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 June 29, 2005
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 |
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155 Otis Street, Northborough, Massachusetts |
| 01532-2414 |
(Address of principal executive offices) |
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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
2,950,732 shares of the registrant’s Common Stock were outstanding on August 11, 2005.
BERTUCCI’S CORPORATION
FORM 10-Q
TABLE OF CONTENTS
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Notes to Condensed Consolidated Financial Statements (Unaudited) |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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EXHIBITS |
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2
BERTUCCI’S CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
(Unaudited)
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| June 29, |
| December 29, |
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ASSETS |
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Current Assets: |
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Cash and cash equivalents |
| $ | 14,520 |
| $ | 12,291 |
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Restricted cash |
| 2,189 |
| 2,403 |
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Accounts receivable |
| 1,100 |
| 1,334 |
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Inventories |
| 1,465 |
| 1,388 |
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Prepaid expenses and other current assets |
| 472 |
| 534 |
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Total current assets |
| 19,746 |
| 17,950 |
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Property and Equipment, at cost: |
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Land |
| 259 |
| 259 |
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Buildings |
| 697 |
| 697 |
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Capital leases - land and buildings |
| 5,764 |
| 5,764 |
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Leasehold improvements |
| 67,351 |
| 66,037 |
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Furniture and equipment |
| 44,423 |
| 43,248 |
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| 118,494 |
| 116,005 |
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Less - accumulated depreciation and amortization |
| (57,671 | ) | (51,517 | ) | ||
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| 60,823 |
| 64,488 |
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Construction work in process |
| — |
| 1,567 |
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Net property and equipment |
| 60,823 |
| 66,055 |
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Goodwill |
| 26,127 |
| 26,127 |
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Deferred finance costs, net |
| 2,514 |
| 2,862 |
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Liquor licenses, net |
| 2,386 |
| 2,414 |
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Other assets |
| 572 |
| 513 |
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TOTAL ASSETS |
| $ | 112,168 |
| $ | 115,921 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT |
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Current Liabilities: |
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Promissory notes - current portion |
| $ | 41 |
| $ | 40 |
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Capital lease obligations - current portion |
| 83 |
| 74 |
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Accounts payable |
| 7,344 |
| 7,819 |
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Accrued expenses |
| 15,723 |
| 16,457 |
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Total current liabilities |
| 23,191 |
| 24,390 |
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Promissory notes, net of current portion |
| 761 |
| 781 |
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Capital lease obligations, net of current portion |
| 6,051 |
| 6,102 |
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Senior Notes |
| 85,310 |
| 85,310 |
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Deferred gain on sale leaseback transaction |
| 1,947 |
| 2,002 |
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Other long-term liabilities |
| 8,583 |
| 8,368 |
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Total liabilities |
| 125,843 |
| 126,953 |
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Commitments and Contingencies |
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Stockholders’ Deficit: |
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Common stock, $.01 par value |
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Authorized - 8,000,000 shares |
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Issued - 3,699,745 and 3,667,495 shares, respectively; Outstanding 2,947,732 and 2,915,482 shares, respectively |
| 37 |
| 37 |
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Less treasury shares, 752,013 at cost |
| (8,480 | ) | (8,480 | ) | ||
Additional paid-in capital |
| 29,192 |
| 29,046 |
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Accumulated deficit |
| (34,424 | ) | (31,635 | ) | ||
Total stockholders’ deficit |
| (13,675 | ) | (11,032 | ) | ||
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT |
| $ | 112,168 |
| $ | 115,921 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
BERTUCCI’S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except share and per share data)
(Unaudited)
|
| Thirteen weeks ended |
| Twenty-six weeks ended |
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| June 29, |
| June 30, |
| June 29, |
| June 30, |
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| (As Restated - See |
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Net sales |
| $ | 52,580 |
| $ | 51,754 |
| $ | 102,532 |
| $ | 101,180 |
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Cost of sales and expenses: |
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Cost of sales |
| 12,322 |
| 12,883 |
| 24,182 |
| 24,439 |
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Operating expenses |
| 31,391 |
| 33,469 |
| 61,845 |
| 63,096 |
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General and administrative expenses |
| 3,283 |
| 3,478 |
| 6,782 |
| 6,571 |
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Asset impairment charge |
| 907 |
| 3,894 |
| 907 |
| 3,894 |
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Depreciation, amortization, deferred rent and pre-opening expenses |
| 3,108 |
| 3,261 |
| 6,334 |
| 6,570 |
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Total cost of sales and expenses |
| 51,011 |
| 56,985 |
