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 JUNE 27, 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
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UNO RESTAURANT CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 04-2953702
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
100 CHARLES PARK ROAD, WEST ROXBURY, MASSACHUSETTS 02132
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(Address of principal executive offices) (Zip Code)
(617) 323-9200
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(Registrant's telephone number, including area code)
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(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 July 30, 1999, 10,173,378 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 --
June 27, 1999 and September 27, 1998............3
Consolidated Statements of Income --
Thirteen and thirty-nine weeks ended
June 27, 1999 and June 28, 1998.................4
Consolidated Statements of Cash Flows --
Thirty-nine weeks ended June 27, 1999 and
June 28, 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)
June 27, Sept.27,
1999 1998
--------- ---------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 1,311 $ 2,030
Accounts receivable, net 1,804 1,784
Inventory 2,449 2,296
Prepaid expenses and other assets 289 815
--------- ---------
TOTAL CURRENT ASSETS 5,853 6,925
PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS
Land 18,373 16,874
Buildings 30,115 27,823
Leasehold improvements 99,526 93,324
Equipment 56,962 52,536
Construction in progress 1,964 3,309
--------- ---------
206,940 193,866
Less allowance for depreciation and amortization 77,858 68,543
--------- ---------
129,082 125,323
OTHER ASSETS
Deferred income taxes 8,337 7,450
Royalty fee 93 157
Liquor licenses and other assets 3,988 3,340
--------- ---------
$147,353 $143,195
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,430 $ 6,589
Accrued expenses 9,452 7,949
Accrued compensation and taxes 3,051 2,666
Income taxes payable 1,355 995
Current portion of long-term debt and capital
lease obligations 4,090 4,081
--------- ---------
TOTAL CURRENT LIABILITIES 24,378 22,280
Long-term debt, net of current portion 38,958 38,676
Capital lease obligations, net of current portion 521 666
Other liabilities 8,427 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, 13,807 and 13,776
shares issued and outstanding in Fiscal Years 1999 and 1998, respectively 138 138
Additional paid-in capital 54,129 53,944
Retained earnings 47,628 42,203
--------- ---------
101,895 96,285
Treasury Stock (3,728 and 3,175 shares at cost,in
Fiscal Years 1999 and 1998, respectively) (26,826) (22,616)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY 75,069 73,669
--------- ---------
$147,353 $143,195
--------- ---------
--------- ---------
3
CONSOLIDATED STATEMENTS OF INCOME
(Amounts in thousands except per share data)
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
-------- -------- -------- --------
REVENUES
Restaurant sales $ 49,766 $ 45,288 $141,417 $130,171
Consumer product sales 2,533 2,475 7,400 7,083
Franchise income 1,249 1,190 3,729 3,349
-------- -------- -------- --------
53,548 48,953 152,546 140,603
COSTS AND EXPENSES
Cost of sales 13,292 12,311 39,397 35,477
Labor and benefits 16,197 14,940 46,617 43,236
Occupancy 7,267 7,065 21,598 21,025
Other operating costs 4,627 4,567 13,315 13,369
General and administrative 4,313 3,487 11,518 9,824
Depreciation and amortization 3,276 3,059 9,442 9,136
-------- -------- -------- --------
48,972 45,429 141,887 132,067
-------- -------- -------- --------
OPERATING INCOME 4,576 3,524 10,659 8,536
OTHER EXPENSE 861 963 2,561 2,821
-------- -------- -------- --------
Income before income taxes 3,715 2,561 8,098 5,715
Provision for income taxes 1,227 844 2,673 1,886
-------- -------- -------- --------
Net income before cumulative effect
of change in accounting principle $ 2,488 $ 1,717 $ 5,425 $ 3,829
Cumulative effect of change in
accounting principle for preopening
costs net of income taxes 636
-------- -------- -------- --------
NET INCOME $ 2,488 $ 1,717 $ 5,425 $ 3,193
-------- -------- -------- --------
-------- -------- -------- --------
Basic and Diluted Earnings per Share:
Net income $ .24 $ .16 $ .52 $ .35
Cumulative effect of change in
accounting principle (.06)
-------- -------- -------- --------
Net income $ .24 $ .16 $ .52 $ .29
-------- -------- -------- --------
-------- -------- -------- --------
Weighted average shares outstanding:
Basic 10,159 10,895 10,317 10,930
Diluted 10,279 10,990 10,416 10,989
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Amounts in thousands)
