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 MARCH 28, 1999
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 April 23, 1999, 10,163,529 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 --
March 28, 1999 and September 27, 1998...........3
Consolidated Statements of Income --
Thirteen and twenty-six weeks ended
March 28, 1999 and March 29, 1998...............4
Consolidated Statements of Cash Flows --
Twenty-six weeks ended March 28, 1999 and
March 29, 1998..................................5
Notes to Consolidated Financial
Statements......................................6
ITEM 2. MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.......................8
ITEM 3. QUANTITATIVE AND QUALITATIVE
DISCLOSURE ABOUT MARKET RISKS..................14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K...............15
2
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands except share data)
March 28, Sept.27,
1999 1998
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,977 $ 2,030
Accounts receivable, net 1,755 1,784
Inventory 2,288 2,296
Prepaid expenses and other assets 601 815
--------- ---------
TOTAL CURRENT ASSETS 6,621 6,925
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Land 18,372 16,874
Buildings 29,951 27,823
Leasehold improvements 97,316 93,324
Equipment 55,315 52,536
Construction in progress 1,817 3,309
--------- ---------
202,771 193,866
Less allowance for depreciation and amortization 74,676 68,543
--------- ---------
128,095 125,323
OTHER ASSETS
Deferred income taxes 8,216 7,450
Royalty fee 114 157
Liquor licenses and other assets 3,290 3,340
--------- ---------
$146,336 $143,195
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 5,801 $ 6,589
Accrued expenses 8,787 7,949
Accrued compensation and taxes 3,006 2,666
Income taxes payable 707 995
Current portion of long-term debt and capital
lease obligations 4,097 4,081
--------- ---------
TOTAL CURRENT LIABILITIES 22,398 22,280
Long-term debt, net of current portion 40,961 38,676
Capital lease obligations, net of current portion 560 666
Other liabilities 7,887 7,904
SHAREHOLDERS' EQUITY
Preferred Stock, $1.00 par value, 1,000 shares
authorized, none issued
Common Stock, $.01 par value, 25,000 shares authorized, 13,798 and 13,776
shares issued and out standing in Fiscal Years 1999 and 1998, respectively 138 138
Additional paid-in capital 54,068 53,944
Retained earnings 45,140 42,203
--------- ---------
99,346 96,285
Treasury Stock (3,457 and 3,175 shares at cost,in
Fiscal Years 1999 and 1998, respectively) (24,816) (22,616)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 74,530 73,669
--------- ---------
$146,336 $143,195
--------- ---------
--------- ---------
3
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
THIRTEEN WEEKS ENDED TWENTY-SIX WEEKS ENDED
-------------------- ----------------------
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
-------- -------- --------- --------
REVENUES
Restaurant sales $46,718 $43,272 $91,651 $84,883
Consumer product sales 2,303 2,323 4,867 4,608
Franchise income 1,230 1,087 2,480 2,159
-------- -------- -------- ---------
50,251 46,682 98,998 91,650
COSTS AND EXPENSES
Cost of sales 13,153 11,835 26,105 23,166
Labor and benefits 15,514 14,547 30,420 28,296
Occupancy 7,237 6,970 14,331 13,960
Other operating costs 4,443 4,769 8,688 8,802
General and administrative 3,717 3,211 7,205 6,337
Depreciation and amortization 3,105 3,064 6,166 6,077
-------- -------- -------- ---------
47,169 44,396 92,915 86,638
-------- -------- -------- ---------
OPERATING INCOME 3,082 2,286 6,083 5,012
OTHER EXPENSE 853 935 1,700 1,858
-------- -------- -------- ---------
Income before income taxes 2,229 1,351 4,383 3,154
Provision for income taxes 735 447 1,446 1,042
-------- ------- -------- ---------
Net income before cumulative effect
of change in accounting principle $ 1,494 $ 904 $ 2,937 $ 2,112
Cumulative effect of change in
accounting principle for preopening
costs net of income taxes 636
-------- -------- ------- ---------
NET INCOME $ 1,494 $904 $ 2,937 $ 1,476
-------- -------- -------- ---------
-------- -------- -------- ---------