| 100,050 |
| 104,570 |
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Income (loss) from operations |
| 1,569 |
| (5,231 | ) | 2,482 |
| (3,390 | ) | ||||
Other income (expense): |
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Interest expense, net |
| (2,621 | ) | (2,661 | ) | (5,271 | ) | (5,299 | ) | ||||
Loss before income taxes |
| (1,052 | ) | (7,892 | ) | (2,789 | ) | (8,689 | ) | ||||
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Income taxes |
| — |
| — |
| — |
| — |
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Net loss |
| $ | (1,052 | ) | $ | (7,892 | ) | $ | (2,789 | ) | $ | (8,689 | ) |
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Basic and diluted loss per share |
| $ | (0.36 | ) | $ | (2.68 | ) | $ | (0.95 | ) | $ | (2.94 | ) |
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Weighted-average shares outstanding - basic and diluted |
| 2,947,691 |
| 2,945,040 |
| 2,936,626 |
| 2,951,738 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
4
BERTUCCI’S CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(In thousands)
(Unaudited)
|
| Twenty-six Weeks Ended |
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| June 29, 2005 |
| June 30, 2004 |
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| (As Restated - See |
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Cash flows from operating activities |
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Net loss |
| $ | (2,789 | ) | $ | (8,689 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
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Depreciation, amortization and deferred rent |
| 6,497 |
| 6,685 |
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Asset impairment charge |
| 907 |
| 3,894 |
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Stock compensation expense |
| 146 |
| — |
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Changes in operating assets and liabilities |
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Inventories |
| (77 | ) | (156 | ) | ||
Prepaid expenses, receivables and other |
| 546 |
| (31 | ) | ||
Other accrued expenses |
| (728 | ) | (549 | ) | ||
Accounts payable |
| (475 | ) | 600 |
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Tenant allowance received |
| — |
| 356 |
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Other operating assets and liabilities |
| (59 | ) | (11 | ) | ||
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Total adjustments |
| 6,757 |
| 10,798 |
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Net cash provided by operating activities |
| 3,968 |
| 2,099 |
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Cash flows from investing activities |
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Additions to property and equipment |
| (1,892 | ) | (3,786 | ) | ||
Decrease in restricted cash |
| 214 |
| — |
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Net cash used in investing activities |
| (1,678 | ) | (3,786 | ) | ||
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Cash flows from financing activities |
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Purchase of treasury shares |
| — |
| (133 | ) | ||
Sale of common stock from exercise of options |
| — |
| 10 |
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Payment on promissory note |
| (19 | ) | (19 | ) | ||
Principal payments under capital lease obligations |
| (42 | ) | (20 | ) | ||
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Net cash used in financing activities |
| (61 | ) | (162 | ) | ||
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Net increase (decrease) in cash and cash equivalents |
| 2,229 |
| (1,849 | ) | ||
Cash and cash equivalents, beginning of year |
| 12,291 |
| 12,647 |
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Cash and cash equivalents, end of period |
| $ | 14,520 |
| $ | 10,798 |
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Supplemental Disclosure of Cash Flow Information: |
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Cash paid for interest |
| $ | 5,052 |
| $ | 5,042 |
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Cash paid for income taxes |
| $ | 84 |
| $ | 354 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
5
BERTUCCI’S CORPORATION
Notes To Condensed Consolidated Financial Statements
June 29, 2005
(Unaudited)
1. Basis of Presentation
The unaudited condensed consolidated 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 condensed 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 29, 2004 (the “2004 Annual Report”). The operating results for the twenty-six weeks ended June 29, 2005 may not be indicative of the results expected for any succeeding interim period or for the entire year ending December 28, 2005.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The Condensed Consolidated Statement of Cash Flows for the twenty-six weeks ended June 29, 2005 reflects a change in the classification of changes in restricted cash balances to present such changes as an investing activity. Such changes were previously presented as a financing activity.
2. Recent Accounting Pronouncements
In June 2005, the Emerging Issues Task Force of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue No. 05-6, Determining the Amortization Period for Leasehold Improvements (“EITF 05-6”). The guidance requires that leasehold improvements acquired in a business combination or purchased subsequent to the inception of a lease be amortized over the lesser of the useful life of the assets or a term that includes renewals that are reasonably assured at the date of the business combination or purchase. The guidance is effective for periods beginning after June 29, 2005. The adoption of EITF 05-6 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
In May 2005, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections–A Replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 applies to all voluntary changes in accounting principle and requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable. SFAS No. 154 requires that a change in depreciation, amortization, or depletion method for long-lived, non-financial assets be accounted for as a change of estimate affected by a change in accounting principle. SFAS No. 154 also carries forward without change the guidance in Accounting Principals Board (“APB”) Opinion No. 20 with respect to accounting for changes in accounting estimates, changes in the reporting unit and correction of an error in previously issued financial statements. The Company is required to adopt SFAS No. 154 for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. The adoption of SFAS No. 154 is not expected to have a material effect on the Company’s consolidated financial position or results of operations.
