providers.  Many of its competitors are significantlylarger than the Company and have substantially greater resources.

 

**Employees**

 

AtDecember 29, 2004, the Company had approximately 1,711 full-time employees(of whom 72 are based at the Company’s headquarters) and approximately 4,596part-time employees.  None of the Company’semployees are covered by a collective bargaining agreement. The Companybelieves its relations with its employees are good.

 

Managementbelieves the Company’s continued success will depend to a large degree on itsability to attract and retain good management employees.  While the Company expects to continuallyaddress the high level of employee attrition normal in the food-serviceindustry, the Company has taken steps to attract and keep qualified managementpersonnel through the implementation of a variety of employee benefit plans,including a management incentive plan, a 401(k) plan, and a non-qualified stockoption plan for its management employees.

 

# **Employee Loans**

 

InFebruary 2002, the Company extended loans to 14 members of management(including eight officers).  The demandnotes accrued interest at 8%, payable quarterly.  The demand notes totaled $157,000 at January 1,2003 and were paid in full as of February 13, 2003.

 

**Government Regulations**

 

Eachof the Company’s restaurants is subject to licensing and regulation by a numberof governmental authorities on matters which include, among other things,health, safety, fire and alcoholic beverage control in the state ormunicipality in which the restaurant is located.  Difficulties or failures in obtainingrequired licenses or approvals could delay or prevent the opening of a newrestaurant in a particular area.  Inaddition, failure to maintain a required license or approval could result inthe temporary or permanent closing of an existing restaurant.

 

Alcoholicbeverage control regulations require each of the Company’s restaurants to applyto a state authority and, in certain locations, county or municipal authoritiesfor a license or permit to sell alcoholic beverages on the premises and toprovide service for extended hours and on Sundays.  Typically, licenses or permits must berenewed annually and may be revoked or suspended for cause at any time.  Alcoholic beverage control regulations relateto numerous aspects of the daily operations of the Company’s restaurants,including minimum age of patrons and employees, hours of operation,advertising, wholesale purchasing, inventory control and handling, storage, anddispensing of alcoholic beverages.

 

TheCompany is also subject to various other federal, state and local laws relatingto the development and operation of restaurants, including those concerningpreparation and sale of food, relationships with employees (including minimumwage requirements, overtime and working conditions and citizenshiprequirements), land use, zoning and building codes, as well as other health,sanitation, safety and environmental matters.

 

5

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**ITEM 2.  PROPERTIES**

 

TheCompany’s executive office is located in Northborough, Massachusetts.  The office is occupied under the terms of alease covering approximately 20,000 square feet that is scheduled to expire in2006 and has two three-year options to renew. An office leased by the Company in Westborough, Massachusetts iscurrently being sub-leased to a third party.

 

**Restaurant Locations**

 

The table below identifies the location of the restaurants operated bythe Company during fiscal 2004.

 
| **State**            | ** ** | **Open as of   01/01/2004** | ** ** | **Openings** | ** ** | **Closings** | ** ** | **Open as of   12/29/2004** | ** ** |
|----------------------|------------|-----------------------------|------------|--------------|------------|--------------|------------|-----------------------------|------------|
| Connecticut          |       | 11                          |       | —       |       | —       | ** ** | **11**                      | ** ** |
| Delaware             |       | 2                           |       | —       |       | —       | ** ** | **2**                       | ** ** |
| District of Columbia |       | 2                           |       | —       |       | —       | ** ** | **2**                       | ** ** |
| Maryland             |       | 6                           |       | —       |       | —       | ** ** | **6**                       | ** ** |
| Massachusetts        |       | 38                          |       | 1            |       | —       | ** ** | **39**                      | ** ** |
| New Hampshire        |       | 3                           |       | —       |       | —       | ** ** | **3**                       | ** ** |
| New Jersey           |       | 6                           |       | —       |       | —       | ** ** | **6**                       | ** ** |
| New York             |       | 3                           |       | —       |       | —       | ** ** | **3**                       | ** ** |
| North Carolina       |       | 2                           |       | —       |       | —       | ** ** | **2**                       | ** ** |
| Pennsylvania         |       | 7                           |       | —       |       | —       | ** ** | **7**                       | ** ** |
| Rhode Island         |       | 2                           |       | —       |       | —       | ** ** | **2**                       | ** ** |
| Virginia             |       | 7                           |       | 1            |       | —       | ** ** | **8**                       | ** ** |
| Total                | ** ** | **89**                      | ** ** | **2**        | ** ** | **—**   | ** ** | **91**                      | ** ** |

 

Ofthe 91 restaurants operated by the Company at December 29, 2004, theCompany leases all but one restaurant which is owned in fee.  Leases for existing restaurants are generallyfor terms of 15 to 20 years and provide for additional option terms and aspecified annual rental. Most of these leases provide for additional rent basedon sales volumes exceeding specified levels. Leases for future restaurants willlikely include similar rent provisions. Bertucci’s restaurant lease terms remaining range from less than one to24 years.  The majority of such leasesprovide for an option to renew for additional terms ranging from five years to20 years.

 

**ITEM 3.  LEGAL PROCEEDINGS**

 

TheCompany is involved in various legal proceedings from time to time incidentalto the conduct of its business.  In theopinion of management, any ultimate liability arising out of such proceedingswill not have a material adverse effect on the financial condition or resultsof operations of the Company.

 

**ITEM 4.  SUBMISSION OF MATTERS TOA VOTE OF SECURITY HOLDERS**

 

None.

 

6

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**PART II**

 

# **ITEM 5.  MARKETFOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES**

# ** **

# **Market Information**

 

Asof March 31, 2005, there was no established public trading market for anyclass of common equity security of the Company.

 

# **Record Holders**

 

Asof March 31, 2005, there were 98 holders of Common Stock of the Company,$.01 par value per share.  As of March 31,2005, the Company did not have any other class of common equity security issuedand outstanding.

 

# **Dividends**

 

TheCompany has not paid any dividends in the last six years.  Furthermore, the Company does not foreseedeclaring or paying any cash dividends in the immediate future.  Moreover, the indenture governing the SeniorNotes significantly limits, and in certain cases prohibits, payment of cashdividends without the indenture trustee’s approval.

 

# **Recent Sales of Unregistered Securities**

 

None.

 

7

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# **ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA**

 

Thedata for fiscal years ended 2002 through 2004 are derived from auditedfinancial statements of the Company. Selected consolidated financial data should be read in conjunction withManagement’s Discussion and Analysis of Financial Condition and Results ofOperations and the Consolidated Financial Statements and the Notes theretoincluded elsewhere in this Form 10-K, particularly Note 3 Restatement of FinancialStatements.  Historical results are notnecessarily indicative of results to be expected in the future.  The Brinker Sale (b) and the 53rdweek of fiscal 2000 affect the comparability of results on a year-to-yearbasis.

 

**Statementof Operations Data (in thousands except share and per share amounts)**

 
| ** **                                                         | ** ** | **Fiscal Year Ended**       | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                         | ** ** | **December 29,  2004** | ** ** | **December 31,  2003(d)** | ** ** | **January 1,  2003(d)** | ** ** | **January 2,  2002(d)** | ** ** | **January 3,  2001 (a)(d)** | ** ** |
| ** **                                                         | ** ** | ** **                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net sales                                                          |       | $                           | 200,408    |   | $ | 186,172 |   | $ | 162,319 |   | $ | 186,638 |   | $ | 284,933 |   |
| Cost of sales and expenses                                         |       |                        |       |   |   |   |   |   |   |   |   |
| Cost of sales                                                      |       | 49,231                      |       | 43,544 |   | 35,667 |   | 44,855 |   | 74,266 |   |
| Operating expenses                                                 |       | 122,056                     |       | 113,036 |   | 96,413 |   | 111,795 |   | 162,098 |   |
| General and administrative expenses                                |       | 13,065                      |       | 11,320 |   | 12,124 |   | 12,548 |   | 16,392 |   |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 13,216                      |       | 14,115 |   | 12,160 |   | 13,613 |   | 17,460 |   |
| Closed restaurants charge                                          |       | —                      |       | — |   | 236 |   | 3,654 |   | 479 |   |
| Asset impairment charge                                            |       | 6,749                       |       | 3,580 |   | — |   | 1,986 |   | — |   |
| Loss on abandonment of Sal &  Vinnie’s               |       | —                      |       | — |   | — |   | — |   | 2,031 |   |
| Cost of sales and expenses                                         |       | 204,317                     |       | 185,595 |   | 156,600 |   | 188,451 |   | 272,726 |   |
| (Loss) income from operations                                      |       | (3,909                      | )          | 577 |   | 5,719 |   | (1,813 | ) | 12,207 |   |
| Other income (expense)                                             |       |                        |       |   |   |   |   |   |   |   |   |
| Gain on Brinker Sale (b)                                           |       | —                      |       | 650 |   | — |   | 36,932 |   | — |   |
| Gain on retirement of Senior Notes                                 |       | —                      |       | — |   | — |   | 2,290 |   | — |   |
| Interest expense, net                                              |       | (10,613                     | )          | (10,133 | ) | (9,587 | ) | (11,365 | ) | (15,838 | ) |
| Other (expense) income                                             |       | (10,613                     | )          | (9,483 | ) | (9,587 | ) | 27,857 |   | (15,838 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| (Loss) income before income tax provision  (benefit)               |       | (14,522                     | )          | (8,906 | ) | (3,868 | ) | 26,044 |   | (3,631 | ) |
| Income tax provision (benefit)                                     |       | —                      |       | — |   | 2,697 |   | 11,195 |   | (115 | ) |
| Net (loss) income                                                  |       | $                           | (14,522    | ) | $ | (8,906 | ) | $ | (6,565 | ) | $ | 14,849 |   | $ | (3,516 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Basic (loss) income per share                                      |       | $                           | (4.93      | ) | $ | (3.00 | ) | $ | (2.20 | ) | $ | 4.98 |   | $ | (1.18 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding - basic                        |       | 2,943,841                   |       | 2,970,403 |   | 2,978,955 |   | 2,978,955 |   | 2,981,414 |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Diluted (loss) income per share                                    |       | $                           | (4.93      | ) | $ | (3.00 | ) | $ | (2.20 | ) | $ | 4.57 |   | $ | (1.18 | ) |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding -  diluted                     |       | 2,943,841                   |       | 2,970,403 |   | 2,978,955 |   | 3,252,605 |   | 2,981,414 |   |
|                                                               |       |                        |       |   |   |   |   |   |   |   |   |
| Comparable restaurant sales (c)                                    |       | 1.4                         | %          | 4.1 | % | 5.8 | % | 2.2 | % | 4.8 | % |

 

**BalanceSheet Data (in thousands)**

 
| ** **                                | ** ** | **December 29,  2004** | ** ** | **December 31,  2003(d)** | ** ** | **January 1,  2003(d)** | ** ** | **January 2,  2002(d)** | ** ** | **January 3,  2001 (a)(d)** | ** ** |
|-------------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------|------------|
| ** **                                | ** ** | ** **                  | ** ** | ** **                     | ** ** | ** **                   | ** ** | ** **                   | ** ** | ** **                       | ** ** |
| Total assets                              |       | $                           | 115,921    |                           | $          | 128,675                      |       | $                            | 127,372    |                             | $          | 134,512 |   | $ | 185,346 |   |
| Long term obligations                     |       | $                           | 92,193     |                           | $          | 92,148                       |       | $                            | 85,310     |                             | $          | 85,310 |   | $ | 100,000 |   |
| Total stockholders’ (deficit) equity |       | $                           | (11,032    | )                              | $          | 3,769                        |       | $                            | 12,746     |                             | $          | 19,311 |   | $ | 4,462 |   |

 

**CashFlow Data (in thousands)**

 
| ** **                              | ** ** | **December 29,  2004** | ** ** | **December 31,  2003(d)** | ** ** | **January 1,  2003(d)** | ** ** | **January 2,  2002(d)** | ** ** | **January 3,  2001 (a)(d)** | ** ** |
|-----------------------------------------|------------|-----------------------------|------------|--------------------------------|------------|------------------------------|------------|------------------------------|------------|----------------------------------|------------|
|                                    |       |                        |       |                           |       |                         |       |                         |       |                             |       |
| Cash flows from operating activities    |       | $                           | 7,881      |                           | $          | 9,071                        |       | $                            | 9,169      |                             | $          | 4,326 |   | $ | 10,371 |   |
| Cash flows from investing activities    |       | (8,598                      | )          | (17,674                        | )          | (17,816                      | )          | 24,264                       |       | (12,190                          | )          |
| Cash flows from financing activities    |       | 361                         |       | 8,117                          |       | (1,455                       | )          | (12,957                      | )          | 1,842                            |       |
| Net Change in cash and cash equivalents |       | $                           | (356       | )                              | $          | (486                         | )          | $                            | (10,102    | )                                | $          | 15,633 |   | $ | 23 |   |

 

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(a)          Fiscal 2000 was comprised of 53 weeks.  All other years presented were comprised of52 weeks.

 

(b)            In April 2001,the Company completed the sale of 40 Chili’s and seven On The Borderrestaurants to Brinker (the “Brinker Sale”) for a total consideration of $93.5million. Brinker acquired the inventory, facilities, equipment and managementteams associated with these restaurants, as well as the four Chili’srestaurants under development by the Company. Further, Brinker assumed themortgage debt on the Company’s Chili’s and On The Border Mexican Cantina (“OTB”)restaurants.  The Company recorded a gain in 2001 on the Brinker Sale of$36.9 million before income taxes. During 2003 the Company concluded certain liabilities recorded inconnection with the Brinker Sale were no longer required and accordinglyreversed $650,000 of accrued liabilities as an additional gain on the BrinkerSale.

 

(c)          The Company defines comparable restaurantsales as net sales from restaurants that have been open for at least one fullfiscal year at the beginning of the year. The comparable sales in 2004, 2003, 2002 and 2001 relate to Bertucci’sonly and 2000 relates to all the restaurants operated by the Company (Bertucci’s,Chili’s and OTB).

 

(d)         Statementof Operations Data and Cash Flow Data for Fiscal Years 2003 and 2002 andBalance Sheet Data for 2003 have been restated as discussed in Note 3 of Notesto the Consolidated Financial Statements included in Item 15 of thisreport.  Earlier periods have beenrestated to give effect to corrections related to lease accounting.

 

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

 

*The following discussion should be read inconjunction with “Item 1.  Business,” “Item6.  Selected Financial Data,” the Company’sConsolidated Financial Statements and Notes thereto and the informationdescribed under the caption “Risk Factors” below.*

 

# **General**

 

Bertucci’s Corporation, a Delaware corporation (the “Company”),is the owner and operator of a chain of full-service casual dining,Italian-style restaurants under the names Bertucci’s Brick Oven Pizzeria® andBertucci’s Brick Oven Ristorante®.  TheCompany was incorporated in 1994 as NE Restaurant Company, Inc. andformally changed its name to Bertucci’s Corporation on August 16,2001.  As of December 29, 2004, theCompany operated 91 restaurants located primarily in the northeastern UnitedStates.

 

In July 1998, the Company completed itsacquisition of Bertucci’s Restaurant Corp.’s parent entity, Bertucci’s, Inc.,for a purchase price, net of cash received, of approximately $89.4 million (the“Acquisition”).  The Company financed the Acquisition primarily throughthe issuance of $100 million of 10 3/4% senior notes due 2008 (the “SeniorNotes”).  The Senior Notes are stilloutstanding as to $85.3 million in principal.

 

Management’s Discussion andAnalysis of Financial Condition and Results of Operations gives effect to therestatement of the Consolidated Financial Statements discussed in Note 3 of theNotes to Consolidated Financial Statements.

 

**Results of Operations**

 

For all the Company’s restaurants, netsales consist of food, beverage and alcohol sales.  Cost of sales consists of food, beverage andalcohol costs as well as supplies used in carry-out and delivery sales.  Total operating expenses consist of fiveprimary categories:  (i) laborexpenses; (ii) restaurant operations; (iii) facility costs; (iv) officeexpenses; and  (v) non-controllable expenses, which include suchitems as Company advertising expenses, rent and insurance.  General and administrative expenses includecosts associated with those departments of the Company that assist inrestaurant operations and management of the business, including multi-unitsupervision, accounting, management information systems, training, executivemanagement, purchasing and construction.

 

Thefollowing table sets forth the percentage-relationship to net sales, unlessotherwise indicated, of certain items included in the Company’s consolidatedstatements of operation, and the pro forma consolidated statement of operationsabove (see reconciliation above), for the periods indicated:

 

9

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**STATEMENT OF OPERATIONS DATA**

**(Percentage of Net Sales for Fiscal Years Presented)**

 
| ** **                                                         | ** ** | **December 29,  2004** | ** ** | **December 31,  2003** | ** ** | **January 1,  2003** | ** ** |
|--------------------------------------------------------------------|------------|-----------------------------|------------|-----------------------------|------------|---------------------------|------------|
|                                                               |       |                        |       |                        |       |                      |       |
| Net sales                                                          |       | 100.0                       |       | 100.0                       |       | 100.0                     |       |
|                                                               |       |                        |       |                        |       |                      |       |
| Cost of sales and expenses:                                        |       |                        |       |                        |       |                      |       |
| Cost of sales                                                      |       | 24.6                        |       | 23.4                        |       | 22.0                      |       |
| Operating expenses                                                 |       | 60.8                        |       | 60.7                        |       | 59.4                      |       |
| General and administrative expenses                                |       | 6.5                         |       | 6.1                         |       | 7.5                       |       |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 6.6                         |       | 7.6                         |       | 7.5                       |       |
| Asset impairment charge                                            |       | 3.4                         |       | 1.9                         |       | —                    |       |
| Closed restaurants charge                                          |       | —                      |       | —                      |       | 0.1                       |       |
| Total cost of sales and expenses                                   |       | 101.9                       |       | 99.7                        |       | 96.5                      |       |
|                                                               |       |                        |       |                        |       |                      |       |
| (Loss) income from operations                                      |       | (1.9                        | )          | 0.3                         |       | 3.5                       |       |
|                                                               |       |                        |       |                        |       |                      |       |
| Other (expense) income:                                            |       |                        |       |                        |       |                      |       |
| Gain on Brinker Sale                                               |       | —                      |       | 0.3                         |       | —                    |       |
| Interest expense, net                                              |       | (5.3                        | )          | (5.4                        | )          | (5.9                      | )          |
| Other (expense) income                                             |       | (5.3                        | )          | (5.1                        | )          | (5.9                      | )          |
|                                                               |       |                        |       |                        |       |                      |       |
| Loss before income tax provision                                   |       | (7.2                        | )          | (4.8                        | )          | (2.4                      | )          |
|                                                               |       |                        |       |                        |       |                      |       |
| Income tax provision                                               |       | —                      |       | —                      |       | 1.6                       |       |
|                                                               |       |                        |       |                        |       |                      |       |
| Net loss                                                           |       | (7.2                        | )          | (4.8                        | )          | (4.0                      | )          |

 

**Year Ended December 29, 2004 Compared to Year Ended December 31,2003**

 

*Net Sales*.  Total net sales increased by $14.2 million,or 7.6%, to $200.4 million during fiscal 2004 from $186.2 million during fiscal2003.  The increase was due to a 1.4%increase in the 79 comparable Bertucci’s restaurants, the incremental 264.7restaurant weeks resulting from full year operations of ten new restaurantsbuilt during 2003 and the addition of two new restaurant openings in 2004 thatcontributed an incremental 54.9 restaurant weeks.  Bertucci’s comparable restaurant dine-insales increased 1.7% while comparable Bertucci’s restaurant carry-out anddelivery sales increased 0.6% for fiscal 2004. The comparable guest counts, measured on dine-in business only,decreased by 4.3% in 2004 versus 2003. The Company believes that the majority of the comparable sales increaseshave been a result of a shift in menu mix and an approximate 3.6% priceincrease in January 2004.  Theaforementioned combined price increase and shift in menu mix combined to drivea 6.5% increase in dine-in revenue per person in 2004 versus 2003.  The 79 comparable restaurants’ sales averageduring 2004 was $2.2 million while the sales average for the ten restaurantsthat opened during 2003 and were opened a full year of 2004 was also $2.2million.  The average weekly sales forthe two restaurants opened during 2004 were $36,500.

 

*Cost of Sales*.  Cost of sales as a percentage of net salesincreased to 24.6% during fiscal 2004 from 23.4% during fiscal 2003.  The increase was primarily attributable to an increase in certain ingredient costs,primarily cheese and oil, as well as a menu mix shift to higher cost items introducedin 2004.

 

*Operating Expenses.*Operating expenses increased by $9.0 million, or 8.0%, to $122.0 million duringfiscal 2004 from $113.0 million during fiscal 2003.  The key components of operating expenses arepayroll (including related employer taxes), utilities, restaurant facilitiesmaintenance, rent and advertising.  Thedollar increase in these expenses is primarily attributable to the additionalrestaurants being operated and a $1.0 million increase in advertising expensewhich totaled $6.6 million in 2004.  Theincrease as a percentage of net sales to 60.8% in fiscal 2004 from 60.7% infiscal 2003 resulted primarily from the advertising expense increase.

