FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended JULY 2, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ____________ Commission file number 1-9573 UNO RESTAURANT CORPORATION ------------------------------------------------------ (Exact name of registrant as specified in its charter) DELAWARE 04-2953702 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 100 CHARLES PARK ROAD, WEST ROXBURY, MASSACHUSETTS 02132 ------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (617) 323-9200 ------------------------------------------------------------- (Registrant's telephone number, including area code) ------------------------------------------------------------- (Former name, former address and former fiscal year, if changed since last report) 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 such filing requirements for the past 90 days. Yes /X/ No / / As of August 1, 2000, 10,930,894 shares of the registrant's Common Stock, $.01 par value, were outstanding. UNO RESTAURANT CORPORATION INDEX PAGE PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS.......................... 3 Consolidated Balance Sheets -- July 2, 2000 and October 3, 1999.............. 3 Consolidated Statements of Income -- Thirteen and thirty-nine weeks ended July 2, 2000 and June 27, 1999................ 4 Consolidated Statements of Cash Flows -- Thirty-nine weeks ended July 2, 2000 and June 27, 1999................................. 5 Notes to Consolidated Financial Statements.................................... 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................... 7 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS.................. 13 PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............... 13 2 CONSOLIDATED BALANCE SHEETS (Amounts in thousands, except per share data) July 2, October 3, 2000 1999 ----------- ------------ (Unaudited) ASSETS CURRENT ASSETS Cash $ 1,450 $ 752 Accounts receivable, net 2,444 2,398 Inventory 2,850 2,436 Prepaid expenses and other assets 1,904 1,757 --------- --------- TOTAL CURRENT ASSETS 8,648 7,343 PROPERTY AND EQUIPMENT Land 19,657 17,143 Buildings 34,506 28,920 Leasehold improvements 110,279 101,326 Equipment 66,336 58,576 Construction in progress 5,816 2,930 --------- --------- 236,594 208,895 Allowance for depreciation and amortization 90,018 80,149 --------- --------- 146,576 128,746 OTHER ASSETS Deferred income taxes 11,491 10,020 Liquor licenses and other assets 3,584 3,503 --------- --------- $170,299 $149,612 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 9,248 $ 7,798 Accrued expenses 8,900 8,668 Accrued compensation and taxes 3,029 3,369 Income taxes payable 1,768 2,914 Current portion of long-term debt and capital lease obligations 3,980 4,075 --------- -------- TOTAL CURRENT LIABILITIES 26,925 26,824 Long-term debt, net of current portion 49,265 31,612 Capital lease obligations, net of current portion 454 489 Other liabilities 9,882 9,708 SHAREHOLDERS' EQUITY Preferred Stock, $1.00 par value, 1,000 shares authorized, none issued Common Stock, $.01 par value, 25,000 shares authorized, 15,707 and 15,375 shares issued and out- standing in fiscal years 2000 and 1999, respectively 157 154 Additional paid-in capital 57,943 55,648 Retained earnings 58,910 52,003 --------- --------- 117,010 107,805 Treasury Stock (4,784 and 4,100 shares at cost,in fiscal years 2000 and 1999, respectively) (33,237) (26,826) --------- --------- TOTAL SHAREHOLDERS' EQUITY 83,773 80,979 --------- --------- $170,299 $149,612 ========= ========= 3 CONSOLIDATED STATEMENTS OF INCOME (Amounts in thousands, except per share data) THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED -------------------------- ----------------------- July 2, June 27, July 2, June 27, 2000 1999 2000 1999 -------- -------- --------- --------- REVENUES Restaurant sales $54,792 $49,766 $154,321 $141,417 Consumer product sales 2,870 2,533 8,500 7,400 Franchise income 1,532 1,249 4,180 3,729 ------- ------- ------- --------- 59,194 53,548 167,001 152,546 COSTS AND EXPENSES Cost of food and beverages 14,644 13,292 41,615 39,397 Labor and benefits 17,949 16,197 51,245 46,617 Occupancy costs 7,548 7,267 22,510 21,598 Other operating costs 4,900 4,447 13,828 12,731 General and administrative 5,252 4,313 13,762 11,518 