THIRTY-NINE WEEKS ENDED
June 27, June 28,
1999 1998
-------- --------
OPERATING ACTIVITIES
Net Income $5,425 $3,193
Adjustments to reconcile net income to net cash
provided by operating activities:
Cumulative effect of change in accounting principle 636
Depreciation and amortization 9,530 9,222
Deferred income taxes (887) (904)
Provision for deferred rent 266 396
(Gain)Loss on disposal of equipment (7) (6)
Changes in operating assets and liabilities, net of effects from business
acquisitions:
Accounts receivable (20) 1,010
Inventory (153) 81
Prepaid expenses and other assets (150) (942)
Accounts payable and other liabilities 2,070 (882)
Income taxes payable 360 (1,037)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 16,434 10,767
INVESTMENT ACTIVITIES
Additions to property, equipment and
leasehold improvements (13,281) (8,574)
Proceeds from sale of fixed assets 7 8
-------- --------
NET CASH USED FOR INVESTING ACTIVITIES (13,274) (8,566)
FINANCING ACTIVITIES
Proceeds from revolving credit agreement 59,223 41,565
Principal payments on revolving credit agreement
and capital lease obligations (59,077) (42,222)
Purchase of Treasury Stock (4,210) (898)
Exercise of stock options 185 95
-------- --------
NET CASH USED BY FINANCING ACTIVITIES (3,879) (1,460)
--------- --------
INCREASE (DECREASE) IN CASH (719) 741
CASH AT BEGINNING OF PERIOD 2,030 1,486
-------- --------
CASH AT END OF PERIOD $1,311 $2,227
-------- --------
-------- --------
Certain amounts in fiscal 1998 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 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 Thirty-nine Weeks Ended
June 27, June 28, June 27, June 28,
1999 1998 1999 1998
----------- ---------- --------- ---------
Numerator for Basic Earnings
per Share:
Weighted average shares
outstanding 10,159,372 10,894,964 10,316,931 10,930,142
Common Stock equivalents:
Stock options 119,407 95,497 99,247 58,713
---------- ---------- ---------- ----------
Numerator for Diluted Earnings
per Share:
Weighted average shares
outstanding including common
stock equivalents 10,278,779 10,990,461 10,416,178 10,988,855
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Net Income before cumulative
effect of change in
accounting principle $2,488,000 $1,717,000 $5,425,000 $3,829,000
Cumulative effect of change
in accounting principle for
preopening costs net of
income taxes (636,000)
---------- ----------- ----------- ----------
Net Income $2,488,000 $1,717,000 $5,425,000 $3,193,000
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Basic and Diluted Earnings per Share:
Net Income before cumulative
effect of change in
accounting principle $ .24 $ .16 $ .52 $ .35
Cumulative effect of change in
accounting principle (.06)
---------- ---------- ---------- ----------
Net Income $ .24 $ .16 $ .52 $ .29
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
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 JUNE 27, 1999 COMPARED TO THIRTEEN WEEKS ENDED
JUNE 28, 1998
13 WEEKS ENDED
--------------
6/27/99 6/28/98
------- -------
REVENUES:
Restaurant sales 93.0% 92.5%
Consumer product sales 4.7 5.1
Franchise income 2.3 2.4
------ ------
Total 100.0% 100.0%
------ ------
COSTS AND EXPENSES:
Cost of food & beverages (1) 25.4% 25.8%
Labor and benefits (1) 31.0 31.3
Occupancy costs (1) 13.9 14.8
Other operating costs (1) 8.8 9.6
General and administrative 8.1 7.1
Depreciation and Amortization (1) 6.3 6.4
------ ------
Operating income 8.5 7.2
Other expense 1.6 2.0
------ ------
Income before taxes 6.9 5.2
Provision for income taxes 2.3 1.7
------ ------
Net income 4.6% 3.5%
------ ------
------ ------
(1) Percentage of restaurant and consumer product sales
NUMBER OF RESTAURANTS AT END OF QUARTER:
Company-owned Uno's - full service 99 94
Franchised Uno's - full service 67 62
8
Total revenue increased 9.4% to $53.5 million from $49.0 million last year.
Company-owned restaurant sales rose 9.9% to $49.8 million from $45.3 million
last year due primarily to an increase in comparable-store sales for the third
quarter which were up 6.1% from the same period last year. Average weekly sales,
which includes sales at comparable stores as well as new units, increased 6.2%
during the third quarter. Growth in operating weeks of full-service Pizzeria Uno
units was up 3.8% resulting from the addition of five restaurants during the
past four quarters, one of which was opened in the third quarter of fiscal 1999.
Consumer product sales were up 2.3% for the third quarter this year at
$2,533,000 from $2,475,000 last year. Sales in the food service category grew
25.1% as shipments to hotels, cinemas and corporate dining accounts increased.
