**SECURITIESAND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

**FORM 10-K**

 

| **ý****  ANNUAL REPORT VOLUNTARILY FILED PURSUANT  TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934**                                                                          |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                   |
| **For the fiscal year ended December 31, 2003**                                                                                                                                                        |
|                                                                                                                                                                                                   |
| **OR**                                                                                                                                                                                                 |
|                                                                                                                                                                                                   |
| **o****   TRANSITION REPORT PURSUANT TO SECTION 13  OR 15(d) OF THE  SECURITIES 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 Section12(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 13 or15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.

 

Yes ý    Noo

 

Indicate by check mark if disclosure of delinquent filers pursuant toItem 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant’s knowledge, in definitive proxy or informationstatements incorporated by reference in Part III of this form 10-K or anyamendment to this Form 10-K.  ý

 

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

 Yes o           Noý

 

Documents Incorporated By Reference

None

 

 

----

 

**CAUTIONARYSTATEMENT FOR THE PURPOSES OF THE “SAFE HARBOR” PROVISIONS OF THEPRIVATE SECURITIES LITIGATION REFORM ACT OF 1995.**

 

*All statements other than statements of historical factsincluded in this Annual Report on Form 10-K, including, without limitation,statements set forth under “Management’s Discussion and Analysis of FinancialCondition and Results of Operations” regarding the Company’s future financialposition, business strategy, budgets, projected costs and plans and objectivesof management for future operations, are forward-looking statements.  In addition, forward-looking statements generallycan be identified by the use of forward-looking terminology such as “may,”  “will,” “expect,” “intend,” “estimate,”“anticipate” or “believe” or the negative thereof or variations thereon orsimilar terminology.  Although theCompany believes that the expectations reflected in such forward-lookingstatements will prove to have been correct, it can give no assurance that suchexpectations will prove to have been correct. Investors are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof.  The Companyundertakes no obligation to publicly release any revisions to theseforward-looking statements to reflect events or circumstances after the datehereof or to reflect the occurrence of unanticipated events.  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’sCorporation, formerly NE Restaurant Company, Inc. (the “Company”), through itswholly owned subsidiaries Bertucci’s Restaurant Corp. and Bertucci’s, Inc.(“Bertucci’s”), owns and operates a full service casual dining restaurantconcept under the name Bertucci’s Brick Oven Pizzeria® (“Bertucci’s restaurants”).  The Company was originally formed as alimited partnership in 1991 to acquire 15 Chili’s Bar & Grill restaurants(“Chili’s”) from a prior franchisee. The Company was incorporated in Delaware in 1994.  The Company grew through the addition of 25new Chili’s and seven On The Border restaurants in New England.  The Company developed and operated theserestaurant franchises under franchise agreements with Brinker International,Inc., a publicly-owned company (“Brinker” or the “Franchisor”).

 

InJuly 1998, the Company completed its acquisition of Bertucci’s RestaurantCorp.’s parent entity, Bertucci’s, Inc., a publicly-owned restaurant company,for a purchase price, net of cash received, of approximately $89.4 million (the“Acquisition”).  The Company financedthe Acquisition primarily through the issuance of $100 million of 10 3/4%senior notes due 2008 (the “Senior Notes”). The Acquisition included 90 Bertucci’s restaurants and one Sal &Vinnie’s restaurant.

 

InApril 2001, the Company completed the sale of 40 Chili’s and seven On TheBorder restaurants to Brinker (the “Brinker Sale”) for a total consideration of$93.5 million.  Brinker acquired the inventory, facilities, equipment andmanagement teams 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 restaurants.  TheCompany recorded a gain in 2001 on the Brinker Sale of $36.9 million beforeincome taxes.  During 2003 the Companyconcluded certain liabilities recorded in connection with the Brinker Sale wereno longer required and accordingly reversed $650,000 of accrued liabilities asan additional gain on the Brinker Sale.

 

InOctober 2001, the Company formed Bertucci’s Franchise Corp., a Delawarecorporation, for the purpose of selling development and licensing rights toinvestors wishing to operate Bertucci’s restaurants.  Bertucci’s Franchise Corp. is a wholly owned subsidiary of theCompany.  Since its inception,Bertucci’s Franchise Corp. has incurred organization and operating expenses buthas not sold any development or licensing rights.

 

Asof December 31, 2003 the Company owned and operated 89 full-service, casualdining, Italian-style restaurants under the name Bertucci’s Brick OvenPizzeria® located primarily in New England and Mid-Atlantic United States.

 

2

----

 

**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 and an 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 that Bertucci’s original recipes and brick-ovenbaking techniques 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 $14.99 for dinnerentrees.  Most items on the menu may bepurchased for take-out service or delivery, which together accounted forapproximately 22% of net sales in fiscal 2003.

 

**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 brickovens.  Ingredients are displayed andfood is prepared on polished granite counters located in front of the brickovens, in plain view of diners. Bertucci’s restaurants historically have been built in varying sizes anddesigns, with no two interior decors exactly alike.  Most restaurantswere re-imaged in recent years and feature a relaxing Tuscan atmosphere withsimilar and consistent elements.  Becausemanagement believes unit economics benefit from a standardized design, in 2000the Company developed a prototype design incorporating approximately 5,400square feet and 170 seats.  The firstrestaurant with this prototypical design opened in Danbury, Connecticut in lateJanuary 2001.  The Company has sincemodified the prototype design which currently envisions approximately 5,800square feet and 200 seats per location. The first restaurant with the modifiedprototypical design opened in Christiana, Delaware in December 2003.  Key features of the prototype design are aseparate carryout designation, a bar/waiting area and modification of interiorelements, including new floor and ceiling materials and new furniture.

 

**RestaurantDevelopment**

 

*Expansion. *The Companyexpects to grow through the opening of new Bertucci’s restaurants over the nextseveral years.  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.

 

*SiteSelection and Construction. *Management’ssite selection strategy for new restaurants focuses on high-density,high-traffic, high-visibility sites which are, for the most part, positionedwithin existing markets to take advantage of certain operationalefficiencies.  Management seeks outsites with a mixture of retail, office, residential and entertainmentconcentration which promote both lunch and dinner business.  Management devotes significant time andresources to identify and analyze potential sites, as it believes that siteselection is crucial to its success. Management also believes that multiple locations focused in definedgeographic areas will result in increased market penetration and brandrecognition, and will permit advertising, management, purchasing andadministrative

 

3

----

 

efficiencies.  The typical time period required to select asite and build and open a full-service restaurant averages 15 to 18 months.

 

*Franchising. *Managementbelieves that franchising can be an efficient vehicle to develop restaurants inmarkets far from the Company’s current locations.  Although the Company has not been aggressively pursuing afranchise strategy, it believes any such plan should be consistent withBertucci’s corporate plan of quickly establishing strong market penetration andmedia efficiency in franchised markets. Compared to the Company’s traditional growth strategies,**t**heCompany believes franchising can provide an alternative development strategythat requires minimal cash outlay, although additional costs would be requiredin franchise sales, operations, marketing, purchasing, and training.  The Company anticipates, however, thatroyalty fees could exceed these costs after a reasonable start-up period.

 

**QualityControl**

 

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 threeregional chefs who provide support to restaurant management and ensure qualityof food preparation.

 

**ManagementIncentive Programs**

 

Managementhas developed a profit-based reward system for its restaurant level managerswith bonus levels directly tied to each restaurant’s quality of food andservice as well as restaurant profitability. The Company believes this incentive program has contributedsignificantly to the entrepreneurial spirit of its restaurants and, ultimately,to overall guest satisfaction and Company profitability.  In 2001, Bertucci’s implemented a ManagingPartner (“MP”) Program which allows general managers with over two years’experience at Bertucci’s to earn a higher rate of bonus, options for theCompany’s common stock and other benefits. The Company believes that the combination of these incentives improvesstability of the restaurant management teams and such stability improves salesand profits.

 

**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 traineesin detailed, concept-specific food preparation standards and procedures as wellas administrative and human resource functions.  This training is largely conducted at specified restaurants whichare designated as ‘‘training restaurants’’ and also incorporates trainingmanuals and other written guides.  Atthe end of the process, trainee skills are tested by a variety of meansincluding a full-day written examination. Initial instruction is typically followed up by periodic supplementaltraining.  When the Company opens a newrestaurant, management positions are typically staffed with personnel who havehad previous experience in a management position at another Bertucci’srestaurant.  In addition, a highlyexperienced training team assists in opening the restaurant.  Prior to opening, all hourly staff personnelundergo a week of intensive training conducted by the restaurant training team.

 

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, computersand information systems, responsible alcohol service and applied foodservicesanitation.  Management believes thatthe testing during Bertucci’s University is

 

4

----

 

rigorousand that the managers who graduate from this program are better prepared forrunning Bertucci’s restaurants. Since its implementation there have been 251graduates of Bertucci’s University.

 

**Advertisingand Marketing**

 

TheCompany’s overall marketing objective is to grow brand recognition, therebyincreasing revenues and profitability. Management utilizes strategies that create customer trial of newproducts/events so as to increase the share of visits and average guest check,yet maintain 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 increase brand awareness,trial and share of visits from its target market by providing media coverage inmarkets where the Company has sufficient penetration to support media atcompetitive levels.  In those marketswhere the Company has its highest penetration, television and radio advertisingis provided.  In its secondary markets,the Company utilizes more cost-effective localized marketing vehicles includingnewspaper inserts, radio, 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 that essential restaurant supplies andproducts are available on short notice from several sources, the Company usesone full-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 five-year contract with its full-service distributorwhich is terminable by either party upon 120 days prior notice.  The Company also has arrangements withseveral smaller and regional distributors for the balance of itspurchases.  These distributionarrangements have allowed the Company to benefit from economies of scale andresulting lower commodity costs.  Smallerday-to-day purchasing decisions are made at the individual restaurantlevel.  The Company has not experiencedany significant delays in receiving food and beverage inventories or restaurantsupplies.

 

**InformationSystems 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 formulti-restaurant operations, training and support.  The POS data is retrieved from each restaurant daily andprocessed at the Company’s headquarters.

 

*Data Warehouse. *The Companymanages a data warehouse, tracking information as minute as guest checkdetail.  Management believes the datawarehouse provides multiple views of operational data which enables the Companyto spot trends, evaluate price sensitivity and track new items/combinations.

 

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

 

Bertucci’shas registered, among others, the names “‘Bertucci’s®” and “‘Bertucci’s BrickOven Pizzeria®” as service marks and trademarks with the United States Patentand Trademark Office.

 

Managementis aware of names similar to that of Bertucci’s used by third parties incertain limited geographical areas. Such third-party use may prevent the Company from licensing the use ofthe Bertucci’s mark for restaurants in

 

5

----

 

suchareas.  Except for these areas,management is not aware of any infringing uses that could materially affect theCompany’s business.

 

## **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 31, 2003, the Company had approximately 1,725 full-time employees (ofwhom 75 are based at the Company’s headquarters) and approximately 4,550part-time employees.  None of theCompany’s employees are covered by a collective bargaining agreement.  The Company surveyed its employees in 2003,2002, and 2001 to assess satisfaction and determine ways to improve companywork conditions and relations.  Thesesurveys support the Company’s belief that its relations with its employees aregood.

 

Managementbelieves that the Company’s continued success will depend to a large degree onits ability 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, the MP Program, a 401(k) plan, and anon-qualified stock option 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 werepaid in full as of February 13, 2003.

 

**GovernmentRegulations**

 

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 obtaining required licenses orapprovals could delay or prevent the opening of a new restaurant in aparticular area.  In addition, failureto maintain a required license or approval could result in the temporary orpermanent 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 be renewed annually and maybe revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of thedaily operations of the Company’s restaurants, including minimum age of patronsand employees, hours of operation, advertising, wholesale purchasing, inventorycontrol and handling, storage, and dispensing 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.

 

6

----

 

**ITEM2.  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. One of the Company’s previous offices in Westborough, Massachusetts iscurrently being sub-leased.

 

**RestaurantLocations**

 

The table below identifies the location of therestaurants operated by the Company during fiscal 2003.

 

| **State**            |   | **Open as of  01/01/2003** |   | **Openings** |   | **Closings** |   | **Open as of  12/31/2003** |   |
|----------------------|--------|----------------------------|--------|--------------|--------|--------------|--------|----------------------------|--------|
| Connecticut          |   | 11                         |   | —       |   | —       |   | 11                         |   |
| Delaware             |   | 1                          |   | 1            |   | —       |   | 2                          |   |
| District of Columbia |   | 2                          |   | —       |   | —       |   | 2                          |   |
| Maryland             |   | 5                          |   | 1            |   | —       |   | 6                          |   |
| Massachusetts        |   | 37                         |   | 1            |   | —       |   | 38                         |   |
| New Hampshire        |   | 3                          |   | —       |   | —       |   | 3                          |   |
| New Jersey           |   | 4                          |   | 2            |   | —       |   | 6                          |   |
| New York             |   | 3                          |   | —       |   | —       |   | 3                          |   |
| North Carolina       |   | —                     |   | 2            |   | —       |   | 2                          |   |
| Pennsylvania         |   | 6                          |   | 1            |   | —       |   | 7                          |   |
| Rhode Island         |   | 2                          |   | —       |   | —       |   | 2                          |   |
| Virginia             |   | 6                          |   | 2            |   | (1           | )      | 7                          |   |
| Total                |   | 80                         |   | 10           |   | (1           | )      | 89                         |   |

 

Ofthe 89 restaurants operated by the Company at December 31, 2003, the Companyleases all but one restaurant which is owned in fee.  Leases for existing restaurants are generally for terms of 15 to20 years and provide for additional option terms and a specified annual rental.Most of these leases provide for additional rent based on sales volumesexceeding specified levels. Leases for future restaurants will likely includesimilar rent provisions.  Bertucci’srestaurant lease terms remaining range from less than one to 24 years.  The majority of such leases provide for anoption to renew for additional terms ranging from five years to 20 years.

 

**ITEM3.  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.

 

Managementis not aware of any litigation to which the Company is a party that is likelyto have a material adverse effect on the Company.

 

**ITEM4.  SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDERS**

 

None.

 

7

----

 

**PART II**

 

# **ITEM 5.  MARKETFOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS**

 

# **Market Information**

 

Asof March 15, 2004, there was no established public trading market for any classof common equity security of the Company.

 

# **Record Holders**

 

Asof March 15, 2004, there were 93 holders of Common Stock of the Company, $.01par value per share.  As of March 15,2004, the Company did not have any other class of common equity security issuedand outstanding.

 

# **Dividends**

 

TheCompany has not paid any dividends in the last five 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 lender’s approval.

 

# **Recent Sales of Unregistered Securities**

 

None.

 

8

----

 

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

 

Thedata for fiscal years ended 1999 through 2003 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. Historical results are not necessarily indicative of results to beexpected in the future.  The BrinkerSale and the 53rd week of fiscal 2000 affect the comparability ofresults on a year-to-year basis.

 
|                                                                                                               |   | **Statements  of Operation Data (in thousands except per share amounts)  Fiscal Year Ended** |    |
|--------------------------------------------------------------------------------------------------------------------|--------|----------------------------------------------------------------------------------------------|---------|
|                                                                                                               |   | **December  31,  2003**                                                                      |    | **January 1,  2003** |   | **January 2,  2002** |   | **January 3,  2001 (a)** |   | **December  29,  1999** |   |
| Net sales                                                                                                          |   | $                                                                                            | 186,172 |   | $ | 162,319 |   | $ | 186,638 |   | $ | 284,933 |   | $ | 267,665 |   |
| Cost of sales and expenses (b)                                                                                     |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Cost of sales                                                                                                      |   | 43,544                                                                                       |    | 35,667 |   | 44,855 |   | 74,266 |   | 73,184 |   |
| Operating expenses                                                                                                 |   | 113,076                                                                                      |    | 96,413 |   | 111,795 |   | 162,098 |   | 155,426 |   |
| General and administrative expenses                                                                                |   | 11,320                                                                                       |    | 12,124 |   | 12,548 |   | 16,392 |   | 15,400 |   |
| Deferred rent, depreciation, amortization  and preopening expenses                                                 |   | 12,700                                                                                       |    | 10,733 |   | 13,142 |   | 17,333 |   | 17,055 |   |
| Closed restaurants charge                                                                                          |   | —                                                                                       |    | 236 |   | 4,200 |   | 479 |   | — |   |
| Asset impairment charge                                                                                            |   | 4,682                                                                                        |    | — |   | 1,800 |   | — |   | — |   |
| Loss on abandonment of Sal & Vinnie’s                                                                     |   | —                                                                                       |    | — |   | — |   | 2,031 |   | — |   |
| Cost of sales and expenses                                                                                         |   | 185,322                                                                                      |    | 155,173 |   | 188,340 |   | 272,599 |   | 261,065 |   |
| Income (loss) from operations                                                                                      |   | 850                                                                                          |    | 7,146 |   | (1,702 | ) | 12,334 |   | 6,600 |   |
| Other income (expense)                                                                                             |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Gain on Brinker Sale                                                                                               |   | 650                                                                                          |    | — |   | 36,932 |   | — |   | — |   |
| Gain on retirement of Senior Notes                                                                                 |   | —                                                                                       |    | — |   | 2,290 |   | — |   | — |   |
| Interest expense, net (b)                                                                                          |   | (10,101                                                                                      | )       | (9,587 | ) | (11,365 | ) | (15,838 | ) | (14,815 | ) |
| Other   (expense) income                                                                                      |   | (9,451                                                                                       | )       | (9,587 | ) | 27,857 |   | (15,838 | ) | (14,815 | ) |
| (Loss) income before income tax provision (benefit), and cumulative  effect of change in accounting principle      |   | (8,601                                                                                       | )       | (2,441 | ) | 26,155 |   | (3,504 | ) | (8,215 | ) |
| Income tax provision (benefit)                                                                                     |   | —                                                                                       |    | 2,697 |   | 11,195 |   | (115 | ) | (2,357 | ) |
| (Loss) income before cumulative effect of change in accounting  principle                                          |   | (8,601                                                                                       | )       | (5,138 | ) | 14,960 |   | (3,389 | ) | (5,858 | ) |
| Cumulative effect of change in accounting  principle, net of tax                                                   |   | —                                                                                       |    | — |   | — |   | — |   | (678 | ) |
| Net (loss) income                                                                                                  |   | $                                                                                            | (8,601  | ) | $ | (5,138 | ) | $ | 14,960 |   | $ | (3,389 | ) | $ | (6,536 | ) |
|                                                                                                               |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Basic (loss) income per share before  cumulative effect of change in accounting principle                          |   | $                                                                                            | (2.90   | ) | $ | (1.72 | ) | $ | 5.02 |   | $ | (1.14 | ) | $ | (1.97 | ) |
| Cumulative effect of change in accounting  principle, net of tax                                                   |   | —                                                                                       |    | — |   | — |   | — |   | (0.22 | ) |
| Basic (loss) income per share                                                                                      |   | $                                                                                            | (2.90   | ) | $ | (1.72 | ) | $ | 5.02 |   | $ | (1.14 | ) | $ | (2.19 | ) |
|                                                                                                               |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding                                                                                |   | 2,970,403                                                                                    |    | 2,978,955 |   | 2,978,955 |   | 2,981,414 |   | 2,988,050 |   |
|                                                                                                               |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Diluted (loss) income per share before  extraordinary item and cumulative effect of change in accounting principle |   | $                                                                                            | (2.90   | ) | $ | (1.72 | ) | $ | 4.60 |   | $ | (1.14 | ) | $ | (1.97 | ) |
| Cumulative effect of change in accounting  principle, net of tax                                                   |   | —                                                                                       |    | — |   | — |   | — |   | (0.22 | ) |
| Diluted (loss) income per share                                                                                    |   | $                                                                                            | (2.90   | ) | $ | (1.72 | ) | $ | 4.60 |   | $ | (1.14 | ) | $ | (2.19 | ) |
|                                                                                                               |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Weighted average shares outstanding                                                                                |   | 2,970,403                                                                                    |    | 2,978,955 |   | 3,252,605 |   | 2,981,414 |   | 2,988,050 |   |
|                                                                                                               |   |                                                                                         |    |   |   |   |   |   |   |   |   |
| Comparable restaurant sales (c)                                                                                    |   | 4.1                                                                                          | %       | 5.8 | % | 2.2 | % | 4.8 | % | 2.1 | % |

 

----

a)              Fiscal 2000 wascomprised of 53 weeks.  All other yearspresented were comprised of 52 weeks.