Depreciation and amortization 3,361 3,276 9,855 9,442 Pre-opening costs 665 180 1,533 584 ------- -------- ------- -------- 54,319 48,972 154,348 141,887 OPERATING INCOME 4,875 4,576 12,653 10,659 INTEREST AND OTHER EXPENSE 806 861 2,188 2,561 ------- ------- -------- -------- INCOME BEFORE INCOME TAXES 4,069 3,715 10,465 8,098 PROVISION FOR INCOME TAXES 1,383 1,227 3,558 2,673 ------- ------- -------- -------- NET INCOME $ 2,686 $ 2,488 $ 6,907 $ 5,425 ======= ======= ======== ======== Earnings per Share: Basic $ .24 $ .22 $ .61 $ .48 Diluted $ .23 $ .22 $ .58 $ .47 Weighted average shares outstanding: Basic 11,106 11,175 11,237 11,349 Diluted 11,796 11,307 11,983 11,458 4 CONSOLIDATED STATEMENTS OF CASH FLOWS (Amounts in thousands) THIRTY-NINE WEEKS ENDED ---------------------------- July 2, June 27, 2000 1999 ------- -------- OPERATING ACTIVITIES Net income $6,907 $5,425 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 9,959 9,530 Deferred income taxes (1,471) (887) Provision for deferred rent 236 266 Gain on disposal of equipment (43) (7) Contribution to employee benefit program 152 200 Changes in operating assets and liabilities, net of effects from business acquisitions: Accounts receivable (431) (20) Inventory (414) (153) Prepaid expenses and other assets (318) (150) Accounts payable and other liabilities 1,280 2,070 Income taxes payable (1,146) 360 -------- ------- NET CASH PROVIDED BY OPERATING ACTIVITIES 14,711 16,634 INVESTMENT ACTIVITIES Additions to property, equipment and leasehold improvements (27,699) (13,281) Proceeds from sale of fixed assets 43 7 -------- -------- NET CASH USED IN INVESTING ACTIVITIES (27,656) (13,274) FINANCING ACTIVITIES Proceeds from revolving credit agreement 67,012 59,223 Principal payments on revolving credit agreement and capital lease obligations (49,489) (59,077) Purchase of Treasury Stock (6,060) (4,421) Exercise of stock options 2,180 196 -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 13,643 (4,079) -------- -------- INCREASE (DECREASE) IN CASH 698 (719) CASH AT BEGINNING OF YEAR 752 2,030 -------- -------- CASH AT END OF PERIOD $1,450 $1,311 ======== ======== Certain amounts in fiscal 1999 have been reclassified to permit comparison. 5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE A - BASIS OF PRESENTATION The accompanying unaudited, consolidated financial statements have been prepared in accordance with instructions to Form 10-Q and, therefore, do not include all information and footnotes normally included in financial statements prepared in conformity with generally accepted accounting principles. They should be read in conjunction with our financial statements for the fiscal year ended October 3, 1999. The accompanying financial statements include all adjustments (consisting only of normal recurring accruals) that management considers necessary for a fair presentation of its financial position and results of operations for the interim periods presented. NOTE B - EARNINGS PER SHARE Basic earnings per share represents net income divided by the weighted average shares of common stock outstanding during the period. Weighted average shares used in diluted earnings per share include common stock equivalents arising from stock options using the treasury stock method. The following table sets forth the computation of basic and diluted earnings per share. Thirteen Weeks Ended Thirty-nine Weeks Ended July 2, June 27, July 2, June 27, 2000 1999 2000 1999 ----------- ---------- --------- -------- Numerator for Basic Earnings per share: Weighted average shares outstanding 11,105,877 11,175,309 11,237,111 11,348,625 Common Stock equivalents: Stock options 689,911 131,347 746,191 109,172 ----------- ----------- ----------- ----------- Numerator for Diluted Earnings per share: Weighted average shares outstanding including common stock equivalents 11,795,788 11,306,656 11,983,302 11,457,797 =========== =========== =========== =========== Net income $ 2,686,000 $ 2,488,000 $ 6,907,000 $ 5,425,000 =========== =========== ----------- =========== Basic and Diluted Earnings per share: Basic $ .24 $ .22 $ .61 $ .48 =========== =========== =========== =========== Diluted $ .23 $ .22 $ .58 $ .47 =========== =========== =========== =========== NOTE C - 10% COMMON STOCK DIVIDEND On November 30, 1999, the Company declared a 10% Common Stock dividend payable on December 23, 1999 to stockholders of record as of December 13, 1999. All share and per share data in the accompanying financial statements have been retroactively adjusted to reflect the stock dividend. 