BERTUCCIS CORP - 10-Q Quarterly Report

BERTUCCI’S CORPORATION

FORM 10-Q

TABLE OF CONTENTS

PART I:		FINANCIAL INFORMATION

	Item 1.	Financial Statements:

	1)	Consolidated Balance Sheets September 29, 2004 (Unaudited) and December 31, 2003

	2)	Consolidated Statements of Operations for the 13 and 39 Weeks Ended September 29, 2004 (Unaudited) and October 1, 2003 (Unaudited)

	3)	Consolidated Statement of Changes in Stockholders’ (Deficit) Equity for the 39 Weeks Ended September 29, 2004 (Unaudited)

	4)	Consolidated Statements of Cash Flow for the 39 Weeks Ended September 29, 2004 (Unaudited) and October 1, 2003 (Unaudited)

	5)	Notes to Consolidated Financial Statements (Unaudited)

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations

	Item 3.	Quantitative and Qualitative Disclosure About Market Risk

	Item 4.	Controls and Procedures

PART II:		OTHER INFORMATION
	Item 1.	Legal Proceedings
	Item 2.	Sales of Equity 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

EXHIBITS

PART I: FINANCIAL INFORMATION

Item 1. FINANCIAL STATEMENTS

BERTUCCI’S CORPORATION

CONSOLIDATED BALANCE SHEETS

(In thousands, except share data)

	(Unaudited)
	September 29, 2004			December 31, 2003
ASSETS
Current Assets:
Cash and cash equivalents	$	6,188		$	12,647
Restricted cash	3,920			3,129
Accounts receivable	847			753
Inventories	1,495			1,268
Prepaid expenses and other current assets	1,709			1,758
Total current assets	14,159			19,555

Property and Equipment, at cost:
Land	259			259
Buildings	697			697
Capital leases - land and buildings	5,764			5,764
Leasehold improvements	62,477			63,084
Furniture and equipment	46,950			43,806
	116,147			113,610
Less - accumulated depreciation and amortization	(48,904		)	(40,300		)
	67,243			73,310
Construction work in process	451			301
Net property and equipment	67,694			73,611

Goodwill	26,127			26,127
Deferred finance costs, net	3,036			3,559
Liquor licenses, net	2,509			2,555
Other assets	438			479
TOTAL ASSETS	$	113,963		$	125,886

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current Liabilities:
Promissory notes - current portion	$	39		$	39
Capital lease obligations - current portion	31			31
Accounts payable	8,276			8,443
Accrued expenses	11,450			14,026
Total current liabiliites	19,796			22,539
Promissory notes, net of current portion	781			821
Captial lease obligations, net of current portion	5,698			5,724
Senior Notes	85,310			85,310
Deferred gain on sale leaseback transaction	2,030			2,112
Other long-term liabilities	4,113			4,164
Total liabilities	117,728			120,670
Stockholders’ (Deficit) Equity:
Common stock, $.01 par value
Authorized - 8,000,000 shares
Issued - 3,667,495 and 3,666,370 shares respectively; Outstanding 2,943,164 and 2,961,552 shares, respectively	37			37
Less treasury shares of 724,331 and 704,818 respectively, at cost	(8,332		)	(8,190		)
Additional paid-in capital	29,045			29,035
Accumulated deficit	(24,515		)	(15,666		)
Total stockholders’ (deficit) equity	(3,765		)	5,216
TOTAL LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY	$	113,963		$	125,886

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

BERTUCCI’S CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except share and per share data)

(Unaudited)

	Thirteen weeks ended								Thirty-nine weeks ended
	September 29,				October 1,				September 29,					October 1,
	2004				2003				2004					2003

Net sales	$	49,260			$	47,381			$			150,440		$		137,642

Cost of sales and expenses:
Cost of sales	12,256				11,402				36,695					31,882
Operating expenses	29,521				28,833				92,640					83,726
General and administrative expenses	2,655				2,554				9,226					8,589
Asset impairment charge	—				4,682				3,338					4,682
Depreciation, amortization, deferred rent and pre-opening expenses	3,111				3,184				9,456					9,419
Total cost of sales and expenses	47,543				50,655				151,355					138,298
Income (loss) from operations	1,717				(3,274			)	(915				)	(656			)

Interest expense, net	(2,654			)	(2,615			)	(7,934				)	(7,511			)
Loss before income tax benefit	(937			)	(5,889			)	(8,849				)	(8,167			)