Basic and Diluted Earnings per Share:
Net income $ .14 $ .08 $ .28 $ .19
Cumulative effect of change in
accounting principle (.06)
-------- -------- -------- ---------
Net income $ .14 $ .08 $ .28 $ .13
-------- -------- -------- ---------
-------- -------- -------- ---------
Weighted average shares outstanding:
Basic 10,339 10,930 10,396 10,947
Diluted 10,485 10,955 10,485 10,988
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
TWENTY-SIX WEEKS ENDED
----------------------------
March 28, March 29,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net Income $2,937 $1,476
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 636
Depreciation and amortization 6,223 6,743
Deferred income taxes (766) (703)
Provision for deferred rent 175 271
(Gain)Loss on disposal of equipment (2) (1)
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Accounts receivable 29 1,285
Inventory 8 127
Prepaid expenses and other assets 246 (1,683)
Accounts payable and other liabilities 215 (1,417)
Income taxes payable (288) (1,427)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 8,777 5,307
INVESTMENT ACTIVITIES
Additions to property, equipment and
leasehold improvements (8,951) (6,586)
Proceeds from sale of fixed assets 2 1
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (8,949) (6,585)
FINANCING ACTIVITIES
Proceeds from revolving credit agreement 39,933 31,215
Principal payments on revolving credit agreement
and capital lease obligations (37,738) (29,248)
Purchase of Treasury Stock (2,200) (384)
Exercise of stock options 124 10
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 119 1,593
-------- --------
INCREASE (DECREASE) IN CASH (53) 315
CASH AT BEGINNING OF PERIOD 2,030 1,486
-------- --------
CASH AT END OF PERIOD $1,977 $1,801
-------- --------
-------- --------
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 the financial statements of the company for the fiscal year
ended September 27, 1998.
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 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 Twenty-six Weeks Ended
March 28, March 29, March 28, March 29,
1999 1998 1999 1998
----------- ---------- --------- ---------
Numerator for Basic Earnings
per Share:
Weighted average shares
outstanding 10,338,667 10,930,209 10,395,711 10,947,731
Common Stock equivalents:
Stock options 146,020 24,758 89,167 40,321
----------- ---------- ----------- -----------
Numerator for Diluted Earnings
per Share:
Weighted average shares
outstanding including common
stock equivalents 10,484,687 10,954,967 10,484,878 10,988,052
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Net Income before cumulative
effect of change in
accounting principle $1,494,000 $904,000 $2,937,000 $2,112,000
Cumulative effect of change
in accounting principle for
preopening costs net of
income taxes (636,000)
----------- ---------- ----------- -----------
Net Income $1,494,000 $904,000 $2,937,000 $1,476,000
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
Basic and Diluted Earnings per Share:
Net Income before cumulative
effect of change in
accounting principle $ .14 $ .08 $ .28 $ .19
Cumulative effect of change in
accounting principle (.06)
----------- ---------- ----------- -----------
Net Income $ .14 $ .08 $ .28 $ .13
----------- ---------- ----------- -----------
----------- ---------- ----------- -----------
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONT.)
NOTE C - PRE-OPENING COSTS
In 1998, the Accounting Standards Executive Committee of the American Institute
of Certified Public Accountants (AICPA) issued Statement of Position 98-5 ("SOP
98-5") entitled "Reporting on the Costs of Start-up Activities." The SOP 98-5
requires companies to expense as incurred all start-up and pre-opening costs
that are not otherwise capitalizable as long lived assets. This new accounting
standard is effective for fiscal years beginning after December 15, 1998 with
early adoption encouraged. The Company elected early implementation of the
accounting standard at the beginning of fiscal 1998. The cumulative effect of
this change in accounting principle was $636,000, net of income taxes.