In December 2004, the FASB issued SFAS No. 123R, Share-Based Payment (“SFAS No. 123R”). This Statement is a revision of SFAS No. 123, Accounting for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and its related implementation guidance. SFAS No. 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. The Statement requires entities to recognize stock compensation expense for awards of equity instruments to employees based on the grant-date fair value of those awards (with limited exceptions). SFAS No. 123R is effective for the first annual reporting period that begins after December 15, 2005. The Company is evaluating the two methods of adoption allowed by SFAS No. 123R; the modified-prospective transition method and the modified-retrospective transition method.
6
3. Restatement of Financial Statements
As disclosed in its 2004 Annual Report, in the first quarter of 2005 the Company initiated a review of its lease accounting, including leased liquor licenses, and leasehold depreciation practices. As a result, the Company corrected its accounting for leases and restated its historical financial statements and certain financial information to correct errors in lease accounting policies (the “Restatement”). The Company historically accounted for tenant improvement allowances as reductions to the related leasehold improvement asset on the consolidated balance sheets and capital expenditures in investing activities on the consolidated statements of cash flows. Also, the Company historically recognized rent on a straight-line basis over a lease term commencing with the initial occupancy date, or Company-operated retail store opening date. In addition, the depreciable lives of certain leasehold improvements and other long-lived assets on those properties were not aligned with the non-cancelable lease term.
Following a review of its lease accounting treatment and relevant accounting literature, the Company determined it should: (a) report tenant improvement allowances as deferred liabilities in the consolidated balance sheets and initiate the amortization of those liabilities at the relevant initial occupancy date; (b) classify the change in the deferred liability related to the tenant allowances in the operating activities on the Condensed Consolidated Statements of Cash Flows; (c) conform the depreciable lives for buildings on leased land and other leasehold improvements to the shorter of the economic life of the asset or the lease term used for determining the capital versus operating lease classification and calculating straight-line rent; and (d) include option periods in the depreciable lives assigned to leased buildings and leasehold improvements and in the calculation of straight-line rent expense only in instances in the which the exercise of the option period can be reasonably assured and failure to exercise such options would result in an economic penalty.
While the Restatement did not have any impact on the Company’s previously reported net sales or compliance with any covenants under its debt instruments, the Company determined the correction of these errors required it to restate its financial statements for all periods prior to September 29, 2004. The following is a summary of the impact of the Restatement on the Company’s condensed consolidated statements of operations and cash flow for the thirteen and twenty-six weeks ended June 30, 2004 (in thousands, except per share data):
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| Thirteen Weeks Ended |
| Twenty-six Weeks Ended |
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| As previously |
| As Restated |
| As previously |
| As Restated |
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Operating expenses |
| $ | 33,480 |
| $ | 33,469 |
| $ | 63,119 |
| $ | 63,096 |
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Deferred rent, depreciation, amortization and pre-opening expenses |
| 3,112 |
| 3,261 |
| 6,345 |
| 6,571 |
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Asset impairment charge |
| 3,338 |
| 3,894 |
| 3,338 |
| 3,894 |
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Loss from operations |
| (4,537 | ) | (5,231 | ) | (2,632 | ) | (3,390 | ) | ||||
Interest expense, net |
| (2,652 | ) | (2,661 | ) | (5,280 | ) | (5,299 | ) | ||||
Net loss |
| (7,189 | ) | (7,892 | ) | (7,912 | ) | (8,689 | ) | ||||
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Basic and diluted loss per share |
| $ | (2.44 | ) | $ | (2.68 | ) | $ | (2.68 | ) | $ | (2.94 | ) |
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Cash flows from operating activities |
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| $ | 1,738 |
| $ | 2,110 |
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Cash flows from investing activities |
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| (3,430 | ) | (3,787 | ) | ||||
Cash flows from financing activities |
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| (157 | ) | (172 | ) |
4. 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. The carrying value of transferable liquor licenses was $2.0 million at each of June 29, 2005 and December 29, 2004. Non-transferable liquor licenses are amortized on a straight-line basis over the contractual life of the license. Accumulated amortization at June 29, 2005 and December 29, 2004 for non-transferable liquor licenses was $168,000 and $140,000, respectively. Amortization expense for the twenty-six weeks ended June 29, 2005 was $28,000 and is expected to be $56,000 per year through fiscal 2010.
