1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended SEPTEMBER 28, 1997 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, MA 02132 - ---------------------------------------- ------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (617) 323-9200 -------------- Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered COMMON STOCK, $.01 PAR VALUE NEW YORK STOCK EXCHANGE - ---------------------------- ----------------------------------------- Securities registered pursuant to Section 12(g) of the Act: NONE ---------------------------------------------------- (Title of Class) 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 ----- ----- 2 Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] The aggregate market value of the registrant's Common Stock, $.01 par value, held by non-affiliates of the registrant as of November 28, 1997, was $30,592,618 based on the closing price of $6.25 on that date on the New York Stock Exchange. As of November 28, 1997, 10,965,455 shares of the registrant's Common Stock, $.01 par value, were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on February 26, 1998 which will be filed within 120 days after the end of the registrant's fiscal year, are incorporated by reference in Part III of this report. Portions of the registrant's Registration Statement on Form S-1 (Registration No. 33-13100) (the "1987 Registration Statement"), the registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 1990, the registrant's Annual Report on Form 10-K for the fiscal year ended September 29, 1991, the registrant's Annual Report on Form 10-K for the fiscal year ended October 2, 1994, the registrant's Annual Report on Form 10-K for the fiscal year ended October 1, 1995, the registrant's Annual Report on Form 10-K for the fiscal year ended September 29, 1996, the registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1995, the registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 22, 1994, the registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 8, 1995, and the registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1997, are incorporated by reference in Part IV of this Report. -2- 3 PART I ITEM 1. BUSINESS GENERAL AND DEVELOPMENTS DURING FISCAL YEAR 1997 The Company owns and operates or franchises a total of 166 restaurants, including 92 owned and 66 franchised casual dining, full-service restaurants under the name "Pizzeria Uno...Chicago Bar & Grill." The Pizzeria Uno restaurants offer a diverse, high-quality menu at moderate prices in a casual, friendly atmosphere. The restaurants feature the Company's signature Chicago-style deep-dish pizza and a selection of entrees, including thin crust pizza, pasta, fajitas, ribs, steak and chicken, as well as a variety of appetizers, salads, sandwiches and desserts. The Company's restaurants average approximately 6,200 square feet with seating for an average of approximately 180 guests. For the fiscal year ended September 28, 1997, Company-owned restaurants averaged $1,818,000 in sales. Company-owned restaurants are located primarily in major markets from New England to Virginia, as well as Florida, Chicago and Denver, and franchised restaurants are located throughout the United States as well as one franchised restaurant in Seoul, Korea. The Company acquired the rights to the name "Pizzeria Uno" from the late Ike Sewell, who opened the original Pizzeria Uno restaurant in Chicago, Illinois in 1943 and is considered the originator of Chicago-style deep-dish pizza. The Company opened its first Pizzeria Uno restaurant in 1979. During the fiscal year ended September 28, 1997, the Company opened seven full-service restaurants and closed one full-service restaurant. Six full-service franchised restaurants opened during the fiscal year and three full-service franchise restaurants closed. The Company also took over operations of one limited-service unit that previously operated as a franchised unit. During the fiscal year ending September 27, 1998, the Company anticipates opening up to six Company-owned full-service restaurants and up to ten franchised restaurants, including several international restaurants. The timing of these planned openings is subject to various factors, including locating satisfactory sites and negotiating leases and franchise agreements. The Company has implemented several strategic initiatives intended to strengthen its position in casual dining and to distinguish its restaurants from quick service pizza, pizza and pasta, and full-service Italian restaurants over the past several years. As part of this strategy, the Company enhanced its kitchen capabilities, to include saute stations, grills and fryers, enabling the Company to improve the quality, breadth and appeal of its non-pizza menu items. This has allowed the Company to be very aggressive in its approach to product development through seasonal menus and targeted specialty offerings. The Company also re-designed its prototype restaurant to replicate the look of an old Chicago warehouse. This prototype was designed as a less serious, more fun experience for our guests and was intended to make the restaurants more consistent with its casual dining theme. In addition, the Company refined the name of its restaurants to "Pizzeria Uno...Chicago Bar & Grill" to communicate its concept and broadened menu to consumers. The Company believes that by keeping its menu offerings current and providing a relaxed, yet fun atmosphere for its patrons, guest satisfaction and frequency will be enhanced. The Company continues to expand its channels of distribution to capitalize on the Pizzeria Uno brand name and the appeal of its signature Chicago-style deep-dish pizza. Currently, the Company is distributing refrigerated and frozen Chicago-style deep-dish pizza to approximately 1,000 supermarkets and wholesale price club stores, primarily in New England, for sale in their fresh deli counters and frozen food sections. In August 1997, the Company began shipping proprietary products and recipes to Sainsbury's Supermarket PLC, a British supermarket chain with over 375 locations. -3- 4 For the past several years, the Company has also been supplying frozen Pizzeria Uno brand, Chicago-style deep-dish pizza to American Airlines for service on its flights and has rolled out a similar pizza product at Pizzeria Uno kiosks in 43 General Cinema theaters. The Company has also entered into a two year agreement with Doubletree Hotels Corporation which will offer Pizzeria Uno brand pizzas and calzones to its guests through the various food venues of the hotels, and is currently in 85 Doubletree units. Several other branded and private label tests are underway with supermarket chains and major foodservice providers. In December 1996, the Company entered into a 15 year mortgage loan agreement with MetLife Capital Financial Corporation in the original aggregate principal amount of $5.1 million. The loan agreement is secured by mortgages on five Company owned full-service properties in Orlando, FL, Amherst, NY, Paoli, PA, Williamsburg, VA and Columbus, OH. The loan has a fixed annual interest rate of 8.75% and requires monthly payments of principal and interest. In June 1997, the Board of Directors of the Company authorized the repurchase of shares of the Company's Common Stock in a "Dutch Auction" tender offer. The terms of the tender offer provided that the Company would purchase up to 1,000,000 shares of its Common Stock and reserved the right to purchase more than 1,000,000 shares under certain circumstances, at prices, not in excess of $7.50 nor less than $6.00 per share, specified by tendering stockholders. The Company would then select the lowest purchase price that would allow it to purchase the 1,000,000 shares. On July 30, 1997, the Company announced that it had repurchased 1,207,624 shares at a price of $7.00 per share. The total number of shares purchased represented approximately 10% of the shares outstanding at the time. During the third quarter of fiscal 1997, the Company recorded special charges in the amount of $4.0 million, consisting of an asset impairment charge of $3.3 million and store closing costs of $700,000. The $3.3 million asset impairment charge was recorded to reduce the carrying value of equipment and leaseholds at two full-service Pizzeria Uno restaurants to their fair market value and resulted from weak operating results and continuing negative cash flow. The store closure costs represent remaining minimum lease payments of one full-service Pizzeria Uno restaurant which was closed during fiscal 1997. In September 1997, the Company announced the signing of three international agreements for the development of Pizzeria Uno restaurants in Indonesia, Pakistan and the Middle East. PT. Nadya Vincent Indotama ("Navindo"), the Company's area developer for Indonesia, entered into a development agreement requiring the opening of a minimum of ten Pizzeria Uno restaurants within ten years. A development agreement with Jason Foods, LLC, the Company's area developer for Pakistan, requires the opening of a minimum of 12 units within five years. The Company also signed a letter of intent with Al Bannai Enterprises for its first international master franchise agreement providing for the development of 22 Pizzeria Uno restaurants over seven years in United Arab Emirates, Saudi Arabia, Egypt, Kuwait, Jordan, Oman, Qatar, Bahrain and Lebanon. On November 4, 1997, the Company entered into a $55 million revolving credit and term loan facility with Fleet National Bank and BankBoston,N.A. which replaced the Company's $50 