7
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 the Company in filings
with the Securities and Exchange Commission, shareholder reports, press releases
and oral statements may include forward-looking statements which reflect the
Company's current views 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. The Company undertakes 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
Company's 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 the Company's
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 the Company's 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 the Company's income
statements and operating data for the periods indicated:
THIRTEEN WEEKS ENDED MARCH 28, 1999 COMPARED TO THIRTEEN WEEKS ENDED
MARCH 29, 1998
13 Weeks Ended
--------------
3/28/99 3/29/98
------- -------
REVENUES:
Restaurant sales 93.0% 92.7%
Consumer product sales 4.6 5.0
Franchise income 2.4 2.3
------ ------
Total 100.0% 100.0%
------ ------
COSTS AND EXPENSES:
Cost of food & beverages (1) 26.8% 26.0%
Labor and benefits (1) 31.6 31.9
Occupancy costs (1) 14.8 15.3
Other operating costs (1) 9.1 10.5
General and administrative 7.4 6.9
Depreciation and Amortization (1) 6.3 6.7
------ ------
Operating income 6.1 4.9
Other expense 1.7 2.0
------ ------
Income before taxes 4.4 2.9
Provision for income taxes 1.4 1.0
------ ------
Net income 3.0% 1.9%
------ ------
------ ------
(1) Percentage of restaurant and consumer product sales
NUMBER OF RESTAURANTS AT END OF QUARTER:
Company-owned Uno's - full service 98 94
Franchised Uno's - full service 66 64
8
Total revenue increased 7.6% to $50.3 million from $46.7 million last year.
Company-owned restaurant sales rose 8.0% to $46.7 million from $43.3 million
last year due primarily to an increase in comparable-store sales for the second
quarter which were up 4.0% from the same period last year. Average weekly sales,
which includes sales at comparable stores as well as new units, increased 4.9%
during the second quarter. This reflects higher-than-average sales levels for
the latest variation of its new prototype units which generated sales volumes
approximately 10% higher than our non-prototype store average for the quarter.
Growth in operating weeks of full-service Pizzeria Uno units was up 3.3%
resulting from the addition of five restaurants during the past four quarters,
one of which was opened in the second quarter of fiscal 1999.
Consumer product sales were essentially flat for the second quarter this year at
$2,303,000 from $2,323,000 last year. Sales in the food service category grew
6.8% as increased shipments to airlines, hotels and corporate dining accounts
were partially offset by the loss of a large private label foodservice account.
Sales in the supermarket category, which include Uno branded, private label and
club store sales, decreased 7.0%, primarily due to lower club store sales over
the prior year.
Franchise income, which includes royalty income and initial franchise fees,
increased 13.2% to $1,230,000 versus $1,087,000 last year. Royalty income
increased 10.9% to $1,205,000 this year compared to $1,087,000 last year. The
increase in royalty income was primarily due to an 8.2% increase in average
weekly sales for full-service franchised restaurants. Franchise fees of $25,000
were recorded this year compared to no fees last year. Two full-service
franchise restaurants opened and one full-service franchise restaurant closed
during the second quarter of fiscal 1999.
Operating income was $3,082,000, which represents an operating margin of 6.1%.
Operating income for last year was $2,286,000, which represents an operating
margin of 4.9%.
Cost of food and beverage as a percentage of restaurant and consumer product
sales increased to 26.8% compared to 26.0% last year. This increase was due in
part to cost increases associated with the company-wide rollout of the new menu
initiative and higher cheese costs, which were up approximately 11% over last
years levels. The block cheese market, which reached a record level of $1.90 per
pound during the quarter, dropped dramatically to $1.25 per pound early in
January 1999 and remained in the $1.25 to $1.33 per pound range through the end
of the quarter. The Company recently signed an agreement with its cheese
supplier to fix the cost of mozzarella cheese for the balance of calendar 1999.
Labor costs were down slightly 31.6% from 31.9% last year as a percentage of
restaurant and consumer product sales as an increase in the average wage rate
was absorbed by a higher check average and lower retail labor expense. Occupancy
costs declined as a percentage of restaurant and consumer product sales to 14.8%
from 15.3% due to operating leverage gains from higher unit volumes. Other
operating costs were down to 9.1% as a percentage of restaurant and consumer
product sales from 10.5% last year on lower advertising and pre-opening expense,
as well as operating leverage gains from higher unit volumes. General and
administrative expenditures as a percentage of total revenues increased to 7.4%
from 6.9% last year on higher salary and related wage expense associated with
field support staffing increases designed to improve restaurant operations, and
increased trainee labor expense. Depreciation and amortization expense as a
percentage of restaurant and consumer product sales was down to 6.3% versus 6.7%
last year due to increased sales leverage.