7
5. 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.
The closed restaurant reserve was calculated net of sublease income at ten locations partially or fully subleased as of June 29, 2005. The Company remains primarily liable for the remaining lease obligations should the sublessee default. Total sublease income excluded from the reserve is approximately $6.7 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):
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| Twenty-six weeks ended |
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| June 29, |
| June 30, |
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Balance, beginning of the year |
| $ | 659 |
| $ | 1,449 |
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Payments charged against reserve |
| (225 | ) | (328 | ) | ||
Balance, end of period |
| $ | 434 |
| $ | 1,121 |
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Current portion (included in accrued expenses) |
| $ | 252 |
| $ | 615 |
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Noncurrent portion |
| 182 |
| 506 |
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| $ | 434 |
| $ | 1,121 |
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6. Loss per Share
Basic loss per share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding for the reporting period. Diluted earnings per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock. For the periods ended June 29, 2005 and June 30, 2004 options representing 534,179 and 560,146 shares of common stock, respectively, were excluded from the calculation of diluted loss per share because of their anti-dilutive effect.
7. 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 previously recorded a full valuation allowance for its deferred tax assets and continues to record an allowance quarterly for the tax benefits associated with the current period’s losses.
8. Stock-Based Compensation
In accordance with SFAS No. 123, Accounting for Stock-Based Compensation (“SFAS No. 123”), the Company has elected to account for stock-based compensation under 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. The Company’s stock-based compensation plan is described more fully in Note 10 of Notes to Consolidated Financial Statements in its 2004 Annual Report. The Company accounts for this plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. 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 loss and loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 (in thousands, except per share data):
8
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| June 29, |
| June 30, |
| June 29, |
| June 30, |
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Net loss, as reported |
| $ | (1,052 | ) | $ | (7,892 | ) | $ | (2,789 | ) | $ | (8,689 | ) |
Add: Stock-based employee compensation expense included in reported net loss |
| 2 |
| — |
| 146 |
| — |
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Adjust: Net stock-based employee compensation income (expense) determined under fair value based method for all awards |
| 65 |
| (78 | ) | (126 | ) | (156 | ) | ||||
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Pro forma net loss |
| $ | (985 | ) | $ | (7,970 | ) | $ | (2,769 | ) | $ | (8,845 | ) |
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Basic and diluted loss per share |
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As reported |
| $ | (0.36 | ) | $ | (2.68 | ) | $ | (0.95 | ) | $ | (2.94 | ) |
Pro forma |
| $ | (0.33 | ) | $ | (2.71 | ) | $ | (0.94 | ) | $ | (3.00 | ) |
During the first two quarters of 2005, the Company awarded bonuses to two senior employees and certain officers and independent members of the Board of Directors consisting of an aggregate of 32,250 shares of Common Stock with an average fair value of $4.53 per share. Accordingly, the grant of such shares resulted in a $146,000 compensation charge to the Company.
The net stock-based employee compensation expense determined under the fair value based method for the current periods includes income resulting from the forfeitures of non-vested options.
9. Asset Impairment Charge
The Company’s long-lived assets consist primarily of goodwill, other intangible assets, and leasehold improvements related to its restaurant operations. SFAS 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 2005, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at four restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the four restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $0.9 million. The Company recorded an impairment charge during the quarter to reflect the write down of the affected assets to fair value.
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: (a) the Company’s high degree of leverage which could, among other things, reduce the 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; (b) the challenges of managing geographic expansion; (c) changes in food costs, supplies and key supplier relationships; and (d) the possible adverse impact of government regulation on the Company. Other factors that could adversely affect the Company’s business and prospects are described in its filings with the Securities and
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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 condensed consolidated financial statements of Bertucci’s Corporation (the “Company”), and the notes thereto included herein, as well as the Company’s 2004 Annual Report.
General
Bertucci’s Corporation, a Delaware corporation (the “Company”), is the owner and operator of a chain of full-service casual dining, Italian-style restaurants under the names Bertucci’s Brick Oven Pizzeria® and Bertucci’s Brick Oven Ristorante®. As of June 29, 2005, the Company operated 92 restaurants located primarily in the northeastern United States.
In July 1998, the Company completed its acquisition of Bertucci’s Restaurant Corp.’s parent entity, Bertucci’s, Inc., for a purchase price, net of cash received, of approximately $89.4 million (the “Acquisition”). The Company financed the Acquisition primarily through the issuance of $100 million of 10 ¾ % senior notes due 2008 (the “Senior Notes”). The Senior Notes are still outstanding as to $85.3 million in principal.
Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect to the restatement of the Consolidated Financial Statements discussed in Note 3 of the Notes to the Condensed Consolidated Financial Statements.
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 condensed consolidated statements of operations, as well as certain operating data, for the periods indicated:
STATEMENTS OF OPERATIONS DATA
(Percentage of Net Sales)
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| Thirteen weeks ended |
| Twenty-six weeks ended |
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| June 29, |
| June 30, |
| June 29, |
| June 30, |
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Net sales |
| 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % |
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Cost of sales and expenses: |
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Cost of sales |
| 23.4 | % | 24.9 | % | 23.6 | % | 24.2 | % |
Operating expenses |
| 59.8 | % | 64.7 | % | 60.3 | % | 62.4 | % |
General and administrative expenses |
| 6.2 | % | 6.7 | % | 6.6 | % | 6.5 | % |
Asset impairment charge |
| 1.7 | % | 7.5 | % | 0.9 | % | 3.8 | % |
Depreciation, amortization, deferred rent, and pre-opening expenses |
| 5.9 | % | 6.3 | % | 6.2 | % | 6.5 | % |
Total cost of sales and expenses |
| 97.0 | % | 110.1 | % | 97.6 | % | 103.4 | % |
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Income from operations |
| 3.0 | % | (10.1 | )% | 2.4 | % | (3.4 | )% |
Interest expense, net |
| (5.0 | )% | (5.1 | )% | (5.1 | )% | (5.2 | )% |
Loss before income taxes |
| (2.0 | )% | (15.2 | )% | (2.7 | )% | (8.6 | )% |
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Income taxes |
| — |
| — |
| — |
| — |
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Net loss |
| (2.0 | )% | (15.2 | )% | (2.7 | )% | (8.6 | )% |
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Restaurant Operating Data: |
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Increase in comparable restaurant sales (a) |
| (0.7 | )% | 1.0 | % | (1.1 | )% | 2.9 | % |
Number of restaurants: |
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Restaurants open, beginning of period |
| 92 |
| 90 |
| 91 |
| 89 |
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Restaurants opened |
| — |
| — |
| 1 |
| 1 |
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Total restaurants open, end of period |
| 92 |
| 90 |
| 92 |
| 89 |
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(a) The Company defines comparable restaurant sales as net sales from restaurants that have been open for at least one full fiscal year at the beginning of the fiscal year.
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Thirteen Weeks Ended June 29, 2005 Compared to Thirteen Weeks Ended June 30, 2004
Net Sales. Total net sales increased by approximately $800,000, or 1.5%, to $52.6 million during the second quarter of 2005 from $51.8 million during the second quarter of 2004. The increase was primarily due to 26 incremental restaurant weeks from three restaurants opened since January 2004 offset by a 0.7% decrease in the 89 comparable restaurants’ sales. Comparable Bertucci’s restaurant dine-in guest counts decreased 0.8% for the second quarter of 2005 as compared to the second quarter of 2004. Bertucci’s comparable restaurant dine-in sales decreased 1.1% and comparable carry-out and delivery sales increased 1.0% for the quarter as compared to the second quarter of 2004. The Company believes comparable sales were down primarily due to the aforementioned guest count decreases while an anticipated menu mix shift to lower priced items also contributed to the decrease. For the 89 comparable restaurants, average weekly sales were approximately $44,100 for the second quarter of 2005 compared to approximately $44,400 per week for the second quarter of 2004.
Cost of Sales. Cost of sales decreased by approximately $600,000, or 4.7%, to $12.3 million during the second quarter of 2005 from $12.9 million during the second quarter 2004. Expressed as a percentage of net sales, overall cost of sales decreased to 23.4% during the second quarter of 2005 from 24.9% during the second quarter of 2004. Of this 1.5% decrease, approximately 0.7% is attributed to a menu mix shift generally to lower priced, lower cost items, approximately 0.5% was due to decreases in certain ingredient costs, and approximately 0.3% from improved restaurant cost controls.
Operating Expenses. Operating expenses decreased by approximately $2.1 million or 6.3%, to $31.4 million during the second quarter of 2005 from $33.5 million during the second quarter of 2004. Expressed as a percentage of net sales, operating expenses decreased to 59.8% in the second quarter of 2005 from 64.7% during the second quarter of 2004. The dollar decrease was primarily due to the timing of marketing expenditures, $2.7 million less than the prior year.