million revolving credit facility. The loan agreement includes a seven year $20 million mortgage loan, a five year term loan for $8.4 million and a $26.6 million revolving loan due in October, 2002. The agreement contains certain financial covenants including, a cash flow coverage ratio and consolidated leverage ratio. -4- 5 RESTAURANT CONCEPT AND MENU "Pizzeria Uno...Chicago Bar & Grill" restaurants are full-service, casual dining restaurants, featuring the Company's signature Chicago-style deep-dish pizza and a diverse menu of high quality, moderately-priced menu items. The Company's target market is middle to upper-middle income individuals in the 17 to 49 year-old age group. The restaurants are generally open from 11:00 a.m. to midnight, seven days per week. The restaurants feature the Company's signature Chicago-style deep-dish pizzas and a selection of entrees, including thin crust pizza, pasta, fajitas, ribs, steak and chicken, as well as a variety of appetizers, salads, sandwiches and desserts. The Company's signature product, its Chicago-style, deep-dish pizza, filled with ingredients such as fresh meats, spices, vegetables and real cheeses, is baked according to proprietary recipes. The Company believes that its proprietary recipes produce a superior pizza that is difficult to duplicate. At the end of fiscal 1997, the Company's average check per guest for full service Company-owned restaurants was approximately $10.10. For fiscal 1997, sales of alcoholic beverages accounted for approximately 18% of total restaurant sales. RESTAURANT DESIGN AND SITE SELECTION The Company has continually upgraded the design and decor of its restaurants to be consistent with its theme as "Pizzeria Uno...Chicago Bar & Grill." Pizzeria Uno restaurants are designed and decorated to provide a friendly and comfortable atmosphere expected of full-service, casual dining restaurants and distinguished from typical pizza restaurants. The decor elements of most restaurants include different variations of wood, brick and brass. During fiscal 1996, the Company re-designed its prototype restaurant to replicate the look of an old Chicago warehouse. This prototype was designed as a less serious, more fun experience for our guests. The Company now has 15 of these prototypes open, including all seven new restaurant openings during fiscal 1997, and is evaluating existing units for possible conversion to the new prototype. During fiscal 1996 and fiscal 1997, the Company developed several variations of this prototype which allows it to readily adapt to specific new site locations by choosing from this "family" of prototype buildings. Initial sales volumes from the Company-owned prototype units have been very encouraging and will continue to be monitored as they begin to mature. To ensure quality and compliance with Company standards, preliminary exterior design, interior and kitchen design for all Company-owned and franchised restaurants are reviewed by the Company. The Company's current prototypes for free-standing restaurants occupy a range of approximately 5,200 to 6,400 square feet, with a seating capacity ranging from 180 to 210 customers. The Company considers the specific location of a restaurant to be critical to its long-term success and devotes significant effort to the investigation and evaluation of potential sites. One or more of the Company's executive officers inspect and approve the site for each Company-owned and franchised restaurant. Within each target market area, the Company evaluates population density and demographics, major retail and office concentration and traffic patterns. In addition, the Company evaluates visibility, accessibility, proximity to direct competition and various other site specific factors. Pizzeria Uno restaurants are located in both urban and suburban markets, in free-standing buildings, strip centers and malls. Restaurant development is currently targeted at high profile, free-standing locations. Historically, the Company has leased most of its restaurants to minimize investment costs. Since fiscal 1992, however, the Company began selectively purchasing real estate to develop new restaurants where available and when the expected long-term cost of owning the real estate is less than the cost of leasing. Of the 100 Company-owned restaurants open as of November 28, 1997, 82 are located in leased facilities and 18 are fee owned properties. See "Item 2. Properties." -5- 6 RESTAURANT LOCATIONS The following tables provide the locations for Company-owned and franchised restaurants as of November 28, 1997. COMPANY-OWNED RESTAURANTS (100) COLORADO (4) MASSACHUSETTS (27) Latham Aurora Boston(5) Lynbrook Denver Bellingham Massapequa Greenwood(a) Braintree New York City Westminster Brockton Bayside Burlington Bay Ridge CONNECTICUT (6) Cambridge(2) Forest Hills Danbury Danvers Manhattan(5) Fairfield Dedham Syracuse Manchester Framingham Victor Milford Hanover Vestal Newington Hyannis(a) Yonkers West Hartford Kingston Lynnfield(a) OHIO (2) FLORIDA (6) Newton(2)(c) Columbus(2)(a) Altamonte Revere Daytona Beach Shrewsbury(d) PENNSYLVANIA (3) Kissimmee Springfield Philadelphia (2)(a) Lake Mary(a) Waltham (2)(c) Pittsburgh Orlando (2)(a) Westborough Woburn RHODE ISLAND (1) ILLINOIS (8) Warwick Aurora MISSOURI (1) Chicago (4)(a)(b) St. Louis VERMONT (1) Gurnee Mills (a) Burlington (a) Lombard NEW HAMPSHIRE(3) Schaumburg Concord VIRGINIA (9) Manchester Ballston MAINE (1) Nashua Fairfax Portland(a) Falls Church NEW JERSEY (1) Merrifield MARYLAND (6) Paramus Newport News Baltimore Norfolk Bel Air NEW YORK (19) Potomac Mills(a) Bethesda Albany Reston Ellicott City (a) Amherst(a) Williamsburg(a) Towson Buffalo Waldorf Henrietta WASHINGTON, DC(2) Cleveland Park Union Station - ----------------------- See footnotes on next page -6- 7 FRANCHISED RESTAURANTS (69) DOMESTIC (68) ARIZONA (2) MASSACHUSETTS (4) OKLAHOMA (1) Phoenix Holyoke Tulsa Tempe Marlborough (d) Springfield(2)(c) PENNSYLVANIA (9) CALIFORNIA (11) Doylestown Cupertino MICHIGAN (3) King of Prussia Fremont Ann Arbor Langhorne Los Angeles Birch Run Media Oakland Bloomfield Philadelphia(3) San Diego(2) Plymouth Meeting San Francisco(2) MINNESOTA (2) Willow Grove Santa Clara Minnetonka Visalia Edina PUERTO RICO (3) West Hollywood San Juan(2)(c) NEVADA (1) San Patricio FLORIDA (3) Las Vegas Miami TENNESSEE (1) Orlando(2) NEW JERSEY (4) Bristol Cherry Hill INDIANA (2) Secaucus TEXAS (4) Indianapolis South Plainfield Addison Merrillville Wayne Arlington Ft. Worth KENTUCKY (3) NEW YORK (2) Houston Lexington Poughkeepsie Louisville (2) White Plains WASHINGTON, DC(1) Georgetown OHIO (7) MARYLAND (1) Cincinnati (2) WISCONSIN (4) Deep Creek Cleveland (3) Janesville Dayton Milwaukee Mentor Madison(2) INTERNATIONAL (1) KOREA (1) Seoul - --------------------- (a) Owned property - Pizzeria Uno. (b) Includes one Mexican restaurant and one limited seating take-out kiosk. (c) Includes one limited seating, take-out restaurant. (d) Limited seating, take-out restaurant. -7- 8 UNIT ECONOMICS For the fiscal year ended September 28, 1997, the 85 Company-owned restaurants open for the entire fiscal year generated average restaurant sales of approximately $1,807,000, average restaurant operating income of approximately $195,000 (or 10.8% of sales) and average restaurant operating cash flow of approximately $323,000 (or 17.9% of sales). The 14 Company-owned restaurants opened in fiscal 1996 and fiscal 1997 had an average cash investment of approximately $1,710,000 for building, leasehold improvements, furniture, fixtures and equipment, but excludes land costs and pre-opening expenses. The Company expects that the average cash investment required to open a full-service Pizzeria Uno restaurant will be approximately $1.6 million, excluding land and pre-opening expenses. In the future, the Company anticipates that it will continue to purchase a portion of its new restaurant locations and expects that its total investment for each fee owned unit will range between $2.1 and $2.6 million. RESTAURANT EXPANSION The Company intends to continue opening Company-owned restaurants in three of its primary metropolitan markets, Boston, New York and Baltimore/Washington, D.C. The Company is also engaged in site development efforts in Chicago and Orlando. In fiscal 1997, the Company opened seven restaurants in existing markets. In fiscal 1998, the Company intends to open approximately six restaurants and does not plan to enter any new markets. The Company will continue to grant franchisees the right to expand the Pizzeria Uno restaurant business throughout the United States and will aggressively pursue international expansion opportunities. In September 1997, the Company announced the signing of three international agreements for the development of Pizzeria Uno restaurants in Indonesia, Pakistan and the Middle East. PT. Nadya Vincent Indotama ("Navindo"), the Company's area developer for Indonesia, entered into a development agreement requiring the opening of a minimum of ten Pizzeria Uno restaurants within ten years. A development agreement with Jason Foods, LLC, the Company's area developer for Pakistan, requires the opening of a minimum of 12 units within five years. The Company also signed a letter of intent with Al Bannai Enterprises for its first international master franchise agreement providing for the development of 22 Pizzeria Uno restaurants over seven years in United Arab Emirates, Saudi Arabia, Egypt, Kuwait, Jordan, Oman, Qatar, Bahrain and Lebanon. In fiscal 1997, six full-service franchised restaurants were opened, including the