 

b)             Certain amounts(operating expenses, general and administrative expenses, depreciation,amortization and preopening expenses, and interest expense, net) have beenreclassified to conform to the current year presentation.

 

c)              The Company definescomparable restaurant sales as net sales from restaurants that have been openfor at least one full fiscal year.  Thecomparable sales in 2003, 2002 and 2001 relate to Bertucci’s only, 2000 and1999 relate to the combined company (Bertucci’s, Chili’s, On The Border and,for 1999 only, Sal & Vinnie’s).

 

9

----

 

**ITEM7.  MANAGEMENT’S DISCUSSION AND ANALYSISOF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

*The following discussion should be read in conjunction with“Item 1.  Business,” “Item 6.  Selected Financial Data,” the Company’sConsolidated Financial Statements and Notes thereto and the informationdescribed under the caption “Risk Factors” below.*

 

# **General**

 

Bertucci’s Corporation,formerly NE Restaurant Company, Inc. (the “Company”), through its wholly ownedsubsidiaries Bertucci’s Restaurant Corp. and Bertucci’s, Inc. (“Bertucci’s”),owns and operates a full service casual dining restaurant concept under thename Bertucci’s Brick Oven Pizzeria® (“Bertucci’s restaurants”).  The Company was originally formed as alimited partnership in 1991 to acquire 15 Chili’s Bar & Grill restaurants(“Chili’s”) from a prior franchisee. The Company was incorporated in Delaware in 1994.  The Company grew through the addition of 25new Chili’s and seven On The Border restaurants in New England.  The Company developed and operated theserestaurant franchises under franchise agreements with Brinker International,Inc., a publicly-owned company (“Brinker” or the “Franchisor”).

 

In July 1998, theCompany completed its acquisition of Bertucci’s Restaurant Corp.’s parent entity,Bertucci’s, Inc., a publicly-owned restaurant company, for a purchase price,net of cash received, of approximately $89.4 million (the “Acquisition”).  The Company financed the Acquisitionprimarily through the issuance of $100 million of 10 3/4% senior notes due 2008(the “Senior Notes”).  The Acquisitionincluded 90 Bertucci’s restaurants and one Sal & Vinnie’s restaurant.

 

In April 2001, theCompany completed the sale of 40 Chili’s and seven On The Border restaurants toBrinker (the “Brinker Sale”).  Total consideration, subject to closingadjustments, was $93.5 million.  Brinker acquired the inventory,facilities, equipment and management teams associated with these restaurants,as well as the four Chili’s restaurants under development by the Company.  Further, Brinker assumed the mortgage debton the Company’s Chili’s and On The Border restaurants. The Company recorded again in 2001 on the Brinker Sale of $36.9 million before income taxes. During2003 the Company concluded certain liabilities recorded in connection with theBrinker Sale were no longer required and accordingly reversed $650,000 ofaccrued liabilities as an additional gain on the Brinker Sale.

 

The pro formaConsolidated Statement of Operations set forth below reflects the recognition ofthe Brinker Sale as if the disposition occurred on January 2, 2001.  Accordingly operating results of therestaurants subject to the Brinker Sale are removed in the pro formainformation provided. The pro forma historical financial information is not a measureof financial performance under generally accepted accounting principles(“GAAP”), although the figures are derived from the Company’s informationprepared in accordance with GAAP.  Areconciliation of these pro forma results to the Company’s results ofoperations calculated in accordance with GAAP is provided in theStatement.  Management uses this proforma information to evaluate the comparative performance of its continuingbusiness.  The Company’s historical proforma financial information should not be considered in isolation or as asubstitute for its historic financial performance calculated and presented inaccordance with GAAP. 

 

10

----

 

**BERTUCCI’S CORPORATION**

**PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS**

(Unaudited- in thousands, except share and per share data)

52Weeks Ended January 2, 2002

 
|                                                              |   | **As  Reported** |    | **Brinker  Sale** |   | **Pro Forma** |   |
|-------------------------------------------------------------------|--------|------------------|---------|-------------------|--------|---------------|--------|
|                                                              |   |             |    |              |   |          |   |
| Net sales                                                         |   | $                | 186,638 |              | $      | (36,527       | )      | $ | 150,111 |   |
|                                                              |   |             |    |              |   |          |   |
| Cost of sales and expenses:                                       |   |             |    |              |   |          |   |
| Cost of sales                                                     |   | 44,855           |    | (10,330           | )      | 34,525        |   |
| Operating expenses                                                |   | 111,795          |    | (21,643           | )      | 90,152        |   |
| General and administrative expenses                               |   | 12,548           |    | (1,329            | )      | 11,219        |   |
| Deferred rent, depreciation, amortization and preopening expenses |   | 13,142           |    | (4,410            | )      | 8,732         |   |
| Closed restaurants charge                                         |   | 4,200            |    | —            |   | 4,200         |   |
| Asset impairment charge                                           |   | 1,800            |    | —            |   | 1,800         |   |
| Total cost of sales and expenses                                  |   | 188,340          |    | (37,712           | )      | 150,628       |   |
| (Loss) income from operations                                     |   | (1,702           | )       | 1,185             |   | (517          | )      |
|                                                              |   |             |    |              |   |          |   |
| Other income (expense):                                           |   |             |    |              |   |          |   |
| Gain on Brinker Sale                                              |   | 36,932           |    | (36,932           | )      | —        |   |
| Gain on retirement of Senior Notes                                |   | 2,290            |    | (2,290            | )      | —        |   |
| Interest expense, net                                             |   | (11,365          | )       | 1,114             |   | (10,251       | )      |
| Other income (expense)                                            |   | 27,857           |    | (38,108           | )      | (10,251       | )      |
| Income (loss) before income tax provision (benefit)               |   | 26,155           |    | (36,923           | )      | (10,768       | )      |
| Income tax provision (benefit)                                    |   | 11,195           |    | (14,837           | )      | (3,642        | )      |
| Net income (loss)                                                 |   | $                | 14,960  |              | $      | (22,086       | )      | $ | (7,126 | ) |
|                                                              |   |             |    |              |   |          |   |
| Basic income (loss) per share                                     |   | $                | 5.02    |              | $      | (7.41         | )      | $ | (2.39 | ) |
|                                                              |   |             |    |              |   |          |   |
| Basic weighted average shares outstanding                         |   | 2,978,955        |    | 2,978,955         |   | 2,978,955     |   |
|                                                              |   |             |    |              |   |          |   |
| Diluted income (loss) per share                                   |   | $                | 4.60    |              | $      | (7.41         | )      | $ | (2.39 | ) |
|                                                              |   |             |    |              |   |          |   |
| Diluted weighted average shares outstanding                       |   | 3,252,605        |    | 2,978,955         |   | 2,978,955     |   |

 

# **Results of Operations**

 

For all the Company’srestaurants, net sales 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) labor expenses;(ii) restaurant operations; (iii) facility costs; (iv) office expenses;and  (v) non-controllable expenses, which include such items as Companyadvertising expenses, rent and insurance. General and administrative expenses include costs associated with thosedepartments of the Company that assist in restaurant operations and managementof the business, including multi-unit supervision, accounting, managementinformation systems, training, executive management, purchasing andconstruction.

 

The following table setsforth the percentage-relationship to net sales, unless otherwise indicated, ofcertain items included in the Company’s consolidated statements of operation,and the pro forma consolidated statement of operations above (seereconciliation above), for the periods indicated:

 

11

----

 

*STATEMENT OFOPERATIONS DATA*

*(Percentage of Net Sales forFiscal Years Presented)*

 
|                                                              |   |                  |   |               |   |               |   | **Proforma  Bertucci’s (*)** |   |
|-------------------------------------------------------------------|--------|-----------------------|--------|--------------------|--------|--------------------|--------|-----------------------------------|--------|
|                                                              |   | **December  31,2003** |   | **January 1,2003** |   | **January 2,2002** |   | **January 2,2002**                |   |
|                                                              |   |                  |   |               |   |               |   |                              |   |
| Net sales                                                         |   | 100.0                 |   | 100.0              |   | 100.0              |   | 100.0                             |   |
|                                                              |   |                  |   |               |   |               |   |                              |   |
| Cost of sales and expenses:                                       |   |                  |   |               |   |               |   |                              |   |
| Cost of sales                                                     |   | 23.4                  |   | 22.0               |   | 24.0               |   | 23.0                              |   |
| Operating expenses                                                |   | 60.7                  |   | 59.4               |   | 59.9               |   | 60.1                              |   |
| General and administrative expenses                               |   | 6.1                   |   | 7.5                |   | 6.7                |   | 7.5                               |   |
| Deferred rent, depreciation, amortization and preopening expenses |   | 6.8                   |   | 6.6                |   | 7.0                |   | 5.8                               |   |
| Asset impairment charge                                           |   | 2.5                   |   | —             |   | 1.0                |   | 1.2                               |   |
| Closed restaurants charge                                         |   | —                |   | 0.1                |   | 2.3                |   | 2.8                               |   |
| Total cost of sales and expenses                                  |   | 99.5                  |   | 95.6               |   | 100.9              |   | 100.4                             |   |
| Income (loss) from operations                                     |   | 0.5                   |   | 4.4                |   | (0.9               | )      | (0.4                              | )      |
|                                                              |   |                  |   |               |   |               |   |                              |   |
| Other (expense) income:                                           |   |                  |   |               |   |               |   |                              |   |
| Gain on Brinker Sale                                              |   | 0.3                   |   | —             |   | 19.8               |   | —                            |   |
| Gain on retirement of Senior Notes                                |   | —                |   | —             |   | 1.2                |   | —                            |   |
| Interest expense, net                                             |   | (5.4                  | )      | (5.9               | )      | (6.1               | )      | (6.8                              | )      |
| Other (expense) income                                            |   | (5.1                  | )      | (5.9               | )      | 14.9               |   | (6.8                              | )      |
|                                                              |   |                  |   |               |   |               |   |                              |   |
| (Loss) income before income tax provision (benefit)               |   | (4.6                  | )      | (1.5               | )      | 14.0               |   | (7.2                              | )      |
| Income tax provision (benefit)                                    |   | —                |   | 1.7                |   | 6.0                |   | (2.4                              | )      |
| Net (loss) income                                                 |   | (4.6                  | )      | (3.2               | )      | 8.0                |   | (4.8                              | )      |

 

----

*          See Pro Formareconciliation above

 

**YearEnded 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 inmid-2002.  Bertucci’s comparable restaurantdine-in sales increased 4.8% while comparable Bertucci’s restaurant carry-outand delivery 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 $41,223.

 

*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 key commodities used as ingredients, primarily seafood, oil,flour, selected dairy products, as well as a shift to new menu items introducedin 2003 which have higher ingredient costs (expressed as a percent of sellingprices).  The Company believes that thisshift in menu emphasis will likely continue into 2004.

 

*Operating Expenses.*Operating expenses increased by $16.7 million, or 17.3%, to $113.1 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

 

12

----

 

expenses is primarilyattributable to the additional restaurants. The percentage increase to 60.7% in fiscal 2003 from 59.4% in fiscal2002 resulted primarily from cost increases in payroll taxes, benefits, andutilities and negative leverage of restaurant manager payroll and occupancyover the lower new restaurant sales.

 

*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, amortizationand preopening expenses increased by approximately $2.0 million, or 18.7%, to$12.7 million during fiscal 2003 from $10.7 million during fiscal 2002. Due toten restaurant openings in 2003, the Company incurred $2.1 million inpreopening expenses, a $600,000 increase over 2002 during which there wereseven restaurant openings. The additional restaurants from both fiscal 2003 and2002 resulted in an incremental $1.3 million of depreciation expense in fiscal2003.

 

*Asset Impairment Charge. *The Companyassessed certain non-performing restaurants for recoverability asrequired.  The Company determined animpairment of fixed assets existed at eleven restaurant locations.  An estimate of the fair value of theseassets based on the net present value of the expected cash flows of the elevenrestaurants was made and the carrying amount of the assets was found to exceedthe fair value of the assets by approximately $4.7 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 and accordingly reversed $650,000 of accrued liabilities asan 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 million duringfiscal 2002.  Interest expense isprimarily comprised of $9.5 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.  The Company anticipates that its currentplan for continued development of Company owned Bertucci’s restaurants willburden pre-tax profits because of the recognition of pre-opening costs andinitial year inefficiencies associated with new restaurants.  During the fourth quarter of 2002 theCompany recorded a full valuation allowance for its net deferred taxasset.  The Company has also provided afull valuation allowance relating to the tax benefits generated during 2003(primarily from its operating losses).

 

**YearEnded January 1, 2003 Compared to Year Ended January 2, 2002**

 

*Net Sales*.  Total Company net sales decreased by $24.3million, or 13.0%, to $162.3 million during fiscal 2002 from $186.6 millionduring fiscal 2001.  The decrease wasprimarily due to the Brinker Sale, partially offset by increased sales for theBertucci’s restaurants.  Net sales forthe Bertucci’s restaurants for fiscal 2002 increased by 8.1%, or $12.2 million,as compared to fiscal 2001 due to seven new restaurants and a 5.8% increase incomparable restaurant sales, partially offset by two restaurant closings in2001 and one restaurant closing in 2002. Comparable Bertucci’s restaurant dine-in guest counts increased overfiscal 2001 by 3.8%.  Bertucci’scomparable restaurant dine-in sales increased 6.7% while comparable Bertucci’srestaurant carry-out and delivery sales increased 2.7% for fiscal 2002.  The Company believes that the majority ofthe comparable sales increases were the result of increased guest visitscombined with a shift in menu mix and an approximate 1.0% price increase inApril 2002.

 

*Cost of Sales*. Costof sales as a percentage of net sales decreased to 22.0% during fiscal 2002from 24.0% during fiscal 2001.  Thechange was primarily due to the Brinker Sale as Brinker Concept Restaurants rana higher cost of

 

13

----

 

sales than Bertucci’srestaurants.  Bertucci’s restaurant costof sales decreased to 22.0% of net sales during fiscal 2002 from the pro formacost of sales rate of 23.0% during fiscal 2001.  The Company believes that management efficiency, sound purchasingpractices and lower cost of ingredients combined to effectuate the favorablechange in Bertucci’s restaurant cost of sales percentage.

 

*Operating Expenses.*Operating expenses decreased by $15.4 million, or 13.8%, to $96.4 millionduring fiscal 2002 from $111.8 million during fiscal 2001.  The dollar decrease was primarily due to theBrinker Sale.  Expressed as a percentageof net sales, operating expenses decreased to 59.4% in fiscal 2002 from 59.9%during fiscal 2001. Operating expenses for Bertucci’s restaurants increased by$6.3 million, or 6.9%, to $96.4 million during fiscal 2002 from $90.1 millionduring fiscal 2001.  Expressed as apercentage of Bertucci’s restaurant net sales, operating expenses for theBertucci’s restaurants decreased to 59.4% in fiscal 2002 compared to the proforma operating expense rate of 60.1% in fiscal 2001.  The dollar increases were primarily due to a net increase in Bertucci’srestaurants open during fiscal 2002 as well as overall higher advertisingexpenses, increased labor costs from new restaurant inefficiencies and higherinsurance costs partially offset by reduced utility expenses.  The pro forma percent decrease was primarilydue to favorable changes in labor, supplies and occupancy costs in relation tonet sales partially offset by increased advertising and insurance expenses.

 

*General and Administrative Expenses.*General and administrative expenses decreased by $424,000, or 3.4%, to $12.1million during fiscal 2002 from $12.5 million during fiscal 2001.  Expressed as a percentage of net sales,general and administrative expenses increased to 7.5% in fiscal 2002 from 6.7%during fiscal 2001.  The dollar decreasewas primarily due to staff reduction as a result of the Brinker Sale and, to alesser degree, reduced corporate office rent due to the Company’s move to asmaller facility in August 2001 partially offset by higher recruiting andtraining costs for new restaurant managers. The percentage increase is a resultof unfavorable leverage of the sales reduction due to the Brinker Sale combinedwith higher new restaurant management recruiting and training costs.

 

*Deferred Rent,**Depreciation, Amortization and Preopening Expenses*.  Deferred rent, depreciation, amortizationand preopening expenses decreased by approximately $2.4 million, or 18.3%, to$10.7 million during fiscal 2002 from $13.1 million during fiscal 2001.  Expressed as a percentage of net sales,deferred rent, depreciation, amortization and preopening expenses decreased to6.6% in fiscal 2002 from 7.0% during fiscal 2001.  The dollar decrease was primarily due to elimination of goodwillamortization resulting from the Company’s adoption of SFAS No. 142 as discussedin Note 4 to the Consolidated Financial Statements and, to lesser extent, theBrinker Sale.  The percentage decreaseresulted from the elimination of goodwill amortization partially offset byunfavorable leverage of the sales reduction due to the Brinker Sale.

 

*Interest Expense.*  Interest expense decreased by approximately$1.8 million to $9.6 million during fiscal 2002 from $11.4 million duringfiscal 2001.  The decrease was due to:a) the Brinker Sale, as $40.9 million of mortgage indebtedness was assumed byBrinker; and b) the retirement of $14.7 million of Senior Notes in July 2001 byusing a portion of the proceeds of the Brinker Sale; partially offset by c) areduction in interest income as a result of reduced investments combined withlower market interest rates.

 

*Income Taxes.* Thefiscal 2002 tax provision of $2.7 million resulted from the recognition of avaluation allowance against deferred tax assets of $4.1 million.  The future tax benefits which gave rise tothe original recognition of a deferred tax asset remain statutorily availableto the Company.  The provisions of SFASNo. 109 require the Company to consider both negative and positive evidence indetermining if a valuation allowance is required.  The Company’s 2001 results were favorably impacted by the BrinkerSale and without it would have recorded a pre-tax loss.  Thus, the Company has an historical trend ofrecurring pre-tax losses since 1998 excluding the Brinker Sale.  The fiscal 2002 loss and the Company’s plansfor continued development of Company owned restaurants were expected to burdenpre-tax profits because of the recognition of preopening costs and initial yearinefficiencies associated with new restaurants.  As a result, management recorded a valuation allowance for theremaining value of deferred tax assets in 2002.