General and Administrative Expenses. General and administrative expenses decreased by approximately $200,000, or 5.7%, to $3.3 million during the second quarter of 2005 from $3.5 million during the second quarter of 2004. Expressed as a percentage of net sales, general and administrative expenses decreased to 6.2% in the second quarter of 2005 from 6.7% in the second quarter of 2004. The dollar decrease over the prior year period is primarily attributable to lower professional fees and travel expenses, partially offset by bonus expense accruals as year-to-date cash flow results are currently exceeding targeted levels under the Company’s bonus plan.
Asset Impairment Charge. As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements, the Company recorded a charge of approximately $0.9 million in the second quarter 2005 to recognize the estimated impairment of depreciable long-lived assets in four restaurants.
During the second quarter of 2005, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at four restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the four restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $0.9 million. The Company recorded an impairment charge during the quarter to reflect the write down of the affected assets to fair value.
Depreciation, Amortization, Deferred Rent and Pre-opening Expenses. Depreciation, amortization, deferred rent and pre-opening expenses decreased by approximately $200,000, or 6.1%, to $3.1 million during the second quarter of 2005 from $3.3 million during the second quarter of 2004. The decrease is primarily due to reduced deferred rent and pre-opening expenses (fewer restaurant openings). Expressed as a percentage of net sales, depreciation, amortization, deferred rent and pre-opening expenses decreased to 5.9% in the second quarter of 2005 from 6.3% during the second quarter of 2004.
Interest Expense, net. Net interest expense was essentially flat in the second quarter of 2005 compared to the second quarter of 2004.
Income Taxes. The Company has an historical trend of recurring pre-tax losses. The Company previously recorded a full valuation allowance for its net deferred tax asset. The Company also provided a full valuation allowance relating to the tax benefits generated since 2003 (primarily from its operating losses). As of December 29, 2004, the Company had net operating losses and tax credit carry forwards totaling $7.8 million.
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Twenty-Six Weeks Ended June 29, 2005 Compared to Twenty-Six Weeks Ended June 30, 2004
Net Sales. Total net sales increased by approximately $1.3 million, or 1.3%, to $102.5 million during the first two quarters of 2005 from $101.2 million during the first two quarters of 2004. The increase was primarily due to 58 incremental restaurant weeks from three restaurants opened since January 2004 offset by a 1.1% decrease in the 89 comparable restaurants’ sales. Comparable Bertucci’s restaurant dine-in guest counts decreased 1.3% for the first two quarters of 2005 as compared to the first two quarters of 2004. Bertucci’s comparable restaurant dine-in sales decreased 1.8% and comparable carry-out and delivery sales increased 1.3% for the quarter as compared to the first two quarters of 2004. The Company believes comparable sales were down primarily due to the aforementioned guest count decreases while an anticipated menu mix shift to lower priced items also contributed to the decrease. For the 89 comparable restaurants, average weekly sales were approximately $43,000 for the first two quarters of 2005 compared to approximately $43,500 per week for the first two quarters of 2004.
Cost of Sales. Cost of sales decreased by approximately $200,000, or 0.8%, to $24.2 million during the first two quarters of 2005 from $24.4 million during the first two quarters 2004. Expressed as a percentage of net sales, overall cost of sales decreased to 23.6% during the first two quarters of 2005 from 24.2% during the first two quarters of 2004. Of this 0.6% decrease, approximately 0.6% is attributed to a menu mix shift generally to lower priced, lower cost items, approximately 0.2% from improved restaurant cost controls, partially offset by an approximate 0.2% net increase in certain ingredient costs.
Operating Expenses. Operating expenses decreased by $1.3 million or 2.1%, to $61.8 million during the first two quarters of 2005 from $63.1 million during the first two quarters of 2004. Expressed as a percentage of net sales, operating expenses decreased to 60.3% in the first two quarters of 2005 from 62.4% during the first two quarters of 2004. The dollar decrease was primarily due to the timing of marketing expenditures ($2.6 million less than the prior year), offset by the operation of three non-comparable restaurants.
General and Administrative Expenses. General and administrative expenses increased by approximately $200,000, or 3.0%, to $6.8 million during the first two quarters of 2005 from $6.6 million during the first two quarters of 2004. Expressed as a percentage of net sales, general and administrative expenses increased to 6.6% in the first two quarters of 2005 from 6.5% in the first two quarters of 2004. The dollar increase over the prior year period is primarily attributable to: (a) bonus expense accruals as year-to-date cash flow results are currently exceeding targeted levels under the Company’s bonus plan; and (b) stock compensation expense relating to the award of 32,250 shares of common stock to key members of management and independent members of the Board of Directors, both partially offset by reduced professional fees and travel expenses.
