SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
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 March 31, 2004
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 |
|
(I.R.S. Employer |
|
|
|
|
|
155 Otis Street, Northborough, Massachusetts |
|
01532-2414 |
|
(Address of principal executive offices) |
|
(Zip Code) |
|
|
|
|
|
Registrant’s telephone number, including area code: (508) 351-2500 |
||
Indicate by check mark whether the registrant (1) 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.
Yes ý No o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yes o No ý
2,944,579 shares of the registrant’s Common Stock were outstanding on May 13, 2004.
BERTUCCI’S CORPORATION
FORM 10-Q
TABLE OF CONTENTS
2
BERTUCCI’S CORPORATION
(In thousands, except share data)
|
|
|
March 31, |
|
December
31, |
|
||
|
|
|
(Unaudited) |
|
|
|
||
|
ASSETS |
|
|
|
|
|
||
|
Current Assets: |
|
|
|
|
|
||
|
Cash and cash equivalents |
|
$ |
9,087 |
|
$ |
12,647 |
|
|
Restricted cash |
|
3,129 |
|
3,129 |
|
||
|
Accounts receivable |
|
1,037 |
|
753 |
|
||
|
Inventories |
|
1,408 |
|
1,268 |
|
||
|
Prepaid expenses and other current assets |
|
2,336 |
|
1,758 |
|
||
|
Total current assets |
|
16,997 |
|
19,555 |
|
||
|
|
|
|
|
|
|
||
|
Property and Equipment, at cost: |
|
|
|
|
|
||
|
Land |
|
259 |
|
259 |
|
||
|
Buildings |
|
697 |
|
697 |
|
||
|
Capital leases - land and buildings |
|
5,764 |
|
5,764 |
|
||
|
Leasehold improvements |
|
63,795 |
|
63,084 |
|
||
|
Furniture and equipment |
|
44,569 |
|
43,806 |
|
||
|
|
|
115,084 |
|
113,610 |
|
||
|
Less - accumulated depreciation and amortization |
|
(43,192 |
) |
(40,300 |
) |
||
|
|
|
71,892 |
|
73,310 |
|
||
|
Construction work in process |
|
262 |
|
301 |
|
||
|
Net property and equipment |
|
72,154 |
|
73,611 |
|
||
|
|
|
|
|
|
|
||
|
Goodwill |
|
26,127 |
|
26,127 |
|
||
|
Deferred finance costs, net |
|
3,386 |
|
3,559 |
|
||
|
Liquor licenses, net |
|
2,540 |
|
2,555 |
|
||
|
Other assets |
|
546 |
|
479 |
|
||
|
TOTAL ASSETS |
|
$ |
121,750 |
|
$ |
125,886 |
|
|
|
|
|
|
|
|
||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
|
|
|
|
||
|
|
|
|
|
|
|
||
|
Current Liabilities: |
|
|
|
|
|
||
|
Promissory notes - current portion |
|
$ |
39 |
|
$ |
39 |
|
|
Capital lease obligations - current portion |
|
31 |
|
31 |
|
||
|
Accounts payable |
|
7,463 |
|
8,443 |
|
||
|
Accrued expenses |
|
11,736 |
|
14,026 |
|
||
|
Total current liabiliites |
|
19,269 |
|
22,539 |
|
||
|
Promissory notes, net of current portion |
|
803 |
|
821 |
|
||
|
Captial lease obligations, net of current portion |
|
5,717 |
|
5,724 |
|
||
|
Senior Notes |
|
85,310 |
|
85,310 |
|
||
|
Deferred gain on sale leaseback transaction |
|
2,090 |
|
2,112 |
|
||
|
Other long-term liabilities |
|
4,130 |
|
4,164 |
|
||
|
Total liabilities |
|
117,319 |
|
120,670 |
|
||
|
Stockholders’ Equity: |
|
|
|
|
|
||
|
Common stock, $.01 par value |
|
|
|
|
|
||
|
Authorized - 8,000,000 shares |
|
|
|
|
|
||
|
Issued - 3,666,370 shares, Outstanding 2,951,049 and 2,961,552 shares, respectively |
|
37 |
|
37 |
|
||
|
Less treasury shares of 715,321 and 704,818 respectively, at cost |
|
(8,252 |
) |
(8,190 |
) |
||
|
Additional paid-in capital |
|
29,035 |
|
29,035 |
|
||
|
Accumulated deficit |
|
(16,389 |
) |
(15,666 |
) |
||
|
Total stockholders’ equity |
|
4,431 |
|
5,216 |
|
||
|
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY |
|
$ |
121,750 |
|
$ |
125,886 |
|
The accompanying notes are an integral part of these consolidated financial statements.