Other expense of $853,000 decreased from $935,000 last year. Interest expense
decreased to $799,000 from $903,000 last year due to a slightly lower borrowing
rate and a reduced level of debt. The effective tax rate of 33% for the quarter
remained the same as last year.
9
TWENTY-SIX WEEKS ENDED MARCH 28, 1999 COMPARED TO TWENTY-SIX WEEKS ENDED
MARCH 29, 1998
26 WEEKS ENDED
-----------------------------
3/28/99 3/29/98
------- -------
REVENUES:
Restaurant sales 92.6% 92.6%
Consumer product sales 4.9 5.0
Franchise income 2.5 2.4
------- -------
Total 100.0% 100.0%
------- -------
COSTS AND EXPENSES:
Cost of food & beverages (1) 27.0% 25.9%
Labor and benefits (1) 31.5 31.6
Occupancy costs (1) 14.8 15.6
Other operating costs (1) 9.0 9.8
General and administrative 7.3 6.9
Depreciation and amortization (1) 6.4 6.8
------- -------
Operating income 6.1 5.5
Other expense 1.7 2.1
------- -------
Income before taxes 4.4 3.4
Provision for income taxes 1.4 1.1
------- -------
Net income before cumulative effect
of change in accounting principle 3.0 2.3
Cumulative effect of change in
accounting principle for pre-opening
costs net of income taxes .7
------- -------
Net income 3.0% 1.6%
------- -------
------- -------
(1) Percentage of restaurant and consumer product sales
Total revenue increased 8.0% to $99.0 million from $91.7 million last year.
Company-owned restaurant sales also rose 8.0% to $91.7 million from $84.9
million last year due primarily to an increase in comparable-store sales for the
first half of the year which were up 4.8% from the same period last year.
Average weekly sales, which includes sales at comparable stores as well as new
units, increased 5.6% during the first half of the year as the latest variation
of the new prototype units generated sales volumes approximately 12% higher than
our non-prototype store average for the first half of the year. Growth in
operating weeks of full-service Pizzeria Uno units was up 2.7% resulting from
the addition of five restaurants during the past four quarters, four of which
were opened in the first half of fiscal 1999.
Consumer product sales increased 5.6% for the first half of this year to
$4,867,000 from $4,608,000 last year. Sales in the contract food service
category grew 25.1%, bolstered by increased shipments to airlines, hotels,
cinemas and corporate dining accounts. Sales in the supermarket category
decreased 12.7% over the same period last year as a 14.2% increase in Uno
branded sales to retail grocers was offset by the loss of a large account and
reductions in club store sales.
Franchise income, which includes royalty income and initial franchise fees,
increased 14.9% to $2,480,000 versus $2,159,000 last year. Royalty income
increased 10.0% to $2,375,000 this year compared to $2,159,000 last year. The
increase in royalty income was primarily due to a 9.1% increase in average
weekly sales for full-service franchised restaurants. Franchise fees of $105,000
were recorded this year compared to no fees last year. Six full-service
franchise restaurants opened and three full-service franchise restaurants closed
during the first half of fiscal 1999.
Operating income was $6,083,000, which represents an operating margin of 6.1%.
Operating income for last year was $5,012,000, which represents an operating
margin of 5.5%.
Cost of food and beverage as a percentage of restaurant and consumer product
sales increased to 27.0% compared to 25.9% last year. This increase was due in
part to cost increases associated with the company-wide rollout of the new menu
initiative and higher cheese costs, which were up approximately 17% over last
years levels.
10
Labor costs were down slightly 31.5% from 31.6% last year as a percentage of
restaurant and consumer product sales as an increase in the average wage rate
was offset by an increase in the average check. Occupancy costs declined as a
percentage of restaurant and consumer product sales to 14.8% from 15.6% due to
operating leverage gains from higher unit volumes. Other operating costs were
down to 9.0% as a percentage of restaurant and consumer product sales from 9.8%
last year on lower advertising and pre-opening expense. General and
administrative expenditures as a percentage of total revenues increased to 7.3%
from 6.9% last year on higher salary and wage expense, increased trainee labor
expense and higher store opening expense related to the opening of four
full-service company-owned and six full-service franchise restaurants during the
first half of the year. Depreciation and amortization expense as a percentage of
restaurant and consumer product sales was down to 6.4% versus 6.8% last year due
to increased sales leverage.