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS SAFE HARBOR CAUTIONARY STATEMENT From time to time, information and statements provided by our filings with the Securities and Exchange Commission, shareholder reports, press releases and oral statements may include forward-looking statements which reflect our current view with respect to future events and financial performance. Forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Investors are cautioned that all forward-looking statements involve risks and uncertainties, which could cause actual results to differ materially from historical results or those anticipated. We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. Risks and uncertainties include, without limitation, the ability to open new restaurants and operate new and existing restaurants profitably, changes in local, regional and national economic conditions, especially economic conditions in the areas in which our restaurants are concentrated, increasingly intense competition in the restaurant industry, increases in food, labor, employee benefits and similar costs, and other risks detailed from time to time in our news releases, reports to shareholders and periodic reports filed with the Securities and Exchange Commission. The following tables set forth the percentage relationship to total revenues, unless otherwise indicated, of certain items included in our income statements and operating data for the periods indicated: THIRTEEN WEEKS ENDED JULY 2, 2000 COMPARED TO THIRTEEN WEEKS ENDED JUNE 27, 1999 13 WEEKS ENDED 7/2/00 6/27/99 REVENUES: Restaurant sales 92.6% 93.0% Consumer product sales 4.8 4.7 Franchise income 2.6 2.3 ------ ------ Total 100.0% 100.0% ------ ------ COSTS AND EXPENSES: Cost of food and beverages (1) 25.4% 25.4% Labor and benefits (1) 31.1 31.0 Occupancy costs (1) 13.1 13.9 Other operating costs (1) 8.5 8.5 General and administrative 8.9 8.1 Depreciation and amortization (1) 5.8 6.3 Pre-opening costs (2) 1.2 .4 ----- ----- Operating income 8.2 8.5 Interest and other expense 1.3 1.6 ------ ------ Income before income taxes 6.9 6.9 Provision for income taxes 2.4 2.3 ------ ------ Net income 4.5% 4.6% ====== ====== (1) Percentage of restaurant and consumer product sales (2) Percentage of restaurant sales NUMBER OF RESTAURANTS AT END OF QUARTER: Company-owned Uno's - full service 106 98 Franchised Uno's - full service 62 66 7 TOTAL REVENUES. Total revenues increased 10.5% to $59.2 million from $53.5 million last year. RESTAURANT SALES. Company-owned restaurant sales rose 10.1% to $54.8 million from $49.8 million last year due primarily to a 3.6% increase in comparable store sales for the third quarter versus the same period last year. Average weekly sales, which includes sales at comparable stores as well as new units, increased 4.8% during the third quarter. Store operating weeks of full-service Pizzeria Uno...Chicago Bar & Grill units grew 5.2% as eight restaurants were added during the past four quarters, three of them in the third quarter of fiscal 2000. CONSUMER PRODUCT SALES. Consumer product sales increased 13.3% for the third quarter this year to $2.9 million from $2.5 million last year. Sales in the contract food service category grew 14.6% over last year. The growth was led by increased shipments to airlines, hotels, and convenience store business. Sales of fresh product to retail grocers in the New England region increased 10.6% over the same period last year. FRANCHISE INCOME. Franchise income, which includes royalty income and initial franchise fees, increased to $1.53 million versus $1.25 million last year. Royalty income increased 6.0% to $1.30 million this year compared to $1.22 million last year. The increase in royalty income was primarily due to an 11.7% increase in average weekly sales for full-service franchised restaurants. Franchise fees of $234,000, which includes a deposit forfeiture of approximately $180,000, were recorded this year compared to $25,000 last year. Two full-service Pizzeria Uno...Chicago