Asset Impairment Charge. As discussed in Note 9 of Notes to Condensed Consolidated Financial Statements, the Company recorded a charge of approximately $0.9 million in the second quarter 2005 to recognize the estimated impairment of depreciable long-lived assets in four restaurants.
During the second quarter of 2005, the Company assessed certain non-performing restaurants for recoverability and determined an impairment of fixed assets existed at four restaurant locations. The Company estimated the fair value of these assets based on the net present value of the expected cash flows of the four restaurants. The carrying amount of the assets exceeded the fair value of the assets by approximately $0.9 million. The Company recorded an impairment charge during the quarter to reflect the write down of the affected assets to fair value.
Depreciation, Amortization, Deferred Rent and Pre-opening Expenses. Depreciation, amortization, deferred rent and pre-opening expenses decreased by approximately $300,000, or 4.5%, to $6.3 million during the first two quarters of 2005 from $6.6 million during the first two quarters of 2004. The decrease is primarily due to reduced deferred rent as the majority of restaurant leases are past the half-way point of their primary terms (and renewal periods where properly includable). Expressed as a percentage of net sales, depreciation, amortization, deferred rent and pre-opening expenses decreased to 6.2% in the first two quarters of 2005 from 6.5% during the first two quarters of 2004.
Interest Expense, net. Net interest expense was essentially flat in the first two quarters of 2005 compared to the first two quarters of 2004.
Income Taxes. The Company has an historical trend of recurring pre-tax losses. The Company previously recorded a full valuation allowance for its net deferred tax asset. The Company also provided a full valuation allowance relating to the tax benefits generated since 2003 (primarily from its operating losses). As of December 29, 2004, the Company had net operating losses and tax credit carry forwards totaling $7.8 million.
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Liquidity and Capital Resources
The Company has historically met its capital expenditures and working capital needs through a combination of operating cash flow and bank and mortgage borrowings, the sale of the Senior Notes, 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 net cash flows provided by operating cash flow and cash on hand.
Net cash flows provided by operating activities were approximately $4.0 million for the first two quarters of 2005, approximately $1.9 million more than the approximate $2.1 million provided during the first two quarters of 2004. As of June 29, 2005, the Company had cash and cash equivalents of $14.5 million.
The Company’s capital additions were approximately $1.9 million during the first two quarters of 2005 compared to approximately $3.8 million for the comparable prior year period. The capital expenditures were primarily comprised of $417,000 for a new restaurant which opened in the first quarter of 2005 and $1.5 million for remodeling and maintenance capital. The Company anticipates capital expenditures for the remainder of 2005 will be approximately $3.1 million.
As of June 29, 2005, the Company had $92.2 million in consolidated indebtedness, $85.3 million pursuant to the Senior Notes, $6.1 million of capital lease obligations, and $0.8 million of promissory notes. The Senior Notes contain no financial covenants and the Company is in compliance with all non-financial covenants as of August 12, 2005. The Senior Notes bear interest at the rate of 10 ¾% per annum, payable semi-annually on January 15 and July 15. The Senior Notes are due in full on July 15, 2008.
Through July 15, 2006, the Company may, at its option, redeem any or all of the Senior Notes at face value, plus a declining premium, which is 1.79% through July 15, 2006. After July 15, 2006, the Senior Notes may be redeemed at face value. Additionally, under certain circumstances, including a change of control or following certain asset sales, the holders of the Senior Notes may require the Company to repurchase the Senior Notes, at a redemption price of 101% of face value.
The Company is operating without a line of credit and is funding all of its capital expenditures, debt reductions and operating needs out of cash flows from operations and cash on hand.
The Company has established a $4.0 million (maximum) letter of credit facility (expiring in December 2005) as collateral with third party administrators for self insurance reserves. As of June 29, 2005, this facility is collateralized with $2.2 million of cash restricted from general use. Letters of credit totaling $2.2 million were outstanding on June 29, 2005.
The Company believes the cash flow generated from its operations and cash on hand should be sufficient to fund its debt service requirements, lease obligations, expected capital expenditures and other operating expenses for the next twelve months. Until the 2008 maturity of its Senior Notes, the Company expects to be able to service its debt, but the lack of short term borrowing availability may impede growth. The Company is evaluating various refinancing alternatives for its Senior Notes upon their maturity in 2008.
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.
There have been no material changes to the Company’s contractual obligations and commitments from those disclosed in the Company’s 2004 Annual Report.
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.
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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 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 requires 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, estimates are evaluated, including those related to the impairment of long-lived assets, self-insurance, and closed restaurant reserves. Estimates are based 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. For a discussion of how these and other factors may affect the Company’s business, see the “Forward-Looking Statements” above and other factors included in the Company’s other filings with the Securities and Exchange Commission.