Sales in the supermarket category, which include Uno branded, private label and
club store sales, declined 27.0%, primarily due to the loss of a major club
store sales account.
Franchise income, which includes royalty income and initial franchise fees,
increased 5.0% to $1,249,000 versus $1,190,000 last year. Royalty income
increased 11.6% to $1,224,000 this year compared to $1,097,000 last year. The
increase in royalty income was primarily due to a 6.4% increase in average
weekly sales for full-service franchised restaurants. Franchise fees of $25,000
were recorded this year compared to $93,000 last year. One full-service
franchise restaurant opened during the third quarter of fiscal 1999.
Operating income was $4,576,000, which represents an operating margin of 8.5%.
Operating income for last year was $3,524,000, which represents an operating
margin of 7.2%.
Cost of food and beverage as a percentage of restaurant and consumer product
sales decreased to 25.4% compared to 25.8% last year. This decrease was due
in part to operational efficiency gains this year versus inefficiencies
absorbed last year due to the rollout of a new menu initiative. In addition,
slight price increases have partially offset higher cheese costs which were
up approximately 6% over last years levels. The Company has signed an
agreement with its cheese supplier to fix the cost of mozzarella cheese for
the balance of calendar 1999 and expects to realize year over year benefits
for the balance of the calendar year. Labor costs were down slightly to 31.0%
from 31.3% 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 increased operating leverage from higher sales volumes. Occupancy
costs declined as a percentage of restaurant and consumer product sales to
13.9% from 14.8% due to operating leverage generated from higher unit
volumes. Other operating costs were down to 8.8% as a percentage of
restaurant and consumer product sales from 9.6% last year on lower
advertising expense as well as operating leverage gains from higher unit
volumes. General and administrative expenditures as a percentage of total
revenues increased to 8.1% from 7.1% last year on higher salary and related
wage expense associated with field support staffing increases designed to
improve restaurant operations, and non-recurring legal and professional
expenses associated with Company's recapitalization efforts. Depreciation and
amortization expense as a percentage of restaurant and consumer product sales
were down to 6.3% versus 6.4% last year due to increased sales leverage.
Other expense of $861,000 decreased from $963,000 last year. Interest expense
declined to $810,000 from $912,000 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
THIRTY-NINE WEEKS ENDED JUNE 27, 1999 COMPARED TO THIRTY-NINE WEEKS ENDED
JUNE 28, 1998
39 WEEKS ENDED
--------------
6/27/99 6/28/98
------- -------
REVENUES:
Restaurant sales 92.7% 92.6%
Consumer product sales 4.9 5.0
Franchise income 2.4 2.4
------ ------
Total 100.0% 100.0%
------ ------
COSTS AND EXPENSES:
Cost of food & beverages (1) 26.5% 25.8%
Labor and benefits (1) 31.3 31.5
Occupancy costs (1) 14.5 15.3
Other operating costs (1) 8.9 9.7
General and administrative 7.6 7.0
Depreciation and amortization (1) 6.3 6.7
------ ------
Operating income 7.0 6.0
Other expense 1.7 2.0
------ ------
Income before taxes 5.3 4.0
Provision for income taxes 1.7 1.3
------ ------
Net income before cumulative effect
of change in accounting principle 3.6 2.7
Cumulative effect of change in
accounting principle for pre-opening
costs net of income taxes .4
------ ------
Net income 3.6% 2.3%
------ ------
------ ------
(1) Percentage of restaurant and consumer product sales
Total revenue increased 8.5% to $152.5 million from $140.6 million last year.
Company-owned restaurant sales rose 8.6% to $141.4 million from $130.2 million
last year due primarily to an increase in comparable-store sales for the first
three quarters of the year which were up 5.3% from the same period last year.
Average weekly sales, which includes sales at comparable stores as well as new
units, increased 5.8% during the first three quarters of the year as the latest
variation of the new prototype units generated sales volumes approximately 9%
higher than our non-prototype store average. Growth in operating weeks of
full-service Pizzeria Uno units was up 3.1% resulting from the addition of five
restaurants during the past four quarters, all of which were opened in the first
three quarters of fiscal 1999.
Consumer product sales increased 4.5% for the first three quarters of this year
to $7,400,000 from $7,083,000 last year. Sales in the contract food service
category grew 27.4%, primarily bolstered by increased shipments to hotels and
corporate dining accounts. Sales in the supermarket category decreased 19.6%
over the same period last year as a 6.4% increase in Uno branded sales to retail
grocers was offset by the loss of a large account and a reduction in club store
sales.