 

**Liquidityand Capital Resources**

 

The Company hashistorically met its capital expenditures and working capital needs through acombination of operating cash flow, bank and mortgage borrowings, the sale ofthe Senior Notes, the sale of Common Stock, and, in fiscal 2003, two saleleaseback transactions. Future capital and working capital needs are expectedto be funded from operating cash flow and cash on hand.

 

14

----

 

Net cash flows fromoperating activities were $8.4 million for fiscal 2003 as compared to $8.2million for fiscal 2002. While the fiscal 2003 net loss increased $3.5 millionover the fiscal 2002, included in the net loss was a $4.7 million non-cashasset impairment charge and a $1.3 million increase in depreciation expense dueto additional restaurants. Further, the Company completed two sale-leasebacktransactions on four restaurant properties which generated $7.2 million and$1.8 million in cash, respectively (net of fees totaling approximately$530,000). These funds, plus the $13.1 million of cash on hand at the beginningof fiscal 2003, allowed the Company to fund capital expenditures totaling $16.7million. As of December 31, 2003, the Company had $12.6 million in cash andcash equivalents.

 

The Company’s capitalexpenditures were $16.7 million, $17.2 million, and $12.3 million, for fiscal2003, 2002, and 2001, respectively.  Infiscal 2003, $12.4 million of the capital spending was for new restaurant development.  The remaining $4.3 million was forremodeling and upgrading facilities in the existing restaurants and forcorporate office equipment and furniture. The Company expects to open three newrestaurants in fiscal 2004, with capital expenditures anticipated to totalapproximately $8.0 million (including new restaurants and maintenance capital).

 

As of December 31, 2003,the Company had $91.9 million in consolidated indebtedness, $85.3 millionpursuant to the Senior Notes, $5.7 million related to capital lease obligationsrelated to the sale leaseback transactions, and $900,000 of promissory notes. The Senior Notes contain no financial covenants and the Company is incompliance with all non-financial covenants as of December 31, 2003.  The Senior Notes bear interest at the rateof 10 3/4% per annum, payable semi-annually on January 15 and July 15, withpayments that commenced on January 15, 1999. The Senior Notes are due in full on July 15, 2008.  Through July 15, 2006, the Company may, atits option, redeem any or all of the Senior Notes at face value, plus adeclining premium, which begins at 5.375%. After July 15, 2006, the Senior Notes may be redeemed at face value.Additionally, under certain circumstances, including a change of control or followingcertain asset sales, the holders of the Senior Notes may require the Company torepurchase the Senior Notes, at a redemption price of 101% of face value.  See Note 6 of Notes to ConsolidatedFinancial Statements.

 

The Company is currentlyoperating without a line of credit and is funding all of its growth, debtreductions and operating needs out of cash flows from operations and cash onhand.

 

The Company hasestablished a $4.0 million (maximum) letter of credit facility.  As ofDecember 31, 2003, this facility is collateralized with $3.1 million of cashrestricted from general use.  Letters ofCredit totaling $3.1 million were outstanding on December 31, 2003, a $661,000increase over the fiscal 2002 ending balance.

 

The Company’s futureoperating performance and ability to service or refinance the Senior Notes willbe subject to future economic conditions and to financial, business and otherfactors, many of which are beyond the Company’s control.  Significantliquidity demands will arise from debt service on the Senior Notes.

 

## **Thetable below depicts the Company’s future contractual obligations committed asof December 31, 2003:**

 
|                                                |   | **Payments  Due by Fiscal Year** |    |
|-----------------------------------------------------|--------|----------------------------------|---------|
|                                                |   | **(Dollars in Thousands)**       |    |
|                                                |   | **Total**                        |    | **2004** |   | **2005 -  2006** |   | **2007 -  2008** |   | **After 2008** |   |
| Contractual Obligations:                            |   |                             |    |   |   |   |   |   |   |   |   |
| Operating Leases (a)                                |   | $                                | 123,529 |   | $ | 14,734 |   | $ | 28,511 |   | $ | 23,261 |   | $ | 57,023 |   |
| Capital Leases (a)                                  |   | 13,191                           |    | 577 |   | 1,184 |   | 1,227 |   | 10,203 |   |
| Senior Notes (b)                                    |   | 108,237                          |    | 9,171 |   | 9,171 |   | 89,895 |   | — |   |
| Promissory Notes (c)                                |   | 945                              |    | 98 |   | 194 |   | 228 |   | 425 |   |
| Closed restaurants reserve, net of sublease  income |   | 1,449                            |    | 615 |   | 503 |   | 86 |   | 245 |   |
| Total Contractual Obligations                       |   | $                                | 247,351 |   | $ | 25,195 |   | $ | 39,563 |   | $ | 114,697 |   | $ | 67,896 |   |

 

----

(a) - See Note 7 of Notes to ConsolidatedFinancial Statements.

(b) - including interest at 10 3/4% per annumto maturity in July 2008.

(c) - including interest at a weightedaverage rate of 7.10% per annum.

 

The Company believes thecash flow generated from its operations and current cash on hand should besufficient to fund its debt service requirements, lease obligations, expectedcapital expenditures and other operating expenses

 

15

----

 

through2004.  Beyond 2004, the Company expects to be able to service its debt,but the lack of short term borrowing availability may impede growth.

 

## **Impactof Inflation**

 

Inflationary factorssuch as increases in labor, food or other operating costs could adverselyaffect the Company’s operations.  TheCompany does not believe that inflation has had a material impact on itsfinancial 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.

 

## **Seasonality**

 

The Company’s quarterlyresults of operations have fluctuated and are expected to continue to fluctuatedepending on a variety of factors, including the timing of new restaurantopenings and related preopening and other startup expenses, net salescontributed by new restaurants, increases or decreases in comparable restaurantsales, competition and overall economic conditions.  The Company’s business is also subject to seasonal influences ofconsumer spending, dining out patterns and weather.  As is the case with many restaurant companies, the Companytypically experiences lower net sales and net income during the first andfourth fiscal quarters.  Because ofthese fluctuations in net sales and net income (loss), the results ofoperations of any quarter are not necessarily indicative of the results thatmay be achieved for a full fiscal year or any future quarter.

 

**Critical Accounting Policies and Estimates**

 

The discussion andanalysis of our financial condition and results of operations are based uponour consolidated financial statements, which have been prepared in accordancewith accounting principles generally accepted in the U.S.  The preparation of these financialstatements requires us to make estimates and judgments that affect the reportedamounts of assets, liabilities, revenues and expenses, and related disclosureof contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those relatedto impairment of long-lived assets, self-insurance, and closed restaurantsreserve. We base our estimates on historical experience and on various otherassumptions that are believed to be reasonable under the circumstances, theresults of which form the basis for making judgments about the carrying valuesof assets and liabilities that are not readily apparent from other sources.Actual results may differ from these estimates under different assumptions orconditions.

 

We believe the followingcritical accounting policies affect our more significant judgments andestimates used in the preparation of our consolidated financial statements.

 

*Impairment of Long-Lived Assets*

 

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 by comparing estimated undiscounted futureoperating cash flows (which the Company estimates using historical cash flowsand other relevant facts and circumstances) for a restaurant to the carryingamount of its assets.  If an impairmentexists, the amount of impairment is measured as the excess of the carryingamount over the estimated discounted future operating cash flows of the assetand the expected proceeds upon sale of the asset.  The estimates and assumption used during this process are subjectto a high degree of judgment.

 

During 2003, the Companyassessed certain non-performing restaurants for recoverability and determinedan impairment of fixed assets existed at eleven restaurant locations.  The Company estimated the fair value of theseassets based on the net present value of the expected cash flows of the elevenrestaurants.  The carrying amount of theassets exceeded the fair value of the assets by approximately $4.7million.  In 2003, the Company recordedan impairment charge to reflect the write down of the affected assets to fairvalue.

 

In addition, at leastannually, the Company assesses the recoverability of goodwill and otherintangible assets related to its restaurant concepts. These impairment testsrequire the Company to estimate fair values of its restaurant concepts bymaking assumptions regarding future cash flows and other factors.  If these assumptions change in the future,the Company may be required to record impairment charges for these assets. Todate, such analysis has indicated no impairment of goodwill and otherintangible assets has occurred.

 

16

----

 

*Self-Insurance*

 

The Company isself-insured for certain losses related to general liability, group healthinsurance, 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, including the severity or frequency of claims, differ from theCompany’s estimates, the Company’s financial results could be impacted. Todate, no activity has occurred requiring significant adjustments to thesereserves.

 

*ClosedRestaurants Reserve*

 

TheCompany remains primarily liable on leases for 14 closed locations. Managementreviews the specifics of each site on a quarterly basis to estimate theCompany’s net remaining liability over the remaining lease term. Certainlocations have subtenants in place while others remain vacant. Estimates mustbe made of future sublease income or lease assignment possibilities. Ifsubtenants default on their subleases or projected future subtenants are notobtained, actual results could differ from the Company’s estimates, therebyimpacting the Company’s financial results. Such a review resulted in a chargeof $4.2 million in 2001, and $236,000 in 2002 when an additional restaurant wasclosed prior to its lease termination. All other activity in fiscal 2002 and2003 has been consistent with reserves and no additional increases in thereserve was necessary.

* *

***RecentAccounting Pronouncements***

* *

In June 2001, the FASBissued SFAS No.143, *Accounting for AssetRetirement Obligations*.  This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities.  It applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and (or) the normal operation of along-lived asset, except for certain obligations of lessees.  The adoptionof this statement on January 3, 2003 did not have a material impact on theCompany’s financial position or its results of operations.

 

In April 2002, the FASBissued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No.13, and Technical Corrections*. Theadoption of SFAS No. 145 requires gains and losses from extinguishment of debtno longer be classified as extraordinary items, but rather be classified aspart of other income (expense) on the Company’s consolidated statement ofoperations. Upon adoption of this statement on January 3, 2003, the Companyreclassified the previously reported gain on the extinguishment of the SeniorNotes as other income with the associated tax expense reported as a componentof the provision for income taxes.

 

In January 2003 andDecember 2003, the FASB issued Interpretation No. 46, “Consolidation ofVariable Interest Entities” (FIN 46) and its revision, FIN 46-R,respectively. FIN 46 and FIN 46-R addresses the consolidation of entities whoseequity holders have either not provided sufficient equity at risk to allow theentity to finance its own activities or do not possess certain characteristicsof a controlling financial interest.  FIN 46 and FIN 46-R require theconsolidation of these entities, known as variable interest entities (VIE’s),by the primary beneficiary of the entity.  FIN 46 and FIN 46-R areapplicable for financial statements of public entities that have interests inVIE’s or potential VIE’s referred to as special purpose entities for periodsending after December 15, 2003 of which the Company had none.

 

In May 2003, the FASBissued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*. The Statementrequires an issuer to classify financial instruments within its scope as aliability. Many of those instruments were previously classified as equity underprior accounting guidelines. SFAS No. 150 is effective for all such financialinstruments entered into or modified after May 31, 2003. Otherwise, it waseffective on July 3, 2003, with the exception of mandatory redeemable financialinstruments of non-public entities, for which the provisions of this statementare applicable in the first quarter of 2004. The Company does not use suchfinancial instruments therefore the adoption of the applicable portions of thisstatement in the third quarter of 2003 did not have a material impact on theCompany’s financial position or results of operations.  The Company is currently assessing theimplications of adopting the mandatory redeemable financial instrumentsprovision in 2004.

 

17

----

 

# **Risk Factors**

 

*This Report contains forward-looking statements that involverisks and uncertainties, such as statements of the Company’s plans, objectives,expectations and intentions.  Thecautionary statements made in this Report should be read as being applicable toall forward looking statements wherever they appear in this Report.  The Company’s actual results could differmaterially from those discussed herein. Factors that could cause or contribute to such differences include thosediscussed below, as well as those discussed elsewhere in this Report.*

 

*Substantial Leverage; Potential Inability to ServiceIndebtedness. *As a resultof the Acquisition, the Company is highly leveraged.  At the end of fiscal 2003, the Company’s aggregate outstandingindebtedness was $91.9 million, the Company’s shareholders’ equity was $5.2million and the Company’s working capital deficit was $3.0 million.

 

The Company’s highdegree of leverage could have important consequences, including but not limitedto the following: (i) the Company’s ability to obtain additional financing forworking capital, capital expenditures, acquisitions, general corporate purposesor other purposes may be impaired in the future; (ii) a substantial portion ofthe Company’s cash flow from operations must be dedicated to the payment ofprincipal and interest on its indebtedness, thereby reducing the fundsavailable to the Company for its operations and other purposes, includinginvestments in development and capital spending; (iii) the Company may besubstantially more leveraged than certain of its competitors, which may placethe Company at a competitive disadvantage; and (iv) the Company’s substantialdegree of leverage may limit its flexibility to adjust to changing marketconditions, reduce its ability to withstand competitive pressures and make itmore vulnerable to a downturn in general economic conditions or in itsbusiness.  The Company’s ability to repayor to refinance its obligations with respect to its indebtedness will depend onits future financial and operating performance, which, in turn, will be subjectto prevailing economic and competitive conditions and to certain financial,business, legislative, regulatory and other factors, many of which are beyondthe Company’s control.  These factorscould include operating difficulties, increased operating costs, productpricing pressures, the response of competitors, regulatory developments, anddelays in implementing strategic projects. The Company’s ability to meet its debt service and other obligations maydepend in significant part on the extent to which the Company can implementsuccessfully its business strategy. There can be no assurance that the Company will be able to implement itsstrategy fully or that the anticipated results of its strategy will berealized.

 

If the Company’s cashflow and capital resources are insufficient to fund its debt serviceobligations, the Company may be forced to reduce or delay capital expenditures,sell assets, seek to obtain additional equity capital, or to refinance orrestructure its debt.  There can be noassurance that the Company’s cash flow and capital resources will be sufficientfor payment of principal of, and premium, if any, and interest on, itsindebtedness in the future, or that any such alternative measures would besuccessful or would permit the Company to meet its scheduled debt serviceobligations.

 

*Restrictive Debt Covenants. *The Indenture for the Senior Notes imposes significantoperating and financial restrictions on the Company and its subsidiaries.  Such restrictions will affect, and in manyrespects significantly limit or prohibit, among other things, the ability ofthe Company to incur additional indebtedness, pay dividends or make otherdistributions, make certain investments, create certain liens, sell certainassets, enter into certain transactions with affiliates, or engage in certainmergers or consolidations involving the Company.  A failure by the Company to comply with the restrictions couldlead to a default under the terms of the Indenture.  In the event of a default, the indenture trustee could elect todeclare all amounts borrowed pursuant thereto, and all amounts due may be,immediately due and payable, together with a premium and accrued and unpaidinterest.  In such event, there can beno assurance that the Company would be able to make such payments or borrowsufficient funds from alternative sources to make any such payment.  Even if additional financing could be obtained,there can be no assurance that it would be on terms that are favorable oracceptable to the Company.

 

*Potential Inability to Manage Geographic Expansion. *All of therestaurants operated by the Company prior to the Acquisition were located inNew England.  As a result ofconsummation of the Acquisition, nearly one-third of the Company’s restaurantswere outside of New England.  As of thisfiling, approximately 40% of the Company’s restaurants are currently outsideNew England.  The ability of the Company’smanagement to effectively recognize and account for diverse regional conditionsand to manage restaurants that are geographically remote will be critical tothe success of the Company.  Anyinability of the Company to successfully manage its geographic expansion mayhave a material adverse effect on the Company.

 

18

----

 

The Company’s futureoperating results will depend largely upon its ability to open and operate newor newly acquired restaurants successfully and to manage a growing businessprofitably.  This will depend on anumber of factors (some of which are beyondthe control of the Company), including (i) selection and availability ofsuitable restaurant locations, (ii) negotiation of acceptable lease orfinancing terms, (iii) securing of required governmental permits and approvals,(iv) timely completion of necessary construction or remodeling of restaurants,(v) hiring and 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 in guestmenu and concept preferences.

 

There can be noassurance that the Company’s expansion plans can be achieved on a timely andprofitable basis or that it will be able to achieve results similar to thoseachieved in existing locations in prior periods or that such expansion will notresult in reduced sales at existing restaurants that have been recently openedor newly acquired restaurants.  Anyfailure to 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 and supplies.  While management has been able to anticipateand react to changing food costs and supplies to date through its purchasingpractices and menu price adjustments, there can be no assurance that it will beable to do so in the future.

 

The Company obtainsapproximately 75% to 80% of its supplies through a single vendor pursuant to acontract for delivery and distribution, with the vendor charging fixed mark-upsover prevailing wholesale prices.  TheCompany has a five-year contract with this vendor which expires in 2007 and isotherwise terminable by either party upon 120 days’ prior notice.  The Company believes that it would be ableto replace any vendor if it were required to do so, however, any disruption in supplyfrom vendors or the Company’s inability to replace vendors, when required, mayhave a material adverse effect on the Company.

 

*Possible Adverse Impact of Economic, Regional and OtherBusiness Conditions on the Company. *TheCompany’s business is sensitive to guests’ spending patterns, which in turn aresubject to prevailing regional and national economic conditions such asunemployment, interest rates, taxation and consumer confidence.  Most of the restaurants owned by the Companyare located in the northeastern United States, with a large concentration inNew England.  In addition, the Companyanticipates substantially all restaurants to be opened in fiscal 2004 will bein states where the Company presently has operations or in contiguous states.  As a result, if the New England or Mid-Atlanticregions of the country suffer prolonged adverse economic conditions, this mayhave a material adverse effect on the Company.

 

*Dependence Upon Key Personnel. *The Company’s business depends upon theefforts, abilities and expertise of its executive officers and other keyemployees.  The Company has no long-termemployment contracts with, and does not maintain life insurance policies on anyof its executive officers or key employees. The loss of the services of certain of these executive officers or keyemployees or the inability to retain key personnel would have a materialadverse effect on the Company.

 

*Competition. *Therestaurant industry is intensely competitive with respect to, among otherthings, price, service, location and food quality.  The Company competes with many well-established national,regional and locally-owned foodservice companies with substantially greaterfinancial and other resources and longer operating histories than the Company,which, among other things, may better enable them to react to changes in therestaurant industry.  With respect toquality and cost of food, size of food portions, decor and quality service, theCompany competes with casual dining, family-style restaurants offering eat-inand take-out menus, including, but not limited to, Olive Garden, Romano’sMacaroni Grill, Carrabba’s, Applebee’s, TGI Friday’s, Ruby Tuesdays, andPizzeria Uno Restaurants.  As a resultof the Brinker Sale, the Company also competes with Chili’s and, to a lesserextent, On the Border.  Many of theCompany’s restaurants are located in areas of high concentration of suchrestaurants.  Among other things, theCompany also vies with all competitors in attracting guests, in obtainingpremium locations for restaurants (including shopping malls and strip shoppingcenters) and in attracting and retaining employees.

 

*Possible Adverse Impact of Government Regulation on theCompany. *Therestaurant business is subject to extensive federal, state and local laws andregulations relating to the development and operation of restaurants,

 

19

----

 

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 anintoxicated person the right to recover damages from an establishment thatwrongfully served alcoholic beverages to the intoxicated person.  The Company carries liquor liabilitycoverage as part of its existing comprehensive general liability insurance.  In addition, the Company may also, incertain jurisdictions, be required to comply with regulations limiting smokingin 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.