 

10

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*General and Administrative Expenses.* Generaland administrative expenses increased by $1.8 million or 15.9%, to $13.1million during fiscal 2004 from $11.3 million during fiscal 2003.  Expressed as a percentage of net sales,general and administrative expenses increased to 6.5% in fiscal 2004 from 6.1%during fiscal 2003.  The dollar andpercentage increases were primarily due to higher benefit expenses and higher professional fees.

 

*Deferred Rent,**Depreciation, Amortization and Preopening Expenses*.  Deferred rent, depreciation, amortization andpreopening expenses decreased by approximately $.9 million, or 6.4%, to $13.2million during fiscal 2004 from $14.1 million during fiscal 2003. Due to only tworestaurant openings in 2004, pre-opening expenses totaled $519,000, a $1.6million decrease over 2003 during which there were ten restaurant openings. Deferredrent decreased by approximately $300,000. The additional restaurant openings inboth fiscal 2004 and 2003 resulted in an incremental $800,000 of depreciationexpense in fiscal 2004.

 

*Asset Impairment Charge. *The Company assessed certain non-performing restaurants forrecoverability of recorded amounts. The Company determined an impairment offixed assets existed at twelve restaurant locations during 2004.  An estimate of the fair value of these assetsbased on the net present value of the expected cash flows of the restaurantswas made and the carrying amount of the assets was found to exceed the fairvalue of the assets by approximately $6.7 million.  An impairment charge in that amount was recordedto reflect the write down of the affected assets to fair value.

 

*Interest Expense, net.*  Interest expense, net of amounts capitalizedfor new construction, increased by approximately $500,000 to $10.6 millionduring fiscal 2004 from $10.1 million during fiscal 2003.  Interest expense is primarily comprised of$9.2 million paid in semi-annual installments on the 10 3/4% Senior Notes.  In fiscal 2004, $539,000 of interest wasincurred on capital lease obligations, $229,000 higher than last year (when theunderlying sale leaseback transactions were recorded). Interest capitalized toconstruction decreased $161,000 due to fewer restaurant openings.  Additionally, interest income decreased by $41,000primarily due to lower interest rates. Lastly, deferred finance costs amortization increased approximately $40,000in conjunction with the 2003 sale leaseback transactions ( See Note 7 of Notesto Consolidated Financial Statements).

 

*Income Taxes.*  The Company has an historical trend ofrecurring pre-tax losses.  During thefourth quarter of 2002 the Company recorded a full valuation allowance for itsnet deferred tax asset.  The Company alsoprovided a full valuation allowance relating to the tax benefits generatedduring 2004 and 2003 (primarily from its operating losses).  For the year ended December 29, 2004,the Company has net operating loss and tax credit carryforwards totaling $7.8million.

 

**Year Ended December 31, 2003 Compared to Year Ended January 1,2003**

 

*Net Sales*.  Total net sales increased by $23.9 million,or 14.7%, to $186.2 million during fiscal 2003 from $162.3 million duringfiscal 2002.  The increase was due to a4.1% increase in the 73 comparable Bertucci’s restaurants, the incremental 232restaurant weeks resulting from full year operations of seven new restaurantsbuilt during 2002 (including the closing of one of those restaurants) and theaddition of 10 new restaurant openings in 2003 that contributed an incremental207 restaurant weeks partially offset by the closing of one restaurant in mid-2002.  Bertucci’s comparable restaurant dine-insales increased 4.8% while comparable Bertucci’s restaurant carry-out anddelivery sales increased 1.6% for fiscal 2003. The comparable guest counts, measured on dine-in business only,decreased by 1.3% in 2003 versus 2002. The Company believes that the majority of the comparable sales increaseshave been a result of a shift in menu mix and an approximate 2.1% priceincrease in March 2003.  Theaforementioned combined price increase and shift in menu mix combined to drivea 6.4% increase in dine-in revenue per person in 2003 versus 2002.  The 73 comparable restaurants’ sales averageduring 2003 was $2.2 million while the sales average for the six restaurantsthat opened during 2002 and were opened a full year of 2003 was $1.9million.  The average weekly sales forthe 10 restaurants opened during 2003 was $41,200.

 

*Cost of Sales*.  Cost of sales as a percentage of net salesincreased to 23.4% during fiscal 2003 from 22.0% during fiscal 2002.  The increase was primarily attributable to acost increase in certain ingredients, primarily seafood, oil, flour, selecteddairy products, as well as a shift to new menu items introduced in 2003 whichhave higher ingredient costs (expressed as a percent of selling prices).

 

*Operating Expenses.*Operating expenses increased by $16.6 million, or 17.2%, to $113.0 millionduring fiscal 2003 from $96.4 million during fiscal 2002.  The key components of operating expenses arepayroll (including related employer taxes), utilities, restaurant facilitiesmaintenance, rent and advertising.  Thedollar increase in these expenses is primarily attributable to the additionalrestaurants.  The percentage increase to60.7% in fiscal 2003 from 59.4% in fiscal 2002 resulted primarily from costincreases in payroll taxes, benefits, and utilities and negative leverage ofrestaurant manager payroll and occupancy over the lower new restaurant sales.

 

11

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*General and Administrative Expenses.*General and administrative expenses decreased by $800,000, or 6.6%, to $11.3million during fiscal 2003 from $12.1 million during fiscal 2002.  Expressed as a percentage of net sales,general and administrative expenses decreased to 6.1% in fiscal 2003 from 7.5%during fiscal 2002.  The dollar andpercentage decreases were primarily due to a $1.1 million decrease in incentivepayments to corporate management as the Company did not meet its internalearnings target in fiscal 2003, lower restaurant management recruiting andtraining costs partially offset by higher travel and real estate selectioncosts.

 

*Deferred Rent,**Depreciation, Amortization and Preopening Expenses*.  Deferred rent, depreciation, amortization andpreopening expenses increased by approximately $1.9 million, or 15.6%, to $14.1million during fiscal 2003 from $12.2 million during fiscal 2002.  Due to ten restaurant openings in 2003, theCompany incurred $2.1 million in preopening expenses, a $600,000 increase over2002 during which there were seven restaurant openings. The additionalrestaurants from both fiscal 2003 and 2002 resulted in an incremental $1.1million of depreciation expense in fiscal 2003.

 

*Asset Impairment Charge. *The Company assessed certain non-performing restaurants forrecoverability as required.  The Companydetermined an impairment of fixed assets existed at four restaurantlocations.  An estimate of the fair valueof these assets based on the net present value of the expected cash flows ofthe restaurants was made and the carrying amount of the assets was found toexceed the fair value of the assets by approximately $3.6 million.  An impairment charge in that amount was madeto reflect the write down of the affected assets to fair value.

 

*Gain on Brinker Sale.*The Company recorded a gain in 2001 onthe Brinker Sale of $36.9 million before income taxes. During 2003 the Companyconcluded certain liabilities recorded in connection with the Brinker Sale wereno longer required as part of the final settlement and accordingly reversed$650,000 of accrued liabilities as an additional gain on the Brinker Sale.

 

*Interest Expense, net.*  Interest expense, net, increased byapproximately $500,000 to $10.1 million during fiscal 2003 from $9.6 millionduring fiscal 2002.  Interest expense isprimarily comprised of $9.2 million paid in semi annual installments on the 103/4% Senior Notes.  In fiscal 2003,$309,000 of interest was incurred on capital lease obligations recorded inconjunction with two sale leaseback transactions. Additionally, interest incomedecreased by $166,000 primarily due to lower interest rates.  Lastly, deferred finance costs amortizationincreased approximately $70,000 as approximately $530,000 was capitalized infiscal 2003 in conjunction with the sale leaseback transactions (See Note 7 ofNotes to Consolidated Financial Statements).

 

*Income Taxes.*  The Company has an historical trend ofrecurring pre-tax losses since 1998 excluding the Brinker sale.  During the fourth quarter of 2002 the Companyrecorded a full valuation allowance for its net deferred tax asset.  The Company also provided a full valuationallowance relating to the tax benefits generated during 2003 (primarily fromits operating losses).

 

**Liquidity and Capital Resources**

 
| ** **                           | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                 |       |     |       |     |       |     |       |
| Cash Flows from Operating Activities |       | $        | 7,881      |     | $          | 9,071    |       | $ | 9,169 |   |
|                                 |       |     |       |     |       |     |       |
| Cash Flows from Investing Activities |       | (8,598   | )          | (17,674  | )          | (17,816  | )          |
|                                 |       |     |       |     |       |     |       |
| Cash Flows from Financing Activities |       | 361      |       | 8,117    |       | (1,455   | )          |
|                                 |       |     |       |     |       |     |       |
| Net decrease in cash                 |       | $        | (356       | )        | $          | (486     | )          | $ | (10,102 | ) |

 

TheCompany has historically met its capital expenditures and working capital needsthrough a combination of operating cash flow, bank and mortgage borrowings, thesale of the Senior Notes, the sale of Common Stock, and, in fiscal 2003, twosale leaseback transactions.  Future capitaland working capital needs are expected to be funded from operating cash flowand cash on hand.

 

Netcash flows from operating activities were $7.9 million for fiscal 2004 ascompared to $9.1 million for fiscal 2003. While the fiscal 2004 net loss increased$5.6 million over that of fiscal 2003, included in the net loss was a $6.7million non-cash asset impairment charge. The $12.6 million of cash on hand atthe beginning of fiscal 2004 allowed the Company to fund capital expenditurestotaling $8.6 million. As of December 29, 2004, the Company had $12.3million in cash and cash equivalents.

 

TheCompany’s capital expenditures were $8.6 million, $17.4 million, and $18.2million, for fiscal 2004, 2003, and 2002, 

 

12

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respectively.  In fiscal 2004, $4.7 million of the capitalspending was for new restaurant development. The remaining $3.9 million was primarily for remodeling and upgradingfacilities in the existing restaurants. The Company anticipates fiscal 2005capital expenditures will be approximately $5.0 million.

 

Asof December 29, 2004, the Company had $92.2 million in consolidatedindebtedness, $85.3 million pursuant to the Senior Notes, $6.1 million ofcapital lease obligations, and $0.8 million of promissory notes.  TheSenior Notes contain no financial covenants and the Company is in compliancewith all non-financial covenants as of April 12, 2005.  The Senior Notes bear interest at the rate of10 3⁄4% per annum, payable semi-annually on January 15 and July 15.  The Senior Notes are due in full on July 15,2008.  Through July 15, 2006, theCompany may, at its option, redeem any or all of the Senior Notes at facevalue, plus a declining premium, which is 3.58% through July 14, 2005 and 1.79%from July 15, 2005 through July 15, 2006.  After July 15, 2006, the Senior Notesmay be redeemed at face value. Additionally, under certain circumstances,including a change of control or following certain asset sales, the holders ofthe Senior Notes may require the Company to repurchase the Senior Notes, at aredemption price of 101% of face value. See Note 6 of Notes to Consolidated Financial Statements.

 

TheCompany is operating without a line of credit and is funding all of its growth,debt reductions and operating needs out of cash flows from operations and cashon hand.

 

TheCompany has established a $4.0 million (maximum) letter of credit (expiring in December 2005)as collateral with third party administrators for self insurance reserves. As of December 29, 2004, this facility is collateralized with $2.4 millionof cash restricted from general use. Letters of Credit totaling $2.2 million were outstanding on December 29,2004, a $900,000 decrease from the fiscal 2003 ending balance.

 

TheCompany’s future operating performance and ability to service or refinance theSenior Notes will be subject to future economic conditions and to financial,business and other factors, many of which are beyond the Company’scontrol.  Significant liquidity demands will arise from debt service onthe Senior Notes.

 

## **The table below depicts theCompany’s future contractual obligations committed as of December 29, 2004:**

 
| ** **                                          | ** ** | **Payments Due by Fiscal Year** | ** ** |
|-----------------------------------------------------|------------|---------------------------------|------------|
| ** **                                          | ** ** | **(Dollars in Thousands)**      | ** ** |
| ** **                                          | ** ** | **Total**                       | ** ** | **2005** | ** ** | **2006 - 2007** | ** ** | **2008 - 2009** | ** ** | **After 2009** | ** ** |
| Contractual Obligations:                            |       |                            |       |   |   |   |   |   |   |   |   |
| Operating Leases (a)                                |       | $                               | 119,993    |   | $ | 15,655 |   | $ | 29,856 |   | $ | 23,777 |   | $ | 50,705 |   |
| Capital Leases (a)                                  |       | 13,428                          |       | 679 |   | 1,397 |   | 1,439 |   | 9,913 |   |
| Senior Notes (b)                                    |       | 121,994                         |       | 9,171 |   | 18,342 |   | 94,481 |   | — |   |
| Promissory Notes (c)                                |       | 905                             |       | 98 |   | 196 |   | 275 |   | 336 |   |
| Closed restaurants reserve, net of sublease  income |       | 659                             |       | 484 |   | 175 |   | — |   | — |   |
| Total Contractual Obligations                       |       | $                               | 256,979    |   | $ | 26,087 |   | $ | 49,966 |   | $ | 119,972 |   | $ | 60,954 |   |

 

----

(a) -See Note 7 of Notes to Consolidated Financial Statements

(b) -including interest at 10 3⁄4% per annum to maturity in July 2008.

(c) -including interest at a weighted average rate of 7.05% per annum.

 

TheCompany believes the cash flow generated from its operations and cash on handshould be sufficient to fund its debt service requirements, lease obligations,expected capital expenditures and other operating expenses through 2005. Beyond 2005 and up to 2008 maturity of its Senior Notes, the Company expects tobe able to service its debt, but the lack of short term borrowing availabilitymay impede growth. The Company is evaluating various refinancing alternativesfor its Senior Notes upon their maturity in 2008.

 

## **Impactof Inflation**

 

Inflationaryfactors such as increases in labor, food or other operating costs couldadversely affect the Company’s operations. The Company does not believe that inflation has had a material impact onits financial position or results of operations for the periods discussedabove.  Management believes that throughthe proper leveraging of purchasing size, labor scheduling, and restaurantdevelopment analysis, inflation will not have a material adverse effect onincome during the foreseeable future. There can be no assurance that inflation will not materially adverselyaffect the Company.

 

13

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## **Seasonality**

 

TheCompany’s quarterly results of operations have fluctuated and are expected tocontinue to fluctuate depending on a variety of factors, including the timingof new restaurant openings and related preopening and other startup expenses,net sales contributed by new restaurants, increases or decreases in comparablerestaurant sales, competition and overall economic conditions.  The Company’s business is also subject toseasonal influences of consumer spending, dining out patterns and weather.  As is the case with many restaurantcompanies, the Company typically experiences lower net sales and net incomeduring the first and fourth fiscal quarters. Because of these fluctuations in net sales and net loss, the results ofoperations of any quarter are not necessarily indicative of the results thatmay be achieved for a full year or any future quarter.

 

**Critical Accounting Policies and Estimates**

 

Thediscussion and analysis of the Company’s financial condition and results ofoperations are based upon its consolidated financial statements, which havebeen prepared in accordance with accounting principles generally accepted inthe United States of America.  Thepreparation of these financial statements requires 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,estimates are evaluated, including those related to the impairment oflong-lived assets, self-insurance, and closed restaurants reserve. Estimates arebased on historical experience and on various other assumptions believed to bereasonable under the circumstances, the results of which form the basis formaking judgments about the carrying values of assets and liabilities notreadily apparent from other sources. Actual results may differ from theseestimates under different assumptions or conditions.

 

TheCompany believes the following critical accounting policies affect the moresignificant judgments and estimates used in the preparation of its consolidatedfinancial statements.

 

*Impairment of Long-Lived Assets*

 

TheCompany evaluates property and equipment held and used in the business forimpairment whenever events or changes in circumstances indicate the carryingamount of a restaurant’s assets may not be recoverable.  An impairment is determined by comparingestimated undiscounted future operating cash flows (which the Company estimatesusing historical cash flows and other relevant facts and circumstances) for arestaurant to the carrying amount of its assets.  If an impairment exists, the amount ofimpairment is measured as the excess of the carrying amount over the estimateddiscounted future operating cash flows of the asset and the expected proceedsupon sale of the asset.  The estimatesand assumptions used during this process are subject to a high degree ofjudgment.

 

During2004, the Company assessed certain non-performing restaurants forrecoverability and determined an impairment of fixed assets existed at twelve restaurantlocations.  The Company estimated thefair value of these assets based on the net present value of the expected cashflows of the restaurants.  The carryingamount of the assets exceeded the fair value of the assets by approximately $6.7million.  In 2004, the Company recordedan impairment charge to reflect the write down of the affected assets to fairvalue.

 

Asimilar analysis in 2003 determined the carrying amount of the assets in fourrestaurants exceeded the fair value of the assets by approximately $3.6million.  Accordingly, the Companyrecorded an impairment charge to reflect the write down of the affected assetsto fair value in 2003.

 

Inaddition, at least annually, the Company assesses the recoverability ofgoodwill and other intangible assets related to its restaurant concepts. Theseimpairment tests require the Company to estimate fair values of its restaurantconcepts by making assumptions regarding future cash flows and otherfactors.  If these assumptions change inthe future, the Company may be required to record impairment charges for theseassets. To date, such analysis has indicated no impairment of goodwill andother intangible assets has occurred.

* *

*Income Tax Valuation Allowances*

* *

The future tax benefitswhich give rise to the deferred tax asset remain statutorily available to theCompany.  The Company considers bothnegative and positive evidence in determining if a valuation allowance isappropriate.  The Company had netoperating losses and tax credit carry forwards of $7.8 million as of December29, 2004 which expire at various dates through 2019.  The Company has an historical trend ofrecurring pre-tax losses.  Based on therecent losses and the historical trend of losses, the Company concluded avaluation allowance for the net deferred tax asset remains appropriate.  Actual amounts realized will be dependent ongenerating future taxable income.

 

*Self-Insurance*

 

TheCompany is self-insured for certain losses related to general liability, grouphealth insurance, and workers’ compensation. The Company maintains stop loss coverage with third party insurers tolimit its total exposure.  Theself-insurance liability represents an estimate of the ultimate cost of claimsincurred as of the balance sheet date. The estimated liability is not discounted and is established based uponanalysis of historical data and estimates of the ultimate costs of claimsincurred, and is reviewed by the Company on a quarterly basis to ensure thatthe liability is appropriate.  If actualtrends, 

 

14

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including the severityor frequency of claims, differ from the Company’s estimates, the Company’sfinancial results could be impacted. To date the Company is not aware of any activityrequiring significant adjustments to these reserves.

 

*Closed Restaurants Reserve*

 

The Company remains primarily liable on leases for13 closed locations. Management reviews the specifics of each site on aquarterly basis to estimate the Company’s net remaining liability over theremaining lease term. Certain locations have subtenants in place while othersremain vacant. Estimates must be made of future sublease income or leaseassignment possibilities. If subtenants default on their subleases or projectedfuture subtenants are not obtained, actual results could differ from theCompany’s estimates, thereby impacting the Company’s financial results. Such areview resulted in a charge of $236,000 in 2002 when an additional restaurantwas closed prior to its lease termination. All other activity in fiscal 2002 through2004 has been consistent with reserves and no additional increases in thereserve were necessary.

* *

***Recent Accounting Pronouncements***

 

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”)  No. 123R, *Share-Based Payment* (“SFAS No. 123R”). This Statementis a revision of SFAS No. 123, *Accountingfor Stock-Based Compensation,* and supersedes Accounting PrinciplesBoard Opinion No. 25, *Accounting forStock Issued to Employees,* and its related implementationguidance.  SFAS No. 123R focusesprimarily on accounting for transactions in which an entity obtains employeeservices in share-based payment transactions. The Statement requires entitiesto recognize stock compensation expense for awards of equity instruments toemployees based on the grant-date fair value of those awards (with limitedexceptions). SFAS No. 123R is effective for the first annual reportingperiod that begins after December 15, 2005.  The Company is evaluating the two methods ofadoption allowed by SFAS No. 123R; the modified-prospective transitionmethod and the modified-retrospective transition method.

 

# **Risk Factors**

 

*This Report contains forward-looking statementsthat involve risks and uncertainties, such as statements of the Company’splans, objectives, expectations and intentions. The cautionary statements made in this Report should be read as beingapplicable to all forward looking statements wherever they appear in thisReport.  The Company’s actual resultscould differ materially from those discussed herein.  Factors that could cause or contribute tosuch differences include those discussed below, as well as those discussedelsewhere in this Report.*

 

*Substantial Leverage; Potential Inability toService Indebtedness. *The Companyis highly leveraged.  At the end offiscal 2004, the Company’s aggregate outstanding indebtedness was $92.2 million,the Company’s had an accumulated deficit of $11.0 million and a working capitaldeficit of $6.4 million.