3
BERTUCCI’S CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
|
|
|
Thirteen weeks ended |
|
||||
|
|
|
March 31, |
|
April 2, |
|
||
|
|
|
|
|
|
|
||
|
Net sales |
|
$ |
49,426 |
|
$ |
42,674 |
|
|
|
|
|
|
|
|
||
|
Cost of sales and expenses: |
|
|
|
|
|
||
|
Cost of sales |
|
11,556 |
|
9,461 |
|
||
|
Operating expenses |
|
29,639 |
|
26,475 |
|
||
|
General and administrative expenses |
|
3,093 |
|
3,179 |
|
||
|
Depreciation, amortization, deferred rent and pre-opening expenses |
|
3,232 |
|
2,963 |
|
||
|
Total cost of sales and expenses |
|
47,520 |
|
42,078 |
|
||
|
Income from operations |
|
1,906 |
|
596 |
|
||
|
Interest expense, net |
|
(2,629 |
) |
(2,398 |
) |
||
|
Loss before income tax benefit |
|
(723 |
) |
(1,802 |
) |
||
|
|
|
|
|
|
|
||
|
Income tax benefit |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Net loss |
|
$ |
(723 |
) |
$ |
(1,802 |
) |
|
|
|
|
|
|
|
||
|
Basic and diluted loss per share |
|
$ |
(0.24 |
) |
$ |
(0.60 |
) |
|
|
|
|
|
|
|
||
|
Weighted average shares outstanding - basic and diluted |
|
2,958,436 |
|
2,978,955 |
|
||
The accompanying notes are an integral part of these consolidated financial statements.
4
BERTUCCI'S CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
|
|
|
Common Stock |
|
Treasury Stock |
|
|
|
|
|
Total |
|
|||||||||
|
|
|
Number of |
|
Amount |
|
Number of |
|
Amount |
|
Additional
Paid-In |
|
Accumulated |
|
Stockholders' |
|
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance December 31, 2003 |
|
3,666,370 |
|
$ |
37 |
|
(704,818 |
) |
$ |
(8,190 |
) |
$ |
29,035 |
|
$ |
(15,666 |
) |
$ |
5,216 |
|
|
Purchase of common stock shares for treasury |
|
— |
|
— |
|
(10,503 |
) |
(62 |
) |
— |
|
— |
|
(62 |
) |
|||||
|
Net loss |
|
— |
|
— |
|
— |
|
— |
|
— |
|
(723 |
) |
(723 |
) |
|||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
|
Balance March 31, 2004 |
|
3,666,370 |
|
$ |
37 |
|
(715,321 |
) |
$ |
(8,252 |
) |
$ |
29,035 |
|
$ |
(16,389 |
) |
$ |
4,431 |
|
The accompanying notes are an integral part of these consolidated financial statements.
5
BERTUCCI'S CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
|
|
|
13 Weeks Ended |
|
||||
|
|
|
March 31, 2004 |
|
April 2, 2003 |
|
||
|
|
|
|
|
|
|
||
|
Cash flows from operating activities |
|
|
|
|
|
||
|
Net loss |
|
$ |
(723 |
) |
$ |
(1,802 |
) |
|
Adjustments to reconcile net loss to net cash used by operating activities: |
|
|
|
|
|
||
|
Depreciation, amortization, and deferred rent |
|
3,208 |
|
2,672 |
|
||
|
Changes in operating assets and liabilities |
|
|
|
|
|
||
|
Inventories |
|
(140 |
) |
(302 |
) |
||
|
Prepaid expenses, receivables and other |
|
(862 |
) |
789 |
|
||
|
Other accrued expenses |
|
(2,475 |
) |
(3,797 |
) |
||
|
Accounts payable |
|
(980 |
) |
215 |
|
||
|
Other operating assets and liabilities |
|
(66 |
) |
(59 |
) |
||
|
Total adjustments |
|
(1,315 |
) |
(482 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used by operating activities |
|
(2,038 |
) |
(2,284 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from investing activities |
|
|
|
|
|
||
|
Additions to property and equipment |
|
(1,435 |
) |
(5,113 |
) |
||
|
Acquisition of liquor licenses |
|
— |
|
(65 |
) |
||
|
|
|
|
|
|
|
||
|
Net cash used in investing activities |
|
(1,435 |
) |
(5,178 |
) |
||
|
|
|
|
|
|
|
||
|
Cash flows from financing activities |
|
|
|
|
|
||
|
Net proceeds from sale leaseback transactions |
|
— |
|
7,176 |
|
||
|
Decrease in restricted cash |
|
— |
|
252 |
|
||
|
Purchase common stock shares for treasury |
|
(62 |
) |
— |
|
||
|
Payment on promissory note |
|
(18 |
) |
— |
|
||
|
Principal payments under capital lease obligations |
|
(7 |
) |
— |
|
||
|
|
|
|
|
|
|
||
|
Net cash (used in) provided by financing activities |
|
(87 |
) |
7,428 |