 

*Franchising. *TheCompany has no experience in franchising restaurants and there can be noassurance that the Company will be able to successfully locate and attractsuitable franchisees or that such franchisees will have the business abilitiesor sufficient access to capital to open and operate restaurants or will operaterestaurants in a manner consistent with the Company’s concept and standards orin compliance with franchise agreements. The success of any franchise programthe Company may employ will also be dependent upon certain other factors,certain of which are not within the control of the Company or its potentialfranchisees including the availability of suitable sites on acceptable lease orpurchase terms, permitting and regulatory compliance and general economic andbusiness conditions.

 

**ITEM7A.  QUANTITATIVE AND QUALITATIVEDISCLOSURES ABOUT MARKET RISKS.**

 

The Company has no exposureto specific risks related to derivatives or other “hedging” types of financialinstruments.

 

**ITEM8.  FINANCIAL STATEMENTS ANDSUPPLEMENTARY DATA**

 

The financial statementsand supplementary data are listed under Part IV, Item 15 in this report.

 

**ITEM9.  CHANGES IN AND DISAGREEMENTS WITHACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE**

 

None.

 

**ITEM 9A. CONTROLS AND PROCEDURES**

 

The Company maintainsdisclosure controls and procedures that are designed to ensure that informationrequired to be disclosed in the Company’s Securities Exchange Act reports isrecorded, processed, summarized and reported within the time periods specifiedin the SEC’s rules and forms, and that such information is accumulated andcommunicated to our management, including our Chief Executive Officer and ChiefFinancial Officer, as appropriate, to allow timely decisions regarding requireddisclosure. In designing and evaluating the disclosure controls and procedures,management recognized that any controls and procedures, no matter how welldesigned and operated, can provide only reasonable assurance of achieving thedesired control objectives, as ours are designed to do, and managementnecessarily was required to apply its judgment in evaluating the cost-benefitrelationship of possible controls and procedures.

 

As of December 31, 2003,the Company carried out an evaluation, under the supervision and with theparticipation of our management, including our Chief Executive Officer andChief Financial Officer, of the effectiveness of the design and operation ofour disclosure controls and procedures, as defined in Rule 15d-15(e) under theSecurities Exchange Act of 1934.  Basedupon that evaluation, our Chief Executive Officer and Chief Financial Officerconcluded that our disclosure controls and procedures are effective in enabling us to record,process, summarize and report information required to be included in ourperiodic SEC filings within the required time period.

 

20

----

 

There have been no changes in our internal control over financialreporting that occurred during the fourth quarter of fiscal 2003 that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**PART III**

 

**ITEM10.  DIRECTORS AND EXECUTIVE OFFICERS OFTHE REGISTRANT**

 

The following table setsforth certain information with respect to the executive officers and directorsof the Company at the time of this filing:

 
| **Name**             |   | **Age** |   | **Position**                                                                      |
|----------------------|--------|---------|--------|-----------------------------------------------------------------------------------|
| Benjamin R. Jacobson |   | 59      |   | Chairman of the Board of Directors, Chief Executive Officer and  Treasurer        |
| Raymond P. Barbrick  |   | 51      |   | President, Chief Operating Officer and Director                                   |
| Kurt J. Schnaubelt   |   | 40      |   | Senior Vice President – Finance and Administration, Chief Financial  Officer |
| Lewis P. Holt        |   | 50      |   | Vice President – Construction                                                |
| Kathleen Kiely       |   | 47      |   | Vice President – Marketing                                                   |
| Heather B. Lammey    |   | 35      |   | Vice President – Risk Management & Benefits                              |
| James D. Lux         |   | 38      |   | Vice President – Information Technology                                      |
| Steven H. Scrima     |   | 40      |   | Vice President – Food & Beverage and Procurement                         |
| Stephen V. Clark     |   | 50      |   | Director                                                                          |
| Sally M. Dungan      |   | 50      |   | Director *                                                                        |
| Stephen R. Karp      |   | 64      |   | Director                                                                          |
| James J. Morgan      |   | 61      |   | Director **                                                                       |
| James N. Moriarty    |   | 37      |   | Director *                                                                        |

 

----

*   Member of Audit Committee

** Member of Compensation Committee

 

**Benjamin R.Jacobson. **Mr.Jacobson has served as Chairman of the Board of Directors of the Company since1991 and as Chief Executive Officer since October 1999.  Since 1989, Mr. Jacobson has served as theManaging General Partner of Jacobson Partners, which specializes in directequity investments. Mr. Jacobson is a director of Childtime, Inc. and a numberof privately-held corporations.

 

**RaymondP. Barbrick. **Mr.Barbrick has been employed in the restaurant industry since 1972 and has servedas President, Chief Operating Officer of the Company since December 2001. Hewas the Chief Operating Officer from November 1999 through November 2001.Further, he has been a Director of the Company since January 2001.  Prior to that, he served as the Company’sVice President of Operations for the Brinker Concept Restaurants from January1998 until October 1999 and was the Senior Director of Operations, from 1992through 1997, with responsibility for all of the Company’s Chili’s restaurantsin Connecticut and western Massachusetts. Prior to joining the Company, Mr. Barbrick was employed by Back BayRestaurant Group, where he held the position of regional director of operationsfrom 1989 to 1992.

 

**KurtJ. Schnaubelt. **Mr. Schnaubelt has been employed in the restaurantindustry since 1980.  He had served asthe Company’s Director of Financial Reporting, Planning and Analysis fromJanuary 1999 until March 2001 when he was promoted to Senior VicePresident – Finance and Administration.  He was promoted to Chief Financial Officerin May 2002.  Hisresponsibilities include all accounting, finance, reporting, planning andanalysis functions as well as risk management and informationtechnologies.  Mr. Schnaubelt has heldseveral other positions in the Company including Assistant Controller,Accounting Manager and Restaurant Manager. His other experience includes serving as the Controller for Quikava, adouble drive-through coffee and specialty beverage concept located in New England.  Mr. Schnaubelt is a Certified ManagementAccountant and a Certified Financial Manager.

 

**Lewis P. Holt. **Mr.Holt has been employed in the restaurant industry since 1978 and currentlyserves as the Company’s Vice President - Construction.  Mr. Holt’s responsibilities includeoverseeing all phases of building and kitchen design, construction andpermitting for all of the Company’s restaurants.  He is also responsible for overseeing the facilities in allrestaurants including maintenance, capital improvements and renovations andremodeling.  Mr. Holt has served asDirector of Construction for Legal Seafoods of Boston and he held constructionand design positions for Pizzeria Uno restaurants.  Mr. Holt has been employed by the Company since 1992.

 

21

----

 

**Kathleen Kiely.**  Ms. Kiely has served asVice President of Marketing since September 2003. She is responsible for allmarketing and advertising activities including research, positioning and allbranding activities. Prior to joining the Company, Ms. Kiely was GeneralManager of the Boston office of Deutsch Advertising from January 2001 throughSeptember 2003. Prior to that, she was Partner and Executive Creative Directorat Arnold Worldwide from 1995 through 2000. Ms. Kiely has over 20 years of advertisingand brand building experience.

 

**Heather B. Lammey.**  Ms. Lammey has been employed in therestaurant industry since 1991 and has served as the Company’s Vice President –Risk Management & Benefits since May 2003. Prior to that, she was the Director – Risk Management & Benefitsfrom October 2000 to May 2003. Prior to that, she was the Manager – RiskManagement from December 1999 to October 2000. Her primary responsibilitiesinclude administration of the company’s benefit and liability programs.  Ms. Lammey started her career with theCompany as a hostess at Chili’s Grill & Bar and since then has held severalpositions within the Company.

 

**James D. Lux.**  Mr.Lux has been employed in the restaurant industry since 1981 and has servedas the Company’s Vice President – Information Technology since December2002.  Prior to that he served asDirector – Information Technology.  Hisresponsibilities include technology strategy, implementation and supportfor both restaurant and corporate computer and telecommunications systems.  Prior to joining the Company in 2000, Mr.Lux was District Operations Manager with Micros, Inc. forthe New England region.  Additionally, Mr. Lux has held variousoperations positions in several restaurant companies including TGI Friday’s.

 

**Steven H. Scrima.**  Mr. Scrima has been employed in therestaurant industry since 1979.  He hadserved as the company’s Director of Food & Beverage and Procurement sinceApril 2000 until January 2004 when he was promoted to Vice President – Food& Beverage and Procurement.  Mr.Scrima’s responsibilities include procurement for all commodities, dry goods(imported and domestic), and distribution as well as leading the menu andproduct development team.  He has beenemployed with the Company since 1998, and has held numerous positions in theindustry.  Mr. Scrima previously wasemployed as Corporate Chef for Landry’s Restaurants Crab House concept from1994 until 1998.

 

**StephenV. Clark. **Mr.Clark has been the President and Chief Executive Officer of Taco Bueno, a quickservice Mexican restaurant chain of over 120 stores, since June 2001 and hasserved as a director of the Company since April 2002.  He previously served as Taco Cabana Inc.’s Chief ExecutiveOfficer from November 1996 through June 2001 and was previously the President,Chief Operating Officer, and Director at Taco Cabana from April 1995 throughNovember 1996.  Prior to that, Mr. Clarkheld various positions with Church’s Chicken, a division of America’s FavoriteChicken, over seventeen years, the last having been Senior Vice President andConcept General Manager.

 

**SallyM. Dungan. **Ms.Dungan was named a director and member of the audit committee of the Company inFebruary 2004.  She is Chief InvestmentOfficer (“CIO”) of Tufts University where she is responsible for the investmentpolicy and total fund structure of Tufts’ $600 million endowment and $200million non-endowment investment assets. Prior to assuming the CIO position in September of 2002, Ms. Dungan wasthe Director of Pension Fund Management for Siemens Corporation.  Ms. Dungan is a Chartered Financial Analyst.

 

**StephenR. Karp. **Mr.Karp is Chairman and CEO of New England Development, a leading developer ofshopping centers and commercial property and has served as a director of theCompany since April 2001.  He is amember of the Greater Boston Real Estate Board and the Urban LandInstitute.  He is a past President andmember of the Board of Trustees of the International Council of ShoppingCenters.  He also serves as a trustee ofthe Belmont Hill School, Dana Farber Cancer Institute and the New EnglandAquarium and is Chairman of the Board of Trustees of Children’s Hospital.

 

**JamesJ. Morgan. **Mr.Morgan has served as a director of the Company since December 1997.  From 1963 until his retirement in 1997, Mr.Morgan was employed by Philip Morris U.S.A. where he served as President andChief Executive Officer from 1994 until his retirement in 1997.  Prior to 1994, Mr. Morgan served in various capacitiesat Philip Morris including Senior Vice President of Marketing, and CorporateVice President of Marketing Planning of the Philip Morris Companies Inc.

 

**James N.Moriarty. **Mr.Moriarty was named a director and chairman of the audit committee of theCompany in February 2004. He has been a partner in the accounting firm ofVitale, Caturano & Company, P.C., a full service CPA and business advisoryfirm, since 2002. He is head of the firm’s Restaurant practice. Prior to that,Mr. Moriarty was with Arthur Andersen LLP for 14 years, the last four years asa partner in that firm. He is a member of

 

22

----

 

the AICPA and the MassachusettsSociety of CPA’s.

 

**Termof Directors**

 

The Company’s directors serve in suchcapacity until the next annual meeting of the shareholders of the Company oruntil their successors are duly elected and qualified.

 

**Audit Committee**

 

TheCompany has an Audit Committee, which consists of Sally M. Dungan and James N.Moriarty.  The Board of Directors hasreviewed the qualifications of Ms. Dungan and has determined she is“independent” under the applicable definition contained in Rule 4200(a)(15) ofthe NASD’s listing standards.  Mr.Moriarty was formerly a partner with Arthur Andersen LLP which audited theCompany’s financial statements for fiscal 2001 and was involved in the audit ofthose financial statements.  Mr.Moriarty has no relationship with Deloitte & Touche LLP, the Company’scurrent auditor.  The Board of Directorsappointed Mr. Moriarty to the Audit Committee because of his auditing andaccounting expertise.  However, becauseof Mr. Moriarty’s prior relationship with Arthur Andersen LLP during the lastthree years he does not qualify as “independent” as defined in the NASD’s or AMEX’slisting standards.  The Company’s Boardof Directors has determined that Mr. Moriarty qualifies as an Audit CommitteeFinancial Expert, as defined in Item 401(h) of Regulation S-K.

 

**Code of Ethics**

 

We have adopted a Code of Ethics forSenior Financial Officers that applies to our principal executive officer andour principal financial officer, principal accounting officer and controller,and other persons performing similar functions.  Our Code of Ethics for Senior Financial Officers is filed as Exhibit14.1 to this Annual Report on Form 10-K. If we make any substantive amendments to this Code of Ethics or grantany waiver, including any implicit waiver, from a provision of this Code ofEthics to our principal executive officer, principal financial officer,principal accounting officer, controller or other persons performing similarfunctions, we will disclose the nature of such amendment or waiver, the name ofthe person to whom the waiver was granted and the date of the amendment orwaiver.

 

23

----

 

**ITEM11.  EXECUTIVE COMPENSATION**

 

**ExecutiveCompensation**

 

The following tablesummarizes the compensation for the most current three fiscal years for theCompany’s Chief Executive Officer and each of its four other most highlycompensated executive officers (the Chief Executive Officer and such otherofficers, collectively, the ‘‘Named Executive Officers’’):

 

**SummaryCompensation Table**

 
|                             |   |   |   | **Annual  Compensation** |   | **Long Term  Compensation** |   |
|----------------------------------|--------|--------|--------|--------------------------|--------|-----------------------------|--------|
| **Name and Principal Position**  |   |   |   | **Salary($)**            |   | **Bonus($)**                |   | **Other  Annual  Compensation ($) (*)** |   | **Securities  Underlying  Options (#)** |   |
|                             |   |   |   |                     |   |                        |   |   |   |   |   |
| Benjamin R. Jacobson             |   | 2003   |   | —                   |   | —                      |   | 13,409 |   | — |   |
| Chairman of the Board,           |   | 2002   |   | —                   |   | —                      |   | 5,119 |   | — |   |
| Chief Executive Officer          |   | 2001   |   | —                   |   | —                      |   | 13,221 |   | 75,000 |   |
|                             |   |   |   |                     |   |                        |   |   |   |   |   |
| Raymond P. Barbrick              |   | 2003   |   | 228,957                  |   | —                      |   | 6,364 |   | — |   |
| President,                       |   | 2002   |   | 216,240                  |   | 153,531                     |   | 527 |   | 10,000 |   |
| Chief Operating Officer          |   | 2001   |   | 202,181                  |   | 152,155                     |   | 9,500 |   | 45,000 |   |
|                             |   |   |   |                     |   |                        |   |   |   |   |   |
| Mark S. Eason (a)                |   | 2003   |   | 155,462                  |   | —                      |   | 9,562 |   | — |   |
| Vice President Operations        |   | 2002   |   | 150,577                  |   | 106,910                     |   | 8,400 |   | 2,500 |   |
|                             |   | 2001   |   | 133,624                  |   | 100,883                     |   | 8,400 |   | 12,500 |   |
|                             |   |   |   |                     |   |                        |   |   |   |   |   |
| Kurt J. Schnaubelt               |   | 2003   |   | 132,371                  |   | —                      |   | 8,994 |   | — |   |
| Senior Vice President,           |   | 2002   |   | 125,721                  |   | 75,535                      |   | 6,588 |   | 5,000 |   |
| Chief Financial Officer          |   | 2001   |   | 111,533                  |   | 61,844                      |   | — |   | 10,000 |   |
|                             |   |   |   |                     |   |                        |   |   |   |   |   |
| Gregory A. Pastore (b)           |   | 2003   |   | 124,171                  |   | —                      |   | 9,523 |   | — |   |
| Vice President - General Counsel |   | 2002   |   | 120,664                  |   | 68,477                      |   | 8,400 |   | — |   |
|                             |   | 2001   |   | 120,000                  |   | 43,198                      |   | 8,400 |   | 15,000 |   |

 

----

(a) Mr. Eason’s responsibilties changed effective December 2003, whereby hebecame a Regional Vice President of Operations (non-executive officer) for theCompany.

(b) Mr. Pastore resigned his position in February 2004.

 

(*) - Includes auto lease payments and autoallowance paid by the Company.

 

**OptionsGranted in Last Fiscal Year**

 

There were no optionsgranted during fiscal 2003 to any of the Named Executive Officers.

 

24

----

 

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

 

The following table setsforth information concerning option exercises during fiscal 2003 (none) and thefiscal year-end value of unexercised options for each of the Named ExecutiveOfficers. 

 
| **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)** |   |
|----------------------|--------|-----------------------------------|--------|---------------------|--------|---------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------------------------|--------|
| Benjamin R. Jacobson |   | —                            |   | $                   | — |                                                                                  | 162,099 |                                                                                                   | 62,500 |   | $ | 291,642 |   | $ | — |   |
| Raymond P. Barbrick  |   | —                            |   | $                   | — |                                                                                  | 66,026  |                                                                                                   | 33,750 |   | $ | 231,390 |   | $ | 31,088 |   |
| Mark S. Eason        |   | —                            |   | $                   | — |                                                                                  | 10,416  |                                                                                                   | 8,750  |   | $ | 19,725 |   | $ | 5,181 |   |
| Kurt J. Schnaubelt   |   | —                            |   | $                   | — |                                                                                  | 7,750   |                                                                                                   | 9,250  |   | $ | 12,435 |   | $ | 4,145 |   |
| Gregory A. Pastore   |   | —                            |   | $                   | — |                                                                                  | 8,625   |                                                                                                   | 7,875  |   | $ | 9,326 |   | $ | 3,109 |   |

 

----

(a)               Basedupon a price of $17.51.

 

**Employment Agreements**

 

Executive officers of the Company are elected by the Board of Directorsand serve at the discretion of the Board. At the date of this filing, the Company is not party to any employmentagreements with executive officers.

 

**Stock Option andOther Plans for Employees**

 

*Stock Option Plan. *OnSeptember 15, 1997, the Board of Directors of the Company established the 1997Equity 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.

 

Options granted to employees under the Stock Option Plan are generallyexercisable cumulatively at the rate of 25% on or after each of the second,third, fourth and fifth anniversaries of the date of grant and options grantedto directors there under are generally exercisable immediately upon grant.  Options granted under the Stock Option Planto date expire 90 days following either the fifth or the tenth anniversary ofthe date of the grant.