Bar & Grill franchise restaurants opened during the third quarter of fiscal 2000 while two Pizzeria Uno Restaurant & Bar franchise restaurants were closed. COST OF FOOD AND BEVERAGES. Cost of food and beverage as a percentage of restaurant and consumer product sales remained stable at 25.4% compared to last year. LABOR AND BENEFITS. Labor costs increased slightly to 31.1% from 31.0% last year as a percentage of restaurant and consumer product sales primarily due to increases in the average wage rate. OCCUPANCY COSTS. Occupancy costs declined as a percentage of restaurant and consumer product sales to 13.1% from 13.9% due to sales leverage gains. OTHER OPERATING COSTS. Other operating costs at 8.5% as a percentage of restaurant and consumer product sales remained stable compared to last year. GENERAL AND ADMINISTRATIVE. General and administrative expenditures as a percentage of total revenues increased to 8.9% from 8.1% last year due primarily to approximately $360,000 of legal and professional fees associated with the company's aborted equity offering. Higher salary and wage expense associated with infrastructure spending to support our accelerated growth objectives also contributed to higher costs compared to last year. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of restaurant and consumer product sales was down to 5.8% versus 6.3% last year due to increased sales leverage. PRE-OPENING COSTS. Pre-opening costs increased as a percentage of restaurant sales to 1.2% from .4% due to the opening of three new company restaurants during the third quarter compared to one company restaurant opened last year. Pre-opening costs were also recorded for two existing company restaurants that were reopened during the quarter after undergoing major facilities upgrades. OPERATING INCOME. Operating income was $4.9 million, which represents an operating margin of 8.2%. Operating income for last year was $4.6 million, which represents an operating margin of 8.5%. INTEREST AND OTHER EXPENSE. Interest and other expense of $806,000 decreased from $861,000 last year as a higher level of capitalized interest associated with accelerated construction activities offset increased debt balances. 8 PROVISION FOR INCOME TAXES. The effective tax rate of 34.0% for the quarter was higher than the 33.0% effective tax rate for the same quarter last year, but consistent with the full year tax rate of 34.0%. NET INCOME. Net income increased to $2.7 million from $2.5 million last year based on the factors noted above. THIRTY-NINE WEEKS ENDED JULY 2, 2000 COMPARED TO THIRTY-NINE WEEKS ENDED JUNE 27, 1999 39 WEEKS ENDED 7/2/00 6/27/99 REVENUES: Restaurant sales 92.4% 92.7% Consumer product sales 5.1 4.9 Franchise income 2.5 2.4 ------ ------ Total 100.0% 100.0% ------ ------ COSTS AND EXPENSES: Cost of food & beverages (1) 25.6% 26.5% Labor and benefits (1) 31.5 31.3 Occupancy costs (1) 13.8 14.5 Other operating costs (1) 8.5 8.6 General and administrative 8.2 7.6 Depreciation and amortization (1) 6.1 6.3 Pre-opening costs (2) 1.0 .4 ----- ----- Operating income 7.6 7.0 Interest and other expense 1.3 1.7 ------ ------ Income before taxes 6.3 5.3 Provision for income taxes 2.2 1.7 ------ ------ Net income 4.1% 3.6% ====== ====== (1) Percentage of restaurant and consumer product sales (2) Percentage of restaurant sales TOTAL REVENUES. Total revenues increased 9.5% to $167.0 million from $152.5 million last year. RESTAURANT SALES. Company-owned restaurant sales rose 9.1% to $154.3 million from $141.4 million last year due primarily to a 4.3% increase in comparable store sales for the thirty-nine weeks versus the same period last year. Average weekly sales, which includes sales at comparable stores as well as new units, also increased 4.8% during the thirty-nine week period. Store operating weeks of full-service Pizzeria Uno...Chicago Bar & Grill units grew 4.4%. CONSUMER PRODUCT SALES. Consumer product sales increased 14.9% for the first nine months this year to $8.5 million from $7.4 million last year. Sales in the contract food service category grew 24.2% over last year. The growth was led by increased shipments to airlines, hotels, and convenience stores. Sales of fresh product to retail grocers primarily in the New England region were essentially flat versus