|
||
|
|
|
|
|
|
|
||
|
Net decrease in cash and cash equivalents |
|
(3,560 |
) |
(34 |
) |
||
|
Cash and cash equivalents, beginning of year |
|
12,647 |
|
13,133 |
|
||
|
Cash and cash equivalents, end of period |
|
$ |
9,087 |
|
$ |
13,099 |
|
|
|
|
|
|
|
|
||
|
Supplemental disclosure of cash flow information: |
|
|
|
|
|
||
|
Cash paid for interest |
|
$ |
4,817 |
|
$ |
4,640 |
|
|
Cash paid for income taxes |
|
$ |
182 |
|
$ |
5 |
|
|
Capital leases entered into during period |
|
$ |
— |
|
$ |
3,821 |
|
The accompanying notes are an integral part of these consolidated financial statements.
6
BERTUCCI’S CORPORATION
Notes To Consolidated Financial Statements
March 31, 2004
(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 Annual Report on Form 10-K for the year ended December 31, 2003. The operating results for the thirteen weeks ended March 31, 2004 may not be indicative of the results expected for any succeeding interim period or for the entire year ending December 29, 2004.
2. Recent Accounting Pronouncements
In May 2003, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standard No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (“SFAS No. 150”). The Statement requires an issuer to classify financial instruments within its scope as a liability. Many of those instruments were previously classified as equity under prior accounting guidelines. SFAS No. 150 is effective for all such financial instruments entered into or modified after May 31, 2003. Otherwise, it was effective on July 3, 2003, with the exception of mandatory redeemable financial instruments of non-public entities, for which the provisions of this statement are applicable in the first quarter of 2004. The Company does not use such financial instruments therefore the adoption of the applicable portions of this statement in the third quarter of 2003 and the first quarter of 2004 did not 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, Inc. in July 1998. 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 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.
The closed restaurant reserve was calculated net of sublease income at 14 locations that are partially or fully subleased as of March 31, 2004. The Company remains primarily liable for the remaining lease obligations should the sublessor default. Total sublease income excluded from the reserve is approximately $8.2 million for subleases expiring at various dates through 2017. There have been no defaults by sublessors to date.
7
Activity within the reserve was as follows (in thousands):
|
|
|
Thirteen weeks ended |
|
||||
|
|
|
March 31, |
|
April 2, |
|
||
|
|
|
|
|
|
|
||
|
Balance, beginning of the year |
|
$ |
1,449 |
|
$ |
2,499 |
|
|
Payments charged against reserve |
|
(184 |
) |
(235 |
) |
||
|
Promissory note issued |
|
— |
|
(386 |
) |
||
|
Balance, end of period |
|
$ |
1,265 |
|
$ |
1,878 |
|
|
Current portion (included in accrued expenses) |
|
$ |
615 |
|
$ |
636 |
|
|
Noncurrent portion |
|
650 |
|
1,242 |
|
||
|
|
|
$ |
1,265 |
|
$ |
1,878 |
|
4. Loss per Share
The number of shares used to calculate diluted loss per share for the periods ended March 31, 2004 and April 2, 2003 exclude the effect of 592,396 and 652,549 shares of Common Stock subject to 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. Management recorded a full valuation allowance for its deferred tax assets in fiscal 2002 and continues to record an allowance quarterly 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 loss and loss per share on a pro forma basis. No stock-based employee compensation cost related to stock options is reflected in the reported 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 loss and loss per share if the Company had applied the fair value method.