 

The followingtable summarizes option activity since September 15, 1997 through December 31,2003:

 

| **Issue Date** |   | **Price** |   | **Granted** |    | **Since  Forfeited** |     | **Exercised** |    | **Outstanding  at  December 31,  2003** |    |
|----------------|--------|-----------|--------|-------------|---------|----------------------|----------|---------------|---------|-----------------------------------------|---------|
| 9/15/1997      |   | $         | 11.63  |        | 331,123 |                 | (210,246 | )             | (11,020 | )                                       | 109,857 |   |
| 7/21/1998      |   | $         | 17.51  |        | 58,429  |                 | (58,429  | )             |    |                                    | —  |   |
| 7/1/1999       |   | $         | 15.00  |        | 23,541  |                 | (8,667   | )             |    |                                    | 14,874  |   |
| 3/14/2000      |   | $         | 17.51  |        | 100,000 |                 | —   |          |    |                                    | 100,000 |   |
| 3/14/2000      |   | $         | 9.22   |        | 99,750  |                 | (50,600  | )             |    |                                    | 49,150  |   |
| 1/24/2001      |   | $         | 17.51  |        | 332,500 |                 | (68,500  | )             |    |                                    | 264,000 |   |
| 3/14/2002      |   | $         | 17.51  |        | 26,000  |                 | (6,500   | )             |    |                                    | 19,500  |   |
| 2/11/2003      |   | $         | 17.51  |        | 13,687  |                 | (3,064   | )             |    |                                    | 10,623  |   |
| 7/1/2003       |   | $         | 17.51  |        | 4,000   |                 |     |          |    |                                    | 4,000   |   |
| 7/8/2003       |   | $         | 11.63  |        | 14,178  |                 |     |          |    |                                    | 14,178  |   |
| 7/8/2003       |   | $         | 17.51  |        | 1,714   |                 |     |          |    |                                    | 1,714   |   |
| 7/8/2003       |   | $         | 15.00  |        | 2,750   |                 |     |          |    |                                    | 2,750   |   |
| 7/8/2003       |   | $         | 9.22   |        | 3,750   |                 |     |          |    |                                    | 3,750   |   |
|           |   |      |   | 1,011,422   |    | (406,006             | )        | (11,020       | )       | 594,396                                 |    |

 

On December 31, 2003, 155,604 shares ofcommon stock were available for grants under the Stock Option Plan.

 

25

----

 

*Management Incentive Plan. *Certainmanagement employees of the Company, including district managers, managingpartners (who are senior general managers), general managers and assistantmanagers are eligible, at the discretion of the Company, to participate in theCompany’s management incentive plan that provides incentives and rewards forperformance with bonus awards that reflect a percentage of each restaurant’scash contribution.  Payments under themanagement incentive plan are payable monthly or in accordance with the thencurrent payroll cycle of the Company.

 

*Executive Savings and Investment Plan.*During1999, the Company established the Bertucci’s Corporation 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 maintains an irrevocable grantortrust which has been established by the Company, as grantor, pursuant to theScudder Kemper Investments Non-Qualified Deferred Compensation Plan Trust Agreement,dated September 20, 1999.  The agreementis between the Company and Scudder Kemper Investments, as trustee, for thepurpose of paying benefits under non-qualified deferred compensation plan.

 

The trust assets are held separately fromother funds of the Company, but remain subject to claims of the Company’sgeneral creditors in the event of the Company’s insolvency.  As of December 31, 2003 there were 14participants in the plan with a total market value of approximately $393,000.

 

*401(k*) *Plan*.The Company 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 Companyfor the years ended December 31, 2003, January 1, 2003, and January 2, 2002,were approximately $81,000, $27,000, and $31,000, respectively

 

*EmployeeLoans.* In February 2002, the Company extended loans to 14 membersof Management (including eight officers). The demand notes accrued interest at 8% payable quarterly.  As of February 13, 2003 all demand noteswere paid in full.

 

**Compensation of Directors**

 

Each of the Company’sdirectors is reimbursed for any expenses incurred by such director inconnection with such director’s attendance at meetings of the Board ofDirectors, or any committee thereof.  Inaddition, all directors are eligible to receive options under the Company’sstock option plans.  Members of therecently appointed Audit Committee receive additional compensation for servingon this committee. This compensation will include a quarterly stipend forserving on the Board of Directors and a fee for attending either a Board ofDirectors meeting or an Audit Committee meeting. Through March 15, 2004 eachmember has been paid $5,000. Directors receive no other compensation from theCompany for serving on the Board of Directors or a committee of the Board ofDirectors.

 

**Compensation CommitteeInterlocks and Insider Participation**

 

Effective as of January1, 1998, the Board of Directors appointed a Compensation Committee.  Currently, Mr. Morgan is the sole member ofthe Compensation Committee. Messrs. James R. Parish and Steven F. Mandel werealso members of this committee until their resignations from the Board ofDirectors in December, 2003.

 

Mr. Jacobson has in thepast and will in the future provide certain consulting services to theCompany.  See “Item 13.  Certain Relationships And RelatedTransactions.”

 

26

----

 

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

 

The following tableprovides information at March 26, 2004, with respect to ownership of theCompany’s common stock $0.01 par value per share (the ‘‘Company CommonStock’’), by (i) each beneficial owner of five percent or more of the Company’sCommon Stock, (ii) each director of the Company who benefically owns shares ofCompany Common Stock, (iii) each of the Named Executive Officers and (iv) alldirectors and executive officers as a group. For the purpose of computing the percentage of the shares of CompanyCommon Stock owned by each person or group listed in this table, shares whichare subject to options exercisable within 60 days after March 26, 2004 havebeen deemed to be outstanding and owned by such person or group, but have notbeen deemed to be outstanding for the purpose of computing the percentage ofthe shares of Company Common Stock owned by any other person.  Except as indicated in the footnotes to thistable, the persons named in the table have sole voting and investment powerwith respect to all shares of Company Common Stock shown as beneficially ownedby them.

 

| **Name and Address of Beneficial Owner**                                |   | **Shares  Beneficially  Owned** |   | **Percent  of Class** |   |
|-------------------------------------------------------------------------|--------|---------------------------------|--------|-----------------------|--------|
|                                                                    |   |                            |   |                  |   |
| Benjamin R. Jacobson (1)                                                |   | 996,826                         |   | 32.0                  | %      |
| 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                   | %      |
|                                                                    |   |                            |   |                  |   |
| Raymond P. Barbrick (4)                                                 |   | 97,263                          |   | 3.2                   | %      |
|                                                                    |   |                            |   |                  |   |
| James J. Morgan (5)                                                     |   | 50,333                          |   | 1.7                   | %      |
|                                                                    |   |                            |   |                  |   |
| Stephen R. Karp (6)                                                     |   | 19,994                          |   |                  |   |
|                                                                    |   |                            |   |                  | *      |
| Kurt J. Schnaubelt (7)                                                  |   | 16,521                          |   |                  |   |
|                                                                    |   |                            |   |                  | *      |
| Mark S. Eason (8)                                                       |   | 15,510                          |   |                  |   |
|                                                                    |   |                            |   |                  | *      |
| Gregory A. Pastore (9)                                                  |   | 8,625                           |   |                  |   |
|                                                                    |   |                            |   |                  | *      |
| Stephen V. Clark                                                        |   | 8,488                           |   |                  |   |
|                                                                    |   |                            |   |                  | *      |
| All directors and executive officers as a group (12 persons)  (10) |   | 1,204,935                       |   | 37.5                  | %      |

 

----

*                      Less than 1%.

 

1)                   Includes(a) 613,273 shares of Company Common Stock held by J.P. Acquisition Fund II,L.P., a Delaware limited partnership (‘‘JPAF II’’), (b) 162,099 shares ofCompany Common Stock issuable upon exercise of outstanding stock options withinthe parameters described above, and (c) 21,217 shares of Company Common Stockheld by trusts for the benefit of Mr. Jacobson’s children, with respect towhich a third party is trustee and has voting control.  JPAF, Inc., a Delaware corporation, is thegeneral 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)in clause (c) above.

2)                   Includes(a) 67,834 shares of Company Common Stock held by JPAF II, representing Mr.Devlin’s pro rata interest as a limited partner of JPAF II; and (b) 3,500shares of Company Common Stock issuable upon exercise of outstanding stockoptions within the parameters described above.

 

27

----

 

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

4)                   Includes66,026 shares of Company Common Stock issuable upon exercise of outstandingstock options within the parameters described above.

5)                   Includes(a) 8,482 shares of Company Common Stock held by JPAF II, representing Mr.Morgan’s pro rata interest as a limited partner of JPAF II; and (b) 4,500shares of Company Common Stock issuable upon exercise of outstanding stockoptions within the parameters described above.

6)                   Includes(a) 18,994 shares of Company Common Stock held by trusts for the benefit of Mr.Karp’s children, with respect to which a third party is trustee and has votingcontrol (Mr. Karp disclaims beneficial ownership of all such shares); and (b)1,000 shares of Company Common Stock issuable upon exercise of outstandingstock options within the parameters described above.  

7)                   Includes7,750 shares of Company Common Stock issuable upon exercise of outstandingstock options within the parameters described above.

8)                   Includes10,416 shares of Company Common Stock issuable upon exercise of outstandingstock options within the parameters described above.

9)                   Mr.Pastore resigned his position in February, 2004 but contractually retains hisoptions rights until May 2004. Accordingly, 8,625 shares of Company CommonStock issuable upon exercise of outstanding stock options within the parametersdescribed above are included. The Company purchased his 10,503 shares of commonstock in February 2004.

10)             Includes(a) 260,416 shares of Company Common Stock issuable upon exercise ofoutstanding stock options within the parameters described above; and (b) the8,482 shares described in (5) above.

 

**ShareholdersAgreement**

 

The Companyand the current shareholders of the Company are parties to a Stockholders’Agreement, dated as of March 14, 2000. Additionally, the Company and certainemployee shareholders and director shareholders are parties to an Agreement,dated February 19, 2002, relating to the transferability of certain of theirshares of common stock (collectively, the ‘‘Shareholder Agreements’’).

 

TheShareholder Agreements provide, among other things, that (i) a shareholder maynot 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) the Companyhas the option to purchase the shares of any shareholder who is an employee ofthe Company following the termination of such shareholder’s employment with theCompany for any reason at a purchase price equal to the fair market value ororiginal purchase price (plus accrued interest in certain circumstances) dependingupon the reason for such termination, (iii) the Company has the option topurchase the shares of any shareholder who is an employee of the Companyfollowing certain transfer events, including such shareholders’ bankruptcy or acourt-ordered transfer of such shareholder’s stock, (iv) if the Company failsto exercise its option to purchase as described in the immediately precedingclause (iii), the remaining shareholders have the option to purchase theapplicable shares, (v) in the event an employee shareholder leaves the Companydue to death, disability or hardship or, 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, (vi) no transfer of shares may occur unless the transfereethereof agrees to be bound by the terms of the Shareholders Agreement and (vii)all share certificates must bear customary legends and all share transfers mustbe in compliance with applicable securities laws.

 

28

----

 

**Equity Compensation Plan Information**

 

The Companymaintains equity compensation plans for employees, officers, directors and otherswhose efforts contribute to its success. The table below sets forth certain information as of our fiscal yearended December 31, 2003 regarding the shares of the Company’s Common Stockavailable for grant or granted under the equity compensation plans that (i)were approved by Company stockholders; and (ii) were not approved by Companystockholders (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            |   | 594,396                                                                                            |   | $                                                                                  | 15.42  |                                                                                                                                                  | 155,604 |   |
| Equity compensation plans not approved by  security holders (none) |   | —                                                                                             |   | —                                                                             |   | —                                                                                                                                                |    |
| Total                                                              |   | 594,396                                                                                            |   | $                                                                                  | 15.42  |                                                                                                                                                  | 155,604 |   |

 

**ITEM 13.  CERTAINRELATIONSHIPS AND RELATED TRANSACTIONS**

 

Benjamin R. Jacobson,Chairman of the Board of Directors, Chief Executive Officer, and Treasurer isthe Managing Partner of Jacobson Partners. Jacobson Partners was paid consulting fees and reimbursed for certaintravel and other incidental expenses in consideration of certain financialadvisory services provided to the Company. The amount paid to Jacobson Partners for financial consulting fees was$250,000 for the fiscal year ended December 31, 2003.  In connection with the Acquisition, the Company entered into afinancial advisory services agreement with Jacobson Partners.  Under this agreement, Jacobson Partnersprovides various financial advisory services to the Company, including, amongother things, assistance in preparing internal budgets, performing cash managementactivities, maintaining and improving accounting and other managementinformation systems, negotiating financing arrangements, complying with publicreporting and disclosure requirements and communicating with creditors andinvestors.  The Company believes thefinancial advisory services agreement was made on terms that are no lessfavorable to the Company than those that could be obtained from an unrelatedparty.  Jacobson Partners is the soleshareholder of the corporate general partner of JPAF II, which ownsapproximately 20.8% of the outstanding common stock of the Company.

 

During 1999, the Company established theBertucci’s Corporation, Inc. Executive Savings and Investment Plan to whichhighly compensated executives of the Company may elect to defer a portion oftheir salary and (or) earned bonus.  TheCompany maintains an irrevocable grantor trust which has been established bythe Company, as grantor, pursuant to the Scudder Kemper Investmentsnon-qualified deferred compensation plan trust agreement, dated September 20,1999.  The agreement is between theCompany and Scudder Kemper Investments, as trustee, for the purpose of payingbenefits under non-qualified deferred compensation plan.  The trust assets are held separately fromother funds of the Company, but remain subject to claims of the Company’sgeneral creditors in the event of the Company’s insolvency. As of December 31,2003, there were 14 participants in the plan with a total market value ofapproximately $393,000.

 

In February 2002, theCompany extended loans to 14 members of Management (including eightofficers).  The demand notes accruedinterest at 8%, payable quarterly.  Asof February 13, 2003 all demand notes were paid in full.

 

29

----

 

**ITEM14.  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 31, 2003 (fiscal 2003) and January 1, 2003 (fiscal 2002):

 

| **Fee Category**   |   | **Fiscal  2003 Fees** |    | **Fiscal  2002 Fees** |   |
|--------------------|--------|-----------------------|---------|-----------------------|--------|
| Audit Fees         |   | $                     | 155,000 |                  | $      | 135,000 |   |
| Audit-Related Fees |   | 16,000                |    | 20,000                |   |
| Tax Fees           |   | 70,000                |    | 37,600                |   |
| All Other Fees     |   | —                |    | —                |   |
| Total Fees         |   | $                     | 241,000 |                  | $      | 192,600 |   |

 

*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-Related Fees consist of aggregate feesbilled for assurance and related services that are reasonably related to theperformance of the audit or review of the Company’s consolidated financialstatements and are not reported under “Audit Fees.” These services areprimarily 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 products and services other thanthose reported above.

 

**Audit Committee Policy on Pre-Approval of Services ofIndependent Auditors**

 

The Company formed its Audit Committee in February 2004.  The Audit Committee’s policy, on agoing-forward basis, is to pre-approve all audit and permissible non-auditservices provided by the independent auditors. These services may include auditservices, audit-related services, tax services and other services. The Companyexpects that pre-approval will generally be provided for up to one year. TheAudit Committee may also pre-approve particular services on a case-by-casebasis.

 

30

----

**PART IV**

 

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

 

(a)           Thefollowing documents are filed as part of this report:

 

(1)   FinancialStatements:

 

Independent Auditors Report.

 

Consolidated Balance Sheets as of December 31, 2003 and January 1,2003.

 

Consolidated Statements of Operations foreach of the years ended December 31, 2003, January 1, 2003, and January 2,2002.

 

Consolidated Statements of Stockholders’Equity for each of the years ended December 31, 2003, January 1, 2003, andJanuary 2, 2002.

 

Consolidated Statements of Cash Flows foreach of the years ended December 31, 2003, January 1, 2003, and January 2,2002.

 

Notes to Consolidated Financial Statements.

 

(2)   ExhibitIndex

 

(b)           Reportson Form 8-K:

 

The Companydid not file any Current Reports on Form 8-K during the last quarter for theperiod covered by this report.

 

31

----

 

SIGNATURES

 

Pursuant to the requirements of Section 13 or 15 (d) of the SecuritiesExchange Act of 1934, the Company has duly caused this report to be signed onits behalf by the undersigned, thereunto duly authorized.

 
|   | BERTUCCI’S CORPORATION |
|--------|-----------------------------|
|   |                        |
|   |                        |
|   | By:                         | /s/ Benjamin R. Jacobson |   |
|   |                        | Benjamin R. Jacobson, Chairman of the Board |
|   |                        |
|   | Date: March 26, 2004        |

 

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,      |     | March 26, 2004 |
| Benjamin R. Jacobson           |   | Chief Executive Officer, Treasurer  (Principal Executive Officer) |                                     |     |
|                           |   |                                                              |                                     |     |
|  /s/ Raymond P. Barbrick  |   |                                                              | President, Chief Operating Officer and   |     | March 26, 2004 |
| Raymond P. Barbrick            |   | Director                                                          |                                     |     |
|                           |   |                                                              |                                     |     |
|  /s/ Kurt J. Schnaubelt   |   |                                                              | Senior Vice President – Finance and |     | March 26, 2004 |
| Kurt J. Schnaubelt             |   | Administration  (Chief  Accounting Officer)                  |                                     |     |
|                           |   |                                                              |                                     |     |
|  /s/ James N. Moriarty    |   |                                                              | Director                                 |     | March 26, 2004 |
| James N. Moriarty              |   |                                                              |                                     |     |
|                           |   |                                                              |                                     |     |
|  /s/ Sally M. Dungan      |   |                                                              | Director                                 |     | March 26, 2004 |
| Sally M. Dungan                |   |                                                              |                                     |     |
|                           |   |                                                              |                                     |     |
|                           |   |                                                              | Director                                 |     |   |
| Stephen V. Clark               |   |                                                              |                                     |     |
|                           |   |                                                              |                                     |     |
|                           |   |                                                              | Director                                 |     |   |
| Stephen R. Karp                |   |                                                              |                                     |     |
|                           |   |                                                              |                                     |     |
|                           |   |                                                              | Director                                 |     |   |
| James J. Morgan                |   |                                                              |                                     |     |

 

32

----

 

### **Independent AuditorsReport**

 

 

To the Board of Directors of Bertucci’s Corporation:

 

We have audited the accompanying consolidated balance sheets ofBertucci’s Corporation and subsidiaries (“the Company”) as of December 31, 2003and January 1, 2003, and the related consolidated statements of operations,changes in stockholders’ equity, and cash flows for the years then ended.  These financial statements are theresponsibility of the Company’s management. Our responsibility is to express an opinion on these financialstatements based on our audits.  Thefinancial statements for the year ended January 2, 2002, before the inclusionof the reclassification discussed in Note 3 and the disclosures discussed inNote 4 to the consolidated financial statements, were audited by other auditorswho have ceased operations.  Thoseauditors expressed an unqualified opinion on those consolidated financialstatements in their report dated February 22, 2002.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States of America. Those standards require that we plan and perform the audit to obtainreasonable assurance about whether the financial statements are free ofmaterial misstatement.  An auditincludes examining, on a test basis, evidence supporting the amounts anddisclosures in the financial statements. An audit also includes assessing the accounting principles used andsignificant estimates made by management, as well as evaluating the overallfinancial statement presentation.  Webelieve that our audits provide a reasonable basis for our opinion.

 

In our opinion, the 2003 and 2002 consolidated financial statementspresent fairly, in all material respects, the financial position of the Companyat December 31, 2003 and January 1, 2003, and the results of their operationsand their cash flows for the years then ended in conformity with accountingprinciples generally accepted in the United States of America.

 

As discussed in Note 4 to the Financial Statements, on January 3, 2002,the Company adopted the provisions of Statement of Financial AccountingStandards (“SFAS”) No. 142, *Goodwill and Other Intangible Assets*.