first unit in Seoul, Korea, and three full-service restaurants were closed. During fiscal 1998, the Company expects franchisees to open approximately ten restaurants. See "Item 1. Franchise Program." OTHER BUSINESS DEVELOPMENTS The Company continues to expand its consumer product business principally through distribution of its deep-dish pizza in the fresh deli counters and frozen food sections of approximately 1,000 supermarkets and wholesale price club stores primarily in New England. Currently, the Company believes that Pizzeria Uno deep-dish pizza is the leading brand of fresh, refrigerated pizza sold in New England supermarkets. The Company continues to supply private-label thin-crust pizza to selected New England supermarket chains. The Company is also supplying proprietary products and recipes to Sainsbury's Supermarket PLC, a British supermarket chain with over 375 locations. The Company continues to supply frozen Pizzeria Uno brand, Chicago-style deep-dish pizza to American Airlines for service on its flights and has rolled out a similar pizza product at Pizzeria Uno kiosks in 43 General Cinema theaters. The Company has also entered into a two year agreement with Doubletree Hotels Corporation -8- 9 which will offer Pizzeria Uno brand pizzas and calzones to its guests through the various food venues of the hotels, and is currently in 85 Doubletree units. Several other branded and private label tests are underway with supermarket chains and major foodservice providers. RESTAURANT MANAGEMENT The staff for a typical Pizzeria Uno restaurant consists of one general manager, an assistant general manager, one manager and approximately 50 to 70 hourly employees, many of whom are part-time personnel. Managers of Company-owned restaurants are compensated with a salary plus a performance bonus based on several factors, including restaurant sales and profits. The Company conducts an initial ten-week training program for all managers and franchisees focusing on restaurant operations. There is continuing training of Company-owned restaurant managers through specialized training programs and regular meetings that emphasize the areas of leadership, quality of food preparation and service. The Company requires its food handling personnel and alcohol serving employees to participate in a training program to ensure the sanitary and responsible service of food and alcohol. The training program is conducted on an ongoing basis. The Company also holds quarterly regional meetings and an annual national meeting of franchisees and Company managers which focus on continuing training in marketing, new products, site selection and aspects of business management. Each Company-owned restaurant manager and franchisee is required to comply with an extensive operations manual which contains detailed standards and specifications for all elements of operations. The Company monitors system wide compliance by regular visits from Company personnel. The Company employs three operations vice presidents and 13 regional operations directors. The regional directors provide field supervision to both Company-owned and franchised restaurants. Their duties include regular visits and detailed inspections of quality, service and sanitation. As additional restaurants are opened, the Company intends to add qualified regional directors in order to maintain quality control. PURCHASING The Company negotiates directly with suppliers for all primary food ingredients and beverage products to ensure adequate supplies and to obtain competitive prices. The Company seeks competitive bids from suppliers on many of its primary food ingredients on a periodic basis and no less than annually for each supplier. The Company approves suppliers of these ingredients and products and requires its suppliers to adhere to product specifications established by the Company. Several key ingredients are proprietary. They are manufactured for the Company under private label and sold to authorized distributors for resale to Company-owned restaurants and franchisees. The Company and its franchisees purchase substantially all food and beverage products from authorized local or national distributors. In some cases, franchisees find it more economical to purchase most of these products from the same distributors servicing the Company-owned restaurants in order to take advantage of volume discounts. The Company does not derive any income from suppliers or distributors on sales to franchisees. All essential food and beverage products are available, or upon short notice can be made available, from alternative qualified suppliers. ADVERTISING AND MARKETING For fiscal 1997, the Company spent 2.8% of restaurant and consumer product sales on advertising and marketing. The Company relies primarily on television, radio, direct mail and print advertising. Through an advertising cooperative fund, the Company prepares regional and local advertising materials and also produces menus and -9- 10 promotional programs for both franchised and Company-owned restaurants. Franchisees are required to contribute a fee of up to 1.0% of franchised restaurant sales to the advertising cooperative fund, and the Company contributes an equal percentage of Company-owned restaurant sales. Except for the materials prepared and distributed by the Company through the advertising cooperative fund, franchisees are responsible for the implementation of advertising and marketing for their respective restaurants, subject to adherence to Company established guidelines. In addition, the Company's franchise agreement requires franchisees to spend at least 2% of franchised restaurant sales each year on local advertising and public relations. FRANCHISE PROGRAM As of September 28, 1997, the Company had 66 franchised Pizzeria Uno restaurants operated by 42 franchisees located in 18 states, the District of Columbia, Puerto Rico and Seoul, Korea. Historically, franchises were granted on a unit-by-unit basis, rather than by territory. The Company is currently pursuing territorial development with franchisees for construction of more than one restaurant over a certain period of time and within a certain geographic area. In fiscal 1996, the Company signed its first international franchise agreement with the Kolon Group, headquartered in Seoul, Korea. This agreement calls for the opening of a minimum of ten full-service restaurants in Korea within ten years. The Kolon Group's first restaurant opened on September 1, 1997. The Company has also signed a Letter of Intent with Al Bannai Enterprises for a master franchise agreement for the development of 22 Pizzeria Uno restaurants in the Middle East over the next seven years. The Company also entered into international agreements for the development of Pizzeria Uno restaurants in Indonesia and Pakistan. See "-- General and Developments During Fiscal Year 1997" and "--Restaurant Expansion." The Company intends to aggressively pursue international expansion opportunities and is in continual discussions with existing and prospective franchisees for the development of certain geographic areas and expects to grant additional franchises to qualified applicants with restaurant related operating experience and requisite financial resources, both domestically and internationally. New domestic franchisees are required to pay at the time the development agreement is signed a non-refundable fee of $25,000 per restaurant committed to be developed. The Company's current franchise agreement also requires franchisees to pay a unit franchise fee of $25,000 per restaurant before signing a franchise agreement for a specific location and a continuing monthly royalty of 5% of restaurant sales. Royalties and franchise fees for international franchises are negotiated on an individual basis. Royalties received by the Company averaged 4.2% of franchised restaurant sales for the fiscal year ended September 28, 1997. The Company has a variable royalty plan that allows royalty rate reductions from contractual rates for those franchised restaurants meeting certain criteria. It is available only to those franchised restaurants that do not achieve minimum sales levels during their first five years of operation in relation to their overall capital investment, including capitalized lease obligations. The minimum royalty rate under the variable royalty plan is 3% and ranges up to 5%. Six franchised restaurants currently qualify for some degree of royalty rate reduction under the variable royalty plan. The Company receives weekly and monthly sales reports from its franchisees and, in addition, conducts random test sales audits of all franchisees on an annual basis. Based upon these reports, the Company believes that the average annualized sales for its franchised restaurants in fiscal 1997 was approximately $1.6 million. The franchise agreements generally prohibit the Company from granting competing franchises or opening competing restaurants within three miles of a franchised restaurant. The franchise agreements have an initial term of 20 years with three successive ten year renewal periods at the option of the franchisee, provided that the agreement has not previously been terminated by either party. Upon each renewal, -10- 11 the Company may require a franchisee to sign a revised franchise agreement and to make capital expenditures to renovate the restaurant, but may not increase the continuing monthly royalty or charge a renewal fee. The Company retains the right to terminate a franchise agreement for a variety of reasons, including significant and willful understatement of gross receipts, failure to pay fees, material misrepresentation on an application for a franchise, or material breach or default under the franchise agreement, including failure to maintain Company operating standards. Many state franchise laws limit the ability of a franchisor to terminate or refuse to renew a franchise. The Company has the right to audit and receive certain monthly and annual financial and other information from franchisees. The Company's initial training program for franchisees is similar to its training program for management trainees and employees in Company-owned restaurants. See "-- Restaurant Management." In order to ensure uniform quality standards, the Company requires franchisees to comply with Company specifications as to space, design and decor, menu items, principal food ingredients and day-to-day operations, as set forth in the Company's operations manual. The Company's executives or field-service personnel on average visit each franchise location at least four times per year. The Company guarantees certain limited equipment and leasehold improvement financing to qualified franchisees through an agreement with an unaffiliated finance company. Under this agreement, the Company guarantees financing provided by the finance company to qualified franchisees in the maximum aggregate amount of $1.0 million for all franchisees combined. The Company has also guaranteed up to a maximum of $400,000 of future lease payments in the event of default by a specific franchisee. COMPETITION The restaurant business is highly competitive with respect to price, service and food quality, and is often affected by changes in consumer tastes, economic conditions and population and traffic patterns. There is also intense competition for real estate sites, personnel and qualified franchisees. The Company competes within each market with locally-owned restaurants as well as with national and regional restaurant chains, some of which operate more restaurants and have greater financial resources and longer operating histories than the Company. EMPLOYEES As of September 28, 1997, the Company employed approximately 6,389 persons, 126 of whom were corporate personnel and 353 of whom were field service or restaurant managers and trainees. The remaining employees were restaurant personnel, many of whom were part-time. Of the 126 corporate employees, 87 were in management positions and 39 were general office employees. The Company considers its employee relations to be good. None of the Company's employees is covered by collective bargaining agreements except for employees of its three restaurants in urban Chicago who are members of the Hotel Employees and Restaurant Employees International Union of the AFL-CIO, and who are subject to a collective bargaining agreement with the Company through November 30, 1999. TRADEMARKS The Company regards its many trademarks and service marks as having significant value and as being an important factor in the marketing of its products. Its most significant marks include "Uno," "Pizzeria Uno," and "Pizzeria Due." The Company's registrations of its significant marks are subject to renewal at various times from 1998 to 2005. However, the Company intends to renew its registration of such marks prior to expiration. The Company has applied for federal registration of the trademark "Pizzeria Uno... Chicago Bar & Grill." The Company's policy is to pursue registration -11- 12 of its marks whenever possible and to oppose strenuously any infringement of its marks. The Company has also initiated efforts toward international trademark registration in support of the Company's plan to expand products and services into international markets. The Company has received one trademark registration in Korea, where the Company has a development agreement with an existing area licensee, and has applied for several other trademark registrations which are still pending. See -- "General and Developments During Fiscal Year 1997" and "Restaurant Expansion." In Korea, Pakistan, Indonesia and other countries, the Company has sought registration of a variety of marks, including "Pizzeria Uno" and "Pizzeria Uno...Chicago Bar & Grill." GOVERNMENT REGULATION The Company is subject to various federal, state and local laws affecting its business. Each of the Company's restaurants is subject to licensing and regulation by a number of governmental authorities, which may include alcoholic beverage control, health and safety and fire agencies in the state or municipality in which the restaurant is located. Difficulties or failures in obtaining the required licenses or approvals could delay or prevent the development of a new restaurant in a particular area. Alcoholic beverage control regulations require each of the Company's restaurants to apply to a state authority and, in certain locations, county and municipal authorities for a license or permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be revoked or suspended for cause at any time. Alcoholic beverage control regulations relate to numerous aspects of the daily operations of the Company's restaurants, including minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control, and handling, storage and dispensing of alcoholic beverages. The Company may be subject in certain states to "dram-shop" statutes, which generally provide a person injured by an intoxicated person the right to recover damages from an establishment which wrongfully served alcoholic beverages to such person. The Company carries liquor liability coverage as part of its existing comprehensive general liability insurance. The Company is also subject to federal and a substantial number of state laws regulating the offer and sale of franchises. Such laws impose registration and disclosure requirements on franchisors in the offer and sale of franchises. These laws often also apply substantive standards to the relationship between franchisor and franchisee and limit the ability of a franchisor to terminate or refuse to renew a franchise. The Company is subject to the rules and regulations of various federal, state and local health agencies, including the United States Food and Drug Administration (the "FDA") and the United States Department of Agriculture. The FDA specifies standards for nutrition content claims and health claims made in connection with food items offered in the Company's restaurants. The FDA also prescribes the format and content of nutrition information required to appear on labels of certain products, including the Company's line of fresh and frozen items sold through supermarkets and wholesale price clubs. -12- 13 EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of the Company and their ages are as follows: DIRECTOR NAME AGE TITLE SINCE ---- --- ----- ----- Aaron D. Spencer ...... 66 Chairman and Director 1979 Craig S. Miller ....... 48 President, Chief Executive 1985 Officer, Chief Operating Officer and Director Robert M. Brown ....... 50 Senior Vice President- 1987 Administration Alan M. Fox ........... 50 Senior Vice President- -- Purchasing, President-Uno Foods Inc. Thomas W. Gathers ..... 41 Senior Vice President- -- Human Resources and Training Damon M. Liever ....... 43 Senior Vice President- -- Marketing Paul W. MacPhail....... 34 Senior Vice President- -- Operations Robert M. Vincent ..... 45 Senior Vice President- -- Finance, Chief Financial Officer and Treasurer The following is certain additional information concerning each executive officer of the Company. When used below, unless otherwise noted, positions held with the Company include positions held with the Company's predecessors. Mr. Spencer, the founder of the Company, has been Chairman since 1986 and previously served as the Company's Chief Executive Officer until September 29, 1996 and as the Company's President until 1986. Mr. Spencer has 32 years of experience in the restaurant industry and was the founder and owner of the predecessor of the Company which operated a chain of 24 Kentucky Fried Chicken franchised restaurants at the time the restaurants were sold. Mr. Miller has been President and Chief Operating Officer since 1986. He was appointed Chief Executive Officer on September 30, 1996. From 1984 to 1986, he served as a Vice President and then Executive Vice President of the Company. Prior to joining the Company, Mr. Miller spent 11 years with the General Mills, Inc. restaurant subsidiary, including four years in various executive capacities with Casa Gallardo Mexican restaurants and six years with the Red Lobster restaurant chain. Mr. Miller has a total of 30 years of experience in the restaurant industry. Mr. Brown has been Senior Vice President-Administration since July 1997 and as Senior Vice President-Finance from 1988 to June 1997. Mr. Brown also served as Chief Financial Officer and Treasurer from 1987 to June 1997. From 1987 to 1988, he served as Vice President-Finance of the Company. From 1984 to 1987, Mr. Brown served as vice president, treasurer and chief financial officer of the waste management subsidiary of Genstar Corporation, and was employed by SCA Services, Inc. from 1980 to 1984, most recently as assistant controller. Mr. Brown is a certified public accountant and has worked in accounting and finance since 1969. -13- 14 Mr. Fox has been Senior Vice President-Purchasing since October 1990. Also, since 1990, Mr. Fox has been President of Uno Foods Inc., the Company's subsidiary responsible for retail pizza distribution. Mr. Fox served as Senior Vice President- Purchasing and Development from 1989 to 1990, and served as Vice President of Purchasing from 1988 to 1989. Prior to joining the Company, from 1971 to 1988, Mr. Fox served as Vice President-Purchasing at Worcester Quality Foods, Inc. a wholesale food service distributor. Mr. Fox has a total of 26 years of experience in the restaurant and food service industries. Mr. Gathers has been Senior Vice President-Human Resources and Training since November 1992. Mr. Gathers served as Vice President-Human Resources and Training from August 1990 to November 1992. Prior to joining the Company, Mr. Gathers served in several senior training and development functions with the General Mills, Inc. restaurant subsidiary from 1981 to 1990. Mr. Gathers has a total of 21 years of experience in the restaurant industry. Mr. Liever has been Senior Vice President-Marketing since January 1994. From 1993 to 1994, he served as Vice President-Marketing of the Company. Prior to joining the Company, Mr. Liever served as Vice President-Marketing for the Black-Eyed Pea restaurant division of Unigate PLC from 1991 to 1993. From 1981 to 1991, Mr. Liever held several senior marketing positions with Pepsico subsidiaries, including Frito-Lay and Taco Bell. Mr.Liever has a total of 16 years of experience in the restaurant industry. Mr. MacPhail has been Senior Vice President-Operations since January 1997. From October 1994 to January 1997, he served as Divisional Vice President - - Operations, and from November 1992 to October 1994, he served as a Regional Director of Operations. Prior to that, Mr. MacPhail served with the Company as a General Manager and Senior Operations Manager from 1990 to 1992. Prior to joining the Company, Mr. MacPhail served for 8 years as a General Manager with Ground Round, Inc. Mr. MacPhail has a total of 14 years of experience in the restaurant industry. Mr. Vincent has been Senior Vice President-Finance, Chief Financial Officer and Treasurer since July 1997. Prior to that, he served as Vice President-Finance and Controller from November 1992 to June 1997. From April 1992 to October 1992, he served as Controller of the Company. Prior to joining the Company, Mr. Vincent served as Chief Financial Officer and Vice President-Finance at Omega Corporation from 1988 to 1992, and Vice President-Finance at Boston Restaurant Associates from 1985 to 1988. From 1976 to 1985 Mr. Vincent worked at Ogden Corporation in a variety of finance positions. Mr. Vincent has 21 years experience in accounting and finance. Officers are elected by, and serve at the pleasure of, the Board of Directors. See also "ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT," "ITEM 11. EXECUTIVE COMPENSATION," "ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT," and "ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS." -14- 15 ITEM 2. PROPERTIES The Company owns a 30,000 square foot production plant in Brockton, Massachusetts. The production plant produces frozen product for service aboard American Airlines flights, at Pizzeria Uno kiosks in General Cinema theaters, Doubletree Hotels and Sainsbury's Supermarkets, as well as fresh, refrigerated pizzas that are sold at deli counters in approximately 1,000 supermarkets and wholesale price club stores throughout New England. This facility provides sufficient capacity to support double the level of sales achieved in fiscal 1997. See "ITEM 1. Other Business Development." As of September 28, 1997, the Company leased 80 and owned 17 of the locations for its restaurants. Since fiscal 1992, the Company began selectively purchasing real estate to develop new restaurants where available and when the expected long-term cost of owning the real estate is less than the cost of leasing. A list of Company-owned properties is presented in "ITEM 1. Restaurants Locations." During fiscal 1997, the Company purchased a property in Ellicott City, MD for which restaurant operations commenced on November 17, 1997. The Company intends to purchase approximately two additional restaurant properties in fiscal 1998. The leases for Company-owned restaurants typically have initial terms of 20 years with certain renewal options and provide for a base rent plus real estate taxes, insurance and other expenses, plus additional percentage rents based on revenues of the restaurant. All of the Company's franchised restaurants are in space leased from parties unaffiliated with the Company, with the exception of one franchised restaurant which is subleased from the Company. Franchised restaurant leases typically have lease terms through the initial term of the franchise agreements. One of the Company-owned restaurants in Boston, Massachusetts is located on the first floor of a six-story office building owned by Aaron D. Spencer, Chairman of the Company. Mr. Spencer has leased the entire building to the Company pursuant to a five-year lease, which ended on March 29, 1997, at a rent of $162,000 per year. The Company is currently negotiating a renewal of this lease and continues to pay $162,000 of rent per year on a tenancy at will basis in the interim. The lease requires that the rent will be increased by 12% of the cost of any improvements to the building made by Mr. Spencer. The Company is responsible for all taxes, utilities, insurance, maintenance and repairs. The lease provided that if Mr. Spencer or the Company terminates the lease, a new lease between the Company and Mr. Spencer relating only to the restaurant space of the building would become effective immediately. The new lease would have a five-year term with two five-year renewal options. Rent under the new lease would be 6.5% of total restaurant revenues but with a minimum rent, determined by independent appraisal, equal to the fair market rent at the time the new lease becomes effective. The Company currently sublets all but the restaurant space at rents which approximate the $162,000 annual rent that it is obligated to pay Mr. Spencer. Management believes that the terms of both the existing lease and the new lease which will become effective upon termination of the existing lease are comparable to those otherwise available in the real estate market. The Company's executive offices are located in two adjacent buildings in West Roxbury, Massachusetts. The first, a three-story building owned by Mr. Spencer, is leased to the Company pursuant to a five-year lease, commencing on March 30, 1987, with options to renew for two additional five-year periods. Rent during the initial term of the lease was $30,000 per year. Currently, the second of the two five-year options has been exercised at a rate of $43,200 per year. The Company is responsible for all taxes, utilities, insurance, maintenance and repairs. The adjacent facility, a two-story building owned by Mr. Spencer's children, is also leased to the Company pursuant to a 15 year term commencing on February 1, 1990, with options to renew for three additional five-year periods. Rent during the first five years of the initial term of the lease was $106,800 per year, increasing to $128,160 per year for the next five years, and to $153,792 for the final five years of the initial term of the lease. The Company is responsible for all taxes, utilities, insurance, maintenance and repairs. Rent during any option period will be 120% of the rent for the prior term of the lease. Management believes that the terms of the leases for the two offices -15- 16 are as favorable as otherwise available in the real estate market. With the two buildings, the executive offices currently consist of approximately 25,000 square feet and house the Company's executive, administrative and clerical offices. The Company also owns a 12,000 square foot warehouse/training facility in Norwood, Massachusetts. A portion of this facility contains classrooms and is currently being used for the training and instruction of restaurant management trainees. The remainder of the building is warehouse space and is currently being used to store Company records and artifacts used in its restaurant properties. ITEM 3. LEGAL PROCEEDINGS The Company agreed to a proposed consent order (the "Agreement") with the Federal Trade Commission (the "FTC") on October 23, 1996. The Agreement was announced by the FTC on January 22, 1997 for public comment and became final on March 22, 1997. The Agreement was based on a complaint by the FTC involving a print advertisement which ran once and a television commercial which ran for two weeks. Although the FTC did not allege that the Company intended any deception, it contended that portions of these advertisements misrepresented that all of the Company's thin crust pizzas were low fat. The Company disputed the FTC's interpretation of the commercial, and believed that it had a reasonable basis for the advertising claims in question. However, rather than contest this matter further, the Company chose to accept the proposed Agreement, which, among other things, imposes no fine, orders the Company not to misrepresent the existence or amount of total fat or any other nutrient or substance in any food product containing a baked crust, and requires the Company to maintain substantiation for nutrition claims for its pizza products for five years. On January 23, 1997, a class action complaint (the "Complaint") was filed by Rhonda D'Ambrosio against the Company and certain of its subsidiaries in the Suffolk Superior Court of the Commonwealth of Massachusetts. The Complaint alleges that the Company, through its advertisements, made false and misleading representations about the fat content of the Company's thin crust pizzas. The plaintiff seeks to have the action maintained as a class action and seeks to recover unspecified damages allegedly sustained by the plaintiff and the other members of the class. The class is alleged to include all purchasers of the Company's "Thinzettas"(R) thin crust pizzas who relied upon, and sustained damage as a result of, the alleged misrepresentations. The Company intends to defend vigorously against the Complaint. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. -16- 17 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS MARKET INFORMATION The Company's Common Stock, $.01 par value, is listed on the New York Stock Exchange under the symbol "UNO." The table below sets forth the range of high and low sales prices on the New York Stock Exchange for the period from October 2, 1995 to September 28, 1997: COMMON STOCK PRICE ------------------ HIGH LOW FISCAL YEAR ENDED SEPTEMBER 29, 1996 - ------------------------------------ First Quarter $8.75 $6.375 Second Quarter $8.125 $5.625 Third Quarter $7.50 $6.50 Fourth Quarter $7.75 $5.625 FISCAL YEAR ENDED SEPTEMBER 28, 1997 - ------------------------------------ First Quarter $7.875 $6.375 Second Quarter $7.375 $6.375 Third Quarter $7.25 $5.875 Fourth Quarter $7.25 $5.8125 NUMBER OF STOCKHOLDERS As of September 28, 1997, there were approximately 2,500 beneficial owners of the Company's Common Stock. DIVIDENDS The Company has never paid any cash dividends on its Common Stock and for the foreseeable future intends to continue its policy of retaining earnings to finance the development and growth of the Company. The Board of Directors may reconsider this policy from time to time in light of conditions then existing, including the Company's earnings performance, financial condition and capital requirements. Pursuant to the Company's $55 million revolving credit and term loan agreement entered into in November 1997, the Company is subject to various financial and operating covenants, including limitations on the payment of cash dividends. The most restrictive limitations, in general, preclude the Company from paying cash dividends, if such payment, when aggregated with certain other payments, would exceed 35% of net income for the then most recent four quarter period or would cause certain net tangible asset and debt ratios to be exceeded. -17- 18 ITEM 6. SELECTED FINANCIAL DATA Fiscal Year Ended (Amounts in thousands, except per share data) -------------------------------------------------------------- Sept. 28 Sept. 29 Oct. 1 Oct. 2 Oct. 3 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- (53 wks) INCOME STATEMENT DATA: REVENUES Restaurant sales.................................... $164,389 $159,581 $146,100 $112,674 $98,234 Consumer product sales.............................. 9,115 8,351 8,477 7,418 7,073 Franchise income.................................... 4,516 4,209 4,129 3,973 3,638 -------- -------- -------- -------- ------- 178,020 172,141 158,706 124,065 108,945 -------- -------- -------- -------- ------- COSTS AND EXPENSES Cost of food and beverages.......................... 43,994 44,064 39,420 30,177 26,024 Labor and benefits.................................. 54,183 51,868 47,377 36,935 32,990 Occupancy costs..................................... 27,045 26,339 22,925 18,979 17,295 Other operating costs............................... 16,067 15,890 13,583 10,751 9,166 General and administrative.......................... 13,384 12,155 11,229 9,277 8,233 Depreciation and amortization....................... 12,469 12,964 10,795 7,655 7,152 Special charges..................................... 4,000 3,937 -------- -------- -------- -------- ------- 171,142 167,217 145,329 113,774 100,860 -------- -------- -------- -------- ------- OPERATING INCOME..................................... 6,878 4,924 13,377 10,291 8,085 INTEREST AND OTHER EXPENSE........................... 2,827 2,481 1,944 845 1,085 -------- -------- -------- -------- ------- INCOME BEFORE INCOME TAXES........................... 4,051 2,443 11,433 9,446 7,000 Provision for income taxes.......................... 1,378 757 4,230 3,690 2,837 -------- -------- -------- -------- ------- NET INCOME........................................... $ 2,673 $ 1,686 $ 7,203 $ 5,756 $ 4,163 ======== ======== ======== ======== ======= EARNINGS PER COMMON SHARE............................ $ 0.22 $ 0.13 $ 0.58 $ 0.51 $ 0.37 ======== ======== ======== ======== ======= WEIGHTED-AVERAGE SHARES OUTSTANDING 12,008 12,756 12,364 11,360 11,291 ======== ======== ======== ======== ======= BALANCE SHEET DATA: Total assets......................................... $143,732 $135,065 $125,260 $92,153 $74,735 Long-term debt, net of current portion............... 42,516 37,085 21,750 17,703 8,167 Capital lease obligations, net of current portion.... 867 1,056 749 820 472 Treasury stock....................................... 19,877 10,653 2,900 Total shareholders' equity........................... 70,880 77,136 83,127 55,958 49,375 OPERATING DATA: SYSTEM-WIDE SALES(a) Company-owned....................................... $160,045 $151,178 $136,659 $110,272 $96,540 Franchised.......................................... 101,512 94,718 91,670 87,646 82,590 -------- -------- -------- -------- ------- TOTAL................................................ $261,557 $245,896 $228,329 $197,918 $179,130 ======== ======== ======== ======== ======= -18- 19 Fiscal Year Ended (Amounts in thousands, except per share data) -------------------------------------------------------------- Sept. 28 Sept. 29 Oct. 1 Oct. 2 Oct. 3 1997 1996 1995 1994 1993 -------- -------- -------- -------- ------- (53 wks) AVERAGE RESTAURANT SALES(b) Company-owned....................................... $1,818 $1,846 $1,925 $1,886 $1,807 Franchised.......................................... 1,579 1,549 1,552 1,488 1,387 NUMBER OF RESTAURANTS Company-owned(c)..................................... 97 92 87 66 57 Franchised(d)........................................ 69 67 61 61 58 ------ ------ ------ ------ ------ TOTAL AT YEAR END.................................... 166 159 148 127 115 ====== ====== ====== ====== ====== - -------------------- (a) Pizzeria Uno full-service restaurants. (b) Pizzeria Uno full-service restaurants, annualized. (c) Includes one Mexican restaurant four quick-service Uno units in 1997 ; one Mexican restaurant, two Bay Street Grill restaurants and three quick-service Uno units in 1996; one Mexican restaurant, three Bay Street Grill restaurants and four quick-service Uno units in 1995; one Mexican restaurant and two quick-service Uno units in 1994; one Mexican restaurant and one quick-service Uno unit in 1993. (d) Includes three quick-service Uno units in 1997; four quick-service Uno units in 1996; two quick-service units in 1995 and 1994. -19- 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets 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: 52 Weeks 52 Weeks 52 Weeks Ended Ended Ended 9/28/97 9/29/96 10/1/95 -------- -------- -------- REVENUES: Restaurant sales................................. 92.4% 92.7% 92.1% Consumer product sales........................... 5.1 4.9 5.3 Franchise income ................................ 2.5 2.4 2.6 ----- ----- ----- Total .......................................... 100.0 100.0 100.0 COSTS AND EXPENSES: Cost of food and beverages (1) .................. 25.4 26.2 25.5 Labor and benefits (1) .......................... 31.2 30.9 30.6 Occupancy costs (1) ............................. 15.6 15.7 14.8 Other operating costs (1) ....................... 9.3 9.5 8.8 General and administrative ...................... 7.5 7.1 7.1 Depreciation and amortization(1)................. 7.2 7.7 7.0 Special charges (1) ............................. 2.3 2.3 OPERATING INCOME.................................. 3.9 2.9 8.4 INTEREST AND OTHER EXPENSE ....................... (1.6) (1.5) (1.2) ----- ----- ----- INCOME BEFORE INCOME TAXES........................ 2.3 1.4 7.2 Provision for income taxes ....................... .8 .4 2.7 ----- ----- ----- NET INCOME ....................................... 1.5% 1.0% 4.5% ===== ===== ===== (1) Percentage of restaurant and consumer product sales FISCAL YEAR 1997 COMPARED TO FISCAL YEAR 1996 Total revenues increased 3.4% to $178.0 million in fiscal 1997 from $172.1 million in the prior year. Company-owned restaurant sales increased 3.0% to $164.4 million from $159.6 million in the prior year, due primarily to a 7.5% increase in operating weeks of full-service Pizzeria Uno restaurants resulting from the addition of seven restaurants during the past four quarters. Comparable store sales for the 52 weeks ended September 28, 1997 declined by 1.7%, while average weekly sales, which includes sales at comparable stores as well as new units, were 1.5% below last year. Sales levels for the Company's new prototype units were 5% above the Company system average for the year. Consumer product sales increased 9.2% to $9.1 million from $8.4 million in fiscal 1996. Sales in the foodservice category have increased significantly as sales to American Airlines increased approximately 37% during fiscal 1997. Also the addition of new business due to the expansion of the Doubletree Hotels and General Cinema programs has contributed to the growth in the foodservice category. There was a decline in sales volumes for existing customers in the fresh refrigerated and wholesale club categories of the business. During the fourth quarter the Company began shipments to an international supermarket chain, Sainsbury's Supermarket PLC, and continues to test several branded and private label products with other -20- 21 supermarket and foodservice providers. See "Item 1 Business - General and Developments During Fiscal Year 1997" and "- Other Business Developments." Franchise income increased 7.3% to $4.5 million in fiscal 1997 from $4.2 million the prior year. Royalty income increased 7.1% in fiscal 1997, as average weekly sales increased by 2.3%. Operating weeks increased by 5.6%, as six new full-service restaurants opened and three full-service units closed in fiscal 1997. Sales volumes for the six new franchised restaurants opened in fiscal 1997 annualized at approximately $2.1 million. Initial franchise fees totaled $182,500 for fiscal 1997 compared to $162,500 in fiscal 1996. During the third quarter of fiscal 1997, the Company recorded special charges in the amount of $4.0 million, consisting of an asset impairment charge of $3.3 million and store closing costs of $0.7 million. The $3.3 million asset impairment charge was recorded to reduce the carrying value of equipment and leaseholds at two full-service Pizzeria Uno restaurants to their fair market value and resulted from weak operating results and continuing negative cash flow. The store closure costs represent remaining minimum lease payments of one full-service Pizzeria Uno restaurant which was closed during fiscal 1997. In fiscal 1996, the Company recorded an asset impairment charge of $3.9 million to adjust the carrying value of those assets identified as impaired. The charge consisted of $1.0 million for three Uno Pizza Takery's, $1.6 million for one full-service Uno restaurant and $1.3 million for certain assets of three Bay Street Grill restaurants. The assets written down include the Bay Street trademark and leasehold improvements and equipment of the aforementioned stores. Operating income, was $6.9 million which represents an operating margin of 3.9% for fiscal year 1997. For fiscal year 1996, operating income was $4.9 million which represents an operating margin of 2.9%. Operating income, exclusive of the special charges, was $10.9 million which represents an operating margin of 6.1% for fiscal year 1997. Fiscal year 1996 operating income, exclusive of the $3.9 million asset impairment charge, was $8.9 million, which represents an operating margin of 5.1%. The improvement in operating income and operating margin in fiscal 1997 was due to lower cost of sales, a reduction in advertising spending and lower pre-opening amortization. Cost of food and beverages as a percentage of restaurant and consumer product sales decreased to 25.4% for fiscal 1997 from 26.2% the prior year. This decline primarily reflects lower cheese costs and overall lower commodity prices on key product ingredients. Partially offsetting these decreases were changes in menu products, promotions and pricing intended to enhance customers' value perception. Labor and benefits as a percentage of restaurant and consumer product sales increased slightly to 31.2% for fiscal 1997 from 30.9% the prior year, principally due to an increase in the average hourly wage rate and increasing salaries for entry level managers. The increase in the average hourly wage rate, due primarily to the increase in the federal minimum wage increase, was partially offset by productivity gains in restaurant operations. Occupancy costs as a percentage of restaurant and consumer product sales decreased to 15.6% for fiscal 1997 from 15.7% the prior year due to slightly lower real estate taxes and a reduction in repair & maintenance expense. Other operating costs decreased as a percentage of restaurant and consumer product sales to 9.3% for fiscal 1997 from 9.5% the prior year, primarily due to lower advertising expenditures. General and administrative expenses as a percentage of total revenues for fiscal year 1997 increased to 7.5% from 7.1% in fiscal 1996. This increase was due to higher -21- 22 legal expense related to the resolution of several legal matters (none of which were material), and higher salary and benefit expense relating to increased staffing in the franchise and operations areas. Depreciation and amortization expense as a percentage of restaurant and consumer product sales decreased to 7.2% for fiscal 1997 from 7.7% the prior year, due to lower pre-opening amortization. Other expense increased to $2.8 million or 1.6% as a percentage of total revenues in fiscal 1997 from $2.5 million or 1.5% of total revenues in the prior year. This increase was principally due to higher interest expense associated with the increased level of debt due to the Company's ownership of an increasing number of restaurant properties and the repurchase of 1.2 million shares under the "Dutch Auction" tender offer. The effective income tax rate increased to 34% for fiscal 1997 from 31% in fiscal 1996, primarily due to the impact of tax credits, which remained consistent from fiscal 1996, being applied against a higher pre-tax income. FISCAL YEAR 1996 COMPARED TO FISCAL YEAR 1995 Total revenues increased 8% to $172.1 million in fiscal 1996 from $158.7 million in the prior year. Company-owned restaurant sales increased 9.2% to $159.6 million due primarily to a 15.4% increase in operating weeks of full-service Pizzeria Uno restaurants resulting from the addition of seven restaurants during fiscal 1995. Comparable store sales for the 52 weeks ended September 29, 1996, declined by 1.3%, while average weekly sales, which includes sales at comparable stores as well as new units, were 4.1% below last year. Consumer product sales declined slightly to $8.4 million in fiscal 1996 from $8.5 million in fiscal 1995. Sales to American Airlines declined by approximately 25% during fiscal 1996, which the company believes was due to a reduction of the number of flights on which food service was offered. This sales decline was mostly offset by new business within the frozen products and contract food service categories, and modest growth in sales volumes for existing customers in the fresh refrigerated segment. Franchise income increased 1.9% to $4.2 million in fiscal 1996 from $4.1 million the prior year. Royalty income increased 1% in fiscal 1996, as average weekly sales increased by .2% and operating weeks increased by 3.4%, resulting from five new full-service restaurants opened during fiscal 1995. Initial franchise fees totaled $162,500 for fiscal 1996 compared to $125,000 in fiscal 1995. The Company's operating income of $4.9 million includes special charges for asset impairment of $3.9 million in connection with the adoption of SFAS 121 during the second fiscal quarter in 1996. The Company recorded this write-down for three Uno Pizza Takery's, one full-service Pizzeria Uno unit and a partial write-down of its investment in three Bay Street Grill units, the Company's seafood test concept. The write-down represents non-cash adjustments made to reduce assets to net realizable value for each of these restaurants. Operating income, exclusive of the asset impairment charge, was $8.9 million which represents an operating margin of 5.3% for fiscal year 1996. Fiscal year 1995 operating income was $13.4 million, which represents an operating margin of 8.4%. The decline in operating income and operating margin in fiscal 1996, is due to lower sales levels at comparable stores and new units, as well as the cost factors mentioned below. -22- 23 Cost of food and beverages as a percentage of restaurant and consumer product sales increased to 26.2% for fiscal 1996 from 25.5% the prior year. This percentage cost increase primarily reflects substantially higher cheese costs, but also reflects changes in menu products and menu pricing intended to enhance customers' value perception. Labor and benefits as a percentage of restaurant and consumer product sales increased slightly to 30.9% for fiscal 1996 from 30.6% the prior year, principally due to additional training costs associated with the introduction of a revised menu during the first half of fiscal 1996. Labor costs as a percentage of restaurant and consumer product sales for the last six months of fiscal 1996 were virtually flat compared to the last half of fiscal 1995. Occupancy costs as a percentage of restaurant and consumer product sales increased to 15.7% for fiscal 1996 from 14.8% the prior year, primarily due to lower sales levels at comparable stores and new units. Other operating costs increased as a percentage of restaurant and consumer product sales to 9.5% for fiscal 1996 from 8.8% the prior year, due to higher advertising expenditures and the effect of lower sales levels at comparable stores and new units. General and administrative expenses as a percentage of total revenues for fiscal 1996 remained unchanged from fiscal 1995 at 7.1%. Depreciation and amortization expense as a percentage of restaurant and consumer product sales increased to 7.7% for fiscal 1996 from 7% the prior year, due to increased capital expenditures for facility renovations and the effect of lower sales levels at comparable stores and new units. Other expense increased to $2.5 million or 1.5% as a percentage of total revenues in fiscal 1996 from $1.9 million or 1.2% of total revenues in the prior year. This increase was principally due to higher interest expense associated with the increased level of debt used to repurchase approximately 1.1 million shares of the Company's common stock, and its ownership of an increasing number of restaurant properties. The effective income tax rate declined to 31% for fiscal 1996 from 37% in fiscal 1995, primarily due to the impact of tax credits, which remained consistent from fiscal 1995, being applied against a lower pre-tax income. -23- 24 LIQUIDITY AND SOURCES OF CAPITAL The following table (000's omitted) presents a summary of the Company's cash flows for fiscal 1997. Net cash provided by operating activities....... $ 20,073 Net cash used in investing activities........... (19,682) Net cash provided by financing activities....... (733) -------- Decrease in cash ............................... $ (342) ======== Historically, the Company has leased most of its restaurant locations and pursued a strategy of controlled growth, financing its expansion principally from operating cash flow, equity offerings and from the issuance of senior, unsecured notes and short-term borrowing under revolving lines of credit. During fiscal 1997, the Company's investment in property, equipment and leasehold improvements was $20.0 million. The Company opened seven restaurants during fiscal 1997 and currently plans to open up to six restaurants in fiscal 1998. The Company expects that the average cash investment required to open a full-service Pizzeria Uno restaurant, excluding land and pre-opening costs, will be approximately $1.6 million. As of September 28, 1997, the Company had outstanding indebtedness of $40.5 million under its $50 million unsecured revolving credit facility (the "$50 million revolver"), $5.1 million under its MetLife Capital mortgage program, and $1.1 million in capital lease obligations. The Company recently entered into a $55 million credit facility ( the "$55 million facility") to replace the $50 million revolver. The $55 million facility consists of three components, a $26.6 million unsecured revolver, a $20 million secured mortgage facility and a $8.4 million loan. The $26.6 million unsecured revolver is due in October 2002. The $20 million secured mortgage facility is due in 27 quarterly installments of $500,0000 plus interest commencing on January 31, 1998 with a final installment of the outstanding principal plus interest due in October 2004. The $8.4 million term loan is due in 20 quarterly installments of $420,000 plus interest commencing on January 31, 1998. Amounts borrowed under the $55 million facility accrue interest at variable rates based on, at the election of the Company, either the LIBOR plus 100-175 basis points or prime plus 0-50 basis points. The Company anticipates using the unsecured revolver of the $55 million facility for the development of additional restaurants and for working capital needs. The Company used the proceeds of the $20 million secured mortgage facility component to refinance certain owned properties and used the $8.4 million term loan component to finance the "Dutch Auction" tender offer completed in the fourth quarter of fiscal 1997. In December 1996, the Company entered into a 15 year mortgage loan agreement with MetLife Capital Financial Corporation in the original aggregate principal amount of $5.1 million. The loan agreement is secured by mortgages on five Company owned full-service properties in Orlando, FL, Amherst, NY, Paoli, PA, Williamsburg, VA and Columbus, OH. The loan has a fixed annual interest rate of 8.75% and requires monthly payments of principal and interest. In October 1995, the Company entered into a five year interest rate swap agreement involving the exchange of floating rate interest payment obligations for fixed rate interest payment obligations. The notional amount of this interest rate swap agreement was $20 million. The Company entered into this agreement in order to manage interest costs and risks associated with fluctuating interest rates. -24- 25 In June 1997, the Board of Directors of the Company authorized the repurchase of 1.0 million shares of the Company's Common Stock though 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 $7.50 nor less then $6.00 per share, specified by tendering stockholders. The Company would than select the lowest purchase price that would allow it to purchase the 1,000,000 shares. On July 31, 1997 the Company announced that it had repurchased 1,207,624 shares at a price of $7.00 per share. The total number of shares purchased represented approximately 10% of the shares outstanding at the time. The Company believes that existing cash balances, cash generated from operations and borrowing under its $55 million facility will be sufficient to satisfy the Company's working capital and capital expenditure requirements for the foreseeable future. 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 quarters than its other quarters due to reduced winter volumes. FORWARD-LOOKING INFORMATION Certain information in this Annual Report on Form 10-K including, but not limited to, statements found in this "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," may be forward-looking statements. Actual results might differ materially from those projected in such forward-looking statements. Among the factors that could cause actual results to differ materially are: the Company's ability to open new restaurants and operate new and existing restaurants profitably, which will depend upon a number of factors including the availability of suitable sites, the negotiation of acceptable lease or purchase terms, the securing of required governmental permits and approvals, the hiring, training and retaining of skilled management, and the availability of adequate financing; 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; changes in consumer tastes and eating habits; increases in food, labor, employee benefits and similar costs; and other risks detailed from time to time in the Company's periodic earnings releases and reports filed with the Securities and Exchange Commission and the more detailed factors discussed in the Company's Registration Statement on Form S-2 (Reg. No. 33-59193). -25- 26 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS Not Applicable. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The financial statements and supplementary data are listed under Part IV, Item 14 in this Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. -26- 27 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information required by this Item 10 is hereby incorporated by reference to the text appearing under Part I, Item 1 - Business, under the caption "Executive Officers of the Registrant" at page 13 of this Report, and by reference to the Company's definitive Proxy Statement which is expected to be filed by the Company within 120 days after the close of its fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by this Item 11 is hereby incorporated by reference to the Company's definitive Proxy Statement which is expected to be filed by the Company within 120 days after the close of its fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this Item 12 is hereby incorporated by reference to the Company's definitive Proxy Statement which is expected to be filed by the Company within 120 days after the close of its fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this Item 13 is hereby incorporated by reference to the Company's definitive Proxy Statement which is expected to be filed by the Company within 120 days after the close of its fiscal year. -27- 28 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. INDEX TO FINANCIAL STATEMENTS Page ---- Report of Independent Auditors ........................... 33 Consolidated Balance Sheets -- September 28, 1997 and September 29, 1996 ...................................... 34 Consolidated Statements of Income -- Years ended September 28, 1997, September 29, 1996, and October 1, 1995 ......................................... 35 Consolidated Statements of Shareholders' Equity -- Years ended September 28, 1997, September 29, 1996, and October 1, 1995 ......................................... 36 Consolidated Statements of Cash Flows -- Years ended September 28, 1997, September 29, 1996, and October 1, 1995 ......................................... 37 Notes to Consolidated Financial Statements ............... 38 2. FINANCIAL STATEMENT SCHEDULES All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or are inapplicable and, therefore, have been omitted. 3. EXHIBITS (3) ARTICLES OF INCORPORATION AND BY-LAWS. (a) Restated Certificate of Incorporation, as amended, filed as Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the fiscal quarter ended April 2, 1995 (the "April 2, 1995 Form 10-Q").* (b) By-laws filed as Exhibit 3.2 to the April 2, 1995 Form 10-Q.* (4) INSTRUMENTS DEFINING THE RIGHTS OF SECURITY HOLDERS, INCLUDING INDENTURES. (a) Specimen Certificate of Common Stock filed as Exhibit 4(a) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1991 (the "1991 Annual Report on Form 10-K").* (10) MATERIAL CONTRACTS. (a) Lease between the Company and Aaron D. Spencer dated March 30, 1987 for premises in West Roxbury, Massachusetts, filed as Exhibit 10.2 to the Registration Statement on Form S-1 (Registration No.33-13100)(the "1987 Registration Statement").* (b) Lease between the Company and Aaron D. Spencer dated March 30, 1987 for premises in Boston, Massachusetts, filed as Exhibit 10.3 to the 1987 Registration Statement.* -28- 29 (c) Lease between Uno Restaurants, Inc. and Lisa S. Cohen and Mark N. Spencer dated February 1, 1990 for premises in West Roxbury, Massachusetts, filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 1990 (the "1990 Annual Report on Form 10- K").* (d) Form of Franchise Agreement and Area Franchise Agreement, filed as Exhibit 10(d) to the Company's Annual Report on Form 10-K for the fiscal year ended September 29, 1996 (the "1996 Annual Report on Form 10-K").* (e) