FORM 10-Q

 

SECURITIES AND EXCHANGE COMMISSION

Washington, DC  20549

 

ý Quarterly Report Voluntarily Filed Pursuant to Section 13 or 15(d) of the Securities and Exchange Act of 1934

 

For the Quarterly Period Ended    July 2, 2003

 

Commission File Number    333-62775

 

BERTUCCI’S CORPORATION

(Exact name of registrant as specified in its charter)

 

 

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

 

 

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

 

 

2,963,674 shares of the registrant’s Common Stock were outstanding on August 14, 2003.

 

 

BERTUCCI’S CORPORATION

 

FORM 10-Q

 

TABLE OF CONTENTS

 

PART I:		FINANCIAL INFORMATION
	Item 1.	Financial Statements:
		1)		Consolidated Balance Sheets July 2, 2003 (Unaudited) and January 1, 2003
		2)		Consolidated Statements of Operations For the 13 and 26 Weeks Ended July 2, 2003 (Unaudited) and July 3, 2002 (Unaudited)
		3)		Consolidated Statement of Changes in Stockholders’ Equity for the 26 Weeks Ended July 2, 2003 (Unaudited)
		4)		Consolidated Statements of Cash Flow for the 26 Weeks Ended July 2, 2003 (Unaudited) and July 3, 2002 (Unaudited)
		5)		Notes to Consolidated Financial Statements (Unaudited)
	Item 2.	Management’s Discussion and Analysis of Results of Operations and Financial Condition
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk
	Item 4.	Controls and Procedures
PART II:		OTHER INFORMATION
	Item 1.		Legal Proceedings
	Item 2.		Changes in Securities and Use of Proceeds
	Item 3.		Defaults upon Senior Securities
	Item 4.		Submission of Matters to a Vote of Security Holders
	Item 5.		Other Information
	Item 6.		Exhibits and Reports on Form 8-K
SIGNATURES
CERTIFICATIONS

 

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PART  I: FINANCIAL INFORMATION

Item 1.  FINANCIAL STATEMENTS

 

BERTUCCI’S CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)

 

		July 2, 2003			January 1, 2003
ASSETS
Current Assets:
Cash and cash equivalents		$	12,105		$	13,133
Restricted cash		2,229			2,468
Accounts receivable		1,002			1,733
Inventories		1,260			900
Prepaid expenses and other current assets		1,942			1,995
Total current assets		18,538			20,229
Property and equipment, at cost:
Land		767			2,468
Buildings		1,393			6,671
Capital lease – buildings		3,831			—
Leasehold improvements		62,628			57,130
Furniture and equipment		41,063			36,660
		109,682			102,929
Less - accumulated depreciation		(34,371		)	(31,555		)
		75,311			71,374
Construction work in process		1,726			1,830
Net property and equipment		77,037			73,204
Goodwill		26,127			26,127
Deferred finance costs, net		3,746			3,714
Liquor licenses		2,441			1,763
Other assets		479			385
Total Assets		$	128,368		$	125,422
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of other long-term obligations		$	92		$	—
Accounts payable		8,322			7,986
Accrued expenses		12,153			13,532
Total current liabilities		20,567			21,518
Other long-term obligations, net of current portion		4,638			—
Restaurant closing reserve, net of current portion		1,096			1,857
Deferred gain on sale-leaseback transaction		2,167			—
Deferred rent		3,070			2,849
Senior Notes		85,310			85,310
Total liabilities		116,848			111,534
Commitments and contingencies
Stockholders’ equity:
Common stock, $.01 par value Authorized - 8,000,000 shares, Issued - 3,666,370 shares, Outstanding - 2,963,674 and 2,978,955 shares, respectively		37			37
Less treasury stock - 702,696 and 687,415 shares, respectively,  at cost		(8,178		)	(8,088		)
Additional paid-in capital		29,004			29,004
Accumulated deficit		(9,343		)	(7,065		)
Total stockholders’ equity		11,520			13,888
Total Liabilities and Stockholders’ Equity		$	128,368		$	125,422

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BERTUCCI’S CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)

 

		Thirteen weeks ended						Twenty-six weeks ended
		July 2, 2003			July 3, 2002			July 2, 2003			July 3, 2002
Net sales		$	47,587		$	41,307		$	90,261		$	77,990
Cost of sales and expenses:
Cost of sales		11,019			9,351			20,480			17,674
Operating expenses		28,418			25,268			54,893			46,713
General and administrative expenses		2,856			3,049			6,035			6,042
Closed restaurant expenses		—			175			—			175
Depreciation, amortization, deferred rent and pre-opening expenses		3,272			2,593			6,235			4,897
Total cost of sales and expenses		45,565			40,436			87,643			75,501
Income from operations		2,022			871			2,618			2,489
Interest expense, net		(2,498		)	(2,392		)	(4,896		)	(4,789		)
Loss before income tax benefit		(476		)	(1,521		)	(2,278		)	(2,300		)
Income tax benefit		—			532			—			805
Net loss		$	(476	)	$	(989	)	$	(2,278	)	$	(1,495	)
Basic and diluted loss per share		$	(0.16	)	$	(0.33	)	$	(0.77	)	$	(0.50	)
Weighted average shares outstanding - basic and diluted		2,975,298			2,978,955			2,977,126			2,978,955

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BERTUCCI’S CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY
(In thousands, except share data)
(Unaudited)

 

		Common Stock					Treasury Stock					Additional Paid-In Capital			Accumulated Deficit			Total Stockholders’ Equity
		Number of Shares		Amount			Number of Shares		Amount
Balance January 1, 2003		3,666,370		$	37		(687,415	)	$	(8,088	)	$	29,004		$	(7,065	)	$	13,888
Purchase common stock shares for treasury		—		—			(15,281	)	(90		)	—			—			(90		)
Net loss		—		—			—		—			—			(2,278		)	(2,278		)
Balance July 2, 2003		3,666,370		$	37		(702,696	)	$	(8,178	)	$	29,004		$	(9,343	)	$	11,520

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BERTUCCI’S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)

 

		Twenty-six weeks ended
		July 2, 2003			July 3, 2002
Cash flows of operating activities
Net loss		$	(2,278	)	$	(1,495	)
Adjustments to reconcile net loss to net cash provided by (used in) operating activities
Depreciation and amortization		5,216			4,792
Deferred rent		221			145
Change in deferred taxes		—			2,705
Closed restaurant charge		—			175
Amortization of gain on sale-leaseback		(29		)	—
Gain on sale of property		—			(235		)
Changes in operating assets and liabilities
Inventories		(360		)	(71		)
Prepaid expenses and accounts receivable		784			612
Accrued expenses		(1,776		)	(3,652		)
Income taxes payable		26			(3,707		)
Accounts payable		336			(2,182		)
Other		(150		)	42
Total adjustments		4,268			(1,376		)
Net cash provided by (used in) operating activities		1,990			(2,871		)
Cash flows for investing activities
Additions to property and equipment		(10,178		)	(8,407		)
Proceeds from sale of property		—			413
Purchase of stock for treasury		(90		)	—
Acquisition of liquor licenses		(123		)	—
Net cash used in investing activities		(10,391		)	(7,994		)
Cash flows for financing activities
Net proceeds from sale-leaseback transaction		7,177			—
Promissory note payments		(40		)	—
Decrease (increase) in restricted cash		239			(895		)
Principal payments under capital lease obligations		(3		)	—
Net cash provided by (used in) financing activities		7,373			(895		)
Net decrease in cash and cash equivalents		(1,028		)	(11,760		)
Cash and cash equivalents, beginning of period		13,133			23,235
Cash and cash equivalents, end of period		$	12,105		$	11,475
Supplemental Disclosure of Cash Flow Information
Cash paid for interest		$	4,809		$	4,528
(Refunds received) cash paid for income taxes		$	(26	)	$	196
Capital lease entered into during period		$	3,821		$	—
Promissory notes issued in exhchange for rights and settlements of liabilities		$	941		$	—

 

The accompanying notes are an integral part of these consolidated financial statements.

 

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BERTUCCI’S CORPORATION
Notes To Consolidated Financial Statements
July 2, 2003
(Unaudited)

 

1.  Basis of Presentation

 

The unaudited consolidated condensed financial statements (the “Unaudited Financial Statements”) presented herein have been prepared by Bertucci’s Corporation and include all of its subsidiaries (collectively, the “Company”) after elimination of inter-company accounts and transactions, without audit, and, in the opinion of management, reflect all adjustments (consisting of normal recurring adjustments) necessary for a fair statement of the interim periods presented.  The accompanying unaudited interim consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission for reporting on Form 10-Q.  Accordingly, certain information and footnote disclosures required for complete financial statements are not included herein.  It is suggested the Unaudited Financial Statements be read in conjunction with the consolidated financial statements and notes included in the Company’s 2002 Form 10-K.  The operating results for the thirteen or twenty-six weeks ended July 2, 2003 may not be indicative of the results expected for any succeeding interim period or for the entire year ending December 31, 2003.

 

Certain reclassifications have been made to prior year financial statements to make them consistent with the current year’s presentation.

 

2.  Recent Accounting Pronouncements

 

In June 2001, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No.143, Accounting for Asset Retirement Obligations.  This Statement addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs.  This Statement applies to all entities.  It applies to legal obligations associated with the retirement of long-lived assets that result from the acquisition, construction, development and (or) the normal operation of a long-lived asset, except for certain obligations of lessees.  The adoption of this statement on January 3, 2003 did not have a material impact on the Company’s financial position or its results of operations.

 

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No.13, and Technical Corrections. The adoption of SFAS No. 145 requires gains and losses from extinguishment of debt no longer be classified as extraordinary items, but rather be classified as part of other income (expense) on the Company’s consolidated statement of operations. Any such gains or losses, classified as extraordinary items in prior periods, will be reclassified in future financial statement presentations upon the adoption of SFAS No. 145.  The adoption of this statement on January 3, 2003 did not have a material impact on the Company’s financial position or its results of operations.

 

In June 2002, the FASB issued SFAS No.  146, Accounting for Costs Associated with Exit or Disposal Activities. SFAS No. 146 supersedes Emerging Issues Task Force (“EITF”) No. 94-3, Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring). SFAS No. 146 eliminates the provisions of EITF No.  94-3 that required a

 

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liability to be recognized for certain exit or disposal activities at the date an entity committed to an exit plan.  SFAS No. 146 requires a liability for costs associated with an exit or disposal activity to be recognized when the liability is incurred.  SFAS No. 146 is effective for exit or disposal activities that are initiated after December 31, 2002.

 

In December 2002, the FASB issued SFAS No.  148, Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of SFAS No 123.  This Statement amends SFAS No. 123, Accounting for Stock-Based Compensation, to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation.  In addition, this Statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.  The disclosure requirements of SFAS No. 148 were adopted on January 3, 2003.

 

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.  FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective for all new variable interest entities created or acquired after January 31, 2003.  For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003.  The Company did not create or acquire any variable interest entities during the twenty-six weeks ended July 2, 2003.  The  adoption of this statement in the first quarter of 2003 did not have a material impact on the Company’s financial position or results of operations.

 

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity. The Statement requires an issuer classify financial instruments within its scope as a liability. Many of those instruments were classified as equity under previous guidance. SFAS No. 150 is effective for all financial instruments entered into or modified after May 31, 2003. Otherwise, it is effective on July 1, 2003. The adoption of SFAS No. 150 is not expected to have a material impact on the Company’s financial position or results of operations.

 

3.  Restaurant Closing Reserves

 

Restaurant closing reserves were established as part of the acquisition of Bertucci’s.  These reserves were related to estimated future lease commitments and exit costs to close 18 Bertucci’s locations.  In 2001, the Company accrued an additional $4.2 million related to selected locations (all of which had been closed), consisting of estimated lease commitments and certain exit costs.  It was originally expected the Company would be able to exit these locations, sublease the locations or otherwise be released from the related leases.  However,  due to market conditions, the Company has been unable to sell, sublease or exit certain of these leases.  In June 2002, the Company closed one restaurant and recorded a charge of $236,000 primarily related to estimated lease termination costs.  In March 2003, the Company terminated a lease for one of its closed locations in exchange for issuing a promissory note of $455,000 payable in varying installments through 2010.  The note does not bear interest, accordingly the Company imputed  interest on the note and recorded the obligation at its present value of $386,000 in other long-term obligations in the accompanying balance sheet.

 

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Activity within the reserve was as follows:

 

		Twenty-six weeks ended
		July 2, 2003			July 3, 2002
Balance, beginning of the year		$	2,499		$	3,351
Payments charged against reserve		(396		)	(443		)
Promissory note issued		(386		)	—
Balance, end of period		$	1,717		$	2,908
Current portion (included in accrued expenses)		$	621		$	903
Noncurrent portion		1,096			2,005
		$	1,717		$	2,908

 

4.  Loss per Share

 

The number of shares used to calculate diluted loss per share for the periods ended July 2, 2003 and July 3, 2002 exclude the effect of 671,244 and 740,473 outstanding stock options, respectively, as the options are anti-dilutive.

 

5.  Income Taxes

 

The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.   Additionally, the Company is required to consider both negative and positive evidence in determining if a valuation allowance is required on a quarterly basis.  The fiscal year 2002 loss and the Company’s current plan for continued development of Company owned restaurants will burden pre-tax profits because of the recognition of pre-opening costs and initial year inefficiencies associated with new restaurants.  As a result, management recorded a full valuation allowance for its deferred tax assets in the fourth quarter of 2002 and recorded an allowance in each quarter of 2003 for the tax benefits associated with the current period’s losses.