 

As discussed above, the consolidated financial statements of theCompany for theyear ended January 2, 2002, were audited by other auditors who haveceased operations.  As described in Note4, those financial statements have been revised to include the transitionaldisclosures required by SFAS No. 142. Our audit procedures with respect to the disclosures in Note 4 withrespect to fiscal 2001 included (i) comparing the previously reported netincome to the previously issued financial statements and the adjustments toreported net income representing amortization expense (including any taxeffects) recognized in those periods related to goodwill to the Company’sunderlying analysis obtained from management, and (ii) testing the mathematicalaccuracy of the reconciliation of adjusted net income to reported net income,and the related earnings per share amounts. As described in Note 3, thosefinancial statements have also been reclassified to give effect to Statement ofFinancial Accounting Standards No. 145, Rescission of FASB Statements No. 4,44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections (SFASNo. 145), which was adopted by the Company on January 2, 2003.  We auditedthe adjustments described in Note 3 that were applied to conform the 2001financial statements to the presentation required by SFAS No. 145.  Ouraudit procedures with respect to the 2001 disclosures in Note 3 included (1)comparing the amounts shown as gain on extinguishment of debt in the Company’sconsolidated statement of operations to the Company’s underlying accountinganalysis obtained from management, (2) on a test basis, comparing the amountscomprising the gain on extinguishment of debt obtained from management toindependent supporting documentation, and (3) testing the mathematical accuracyof the underlying analysis. In our opinion, the disclosures for fiscal 2001 inNote 4 are appropriate and the reclassifications discussed in Note 3 have beenproperly applied.  However, we were notengaged to audit, review, or apply any procedures to the 2001 financialstatements of the Company other than with respect to such disclosures andreclassification and, accordingly, we do not express an opinion or any otherform of assurance on the 2001 financial statements taken as a whole.

 
| /s/ Deloitte & Touche LLP |   |
|-------------------------------|--------|
|                          |
| Boston, Massachusetts         |
| March 26, 2004                |

 

33

----

 

**Report of Independent Public Accountants**

 

To the Board of Directors of Bertucci’s Corporation:

 

We have audited the accompanying consolidated balance sheets ofBertucci’s Corporation (formerly NE Restaurant Company, Inc.), a DelawareCorporation (the Company), and its subsidiaries as of January 2, 2002 andJanuary 3, 2001, and the related consolidated statements of operations, changesin stockholders’ equity and cash flows for each of the three years in theperiod ended January 2, 2002.  These financial statements and the schedulereferred to below are the responsibility of the Company’s management.  Ourresponsibility is to express an opinion on these financial statements andschedule based on our audits.

 

We conducted our audits in accordance with auditing standards generallyaccepted in the United States.  Those standards require that we plan andperform the audit to obtain reasonable assurance about whether the financialstatements are free of material misstatement.  An audit includesexamining, on a test basis, evidence supporting the amounts and disclosures inthe financial statements.  An audit also includes assessing the accountingprinciples used and significant estimates made by management, as well asevaluating the overall financial statement presentation.  We believe thatour audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above presentfairly, in all material respects, the financial position of Bertucci’sCorporation and its subsidiaries as of January 2, 2002 and January 3, 2001, andthe results of their operations and their cash flows for each of the threeyears in the period ended January 2, 2002, in conformity with accountingprinciples generally accepted in the United States.

 

Our audits were made for the purpose of forming an opinion on the basicfinancial statements taken as a whole.  The schedule listed in the indexof financial statements is presented for purposes of complying with theSecurities and Exchange Commissions rules and is not part of the basicfinancial statements.  This schedule has been subjected to the auditingprocedures applied in the audits of the basic financial statements and, in ouropinion, fairly states in all material respects the financial data required tobe set forth therein in relation to the basic financial statements taken as awhole.

 
| /s/ Arthur Andersen LLP |   |
|-------------------------|--------|
|                    |
|                    |
| Boston, Massachusetts   |
| February 22, 2002       |

 

This is a copy of a report previously issued by Arthur Andersen LLP.This report has not been reissued by Arthur Andersen LLP nor has ArthurAndersen LLP provided a consent to the inclusion of its report in thesefinancial statements. The financial statements as of January 2, 2002 andJanuary 3, 2001 and for the year ended December 29, 1999 are not presentedherein.

 

34

----

 

BERTUCCI’S CORPORATION

CONSOLIDATEDBALANCE SHEETS

(Dollarsin thousands except share data)

 
|                                                                                 |   | **December  31,  2003** |    | **January 1,  2003** |   |
|--------------------------------------------------------------------------------------|--------|-------------------------|---------|----------------------|--------|
| ASSETS                                                                               |   |                    |    |                 |   |
| Current Assets:                                                                      |   |                    |    |                 |   |
| Cash and cash equivalents                                                            |   | $                       | 12,647  |                 | $      | 13,133 |   |
| Restricted cash                                                                      |   | 3,129                   |    | 2,468                |   |
| Accounts receivable                                                                  |   | 753                     |    | 1,733                |   |
| Inventories                                                                          |   | 1,268                   |    | 900                  |   |
| Prepaid expenses and other current assets                                            |   | 1,758                   |    | 1,995                |   |
| Total current assets                                                                 |   | 19,555                  |    | 20,229               |   |
|                                                                                 |   |                    |    |                 |   |
| Property and Equipment, at cost:                                                     |   |                    |    |                 |   |
| Land                                                                                 |   | 259                     |    | 2,468                |   |
| Buildings                                                                            |   | 697                     |    | 6,671                |   |
| Capital leases - land and buildings                                                  |   | 5,764                   |    | —               |   |
| Leasehold improvements                                                               |   | 63,084                  |    | 57,130               |   |
| Furniture and equipment                                                              |   | 43,806                  |    | 36,660               |   |
|                                                                                 |   | 113,610                 |    | 102,929              |   |
| Less - accumulated depreciation and amortization                                     |   | (40,300                 | )       | (31,555              | )      |
|                                                                                 |   | 73,310                  |    | 71,374               |   |
| Construction work in process                                                         |   | 301                     |    | 1,830                |   |
| Net property and equipment                                                           |   | 73,611                  |    | 73,204               |   |
|                                                                                 |   |                    |    |                 |   |
| Goodwill                                                                             |   | 26,127                  |    | 26,127               |   |
| Deferred finance costs, net                                                          |   | 3,559                   |    | 3,714                |   |
| Liquor licenses                                                                      |   | 2,555                   |    | 1,763                |   |
| Other assets                                                                         |   | 479                     |    | 385                  |   |
| TOTAL ASSETS                                                                         |   | $                       | 125,886 |                 | $      | 125,422 |   |
|                                                                                 |   |                    |    |                 |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                           |   |                    |    |                 |   |
|                                                                                 |   |                    |    |                 |   |
| Current Liabilities:                                                                 |   |                    |    |                 |   |
| Promissory notes - current portion                                                   |   | $                       | 39      |                 | $      | — |   |
| Capital lease obligations - current portion                                          |   | 31                      |    | —               |   |
| Accounts payable                                                                     |   | 8,443                   |    | 7,986                |   |
| Accrued expenses                                                                     |   | 14,026                  |    | 13,532               |   |
| Total current liabiliites                                                            |   | 22,539                  |    | 21,518               |   |
| Promissory notes, net of current portion                                             |   | 821                     |    | —               |   |
| Captial lease obligations, net of current  portion                                   |   | 5,724                   |    | —               |   |
| Senior Notes                                                                         |   | 85,310                  |    | 85,310               |   |
| Deferred gain on sale leaseback transaction                                          |   | 2,112                   |    | —               |   |
| Other long-term liabilities                                                          |   | 4,164                   |    | 4,706                |   |
| Total liabilities                                                                    |   | 120,670                 |    | 111,534              |   |
| Stockholders’ Equity:                                                           |   |                    |    |                 |   |
| Common stock, $.01 par value                                                         |   |                    |    |                 |   |
| Authorized - 8,000,000 shares                                                        |   |                    |    |                 |   |
| Issued - 3,666,370 shares, Outstanding  2,961,552 and 2,978,955 shares, respectively |   | 37                      |    | 37                   |   |
| Less treasury shares of 704,818 and  687,415, respectively, at cost                  |   | (8,190                  | )       | (8,088               | )      |
| Additional paid-in capital                                                           |   | 29,035                  |    | 29,004               |   |
| Accumulated deficit                                                                  |   | (15,666                 | )       | (7,065               | )      |
| Total stockholders’ equity                                                      |   | 5,216                   |    | 13,888               |   |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                     |   | $                       | 125,886 |                 | $      | 125,422 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

35

----

 

BERTUCCI’S CORPORATION

CONSOLIDATEDSTATEMENTS OF OPERATIONS

(Dollarsin thousands except share and per share data)

 
|                                                               |   | **52 Weeks  Ended**     |    |
|--------------------------------------------------------------------|--------|-------------------------|---------|
|                                                               |   | **December  31,  2003** |    | **January 1,  2003** |   | **January 2,  2002** |   |
|                                                               |   |                    |    |   |   |   |   |
| Net sales                                                          |   | $                       | 186,172 |   | $ | 162,319 |   | $ | 186,638 |   |
|                                                               |   |                    |    |   |   |   |   |
| Cost of sales and expenses:                                        |   |                    |    |   |   |   |   |
| Cost of sales                                                      |   | 43,544                  |    | 35,667 |   | 44,855 |   |
| Operating expenses                                                 |   | 113,076                 |    | 96,413 |   | 111,795 |   |
| General and administrative expenses                                |   | 11,320                  |    | 12,124 |   | 12,548 |   |
| Deferred rent, depreciation, amortization  and preopening expenses |   | 12,700                  |    | 10,733 |   | 13,142 |   |
| Asset impairment charge                                            |   | 4,682                   |    | — |   | 1,800 |   |
| Closed restaurants charge                                          |   | —                  |    | 236 |   | 4,200 |   |
| Total cost of sales and expenses                                   |   | 185,322                 |    | 155,173 |   | 188,340 |   |
|                                                               |   |                    |    |   |   |   |   |
| Income (loss) from operations                                      |   | 850                     |    | 7,146 |   | (1,702 | ) |
|                                                               |   |                    |    |   |   |   |   |
| Other (expense) income:                                            |   |                    |    |   |   |   |   |
| Gain on Brinker Sale                                               |   | 650                     |    | — |   | 36,932 |   |
| Gain on retirement of Senior Notes                                 |   | —                  |    | — |   | 2,290 |   |
| Interest expense, net                                              |   | (10,101                 | )       | (9,587 | ) | (11,365 | ) |
| Other (expense) income                                             |   | (9,451                  | )       | (9,587 | ) | 27,857 |   |
|                                                               |   |                    |    |   |   |   |   |
| (Loss) income before income tax provision                          |   | (8,601                  | )       | (2,441 | ) | 26,155 |   |
|                                                               |   |                    |    |   |   |   |   |
| Income tax provision                                               |   | —                  |    | 2,697 |   | 11,195 |   |
|                                                               |   |                    |    |   |   |   |   |
| Net (loss) income                                                  |   | $                       | (8,601  | ) | $ | (5,138 | ) | $ | 14,960 |   |
|                                                               |   |                    |    |   |   |   |   |
| Basic (loss) income per share                                      |   | $                       | (2.90   | ) | $ | (1.72 | ) | $ | 5.02 |   |
|                                                               |   |                    |    |   |   |   |   |
| Weighted average shares outstanding - basic                        |   | 2,970,403               |    | 2,978,955 |   | 2,978,955 |   |
|                                                               |   |                    |    |   |   |   |   |
| Diluted (loss) income per share                                    |   | $                       | (2.90   | ) | $ | (1.72 | ) | $ | 4.60 |   |
|                                                               |   |                    |    |   |   |   |   |
| Weighted average shares outstanding -  diluted                     |   | 2,970,403               |    | 2,978,955 |   | 3,252,605 |   |

 

Theaccompanying notes are an integral part of these consolidated financialstatements.

 

36

----

 

BERTUCCI’S CORPORATION

CONSOLIDATED STATEMENTS OF CHANGES INSTOCKHOLDERS’ EQUITY

(Dollars in thousands)

 
|                                                |   | **Common  Stock**     |   | **Treasury  Stock** |   |                  |     |       |   | **Total  Stockholders’  Equity** |   |
|-----------------------------------------------------|--------|-----------------------|--------|---------------------|--------|-----------------------|----------|------------|--------|---------------------------------------|--------|
|                                                |   | **Number of  Shares** |   | **Amount**          |   | **Number of  Shares** |     | **Amount** |   | **Additional  Paid  In Capital**      |   | **Accumulated  Deficit** |   |   |
|                                                |   |                  |   |                |   |                  |     |       |   |                                  |   |   |   |   |   |
| Balance January 3, 2001                             |   | 3,666,370             |   | $                   | 37     |                  | (687,415 | )          | $      | (8,088                                | )      | $ | 29,004 |   | $ | (16,887 | ) | $ | 4,066 |   |
|                                                |   |                  |   |                |   |                  |     |       |   |                                  |   |   |   |   |   |
| Net income                                          |   | —                |   | —              |   | —                |     | —     |   | —                                |   | 14,960 |   | 14,960 |   |
| Balance January 2, 2002                             |   | 3,666,370             |   | 37                  |   | (687,415              | )        | (71        | )      | 29,004                                |   | (1,927 | ) | 27,043 |   |
|                                                |   |                  |   |                |   |                  |     |       |   |                                  |   |   |   |   |   |
| Net loss                                            |   | —                |   | —              |   | —                |     | —     |   | —                                |   | (5,138 | ) | (5,138 | ) |
| Balance January 1, 2003                             |   | 3,666,370             |   | $                   | 37     |                  | (687,415 | )          | (8,088 | )                                     | $      | 29,004 |   | $ | (7,065 | ) | $ | 13,888 |   |
|                                                |   |                  |   |                |   |                  |     |       |   |                                  |   |   |   |   |   |
| Net loss                                            |   | —                |   | —              |   | —                |     | —     |   | —                                |   | (8,601 | ) | (8,601 | ) |
| Compensation expense associated with option  grants |   | —                |   | —              |   | —                |     | —     |   | 31                                    |   | — |   | 31 |   |
| Purchase of common stock for treasury               |   | —                |   | —              |   | (17,403               | )        | (102       | )      | —                                |   | — |   | (102 | ) |
| Balance December 31, 2003                           |   | 3,666,370             |   | $                   | 37     |                  | (704,818 | )          | $      | (8,190                                | )      | $ | 29,035 |   | $ | (15,666 | ) | $ | 5,216 |   |

 

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

 

37

----

 

BERTUCCI’SCORPORATION

CONSOLIDATED STATEMENTS OFCASH FLOW

(Dollarsin thousands)

 
|                                                                                      |   | **52 Weeks  Ended  December 31, 2003** |   | **52 Weeks  Ended  January 1, 2003** |   | **52 Weeks  Ended  January 2, 2002** |   |
|-------------------------------------------------------------------------------------------|--------|----------------------------------------|--------|--------------------------------------|--------|--------------------------------------|--------|
|                                                                                      |   |                                   |   |                                 |   |                                 |   |
| Cash flows from operating activities                                                      |   |                                   |   |                                 |   |                                 |   |
| Net (loss) income                                                                         |   | $                                      | (8,601 | )                                    | $      | (5,138                               | )      | $ | 14,960 |   |
| Adjustments to reconcile net (loss) income  to net cash provided by operating activities: |   |                                   |   |                                 |   |                                 |   |
| Gain on Brinker Sale, net of tax                                                          |   | (650                                   | )      | —                               |   | (22,150                              | )      |
| Gain on Senior Notes retirement                                                           |   | —                                 |   | —                               |   | (2,290                               | )      |
| Gain on sale of property                                                                  |   | —                                 |   | (235                                 | )      | —                               |   |
| Loss on sale leaseback transaction                                                        |   | 59                                     |   | —                               |   | —                               |   |
| Stock compensation expense                                                                |   | 31                                     |   | —                               |   | —                               |   |
| Closed restaurant charge                                                                  |   | —                                 |   | 236                                  |   | 4,200                                |   |
| Asset impairment charge                                                                   |   | 4,682                                  |   | —                               |   | 1,800                                |   |
| Deferred rent, depreciation, and  amortization                                            |   | 11,235                                 |   | 9,860                                |   | 13,150                               |   |
| Deferred income taxes                                                                     |   | —                                 |   | 7,697                                |   | 4,187                                |   |
| Changes in operating assets and liabilities                                               |   |                                   |   |                                 |   |                                 |   |
| Inventories                                                                               |   | (368                                   | )      | (95                                  | )      | 223                                  |   |
| Prepaid expenses, receivables and other                                                   |   | 1,217                                  |   | (1,126                               | )      | 1,211                                |   |
| Other accrued expenses                                                                    |   | 106                                    |   | (1,131                               | )      | (4,210                               | )      |
| Income taxes payable                                                                      |   | 409                                    |   | (1,149                               | )      | (7,440                               | )      |
| Accounts payable                                                                          |   | 457                                    |   | (822                                 | )      | (1,866                               | )      |
| Other operating assets and liabilities                                                    |   | (169                                   | )      | 75                                   |   | 2,551                                |   |
| Total adjustments                                                                         |   | 17,009                                 |   | 13,310                               |   | (10,634                              | )      |
| Net cash provided by operating activities                                                 |   | 8,408                                  |   | 8,172                                |   | 4,326                                |   |
|                                                                                      |   |                                   |   |                                 |   |                                 |   |
| Cash flows from investing activities                                                      |   |                                   |   |                                 |   |                                 |   |
| Additions to property and equipment                                                       |   | (16,738                                | )      | (17,215                              | )      | (12,261                              | )      |
| Proceeds from sale of restaurants                                                         |   | —                                 |   | 413                                  |   | 200                                  |   |
| Acquisition of liquor licenses                                                            |   | (278                                   | )      | (17                                  | )      | —                               |   |
| Net proceeds from Brinker Sale                                                            |   | —                                 |   | —                               |   | 36,325                               |   |
| Net cash (used in) provided by investing  activities                                      |   | (17,016                                | )      | (16,819                              | )      | 24,264                               |   |
|                                                                                      |   |                                   |   |                                 |   |                                 |   |
| Cash flows from financing activities                                                      |   |                                   |   |                                 |   |                                 |   |
| Net proceeds from sale leaseback  transactions                                            |   | 8,977                                  |   | —                               |   | —                               |   |
| Payments on mortgage loans                                                                |   | —                                 |   | —                               |   | (422                                 | )      |
| Increase in restricted cash                                                               |   | (661                                   | )      | (1,455                               | )      | (1,013                               | )      |
| Purchase of treasury shares                                                               |   | (102                                   | )      | —                               |   | —                               |   |
| Payment on promissory note                                                                |   | (81                                    | )      | —                               |   | —                               |   |
| Principal payments under capital lease  obligations                                       |   | (11                                    | )      | —                               |   | —                               |   |
| Senior Notes retirement                                                                   |   | —                                 |   | —                               |   | (11,522                              | )      |
| Net cash provided by (used in) financing  activities                                      |   | 8,122                                  |   | (1,455                               | )      | (12,957                              | )      |
|                                                                                      |   |                                   |   |                                 |   |                                 |   |
| Net (decrease) increase in cash and cash  equivalents                                     |   | (486                                   | )      | (10,102                              | )      | 15,633                               |   |
| Cash and cash equivalents, beginning of  year                                             |   | 13,133                                 |   | 23,235                               |   | 7,602                                |   |
| Cash and cash equivalents, end of year                                                    |   | $                                      | 12,647 |                                 | $      | 13,133                               |   | $ | 23,235 |   |
|                                                                                      |   |                                   |   |                                 |   |                                 |   |
| Supplemental Disclosure of Cash Flow  Information:                                        |   |                                   |   |                                 |   |                                 |   |
| Cash paid for interest                                                                    |   | $                                      | 9,772  |                                 | $      | 9,750                                |   | $ | 11,537 |   |
| Cash (refunded) paid for income taxes                                                     |   | $                                      | (408   | )                                    | $      | (3,863                               | )      | $ | 6,103 |   |
| Capital leases entered into during period                                                 |   | $                                      | 5,766  |                                 | $      | —                               |   | $ | — |   |
| 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.