Income tax benefit	—				—				—					—

Net loss	$	(937		)	$	(5,889		)	$	(8,849			)	$	(8,167		)

Basic and diluted loss per share	$		(0.32	)	$		(1.99	)	$		(3.00		)	$	(2.75		)

Weighted average shares outstanding - basic and diluted	2,944,377				2,963,674				2,949,279					2,972,642

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

BERTUCCI’S CORPORATION

CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ (DEFICIT) EQUITY

(In thousands, except share data)

(Unaudited)


	Common Stock			Treasury Stock
	Number of Shares	Amount		Number of Shares		Amount			Additional Paid-In Capital		Accumulated Deficit			Total Stockholders’ (Deficit) Equity

Balance December 31, 2003	3,666,370	$	37	(704,818	)	$	(8,190	)	$	29,035	$	(15,666	)	$		5,216
Purchase of common stock for treasury	—	—		(19,513	)	(142		)	—		—			(142			)
Sale of common stock from exercise of options	1,125	—		—		—			10		—			10
Net loss	—	—		—		—			—		(8,849		)	(8,849			)
Balance September 29, 2004	3,667,495	$	37	(724,331	)	$	(8,332	)	$	29,045	$	(24,515	)	$	(3,765		)

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

BERTUCCI’S CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOW

(In thousands)

(Unaudited)

	Thirty-Nine Weeks Ended
	September 29, 2004			October 1, 2003

Cash flows from operating activities
Net loss	$	(8,849	)	$	(8,167	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization	9,173			8,052
Asset impairment charge	3,338			4,682
Deferred rent	418			344
Amortization of gain on sale-leaseback	(82		)	(56		)
Changes in operating assets and liabilities
Inventories	(227		)	(357		)
Prepaid expenses, receivables and other	(45		)	1,033
Other accrued expenses	(3,045		)	(4,556		)
Accounts payable	(167		)	519
Other operating assets and liabilities	41			(144		)
Total adjustments	9,404			9,517
Net cash provided by operating activities	555			1,350

Cash flows from investing activities
Additions to property and equipment	(6,025		)	(13,288		)
Acquisition of liquor licenses	—			(133		)
Net cash used in investing activities	(6,025		)	(13,421		)

Cash flows from financing activities
Net proceeds from sale leaseback transactions	—			7,177
Increase in restricted cash	(791		)	(652		)
Purchase of common stock for treasury	(142		)	(90		)
Sale of common stock from exercise of options	10			—
Payment on promissory note	(40		)	(67		)
Principal payments under capital lease obligations	(26		)	(5		)
Net cash (used in) provided by financing activities	(989		)	6,363

Net decrease in cash and cash equivalents	(6,459		)	(5,708		)
Cash and cash equivalents, beginning of year	12,647			13,133
Cash and cash equivalents, end of period	$	6,188		$	7,425

Supplemental disclosure of cash flow information:
Cash paid for interest	$	9,863		$	9,577
Cash paid for income taxes	$	373		$	17
Capital leases entered into during period	$	—		$	3,821
Promissory note issued in exchange for liquor license rights	$	—		$	555
Promissory note issued in exchange for settlement of lease liability	$	—		$	941

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

BERTUCCI’S CORPORATION

Notes To Consolidated Financial Statements

September 29, 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 and thirty-nine weeks ended September 29, 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 were applicable in the first quarter of 2004. The Company does not use such financial instruments, and therefore, the adoption of the applicable portions of this statement did not have a material impact on the Company’s financial position or results of operations.

3. Liquor Licenses

Transferable liquor licenses purchased are accounted for at the lower of cost or fair market value and are not amortized. Annual renewal fees are expensed as incurred. Non-transferable liquor licenses are amortized on a straight-line basis over the contractual life of the license. The carrying value of transferable liquor licenses was $2.0 million at December 31, 2003 and September 29, 2004. Accumulated amortization at December 31, 2003 and September 29, 2004 for a non-transferable liquor license was $40,000 and $86,000, respectively. Amortization expense for the thirty-nine weeks ended September 29, 2004 was $46,000 and is expected to be $60,000 per year through fiscal 2013.

4. 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 then 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 September 29, 2004. The Company remains primarily liable for the remaining lease obligations should the sublessee default. Total sublease income excluded from the reserve is approximately $7.5 million for subleases expiring at various dates through 2017. There have been no defaults by sublessors to date.