 

TheCompany’s high degree of leverage could have important consequences, includingbut not limited to the following: (i) the Company’s ability to obtainadditional financing for working capital, capital expenditures, acquisitions,general corporate purposes or other purposes may be impaired in the future; (ii) asubstantial portion of the Company’s cash flow from operations must bededicated to the payment of principal and interest on its indebtedness, therebyreducing the funds available to the Company for its operations and otherpurposes, including investments in development and capital spending; (iii) theCompany may be substantially more leveraged than certain of its competitors,which may place the Company at a competitive disadvantage; and (iv) theCompany’s substantial degree of leverage may limit its flexibility to adjust tochanging market conditions, reduce its ability to withstand competitivepressures and make it more vulnerable to a downturn in general economicconditions or in its business.  TheCompany’s ability to repay or to refinance its obligations with respect to itsindebtedness will depend on its future financial and operating performance,which, in turn, will be subject to prevailing economic and competitiveconditions and to certain financial, business, legislative, regulatory andother factors, many of which are beyond the Company’s control.  These factors could include operatingdifficulties, increased operating costs, product pricing pressures, theresponse of competitors, regulatory developments, and delays in implementingstrategic projects.  The Company’sability to meet its debt service and other obligations may depend in significantpart on the extent to which the Company can implement successfully its businessstrategy.  There can be no assurance thatthe Company will be able to implement its strategy fully or that theanticipated results of its strategy will be realized.

 

Ifthe Company’s cash flow and capital resources are insufficient to fund its debtservice obligations, the Company may be forced to reduce or delay capitalexpenditures, sell assets, seek to obtain additional equity capital, or torefinance or restructure its debt.  Therecan be no assurance the Company’s cash flow and capital resources will besufficient for payment of principal of, and premium, if any, and interest on,its indebtedness in the future, or any such alternative measures would be 

 

15

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successful or wouldpermit the Company to meet its scheduled debt service obligations.

 

*Restrictive Debt Covenants. *The Indenture for the Senior Notesimposes significant operating and financial restrictions on the Company and itssubsidiaries.  Such restrictions willaffect, and in many respects significantly limit or prohibit, among otherthings, the ability of the Company to incur additional indebtedness, paydividends or make other distributions, make certain investments, create certainliens, sell certain assets, enter into certain transactions with affiliates, orengage in certain mergers or consolidations involving the Company.  A failure by the Company to comply with therestrictions could lead to a default under the terms of the Indenture.  In the event of a default, the indenturetrustee could elect to declare all amounts borrowed pursuant thereto, and allamounts due may be, immediately due and payable, together with a premium andaccrued and unpaid interest.  In suchevent, there can be no assurance that the Company would be able to make suchpayments or borrow sufficient funds from alternative sources to make any suchpayment.  Even if additional financingcould be obtained, there can be no assurance that it would be on terms that arefavorable or acceptable to the Company.

 

*Potential Inability to Manage Expansion.*  The Company’s future operating results willdepend largely upon its ability to open and operate new restaurantssuccessfully and to manage a growing business profitably.  This will depend on a number of factors (someof which are beyond the controlof the Company), including (i) selection and availability of suitablerestaurant locations, (ii) negotiation of acceptable lease or financingterms, (iii) securing of required governmental permits and approvals, (iv) timelycompletion of necessary construction or remodeling of restaurants, (v) hiringand training of skilled management and personnel, (vi) successfulintegration of new or newly acquired restaurants into the Company’s existingoperations and (vii) recognition and response to regional differences inguest menu and concept preferences.

 

Therecan be no assurance the Company’s expansion plans can be achieved on a timelyand profitable basis, if at all, or that it will be able to achieve resultssimilar to those achieved in existing locations in prior periods or suchexpansion will not result in reduced sales at existing restaurants. Any failureto successfully and profitably execute its expansion plans could have amaterial adverse effect on the Company.

 

*Changes in Food Costs and Supplies; Key Supplier*.  The Company’s profitability is dependent on,among other things, its continuing ability to offer fresh, high quality food atmoderate prices.  Various factors beyondthe Company’s control, such as adverse weather, labor disputes, increasedpricing or other unforeseen circumstances, may affect its food costs andsupplies.  While management has been ableto anticipate and react to changing food costs and supplies to date through itspurchasing practices and menu price adjustments, there can be no assurance thatit will be able to do so in the future.

 

TheCompany obtains approximately 75% to 80% of its supplies through a singlevendor pursuant to a contract for delivery and distribution, with the vendorcharging fixed mark-ups over prevailing wholesale prices.  The Company has a six-year contract with thisvendor which expires in 2011. The Company believes it would be able to replaceany vendor if it were required to do so, however, any disruption in supply fromvendors or the Company’s inability to replace vendors, when required, may havea material adverse effect on the Company.

 

*Possible Adverse Impact of Economic, Regional andOther Business Conditions on the Company. *The Company’s business is sensitive to guests’ spendingpatterns, which in turn are subject to prevailing regional and nationaleconomic conditions such as unemployment, interest rates, taxation and consumerconfidence.  Most of the restaurantsowned by the Company are located in the northeastern United States, with alarge concentration in New England.  Inaddition, the Company anticipates substantially all restaurants to be opened inthe future will be in states where the Company presently has operations or incontiguous states.  As a result, if theNew England or Mid-Atlantic regions of the country suffer prolonged adverseeconomic conditions, this may have a material adverse effect on the Company.

 

*Competition. *The restaurant industry is intensely competitive withrespect to, among other things, price, service, location and food quality.  The Company competes with manywell-established national, regional and locally-owned foodservice companieswith substantially greater financial and other resources and longer operatinghistories than the Company, which, among other things, may better enable themto react to changes in the restaurant industry. With respect to quality and cost of food, size of food portions, decorand quality service, the Company competes with casual dining, family-stylerestaurants offering eat-in and take-out menus, including, but not limited to,Olive Garden, Romano’s Macaroni Grill, Carrabba’s, Applebee’s, TGI Friday’s,Ruby Tuesday, and Pizzeria Uno Restaurants. As a result of the Brinker Sale (as defined in footnote (b) in Item6), the Company also competes with Chili’s and, to a lesser extent, OTB.  Many of the Company’s restaurants are locatedin areas of high concentration of such restaurants.  The Company also vies with all competitors inattracting guests, in obtaining premium locations for restaurants (includingshopping malls and strip shopping centers) and in attracting and retainingemployees.

 

16

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*Possible Adverse Impact of Government Regulation onthe Company. *Therestaurant business is subject to extensive federal, state and local laws andregulations relating to the development and operation of restaurants, includingthose concerning alcoholic beverage sales, preparation and sale of food,relationships with employees (including minimum wage requirements, overtime andworking conditions and citizenship requirements), land use, zoning and buildingcodes, as well as other health, sanitation, safety and environmentalmatters.  Compliance with such laws andregulations can impede the operations of existing Company restaurants and maydelay or preclude construction and completion of new Company restaurants.  The Company is subject in certain states to ‘‘dram-shop’’statutes, which generally provide a person injured by an intoxicated person theright to recover damages from an establishment that wrongfully served alcoholicbeverages to the intoxicated person.  TheCompany carries liquor liability coverage as part of its existing comprehensivegeneral liability insurance.  Inaddition, the Company may also, in certain jurisdictions, be required to complywith regulations limiting smoking in restaurants.

 

*Reliance on Information Systems. *The Company relies on various informationsystems to manage its operations and regularly makes investments to upgrade,enhance or replace such systems.  Anydisruption affecting the Company’s information systems could have a materialadverse effect on the Company.

 

**ITEM 7A.  QUANTITATIVE ANDQUALITATIVE DISCLOSURES ABOUT MARKET RISKS.**

 

TheCompany has no exposure to specific risks related to derivatives or other “hedging”types of financial instruments.   In addition, the Company does not haveoperations outside of the United States of America which expose it to foreigncurrency risk and substantially all of the Company’s outstanding debt has fixedinterest rates.

 

**ITEM 8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

Thefinancial statements and supplementary data are listed under Part IV, Item15 in this report.

 

**ITEM 9.  CHANGES IN ANDDISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

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**ITEM 9A. CONTROLS AND PROCEDURES**

 

*Disclosure Controls and Procedures*.  TheCompany maintains disclosure controls and procedures that are designed toensure that information required to be disclosed in the Company’s reports underthe Securities Exchange Act of 1934, as amended (the “Exchange Act”), isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission (the “SEC”),and that such information is accumulated and communicated to management,including the Company’s Chief Executive Officer (the “CEO”) and Chief FinancialOfficer (the “CFO”), as appropriate, to allow timely decisions regardingrequired disclosure. In designing and evaluating the disclosure controls andprocedures, management recognized that any controls and procedures, no matterhow well designed and operated, can provide only reasonable assurance ofachieving the desired control objectives, as the Company’s are designed to do,and management necessarily was required to apply its judgment in evaluating thecost-benefit relationship of possible controls and procedures.

 

In connection with thepreparation of this Annual Report on Form 10-K, an evaluation (the “Evaluation”)was performed under the supervision and with the participation of the Company’smanagement, including the CEO and CFO, of the effectiveness of the design andoperation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) underthe Exchange Act). In performing the Evaluation, management reviewed theCompany’s lease accounting and leasehold depreciation practices partially inlight of the recent attention and focus on such practices by restaurant andretail companies.

 

On March 14,2005, the Audit Committee met with management to discuss the results of theEvaluation.  At this meeting, the AuditCommittee and management concluded that the Company’s previouslyestablished lease accounting and leasehold depreciation practices were notappropriate and determined to restate certain of its previously issuedfinancial statements to reflect the correction in the Company’s leaseaccounting and leasehold depreciation practices.  The restatement applies to the financialstatements for all fiscal years prior to January 1, 2004 and each of thefirst three quarters of fiscal 2004 (collectively, the “Subject FinancialStatements”).  See Note 3 of Notes to theConsolidated Financial Statements.

 

Based on the determinationthat the Company’s lease accounting and lease depreciation practices were notappropriate as of December 29, 2004, the Company’s CEO and CFO concludedthat the Company’s disclosure controls and procedures were not effective as ofthat date.

 

*Internal Control Over Financial Reporting*.  Based on the definition of “material weakness”in the Public Company Accounting Oversight Board’s Auditing Standard No. 2,(*An Audit of Internal Control Over FinancialReporting Performed in Conjunction With an Audit of Financial Statements*),restatement of the Subject Financial Statements is a strong indicator of theexistence of a “material weakness” in the design or operation of internalcontrol over financial reporting. Based on the Evaluation, management concludeda material weakness existed in the Company’s internal control over financialreporting as it related to its lease accounting and lease depreciationpractices, and disclosed this to the Audit Committee and to the Company’sindependent registered public accountants.

 

*Remediation Steps to Address Material Weakness*.  Toremediate the material weakness in the Company’s internal control over financialreporting, subsequent to year end the Company implemented additional reviewprocedures over the selection and monitoring of appropriate assumptions andfactors affecting lease accounting and leasehold depreciation accountingpractices and has corrected its method of accounting for tenant improvementallowances and rent holidays.

 

*Change in Internal Control Over Financial Reporting*.  Therewere no changes in the Company’s internal control over financial reporting thatoccurred during the Company’s last fiscal quarter that have materiallyaffected, or are reasonably likely to materially affect, the Company’s internalcontrol over financial reporting.  Duringthe first fiscal quarter of 2005, however, the Company did make changes to itsinternal control over financial reporting as set forth above.

 

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**PART III**

 

**ITEM 10.  DIRECTORS AND EXECUTIVEOFFICERS OF THE REGISTRANT**

 

Thefollowing table sets forth certain information with respect to the executiveofficers and directors of the Company at the time of this filing:

 
| **Name**              | ** ** | **Age** | ** ** | **Position**                                      | ** ** |
|-----------------------|------------|---------|------------|---------------------------------------------------|------------|
| Stephen V.  Clark     |       | 51      |       | President,  Chief Executive Officer and Director  |       |
| David G.  Lloyd       |       | 41      |       | Chief  Financial Officer                          |       |
| Benjamin R.  Jacobson |       | 60      |       | Chairman of  the Board of Directors and Treasurer |       |
| Sally M.  Dungan      |       | 51      |       | Director *                                        |       |
| James J.  Morgan      |       | 62      |       | Director #                                        |       |
| James N.  Moriarty    |       | 38      |       | Director *                                        |       |
| Heywood  Wilansky     |       | 55      |       | Director * #                                      |       |

 

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*   Member of Audit Committee

# Member ofCompensation Committee

 

**Stephen V. Clark. **Mr. Clarkwas named Chief Executive Officer of the Company in August 2004. Heassumed the role of President in October 2004 and has served as a directorof the Company since April 2002. Mr. Clark has been the President andChief Executive Officer of Taco Bueno, a quick service Mexican restaurant chainof over 120 stores, since June 2001. He will retain that position inaddition to his duties with the Company. He previously served as TacoCabana Inc.’s Chief Executive Officer from November 1996 through June 2001and was previously the President, Chief Operating Officer, and a Director atTaco Cabana from April 1995 through 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.

 

**David G. Lloyd.** Mr. Lloyd became ChiefFinancial Officer of the Company in November 2004. Mr. Lloyd has beenthe Chief Financial Officer of Taco Bueno, a quick service Mexican restaurantchain of over 120 stores, since June 2001. He will retain that position inaddition to his duties with the Company.  He previously served as TacoCabana Inc.’s Chief Financial Officer from November 1994 through June 2001.Prior to that, Mr. Lloyd, a Certified Public Accountant, was with Deloitte &Touche LLP from 1985 through 1994.

 

**Benjamin R. Jacobson. **Mr. Jacobsonhas served as Chairman of the Board of Directors of the Company since 1991 andserved as Chief Executive Officer from October 1999 until August 2004.  Since 1989, Mr. Jacobson has served asthe Managing General Partner of Jacobson Partners, which specializes in directequity investments. Mr. Jacobson is a director of Learning Care Group,formerly Childtime, Inc., Taco Bueno, and a number of other privately-heldcorporations.

 

**Sally M. Dungan. **Ms. Dunganwas named a director and member of the audit committee of the Company in February 2004.  She is Chief Investment Officer (“CIO”) ofTufts University where she is responsible for the investment policy and totalfund structure of Tufts’ $600 million endowment and $200 million non-endowmentinvestment assets.  Prior to assuming theCIO position in September of 2002, Ms. Dungan was the Director ofPension Fund Management for Siemens Corporation.  Ms. Dungan is a Chartered FinancialAnalyst.

 

**James J. Morgan. **Mr. Morganhas served as a director of the Company since December 1997.  From 1963 until his retirement in 1997, Mr. Morganwas employed by Philip Morris U.S.A. where he served as President and ChiefExecutive Officer from 1994 until his retirement in 1997.  Prior to 1994, Mr. Morgan served invarious capacities at Philip Morris including Senior Vice President ofMarketing, and Corporate Vice President of Marketing Planning of the PhilipMorris Companies Inc.  Mr. Morgan isa Partner in Jacobson Partners, is a director of Learning Care Group, formerlyChildtime, Inc., and a director of Taco Bueno.

 

**James N. Moriarty. **Mr. Moriartywas named a director and chairman of the audit committee of the Company in February 2004.He has been a partner in the accounting firm of Vitale, Caturano &Company, P.C., a full service CPA and business advisory firm, since 2002. He ishead of the firm’s Restaurant practice. Prior to that, Mr. Moriarty waswith Arthur Andersen LLP for 14 years, the last four years as a partner in thatfirm. He is a member of the AICPA and the Massachusetts Society of CPA’s.

 

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**Heywood Wilansky. **Mr. Wilanskywas named a director and member of the audit committee of the Company in May 2004.He became a member of the compensation committee in November 2004. He hasbeen the President and Chief Executive Officer of Retail Ventures, Inc.since November 2004. Prior to that, he was the President and ChiefExecutive Officer of Filene’s Basement, Inc. from February 2003through November 2004. Prior to that, he was a Professor at the Universityof Maryland, Smith School of Business from August 2002 through January 2003.He was the President and CEO of Strategic Management Resources, LLC, amanagement consulting service from July 2000 through January 2003 andwas the President and CEO of Bon-Ton Stores, Inc. from 1995 through 2000.

 

**Term of Directors**

 

The Company’s directors serve in such capacityuntil the next annual meeting of the shareholders of the Company or until theirsuccessors are duly elected and qualified.

 

**AuditCommittee**

 

TheCompany has an Audit Committee, which consists of Sally M. Dungan, HeywoodWilansky, and James N. Moriarty (Chairman). The Board of Directors has reviewed the qualifications of Ms. Dungan,Mr. Wilansky and Mr. Moriarty and have determined they are “independent”under the applicable definition contained in Rule 4200(a)(15) of the NASD’slisting standards.  Mr. Moriarty wasformerly a partner with Arthur Andersen LLP which audited the Company’sfinancial statements prior to fiscal 2002 and he was involved in the audit ofthose financial statements.  Mr. Moriartyhas no relationship with Deloitte & Touche LLP, the Company’s currentauditor.  The Board of Directorsappointed Mr. Moriarty to the Audit Committee because of his auditing andaccounting expertise.  The Company’sBoard of Directors has determined Mr. Moriarty qualifies as an AuditCommittee Financial Expert, as defined in Item 401(h) of Regulation S-K.

 

**Code of Ethics**

 

The Company has adopted a Code of Ethicsfor Senior Financial Officers including its principal executive officer,principal financial officer, principal accounting officer and controller, andother persons performing similar functions. If the Company makes any substantive amendments to the Code of Ethics orgrants any waivers, including any implicit waiver, from a provision of the Codeof Ethics to any of the Company’s principal executive officer, principalfinancial officer, principal accounting officer, controller or other personsperforming similar functions, it must disclose the nature of such amendment orwaiver, the name of the person to whom the waiver was granted and the date of theamendment or waiver.  A copy of theCompany’s Code of Ethics for Senior Financial Officers is filed as Exhibit 14.1to the Company’s Annual Report for the fiscal year ended December 31,2003.  In addition, the Company willprovide any person, without charge, a copy of the Code of Ethics for SeniorFinancial Officers, if such person delivers a written request to the Company atBertucci’s Corporation, 155 Otis Street, Northborough, MA 01532, Attn:Compliance Officer.

 

**ITEM 11.  EXECUTIVE COMPENSATION**

 

**Executive Compensation**

 

Thefollowing table summarizes the compensation for the most current three fiscalyears for the Company’s Chief Executive Officer and each of its four other mosthighly compensated executive officers (the Chief Executive Officer and such otherofficers, collectively, the ‘‘Named Executive Officers’’):

 

20

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| ** **                                      | ** ** | ** ** | ** ** | **Annual Compensation** | ** ** | **Long Term  Compensation** | ** ** |
|-------------------------------------------------|------------|------------|------------|-------------------------|------------|-----------------------------|------------|
| **Name and Principal Position**                 | ** ** | ** ** | ** ** | **Salary($)**           | ** ** | **Bonus($)**                | ** ** | **Other Annual   Compensation ($)** | ** ** | **Securities Underlying  Options (#)** | ** ** |
|                                            |       |       |       |                    |       |                        |       |   |   |   |   |
| Stephen V. Clark (a)                            |       | 2004       |       | 61,731                  |       | 100,000                     |       | — |   | — |   |
| President, Chief Executive Officer              |       | 2003       |       | —                  |       | —                      |       | — |   | — |   |
|                                            |       | 2002       |       | —                  |       | —                      |       | — |   | — |   |
|                                            |       |       |       |                    |       |                        |       |   |   |   |   |
| Benjamin R. Jacobson (b)                        |       | 2004       |       | —                  |       | —                      |       | 14,000 |   | 75,000 |   |
| Chairman of the Board, Chief Executive  Officer |       | 2003       |       | —                  |       | —                      |       | 13,409 |   | — |   |
|                                            |       | 2002       |       | —                  |       | —                      |       | 5,119 |   | — |   |
|                                            |       |       |       |                    |       |                        |       |   |   |   |   |
| David G. Lloyd (c)                              |       | 2004       |       | 41,154                  |       | 67,000                      |       | — |   | — |   |
| Vice President, Chief Financial Officer         |       | 2003       |       | —                  |       | —                      |       | — |   | — |   |
|                                            |       | 2002       |       | —                  |       | —                      |       | — |   | — |   |
|                                            |       |       |       |                    |       |                        |       |   |   |   |   |
| Raymond P. Barbrick (d)                         |       | 2004       |       | 202,635                 |       | —                      |       | 46,678 |   | — |   |
| President, Chief Operating Officer              |       | 2003       |       | 228,957                 |       | —                      |       | 6,364 |   | — |   |
|                                            |       | 2002       |       | 216,240                 |       | 153,531                     |       | 527 |   | 10,000 |   |
|                                            |       |       |       |                    |       |                        |       |   |   |   |   |
| Kurt J. Schnaubelt (e)                          |       | 2004       |       | 158,241                 |       | —                      |       | 136,686 |   | — |   |
| Senior Vice President, Chief Financial  Officer |       | 2003       |       | 132,371                 |       | —                      |       | 8,994 |   | — |   |
|                                            |       | 2002       |       | 125,721                 |       | 75,535                      |       | 6,588 |   | 5,000 |   |

 

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(a)     Mr. Clark was namedPresident and CEO in August, 2004.

(b)    Mr. Jacobsonresigned his position as CEO effective with the appointment of Mr. Clarkbut remains the Company’s Chairman of the Board.