 

38

----

 

# **BERTUCCI’S CORPORATION**

Notes to Consolidated Financial Statements

DECEMBER 31, 2003

 

(1)           ORGANIZATION ANDOPERATIONS

 

Bertucci’s Corporation (the “Company”) (a Delawarecorporation) was incorporated on January 1, 1994 as NE Restaurant Company,Inc., and formally changed its name to Bertucci’s Corporation on August 16,2001.  The Company was originally formedto acquire and operate Chili’s Grill & Bar restaurant franchises located inMassachusetts, New Hampshire, Maine, Vermont, Rhode Island, and Connecticut.While continuing to build and operate Chili’s Grill & Bar restaurants, theCompany later acquired the rights to build and operate On The Border restaurantfranchises in the same states plus portions of New York. The Company developedand operated these restaurant franchises under franchise agreements withBrinker International, Inc., a publicly-owned company (“Brinker” or the“Franchisor”).

 

In July 1998, the Company completed its acquisition ofBertucci’s Inc. (“Bertucci’s”), a publicly owned restaurant company. Inconnection with this acquisition, the Company acquired 90 Bertucci’srestaurants and one Sal & Vinnie’s Sicilian Steakhouse.  During 2000, the Company abandoned the Sal& Vinnie’s restaurant in exchange for termination of its lease obligation.

 

In April 2001, the Company completed its sale of 40Chili’s and seven On The Border restaurants to Brinker (the “Brinker Sale”) fortotal consideration of $93.5 million. Brinker acquired the inventory,facilities, equipment, management teams associated with these restaurants, aswell as the four Chili’s restaurants then under development by the Company.Further, Brinker assumed the mortgage debt on the Company’s Chili’s and On TheBorder restaurants.

 

As of December 31, 2003, the Company owned andoperated 89 full-service casual dining, Italian-style restaurants under thename Bertucci’s Brick Oven Pizzeria® located primarily in the northeasternUnited States.

 

*Fiscal Year End*

 

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

 

(2)           ACQUISITIONAND BRINKER SALE

 

On July 21, 1998, the Company, through a wholly ownedsubsidiary, NE Restaurant Acquisition Corp., completed its acquisition ofBertucci’s pursuant to the terms of an Agreement and Plan of Merger dated as ofMay 13, 1998 (the “Acquisition”).  TheCompany purchased all of the issued and outstanding shares of Bertucci’s commonstock at a price of $10.50 per share. The total purchase price was approximately $89.4 million.  NE Restaurant Acquisition Corp. had nooperations prior to the acquisition and was subsequently merged into theCompany.  In connection with theAcquisition, the Company sold $100 million principal amount of 103⁄4% SeniorNotes due July 15, 2008 (the “Senior Notes”). The net proceeds along with equity financing of approximately $29.0million were used to consummate the Acquisition, repay certain outstandingindebtedness of the Company and Bertucci’s and pay fees and expenses incurredin connection with the financing and the Acquisition.

 

The purchase price, including expenses related to the Acquisition, hasbeen allocated to assets and liabilities based on estimated fair market valueson July 21, 1998.  The differencebetween the purchase price and the net assets acquired of $34 million wasrecorded as goodwill.

 

On April 12, 2001, theCompany completed the Brinker Sale for a total consideration of $93.5 million.Brinker acquired the inventory, facilities, equipment, management teamsassociated with 40 Chili’s and seven On The Border restaurants, as well as thefour Chili’s restaurants then under development by the Company. Further,Brinker assumed the mortgage debt on the Company’s Chili’s and On The Borderrestaurants. The Company recorded a gain in 2001 on the Brinker Sale of $36.9million before income taxes. During 2003 the Company concluded certainliabilities recorded in connection with the Brinker Sale were no longerrequired and accordingly reversed $650,000 of accrued liabilities as anadditional gain on the Brinker Sale.

 

39

----

 

*Closed RestaurantsReserve*

 

The acquisition of Bertucci’s included90 Bertucci’s restaurants and one Sal & Vinnie’s restaurant.

 

From the date of the Acquisition through January 3,2001, the Company sold the former Bertucci’s headquarters located in Wakefield,Massachusetts, closed the Bertucci’s test kitchen restaurant located in theformer Bertucci’s headquarters and closed 17 other under-performing Bertucci’srestaurants.

 

As a result of the purchase accounting adjustment onthe Acquisition, in fiscal 1998 the Company accrued approximately $3.0 millionrelated to closing these 17 locations, consisting of estimated leasecommitments beyond the closings and certain exit costs. During 2000, theCompany accrued an additional $0.5 million of costs related to exiting certainlocations. During 2001, the Company accrued an additional $4.2 million of costsrelating to net lease obligations and other exit costs remaining on the unitsfor which the Company was still primarily liable.  These amounts are included in the accompanying consolidatedstatements of operation as closed restaurant charges. It was originallyexpected the Company would be able to exit these locations, sublease thelocations or otherwise be released from the related leases.  However, dueto market conditions, the Company was unable to sell, sublease or exit certainof these leases as originally anticipated.  Additionally, in 2002, theCompany closed one restaurant and recorded a charge of $236,000 primarilyrelated to estimated lease 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.  Thenote does not bear interest, and accordingly the Company has recorded imputedinterest on the note.  The obligationwas reclassified from the closed restaurants reserve to other long-termobligations in the accompanying balance sheet.

 

Activity within theCompany’s closed restaurants reserve was as follows (dollars in thousands):

 
|                                       |   | **2003** |   | **2002** |   | **2001** |   |
|--------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Balance, beginning of year                 |   | $        | 2,499  |     | $      | 3,352    |   | $ | 774 |   |
| Additonal reserves charged to operations   |   | —   |   | 236      |   | 4,200    |   |
| Promissory note issued                     |   | (386     | )      | —   |   | —   |   |
| Lease and related costs charged to reserve |   | (664     | )      | (1,089   | )      | (1,622   | )      |
| Balance, end of year                       |   | $        | 1,449  |     | $      | 2,499    |   | $ | 3,352 |   |
|                                       |   |     |   |     |   |     |   |
| Current portion                            |   | $        | 615    |     | $      | 642      |   | $ | 667 |   |
| Noncurrent portion                         |   | 834      |   | 1,857    |   | 2,685    |   |
|                                       |   | $        | 1,449  |     | $      | 2,499    |   | $ | 3,352 |   |

 

The closed restaurant reserve was calculated net of sublease income at14 locations that are partially or fully subleased as of December 31,2003.  The Company remains primarilyliable for the remaining lease obligations should the sublessor default.  Total sublease income excluded from thereserve is approximately $8.3 million for subleases expiring at various datesthrough 2017.  There have been nodefaults by sublessors to date.

 

(3)           SUMMARY OF SIGNIFICANTACCOUNTING POLICIES

 

*RevenueRecognition*

 

The Company records revenue from the sale of food, beverage and alcoholwhen sales occur.  Proceeds from thesale of gift cards are recorded as deferred revenue and recognized as incomewhen redeemed by the holder.

 

40

----

 

*Cash and CashEquivalents*

 

Cash and equivalents are comprised of demand and interest bearingaccounts with original maturities of no more than sixty days. The Company utilizeszero balance disbursement accounts for cash management purposes and maintains acash balance sufficient to cover disbursements from these accounts when thecheck is presented for payment. Outstanding checks written against the disbursement accounts of $4.0million and $3.5 million at December 31, 2003 and January 1, 2003,respectively, are included in accounts payable in the accompanying consolidatedbalance sheets.

 

*Restricted Cash*

 

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

* *

*Inventories*

 

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

 
|            |   | **2003** |   | **2002** |   |
|-----------------|--------|----------|--------|----------|--------|
|            |   |     |   |     |   |
| Food            |   | $        | 705    |     | $      | 493 |   |
| Liquor          |   | 471      |   | 332      |   |
| Supplies        |   | 92       |   | 75       |   |
| Total inventory |   | $        | 1,268  |     | $      | 900 |   |

 

*Property andEquipment*

 

Property and equipment are carried at cost.  The Company provides for depreciation andamortization using the straight-line method to charge the cost of property andequipment to expense over the estimated useful lives of the assets.  The lives used are as follows:

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

 

The Company evaluates property andequipment held and used in the business for impairment whenever events orchanges in circumstances indicate that the carrying amount of a restaurant’sassets may not be recoverable.  Animpairment is determined by comparing estimated undiscounted future operatingcash flows for a restaurant 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.  During 2003,the Company assessed certain non-performing restaurants for recoverability anddetermined an impairment of fixed assets existed at eleven restaurantlocations.  The Company estimated thefair value of these assets based on the net present value of the expected cashflows of the eleven restaurants.  Thecarrying amount of the assets exceeded the fair value of the assets byapproximately $4.7 million.  In 2003,the Company recorded an impairment charge to reflect the write down of theaffected assets to fair value. This impairment was charged to earnings andincluded in the accompanying consolidated statements of operations for fiscal2003.

 

41

----

 

*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):

 
|                      |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------|--------|----------|--------|----------|--------|----------|--------|
|                      |   |     |   |     |   |     |   |
| Total interest expense    |   | $        | 10,339 |     | $      | 9,713    |   | $ | 11,489 |   |
| Less - Amount capitalized |   | 238      |   | 126      |   | 124      |   |
| Interest expense, net     |   | $        | 10,101 |     | $      | 9,587    |   | $ | 11,365 |   |

 

*Self-Insurance*

* *

*The Company is self-insured forcertain losses related to general liability, group health insurance, andworkers’ compensation.  The Companymaintains stop loss coverage with third party insurers to limit its totalexposure.  The self-insurance liabilityis not discounted and represents an estimate of the ultimate cost of claimsincurred as of the balance sheet date based upon analysis of historical dataand estimates.*

 

*Accrued Expenses*

 

Accrued expenses consisted of the following as ofDecember 31, 2003 and January 1, 2003 (dollars in thousands):

 
|                                    |   | **2003** |   | **2002** |   |
|-----------------------------------------|--------|----------|--------|----------|--------|
|                                    |   |     |   |     |   |
| Accrued interest                        |   | $        | 4,279  |     | $      | 4,299 |   |
| Accrued payroll and related benefits    |   | 3,679    |   | 3,927    |   |
| Unredeemed gift certificates            |   | 2,973    |   | 2,402    |   |
| Other accrued liabilities               |   | 1,466    |   | 1,551    |   |
| Store closing reserves, current portion |   | 615      |   | 642      |   |
| Accrued occupancy costs                 |   | 522      |   | 581      |   |
| Accrued advertising                     |   | 36       |   | 83       |   |
| Income taxes payable                    |   | 456      |   | 47       |   |
| Total accrued expenses                  |   | $        | 14,026 |     | $      | 13,532 |   |

* *

*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 purchased are accountedfor at the lower of cost or market and are not amortized. Annual renewal feesare expensed as incurred. Non-transferable liquor licenses are amortized on astraight-line basis over the contractual life of the license. Amortizationexpense for a non-transferable liquor license acquired in fiscal 2003 was$40,000 in fiscal 2003 and will be $60,000 per year through fiscal 2013.

 

*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

 

42

----

 

nature of these instruments.   The fair value of the Company’s long term debt, consisting ofthe Senior Notes, is based on quoted market prices for similar issues andapproximates the current carrying value.

 

*ComprehensiveIncome*

* *

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

 

*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*

 

Advertising costs are expensed as incurred.  Advertising costs were $5.2 million, $5.3 million, and $4.5million in fiscal 2003, 2002, and 2001, respectively, and are included inoperating expenses in the consolidated statements of operations.

 

*Earnings Per Share*

 

Basic earnings per share is computed by dividing net(loss) income by the weighted average number of common shares outstanding forthe reporting period. Diluted earnings per share reflects the potentialdilution that could occur if options or other contracts to issue common stockwere exercised or converted into common stock. For the calculation of dilutednet income per share (only applicable to the fiscal year ended January 2,2002), the basic weighted average number of shares is increased by the dilutiveeffect of stock options using the treasury stock method. For the fiscal yearsended December 31, 2003 and January 1, 2003 options representing 594,396, and652,549 shares of common stock, respectively, were excluded from thecalculation of diluted loss per share because of their anti-dilutive effect.

 

*Stock-Based Compensation*

 

As allowed by SFAS No. 123, *Accounting for Stock-BasedCompensation,*the Company has elected to account for stock-basedcompensation under the intrinsic value method with disclosure of the effects offair value accounting on net income and earnings per share on a pro formabasis.  The Company’s stock-basedcompensation plan is described more fully in Note 10.  The Company accounts for this plan under the recognition andmeasurement principles of APB Opinion No. *25, Accounting for Stock Issued to Employees,*andrelated Interpretations.  With theexception of one modification to a grant during 2003, no stock-based employeecompensation cost related to stock options is reflected in net (loss) income,as all options granted had an exercise price equal to, or in excess of, themarket value of the underlying common stock on the date of grant.  The following table illustrates the effecton net income and earnings per share if the Company had applied the fair valuerecognition provisions of SFAS No. 123.

 
|                            |   | **2003** |   | **2002** |   | **2001** |   |
|---------------------------------|--------|----------|--------|----------|--------|----------|--------|
|                            |   |     |   |     |   |     |   |
| Net (loss) income, in thousands |   |     |   |     |   |     |   |
| As reported                     |   | $        | (8,601 | )        | $      | (5,138   | )      | $ | 14,960 |   |
| Pro Forma                       |   | $        | (9,150 | )        | $      | (5,282   | )      | $ | 14,775 |   |
|                            |   |     |   |     |   |     |   |
| Basic (loss) income per share   |   |     |   |     |   |     |   |
| As reported                     |   | $        | (2.90  | )        | $      | (1.72    | )      | $ | 5.02 |   |
| Pro Forma                       |   | $        | (3.08  | )        | $      | (1.77    | )      | $ | 4.96 |   |
|                            |   |     |   |     |   |     |   |
| Diluted (loss) income per share |   |     |   |     |   |     |   |
| As reported                     |   | $        | (2.90  | )        | $      | (1.72    | )      | $ | 4.60 |   |
| Pro Forma                       |   | $        | (3.08  | )        | $      | (1.77    | )      | $ | 4.54 |   |

 

43

----

 

*AccountingPronouncements*

 

In June 2001, the FASBissued SFAS No.143, *Accounting for AssetRetirement Obligations*.  This Statement addresses financialaccounting and reporting for obligations associated with the retirement oftangible long-lived assets and the associated asset retirement costs. This Statement applies to all entities.  It applies to legal obligationsassociated with the retirement of long-lived assets that result from theacquisition, construction, development and (or) the normal operation of along-lived asset, except for certain obligations of lessees.  The adoptionof this statement on January 3, 2003 did not have a material impact on theCompany’s financial position or its results of operations.

 

In April 2002, the FASBissued SFAS No. 145, *Rescission of FASB Statements No. 4, 44, and 64,Amendment of FASB Statement No.13, and Technical Corrections*. Theadoption of SFAS No. 145 requires gains and losses from extinguishment of debtno longer be classified as extraordinary items, but rather be classified aspart of other income (expense) on the Company’s consolidated statement ofoperations. Upon adoption of this statement on January 2, 2003, the Companyreclassified the previously reported gain on the extinguishment of the SeniorNotes of $1,338,000 (net of income taxes of $952,000) as other income with theassociated tax expense reported as a component of the provision for incometaxes.

 

In January 2003 and December 2003, the FASB issued Interpretation No.46, “Consolidation of Variable Interest Entities” (FIN 46) and itsrevision, FIN 46-R, respectively. FIN 46 and FIN 46-R addresses the consolidationof entities whose equity holders have either not provided sufficient equity atrisk to allow the entity to finance its own activities or do not possesscertain characteristics of a controlling financial interest.  FIN 46 andFIN 46-R require the consolidation of these entities, known as variableinterest entities (VIE’s), by the primary beneficiary of the entity.  FIN46 and FIN 46-R are applicable for financial statements of public entities thathave interests in VIE’s or potential VIE’s referred to as special purposeentities for periods ending after December 15, 2003 of which the Company hadnone.

 

In May 2003, the FASBissued SFAS No. 150, *Accounting for Certain Financial Instruments withCharacteristics of both Liabilities and Equity*. The Statementrequires an issuer to classify financial instruments within its scope as aliability. Many of those instruments were previously classified as equity underprior accounting guidelines. SFAS No. 150 is effective for all such financialinstruments entered into or modified after May 31, 2003. Otherwise, it waseffective on July 3, 2003, with the exception of mandatory redeemable financialinstruments of non-public entities, for which the provisions of this statementare applicable in the first quarter of 2004. The Company does not use suchfinancial instruments therefore the adoption of the applicable portions of thisstatement in the third quarter of 2003 did not have a material impact on theCompany’s financial position or results of operations.  The Company is currently assessing theimplications of adopting the mandatory redeemable financial instrumentsprovision in 2004.

 

*Reclassification*

 

Certain reclassifications have been made to prior yearfinancial statements to make them consistent with the current yearpresentation.

* *

*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 estimates include the reserve for closed restaurantlocations, impairment analysis on closed locations, and insurancereserves.  Actual results could differfrom those estimates.

 

44

----

 

(4)           GOODWILL

 

On January 3, 2002, the Company adopted the provisions of SFAS No. 142,*Goodwill and Other Intangible Assets.*  SFAS No. 142 superseded APB Opinion No. 17, *Intangible Assets,*and requires thatgoodwill and other intangible assets with indefinite lives no longer beamortized, but be reviewed for impairment at least annually.  Accordingly, the Company ceased amortizinggoodwill on January 3, 2002. Amortization expense totaling $2.3 million is recorded in the ConsolidatedStatement of Operations for the fiscal year 2001.

 

In accordance with SFAS No. 142, the effect of this accounting changeis reflected prospectively.  Had theCompany accounted for goodwill in accordance with SFAS No. 142 in 2001, netloss and loss per share for the periods presented would have been as follows(in thousands, except per share amounts):

 
|                              |   | **52 Weeks  Ended  January 2,  2002** |   |
|-----------------------------------|--------|---------------------------------------|--------|
|                              |   |                                  |   |
| Reported net income               |   | $                                     | 14,960 |   |
| Goodwill amortization             |   | 2,278                                 |   |
| Adjusted net income               |   | $                                     | 17,238 |   |
|                              |   |                                  |   |
| Basic income per share:           |   |                                  |   |
| Reported income per share         |   | $                                     | 5.02   |   |
| Goodwill amortization             |   | 0.76                                  |   |
| Adjusted basic income per share   |   | $                                     | 5.78   |   |
|                              |   |                                  |   |
| Diluted income per share:         |   |                                  |   |
| Reported income per share         |   | $                                     | 4.60   |   |
| Goodwill amortization             |   | 0.70                                  |   |
| Adjusted diluted income per share |   | $                                     | 5.30   |   |

 

(5)           INCOME TAXES

 

The Company accounts for income taxes under theliability method in accordance with SFAS No. 109 *Accounting for Income Taxes*.  The components of the provision (benefit) for income taxes forthe years ended December 31, 2003, January 1, 2003 and January 2, 2002 are asfollows (dollars in thousands):

 
|                             |   | **2003** |   | **2002** |   | **2001** |   |
|----------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Current:                         |   |     |   |     |   |     |   |
| Federal                          |   | $        | — |     | $      | (5,000   | )      | $ | 4,612 |   |
| State                            |   | —   |   | —   |   | 2,396    |   |
|                             |   | —   |   | (5,000   | )      | 7,008    |   |
| Deferred:                        |   |     |   |     |   |     |   |
| Federal                          |   | (3,642   | )      | 2,552    |   | 4,173    |   |
| State                            |   | (258     | )      | 1,074    |   | 14       |   |
|                             |   | (3,900   | )      | 3,626    |   | 4,187    |   |
|                             |   |     |   |     |   |     |   |
| Valuation allowance              |   | 3,900    |   | 4,071    |   | —   |   |
|                             |   |     |   |     |   |     |   |
| Total provision for income taxes |   | $        | — |     | $      | 2,697    |   | $ | 11,195 |   |

 

45

----

 

A reconciliation of the amount computed by applyingthe statutory federal income tax rate of 35% to the (loss) income before incometax provision (benefit) for the years ended December 31, 2003, January 1, 2003,and January 2, 2002, respectively, is as follows (dollars in thousands):

 
|                                                                   |   | **2003** |   | **2002** |   | **2001** |   |
|------------------------------------------------------------------------|--------|----------|--------|----------|--------|----------|--------|
| Income tax (benefit) provision computed at  federal statutory rate     |   | $        | (3,010 | )        | $      | (855     | )      | $ | 9,044 |   |
| State taxes, including expired state  benefits, net of federal benefit |   | (258     | )      | (122     | )      | 1,780    |   |
| FICA tax credit                                                        |   | (632     | )      | (397     | )      | (426     | )      |
| Goodwill amortization                                                  |   | —   |   | —   |   | 797      |   |
| Valuation allowance                                                    |   | 3,900    |   | 4,071    |   | —   |   |
| Income tax provision                                                   |   | $        | — |     | $      | 2,697    |   | $ | 11,195 |   |

 

Significant items giving rise to deferred tax assetsand deferred tax liabilities at December 31, 2003 and January 1, 2003 are asfollows (dollars in thousands):

 
|                                             |   | **2003** |   | **2002** |   |
|--------------------------------------------------|--------|----------|--------|----------|--------|
| Deferred tax assets–                        |   |     |   |     |   |
| Net operating loss and tax credit  carryforwards |   | $        | 3,262  |     | $      | 2,159 |   |
| Store closing write downs and liabilities        |   | 2,395    |   | 3,215    |   |
| Deferred rent                                    |   | 1,338    |   | 1,144    |   |
| Accrued expenses and other                       |   | 645      |   | 448      |   |
| Deferred and accrued compensation                |   | 211      |   | 260      |   |
| Depreciation                                     |   | 488      |   | —   |   |
|                                             |   | 8,339    |   | 7,226    |   |
| Deferred tax liabilities–                   |   |     |   |     |   |
| Liquor licenses                                  |   | (368     | )      | (442     | )      |
| Depreciation                                     |   | —   |   | (2,713   | )      |
|                                             |   | (368     | )      | (3,155   | )      |
|                                             |   |     |   |     |   |
| Total net deferred tax assets                    |   | 7,971    |   | 4,071    |   |
| Valuation allowance                              |   | (7,971   | )      | (4,071   | )      |
|                                             |   |     |   |     |   |
| Carrying value of net deferred tax assets        |   | $        | — |     | $      | — |   |

 

Thefuture tax benefits which gave rise to the deferred tax asset remainstatutorily available to the Company. The Company considered both negative andpositive evidence in determining if a valuation allowance is required.  The Company has an historical trend ofrecurring pre-tax losses since 1998 excluding the Brinker Sale.  Based on the recent losses and thehistorical trend of losses, excluding the Brinker Sale, the Company concluded avaluation allowance for the net deferred tax asset remains appropriate.

 

(6)           SENIORNOTES PAYABLE

 

From1997 through 2000, the Company entered into various loan agreements withFranchise Finance Corporation of America (“FFCA”) which resulted in theissuance of promissory notes and mortgages collateralized by various BrinkerConcept restaurants.  For the year endedJanuary 2, 2002, interest related to the FFCA loans was $1.3 million.  The loans were assumed by Brinker as aresult of the Brinker Sale.

 

On July 13, 1998, the Company issued $100million of 10 3/4% Notes due 2008 (the “Notes”). The net proceeds were $92.0million, after expenses in connection with the offering.  The proceeds were used to fund the purchaseprice of the acquisition of Bertucci’s Inc. and its subsidiaries and, alongwith equity contributions, to repay outstanding bank debt.  The Notes were exchanged for Senior Noteswith the same terms pursuant to a registered exchange offer that was completedin November 1998.  Interest on theSenior Notes is payable semi-annually on January 15 and July 15.  After July 15, 2003, the Company may, at itsoption, redeem any or all of

 

46

----

 

the Senior Notes at face value, plus a premiumof up to 5.375% through July 15, 2006. Thereafter, the Senior Notes may be redeemed at face value.  Under certain circumstances, including achange of control or following certain asset sales, the holders of the SeniorNotes may require the Company to repurchase the Senior Notes, at a redemptionprice of 101%.  The Senior Notes arefully and unconditionally guaranteed, on a joint and several basis, on anunsecured senior basis, by all of the Company’s subsidiaries.  In July 2001, the Company retired $14.7million of the Senior Notes with a portion of the proceeds from the BrinkerSale.  A gain of $2.3 million wasrecorded in the Consolidated Statement of Operations in fiscal 2001.  The Senior Notes contain no financialcovenants and the Company is in compliance with all non-financial covenants asof December 31, 2003.

 

The indenture governing the Senior Notesrequires the use of proceeds from selected asset sales take place within oneyear of the transaction date. The indenture defines acceptable uses to include therepurchase of debt or investment in assets. TheCompany believes it has met the terms of the indenture for the use of BrinkerSale proceeds.

 

(7)           COMMITMENTS ANDCONTINGENCIES

 

*Letter of CreditFacility*

 

The Company has a $4.0 million (maximum) letter ofcredit facility.  As of December 31, 2003, this facility is collateralizedwith $3.1 million of cash restricted from general use.  Letters of credit totaling $3,097,000 wereoutstanding pursuant to this facility on December 31, 2003.

* *

*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 $13.4 million, $11.4 million, and $12.1 million for the yearsended December 31, 2003, January 1, 2003, and January 2, 2002, respectively.The annual difference of accrued rent versus amounts paid is classified asdeferred rent in the accompanying consolidated statements of operations and thecumulative 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. The percentage rentfactors generally range from 2.5% to 8.0% of sales, averaging approximately5.0%. Percentage rent expense was $264,000, $260,000, and $390,000, for fiscal2003, 2002, and 2001, respectively.

 

Future minimum rental payments due under allnon-cancelable operating leases as of December 31, 2003 are as follows (dollarsin thousands):

 
| Year-      |   |   |    |
|------------|--------|--------|---------|
| 2004       |   | $      | 14,734  |   |
| 2005       |   | 14,439 |    |
| 2006       |   | 14,072 |    |
| 2007       |   | 12,533 |    |
| 2008       |   | 10,728 |    |
| Thereafter |   | 57,023 |    |
|       |   | $      | 123,529 |   |

 

In addition to the leases summarized above, theCompany is primarily liable on 14 locations for approximately $9.7 million ingross lease commitments over the remaining terms of the leases. Eleven of thoselocations are subleased to tenants under sublease obligations aggregating $8.3million. The difference of $1.4 million represents the Company’s closedrestaurant reserve at December 31, 2003.

 

47

----

 

*Capital Leases*

 

During 2003, the Company completed twosale-leaseback transactions on four restaurant properties.  In the first transaction, the Company soldthree 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 andwill be amortized into income over the lease term. The properties sold includedland and buildings at each location which the Company agreed to lease back fora 20-year period. The portion of the contractual obligation relating to thebuildings is recorded at its net present value of $3.8 million (at inception)as an obligation under a capital lease. The land portion of the obligation isclassified as an operating lease, requiring future payments to be classified asoperating expenses.  In the 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 $60,000 representing theexcess of the property’s carrying value over its fair market value.  The fair value of the land is less than 25%of the transaction value and therefore the entire contractual obligation isrecorded at its net present value of $1.9 million (at inception) as a capitallease 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 is required to maintain theproperties for the term of the leases and to pay all taxes, insurance,utilities and other costs associated with those properties.  Under the leases, the Company agreed tocustomary indemnities and, in the event the Company defaults on any lease, thelandlord may terminate the lease, accelerate rental payments and collectliquidated damages.

 

Payments under capital lease commitments for theserestaurants are as follows (dollars in thousands):

 
| Lease commitments                 |   |   |   |
|-----------------------------------|--------|--------|--------|
| 2004                              |   | $      | 577    |   |
| 2005                              |   | 587    |   |
| 2006                              |   | 597    |   |
| 2007                              |   | 608    |   |
| 2008                              |   | 619    |   |
| Thereafter                        |   | 10,203 |   |
|                              |   | 13,191 |   |
| Less amount representing interest |   | (7,436 | )      |
| Present value of minimum payments |   | $      | 5,755  |   |
| Current portion                   |   | 31     |   |
| Long term portion                 |   | 5,724  |   |
|                              |   | $      | 5,755  |   |

 

*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 or results of operations of the Company.

 

(8)           RELATED PARTIES

 

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. Financial consulting fees of $250,000 were paid to Jacobson Partners foreach of the years ended December 31, 2003, January 1, 2003, and January 2, 2002,respectively, and are included in general and administrative expenses in theaccompanying consolidated statements of operations.

 

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

 

48

----

 

(9)           401(k) PROFIT SHARINGPLAN 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 matchingcontribution to the Bertucci’s 401(k) Plan that is allocated, based on aformula as defined by the Bertucci’s 401(k) Plan, to Plan participants.Matching contributions made by the Company for the years ended December 31, 2003,January 1, 2003, and January 2, 2002 were approximately $81,000, $27,000, and$31,000, respectively.

 

During 1999, the Company established theBertucci’s Corporation, Inc. Executive Savings and Investment Plan to whichhighly compensated executives of the Company may elect to defer a portion oftheir salary and or earned bonus. The Company maintains an irrevocable grantortrust which has been established by the Company, as grantor, pursuant to theScudder Kemper Investments nonqualified deferred compensation plan trustagreement, dated September 20, 1999. The agreement is between the Company and Scudder Kemper Investments, astrustee, for the purpose of paying benefits under nonqualified deferredcompensation plan.

 

The trust assets are held separately fromother funds of the Company, but remain subject to claims of the Company’sgeneral creditors in the event of the Company’s insolvency.  As of December 31, 2003, there were 14participants in the plan which had a total market value of approximately $393,000.  The assets of the trust are included inother assets in the consolidated balance sheet.  A corresponding liability is included in other long termliabilities.

 

(10)         COMMON STOCK AND STOCKOPTION PLAN

 

On September 15, 1997, the Board of Directors of theCompany 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 31, 2003 there were 155,604 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 31, 2003, January 1, 2003, and January 2, 2002 is presented inthe table and narrative below. 

 

49

----

 
|                                                |   | **2003**        |   | **2002**                              |   | **2001**       |    |
|-----------------------------------------------------|--------|-----------------|--------|---------------------------------------|--------|----------------|---------|
|                                                |   | **Shares**      |   | **Weighted  Average  Exercise Price** |   | **Shares**     |    | **Weighted  Average  Exercise Price** |   | **Shares** |   | **Weighted  Average  Exercise Price** |   |
| Outstanding at beginning of year                    |   | 652,549         |   | $                                     | 15.44  |           | 713,973 |   | $ | 15.19 |   | 451,251 |   | $ | 13.01 |   |
| Granted                                             |   | 40,079          |   | $                                     | 14.48  |           | 26,000  |   | $ | 17.51 |   | 332,500 |   | $ | 17.50 |   |
| Forfeited                                           |   | (98,232         | )      | $                                     | (15.13 | )              | (87,424 | ) | $ | (13.38 | ) | (69,778 | ) | $ | (12.09 | ) |
| Outstanding at end of year                          |   | 594,396         |   | $                                     | 15.42  |           | 652,549 |   | $ | 15.44 |   | 713,973 |   | $ | 15.19 |   |
|                                                |   |            |   |                                  |   |           |    |   |   |   |   |   |   |
| Exercisable at end of year                          |   | 294,603         |   | $                                     | 14.12  |           | 322,714 |   | $ | 14.28 |   | 169,775 |   | $ | 12.24 |   |
|                                                |   |            |   |                                  |   |           |    |   |   |   |   |   |   |
| 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 |   |   |   | $ | 3.81 |   |

 

The 594,396 options outstanding at December 31, 2003have a remaining weighted average contractual life of approximately 6.1 years.  Options granted under the Stock Option Planto date expire 90 days following either the fifth or the tenth anniversary ofthe date of the grant. There were no options exercised during the last threefiscal years.

 

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 3.18%, 2.91%, and 4.91% were used in 2003,2002, and 2001, respectively. Weighted average expected lives of five years andan expected volatility of 0% were used in all three years.

 

The Company’s shareholders are parties to variousshareholder agreements which restrict their ability to transfer their shareswithout the approval of the Company’s Board of Directors.  Additionally, the Company has the option topurchase shares held by employee shareholders (approximately 78,000 shares atDecember 31, 2003) upon their termination at a purchase price equal to eitherfair market value or the original purchase price (plus accrued interest incertain circumstances), depending on the reason for termination.  Employee shareholders, or their estate, mayrequire the Company to purchase their shares upon their death or disability,and with respect to certain shares if they are terminated without cause, at thegreater of fair market value or the original purchase price.

 

50

----

 

(11)         QUARTERLYRESULTS (UNAUDITED)

 

BERTUCCI’S CORPORATION

(Dollarsin thousands except share and per share data)

 
|                                                               |   | **Quarter 1  April 2,  2003** |   | **Quarter 2  July 2,  2003** |   | **Quarter 3  October 1,  2003** |   | **Quarter 4  December 31,  2003** |   | **Year  December 31,  2003** |   |
|--------------------------------------------------------------------|--------|-------------------------------|--------|------------------------------|--------|---------------------------------|--------|-----------------------------------|--------|------------------------------|--------|
|                                                               |   |                          |   |                         |   |                            |   |                              |   |                         |   |
| 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 before income tax benefit                                     |   | (1,803                        | )      | (476                         | )      | (5,889                          | )      | (433)                             |   | (8,601                       | )      |
|                                                               |   |                          |   |                         |   |                            |   |                              |   |                         |   |
| Income tax benefit                                                 |   | —                        |   | —                       |   | —                          |   | —                            |   | —                       |   |
|                                                               |   |                          |   |                         |   |                            |   |                              |   |                         |   |
| Net loss                                                           |   | $                             | (1,803 | )                            | $      | (476                            | )      | $                                 | (5,889 | )                            | $      | (433) |   | $ | (8,601 | ) |
|                                                               |   |                          |   |                         |   |                            |   |                              |   |                         |   |
| Basic and diluted loss 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  April 3,  2002** |   | **Quarter 2  July 3,  2002** |   | **Quarter 3  October 2,  2002** |   | **Quarter 4  January 1,  2003** |   | **Year  January 1,  2003** |   |
|--------------------------------------------------------------------|--------|-------------------------------|--------|------------------------------|--------|---------------------------------|--------|---------------------------------|--------|----------------------------|--------|
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Net sales                                                          |   | $                             | 36,683 |                         | $      | 41,307                          |   | $                               | 41,664 |                       | $      | 42,665 |   | $ | 162,319 |   |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Cost of sales and expenses:                                        |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Cost of sales                                                      |   | 8,323                         |   | 9,351                        |   | 8,953                           |   | 9,040                           |   | 35,667                     |   |
| Operating expenses                                                 |   | 21,445                        |   | 25,267                       |   | 24,973                          |   | 24,728                          |   | 96,413                     |   |
| General and administrative expenses                                |   | 2,993                         |   | 3,049                        |   | 3,070                           |   | 3,012                           |   | 12,124                     |   |
| Deferred rent, depreciation, amortization  and preopening expenses |   | 2,304                         |   | 2,594                        |   | 3,153                           |   | 2,682                           |   | 10,733                     |   |
| Closed restaurants charge                                          |   | —                        |   | 175                          |   | 61                              |   | —                          |   | 236                        |   |
| Total cost of sales and expenses                                   |   | 35,065                        |   | 40,436                       |   | 40,210                          |   | 39,462                          |   | 155,173                    |   |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Income from operations                                             |   | 1,618                         |   | 871                          |   | 1,454                           |   | 3,203                           |   | 7,146                      |   |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Interest expense, net                                              |   | (2,397                        | )      | (2,391                       | )      | (2,447                          | )      | (2,352                          | )      | (9,587                     | )      |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| (Loss) income before income tax (benefit)  provision               |   | (779                          | )      | (1,520                       | )      | (993                            | )      | 851                             |   | (2,441                     | )      |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Income tax (benefit) provision (1)                                 |   | (273                          | )      | (532                         | )      | (347                            | )      | 3,849                           |   | 2,697                      |   |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Net loss                                                           |   | $                             | (506   | )                            | $      | (988                            | )      | $                               | (646   | )                          | $      | (2,998 | ) | $ | (5,138 | ) |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Basic and diluted loss per share                                   |   | $                             | (0.17  | )                            | $      | (0.33                           | )      | $                               | (0.22  | )                          | $      | (1.01 | ) | $ | (1.72 | ) |
|                                                               |   |                          |   |                         |   |                            |   |                            |   |                       |   |
| Weighted average shares outstanding - basic  and diluted           |   | 2,978,955                     |   | 2,978,955                    |   | 2,978,955                       |   | 2,978,955                       |   | 2,978,955                  |   |

 

----

(1)   During the fourth quarter ended January 1, 2003 theCompany recorded a valuation allowance of $4.1 million associated with itsdeferred tax assets.

 

51

----

 

**EXHIBITLISTING 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  (c)       |   | Subsidiaries  of Registrant.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| 31.1  (e)       |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by  Benjamin R. Jacobson.                                                                                                                                                                                                                                                                                                                                                                                                  |
| 31.2  (e)       |   | Certification  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 signed by Kurt  J. Schnaubelt.                                                                                                                                                                                                                                                                                                                                                                                                    |
| 99-1  (c)       |   | Asset  Purchase and Sales Agreement dated November 20, 2000 and fully executed on  April 12, 2001                                                                                                                                                                                                                                                                                                                                                                                                               |

 

52

----

 

----

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

(b)   Filed as an Exhibit, with thesame Exhibit number to Registrant’s quarterly report on form 10-Q filed withthe Securities and Exchange Commission on May 15, 2000.

(c)   Filed as an Exhibit, with thesame Exhibit number to Registrant’s quarterly report on form 10-Q filed withthe Securities and Exchange Commission on May 18, 2001.

(d)   Filed as an Exhibit, with thesame Exhibit number to Registrant’s annual report on form 10-K filed with theSecurities and Exchange Commission on April 1, 2002.

(e)   Filed herewith.

*      Management compensation plan or arrangement.

 

53

----