Activity within the reserve was as follows (in thousands):

	Thirty-nine weeks ended
	September 29, 2004			October 1, 2003

Balance, beginning of the year	$	1,449		$	2,499
Payments charged against reserve	(469		)	(566		)
Promissory note issued	—			(386		)
Balance, end of period	$	980		$	1,547

Current portion (included in accrued expenses)	$	615		$	621
Noncurrent portion	365			926
	$	980		$	1,547

5. Loss per Share

The number of shares used to calculate diluted loss per share for the periods ended September 29, 2004 and October 1, 2003 exclude the effect of 554,021 and 602,311 shares of Common Stock subject to outstanding stock options, respectively, as the options are anti-dilutive.

6. 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.

7. 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									Thirty-nine weeks ended
	September 29, 2004					October 1, 2003				September 29, 2004				October 1, 2003

Net loss, as reported	$		(937		)	$	(5,889		)	$	(8,849		)	$			(8,167	)
Add: Stock-based employee compensation expense included in reported net income, net of related tax effects	—					—				—				—

Adjust: Net stock-based employee compensation expense/income determined under fair value based method for all awards, net of related tax effects	61					(153			)	(95			)	(460				)

Pro forma net loss	$			(876	)	$	(6,042		)	$	(8,944		)	$	(8,627			)

Loss per share:
Basic and diluted—as reported	$	(0.32			)	$		(1.99	)	$		(3.00	)	$		(2.75		)
Basic and diluted—pro forma	$	(0.30			)	$	(2.04		)	$		(3.03	)	$		(2.90		)

8. 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. Asset Impairment Charge

The Company’s long-lived assets consist primarily of goodwill and leasehold improvements related to its restaurant operations. Statement of Financial Accounting Standard No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, requires management to test the recoverability of long-lived assets (excluding goodwill) by comparing estimated undiscounted future operating cash flows expected to be generated from these assets to the carrying amounts of the assets whenever events or changes in circumstances indicate the carrying value may not be recoverable. If cash flows are not sufficient to recover the carrying amount of the assets, impairment has occurred and the assets are written down to fair value. Significant estimates and assumptions regarding future sales, cost trends, productivity and market maturity are required to be made by management in order to test for impairment under this standard.

During the second quarter of 2004, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at seven restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the seven restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $3.3 million. The Company recorded an impairment charge during the quarter to reflect the write down of the affected assets to fair value.

During the third quarter of 2003, the Company made a similar assessment and determined an impairment of fixed assets existed at eleven restaurant locations. The carrying amount of the assets exceeded the fair value of the assets (determined with the same method described above) by approximately $4.7 million. The Company recorded an impairment charge during the quarter to reflect the write down of the affected assets to fair value.

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				Thirty-nine weeks ended
	September 29,		October 1,		September 29,		October 1,
	2004		2003		2004		2003
Net sales	100.0	%	100.0	%	100.0	%	100.0	%

Cost of sales and expenses:
Cost of sales	24.9	%	24.1	%	24.4	%	23.2	%
Operating expenses	59.9	%	60.8	%	61.6	%	60.8	%
General and administrative expenses	5.4	%	5.4	%	6.1	%	6.2	%
Asset impairment charge	—		9.9	%	2.2	%	3.4	%
Depreciation, amortization, deferred rent, and pre-opening expenses	6.3	%	6.7	%	6.3	%	6.8	%
Total cost of sales and expenses	96.5	%	106.9	%	100.6	%	100.4	%

Income (loss) from operations	3.5	%	(6.9	)%	(0.6	)%	(0.4	)%
Interest expense, net	(5.4	)%	(5.5	)%	(5.3	)%	(5.5	)%
Loss before income tax benefit	(1.9	)%	(12.4	)%	(5.9	)%	(5.9	)%

Income tax benefit	—		—		—		—

Net loss	(1.9	)%	(12.4	)%	(5.9	)%	(5.9	)%

Restaurant Operating Data:
Increase in comparable restaurant sales (a)	—		2.4	%	1.9	%	4.3	%
Number of restaurants:
Restaurants open, beginning of period	90		86		89		80
Restaurants opened	1		1		2		7
Total restaurants open, end of period	91		87		91		87

(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 September 29, 2004 Compared to Thirteen Weeks Ended October 1, 2003