(c)     Mr. Lloydjoined the Company in September and was named CFO in November, 2004.

(d)    Mr. Barbrickresigned in October, 2004. Amounts in the Other Annual Compensation columninclude a distribution from the Company’s non-qualified deferred compensationplan.

(e)     Mr. Schnaubeltresigned in December, 2004. Amounts in the Other Annual Compensation columninclude amounts payable under a severance agreement and a distribution from theCompany’s non-qualified deferred compensation plan.

 

**Options Granted in Last Fiscal Year**

 

The following table sets forththe stock options granted to the Company’s Named Executive Officers during thefiscal year ended December 29, 2004.

 
| ** **           | ** ** | **Individual Grants**                                         | ** ** | **Potential Realizable Value at   Assumed Annual Rates of   Stock Price Appreciation for   Option Term (3)** | ** ** |
|----------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------------|------------|
| **Name**             | ** ** | **Number of   Securities  Underlying   Options  Granted (1)** | ** ** | **% of Total  Options   Granted to  Employees in   Fiscal Year**                                             | ** ** | **Exercise Price  ($/share)(2)** | ** ** | **Expiration   Date** | ** ** | **5% ($)** | ** ** | **10% ($)** | ** ** |
|                 |       |                                                          |       |                                                                                                         |       |   |   |   |   |   |   |   |   |
| Benjamin R. Jacobson |       | 75,000                                                        |       | 100                                                                                                          | %          | $ | 17.51 |   | 8/11/14 |   | 557,082 |   | 887,060 |   |
|                      |            |                                                               |            |                                                                                                              |            |  |  |  |  |  |  |  |  |  |

 

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(1)     Theoption was granted under the Company’s 1997 Equity Incentive Plan and the underlyingshares of Common Stock vest on August 11, 2009.

 

(2)     TheCompany’s Board of Directors has determined the fair market value of a share ofCommon Stock on December 29, 2004 was $4.56.

 

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(3)     The5% and 10% assumed rates of annual compounded stock price appreciation are setforth in the rules of the Securities and Exchange Commission (the “SEC”)and do not represent the Company’s estimate or projection of future CommonStock prices. Note these amounts are still below the exercise price of theoptions listed above.

 

**Aggregated Option Exercises inLast Fiscal Year and Fiscal Year-End Values**

 

Thefollowing table sets forth information concerning option exercises duringfiscal 2004 (none) and the fiscal year-end value of unexercised options foreach of the Named Executive Officers.

 
| **Name**             | ** ** | **Shares  Acquired on  Exercise** | ** ** | **Value  Realized** | ** ** | **Number Of  Securities  Underlying At  Fiscal Year-End  Exerciseable/Unexercisable** | ** ** | **Value Of  Unexercised  In-The-Money  Options At  Fiscal Year-End  Exerciseable/  Unexerciseable(a)** | ** ** |
|----------------------|------------|-----------------------------------|------------|---------------------|------------|---------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------------|------------|
|                 |       |                              |       |                |       |                                                                                  |       | ** **                                                                                             |       |   |   |   | ** ** |   |   |   |
| Stephen V. Clark     |       | —                            |       | $                   | —     |                                                                                  | —     | ** **                                                                                             | —     |   | $ | — | ** ** | $ | — |   |
| Benjamin R. Jacobson |       | —                            |       | $                   | —     |                                                                                  | 149,599    | ** **                                                                                             | 75,000     |   | $ | — | ** ** | $ | — |   |
| David G. Lloyd       |       | —                            |       | $                   | —     |                                                                                  | —     | ** **                                                                                             | —     |   | $ | — | ** ** | $ | — |   |
| Raymond P. Barbrick  |       | —                            |       | $                   | —     |                                                                                  | —     | ** **                                                                                             | —     |   | $ | — | ** ** | $ | — |   |
| Kurt J. Schnaubelt   |       | —                            |       | $                   | —     |                                                                                  | 1,500      | ** **                                                                                             | —     |   | $ | — | ** ** | $ | — |   |

 

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(a)               Basedupon a price of $4.56.

 

**EmploymentAgreements**

 

Executiveofficers of the Company are elected by the Board of Directors and serve at thediscretion of the Board.  At the date ofthis filing, the Company is not party to employment agreements with any of itsexecutive officers.

 

**StockOption and Other Plans for Employees**

 

*StockOption Plan. *OnSeptember 15, 1997, the Board of Directors of the Company established the1997 Equity Incentive Plan, which includes a nonqualified stock option plan(the ‘‘Stock Option Plan’’), for certain key employees and directors.  The Stock Option Plan is administered by theBoard of Directors of the Company and may be modified or amended by the Boardof Directors in any respect.

 

Generally, options grantedto employees under the Stock Option Plan are exercisable either: (a) cumulatively atthe rate of 25% on or after each of the second, third, fourth and fifthanniversaries of the date of grant; or (b) only upon the fifth anniversaryof the date of grant.  Options granted to directors under the Stock OptionPlan are generally exercisable immediately upon grant, although the optionissued to Mr. Jacobson to purchase 75,000 shares of Common Stock isexercisable only upon the fifth anniversary of the date of grant. Optionsgranted under the Stock Option Plan to date expire 90 days following either thefifth or the tenth anniversary of the date of the grant.

 

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The followingtable summarizes option activity since September 15, 1997 through December 29,2004:

 
| **Issue Date** | ** ** | **Price** | ** ** | **Granted** | ** ** | **Since  Forfeited** | ** ** | **Exercised** | ** ** | **Outstanding at December 29, 2004** | ** ** |
|----------------|------------|-----------|------------|-------------|------------|----------------------|------------|---------------|------------|-------------------------------------------|------------|
| 09/15/1997     |       | $         | 11.63      |        | 331,123    |                 | (224,424   | )             | (11,020    | )                                         | 95,679     |   |
| 07/21/1998     |       | $         | 17.51      |        | 58,429     |                 | (58,429    | )             |       |                                      | —     |   |
| 07/01/1999     |       | $         | 15.00      |        | 23,541     |                 | (8,667     | )             |       |                                      | 14,874     |   |
| 03/14/2000     |       | $         | 17.51      |        | 100,000    |                 | —     |          |       |                                      | 100,000    |   |
| 03/14/2000     |       | $         | 9.22       |        | 99,750     |                 | (53,950    | )             | (1,125     | )                                         | 44,675     |   |
| 01/24/2001     |       | $         | 17.51      |        | 332,500    |                 | (206,500   | )             |       |                                      | 126,000    |   |
| 03/14/2002     |       | $         | 17.51      |        | 26,000     |                 | (6,500     | )             |       |                                      | 19,500     |   |
| 02/11/2003     |       | $         | 17.51      |        | 13,687     |                 | (3,636     | )             |       |                                      | 10,051     |   |
| 07/01/2003     |       | $         | 17.51      |        | 4,000      |                 |       |          |       |                                      | 4,000      |   |
| 07/08/2003     |       | $         | 11.63      |        | 14,178     |                 |       |          |       |                                      | 14,178     |   |
| 07/08/2003     |       | $         | 17.51      |        | 1,714      |                 |       |          |       |                                      | 1,714      |   |
| 07/08/2003     |       | $         | 15.00      |        | 2,750      |                 |       |          |       |                                      | 2,750      |   |
| 07/08/2003     |       | $         | 9.22       |        | 3,750      |                 |       |          |       |                                      | 3,750      |   |
| 01/01/2004     |       | $         | 17.51      |        | 3,000      |                 |       |          |       |                                      | 3,000      |   |
| 04/01/2004     |       | $         | 17.51      |        | 2,000      |                 |       |          |       |                                      | 2,000      |   |
| 05/01/2004     |       | $         | 17.51      |        | 2,000      |                 |       |          |       |                                      | 2,000      |   |
| 06/10/2004     |       | $         | 17.51      |        | 2,000      |                 |       |          |       |                                      | 2,000      |   |
| 06/24/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 07/01/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 08/11/2004     |       | $         | 17.51      |        | 90,000     |                 |       |          |       |                                      | 90,000     |   |
| 08/12/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 09/20/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 09/30/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 10/15/2004     |       | $         | 17.51      |        | 5,000      |                 |       |          |       |                                      | 5,000      |   |
| 10/28/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
| 11/15/2004     |       | $         | 17.51      |        | 1,000      |                 |       |          |       |                                      | 1,000      |   |
|           |       |      |       | 1,122,422   |       | (562,106             | )          | (12,145       | )          | 548,171                                   |       |

 

On December 29, 2004, 201,829 shares of common stock wereavailable for grants under the Stock Option Plan.

 

*Executive Savings and Investment Plan.* In 1999, the Company established theBertucci’s Corporation Executive Savings and Investment Plan, a non-qualifiedcompensation plan, to which highly compensated executives of the Company mayelect to defer a portion of their salary and/or earned bonus.  The Company replaced the original trustee ofthe Executive Savings and Investment Plan, Scudder Kemper Investments (“Scudder”),in December 2004 with Reliance Trust Company (“Reliance”) pursuant to a new Trust Agreement.  The Trust Agreement between the Company andReliance is for the purpose of paying benefits under Executive Savings andInvestment Plan and its terms are substantially similar to the trust agreementthat the Company entered into with Scudder in 1999.  An irrevocable grantor trust has beenestablished under the Trust Agreement with the Company as grantor.

 

The trust assets are held separately from other funds of the Company,but remain subject to claims of the Company’s general creditors in the event ofthe Company’s insolvency.  As of December 29,2004 there were 14 participants in the plan with assets in the trust with anaggregate market value of approximately $378,000.

 

*401(k*) *Plan*. TheCompany maintains the Bertucci’s 401(k) Plan, a defined contribution plan.Under the Bertucci’s 401(k) Plan, substantially all employees of the Companymay defer a portion of their current salary, on a pretax basis, to the 401(k)Plan. The Company makes a matching contribution to the Bertucci’s 401(k) Planthat is allocated, based on a formula as defined by the Bertucci’s 401(k) Plan,to the Bertucci’s 401(k) Plan participants. In fiscal 2001, the Company effectively terminated the NE Restaurant401(k) Plan at which time all amounts became fully vested. As of May 1, 1999,all eligible participant balances were transferred to the Bertucci’s 401(k)Plan in order to consolidate the Plans after the Acquisition.  Matching contributions made by the Company forthe years ended December 29, 2004, December 31, 2003, and January 1,2003, were approximately $98,000, $81,000, and $27,000 respectively.

 

*Employee Loans.* In February 2002, the Companyextended loans to 14 members of Management (including eight officers). The demand notes accrued interest at 8%payable quarterly.  As of February 13,2003 all demand notes were paid in full.

 

23

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**Compensationof Directors**

 

Eachof the Company’s directors is reimbursed for any expenses incurred by suchdirector in connection with such director’s attendance at meetings of the Boardof Directors, or any committee thereof. In addition, all directors are eligible to receive options under theCompany’s stock option plans.

 

Independentdirectors of the Company are paid: (1) a quarterly stipend of $2,500 forserving on the Board of Directors; (2) a payment of $2,500 for each Boardof Directors meeting they attend (either in person or telephonically); and (3) ifthey are a member of the Audit Committee, a payment of $1,000 for each AuditCommittee meeting they attend (either in person or telephonically).

 

Directorsreceive no other compensation from the Company for serving on the Board ofDirectors or a committee of the Board of Directors.

 

**Compensation Committee Interlocksand Insider Participation**

 

Effectiveas of January 1, 1998, the Board of Directors appointed a CompensationCommittee.  During fiscal 2004, Mr. Morganand Mr. Wilansky were the only members of the Compensation Committee.

 

Mr. Jacobsonhas in the past and will in the future provide certain consulting services tothe Company.  See “Item 13.  Certain Relationships And RelatedTransactions.”

 

**ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIALOWNERS AND MANAGEMENT**

 

Thefollowing table provides information at March 31, 2005, with respect toownership of the Company’s common stock $0.01 par value per share (the ‘‘CompanyCommon Stock’’), by (i) each beneficial owner of five percent or more ofthe Company’s Common Stock, (ii) each director of the Company who beneficiallyowns shares of Company Common Stock, (iii) each of the Named ExecutiveOfficers and (iv) all directors and executive officers as a group.  For the purpose of computing the percentageof the shares of Company Common Stock owned by each person or group listed inthis table, shares which are subject to options exercisable within 60 daysafter March 31, 2005 have been deemed to be outstanding and owned by suchperson or group, but have not been deemed to be outstanding for the purpose ofcomputing the percentage of the shares of Company Common Stock owned by anyother person.  Except as indicated in thefootnotes to this table, the persons named in the table have sole voting andinvestment power with respect to all shares of Company Common Stock shown asbeneficially owned by them.

 
| **Name and Address of Beneficial  Owner**                        | ** ** | **Shares  Beneficially  Owned** | ** ** | **Percent  of Class** | ** ** |
|------------------------------------------------------------------|------------|---------------------------------|------------|-----------------------|------------|
| ** **                                                       | ** ** | ** **                      | ** ** | ** **            | ** ** |
| Benjamin R. Jacobson (1)                                         |       | 985,826                         |       | 31.8                  | %          |
| 595 Madison Avenue                                               |       |                            |       |                  |       |
| New York, New York 10022                                         |       |                            |       |                  |       |
|                                                             |       |                            |       |                  |       |
| Thomas R. Devlin (2)                                             |       | 316,160                         |       | 10.5                  | %          |
| 1313 North Webb Road                                             |       |                            |       |                  |       |
| P.O. Box 782170                                             |       |                            |       |                  |       |
| Wichita, Kansas 67206                                            |       |                            |       |                  |       |
|                                                             |       |                            |       |                  |       |
| Dennis D. Pedra (3)                                              |       | 230,605                         |       | 7.8                   | %          |
|                                                             |       |                            |       |                  |       |
| James J. Morgan (4)                                              |       | 51,333                          |       | 1.7                   | %          |
|                                                             |       |                            |       |                  |       |
| Stephen V. Clark                                                 |       | 16,192                          |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| David G. Lloyd                                                   |       | 9,716                           |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| Sally M. Dungan                                                  |       | 4,000                           |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| Heywood Wilansky                                                 |       | 4,000                           |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| James N. Moriarty                                                |       | 2,500                           |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| Kurt J. Schnaubelt                                               |       | 1,500                           |       |                  | *          |
|                                                             |       |                            |       |                  |       |
| All directors and executive officers as a  group (8 persons) (5) |       | 1,075,067                       |       | 34.5                  | %          |

 

----

* Less than 1%

 

24

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(1)               Includes(a) 613,273 shares of Company Common Stock held by J.P. Acquisition FundII, L.P., a Delaware limited partnership (‘‘JPAF II’’), (b) 149,599 sharesof Company Common Stock issuable upon exercise of outstanding stock optionswithin the parameters described above, and (c) 21,217 shares of CompanyCommon Stock held by trusts for the benefit of Mr. Jacobson’s children,with respect to which a third party is trustee and has voting control.  JPAF, Inc., a Delaware corporation, isthe General Partner of JPAF II and Mr. Jacobson is president of JPAF, Inc.Mr. Jacobson is a general partner of Jacobson Partners, which is the soleshareholder of JPAF, Inc.  Mr. Jacobsondisclaims beneficial ownership of the shares described (i) in clause (a) above,except to the extent of his general partnership interest in JPAF II, and (ii) inclause (c) above.

(2)               Includes(a) 67,834 shares of Company Common Stock held by JPAF II, representing Mr. Devlin’spro rata interest as a limited partner of JPAF II; and (b) 3,500 shares ofCompany Common Stock issuable upon exercise of outstanding stock options withinthe parameters described above.

(3)               Includes33,000 shares of Company Common Stock held by trusts for the benefit of Mr. Pedra’schildren, with respect to which Mr. Pedra’s sister is trustee and has solevoting control.  Mr. Pedra disclaimsbeneficial ownership of all such shares.

(4)               Includes(a) 8,482 shares of Company Common Stock held by JPAF II, representing Mr. Morgan’spro rata interest as a limited partner of JPAF II; and (b) 4,500 shares ofCompany Common Stock issuable upon exercise of outstanding stock options withinthe parameters described above.

(5)               Includes(a) 155,099 shares of Company Common Stock issuable upon exercise ofoutstanding stock options within the parameters described above; and (b) the8,482 shares described in (4) above.

 

**Shareholders Agreement**

 

The Companyand the current shareholders of the Company are parties to various agreements,(collectively, the ‘‘Shareholder Agreements’’).

 

TheShareholder Agreements provide, among other things, that (i) a shareholdermay not transfer his or its shares in the Company, whether voluntarily or byoperation of law, other than in certain limited circumstances specifiedtherein, including transfers through a right of first refusal procedure,distributions by certain legal entities to the constituents of such entities(i.e. a partnership to its partners), transfers by will or intestatesuccession, transfers approved by the Board to an affiliate of a shareholder orto another shareholder, transfers to family members or trusts for theirbenefit, and any transfer unanimously approved by the Board, (ii) theCompany has the option to purchase the shares of any shareholder who is anemployee of the Company following the termination of such shareholder’semployment with the Company for any reason at a purchase price equal to the fairmarket value or original purchase price (plus accrued interest in certaincircumstances) depending upon the reason for such termination, (iii) theCompany has the option to purchase the shares of any shareholder who is anemployee of the Company following certain transfer events, including suchshareholders’ bankruptcy or a court-ordered transfer of such shareholder’sstock, (iv) if the Company fails to exercise its option to purchase asdescribed in the immediately preceding clause (iii), the remaining shareholdershave the option to purchase the applicable shares, (v) in the event anemployee shareholder leaves the Company due to death, disability or hardshipor, with respect to certain shares, is terminated by the Company without cause,such shareholder has a one-time option to require the Company to purchase suchshareholder’s shares at the greater of fair market value or the originalpurchase price, subject to certain approval by the Board of Directors,excluding effected employees, (vi) no transfer of shares may occur unlessthe transferee thereof agrees to be bound by the terms of the ShareholdersAgreements and (vii) all share certificates must bear customary legendsand all share transfers must be in compliance with applicable securities laws.

 

25

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**Equity Compensation Plan Information**

 

The Company maintains equity compensation plans for employees,officers, directors and others whose efforts contribute to its success. Thetable below sets forth certain information as of our fiscal year ended December 29,2004 regarding the shares of the Company’s Common Stock available for grant orgranted under the equity compensation plans that (i) were approved byCompany stockholders; and (ii) were not approved by Company stockholders(none).

 
| **Plan Category**                                                  | ** ** | **Number of securities to be  issued upon exercise of  outstanding options, warrants  and rights** | ** ** | **Weighted-average exercise  price of outstanding options,  warrants and rights** | ** ** | **Number of securities  remaining available for future  issuance under equity  compensation plans (excluding  securities reflected in column   (a))** | ** ** |
|--------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **                                                         | ** ** | **(a)**                                                                                            | ** ** | **(b)**                                                                           | ** ** | **(c)**                                                                                                                                               | ** ** |
| Equity compensation plans approved by  security holders            |       | 548,171                                                                                            |       | $                                                                                 | 15.47      |                                                                                                                                                  | 201,829    |   |
| Equity compensation plans not approved by  security holders (none) |       | —                                                                                             |       | —                                                                            |       | —                                                                                                                                                |       |
| Total                                                              |       | 548,171                                                                                            |       | $                                                                                 | 15.47      |                                                                                                                                                  | 201,829    |   |

 

**ITEM 13. CERTAIN RELATIONSHIPSAND RELATED TRANSACTIONS**

 

Benjamin R. Jacobson,Chairman of the Board of Directors and Treasurer is the Managing Partner ofJacobson Partners. Jacobson Partners was paid consulting fees and reimbursedfor certain travel and other incidental expenses in consideration of certainfinancial advisory services provided to the Company. The amount paid toJacobson Partners for financial consulting fees was $425,000 for the fiscalyear ended December 29, 2004. In connection with the Acquisition, theCompany entered into a financial advisory services agreement with JacobsonPartners. Under this agreement, Jacobson Partners provides various financialadvisory services to the Company, including, among other things, assistance inpreparing internal budgets, performing cash management activities, maintainingand improving accounting and other management information systems, negotiatingfinancing arrangements, complying with public reporting and disclosurerequirements and communicating with creditors and investors. The Companybelieves the financial advisory services agreement was made on terms that areno less favorable to the Company than those that could be obtained from anunrelated party. Jacobson Partners is the sole shareholder of the corporategeneral partner of J.P. Acquisition Fund II, L.P., a Delaware limitedpartnership (“JPAF II”), which owns approximately 20.8% of the outstandingcommon stock of the Company.