|
|
|
Thirteen weeks ended |
|
||||
|
|
|
March 31, |
|
April 2, |
|
||
|
Net loss, as reported |
|
$ |
(723 |
) |
$ |
(1,802 |
) |
|
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects |
|
— |
|
— |
|
||
|
|
|
|
|
|
|
||
|
Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
|
(96 |
) |
(169 |
) |
||
|
|
|
|
|
|
|
||
|
Pro forma net loss |
|
$ |
(819 |
) |
$ |
(1,971 |
) |
|
Loss per share: |
|
|
|
|
|
||
|
Basic and diluted—as reported |
|
$ |
(0.24 |
) |
$ |
(0.60 |
) |
|
Basic and diluted—pro forma |
|
$ |
(0.28 |
) |
$ |
(0.66 |
) |
8
7. Sale of Properties
During 2003, the Company completed two sale-leaseback transactions on four restaurant properties. In the first transaction (which occurred in the second quarter of 2003), the Company sold three properties for $7.2 million in cash (net of fees of approximately $320,000), resulting in a gain of $2.2 million. The gain has been deferred and will be amortized into income over the lease term. The properties sold included land and buildings at each location which the Company agreed to lease back for a 20-year period. 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. The land portion of the obligation is classified as an operating lease, requiring future payments to be classified as operating expenses. In the second transaction (which occurred in the fourth quarter of 2003), 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 connection with this transaction the Company recorded a charge of $60,000 representing the excess 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 is recorded at its net present value of $1.9 million (at inception) as a capital lease obligation. The Company agreed to lease back the property for a 20-year period. All leases entered into in connection with these transactions include two five-year renewal terms, which the Company may exercise at its option. The Company is required to maintain the properties 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 to customary indemnities and, in the event the Company defaults on any lease, the landlord may terminate the lease, accelerate rental payments and collect liquidated damages.
9
Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking Statements
All statements other than statements of historical facts included in this Report on Form 10-Q, including, without limitation, statements set forth under this “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 be correct. Factors that could cause actual results to materially differ include, without limitation, the Company’s high degree of leverage could, among other things, reduce Company’s ability to obtain financing for operations and expansion, place the Company at a competitive disadvantage and limit the Company’s flexibility to adjust to changing market conditions; the challenges of managing geographic expansion; changes in food costs, supplies and key supplier relationships; and the possible adverse impact of government regulation on the Company. Other factors that could adversely affect our business and prospects are described in our filings with the Securities and Exchange Commission. 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.
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.
The Company’s wholly owned subsidiary, Bertucci’s Restaurant Corp. owns and operates a full-service, casual dining, Italian-style restaurant concept under the name Bertucci’s Brick Oven Pizzeria®. As of March 31, 2004, the Company owned and operated 90 such restaurants located primarily in the northeastern United States.
10
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 |
|
||
|
|
|
March 31, |
|
April 2, |
|
|
Net sales |
|
100.0 |
% |
100.0 |
% |
|
Cost of sales and expenses: |
|
|
|
|
|
|
Cost of sales |
|
23.4 |
% |
22.2 |
% |
|
Operating expenses |
|
60.0 |
% |
62.1 |
% |
|
General and administrative expenses |
|
6.3 |
% |
7.4 |
% |
|
Depreciation, amortization, deferred rent, and pre-opening expenses |
|
6.5 |
% |
6.9 |
% |
|
Total cost of sales and expenses |
|
96.2 |
% |
98.6 |
% |
|
Income from operations |
|
3.8 |
% |
1.4 |
% |
|
Interest expense, net |
|
(5.3 |
)% |
(5.6 |
)% |
|
Loss before income tax benefit |
|
(1.5 |
)% |
(4.2 |
)% |
|
Income tax benefit |
|
— |
|
— |
|
|
Net loss |
|
(1.5 |
)% |
(4.2 |
)% |
|
|
|
|
|
|
|
|
Restaurant Operating Data: |
|
|
|
|
|
|
Increase in comparable restaurant sales (a) |
|
4.9 |
% |
6.6 |
% |
|
Number of restaurants: |
|
|
|
|
|
|
Restaurants open, beginning of period |
|
89 |
|
80 |
|
|
Restaurants opened |
|
1 |
|
2 |
|
|
Total restaurants open, end of period |
|
90 |
|
82 |
|
(a) The Company defines comparable restaurant sales as net sales from restaurants open at least one full fiscal year prior to the beginning of the current reported period.