 

6.  Stock-Based Compensation

 

The Company has elected to account for stock-based compensation using the intrinsic value method with disclosure of the effects of fair value accounting on net income and earnings per share on a pro forma basis.  No stock-based employee compensation cost related to stock options is reflected in net loss, as all options granted had an exercise price equal to, or in excess of, the market value of the underlying common stock on the date of grant.  The following table illustrates the effect on net income and earnings per share if the company had applied the fair value method.

 

		Thirteen weeks ended						Twenty-six weeks ended
		July 2, 2003			July 3, 2002			July 2, 2003			July 3, 2002
Net loss, in thousands
As reported		$	(476	)	$	(989	)	$	(2,278	)	$	(1,495	)
Pro Forma		$	(637	)	$	(1,021	)	$	(2,599	)	$	(1,559	)
Basic and diluted loss per share
As reported		$	(0.16	)	$	(0.33	)	$	(0.77	)	$	(0.50	)
Pro Forma		$	(0.21	)	$	(0.34	)	$	(0.87	)	$	(0.52	)

 

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7.   Sale of Properties

 

In the first quarter of 2002, the Company sold land adjacent to a restaurant previously sold.  The property had a carrying value of approximately $179,000 and sold for $413,000.  The gain is included in operating expenses in the consolidated statement of operations for the twenty-six weeks ended July 3, 2002.

 

In the first quarter of 2003, the Company completed a sale-leaseback transaction on three restaurant properties for $7.2 million in cash (net of fees of approximately $300,000).  The properties sold included land and buildings at three locations which the Company agreed to lease back for a 20-year period with total contractual lease obligations of approximately $16.7 million.  The portion of the contractual obligation relating to the buildings is recorded at its net present value of $3.8 million (at inception) as an obligation under a capital lease, and is included in other long-term obligations in the accompanying balance sheet.  The land portion of the obligation is classified as an operating lease, requiring future payments to be classified as operating expenses.  The gain on the sale of these properties of approximately $2.2 million has been deferred and will be recognized over the 20-year term of the leaseback.

 

8.  Other Long-Term Obligations

 

During the second quarter, the Company issued a promissory note in the amount of $555,000 to acquire rights to a liquor license over a 10-year period.

 

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

 

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

 

General

 

The Company is an operator of full-service, casual dining restaurants in the northeastern United States.  The Company’s wholly owned subsidiary, Bertucci’s Restaurant Corp. owns and operates a restaurant concept under the name Bertucci’s Brick Oven Pizzeria®.  In July 1998, the Company 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 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.  Since 1999, the Company closed the Bertucci’s test kitchen restaurant in Wakefield, Massachusetts and closed seventeen under performing Bertucci’s restaurants.  In December of 2000, the Company also closed the Sal and Vinnie’s restaurant located in Massachusetts.

 

As of July 2, 2003 the Company owned and operated 86 full-service, casual dining, Italian-style restaurants under the name Bertucci’s Brick Oven Pizzeria® located primarily in New England and Mid-Atlantic United States.

 

Results of Operations

 

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

 

STATEMENTS OF OPERATIONS DATA
(Percentage of Net Sales)

 

		Thirteen weeks ended				Twenty-six weeks ended
		July 2, 2003		July 3, 2002		July 2, 2003		July 3, 2002
Net sales		100.0	%	100.0	%	100.0	%	100.0	%
Cost of sales and expenses:
Cost of sales		23.2	%	22.6	%	22.7	%	22.7	%
Operating expenses		59.7	%	61.2	%	60.8	%	59.9	%
General and administrative expenses		6.0	%	7.4	%	6.7	%	7.7	%
Closed restaurant expense		—		0.4	%	—		0.2	%
Depreciation, amortization, deferred rent, and pre-opening expenses		6.9	%	6.3	%	6.9	%	6.3	%
Total cost of sales and expenses		95.8	%	97.9	%	97.1	%	96.8	%
Income from operations		4.2	%	2.1	%	2.9	%	3.2	%
Interest expense, net		(5.2	)%	(5.8	)%	(5.4	)%	(6.1	)%
Loss before income tax benefit		(1.0	)%	(3.7	)%	(2.5	)%	(2.9	)%
Income tax benefit		—		1.3	%	—		1.0	%
Net loss		(1.0	)%	(2.4	)%	(2.5	)%	(1.9	)%
Restaurant Operating Data:
Increase in comparable restaurant sales (a)		4.0	%	7.1	%	5.2	%	3.8	%
Number of restaurants:
Restaurants open, beginning of period		82		74		80		74
Restaurants opened		4		1		6		1
Restaurant closed		—		(1	)	—		(1	)
Total restaurants open, end of period		86		74		86		74

(a)                                  The Company defines comparable restaurant sales as net sales from restaurants open at least one full fiscal year.