the same period last year. FRANCHISE INCOME. Franchise income, which includes royalty income and initial franchise fees, increased to $4.18 million versus $3.73 million last year. Royalty income increased 5.4% to $3.79 million this year compared to $3.60 million last year. The increase in royalty income was primarily due to a 9.8% increase in average weekly sales for full-service franchised restaurants. Franchise fees of $387,000 were recorded this year, including approximately $180,000 from a deposit forfeiture, compared to $130,000 last year. Seven full-service Pizzeria Uno...Chicago Bar & Grill franchise restaurants opened during the first nine months of fiscal 2000 while five franchise restaurants closed, including four Pizzeria Uno Restaurant & Bar units. 9 COST OF FOOD AND BEVERAGES. Cost of food and beverage as a percentage of restaurant and consumer product sales decreased to 25.6% from 26.5% last year, reflecting greater purchasing efficiencies and lower cheese costs. We have entered into several contracts for key food items, including one with our cheese supplier to fix the cost of mozzarella cheese for calendar year 2000 at favorable pricing versus fiscal 1999 pricing. LABOR AND BENEFITS. Labor costs increased slightly to 31.5% from 31.3% last year as a percentage of restaurant and consumer product sales, primarily due to increases in the average wage rate. OCCUPANCY COSTS. Occupancy costs declined as a percentage of restaurant and consumer product sales to 13.8% from 14.5% due to sales leverage gains. OTHER OPERATING COSTS. Other operating costs were 8.5% of restaurant and consumer product sales, down slightly from 8.6% last year on sales leverage gains. GENERAL AND ADMINISTRATIVE. General and administrative expenditures as a percentage of total revenues increased to 8.2% from 7.6% last year, reflecting the increase in legal and professional fees associated with the canceled stock offering as well as higher salary and wage expense related to infrastructure spending to support our accelerated growth objectives. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of restaurant and consumer product sales was down to 6.1% versus 6.3% last year due to increased sales leverage. PRE-OPENING COSTS. Pre-opening costs as a percentage of restaurant sales increased to 1.0% from .4% due to the opening of eight new company restaurants this year compared with five during the first nine months of fiscal 1999. Pre-opening costs for two existing company restaurants that underwent major facilities upgrades this year also contributed to the increase. OPERATING INCOME. Operating income was $12.7 million, which represents an operating margin of 7.6%. Operating income for last year was $10.7 million, which represents an operating margin of 7.0%. INTEREST AND OTHER EXPENSE. Interest and other expense of $2,188,000 decreased from $2,561,000 last year due primarily to a higher level of capitalized interest associated with accelerated growth plans along with a slightly lower average debt balance. PROVISION FOR INCOME TAXES. The effective tax rate of 34.0% for the first nine months of fiscal 2000 was higher than the 33.0% effective tax rate for the same period last year, but consistent with the full year tax rate of 34.0%. NET INCOME. Net income increased to $6.9 million from $5.4 million last year based on the factors noted above. LIQUIDITY AND SOURCES OF CAPITAL The following table presents a summary of our cash flows for the thirty-nine weeks ended July 2, 2000. (IN THOUSANDS) Net cash provided by operating activities $ 14,711 Net cash used in investing activities (27,656) Net cash provided by financing activities 13,643 ------- Increase in cash $ 698 ======= Historically, we have leased most of our restaurant locations and pursued a strategy of controlled growth, financing our expansion principally from operating cash flow, public equity offerings, the sale of senior, unsecured notes, and revolving lines of credit. During the first nine months of fiscal 2000, our investment in property, equipment and leasehold improvements was $27.7 million. 