Thirteen Weeks Ended March 31, 2004 Compared to Thirteen Weeks Ended April 2, 2003
Net Sales. Total net sales increased by $6.7 million, or 15.7%, to $49.4 million during the first quarter of 2004 from $42.7 million during the first quarter of 2003. The increase was primarily due to a $2.0 million (4.9%) increase in comparable restaurant sales, a $5.0 million increase in sales due to 109 incremental restaurant weeks from eleven restaurants opened since January 2003, and an offset of approximately $300,000 from one restaurant closing in the fourth quarter of 2003. Comparable Bertucci’s restaurant dine-in guest counts decreased 2.5% for the first quarter of 2004 as compared to the first quarter of 2003. Bertucci’s comparable restaurant dine-in sales increased 5.3% and comparable carry-out and delivery sales increased 3.5% for the quarter as compared to the first quarter of 2003. The Company believes the increase in comparable sales was primarily due to an aggregate 4.9% increase in menu prices in March 2003 and February 2004 and a menu mix shift to higher priced items, partially offset by the aforementioned guest count decreases. For the 79 comparable restaurants, average weekly sales increased from $40,800 per restaurant in the first quarter 2003 to $42,800 per restaurant during the first quarter of 2004. For the eleven restaurants opened since January 2003, average weekly sales were $38,300 per restaurant during the first quarter of 2004.
Cost of Sales. Cost of sales increased by approximately $2.1 million, or 22.1%, to $11.6 million during the first quarter of 2004 from $9.5 million during the first quarter 2003. Expressed as a percentage of net sales, overall cost of sales increased to 23.4% during the first quarter of 2004 from 22.2% during the first quarter of 2003. Approximately $1.0 million of the increase was due to increased sales, $600,000 from increases in selected ingredient costs, primarily cheese and oil, and $500,000 due to a menu mix shift to higher cost items. The Company believes that this shift in menu emphasis will continue during 2004.
11
Operating Expenses. Operating expenses increased by $3.1 million, or 11.7%, to $29.6 million during the first quarter of 2004 from $26.5 million during the first quarter of 2003. Expressed as a percentage of net sales, operating expenses decreased to 60.0% in the first quarter of 2004 from 62.1% during the first quarter of 2003. The dollar increase was primarily due to the opening and operation of restaurants that were not opened in the first quarter of 2003. In addition, with only one restaurant opening in the first quarter of 2004, new restaurant inefficiencies were less than during the first quarter of 2003; accordingly a margin improvement of approximately 1.1% was realized. Further, advertising expenditures were $456,000 less in first quarter of 2004 as compared to the first quarter of 2003, primarily due to the timing of marketing campaigns each year. The first marketing campaign of fiscal 2004 began in April, while a similar campaign began in March of fiscal 2003. These factors combined to mitigate an increase in utilities expense, primarily natural gas, which reduced margin by approximately.4% of net sales.
General and Administrative Expenses. General and administrative expenses decreased by approximately $86,000, or 2.6%, to $3.1 million during the first quarter of 2004 from $3.2 million during the first quarter of 2003. Expressed as a percentage of net sales, general and administrative expenses decreased to 6.3% in the first quarter of 2004 from 7.4% during the first quarter of 2003. The dollar decrease was primarily due to reduced costs of training and recruiting new restaurant managers.
Depreciation, Amortization, Deferred Rent, and Pre-opening Expenses. Depreciation, amortization, deferred rent, and pre-opening expenses increased by approximately $269,000, or 9.0%, to $3.2 million during the first quarter of 2004 from $3.0 million during the first quarter of 2003. Expressed as a percentage of net sales, depreciation, amortization, deferred rent, and pre-opening expenses decreased to 6.5% in the first quarter of 2004 from 6.9% during the first quarter of 2003. The dollar variance was primarily the result of a $490,000 increase in depreciation costs due to new restaurants partially offset by a $260,000 decrease in pre-opening costs.
Interest Expense. Net interest expense increased by approximately $231,000, or 9.6%, to $2.6 million during the first quarter of 2004 from $2.4 million during the first quarter of 2003. Incremental interest expense of approximately $152,000 was incurred in the first quarter of 2004 as a result of capitalized leases recorded in 2003.
Income Taxes. The Company has an historical trend of recurring pre-tax losses since 1998 excluding the sale of 40 Chili’s and seven On The Border restaurants to Brinker International, Inc. in April 2001. The Company anticipates that its current plan for continued development of Company owned Bertucci’s 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. The Company has also provided a full valuation allowance relating to the tax benefits generated during 2004 and 2003 (primarily from its operating losses).
The Company has historically met its capital expenditures and working capital needs through a combination of operating cash flow, bank and mortgage borrowings, the sale of Common Stock, and, in fiscal 2003, two sale leaseback transactions. Future capital and working capital needs are expected to be funded from operating cash flow.
Net cash flows used by operating activities were $2.0 million for the first quarter of 2004, $300,000 less than the $2.3 million used during the first quarter of 2003. As of March 31, 2004, the Company had cash and cash equivalents of $9.1 million.