 

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Thirteen Weeks Ended July 2, 2003 Compared to Thirteen Weeks Ended July 3, 2002

 

Net Sales.  Total company net sales increased by $6.3 million, or 15.2%, to $47.6 million during the second quarter 2003 from $41.3 million during the second quarter 2002.  The increase was primarily due to a $1.6 million (4.0%) increase in comparable restaurant sales and a $4.8 million increase in sales from thirteen restaurants opened since January 2002, partially offset by a $197,000 decrease due to one restaurant closed at the end of the second quarter of 2002.  Comparable Bertucci’s restaurant dine-in guest counts decreased 1.3% for the quarter as compared to the second quarter of 2002.  Bertucci’s comparable restaurant dine-in sales increased 5.1% for the quarter as compared to the second quarter of 2002 mainly as a result of a 2.1% increase in menu prices and menu mix shift.  Comparable Bertucci’s restaurant carry-out and delivery sales increased 0.4% for the quarter as compared to the same period in the prior year, primarily from a 3.0% increase in average transaction partially offset by 2.5% decrease in transaction counts.

 

Cost of Sales.  Cost of sales increased by approximately $1.7 million, or 17.8%, to $11.0 million during the second quarter 2003 from $9.3 million during the second quarter 2002.  Expressed as a percentage of net sales, overall cost of sales increased to 23.2% during the second quarter 2003 from 22.6% during the second quarter 2002.  The dollar increase was a result of higher sales from new restaurants and an increase in comparable restaurant sales.  The percent change was due to menu mix shift to higher cost items, increases in ingredient costs and new restaurant inefficiencies.

 

Operating Expenses.  Operating expenses increased by $3.1 million or 12.5%, to $28.4 million during the second quarter 2003 from $25.3 million during the second quarter 2002.  Expressed as a percentage of net sales, operating expenses decreased to 59.7% in the second quarter 2003 from 61.2% during the second quarter 2002.  The dollar increase was primarily due to increased labor costs associated with six additional restaurant openings during the first half of 2003 (four additional restaurants opened during the second quarter) compounded by increased labor, occupancy and insurance costs in comparable restaurants partially offset by reduced advertising costs.  The percentage decrease was primarily due to increased leverage from higher sales volume, the impact of a 2.1% increase in menu prices and reduced advertising costs.  The Company spent $1.2 million less on advertising in the second quarter of 2003 than in the second quarter 2002, primarily media and print costs.

 

General and Administrative Expenses.  General and administrative expenses decreased by approximately $193,000, or 6.3%, to $2.8 million during the second quarter 2003 from $3.0 million during the second quarter 2002.  Expressed as a percentage of net sales, general and administrative expenses decreased to 6.0% in the second quarter 2003 from 7.4% during the second quarter 2002.  The dollar decrease is primarily due to reduced costs of training and recruiting new restaurant managers and reduced corporate incentive compensation costs partially offset by higher benefits costs and travel costs associated with new restaurant development.

 

Depreciation, Amortization, Deferred Rent, and Pre-opening Expenses.  Depreciation, amortization, deferred rent, and pre-opening expenses increased by approximately $679,000 or 26.2%, to $3.3 million during the second quarter 2003 from $2.6 million during the second quarter of 2002.  Expressed as a percentage of net sales, depreciation, amortization, deferred rent, and pre-opening expenses increased to 6.9% in the second quarter 2003 from 6.3% during the second quarter 2002.  The dollar increase was primarily due to the higher pre-opening costs during the quarter, depreciation expenses associated with thirteen new restaurants opened since January 2002, and incremental amortization expense of

 

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approximately $48,000 from the capital lease portion of the sale-leaseback transaction.  See Note 7 of Notes to Consolidated Financial Statements.

 

Interest Expense.  Net interest expense increased by $107,000 to $2.5 million from $2.4 million during the second quarter of 2003 compared to the second quarter 2002. Incremental interest expense of approximately $95,000 was incurred in the second quarter of 2003 as a result of the new capital lease.  See Note 7 of Notes to Consolidated Financial Statements.