 

JPAF II owns a controlling interest in theCompany. JPAF, Limited Partnership, a Delaware limited partnership (“JPAF LP”)is the General Partner of JPAF II.  The General Partner of JPAF LP is JPAF, Inc.,a Delaware corporation. Benjamin R. Jacobson, Chairman of the Company, is thepresident and majority shareholder of JPAF, Inc.  J.P. AcquisitionFund III, L.P., a Delaware limited partnership (“JPAF III”), owns a controllinginterest in Taco Bueno. The General Partner of JPAF III is JPAF III, LLC, aDelaware limited liability company (“JPAF III, LLC”).  Jacobson Partnersis the sole shareholder of JPAF III, LLC. Mr. Jacobson is the ManagingGeneral Partner of Jacobson Partners. Stephen V. Clark, President and ChiefExecutive Officer of the Company, and David G. Lloyd, Chief Financial Officerof the Company, hold similar positions with Taco Bueno. No agreement exists,however, between the two entities as to the allocation of services by Mr. Clarkor Mr. Lloyd.  Effective December 30, 2004 compensationarrangements for these individuals will be borne equally by both companies, anarrangement approved by each company’s Board of Directors.

 

During 1999, theCompany established the Bertucci’s Corporation, Inc. Executive Savings andInvestment Plan to which highly compensated executives of the Company may electto defer a portion of their salary and (or) earned bonus. The Company maintainsan irrevocable grantor trust which has been established by the Company, asgrantor, pursuant to a Trust Agreement with Reliance Trust Company, dated December 2004.The agreement is between the Company and Reliance Trust Company, as trustee,for the purpose of paying benefits under the non-qualified deferredcompensation plan. The trust assets are held separately from other funds of theCompany, but remain subject to claims of the Company’s general creditors in the

 

26

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event of the Company’s insolvency. As of December 29,2004, there were 14 participants in the planwith assets in the trust with an aggregate market value of approximately $378,000.

 

In February 2002,the Company extended loans to 14 members of Management (including eightofficers). The demand notes accrued interest at 8%, payable quarterly. As of February 13,2003 all demand notes were paid in full.

 

**ITEM 14. PRINCIPAL ACCOUNTANT FEES ANDSERVICES**

 

Thefollowing is a summary of the fees billed to the Company by Deloitte &Touche LLP (“Deloitte”) for professional services rendered for the fiscal yearsended December 29, 2004 (fiscal 2004) and December 31, 2003 (fiscal 2003):

 
| **Fee Category**   | ** ** | **Fiscal 2004 Fees** | ** ** | **Fiscal 2003 Fees** | ** ** |
|--------------------|------------|----------------------|------------|----------------------|------------|
| Audit Fees         |       | $                    | 218,400    |                 | $          | 155,000 |   |
| Audit-Related Fees |       | 16,600               |       | 16,000               |       |
| Tax Fees           |       | 77,600               |       | 70,000               |       |
| All Other Fees     |       | —               |       | —               |       |
|               |       |                 |       |                 |       |
| Total Fees         |       | $                    | 312,600    |                 | $          | 241,000 |   |

 

*Audit Fees.*  The Audit Fees consist of aggregate fees billed forprofessional services rendered for the audit of the Company’s consolidatedfinancial statements and review of the interim consolidated financialstatements included in quarterly reports.

 

*Audit-Related Fees.*  The Audit-RelatedFees consist of aggregate fees billed for assurance and related servicesthat are reasonably related to the performance of the audit or review of theCompany’s consolidated financial statements and are not reported under “AuditFees.” These services were primarily for benefit plan audits.

 

*Tax Fees*.  The Tax Fees consist of aggregate fees billed forprofessional services for tax compliance, tax advice and tax planning. Theseservices included assistance regarding federal and state tax compliance, andtax audit defense.

 

*All Other Fees*.  No fees were billed for productsand services other than those reported above.

 

**Audit Pre-Approval of Policies and Procedures**

 

The Company formed its Audit Committee in February 2004. The AuditCommittee’s policy since February 2004 is to pre-approve all audit andpermissible non-audit services provided by the independent auditors. Theseservices may include audit services, audit-related services, tax services andother services. The Audit Committee may also pre-approve particular services ona case-by-case basis.

 

**Audit Committee Approval of Fees**

 

The Audit-Related Fees and Tax Fees provided by Deloitte to the Companyduring fiscal 2004 were all approved by the Audit Committee.

 

27

----

 

**PART IV**

 

# **ITEM 15. EXHIBITS, FINANCIALSTATEMENT SCHEDULES AND REPORTS ON FORM 8K**

# ** **

| (a) | The  following documents are filed as part of this report: |
|-----|------------------------------------------------------------|

 
|   | (1)    | Financial Statements:                                                                                                                                                      |   |
|--------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|
|   |   |                                                                                                                                                                       |   |
|   |   | Report of Independent Registered Public  Accounting Firm                                                                                                                   |   |
|   |   |                                                                                                                                                                       |   |
|   |   | Consolidated Balance Sheets as of December 29, 2004 and  December 31, 2003. (as Restated)                                                                        |   |
|   |   |                                                                                                                                                                       |   |
|   |   | Consolidated Statements of Operations for  each of the years ended December 29, 2004, December 31, 2003, and  January 1, 2003. (as Restated)                |   |
|   |   |                                                                                                                                                                       |   |
|   |   | Consolidated Statements of Stockholders’  Equity for each of the years ended December 29, 2004, December 31,  2003, and January 1, 2003. (as Restated) |   |
|   |   |                                                                                                                                                                       |   |
|   |   | Consolidated Statements of Cash Flows for  each of the years ended December 29, 2004, December 31, 2003, and  January 1, 2003. (as Restated)                |   |
|   |   |                                                                                                                                                                       |   |
|   |   | Notes to Consolidated Financial Statements.                                                                                                                                |   |
|   |   |                                                                                                                                                                       |   |
|   | (2)    | Exhibit Index                                                                                                                                                         |   |

 
| (b)    | Reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|   | The Company  did not file any reports on Form 8-K during the last quarter of the  period covered by this Annual Report on Form 10-K. The Company did,  however, file a Current Report on Form 8-K with the SEC on March 16,  2005 advising of the impending restatement of certain of the financial  statements included within this Annual Report on Form 10-K as discussed  more fully in Note 3 of Notes to Consolidated Financial Statements. |

 

28

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of theSecurities Exchange Act of 1934, the Company has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized.

 
|   | BERTUCCI’S CORPORATION |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         | /s/ Stephen V. Clark |   |
|   |                        | Stephen V. Clark, President, Chief Executive Officer |
|   |                        |   |
|   | Date: April 12, 2005   |

 

Pursuant to the requirements of the Securities Exchange Act of 1934,this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated.

 
| **SIGNATURE**                  | ** ** | **TITLE**                              | ** **                                       | **DATE**   | ** **          |
|--------------------------------|------------|----------------------------------------|--------------------------------------------------|------------|---------------------|
| ** **                     | ** ** | ** **                             | ** **                                       | ** ** | ** **          |
|  /s/ Benjamin R. Jacobson |       |                                   | Chairman of the Board of Directors               |       | April 12, 2005 |   |
| Benjamin R. Jacobson           |       |                                   |                                             |       |                |
|                           |       |                                   |                                             |       |                |
|  /s/ Stephen V. Clark     |       |                                   | President, Chief Executive Officer and           |       | April 12, 2005 |   |
| Stephen V. Clark               |       | Director (Principal Executive Officer) |                                             |       |                |
|                           |       |                                   |                                             |       |                |
|  /s/ David G. Lloyd       |       |                                   | Chief Financial Officer (Principal Financial and |       | April 12, 2005 |   |
| David G. Lloyd                 |       | Accounting Officer)                    |                                             |       |                |
|                           |       |                                   |                                             |       |                |
|  /s/ James N. Moriarty    |       |                                   | Director                                         |       | April 12, 2005 |   |
| James N. Moriarty              |       |                                   |                                             |       |                |
|                           |       |                                   |                                             |       |                |
|  /s/ Sally M. Dungan      |       |                                   | Director                                         |       | April 12, 2005 |   |
| Sally M. Dungan                |       |                                   |                                             |       |                |
|                           |       |                                   |                                             |       |                |
| /s/ James J. Morgan            |       |                                   | Director                                         |       | April 12, 2005 |   |
| James J. Morgan                |       |                                   |                                             |       |                |
|                           |       |                                   |                                             |       |                |
| /s/ Heywood Wilansky           |       |                                   | Director                                         |       | April 12, 2005 |   |
| Heywood Wilansky               |       |                                   |                                             |       |                |
|                                |            |                                        |                                                  |            |                     |  |  |

 

29

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**REPORTOF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

To the Board of Directors and Shareholders of Bertucci’s Corporation

Northborough, MA

 

We have audited the accompanying consolidated balance sheets ofBertucci’s Corporation and subsidiaries (the “Company”) as of December 29,2004 and December 31, 2003, and the related consolidated statements ofoperations, shareholders’ equity (deficit) and cash flows for each of the yearsended December 29, 2004, December 31, 2003, and January 1, 2003.These financial statements are the responsibility of the Company’s management.Our responsibility is to express an opinion on these financial statements basedon our audits.

 

We conducted our audits in accordance with the standards of the PublicCompany Accounting Oversight Board (United States). Those standards requirethat we plan and perform the audit to obtain reasonable assurance about whetherthe financial statements are free of material misstatement. The Company is notrequired to have, nor were we engaged to perform, an audit of its internal controlover financial reporting. An audit includes consideration of internal controlover financial reporting as a basis for designing audit procedures that areappropriate in the circumstances, but not for the purpose of expressing anopinion on the effectiveness of the Company’s internal control over financialreporting. Accordingly, we express no such opinion. An audit also includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements, assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation. We believe that our audits provide areasonable basis for our opinion.

 

In our opinion, such consolidated financial statements present fairly,in all material respects, the financial position of the Company as of December 29,2004 and December 31, 2003, and the results of its operations and its cashflows for each of the years ended December 29, 2004, December 31,2003, and January 1, 2003, in conformity with accounting principlesgenerally accepted in the United States of America.

 

As discussed in Note 3, the accompanying 2003 and 2002consolidated financial statements have been restated.

 
| /s/ DELOITTE & TOUCHE LLP |   |
|------------------------------------|--------|
| Boston, MA                         |
| April 12, 2005                |

 

30

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BERTUCCI’S CORPORATION

CONSOLIDATEDBALANCE SHEETS

(In thousands except sharedata)

 
| ** **                                                                                                                                                                      | ** ** | **December 29,** | ** ** | **December 31,**              | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------|------------|------------------------------------|------------|
| ** **                                                                                                                                                                      | ** ** | **2004**              | ** ** | **2003**                           | ** ** |
| ** **                                                                                                                                                                      | ** ** | ** **            | ** ** | **(As Restated-**

**See Note 3)** | ** ** |
| ASSETS                                                                                                                                                                          |       |                  |       |                               |       |
| Current Assets:                                                                                                                                                                 |       |                  |       |                               |       |
| Cash and cash equivalents                                                                                                                                                       |       | $                     | 12,291     |                               | $          | 12,647 |   |
| Restricted cash                                                                                                                                                                 |       | 2,403                 |       | 3,129                              |       |
| Accounts receivable                                                                                                                                                             |       | 1,334                 |       | 753                                |       |
| Inventories                                                                                                                                                                     |       | 1,388                 |       | 1,268                              |       |
| Prepaid expenses and other current assets                                                                                                                                       |       | 534                   |       | 1,758                              |       |
| Total current assets                                                                                                                                                            |       | 17,950                |       | 19,555                             |       |
|                                                                                                                                                                            |       |                  |       |                               |       |
| Property and Equipment, at cost:                                                                                                                                                |       |                  |       |                               |       |
| Land                                                                                                                                                                            |       | 259                   |       | 259                                |       |
| Buildings                                                                                                                                                                       |       | 697                   |       | 697                                |       |
| Capital leases - land and buildings                                                                                                                                             |       | 5,764                 |       | 5,764                              |       |
| Leasehold improvements                                                                                                                                                          |       | 66,037                |       | 67,404                             |       |
| Furniture and equipment                                                                                                                                                         |       | 43,248                |       | 40,783                             |       |
|                                                                                                                                                                            |       | 116,005               |       | 114,907                            |       |
| Less - accumulated depreciation and  amortization                                                                                                                               |       | (51,517               | )          | (39,091                            | )          |
|                                                                                                                                                                            |       | 64,488                |       | 75,816                             |       |
| Construction work in process                                                                                                                                                    |       | 1,567                 |       | 301                                |       |
| Net property and equipment                                                                                                                                                      |       | 66,055                |       | 76,117                             |       |
|                                                                                                                                                                            |       |                  |       |                               |       |
| Goodwill                                                                                                                                                                        |       | 26,127                |       | 26,127                             |       |
| Deferred finance costs, net                                                                                                                                                     |       | 2,862                 |       | 3,559                              |       |
| Liquor licenses, net                                                                                                                                                            |       | 2,414                 |       | 2,838                              |       |
| Other assets                                                                                                                                                                    |       | 513                   |       | 479                                |       |
| TOTAL ASSETS                                                                                                                                                                    |       | $                     | 115,921    |                               | $          | 128,675 |   |
|                                                                                                                                                                            |       |                  |       |                               |       |
| LIABILITIES  AND STOCKHOLDERS’ (DEFICIT) EQUITY                                                                                                                            |       |                  |       |                               |       |
|                                                                                                                                                                            |       |                  |       |                               |       |
| Current Liabilities:                                                                                                                                                            |       |                  |       |                               |       |
| Promissory notes - current portion                                                                                                                                              |       | $                     | 40         |                               | $          | 39 |   |
| Capital lease obligations - current portion                                                                                                                                     |       | 74                    |       | 31                                 |       |
| Accounts payable                                                                                                                                                                |       | 7,819                 |       | 8,426                              |       |
| Accrued expenses                                                                                                                                                                |       | 16,457                |       | 14,026                             |       |
| Total current liabiliites                                                                                                                                                       |       | 24,390                |       | 22,522                             |       |
|                                                                                                                                                                            |       |                  |       |                               |       |
| Promissory notes, net of current portion                                                                                                                                        |       | 781                   |       | 821                                |       |
| Captial lease obligations, net of current  portion                                                                                                                              |       | 6,102                 |       | 6,017                              |       |
| Senior Notes                                                                                                                                                                    |       | 85,310                |       | 85,310                             |       |
| Deferred gain on sale leaseback transaction                                                                                                                                     |       | 2,002                 |       | 2,112                              |       |
| Other long-term liabilities                                                                                                                                                     |       | 8,368                 |       | 8,124                              |       |
| Total liabilities                                                                                                                                                               |       | 126,953               |       | 124,906                            |       |
| Commitments and Contingencies                                                                                                                                                   |       |                  |       |                               |       |
| Stockholders’ (Deficit) Equity:                                                                                                                                            |       |                  |       |                               |       |
| Common stock, $.01 par value  Authorized - 8,000,000 shares  Issued - 3,667,495 and 3,666,370 shares, respectively;  Outstanding - 2,915,482 and 2,961,552 shares, respectively |       | 37                    |       | 37                                 |       |
| Less treasury shares of 752,013 and  704,818, respectively, at cost                                                                                                             |       | (8,480                | )          | (8,190                             | )          |
| Additional paid-in capital                                                                                                                                                      |       | 29,046                |       | 29,035                             |       |
| Accumulated deficit                                                                                                                                                             |       | (31,635               | )          | (17,113                            | )          |
| Total stockholders’ (deficit) equity                                                                                                                                       |       | (11,032               | )          | 3,769                              |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY                                                                                                                       |       | $                     | 115,921    |                               | $          | 128,675 |   |

 

The accompanying notes are an integral partof these consolidated financial statements.

 

31

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BERTUCCI’S CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Inthousands except share and per share data)

 
| ** **                                                         | ** ** | **December 29,** | ** ** | **December 31,**               | ** ** | **January 1,**                 | ** ** |
|--------------------------------------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|-------------------------------------|------------|
| ** **                                                         | ** ** | **2004**              | ** ** | **2003**                            | ** ** | **2003**                            | ** ** |
| ** **                                                         | ** ** | ** **            | ** ** | **(As Restated -**

**See Note 3)** | ** ** | **(As Restated -**

**See Note 3)** | ** ** |
| Net sales                                                          |       | $                     | 200,408    |                                | $          | 186,172                             |       | $ | 162,319 |   |
|                                                               |       |                  |       |                                |       |                                |       |
| Cost of sales and expenses:                                        |       |                  |       |                                |       |                                |       |
| Cost of sales                                                      |       | 49,231                |       | 43,544                              |       | 35,667                              |       |
| Operating expenses                                                 |       | 122,056               |       | 113,036                             |       | 96,413                              |       |
| General and administrative expenses                                |       | 13,065                |       | 11,320                              |       | 12,124                              |       |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 13,216                |       | 14,115                              |       | 12,160                              |       |
| Asset impairment charge                                            |       | 6,749                 |       | 3,580                               |       | —                              |       |
| Closed restaurants charge                                          |       | —                |       | —                              |       | 236                                 |       |
| Total cost of sales and expenses                                   |       | 204,317               |       | 185,595                             |       | 156,600                             |       |
|                                                               |       |                  |       |                                |       |                                |       |
| (Loss) income from operations                                      |       | (3,909                | )          | 577                                 |       | 5,719                               |       |
|                                                               |       |                  |       |                                |       |                                |       |
| Other expense                                                      |       |                  |       |                                |       |                                |       |
| Gain on Brinker Sale                                               |       | —                |       | 650                                 |       | —                              |       |
| Interest expense, net                                              |       | (10,613               | )          | (10,133                             | )          | (9,587                              | )          |
| Other expense                                                      |       | (10,613               | )          | (9,483                              | )          | (9,587                              | )          |
|                                                               |       |                  |       |                                |       |                                |       |
| Loss before income tax provision                                   |       | (14,522               | )          | (8,906                              | )          | (3,868                              | )          |
|                                                               |       |                  |       |                                |       |                                |       |
| Income tax provision                                               |       | —                |       | —                              |       | 2,697                               |       |
|                                                               |       |                  |       |                                |       |                                |       |
| Net loss                                                           |       | $                     | (14,522    | )                                   | $          | (8,906                              | )          | $ | (6,565 | ) |
|                                                               |       |                  |       |                                |       |                                |       |
| Basic and diluted loss per share                                   |       | $                     | (4.93      | )                                   | $          | (3.00                               | )          | $ | (2.20 | ) |
|                                                               |       |                  |       |                                |       |                                |       |
| Weighted average shares outstanding - basic  and diluted           |       | 2,943,841             |       | 2,970,403                           |       | 2,978,955                           |       |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

32

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BERTUCCI’SCORPORATION

STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY (DEFICIT)

(Inthousands except share data)

 
| ** **                                               | ** ** | **Common  Stock** | ** ** | **Treasury  Stock** | ** ** | ** **     | ** ** | ** ** | ** ** | **Total**            | ** ** |
|----------------------------------------------------------|------------|-------------------|------------|---------------------|------------|----------------|------------|------------|------------|----------------------|------------|
| ** **                                               | ** ** | **Number  of**    | ** ** | ** **          | ** ** | **Number  of** | ** ** | ** ** | ** ** | **Additional  Paid** | ** ** | **Accumulated** | ** ** | **Stockholders’** | ** ** |
| ** **                                               | ** ** | **Shares**        | ** ** | **Amount**          | ** ** | **Shares**     | ** ** | **Amount** | ** ** | **In  Capital**      | ** ** | **Deficit** | ** ** | **Equity  (Deficit)** | ** ** |
| Balance  January 2, 2002 (As Restated-See Note 3)   |       | 3,666,370         |       | $                   | 37         |           | (687,415   | )          | $          | (8,088               | )          | $ | 29,004 |   | $ | (1,642 | ) | $ | 19,311 |   |
| Net loss (As  Restated-See Note 3)                       |       | —            |       | —              |       | —         |       | —     |       | —               |       | (6,565 | ) | (6,565 | ) |
| Balance  January 1, 2003 (As Restated-See Note 3)   |       | 3,666,370         |       | $                   | 37         |           | (687,415   | )          | (8,088     | )                    | $          | 29,004 |   | $ | (8,207 | ) | $ | 12,746 |   |
| Net loss (As  Restated-See Note 3)                       |       | —            |       | —              |       | —         |       | —     |       | —               |       | (8,906 | ) | (8,906 | ) |
| Compensation  expense associated with option grants      |       | —            |       | —              |       | —         |       | —     |       | 31                   |       | — |   | 31 |   |
| Purchase of  common stock for treasury                   |       | —            |       | —              |       | (17,403        | )          | (102       | )          | —               |       | — |   | (102 | ) |
| Balance December 31,  2003 (As Restated-See Note 3) |       | 3,666,370         |       | $                   | 37         |           | (704,818   | )          | (8,190     | )                    | $          | 29,035 |   | $ | (17,113 | ) | $ | 3,769 |   |
| Net loss                                                 |       | —            |       | —              |       | —         |       | —     |       | —               |       | (14,522 | ) | (14,522 | ) |
| Sale of common  stock from exercise of options           |       | 1,125             |       | —              |       | —         |       | —     |       | 11                   |       |   |   | 11 |   |
| Purchase of  common stock for treasury                   |       | —            |       | —              |       | (47,195        | )          | (290       | )          | —               |       | — |   | (290 | ) |
| Balance  December 29, 2004                          |       | 3,667,495         |       | $                   | 37         |           | (752,013   | )          | $          | (8,480               | )          | $ | 29,046 |   | $ | (31,635 | ) | $ | (11,032 | ) |

 

The accompanying notes are an integral part of these consolidatedfinancial statements.