10 We currently plan to open approximately 12 restaurants in fiscal 2000, eight of which were opened in the first nine months of the fiscal year. The average cash investment required to open a full service Pizzeria Uno restaurant, excluding land and pre-opening costs, is approximately $1.6 million. During the quarter the company amended its $55 million credit facility to expand the revolver component from $26.6 million to $36.6 million, leaving the remaining term loans of the facility unchanged. The maturity of the revolver is now June 2005. As of July 2, 2000, we had outstanding indebtedness of $48.7 million under our $55 million credit facility, $521,000 in capital lease obligations and $4.4 million under our mortgage financing. Advances under the revolving credit facility will accrue interest at the lender's prime rate plus 0-50 basis points, or alternatively, at 75-175 basis points above LIBOR. We anticipate using the revolving credit facility in the future for the development of additional restaurants, and for working capital. On November 30, 1999 our board of directors declared a 10% stock dividend on the outstanding shares of our common stock. The stock dividend was payable on December 23, 1999 to shareholders of record as of December 13, 1999. On February 25, 2000, the board of directors amended its authorization regarding the repurchase of the company's common stock. Under this amendment, the company has approval to repurchase up to 1,500,000 shares of its common stock at such time and at such prices as the company deems appropriate. To date under this authorization, we have repurchased 1,392,775 shares, of which 688,505 shares have been purchased during fiscal 2000. We believe that existing cash balances, cash generated from operations and borrowing under our revolving line of credit will be sufficient to fund our capital requirements for the foreseeable future. We are currently obligated under 108 leases, including 104 leases for Company-owned restaurants, two leases for our executive offices, one lease for an office building containing one of our restaurants and one lease for a mill shop. NEW ACCOUNTING PRONOUNCEMENT In June 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal year 2001. This statement requires all derivatives to be carried on the balance sheet as assets or liabilities at fair value. The accounting for changes in the fair value of the derivatives would depend on the hedging relationship and would be reported in the income statement, or as a component of comprehensive income. We believe that the adoption of this new accounting standard will not have a material impact on the consolidated financial statements. In March 2000, the FASB issued Interpretation No.44, Accounting for Certain Transactions Involving Stock Compensation (the Interpretation). This interpretation clarifies how companies should apply the Accounting Principles Board's Opinion No.25, Accounting for Stock Issued to Employees. The Interpretation will be applied prospectively to new awards, modifications to outstanding awards, and changes in employee status on or after July 1, 2000, except as follows: the definition of an employee applies to awards granted after December 15, 1998; the Interpretation applies to modifications that reduce the exercise price of an award after December 15, 1998; and the Interpretation applies to modifications that add a reload feature to an award made after January 12, 2000. At the present time, there are no awards granted by the Company which would result in an adjustment at July 1, 2000 as a result of this Interpretation. In December 1999, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin (SAB) 101, Revenue Recognition in Financial Statements. SAB 101 clarifies the SEC staff's views on applying generally accepted accounting principles to revenue recognition in financial statements. In March 2000, the SEC issued an amendment, SAB 101A, which deferred the effective date of SAB 101. In June 2000, the SEC issued an amendment, SAB 101B, which again deferred the effective date of SAB 101. The Company will adopt SAB 101 in the fourth quarter of fiscal 2001 in accordance with the 11 amendment. The adoption of this SAB is not expected to have a significant impact on the Company's financial statements. YEAR 2000 COMPLIANCE The Year 2000 problem is a result of computer programs being written using two digits rather than four to define the applicable year. Any of our programs that have time sensitive software may