 

Income Taxes.  The Company has an historical trend of recurring pre-tax losses since 1998 excluding the non-recurring sale of 47 restaurants in 2001.  The Company’s current plan for continued development of Company owned restaurants will burden pre-tax profits because of the recognition of pre-opening costs and initial year inefficiencies associated with new restaurants.  During the fourth quarter of 2002 the Company recorded a full valuation allowance for its net deferred tax asset.  During the second quarter of 2003, the Company has also provided a full valuation allowance relating to the tax benefits generated during the quarter (primarily its operating losses).

 

Twenty-Six Weeks Ended July 2, 2003 Compared to Twenty-Six Weeks Ended July 3, 2002

 

Net Sales.  Total company net sales increased by $12.3 million, or 15.7%, to $90.3 million during the first half of 2003 from $78.0 million during the first half of 2002.  The increase was primarily due to a $4.0 million (5.2%) increase in comparable restaurant sales and a $8.6 million increase in sales from thirteen restaurants opened since January 2002, partially offset by a $379,000 decrease due to one restaurant closed at the end of the second quarter of 2002.  Comparable Bertucci’s restaurant dine-in guest counts were flat for the first half of 2003 as compared to the first half of 2002.  Bertucci’s comparable restaurant dine-in sales increased 6.4% for the first half of 2003 as compared to the first half of 2002 mainly as a result of a 2.1% increase in menu prices and menu mix shift.  Comparable Bertucci’s restaurant carry-out and delivery sales increased 1.6% for the first half of 2003 as compared to the same period in the prior year, primarily from a 3.8% increase in average transaction partially offset by a 2.2% decrease in transaction counts.

 

Cost of Sales.  Cost of sales increased by approximately $2.8 million, or 15.9%, to $20.5 million during the first half of 2003 from $17.7 million during the first half of 2002.  Expressed as a percentage of net sales, overall cost of sales was flat at 22.7% during the first half of 2003 compared to the first half of 2002.  The dollar increase was a result of higher volumes due to new restaurants and higher cost of ingredients.  The percentage change remained flat as a 2.1% price increase was offset by menu mix shift to higher cost items and increases in raw ingredient costs.

 

Operating Expenses.  Operating expenses increased by $8.2 million or 17.5%, to $54.9 million during the first half of 2003 from $46.7 million during the first half of 2002.  Expressed as a percentage of net sales, operating expenses increased to 60.8% in the first half of 2003 from 59.9% during the first half of 2002.  The increase was primarily due to increased labor costs associated with thirteen additional restaurant openings since January 2002 compounded by increased labor, occupancy, utilities and insurance costs in comparable restaurants partially offset by reduced advertising costs.  Furthermore, during the first half of 2002, the Company received the benefit of a $234,900 gain on the sale of land that was recorded as a reduction of operating expenses.  However, the Company spent $346,700 less on advertising in the first half of 2003 than in the first half of 2002, primarily media and print costs.

 

General and Administrative Expenses.  General and administrative expenses during the first half of 2003 were essentially flat to the first half of 2002.  Higher corporate payroll, travel and utility costs were offset

 

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by reduced training costs associated with new restaurant managers and reduced meeting costs.  Expressed as a percentage of net sales, general and administrative expenses decreased to 6.7% in the first half of 2003 from 7.7% during the first half of 2002.  The percentage reduction was primarily a result of higher sales volumes associated with a comparable restaurant sales increase and the impact of thirteen new restaurants opened since January 2002.

 

Depreciation, Amortization, Deferred Rent, and Pre-opening Expenses.  Depreciation, amortization, deferred rent, and pre-opening expenses increased by approximately $1.3 million or 27.3%, to $6.2 million during the first half of 2003 from $4.9 million during the first half of 2002.  Expressed as a percentage of net sales, depreciation, amortization, deferred rent, and pre-opening expenses increased to 6.9% in the first half of 2003 from 6.3% during the first half of 2002.  The dollar increase was primarily due to the higher pre-opening costs during the first half of 2003 and depreciation expenses associated with thirteen new restaurants opened since January 2002.  See Note 7 of Notes to Consolidated Financial Statements.

 

Interest Expense.  Net interest expense increased by $108,000 to $4.9 million from $4.8 million during the first half of 2003 compared to the first half of 2002.  The incremental indebtedness primarily associated with the new capital lease resulted in incremental interest expense of approximately $95,000 in 2003 versus 2002. See Note 7 of Notes to Consolidated Financial Statements.