Other expense of $1,700,000 decreased from $1,858,000 last year. Interest
expense decreased to $1,598,000 from $1,787,000 last year due to a slightly
lower borrowing rate and a lower debt level. The effective tax rate of 33% for
the first half of fiscal 1999 remained the same as last year.
The Company adopted SOP 98-5 "Reporting on the Costs of Start-up Activities"
retroactive to the beginning fiscal 1998, and the cumulative effect of this
change in accounting principle was $636,000, net of income taxes, for the first
half of fiscal 1998. Net income increased to $2,937,000 from $1,476,000 last
year based on the factors noted above, and reflects the change in accounting
principle adopted.
LIQUIDITY AND SOURCES OF CAPITAL
The following table presents a summary of the Company's cash flows for the
period ended March 28, 1999.
(In Thousands)
--------------
Net cash provided by operating activities $8,777
Net cash used in investing activities (8,949)
Net cash provided by financing activities 119
--------
Increase (Decrease) in cash $ (53)
--------
--------
Historically, the Company had leased most of its restaurant locations and
pursued a strategy of controlled growth, financing its expansion principally
from operating cash flow, public equity offerings, the sale of senior, unsecured
notes, and revolving lines of credit. During the first six months of fiscal
1999, the Company's investment in property, equipment and leasehold improvements
was $9.0 million.
The Company currently plans to open approximately seven restaurants in fiscal
1999, four of which were opened in the first six months of fiscal 1999. The
average cash investment required to open a full service Pizzeria Uno restaurant,
excluding land and pre-opening costs, is approximately $1.6 million.
As of March 28, 1999, the Company had outstanding indebtedness of $40.2 million
under its $55 million credit facility, $768,000 in capital lease obligations and
$4,698,000 under its mortgage financing. Advances under the revolving credit
facility will accrue interest at the lender's prime rate plus 0-50 basis points,
or alternatively, 100-175 basis points above LIBOR. The Company anticipates
using the revolving credit facility in the future for the development of
additional restaurants, and for working capital.
In September 1998, the Board of Directors of the Company authorized the
repurchase of 1.0 million shares of the Company's Common Stock through a "Dutch
Auction" tender offer. The terms of the tender offer provided that the Company
would purchase up to 1,000,000 shares (subject to increase under certain
circumstances) of its Common Stock at prices, not in excess of $7.00 nor less
then $5.75 per share, specified by tendering stockholders. On October 30, 1998,
the Company completed the repurchase of 274,721 shares at a price of $7.00 per
share. The total number of shares purchased represented approximately 3% of the
shares outstanding at the time. The Company used a portion of its $55 million
credit facility to purchase the shares tendered.
On April 14, 1999, the Board of Directors extended the previous one million
share stock repurchase program announced on April 22, 1998, for an additional
twelve months. To date under this authorization, the company has repurchased
540,364 shares.
11
The Company believes that existing cash balances, cash generated from operations
and borrowing under its revolving line of credit will be sufficient to fund the
Company's capital requirements for the foreseeable future.
The Company is currently obligated under 92 leases, including 90 leases for
Company- owned restaurants and two leases for its executive offices. The Company
is currently negotiating the renewal of a lease for an office building
containing one of its restaurants and continues to pay rent on a tenancy at will
basis in the interim.
YEAR 2000 COMPLIANCE
The Company has completed its initial assessment of its computer
systems to identify the systems that could be affected by the "Year 2000" issue
and has developed an implementation and compliance plan to resolve the issue.
The Company's current plan calls for implementation to be completed during
fiscal year 1999. 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
the Company's 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.
In addition to the assessment of in-house computer systems, the Company
is in the process of assessing the readiness of its vendors, franchise partners
and non-information technology equipment for the Year 2000 issue. The Company
has received assurance from its major food distributor regarding their Year 2000
compliance plans and has verified that its credit card processing vendor is Year
2000 compliant. The Company has send out questionnaires to its business-critical
vendors and franchise partners to assess their Year 2000 readiness. Contingency
plans will be developed in the event that business-critical vendors or franchise
partners do not provide the Company with satisfactory evidence of their Year
2000 readiness. The Company intends to make every reasonable effort to assess
the Year 2000 readiness of these critical business partners and to create action
plans to address the identified risks. The Company has determined that the most
reasonably likely worst case scenario would result from the inability to acquire
food supplies from our foodservice distributors. The Company is currently
assessing this possibility and will develop a contingency plan to assure that
there is adequate inventory on-hand to provide service until an alternative
source of supplies becomes available. The Company believes its operations will
not be significantly disrupted if other third parties with whom the Company has
relationships with are not year 2000 compliant. The Company also believes that
it will not have any material liability to third parties as a result of any
potential non-compliance with Year 2000 issues.
All maintenance and modification costs will be expensed as incurred,
while the cost of new software, if material, is being capitalized and
depreciated over its expected useful life. Testing and remediation of all the
Company's systems and applications is expected to cost approximately $200,000,
of which approximately $125,000 has been incurred as of the end of the second
quarter of fiscal 1999. Of the expected total cost of testing and remediation
approximately $60,000 relates to repair issues and the remainder to replacement
of equipment. All estimated costs have been budgeted and are expected to be
funded by cash flows from operations. No information technology projects have
been deferred due to Year 2000 compliance efforts. The Company is not pursing
independent verification of its systems as it believes that any effort would be
as costly as the remediation effort and is not warranted at this time.
The Company does not believe the costs related to the Year 2000
compliance project will be material to its financial position or results of
operations. However, the cost of the project and the date on which the Company
plans to complete the Year 2000 modifications are based on management's best
estimates, which were derived utilizing numerous assumptions of future events
including the continued availability of certain resources, third party
modification plans, and other factors. Unanticipated failures by critical
vendors, franchise partners, as well as the failure by the Company to execute
its own remediation efforts could have a material adverse effect on the cost of
the project and its completion date. As a result, there can be no assurance that
these forward-looking estimates will be achieved and the actual cost and vendor
compliance could differ materially from those plans, resulting in material
financial risk.
12
IMPACT OF INFLATION
Inflation has not been a major factor in the Company's business for the last
several years. The Company believes it has historically been able to pass on
increased costs through menu price increases, but there can be no assurance that
it will be able to do so in the future. Future increases in local area
construction costs could adversely affect the Company's ability to expand.
SEASONALITY
The Company's business is seasonal in nature, with revenues and, to a greater
degree, operating income being lower in its first and second fiscal quarters
than its other quarters. The Company's seasonal business pattern is due to its
concentration of units in the Northeast, and the resulting lower winter volumes.
13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS
The Company has market risk exposure to interest rates on its fixed and variable
rate debt obligations and manages this exposure through the use of interest rate
swaps. The Company does not enter into contracts for trading purposes. The
information below summarizes the Company's market risk associated with debt
obligations and derivative financial instruments as of March 28, 1999. 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
1999 2000 2001 2002 2003 Thereafter 03/28/99
---- ---- ---- ---- ---- ---------- --------
Liabilities:
Fixed Rate $0.1 $0.2 $0.2 $0.3 $ 0.3 $3.6 $4.7
Average Interest Rate 8.75% 8.75% 8.75% 8.75% 8.75%
Variable rate $1.8 $3.7 $3.7 $3.7 $14.5 $8.5 $40.2
Average Interest Rate 6.56% 7.01% 7.26% 7.39% 7.53%
Interest Rate Swaps:
Receive Variable/
Pay Fixed $30.0 $30.0 $30.0 $(0.3)
Weighted Average
Pay Rate 5.96% 5.96% 5.84% - - -
Average Receive Rate 5.06% 5.51% 5.75%
14
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
None.
(b) REPORTS ON FORM 8-K
Uno Restaurant Corporation did not file any Reports on
Form 8-K during the quarter ended March 28, 1999.
15
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: April 27, 1999 By: /s/ Craig S. Miller
------------------ ------------------------------
Craig S. Miller
Chief Executive Officer
(Principal Executive Officer)
Date: April 27, 1999 By: /s/ Robert M. Vincent
------------------ ----------------------------------
Robert M. Vincent
Senior Vice President-Finance,
and Chief Financial Officer
(Principal Financial Officer)
16