Net Sales. Total net sales increased by $1.9 million, or 4.0%, to $49.3 million during the third quarter of 2004 from $47.4 million during the third quarter of 2003. The increase was primarily due to a net 43 incremental restaurant weeks from eleven restaurants opened since January 2003 ($2.2 million), and an offset of approximately $301,000 from one restaurant closing in the fourth quarter of 2003. Comparable Bertucci’s restaurant dine-in guest counts decreased 5.3% for the third quarter of 2004 as compared to the third quarter of 2003. Bertucci’s comparable restaurant dine-in sales increased 0.4% and comparable carry-out and delivery sales decreased 1.6% for the quarter as compared to the third quarter of 2003. Comparable sales were essentially flat because of an aggregate 3.7% increase in menu prices in 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 were flat from the third quarter 2003 to the third quarter of 2004. For the eleven restaurants opened since January 2003, average weekly sales were $39,200 per restaurant during the third quarter of 2004.

Cost of Sales. Cost of sales increased by approximately $853,400, or 7.5%, to $12.3 million during the third quarter of 2004 from $11.4 million during the third quarter 2003. Expressed as a percentage of net sales, overall cost of sales increased to 24.9% during the third quarter of 2004 from 24.1% during the third quarter of 2003. Approximately $452,000 resulted from the increase in net sales, while approximately $512,000 (1.0% as a percentage of sales) was due to a menu mix shift to higher cost items, and approximately $335,000 (0.7% as a percentage of sales) was due to increases in selected ingredient costs, primarily cheese and oil. These increases were partially mitigated by the benefit of menu price increases, such benefit approximating $441,000 or 0.9% of sales. The Company believes the higher ingredient costs and the shift in menu emphasis will continue during 2004.

Operating Expenses. Operating expenses increased by $688,000 or 2.4%, to $29.5 million during the third quarter of 2004 from $28.8 million during the third quarter of 2003. Expressed as a percentage of net sales, operating expenses decreased to 59.9% in the third quarter of 2004 from 60.8% during the third quarter of 2003. The dollar increase was primarily due to the opening and operation of restaurants opened after the third quarter of 2003 and offset by advertising expenditures of $1.0 million less in the third quarter of 2004 as compared to the third quarter of 2003, primarily due to the timing of marketing campaigns.

General and Administrative Expenses. General and administrative expenses increased by approximately $101,000, or 4.0%, to $2.7 million during the third quarter of 2004 from $2.6 million during the third quarter of 2003. Expressed as a percentage of net sales, general and administrative expenses were essentially flat at 5.4%. The net dollar increase was primarily due to incentive compensation reductions recorded in the thrid quarter of the prior year.

Depreciation, Amortization, Deferred Rent and Pre-opening Expenses. Depreciation, amortization, deferred rent and pre-opening expenses decreased by approximately $73,000, or 2.2%, to $3.1 million during the third quarter of 2004 from $3.2 million during the third quarter of 2003. Expressed as a percentage of net sales, depreciation, amortization, deferred rent and pre-opening expenses decreased to 6.3% in the third quarter of 2004 from 6.7% during the third quarter of 2003. The dollar variance was primarily the result of a $245,000 decrease in pre-opening costs as there was only one opening in the third quarter of 2004 partially offset by an $185,000 increase in depreciation costs due to restaurants open since October 2003.

Interest Expense, net. Net interest expense increased by approximately $39,000 or 1.5%, to $2.7 million during the third quarter of 2004 from $2.6 million during the third quarter of 2003 primarily as a result of reduced interest rates available for short term (primarily overnight) investing and reduced construction costs capitalized.

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 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 subsequently generated (primarily from its operating losses).

Thirty-Nine Weeks Ended September 29, 2004 Compared to Thirty-Nine Weeks Ended October 1, 2003

Net Sales. Total net sales increased by $12.8 million, or 9.3%, to $150.4 million during the first three quarters of 2004 from $137.6 million during the first three quarters of 2003. The increase was primarily due to an $11.2 million increase in sales due to a net 244 incremental restaurant weeks from eleven restaurants opened since January 2003, a $2.5 million, or 1.9%, increase in comparable restaurant sales, and an offset of approximately $935,000 from one restaurant closing in the fourth quarter of 2003. Comparable Bertucci’s restaurant dine-in guest counts decreased 4.3% for the first three quarters of 2004 as compared to the first three quarters of 2003. Bertucci’s comparable restaurant dine-in sales increased 2.2% and comparable carry-out and delivery sales increased 0.7% for the period as compared to the first three quarters of 2003. The increase in comparable sales was primarily due to an aggregate 3.4% 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 $42,500 per restaurant in the first three quarters 2003 to $43,300 per restaurant during the first three quarters of 2004. For the eleven restaurants opened since January 2003, average weekly sales were $39,800 per restaurant during the first three quarters of 2004.