Franchise income, which includes royalty income and initial franchise fees,
increased 11.3% to $3,729,000 versus $3,349,000 last year. Royalty income
increased 10.5% to $3,599,000 this year compared to $3,256,000 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 $130,000
were recorded this year compared to $93,000 last year. Seven full-service
franchise restaurants opened and three full-service franchise restaurants closed
during the first three quarters of fiscal 1999.
Operating income was $10,659,000, which represents an operating margin of 7.0%.
Operating income for last year was $8,536,000, which represents an operating
margin of 6.0%.
Cost of food and beverage as a percentage of restaurant and consumer product
sales increased to 26.5% compared to 25.8% last year. This increase was due in
part to cost increases associated with the company-wide rollout of the new menu
initiative
10
and higher cheese costs, which were up approximately 14% over last years levels.
Labor costs were down slightly to 31.3% from 31.5% 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 consumer product labor expense.
Occupancy costs declined as a percentage of restaurant and consumer product
sales to 14.5% from 15.3% due to operating leverage generated from higher unit
volumes. Other operating costs declined to 9.0% as a percentage of restaurant
and consumer product sales from 9.7% last year on lower advertising and
pre-opening expense. General and administrative expenditures as a percentage of
total revenues increased to 7.6% from 7.0% last year on higher salary and wage
expense, increased trainee labor expense and costs associated with the
non-recurring legal and professional expenses associated with the Company's
recapitalization efforts. 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 $2,561,000 decreased from $2,821,000 last year. Interest
expense decreased to $2,409,000 from $2,699,000 last year due to a slightly
lower borrowing rate and a lower debt level. The effective tax rate of 33% for
the first three quarters of fiscal 1999 remained the same as last year.
Net income increased to $5,425,000 from $3,193,000 last year based on the
factors noted above, as 1998 results reflect the adoption of SOP 98-5 "Reporting
on the Costs of Start-up Activities" retroactive to the beginning fiscal 1998.
The cumulative effect of this change in accounting principle was $636,000, net
of income taxes.
LIQUIDITY AND SOURCES OF CAPITAL
The following table presents a summary of the Company's cash flows for the
period ended June 27, 1999.
(IN THOUSANDS)
--------------
Net cash provided by operating activities $16,434
Net cash used in investing activities (13,274)
Net cash provided by financing activities (3,879)
--------
Increase (Decrease) in cash $ (719)
--------
--------
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 nine months of fiscal
1999, the Company's investment in property, equipment and leasehold improvements
was $13.3 million.
The Company currently plans to open approximately five restaurants in fiscal
1999, all of which were opened in the first nine 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 June 27, 1999, the Company had outstanding indebtedness of $38.2 million
under its $55 million credit facility, $0.7 million in capital lease obligations
and $4.6 million 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
640,246 shares,
11
of which 308,350 have been purchased during fiscal 1999.
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 94 leases, including 91 leases for
Company-owned restaurants, two leases for its executive offices and one lease
for a mill shop. 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 sent 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 noncompliance 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 $150,000,
of which approximately $135,000 has been incurred as of the end of the third
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 costs 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
12
the actual cost and vendor compliance could differ materially from those plans,
resulting in material financial risk.
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 June 27, 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 06/27/99
---- ---- ---- ---- ---- ---------- --------
Liabilities:
Fixed Rate $0.0 $0.2 $0.2 $0.3 $0.3 $3.6 $4.6
Average Interest Rate 8.75% 8.75% 8.75% 8.75% 8.75%
Variable rate $0.9 $3.7 $3.7 $3.7 $14.5 $8.5 $38.2
Average Interest Rate 6.93% 7.45% 7.90% 8.04% 8.18%
Interest Rate Swaps:
Receive Variable/
Pay Fixed $30.0 $30.0 $30.0 $(0.1)
Weighted Average
Pay Rate 5.96% 5.96% 5.84% - - -
Average Receive Rate 5.43% 5.95% 6.38%
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PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10(d) Form of Franchise Agreement and Area Franchise Agreement.
10(p) Third Amendement to Promissory Note and Revised Debt
Agreement between the Company and Craig S. Miller dated
August 3, 1999.
(b) REPORTS ON FORM 8-K
Uno Restaurant Corporation did not file any Reports on
Form 8-K during the quarter ended June 27, 1999.
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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 6, 1999 By: /s/ CRAIG S. MILLER
------------------ ----------------------------------
Craig S. Miller
Chief Executive Officer
(Principal Executive Officer)
Date: AUGUST 6, 1999 By: /s/ ROBERT M. VINCENT
------------------ ---------------------------------
Robert M. Vincent
Senior Vice President-Finance,
and Chief Financial Officer
(Principal Financial Officer)
16