 

Income Taxes.  The Company has an historical trend of recurring pre-tax losses since 1998 excluding the non-recurring sale of 47 restaurants in 2001.  The Company’s current plan for continued development of Company owned restaurants will burden pre-tax profits because of the recognition of pre-opening costs and initial year inefficiencies associated with new restaurants.  During the fourth quarter of 2002 the Company recorded a full valuation allowance for its net deferred tax asset.  During the first half of 2003, the Company has also provided a full valuation allowance relating to the tax benefits generated during the first half of 2003 (primarily its operating losses).

 

Liquidity And Capital Resources

 

Net cash flows provided by operating activities were $2.0 million for the first half of 2003, $4.9 million more than the $2.9 million used during the first half of 2002.  As of July 2, 2003, cash and cash equivalents of $14.3 million consisted of $11.2 million of short-term investments ($2.2 million of which is restricted, see below) and the remainder in operating cash accounts.

 

The Company’s 2003 capital expenditures were $10.2 million through July 2, 2003 compared to $8.4 million for the comparable prior year period.  The capital expenditures for 2003 were primarily comprised of $7.5 million for new Bertucci’s restaurants and $2.7 million for remodels and maintenance capital.  In the first quarter of 2003, the Company completed a sale-leaseback transaction on three restaurant properties.  This transaction generated $7.2 million in cash and increased the Company’s cash contractual obligations over the next twenty years by $16.7 million.

 

The Company believes that the cash flow generated from operations, the proceeds from one additional sale-leaseback transaction not yet closed and current cash on hand should be sufficient to fund its debt service requirements, lease obligations, balance of the year capital expenditures of approximately $6.0 million and other operating expenses through 2003.  While the Company expects to be able to service its debt, the lack of short term borrowing availability may impede growth.

 

As of July 2, 2003, the Company had $90.0 million in consolidated indebtedness, $85.3 million pursuant to the Senior Notes, $3.8 million related to the capital lease portion of the sale-leaseback transaction, and $902,000 of promissory notes.  The Company has a $3.0 million (maximum) Letter of Credit Facility.  As

 

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of July 2, 2003, this facility is collateralized with $2.2 million of cash restricted from general use in support of $2.2 million of outstanding letters of credit.

 

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

 

As of January 1, 2003, the Company had contractual obligations as follows:

 

Payments Due by Period
(Dollars in Thousands)

 

		Total			Less than 1 year			1 - 3 years			4 - 5 years			After 5 years
Contractual Obligations:
Operating Leases		$	118,098		$	13,660		$	39,266		$	20,321		$	44,851
Senior Notes		85,310			—			—			—			85,310
Closed restaurant reserve, net of sublease income estimated		2,499			642			1,347			255			255
Total Contractual Cash Obligations		$	205,907		$	14,302		$	40,613		$	20,576		$	130,416

 

Contractual obligations executed subsequent to January 1, 2003:

 

Payments Due by Period
(Dollars in Thousands)

 

		Total			Less than 1 year			1 - 3 years			4 - 5 years			After 5 years
Operating Leases		14,717			$	614		$	3,220		$	2,026		$	8,857
Capital Leases		9,346			391			1,218			851			6,886
Promissory Notes		941			82			122			137			600
Total new obligations		$	25,004		$	1,087		$	4,560		$	3,014		$	16,343

 

As mentioned above, the Company entered into a sale-leaseback transaction for three properties.  The land portion is classified as an operating lease and the building portion is classified as a capital lease.  In addition, the Company executed operating leases during the first half of 2003 for three future restaurant openings.

 

Impact of Inflation

 

Inflationary factors such as increases in labor, food or other operating costs could adversely affect the Company’s operations.  The Company does not believe inflation has had a material impact on its financial position or results of operations for the periods discussed above.  Management believes through the proper leveraging of purchasing size, labor scheduling, and restaurant development analysis, inflation will not have a material adverse effect on income during the foreseeable future.  There can be no assurance inflation will not materially adversely affect the Company.

 

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Seasonality

 

The Company’s quarterly results of operations have fluctuated and are expected to continue to fluctuate depending on a variety of factors, including the timing of new restaurant openings and related pre-opening and other startup expenses, net sales contributed by new restaurants, increases or decreases in comparable restaurant sales, competition and overall economic conditions.  The Company’s business is also subject to seasonal influences of consumer spending, dining out patterns and weather.  As is the case with many restaurant companies, the Company typically experiences lower net sales and net income during the first and fourth quarters.  Because of these fluctuations in net sales and net loss, the results of operations of any quarter are not necessarily indicative of the results that may be achieved for a full year or any future quarter.

 

Critical Accounting Policies

 

The following discussion addresses the Company’s most critical accounting policies, which are those most important to the portrayal of the Company’s financial condition and results, and require significant judgment.