Cost of Sales. Cost of sales increased by approximately $4.8 million, or 15.0%, to $36.7 million during the first three quarters of 2004 from $31.9 million during the first three quarters 2003. Expressed as a percentage of net sales, overall cost of sales increased to 24.4% during the first three quarters of 2004 from 23.2% during the first three quarters of 2003. Approximately $2.9 million resulted from the increase in net sales, while approximately $1.7 million (1.1% as a percentage of sales) was due to a menu mix shift to higher cost items, approximately $1.4 million (0.9% as a percentage of sales) was due to increases in selected ingredient costs, primarily cheese and oil. These increases were partially mitigated by the benefit of menu price increases, such benefit approximating $1.2 million or 0.8% of sales. The Company believes the higher ingredient costs and the shift in menu emphasis will continue during 2004.

Operating Expenses. Operating expenses increased by $8.9 million, or 10.6%, to $92.6 million during the first three quarters of 2004 from $83.7 million during the first three quarters of 2003. Expressed as a percentage of net sales, operating expenses increased to 61.6% in the first three quarters of 2004 from 60.8% during the first three quarters of 2003. Advertising expenditures were $1.4 million more in the first three quarters of 2004 as compared to the first three quarters of 2003. Expenses in new restaurants, exclusive of advertising, were responsible for $7.4 million of the increase.

General and Administrative Expenses. General and administrative expenses increased by approximately $637,000 or 7.4%, to $9.2 million during the first three quarters of 2004 from $8.6 million during the first three quarters of 2003. Expressed as a percentage of net sales, general and administrative expenses decreased to 6.1% in the first three quarters of 2004 from 6.2% during the first three quarters of 2003. The dollar increase was primarily due to higher benefit expenses and higher professional fees.

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

Depreciation, Amortization, Deferred Rent and Pre-opening Expenses. Depreciation, amortization, deferred rent and pre-opening expenses increased by approximately $37,000, or 0.4%, to $9.5 million during the first three quarters of 2004 from $9.4 million during the first three quarters of 2003. Expressed as a percentage of net sales, depreciation, amortization, deferred rent and pre-opening expenses decreased to 6.3% in the first three quarters of 2004 from 6.8% during the first three quarters of 2003. The dollar variance was primarily the result of a $1.2 million increase in depreciation costs and deferred rent due to new restaurants partially offset by a $1.1 million decrease in pre-opening costs.

Interest Expense, net. Net interest expense increased by approximately $423,000, or 5.6%, to $7.9 million during the first three quarters of 2004 from $7.5 million during the first three quarters of 2003. Incremental interest expense of approximately $232,000 was incurred in the first three quarters of 2004 as a result of capitalized leases and promissory notes recorded in 2003. Fewer restaurant openings contributed to approximately $140,000 less interest capitalized to construction costs. Reduced interest income, due to both lower interest rates and lower cash balances available, were primarily responsible for the balance of the net increase.

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 subsequently generated (primarily from its operating losses).

Liquidity and Capital Resources

The Company has historically met its capital expenditures and working capital needs through a combination of operating cash flow, borrowings and, in fiscal 2003, two sale leaseback transactions. Future capital and working capital needs are expected to be funded from net cash flows provided by operating activities.

Net cash flows provided by operating activities were $555,000 for the first three quarters of 2004, approximately $800,000 less than the $1.4 million provided during the first three quarters of 2003. As of September 29, 2004, the Company had cash and cash equivalents of $6.2 million.

The Company’s capital expenditures were $6.0 million during the first three quarters of 2004 compared to $13.3 million for the comparable prior year period. The capital expenditures were primarily comprised of $2.8 million for new Bertucci’s restaurants and $3.2 million for remodeling and maintenance capital. The Company anticipates capital expenditures for the remainder of 2004 will be approximately $2.0 million.

As of September 29, 2004, the Company had $91.9 million in consolidated indebtedness: $85.3 million in outstanding principal amount of 10 ¾% senior notes (the “Senior Notes”), $5.7 million related to the capital lease portion of the sale-leaseback transactions, and $820,000 of promissory notes. The Company has a $4.0 million (maximum) Letter of Credit Facility. As of September 29, 2004, this facility was collateralized with $3.9 million of cash restricted from general use in support of $3.9 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 when its 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.