 

33

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BERTUCCI’SCORPORATION

CONSOLIDATED STATEMENTS OFCASH FLOW

(Inthousands)

 
| ** **                                                                       | ** ** | **December 29, 2004** | ** ** | **December 31, 2003**         | ** ** | **January 1, 2003**           | ** ** |
|----------------------------------------------------------------------------------|------------|----------------------------|------------|------------------------------------|------------|------------------------------------|------------|
| ** **                                                                       | ** ** | ** **                 | ** ** | **(As Restated-**

**See Note 3)** | ** ** | **(As Restated-**

**See Note 3)** | ** ** |
|                                                                             |       |                       |       |                               |       |                               |       |
| Cash flows from operating activities                                             |       |                       |       |                               |       |                               |       |
| Net loss                                                                         |       | $                          | (14,522    | )                                  | $          | (8,906                             | )          | $ | (6,565 | ) |
| Adjustments to reconcile net loss to net  cash provided by operating activities: |       |                       |       |                               |       |                               |       |
| Gain on Brinker Sale, net of tax                                                 |       | —                     |       | (650                               | )          | —                             |       |
| Gain on sale of property                                                         |       | —                     |       | —                             |       | (235                               | )          |
| Loss on sale leaseback transaction                                               |       | —                     |       | 59                                 |       | —                             |       |
| Stock compensation expense                                                       |       | —                     |       | 31                                 |       | —                             |       |
| Closed restaurant charge                                                         |       | —                     |       | —                             |       | 236                                |       |
| Asset impairment charge                                                          |       | 6,749                      |       | 3,580                              |       | —                             |       |
| Deferred rent, depreciation, and  amortization                                   |       | 13,422                     |       | 12,650                             |       | 11,287                             |       |
| Deferred income taxes                                                            |       | —                     |       | —                             |       | 7,697                              |       |
| Changes in operating assets and liabilities                                      |       |                       |       |                               |       |                               |       |
| Inventories                                                                      |       | (120                       | )          | (368                               | )          | (95                                | )          |
| Prepaid expenses and receivables                                                 |       | 643                        |       | 1,217                              |       | (1,126                             | )          |
| Other accrued expenses                                                           |       | 2,186                      |       | 106                                |       | (1,131                             | )          |
| Income taxes payable                                                             |       | (413                       | )          | 409                                |       | (1,149                             | )          |
| Accounts payable                                                                 |       | (607                       | )          | 457                                |       | (822                               | )          |
| Tenant allowances received                                                       |       | 577                        |       | 658                                |       | 997                                |       |
| Other operating assets and liabilities                                           |       | (34                        | )          | (172                               | )          | 75                                 |       |
|                                                                             |       |                       |       |                               |       |                               |       |
| Total adjustments                                                                |       | 22,403                     |       | 17,977                             |       | 15,734                             |       |
|                                                                             |       |                       |       |                               |       |                               |       |
| Net cash provided by operating activities                                        |       | 7,881                      |       | 9,071                              |       | 9,169                              |       |
|                                                                             |       |                       |       |                               |       |                               |       |
| Cash flows from investing activities                                             |       |                       |       |                               |       |                               |       |
| Additions to property and equipment                                              |       | (8,598                     | )          | (17,396                            | )          | (18,212                            | )          |
| Proceeds from sale of restaurants                                                |       | —                     |       | —                             |       | 413                                |       |
| Acquisition of liquor licenses                                                   |       | —                     |       | (278                               | )          | (17                                | )          |
|                                                                             |       |                       |       |                               |       |                               |       |
| Net cash used in investing activities                                            |       | (8,598                     | )          | (17,674                            | )          | (17,816                            | )          |
|                                                                             |       |                       |       |                               |       |                               |       |
| Cash flows from financing activities                                             |       |                       |       |                               |       |                               |       |
| Net proceeds from sale leaseback  transactions                                   |       | —                     |       | 8,977                              |       | —                             |       |
| Sale of common stock from exercise of  options                                   |       | 11                         |       | —                             |       | —                             |       |
| Decrease (increase) in restricted cash                                           |       | 726                        |       | (661                               | )          | (1,455                             | )          |
| Purchase of treasury shares                                                      |       | (290                       | )          | (102                               | )          | —                             |       |
| Payment on promissory note                                                       |       | (39                        | )          | (81                                | )          | —                             |       |
| Principal payments under capital lease  obligations                              |       | (47                        | )          | (16                                | )          | —                             |       |
|                                                                             |       |                       |       |                               |       |                               |       |
| Net cash provided by (used in) financing  activities                             |       | 361                        |       | 8,117                              |       | (1,455                             | )          |
|                                                                             |       |                       |       |                               |       |                               |       |
| Net decrease in cash and cash equivalents                                        |       | (356                       | )          | (486                               | )          | (10,102                            | )          |
| Cash and cash equivalents, beginning of  year                                    |       | 12,647                     |       | 13,133                             |       | 23,235                             |       |
| Cash and cash equivalents, end of year                                           |       | $                          | 12,291     |                               | $          | 12,647                             |       | $ | 13,133 |   |
|                                                                             |       |                       |       |                               |       |                               |       |
| Supplemental Disclosure of Cash Flow  Information:                               |       |                       |       |                               |       |                               |       |
| Cash paid for interest                                                           |       | $                          | 10,090     |                               | $          | 9,804                              |       | $ | 9,750 |   |
| Cash paid (refunded) for income taxes                                            |       | $                          | 377        |                               | $          | (408                               | )          | $ | (3,863 | ) |
| Capital leases entered into during period                                        |       | $                          | 175        |                               | $          | 6,066                              |       | $ | — |   |
| 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.

 

34

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# **BERTUCCI’S CORPORATION**

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

DECEMBER 29, 2004

 

(1)                                  ORGANIZATIONAND OPERATIONS

 

Bertucci’s Corporation, a Delaware corporation (the “Company”),is the owner and operator of a chain of full-service casual dining,Italian-style restaurants under the names Bertucci’s Brick Oven Pizzeria® andBertucci’s Brick Oven Ristorante®. The Company was incorporated in 1994 as NERestaurant Company, Inc. and formally changed its name to Bertucci’sCorporation on August 16, 2001. As of December 29, 2004, the Companyoperated 91 restaurants located primarily in the northeastern United States.

 

In July 1998, the Company completed itsacquisition of Bertucci’s Restaurant Corp.’s parent entity, Bertucci’s, Inc.,for a purchase price, net of cash received, of approximately $89.4 million (the“Acquisition”).  The Company financed the Acquisition primarily throughthe issuance of $100 million of 10 3/4% senior notes due 2008 (the “SeniorNotes”). The Senior Notes are still outstanding as to $85.3 million inprincipal.

 

*Fiscal Year End*

* *

The Company’s fiscal year is the 52 or 53-week periodended on the Wednesday closest to December 31st. All years presentedconsist of 52 weeks.

 

*Basis of Consolidation*

 

The consolidated financial statements include the accounts of theCompany and its subsidiaries. All intercompany balances and transactions havebeen eliminated in consolidation.

 

(2)                              SUMMARY OFSIGNIFICANT ACCOUNTING POLICIES

 

*RevenueRecognition*

* *

TheCompany records revenue from the sale of food, beverage and alcohol when salesoccur. Proceeds from the sale of gift cards are recorded as deferred revenueand recognized as income when redeemed by the holder.

 

*Cash and CashEquivalents*

* *

Cash and equivalents are comprised of demand and interest bearingaccounts with original maturities of no more than sixty days. The Companyutilizes zero balance disbursement accounts for cash management purposes andmaintains a cash balance sufficient to cover disbursements from these accountswhen the check is presented for payment. Outstanding checks written against thedisbursement accounts of $1.4 million and $4.0 million at December 29,2004 and December 31, 2003, respectively, are included in accounts payablein the accompanying consolidated balance sheets.

 

*Restricted Cash*

 

The Company is required to maintain cash as collateral for outstandingletters of credit under its letter of credit facility.

 

35

----

 

*Inventories*

* *

Inventories are carried at the lower of cost(first-in, first-out) or market value, and consist of the following (dollars inthousands):

 
| ** **      | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------|------------|----------|------------|----------|------------|
|            |       |     |       |     |       |
| Food            |       | $        | 750        |     | $          | 705 |   |
| Liquor          |       | 542      |       | 471      |       |
| Supplies        |       | 96       |       | 92       |       |
| Total inventory |       | $        | 1,388      |     | $          | 1,268 |   |

 

*Property andEquipment*

* *

Property and equipment are carried at cost. TheCompany provides for depreciation and amortization using the straight-linemethod to charge the cost of property and equipment to expense over theestimated useful lives of the assets. The lives used are as follows:

 
| **Asset  Classification** | ** ** | **Estimated  Useful Life**                                                    | ** ** |
|---------------------------|------------|-------------------------------------------------------------------------------|------------|
|                      |       |                                                                          |       |
| Buildings                 |       | 20 years                                                                      |       |
| Leasehold improvements    |       | Shorter of term of the lease (ranging between 10-20 years), or life  of asset |       |
| Furniture and equipment   |       | 3-7 years                                                                     |       |

 

The Company evaluatesproperty and equipment held and used in the business for impairment wheneverevents or changes in circumstances indicate that the carrying amount of arestaurant’s assets may not be recoverable. An impairment is determined bycomparing estimated undiscounted future operating cash flows for a restaurantto the carrying amount of its assets. If an impairment exists, the amount ofimpairment is measured as the excess of the carrying amount over the estimateddiscounted future operating cash flows of the asset and the expected proceedsupon sale of the asset.

 

The Company regularly assessesrestaurants’ performance for recoverability to determine if an impairment offixed assets exists at any location. The Company estimates the fair value ofassets based on the net present value of the expected cash flows for eachrestaurant. If the carrying amount of the assets (including any nontransferableliquor licenses) exceeds the fair value of the assets, the Company records animpairment charge to reflect the write down of the affected assets to fairvalue. Any impairment is charged to earnings and included in the accompanyingconsolidated statements of operations. For fiscal 2004 and 2003, impairmentcharges of $6.7 million and $3.6 million, respectively, were recorded.

 

*CapitalizedInterest*

* *

The Company capitalizes interest costs (in leaseholdimprovements) based on new restaurant capital expenditures. Total interestcosts incurred and amounts capitalized are as follows (dollars in thousands):

 
| ** **                | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|---------------------------|------------|----------|------------|----------|------------|----------|------------|
|                      |       |     |       |     |       |     |       |
| Total interest expense    |       | $        | 10,690     |     | $          | 10,371   |       | $ | 9,713 |   |
| Less - Amount capitalized |       | 77       |       | 238      |       | 126      |       |
| Interest expense, net     |       | $        | 10,613     |     | $          | 10,133   |       | $ | 9,587 |   |

 

36

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*Self-Insurance*

 

*The Company is self-insured forcertain losses related to general liability, group health insurance, andworkers’ compensation. The Company maintains stop loss coverage with thirdparty insurers to limit its total exposure. The self-insurance liability is notdiscounted and represents an estimate of the ultimate cost of claims incurredas of the balance sheet date based upon analysis of historical data andestimates.*

* *

*Accrued Expenses*

* *

Accrued expenses consisted of the following as of December 29,2004 and December 31, 2003 (dollars in thousands):

 
| ** **                              | ** ** | **2004** | ** ** | **2003** | ** ** |
|-----------------------------------------|------------|----------|------------|----------|------------|
|                                    |       |     |       |     |       |
| Accrued payroll and related benefits    |       | $        | 4,810      |     | $          | 3,679 |   |
| Accrued interest                        |       | 4,254    |       | 4,279    |       |
| Unredeemed gift certificates            |       | 3,857    |       | 2,973    |       |
| Other accrued liabilities               |       | 1,904    |       | 1,466    |       |
| Accrued occupancy costs                 |       | 1,034    |       | 522      |       |
| Store closing reserves, current portion |       | 484      |       | 615      |       |
| Accrued advertising                     |       | 72       |       | 36       |       |
| Income taxes payable                    |       | 42       |       | 456      |       |
|                                    |       |     |       |     |       |
| TOTAL                                   |       | $        | 16,457     |     | $          | 14,026 |   |

 

*Goodwill*

 

The Companytests goodwill for impairment annually on the first day after the fiscal yearend. This same impairment test is performed at other times during the course ofthe year should an event occur that indicates goodwill may be impaired. Therewas no impairment of goodwill at December 29, 2004 and December 31, 2003.

 

*Deferred FinanceCosts*

* *

Underwriting, legal and other direct costs incurred inconnection with the issuance of the Senior Notes and the completion of thesale-leaseback transactions discussed in Note 7 have been capitalized and arebeing amortized into interest expense over the life of the related borrowingsand underlying leases, respectively.

 

*Liquor Licenses*

* *

Transferable liquor licenses are accounted for at thelower of cost or market and are not amortized. Annual renewal fees are expensedas incurred. Non-transferable liquor licenses are amortized on a straight-linebasis over the contractual life of the license. The carrying values oftransferable liquor licenses were $1.5 million and $2.0 million at December 29,2004 and December 31, 2003, respectively. Amortization expense fornon-transferable liquor licenses was $82,000 in fiscal 2004, $58,000 in fiscal 2003,and for existing licenses is expected to be $56,000 per year for each of thenext five fiscal years.

 

*Fair Value ofFinancial Instruments*

* *

The Company’s financial instruments mainly consist ofcash and cash equivalents, restricted cash, accounts receivable, accountspayable and long-term debt. The carrying amounts of the Company’s cash and cashequivalents, restricted cash, accounts receivable and accounts payableapproximate fair value due to the short-term nature of these instruments.                The fair value of the Company’s long term debt,consisting of the Senior Notes, is based on the present value of remainingprincipal and interest payments discounted at a comparable borrowing rate eachfiscal year (see Note 6 of Notes to Consolidated Financial Statements).

 

*ComprehensiveIncome*

* *

*Comprehensive income is equal to net income asreported for all three fiscal years reported herein.*

 

37

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*PreopeningExpenses*

* *

Preopening costs are expensed as incurred. These costsinclude the training of new restaurant management teams; travel and lodging forboth the training and opening unit management teams; and the food, beverage andsupplies costs incurred to perform the training and testing of all equipment,concept systems and recipes.

 

*Advertising*

* *

Advertisingcosts are expensed as incurred. Advertising costs were $6.6 million, $5.5million and $5.5 million in fiscal 2004, 2003, and 2002, respectively, and areincluded in operating expenses in the consolidated statements of operations.

 

*Earnings Per Share*

* *

Basic earnings per share is computed by dividing netloss by the weighted average number of common shares outstanding for thereporting period. Diluted earnings per share reflects the potential dilutionthat could occur if options or other contracts to issue common stock wereexercised or converted into common stock. For the fiscal years ended December 29,2004, December 31, 2003, and January 1, 2003 options representing548,171, 594,396, and 652,549 shares of common stock, respectively, wereexcluded from the calculation of diluted loss per share because of theiranti-dilutive effect.

 

*Stock-Based Compensation*

 

As allowed by SFAS No. 123, *Accountingfor Stock-Based Compensation* (“SFAS No. 123”), the Company haselected to account for stock-based compensation under the intrinsic valuemethod with disclosure of the effects of fair value accounting on net incomeand earnings per share on a pro forma basis. The Company’s stock-basedcompensation plan is described more fully in Note 10. The Company accounts forthis plan under the recognition and measurement principles of APB Opinion No. *25, Accounting for Stock Issued to Employees,*and relatedInterpretations. With the exception of one modification to a grant during 2003,no stock-based employee compensation cost related to stock options is reflectedin net loss, as all options granted had an exercise price equal to, or inexcess of, the market value of the underlying common stock on the date ofgrant. The following table illustrates the effect on net loss and loss pershare if the Company had applied the fair value recognition provisions of SFAS No. 123(in thousands, except per share data):

 
| ** **                                                                                                              | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
|                                                                                                                    |       |     |       |     |       |     |       |
| Net loss, as reported                                                                                                   |       | $        | (14,522    | )        | $          | (8,906   | )          | $ | (6,565 | ) |
|                                                                                                                    |       |     |       |     |       |     |       |
| Add: Stock-based employee compensation  expense included in reported net loss.                                          |       | —   |       | 31       |       | —   |       |
|                                                                                                                    |       |     |       |     |       |     |       |
| Deduct: Net stock-based employee  compensation expense/income determined under fair value based method for all  awards. |       | (77      | )          | (580     | )          | (144     | )          |
|                                                                                                                    |       |     |       |     |       |     |       |
| Pro forma net loss                                                                                                      |       | $        | (14,599    | )        | $          | (9,455   | )          | $ | (6,709 | ) |
|                                                                                                                    |       |     |       |     |       |     |       |
| Basic and diluted loss per share                                                                                        |       |     |       |     |       |     |       |
| As reported                                                                                                             |       | $        | (4.93      | )        | $          | (3.00    | )          | $ | (2.20 | ) |
| Pro forma                                                                                                               |       | $        | (4.96      | )        | $          | (3.18    | )          | $ | (2.25 | ) |

 

*RecentAccounting Pronouncements*

* *

In December 2004, the Financial Accounting Standards Board (“FASB”)issued Statement of Financial Accounting Standards (“SFAS”) No. 123R, *Share-Based Payment* (“SFAS No. 123R”).This Statement is a revision of SFAS No. 123, *Accounting for Stock-Based Compensation,* and supersedesAccounting Principles Board Opinion No. 25,

 

38

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*Accounting for Stock Issued to Employees,*and its related implementation guidance. SFAS No. 123R focuses primarilyon accounting for transactions in which an entity obtains employee services inshare-based payment transactions. The Statement requires entities to recognizestock compensation expense for awards of equity instruments to employees basedon the grant-date fair value of those awards (with limited exceptions). SFAS No. 123Ris effective for the first annual reporting period that begins after June 15,2005. The Company is evaluating the two methods of adoption allowed by SFAS No. 123R;the modified-prospective transition method and the modified-retrospectivetransition method.

 

*Use of ManagementEstimates*

* *

The preparation of financial statements in conformitywith accounting principles generally accepted in the United States of Americarequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the financial statements and the reported amounts ofrevenues and expenses during the reporting period. Significant estimatesinclude the reserve for closed restaurant locations, impairment analysis onclosed locations, and insurance reserves. Actual results could differ fromthose estimates.

 

(3)                              RESTATEMENTOF FINANCIAL STATEMENTS

 

Subsequent to the issuance of its financial statements for the yearended December 31, 2003, as a result of views expressed in a letter issuedFebruary 7, 2005 by the office of the Chief Accountant of the Securities andExchange Commission (“SEC”) to the AICPA regarding certain operatinglease-related accounting issues, The Company reviewed its lease accounting,including leased liquor licenses and leasehold depreciation practices.  As a result, the Company corrected itsaccounting for leases and restated its historical financial statements andcertain financial information for corrected periods to correct errors in leaseaccounting policies. The Company historically accounted for tenant improvementallowances as reductions to the related leasehold improvement asset on theconsolidated balance sheets and capital expenditures in investing activities onthe consolidated statements of cash flows. Also, the Company historically recognized rent on a straight-line basisover a lease term commencing with the initial occupancy date, orCompany-operated retail store opening date. In addition, the depreciable lives of certain leasehold improvements andother long-lived assets on those properties were not aligned with thenon-cancelable lease term. 

 

Following a review of its lease accounting treatment and relevantaccounting literature, the Company determined it should:  (a) report tenant improvement allowancesas  deferred liabilities in theconsolidated balance sheets and initiate the amortization of those liabilitiesat the relevant initial occupancy date; (b) classify the change in the deferred liability related to the tenantallowances in the operating activities on the Consolidated Statements of CashFlows; (c) conform the depreciable lives for buildings on leased land and otherleasehold improvements to the shorter of the economic life of the asset or thelease term used for determining the capital versus operating leaseclassification and calculating straight-line rent; (d) include option periodsin the depreciable lives assigned to leased buildings and leaseholdimprovements and in the calculation of straight-line rent expense only ininstances in the which the exercise of the option period can be reasonablyassured and failure to exercise such options would result in an economicpenalty and, (e) classify the change in deferred liabilities related to tenantimprovement allowances in operating activities in the consolidated statement ofcash flow.

 

The restatement for leaseholds also resulted in restatements of amountspreviously reported for asset impairments.

 

The restatement did not have any impact on the Company's previouslyreported net sales or compliance with any covenant under its debt instruments.The cumulative effect of the accounting correction results in an increase inaccumulated deficit of $285,000 as of the beginning of fiscal 2002.

 

39

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The following is a summary of the significanteffects of the restatement on the Company’s consolidated financial statements(in thousands, except per share data):

 
| ** **                                         | ** ** | **As of December 31, 2003** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                         | ** ** | **As previously  reported**      | ** ** | **Restated** | ** ** |
| Net property  and equipment                        |       | $                                | 73,611     |   | $ | 76,117 |   |
| Liquor  licenses, net                              |       | 2,555                            |       | 2,838 |   |
| Total Assets                                       |       | 125,886                          |       | 128,675 |   |
|                                               |       |                             |       |   |   |
| Total  current liabilities                         |       | 22,539                           |       | 22,522 |   |
| Capital  lease obligations, net of current portion |       | 5,724                            |       | 6,017 |   |
| Other  long-term liabilities                       |       | 4,164                            |       | 8,124 |   |
| Accumulated  deficit                               |       | (15,666                          | )          | (17,113 | ) |
| Total  Liabilities And Stockholders’ Equity   |       | 125,886                          |       | 128,675 |   |
|                                                    |            |                                  |            |  |  |  |  |

 
| ** **                                                         | ** ** | **For the year ended December 31,  2003** | ** ** |
|--------------------------------------------------------------------|------------|------------------------------------------------|------------|
| ** **                                                         | ** ** | **As previously  reported**                    | ** ** | **Restated** | ** ** |
| Operating expenses                                                 |       | $                                              | 113,076    |   | $ | 113,036 |   |
| Deferred  rent, depreciation, amortization and preopening expenses |       | 12,700                                         |       | 14,115 |   |
| Asset  impairment charge                                           |       | 4,682                                          |       | 3,580 |   |
| Income  (loss) from operations                                     |       | 850                                            |       | 577 |   |
| Interest  expense, net                                             |       | (10,101                                        | )          | (10,133 | ) |
| Net loss                                                           |       | $                                              | (8,601     | ) | $ | (8,906 | ) |
|                                                               |       |                                           |       |   |   |
| Basic and  diluted loss per share                                  |       | $                                              | (2.90      | ) | $ | (3.00 | ) |
|                                                               |       |                                           |       |   |   |
| ** **                                                         | ** ** | **For the year ended January 1,  2003**   | ** ** |
| ** **                                                         | ** ** | **As previously  reported**                    | ** ** | **Restated** | ** ** |
| Deferred  rent, depreciation, amortization and preopening expenses |       | 10,733                                         |       | 12,160 |   |
| Income  (loss) from operations                                     |       | 7,146                                          |       | 5,719 |   |
| Net loss                                                           |       | $                                              | (5,138     | ) | $ | (6,565 | ) |
|                                                               |       |                                           |       |   |   |
| Basic and  diluted loss per share                                  |       | $                                              | (1.72      | ) | $ | (2.20 | ) |
|                                                               |       |                                           |       |   |   |

 

40

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| ** **                           | ** ** | **For the year ended December 31, 2003** | ** ** |
|--------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **As previously  reported**                   | ** ** | **Restated** | ** ** |
| Cash flows from operating activities |       | $                                             | 8,408      |   | $ | 9,071 |   |
| Cash flows from investing activities |       | (17,016                                       | )          | (17,674 | ) |
| Cash flows from financing activities |       | 8,122                                         |       | 8,117 |   |
|                                      |            |                                               |            |  |  |  |  |

 
| ** **                           | ** ** | **For the year ended January 1, 2003** | ** ** |
|--------------------------------------|------------|---------------------------------------------|------------|
| ** **                           | ** ** | **As previously  reported**                 | ** ** | **Restated** | ** ** |
| Cash flows from operating activities |       | $                                           | 8,172      |   | $ | 9,169 |   |
| Cash flows from investing activities |       | (16,819                                     | )          | (17,816 | ) |
|                                      |            |                                             |            |  |  |  |  |

 

 

(4)                                  RESTAURANTSALES AND CLOSURES

 

*Brinker Sale*

 

In April 2001, theCompany completed the sale of a number of non-Bertucci’s brand restaurants (the”BrinkerSale”) and recorded a gain of $36.9 million before income taxes. During 2003the Company concluded certain liabilities recorded in connection with theBrinker Sale were no longer required as part of the final settlement andaccordingly reversed $650,000 of accrued liabilities as an additional gain onthe Brinker Sale.

 

*Closed RestaurantsReserve*

* *

Prior to fiscal 2002, the Company had recorded reservesrelating to lease commitments at certain closed locations, including other exitcosts for which the Company was still primarily liable.  It was originally expected the Company wouldbe able to exit these locations, sublease the locations or otherwise bereleased from the related leases.  However, due to market conditions, theCompany was unable to sell, sublease or exit certain of these leases asoriginally anticipated.  Additionally, in 2002, the Company closed onerestaurant and recorded a charge of $236,000 primarily related to estimatedlease termination costs.

 

During 2003, the Company terminated a lease for one of its closedlocations in exchange for issuing a promissory note of $0.4 million, payable invarying installments through 2010. The note does not bear interest, andaccordingly the Company has recorded imputed interest on the note. Theobligation was reclassified from the closed restaurants reserve to otherlong-term obligations in the accompanying balance sheet.

 

41

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Activity within the Company’s closed restaurantsreserve was as follows (dollars in thousands):

 
| ** **                                 | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|--------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Balance, beginning of year                 |       | $        | 1,449      |     | $          | 2,499    |       | $ | 3,352 |   |
| Additonal reserves charged to operations   |       | —   |       | —   |       | 236      |       |
| Promissory note issued                     |       | —   |       | (386     | )          | —   |       |
| Lease and related costs charged to reserve |       | (790     | )          | (664     | )          | (1,089   | )          |
| Balance, end of year                       |       | $        | 659        |     | $          | 1,449    |       | $ | 2,499 |   |
|                                       |       |     |       |     |       |     |       |
| Current portion                            |       | $        | 484        |     | $          | 615      |       | $ | 642 |   |
| Noncurrent portion                         |       | 175      |       | 834      |       | 1,857    |       |
|                                       |       | $        | 659        |     | $          | 1,449    |       | $ | 2,499 |   |

 

The closed restaurant reserve was calculated net of sublease income at 11locations that are partially or fully subleased as of December 29, 2004. TheCompany remains primarily liable for the remaining lease obligations should thesublessor default. Total sublease income excluded from the reserve isapproximately $7.2 million for subleases expiring at various dates through2017. There have been no defaults by sublessors to date.

 

 (5)                               INCOMETAXES

 

The components of the provision for income taxes forthe years ended December 29, 2004, December 31, 2003 and January 1,2003 are as follows (dollars in thousands):

 
| ** **                       | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|----------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Current:                         |       |     |       |     |       |     |       |
| Federal                          |       | $        | —     |     | $          | —   |       | $ | (5,000 | ) |
| State                            |       | —   |       | —   |       | —   |       |
|                             |       | —   |       | —   |       | (5,000   | )          |
| Deferred:                        |       |     |       |     |       |     |       |
| Federal                          |       | (5,864   | )          | (3,749   | )          | 2,115    |       |
| State                            |       | (436     | )          | (267     | )          | 849      |       |
|                             |       | (6,300   | )          | (4,016   | )          | 2,964    |       |
|                             |       |     |       |     |       |     |       |
| Valuation allowance              |       | 6,300    |       | 4,016    |       | 4,733    |       |
|                             |       |     |       |     |       |     |       |
| Total provision for income taxes |       | $        | —     |     | $          | —   |       | $ | 2,697 |   |

 

A reconciliation of the amount computed by applyingthe statutory federal income tax rate of 35% to the loss before income taxprovision for the years ended December 29, 2004, December 31, 2003,and January 1, 2003, respectively, is as follows (dollars in thousands):

 
| ** **                                                             | ** ** | **2004** | ** ** | **2003** | ** ** | **2002** | ** ** |
|------------------------------------------------------------------------|------------|----------|------------|----------|------------|----------|------------|
| Income tax benefit computed at federal  statutory rate                 |       | $        | (5,082     | )        | $          | (3,117   | )          | $ | (1,300 | ) |
| State taxes, including expired state  benefits, net of federal benefit |       | (436     | )          | (267     | )          | (250     | )          |
| FICA tax credit                                                        |       | (782     | )          | (632     | )          | (486     | )          |
| Valuation allowance                                                    |       | 6,300    |       | 4,016    |       | 4,733    |       |
| Income tax provision                                                   |       | $        | —     |     | $          | —   |       | $ | 2,697 |   |

 

42

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Significant items giving rise to deferred tax assetsand deferred tax liabilities at December 29, 2004 and December 31,2003 are as follows (dollars in thousands):

 
| ** **                                            | ** ** | **2004** | ** ** | **2003** | ** ** |
|-------------------------------------------------------|------------|----------|------------|----------|------------|
| Deferred tax assets–                             |       |     |       |     |       |
| Property and equipment, including  impairment charges |       | $        | 4,857      |     | $          | 611 |   |
| Net operating loss and tax credit  carryforwards      |       | 4,356    |       | 2,701    |       |
| Deferred rent                                         |       | 3,195    |       | 2,770    |       |
| Store closing write downs and liabilities             |       | 1,694    |       | 2,265    |       |
| Accrued expenses and other                            |       | 1,042    |       | 550      |       |
| Deferred and accrued compensation                     |       | 201      |       | 200      |       |
|                                                  |       | 15,345   |       | 9,097    |       |
| Deferred tax liabilities–                        |       |     |       |     |       |
| Liquor licenses                                       |       | (296     | )          | (348     | )          |
|                                                  |       | (296     | )          | (348     | )          |
|                                                  |       |     |       |     |       |
| Total net deferred tax assets                         |       | 15,049   |       | 8,749    |       |
| Valuation allowance                                   |       | (15,049  | )          | (8,749   | )          |
|                                                  |       |     |       |     |       |
| Carrying value of net deferred tax assets             |       | $        | —     |     | $          | — |   |

 

The future tax benefitswhich give rise to the deferred tax asset remain statutorily available to theCompany. The Company considers both negative and positive evidence indetermining if a valuation allowance is appropriate. The Company had netoperating losses and tax credit carryforwards of $7.8 million as of December 29,2004 which expire at various dates through 2019. The Company has an historicaltrend of recurring pre-tax losses. Based on the recent losses and thehistorical trend of losses, the Company concluded a valuation allowance for thenet deferred tax asset remains appropriate. Actual amounts realized will be dependent on generating future taxableincome.

 

(6)                                  SENIORNOTES PAYABLE

 

The Company has outstanding10 3/4% Senior Notes with a face value of $85.3 million due 2008 (the “Senior Notes”).Interest on the Senior Notes is payable semi-annually on January 15 and July 15.Through July 15, 2006, the Company may, at its option, redeem any or allof the Senior Notes at face value, plus a declining premium, which is 3.58%through July 14, 2005 and 1.79% from July 15, 2005 through July 15,2006. After July 15, 2006, the Senior Notes may be redeemed at face value.Under certain circumstances, including a change of control or following certainasset sales, the holders of the Senior Notes may require the Company torepurchase the Senior Notes, at a redemption price of 101%. The Senior Notesare fully and unconditionally guaranteed, on a joint and several basis, on anunsecured senior basis, by all of the Company’s subsidiaries. The Company’sparent company has no independent assets or operations. The Senior Notescontain no financial covenants and the Company is in compliance with allnon-financial covenants as of December 29, 2004.

 

43

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Thefair values of the Company’s long-term debt, including current portion at December 29,2004 and December 31, 2003 were as follows (dollars in thousands):

 
| ** **       | ** ** | **2004**             | ** ** | **2003**       | ** ** |
|------------------|------------|----------------------|------------|----------------|------------|
| ** **       | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** | **Carrying  Amount** | ** ** | **Fair Value** | ** ** |
| Senior Notes     |       | $                    | 85,310     |           | $          | 86,556 |   | $ | 85,310 |   | $ | 86,806 |   |
| Promissory Notes |       | 821                  |       | 737            |       | 860 |   | 760 |   |
|             |       | $                    | 86,131     |           | $          | 87,293 |   | $ | 86,170 |   | $ | 87,566 |   |

 

The fair values of the long term obligationsabove were determined based on the present value of remaining principal andinterest payments discounted at the rate of 10.0%, the Company’s estimate of acomparable borrowing rate as of December 29, 2004 and December 31,2003, respectively.  Restricted cash ispresented as current based on the December 2005 letter of credit expirationdate.

 

(7)                                  COMMITMENTSAND CONTINGENCIES

 

*Letter of CreditFacility*

* *

The Company has a $4.0 million (maximum) letter ofcredit facility.  As of December 29, 2004, this facility iscollateralized with $2.4 million of cash restricted from general use. Lettersof credit totaling $2.2 million were outstanding pursuant to this facility on December 29,2004 and expire in December 2005. Restricted cash is presented as currentbased on the December 2005 letter of credit expiration date.

 

*Operating Leases*

* *

The Company has entered into numerous leasearrangements, primarily for restaurant land, equipment and buildings, which arenon-cancelable and expire on various dates through 2027.

 

Some operating leases contain rent escalation clauseswhereby the rent payments increase over the term of the lease. Rent expenseincludes base rent amounts, percentage rent payable periodically, as defined ineach lease, and rent expense accrued to recognize lease escalation provisionson a straight-line basis over the lease term. Rent expense recognized inoperating expenses in the accompanying consolidated statements of income wasapproximately $14.8 million, $13.4 million and $11.4 million for the yearsended December 29, 2004, December 31, 2003 and January 1, 2003respectively. The annual difference of accrued rent versus amounts paid isclassified as deferred rent in the accompanying consolidated statements of operationsand the cumulative difference is included in other long-term liabilities in theaccompanying consolidated balance sheets. Certain leases require the payment ofan additional amount, calculated as a percentage of annual sales, as defined inthe lease agreement, which exceeds annual minimum rentals. Such percentage rentexpense was $154,600, $264,000 and $260,000, for fiscal 2004, 2003, and 2002,respectively.

 

Future minimum rental payments due under allnon-cancelable operating leases as of December 29, 2004 were as follows(dollars in thousands):

 
| **Year-**  | ** ** | ** ** | ** ** |
|------------|------------|------------|------------|
| 2005       |       | $          | 15,655     |   |
| 2006       |       | 15,645     |       |
| 2007       |       | 14,211     |       |
| 2008       |       | 12,474     |       |
| 2009       |       | 11,303     |       |
| Thereafter |       | 50,705     |       |
|       |       | $          | 119,993    |   |

 

In addition to the leases summarized above, theCompany is primarily liable on 13 locations for approximately $7.8 million ingross lease commitments over the remaining terms of the leases. Eleven of thoselocations are subleased to tenants under sublease obligations aggregating $7.2million. The difference of $649,000 represents the Company’s closed restaurantreserve at December 29, 2004.

 

44

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*Capital Leases*

* *

During 2003, the Companycompleted two sale-leaseback transactions on four restaurant properties. In thefirst transaction, the Company sold three properties for $7.2 million in cash(net of fees of approximately $300,000), resulting in a gain of $2.2 million.The gain has been deferred and will be amortized into income over the leaseterm. The properties sold included land and buildings at each location whichthe Company agreed to lease back for a 20-year period. The portion of thecontractual obligation relating to the buildings is recorded at its net presentvalue of $3.8 million (at inception) as an obligation under a capital lease.The land portion of the obligation is classified as an operating lease,requiring future payments to be classified as operating expenses. In the secondtransaction, the Company sold a property consisting of land and a building for$1.8 million in cash (net of fees of approximately $210,000). In connectionwith this transaction the Company recorded a charge of $59,000 representing theexcess of the property’s carrying value over its fair market value. The fairvalue of the land is less than 25% of the transaction value and therefore theentire contractual obligation is recorded at its net present value of $1.9million (at inception) as a capital lease obligation. The Company agreed tolease back the property for a 20-year period. Both leases include two five-yearrenewal terms, which the Company may exercise at its option. The Company isrequired to maintain the properties for the term of the leases and to pay alltaxes, insurance, utilities and other costs associated with those properties. Underthe leases, the Company agreed to customary indemnities and, in the event theCompany defaults on any lease, the landlord may terminate the lease, acceleraterental payments and collect liquidated damages.

 

Payments under capital lease commitments for these restaurantsare as follows (dollars in thousands):

 
| **Year**                          | ** ** | ** ** | ** ** |
|-----------------------------------|------------|------------|------------|
| 2005                              |       | $          | 679        |   |
| 2006                              |       | 693        |       |
| 2007                              |       | 704        |       |
| 2008                              |       | 715        |       |
| 2009                              |       | 724        |       |
| Thereafter                        |       | 9,913      |       |
|                              |       | 13,428     |       |
| Less amount representing interest |       | 7,252      |       |
| Present value of minimum payments |       | $          | 6,176      |   |
| Current portion                   |       | 74         |       |
| Long-term portion                 |       | 6,102      |       |
|                              |       | $          | 6,176      |   |

 

*Contingencies*

* *

The Company is subject to various legal proceedingsthat arise in the ordinary course of business. Based on consultation with theCompany’s legal counsel, management believes that the amount of ultimateliability with respect to these actions will not be material to the financialposition, cash flows or results of operations of the Company.

 

(8)                                  RELATEDPARTIES

 

Under the terms of the Company’s agreements, the stockholders haveconsented to the payment of an ongoing financial consulting fee to JacobsonPartners, a stockholder of the Company. Fees of $250,000 were paid to JacobsonPartners for each of the fiscal years ended December 29, 2004, December 31,2003 and January 1, 2003, respectively. Additionally, the Board ofDirectors approved an additional fee of $175,000 paid in fiscal 2004. All feesare included in general and administrative expenses in the accompanyingconsolidated statements of operations.

 

JPAFII owns a controlling interest in the Company. JPAF, Limited Partnership, aDelaware limited partnership (“JPAF LP”) is the General Partner of JPAFII.  The General Partner of JPAF LP is JPAF, Inc., a Delawarecorporation. Benjamin R. Jacobson, Chairman of the Company, is the presidentand majority shareholder of JPAF, Inc.  J.P. Acquisition Fund III,L.P., a Delaware limited partnership (“JPAF III”), owns a controlling interestin Taco Bueno. The General Partner of JPAF III is JPAF III, LLC, a Delawarelimited liability company (“JPAF III, LLC”).  Jacobson Partners is thesole shareholder of JPAF III, LLC. Mr. Jacobson is the Managing GeneralPartner of Jacobson Partners. Stephen V. Clark, President and Chief ExecutiveOfficer of the Company, and David G. Lloyd,

 

45

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ChiefFinancial Officer of the Company, hold similar positions with Taco Bueno. Noagreement exists, however, between the two entities as to the allocation ofservices by Mr. Clark or Mr. Lloyd.  Effective December 30,2004 compensation arrangements for these individuals will be borne equally byboth companies, an arrangement approved by each company’s Board of Directors.

 

InFebruary 2002, the Company extended loans to 14 members of management(including eight officers). The demand notes accrued interest at 8%, payablequarterly. The demand notes totaled $157,000 at January 1, 2003 and werepaid in full with accrued interest as of February 13, 2003.

 

(9)                                  401(k)PROFIT SHARING PLAN AND DEFERRED COMPENSATION PLAN

 

The Company maintains a defined contribution planknown as the Bertucci’s 401(k) Plan. Under the Bertucci’s 401(k) Plan,substantially all salaried employees of the Company may defer a portion oftheir current salary, on a pretax basis. The Company makes a matching contributionto the Bertucci’s 401(k) Plan that is allocated, based on a formula as definedby the Bertucci’s 401(k) Plan, to Plan participants. Matching contributionsmade by the Company for the years ended December 29, 2004, December 31,2003 and January 1, 2003 were approximately $98,000, $81,000 and $27,000respectively.

 

In 1999, the Company established the Bertucci’s Corporation ExecutiveSavings and Investment Plan, a non-qualified compensation plan, to which highlycompensated executives of the Company may elect to defer a portion of theirsalary and/or earned bonus. The Company replaced the original trustee of theExecutive Savings and Investment Plan, Scudder, in December 2004 withReliance pursuant to a new Trust Agreement. The Trust Agreement betweenthe Company and Reliance is for the purpose of paying benefits under ExecutiveSavings and Investment Plan and its terms are substantially similar to thetrust agreement that the Company entered into with Scudder in 1999. Anirrevocable grantor trust has been established under the Trust Agreement withthe Company as grantor.

 

The trust assets are held separately from other funds of the Company,but remain subject to claims of the Company’s general creditors in the event ofthe Company’s insolvency. As of December 29, 2004, there were 14participants in the plan with assets in the trust with an aggregate marketvalue of approximately $378,000. The assets of the trust are included in otherassets in the consolidated balance sheet. A corresponding liability is includedin other long term liabilities.

 

(10)                            COMMONSTOCK AND STOCK OPTION PLAN

 

On September 15, 1997, the Board of Directors ofthe Company established the 1997 Equity Incentive Plan, which included anonqualified stock option plan (the “Option Plan”), for certain key employeesand directors. The Option Plan is administered by the Board of Directors of theCompany and may be modified or amended by the Board of Directors in anyrespect. As of December 29, 2004 there were 201,829 authorized shares remainingfor issuance under the Option Plan.

 

The options granted under the Option Plan areexercisable as follows:

 
| Two years beyond option grant date   |   | 25  | % |
|--------------------------------------|--------|-----|---|
| Three years beyond option grant date |   | 50  | % |
| Four years beyond option grant date  |   | 75  | % |
| Five years beyond option grant date  |   | 100 | % |

 

A summary of the Option Plan activity for the yearsended December 29, 2004, December 31, 2003 and January 1, 2003is presented in the table and narrative below.

 

46

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| ** **                                          | ** ** | **2004**      | ** ** | **2003**                              | ** ** | **2002**      | ** ** |
|-----------------------------------------------------|------------|---------------|------------|---------------------------------------|------------|---------------|------------|
| ** **                                          | ** ** | **Shares**    | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares**    | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Shares** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| Outstanding at beginning of year                    |       | 594,396       |       | $                                     | 15.42      |          | 652,549    |   | $ | 15.44 |   | 713,973 |   | $ | 15.19 |   |
| Granted                                             |       | 111,000       |       | $                                     | 17.51      |          | 40,079     |   | $ | 14.48 |   | 26,000 |   | $ | 17.51 |   |
| Exercised                                           |       | (1,125        | )          | $                                     | (9.22      | )             | —     |   | $ | — |   | — |   | $ | — |   |
| Forfeited                                           |       | (156,100      | )          | $                                     | (16.80     | )             | (98,232    | ) | $ | (15.13 | ) | (87,424 | ) | $ | (13.38 | ) |
| Outstanding at end of year                          |       | 548,171       |       | $                                     | 15.47      |          | 594,396    |   | $ | 15.42 |   | 652,549 |   | $ | 15.44 |   |
|                                                |       |          |       |                                  |       |          |       |   |   |   |   |   |   |
| Exercisable at end of year                          |       | 256,377       |       | $                                     | 13.61      |          | 294,603    |   | $ | 14.12 |   | 322,714 |   | $ | 14.28 |   |
|                                                |       |          |       |                                  |       |          |       |   |   |   |   |   |   |
| Range of Exercise Price per share                   |       | $9.22 -$17.51 |       | $9.22 -$17.51                         |       | $9.22 -$17.51 |       |
| Weighted average fair value of each option  granted |       |          |       | $                                     | —     |          |       |   | $ | 2.83 |   |   |   | $ | 3.53 |   |

 

The 548,171 shares of Common Stock subject to outstandingoptions at December 29, 2004 have a remaining weighted average contractuallife of approximately 5.8 years. Options granted under the Stock Option Plan todate expire 90 days following either the fifth or the tenth anniversary of thedate of the grant.

 

The fair value of each option grant is estimated onthe date of grant using the Black-Scholes option pricing model. Weightedaverage risk-free interest rates of 3.53%, 3.18% and 2.91% were used in 2004, 2003and 2002, respectively. Weighted average expected lives of five years and anexpected volatility of 0% were used in all three years.

 

The Company’s shareholders are parties tovarious shareholder agreements which restrict their ability to transfer theirshares without the approval of the Company’s Board of Directors. TheShareholder Agreements provide, among other things, that (i) a shareholdermay not transfer his or its shares in the Company, whether voluntarily or byoperation of law, other than in certain limited circumstances specifiedtherein, including transfers through a right of first refusal procedure,distributions by certain legal entities to the constituents of such entities(i.e. a partnership to its partners), transfers by will or intestatesuccession, transfers approved by the Board to an affiliate of a shareholder orto another shareholder, transfers to family members or trusts for theirbenefit, and any transfer unanimously approved by the Board, (ii) theCompany has the option to purchase the shares of any shareholder who is anemployee of the Company following the termination of such shareholder’semployment with the Company for any reason at a purchase price equal to thefair market value or original purchase price (plus accrued interest in certaincircumstances) depending upon the reason for such termination, (iii) theCompany has the option to purchase the shares of any shareholder who is anemployee of the Company following certain transfer events, including suchshareholders’ bankruptcy or a court-ordered transfer of such shareholder’sstock, (iv) if the Company fails to exercise its option to purchase asdescribed in the immediately preceding clause (iii), the remaining shareholdershave the option to purchase the applicable shares, (v) in the event anemployee shareholder leaves the Company due to death, disability or hardshipor, with respect to certain shares, is terminated by the Company without cause,such shareholder has a one-time option to require the Company to purchase suchshareholder’s shares at the greater of fair value or the original purchaseprice, subject to certain approval by the Board of Directors, excludingeffected employees, (vi) no transfer of shares may occur unless thetransferee thereof agrees to be bound by the terms of the ShareholdersAgreement and (vii) all share certificates must bear customary legends andall share transfers must be in compliance with applicable securities laws.

 

Additionally, the Company has the option to purchaseshares held by employee stockholders (approximately 70,629 shares at December 29,2004) upon their termination at a purchase price equal to either fair marketvalue or the original purchase price (plus accrued interest in certaincircumstances), depending on the reason for termination. Employee shareholders,or their estate, may require the Company to purchase their shares upon theirdeath or disability and with respect to certain shares if they are terminatedwithout cause, at the greater of fair value or the original purchase price,subject to certain approval by the Board of Directors.

 

47

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(11)                            QUARTERLYRESULTS

 

QUARTERLY STATEMENT OF OPERATIONS (UNAUDITED)

BERTUCCI’S CORPORATION

(Inthousands except share and per share data)

 
| ** **                                                         | ** ** | **Quarter 1**      | ** ** | **Quarter 2**     | ** ** | **Quarter 3**          | ** ** | **Quarter 4**         | ** ** | **Year**              | ** ** |
|--------------------------------------------------------------------|------------|--------------------|------------|-------------------|------------|------------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **March 31,** | ** ** | **June 30,** | ** ** | **September 29,** | ** ** | **December 29,** | ** ** | **December 29,** | ** ** |
| ** **                                                         | ** ** | **2004**           | ** ** | **2004**          | ** ** | **2004**               | ** ** | **2004**              | ** ** | **2004**              | ** ** |
| ** **                                                         | ** ** | **(Restated)***    | ** ** | **(Restated)***   | ** ** | **(Restated)***        | ** ** | ** **            | ** ** | ** **            | ** ** |
| Net sales                                                          |       | $                  | 49,426     |              | $          | 51,754                 |       | $                     | 49,260     |                  | $          | 49,968 |   | $ | 200,408 |   |
|                                                               |       |               |       |              |       |                   |       |                  |       |                  |       |
| Cost of sales and expenses:                                        |       |               |       |              |       |                   |       |                  |       |                  |       |
| Cost of sales                                                      |       | 11,556             |       | 12,883            |       | 12,256                 |       | 12,536                |       | 49,231                |       |
| Operating expenses                                                 |       | 29,627             |       | 33,469            |       | 29,509                 |       | 29,451                |       | 122,056               |       |
| General and administrative expenses                                |       | 3,093              |       | 3,478             |       | 2,655                  |       | 3,839                 |       | 13,065                |       |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 3,309              |       | 3,261             |       | 3,379                  |       | 3,267                 |       | 13,216                |       |
| Asset impairment charge                                            |       | —             |       | 3,894             |       | —                 |       | 2,855                 |       | 6,749                 |       |
| Total cost of sales and expenses                                   |       | 47,585             |       | 56,985            |       | 47,799                 |       | 51,948                |       | 204,317               |       |
|                                                               |       |               |       |              |       |                   |       |                  |       |                  |       |
| Income (loss) from operations                                      |       | 1,841              |       | (5,231            | )          | 1,461                  |       | (1,980                | )          | (3,909                | )          |
| Other expense:                                                     |       |               |       |              |       |                   |       |                  |       |                  |       |
| Interest expense, net                                              |       | (2,638             | )          | (2,661            | )          | (2,664                 | )          | (2,650                | )          | (10,613               | )          |
| Other expense                                                      |       | (2,638             | )          | (2,661            | )          | (2,664                 | )          | (2,650                | )          | (10,613               | )          |
| Loss before income tax provision                                   |       | (797               | )          | (7,892            | )          | (1,203                 | )          | (4,630                | )          | (14,522               | )          |
|                                                               |       |               |       |              |       |                   |       |                  |       |                  |       |
| Net loss                                                           |       | $                  | (797       | )                 | $          | (7,892                 | )          | $                     | (1,203     | )                     | $          | (4,630 | ) | $ | (14,522 | ) |
|                                                               |       |               |       |              |       |                   |       |                  |       |                  |       |
| Basic and diluted loss per share                                   |       | $                  | (0.27      | )                 | $          | (2.68                  | )          | $                     | (0.41      | )                     | $          | (1.58 | ) | $ | (4.93 | ) |
|                                                               |       |               |       |              |       |                   |       |                  |       |                  |       |
| Weighted average shares outstanding - basic  and diluted           |       | 2,958,436          |       | 2,945,040         |       | 2,944,337              |       | 2,928,740             |       | 2,943,841             |       |

 

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*                 Quarterlyfinancial information has been restated to reflect the correction of an errorrelated to lease accounting, as discussed in Note 3.

 

 

48

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| ** **                                                         | ** ** | **Quarter 1**              | ** ** | **Quarter 2**              | ** ** | **Quarter 3**              | ** ** | **Quarter 4**              | ** ** | **Year**                   | ** ** |
|--------------------------------------------------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|----------------------------|------------|
| ** **                                                         | ** ** | **April 2,**               | ** ** | **July 2,**                | ** ** | **October 1,**             | ** ** | **December 31,**           | ** ** | **December 31,**           | ** ** |
| ** **                                                         | ** ** | **2003**                   | ** ** | **2003**                   | ** ** | **2003**                   | ** ** | **2003**                   | ** ** | **2003**                   | ** ** |
|                                                               |       | **(Previously  Reported)** |       | **(Previously  Reported)** | ** ** | **(Previously  Reported)** | ** ** | **(Previously  Reported)** | ** ** | **(Previously  Reported)** |       |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Net sales                                                          |       | $                          | 42,674     |                       | $          | 47,587                     |       | $                          | 47,381     |                       | $          | 48,530 |   | $ | 186,172 |   |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Cost of sales and expenses:                                        |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Cost of sales                                                      |       | 9,461                      |       | 11,019                     |       | 11,402                     |       | 11,662                     |       | 43,544                     |       |
| Operating expenses                                                 |       | 26,475                     |       | 28,418                     |       | 28,833                     |       | 29,350                     |       | 113,076                    |       |
| General and administrative expenses                                |       | 3,179                      |       | 2,856                      |       | 2,554                      |       | 2,731                      |       | 11,320                     |       |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 2,964                      |       | 3,272                      |       | 3,184                      |       | 3,280                      |       | 12,700                     |       |
| Asset impairment charge                                            |       | —                     |       | —                     |       | 4,682                      |       | —                     |       | 4,682                      |       |
| Total cost of sales and expenses                                   |       | 42,079                     |       | 45,565                     |       | 50,655                     |       | 47,023                     |       | 185,322                    |       |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Income (loss) from operations                                      |       | 595                        |       | 2,022                      |       | (3,274                     | )          | 1,507                      |       | 850                        |       |
| Other (expense) income:                                            |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Gain on Brinker Sale                                               |       | —                     |       | —                     |       | —                     |       | 650                        |       | 650                        |       |
| Interest expense, net                                              |       | (2,398                     | )          | (2,498                     | )          | (2,615                     | )          | (2,590                     | )          | (10,101                    | )          |
| Other (expense) income                                             |       | (2,398                     | )          | (2,498                     | )          | (2,615                     | )          | (1,940                     | )          | (9,451                     | )          |
| (Loss) income before income tax provision                          |       | (1,803                     | )          | (476                       | )          | (5,889                     | )          | (433                       | )          | (8,601                     | )          |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Income tax benefit                                                 |       | —                     |       | —                     |       | —                     |       | —                     |       | —                     |       |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Net (loss) income                                                  |       | $                          | (1,803     | )                          | $          | (476                       | )          | $                          | (5,889     | )                          | $          | (433 | ) | $ | (8,601 | ) |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Basic and diluted (loss) income per share                          |       | $                          | (0.61      | )                          | $          | (0.16                      | )          | $                          | (1.99      | )                          | $          | (0.15 | ) | $ | (2.90 | ) |
|                                                               |       |                       |       |                       |       |                       |       |                       |       |                       |       |
| Weighted average shares outstanding - basic  and diluted           |       | 2,978,955                  |       | 2,976,166                  |       | 2,963,674                  |       | 2,963,371                  |       | 2,970,403                  |       |
|                                                                    |            |                            |            |                            |            |                            |            |                            |            |                            |            |  |  |  |  |  |  |  |  |  |

 

 
| ** **                                                         | ** ** | **Quarter 1**     | ** ** | **Quarter 2**    | ** ** | **Quarter 3**       | ** ** | **Quarter 4**         | ** ** | **Year**              | ** ** |
|--------------------------------------------------------------------|------------|-------------------|------------|------------------|------------|---------------------|------------|-----------------------|------------|-----------------------|------------|
| ** **                                                         | ** ** | **April 2,** | ** ** | **July 2,** | ** ** | **October 1,** | ** ** | **December 31,** | ** ** | **December 31,** | ** ** |
| ** **                                                         | ** ** | **2003**          | ** ** | **2003**         | ** ** | **2003**            | ** ** | **2003**              | ** ** | **2003**              | ** ** |
| ** **                                                         | ** ** | **(Restated)***   | ** ** | **(Restated)***  | ** ** | **(Restated)***     | ** ** | **(Restated)***       | ** ** | **(Restated)***       | ** ** |
| Net sales                                                          |       | $                 | 42,674     |             | $          | 47,587              |       | $                     | 47,381     |                  | $          | 48,530 |   | $ | 186,172 |   |
|                                                               |       |              |       |             |       |                |       |                  |       |                  |       |
| Cost of sales and expenses:                                        |       |              |       |             |       |                |       |                  |       |                  |       |
| Cost of sales                                                      |       | 9,461             |       | 11,019           |       | 11,402              |       | 11,662                |       | 43,544                |       |
| Operating expenses                                                 |       | 26,471            |       | 28,407           |       | 28,821              |       | 29,337                |       | 113,036               |       |
| General and administrative expenses                                |       | 3,179             |       | 2,856            |       | 2,554               |       | 2,731                 |       | 11,320                |       |
| Deferred rent, depreciation, amortization  and preopening expenses |       | 3,340             |       | 3,774            |       | 3,707               |       | 3,294                 |       | 14,115                |       |
| Asset impairment charge                                            |       | —            |       | —           |       | 3,580               |       | —                |       | 3,580                 |       |
| Total cost of sales and expenses                                   |       | 42,451            |       | 46,056           |       | 50,064              |       | 47,024                |       | 185,595               |       |
|                                                               |       |              |       |             |       |                |       |                  |       |                  |       |
| Income (loss) from operations                                      |       | 223               |       | 1,531            |       | (2,683              | )          | 1,506                 |       | 577                   |       |
| Other (expense) income:                                            |       |              |       |             |       |                |       |                  |       |                  |       |
| Gain on Brinker Sale                                               |       | —            |       | —           |       | —              |       | 650                   |       | 650                   |       |
| Interest expense, net                                              |       | (2,401            | )          | (2,508           | )          | (2,625              | )          | (2,599                | )          | (10,133               | )          |
| Other expense                                                      |       | (2,401            | )          | (2,508           | )          | (2,625              | )          | (1,949                | )          | (9,483                | )          |
| Loss before income tax provision                                   |       | (2,178            | )          | (977             | )          | (5,308              | )          | (443                  | )          | (8,906                | )          |
|                                                               |       |              |       |             |       |                |       |                  |       |                  |       |
| Net loss                                                           |       | $                 | (2,178     | )                | $          | (977                | )          | $                     | (5,308     | )                     | $          | (443 | ) | $ | (8,906 | ) |
|                                                               |       |              |       |             |       |                |       |                  |       |                  |       |
| Basic and diluted loss per share                                   |       | $                 | (0.73      | )                | $          | (0.33               | )          | $                     | (1.79      | )                     | $          | (0.15 | ) | $ | (3.00 | ) |
|                                                               |       |              |       |             |       |                |       |                  |       |                  |       |
| Weighted average shares outstanding - basic  and diluted           |       | 2,978,955         |       | 2,976,166        |       | 2,963,674           |       | 2,963,371             |       | 2,970,403             |       |

 

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*                 Quarterlyfinancial information has been restated to reflect the correction of an errorrelated to lease accounting, as discussed in Note 3.

 

 

49

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**EXHIBIT LISTING AND INDEX**

 
| **Exhibit No.** | ** ** | **Description** |
|----------------------|------------|-----------------|
| 2.1 (a)              |       |            | Agreement and Plan of Merger, dated as of May 13, 1998 among  Bertucci’s, Inc., NE Restaurant Company, Inc. (“NERCO”) and NERC  Acquisition Corp. |
| 3.1 (a)              |       |            | Certificate of Incorporation of NERCO. |
| 3.2 (a)              |       |            | Certificate of Amendment of Certificate of Incorporation of NERCO,  dated August 1, 1998. |
| 3.3 (a)              |       |            | Certificate of Amendment of Certificate of Incorporation of NERCO,  dated August 20, 1998. |
| 3.4 (a)              |       |            | By-laws of NERCO. |
| 3.25 (d)             |       |            | Certificate of Amendment of Certificate of Incorporation of NERCO, dated  August 16, 2001. |
| 4.1 (a)              |       |            | Indenture, dated July 20, 1998 between NERCO and United States  Trust Company of New York (“U.S. Trust”) as Trustee (including the form of 10  3⁄4% Senior Note due July 15, 2008). |
| 4.2 (a)              |       |            | Supplemental Indenture, dated as of July 21, 1998 by and among  Bertucci’s, Inc., Bertucci’s Restaurant Corp., Bertucci’s Securities  Corporation, Berestco, Inc., Sal & Vinnie’s Sicilian  Steakhouse, Inc., Bertucci’s of Anne Arundel County, Inc.,  Bertucci’s of Columbia, Inc., Bertucci’s of Baltimore County, Inc.,  Bertucci’s of Bel Air, Inc. and Bertucci’s of White Marsh, Inc.  (collectively, the “Guarantors”), NERCO and U.S. Trust |
| 4.3 (a)              |       |            | Purchase Agreement, dated July 13, 1998 by and among NERCO,  Chase Securities Inc. and BancBoston Securities Inc. |
| 4.4 (a)              |       |            | Amendment No. 1 to the Purchase Agreement, dated July 21,  1998 by and among NERCO, Chase Securities Inc., BancBoston Securities Inc.  and the Guarantors |
| 4.5 (a)              |       |            | Exchange and Registration Rights Agreement, dated July 20, 1998  by and among NERCO, Chase Securities Inc. and BancBoston Securities Inc. |
| 4.6 (a)              |       |            | Amendment No. 1 to Exchange and Registration Rights Agreement,  dated July 21, 1998 by and among NERCO, Chase Securities Inc.,  BancBoston Securities Inc. and the Guarantors. |
| 4.7 (a)              |       |            | Form of Stockholders Agreement, dated as of December 31,  1993 between the stockholders of NERCO and NERCO. |
| 4.8 (a)              |       |            | Form of Stockholders Agreement, dated September 15, 1997 by  and among certain stockholders of NERCO and NERCO. |
| 4.9 (d)              |       |            | Form of Stockholders Agreement, dated March 14, 2000 by and  among certain stockholders of NERCO and NERCO. |
| 10.1 (a)             |       |            | 1997 Equity Incentive Plan of NERCO, dated September 15, 1997  for certain key employees and directors of NERCO.* |
| 10.21 (a)            |       |            | Financial Advisory Services Agreement, dated July 21, 1998 by  and between the Company and Jacobson Partners. |
| 10.30 (b)            |       |            | NERCO Savings and Investment Plan dated as of April 29, 1999 |
| 10.31 (b)            |       |            | NE Restaurant Company, Inc. Executive Savings and Investment  Plan dated September 2, 1999 |
| 10.32 (b)            |       |            | Primary Distribution Agreement dated as of May 13, 1999 by and  between Maines Paper & Food Service, Inc. and Bertucci’s  Corporation |
| 14.1  (e)            |       |            | Code  of Ethics for Senior Financial Officers. |
| 21.1  (e)            |       |            | Subsidiaries  of Registrant. |
| 31.1  (f)            |       |            | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by  Stephen V. Clark. |
| 31.2  (f)            |       |            | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by  David G. Lloyd. |
| 99-1  (c)            |       |            | Asset  Purchase and Sales Agreement dated November 20, 2000 and fully executed  on April 12, 2001. |

 

----

(a)          Filed as an Exhibit, with the same Exhibit number,to Amendment No. 3 to the Registrant’s registration statement on Form S-4filed with the Securities and Exchange Commission on November 12, 1998.

(b)         Filed as an Exhibit, with the same Exhibit numberto Registrant’s quarterly report on form 10-Q filed with the Securities andExchange Commission on May 15, 2000.

(c)          Filed as an Exhibit, with the same Exhibit numberto Registrant’s quarterly report on form 10-Q filed with the Securities andExchange Commission on May 18, 2001.

(d)         Filed as an Exhibit, with the same Exhibit numberto Registrant’s annual report on form 10-K filed with the Securities andExchange Commission on April 1, 2002.

(e)          Filed as an Exhibit, with the same Exhibit numberto Registrant’s annual report on form 10-K filed with the Securities andExchange Commission on March 28, 2004.

(f)            Filed herewith.

*                 Managementcompensation plan or arrangement.

 

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