The Company’s critical accounting policies affect the more significant judgments and estimates used in the preparation of the Company’s consolidated financial statements. The Company believes its critical accounting policies relate to the impairment of long-lived assets, income tax valuation allowances, self-insurance and closed restaurant reserves. For a more detailed discussion of the Company’s critical accounting policies and estimates, please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies and Estimates” contained in the Company’s 2004 Annual Report. There have been no material changes to the Company’s critical accounting policies and estimates from those disclosed in the 2004 Annual Report.
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. In addition, the Company does not have operations outside of the United States of America which expose it to foreign currency risk and substantially all of the Company’s outstanding debt has fixed interest rates.
Item 4. CONTROLS AND PROCEDURES
Disclosure Control and Procedures. The Company maintains disclosure controls and procedures designed to ensure information required to be disclosed in the Company’s reports under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), 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 the Company’s management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), 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 the Company’s 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 June 29, 2005, an evaluation was performed under the supervision and with the participation of the Company’s management, including the CEO and CFO, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act). Based on that evaluation, the Company’s CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of June 29, 2005.
There were no significant changes in the Company’s internal control over financial reporting that occurred during the Company’s last fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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.
Item 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the second quarter of 2005, the Company issued 750 shares of Common Stock to an officer as a bonus. The Company recorded a compensation charge of $2,730 in connection with the grant of these shares. In addition, the Company issued 3,000 shares to an officer as a bonus in the third quarter of 2005. Each grantee acknowledged in writing the transfer of their shares is subject to the provisions of a Stockholders’ Agreement, which are summarized in “Security Ownership of Certain Beneficial Owners and Management - Shareholders Agreement” in the Company’s 2004 Annual Report. If the grants of such shares are characterized as sales under Section 5 of the Securities Act of 1933, as amended (the “Act”), then the Company believes the grants were exempt from registration under the Act pursuant to the exemption provided by Section 4(2) of the Act. No commissions were paid to any underwriter in connection with the issuance of these shares.
The grants were issued as follows:
On April 5, 2005, the Company issued 750 shares of Common Stock to an officer.
On July 20, 2005, the Company issued 3,000 shares of Common Stock to an officer.
Item 3. DEFAULTS UPON SENIOR SECURITIES
None
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
Effective August 10, 2005, the Company’s Chief Executive Officer, Stephen V. Clark, [age 52], was named Vice Chairman of the Board of Directors of the Company. Mr. Clark served as the Company’s Chief Executive Officer and President of the Company from August 2004 until August 10, 2005 at which time Mr. Clark resigned as President of the Company; although he remains the Company’s Chief Executive Officer. Mr. Clark has served as a director of the Company since April 2002. Mr. Clark was the President and Chief Executive Officer of Taco Bueno, a quick service Mexican restaurant chain of over 130 stores (“Taco Bueno”), from June 2001 through August 10, 2005. He previously served as Taco Cabana Inc.’s Chief Executive Officer from November 1996 through June 2001 and was previously the President, Chief Operating Officer, and a Director at Taco Cabana from April 1995 through November 1996. Prior to that, Mr. Clark held various positions with Church’s Chicken, a division of America’s Favorite Chicken, over seventeen years, the last having been Senior Vice President and Concept General Manager.
Effective August 10, 2005, David G. Lloyd, [age 42], was named President of the Company. Mr. Lloyd served the Company as Vice President and Chief Financial Officer since November 2004 and remains the Company’s Chief Financial Officer. Mr. Lloyd was the Chief Financial Officer of Taco Bueno, from June 2001 through August 10, 2005. 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.
Taco Bueno was previously indirectly controlled by Benjamin R. Jacobson, Chairman of the Board of Directors and Treasurer of the Company. While Messrs. Clark and Lloyd held positions at both the Company and Taco Bueno, no agreement existed between the two entities as to the allocation of services by Mr. Clark or Mr. Lloyd, although effective December 30, 2004 compensation arrangements for these individuals were agreed to be borne equally by both companies. After August 10, 2005, Messrs. Jacobson, Clark, and Clark have no financial interests in, or management commitments to, Taco Bueno and hold the positions detailed above for only the Company.
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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 (*). |
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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 (*). |
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(*) | — | Included with this report. |
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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) | ||
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Date: August 12, 2005 | By: | /s/ Stephen V. Clark |
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| Chief Executive Officer and Director | |
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Date: August 12, 2005 | By: | /s/ David G. Lloyd |
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| Chief Financial Officer |
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