The Company’s capital expenditures were $1.4 million from January 1, 2004 through March 31, 2004 compared to $5.1 million for the comparable prior year period. The capital expenditures were primarily comprised of $1.0 million for new Bertucci’s restaurants and $400,000 for remodels and maintenance capital. The Company anticipates capital expenditures for the remainder of 2004 will be approximately $6.6 million.
12
As of March 31, 2004, the Company had $91.9 million in consolidated indebtedness: $85.3 million pursuant to the Senior Notes, $5.7 million related to the capital lease portion of the sale-leaseback transaction, and $860,000 of promissory notes. The Company has a $4.0 million (maximum) Letter of Credit Facility. As of March 31, 2004, this facility was collateralized with $3.1 million of cash restricted from general use in support of $3.1 million of outstanding letters of credit. The Company does not have a line of credit or other similar borrowing facility.
The Company believes the cash flow generated from operations and current cash on hand will be sufficient to fund its planned operations, including debt service, lease commitments and capital expenditures, for the next twelve months. The Company expects that it will experience significant liquidity demands in 2008, however, when its 10 3/4% senior notes with a current outstanding principal amount of $85.3 million (the “Senior Notes”) must be paid in full. Currently, the Company is only required to pay semi-annual interest payments on the Senior Notes.
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.
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 operations during the foreseeable future. There can be no assurance inflation will not materially adversely affect the Company.
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 and Estimates
The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to impairment of long-lived assets, self-insurance, and closed restaurants reserve. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
13
Impairment of Long-Lived Assets
The Company evaluates property and equipment held and used in the business for impairment whenever events or changes in circumstances indicate that the carrying amount of a restaurant’s assets may not be recoverable. An impairment is determined by comparing estimated undiscounted future operating cash flows (which the Company estimates using historical cash flows and other relevant facts and circumstances) for a restaurant to the carrying amount of its assets. If an impairment exists, the amount of impairment is measured as the excess of the carrying amount over the estimated discounted future operating cash flows of the asset and the expected proceeds upon sale of the asset. The estimates and assumptions used during this process are subject to a high degree of judgment.
During the third quarter of 2003, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at eleven restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the eleven restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $4.7 million. In the third quarter of 2003, the Company recorded an impairment charge to reflect the write down of the affected assets to fair value.
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. To date, such analysis has indicated no impairment of goodwill and other intangible assets has occurred.
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 estimates of the ultimate costs of claims incurred, 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. To date, no activity has occurred requiring significant adjustments to these reserves.
Closed Restaurants Reserve
The Company remains primarily liable on leases for 14 closed locations. 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 on their subleases or projected future subtenants are not obtained, actual results could differ from the Company’s estimates, thereby impacting the Company’s financial results. All activity in fiscal 2003 and 2004 has been consistent with reserves and no increases in the reserve have been necessary.
The Company has no exposure to specific risks related to derivatives or other “hedging” types of financial instruments.
14
Item 4. CONTROLS AND PROCEDURES
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the Company’s Securities Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, as ours are designed to do, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As of March 31, 2004, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 15d-15(e) under the Securities Exchange Act of 1934. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective in enabling us to record, process, summarize and report information required to be included in our periodic SEC filings within the required time period.
There have been no changes in our internal control over financial reporting that occurred during the first quarter of fiscal 2004 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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 currently a party that is likely to have a material adverse effect on the Company.
Item 2. CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY SECURITIES
None
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
None
15
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibits
31.1 Certification of Benjamin R. Jacobson pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*).
31.2 Certification of Kurt J. Schnaubelt pursuant to Item 601(b)(31) of Regulation S-K, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*).
(*) – Included with this report.
Reports on Form 8-K
The Company did not file any Current Reports on Form 8-K during the period covered by this report.
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: |
May 13, 2004 |
|
|
By: /s/ Benjamin R. Jacobson |
|
||
|
|
|
|
Chairman of the Board of Directors, |
||||
|
|
|
|
Chief Executive Officer, Treasurer |
||||
|
|
|
|
(Principal Executive Officer) |
||||
|
|
|
|
|
||||
|
Date: |
May 13, 2004 |
|
|
By: /s/ Kurt J. Schnaubelt |
|
||
|
|
|
|
Chief Financial Officer, |
||||
|
|
|
|
Senior Vice President – Finance and |
||||
|
|
|
|
Administration (Chief Accounting Officer) |
||||
16