 

Property and Equipment

 

Property and equipment are depreciated on a straight-line basis over the estimated useful lives of the assets.  The useful lives of the assets are based upon the Company’s expectations for the period of time that the asset will be used to generate revenue.  The Company periodically reviews the assets for changes in circumstances which may impact their useful lives.

 

Impairment of Long-Lived Assets

 

The Company reviews property and equipment for impairment when events or circumstances indicate it might be impaired. The Company tests impairment using historical cash flows and other relevant facts and circumstances as the primary basis for its estimates of future cash flows.  This process requires the use of estimates and assumptions which are subject to a high degree of judgment.  In addition, at least annually, the Company assesses the recoverability of goodwill and other intangible assets related to its restaurant concepts. These impairment tests require the Company to estimate fair values of its restaurant concepts by making 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.

 

Self-Insurance

 

The Company is self-insured for certain losses related to general liability, group health insurance, and workers’ compensation.  The Company maintains stop loss coverage with third party insurers to limit its total exposure.  The self-insurance liability represents an estimate of the ultimate cost of claims incurred as of the balance sheet date.  The estimated liability is not discounted and is established based upon analysis of historical data and actuarial estimates, and is reviewed by the Company on a quarterly basis to ensure that the liability is appropriate.  If actual trends, including the severity or frequency of claims, differ from the Company’s estimates, the Company’s financial results could be impacted.

 

Closed Restaurant Reserve

 

The Company remains primarily liable on approximately 14 leases for closed restaurants. Management reviews the specifics of each site on a quarterly basis to estimate the Company’s net remaining liability over the remaining lease term. Certain locations have subtenants in place while others remain vacant. Estimates must be made of future sublease income or lease assignment possibilities. If subtenants default

 

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on their subleases or projected future subtenants are not arranged, actual results could differ from the Company’s estimates, thereby impacting the Company’s financial results.

 

Forward-Looking Statements

 

All statements other than statements of historical facts included in this Quarterly Report on Form 10-Q, including, without limitation, statements set forth under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” regarding the Company’s future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations, are forward-looking statements.  In addition, forward-looking statements generally can 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 or similar terminology.  Although the Company believes that the expectations reflected in such forward-looking statements will prove to have been correct, it can give no assurance that such expectations will prove to have been correct.  Factors including those set forth herein, as well as those set forth in the Company’s Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 28, 2003 and other filings with the SEC may affect such expectations.  Investors are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.  The Company undertakes no obligation to publicly release any revisions to these forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

 

Item 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS

 

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

 

Item 4. CONTROLS AND PROCEDURES

 

The Company has established disclosure controls and procedures to ensure material information relating to the Company, including consolidated subsidiaries, is made known to the officers who certify financial reports and to other members of senior management and the Board of Directors.

 

a)              Evaluation of disclosure contro1s and procedures.  Our management, with the participation of our principal executive officer and principal financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13(a)-15(e) and 15(d)-15(e) under the Securities Exchange Act of 1934. as amended) as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation our principal executive officer and principal financial officer concluded these disclosure controls and procedures are effective and designed to ensure the information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the requisite time periods.

 

b)             Changes in internal controls.  There was no change in our internal control over financial reporting as defined in Rules 13(a)-15(f) and 15(d)-l5(f) under the Securities and Exchange Act of 1934, as amended) identified in connection with the evaluation of our internal control performed during our last fiscal quarter which materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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PART II: OTHER INFORMATION

 

Item 1.  LEGAL PROCEEDINGS

The Company is involved in various legal proceedings from time to time incidental to the conduct of its business. In the opinion of management, any ultimate liability arising out of such proceedings will not have a material adverse effect on the financial condition or results of operations of the Company.

 

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

 

Item 2.  CHANGES IN SECURITIES AND USE OF PROCEEDS

None

 

Item 3.  DEFAULTS UPON SENIOR SECURITIES

None

 

Item 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None

 

Item 5.  OTHER INFORMATION

None

 

Item 6.  EXHIBITS AND REPORTS ON FORM 8-K

None

 

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SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

		BERTUCCI’S CORPORATION
		(Registrant)
Date:	August 14, 2003		By: /s/ Benjamin R. Jacobson
		Chairman of the Board of Directors,
		Chief Executive Officer, Treasurer
		(Principal Executive Officer)
Date:	August 14, 2003			By: /s/ Kurt J. Schnaubelt
		Chief Financial Officer,
		Senior Vice President - Finance and
		Administration (Chief Accounting Officer)

 

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