recognize the date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations using existing software. We did not experience any significant disruptions of business as a result of the Year 2000 problem. Business affairs with our major vendors and food distributors, our credit card processor and our franchisees continued without any critical interruptions. However, if unanticipated problems arise from systems or equipment in the future, there could be material adverse effects on our consolidated financial position, results of operations and cash flows. We expensed all maintenance and modification costs as we incurred them. We capitalized and depreciated the cost of new software, if material, over its expected useful life. We incurred costs of approximately $150,000 in testing and remediation of all our systems and applications. Approximately $60,000 of the total cost of testing and remediation related to repair issues and the remainder to replacement of equipment. All costs were budgeted and funded by cash flows from operations. No information technology projects were deferred due to Year 2000 compliance efforts. We did not pursue independent verification of our systems because we believe that any effort would be as costly as the remediation effort and was not warranted. The costs related to the Year 2000 compliance project were not material to our financial position or results of operations. IMPACT OF INFLATION Inflation has not been a major factor in our business for the last several years. We believe we have historically been able to pass on increased costs through menu price increases, but there can be no assurance that we will be able to do so in the future. Future increases in local area construction costs could adversely affect our ability to expand. SEASONALITY Our business is seasonal in nature, with revenues and, to a greater degree, operating income being lower in the first and second fiscal quarters than in other quarters. Our seasonal business pattern is due to our concentration of units in the Northeast, and the resulting lower winter volumes. 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS We have market risk exposure to interest rates on our fixed and variable rate debt obligations and we manage this exposure through the use of interest rate swaps. We do not enter into contracts for trading purposes. The information below summarizes our market risk associated with debt obligations and derivative financial instruments as of July 2, 2000. For debt obligations, the table presents principal cash flows and related average interest rates by expected fiscal year of maturity. For variable rate debt obligations, the average variable rates are based on implied forward rates as derived from appropriate quarterly spot rate observations as of the fiscal quarter end. For interest rate swaps, the table presents the notional amounts and related weighted average interest rates by fiscal year of maturity. The average variable rates are the implied forward rates as derived from appropriate quarterly spot rate observations as of the fiscal quarter end. Expected Fiscal Year of Maturity (US$ in millions) Fair Value 2000 2001 2002 2003 2004 Thereafter 7/2/2000 ---- ---- ---- ---- ---- ---------- -------- Liabilities: Fixed Rate $0.06 $0.24 $0.26 $0.28 $0.31 $3.29 $4.44 Average Interest Rate 8.75% 8.75% 8.75% 8.75% 8.75% Variable rate $0.92 $3.68 $3.68 $2.42 $2.00 $36.04 $48.74 Average Interest Rate 8.14% 8.31% 8.34% 8.35% 8.42% Interest Rate Swaps: Receive Variable/ Pay Fixed $30.00 $30.00 $0.17 Weighted Average Pay Rate 5.96% 5.84% -- -- -- -- Average Receive Rate 6.80% 6.96% -- -- -- -- PART II. OTHER INFORMATION ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a)REPORTS ON FORM 8-K Uno Restaurant Corporation did not file any Reports on Form 8-K during the quarter ended July 2, 2000 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. UNO RESTAURANT CORPORATION (Registrant) Date: AUGUST 4, 2000 By: /s/ Craig S. Miller -------------- --------------------------------- Craig S. Miller Chief Executive Officer (Principal Executive Officer) Date: AUGUST 4, 2000 By: /s/ Robert M. Vincent -------------- --------------------------------- Robert M. Vincent Executive Vice President and Chief Financial Officer (Principal Financial Officer) 14