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 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 quarter. 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 the Company’s financial condition and results of operations are based upon its 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 required the Company to make estimates and judgments affecting the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, the Company evaluates its estimates, including those related to impairment of long-lived assets, self-insurance, and closed restaurants reserve. The Company bases its estimates on historical experience and on various other assumptions 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 not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

The Company believes the following critical accounting policies affect the more significant judgments and estimates used in the preparation of the consolidated financial statements.

Impairment of Long-Lived Assets

The Company evaluates property and equipment for impairment whenever events or changes in circumstances indicate the carrying amount of a restaurant’s assets may not be recoverable. Unless extreme circumstances dictate otherwise, the evaluation is not performed on a new restaurant until it has been opened a full year. 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 second quarter of 2004, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at seven restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the seven restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $3.3 million. In the second quarter of 2004, the Company recorded an impairment charge to reflect the write down of the affected assets to fair value. Impairment of three restaurants opened in 2003 comprised all but $80,000 of the total charge.

A similar assessment by the Company during the third quarter of 2003 determined an impairment of fixed assets existed at eleven restaurant locations. The carrying amount of the assets exceeded the estimated fair value of the assets by approximately $4.7 million. The Company recorded an impairment charge of that amount in the third quarter of 2003 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, which 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.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

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 maintains disclosure controls and procedures designed to ensure 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 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 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 September 29, 2004, the Company carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and our then Chief Financial Officer, Kurt J. Schnaubelt, 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 our then Chief Financial Officer concluded 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. Since September 29, 2004, our new Chief Financial Officer, David G. Lloyd, has confirmed the conclusions of Mr. Schnaubelt as of September 29, 2004.

No changes in our internal control over financial reporting occurred during the third quarter of fiscal 2004 which materially affected, or were reasonably likely to materially affect, our internal control over financial reporting.

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 currently a party that is likely to have a material adverse effect on the Company.

Item 2. SALES OF EQUITY 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

On October 22, 2004, Raymond P. Barbrick resigned from the office of President and Chief Operating Officer of the Company. Those duties were assumed by Stephen V. Clark, who was elected the Company’s Chief Executive Officer in August 2004.

On November 10, 2004, Kurt J. Schnaubelt, Chief Financial Officer, Senior Vice President — Finance and Administration resigned from the office of Chief Financial Officer. Also, on November 10, 2004, the Board of Directors of the Company elected David G. Lloyd, 41, as the Company’s Chief Financial Officer. Mr. Lloyd has served as a Vice President of the Company since September 2004 and is very familiar with the Company's financial operations. Mr. Lloyd has been the Chief Financial Officer of Taco Bueno, a quick service Mexican restaurant chain of over 120 stores, since June 2001. He will retain that position in addition to his duties with the Company. He previously served as Taco Cabana Inc.’s Chief Financial Officer from November 1994 through June 2001. Prior to that, Mr. Lloyd, a Certified Public Accountant, was with Deloitte & Touche LLP from 1985 through 1994.

J.P. Acquisition Fund II, L.P., a Delaware limited partnership (“JPAF II”) owns a controlling interest in the Company. J.P. Acquisition Fund III, L.P., a Delaware limited partnership (“JPAF III”) owns a controlling interest in Taco Bueno. JPAF, Inc., a Delaware corporation, is a general partner of both JPAF II and JPAF III. Benjamin R. Jacobson, Chairman of the Company, is president of JPAF, Inc. Mr. Jacobson is a general partner of Jacobson Partners, which is the sole shareholder of JPAF, Inc. While Mr. Clark and Mr. Lloyd hold executive positions in the Company and Taco Bueno, no agreement exists between the two entities as to the allocation of services by Mr. Clark or Mr. Lloyd. Compensation arrangements for these individuals are independently approved by each company’s Board of Directors.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

Exhibits

31.1		Certification of Stephen V. Clark 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 David G. Lloyd 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.

Delaware		06-1311266
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

155 Otis Street, Northborough, Massachusetts		01532-2414
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (508) 351-2500

	BERTUCCI’S CORPORATION
	(Registrant)

Date: November 12, 2004		By: /s/ Stephen V. Clark
		Chief Executive Officer
		(Principal Executive Officer)

Date: November 12, 2004		By: /s/ David G. Lloyd
		Chief Financial Officer,
		(Chief Accounting Officer)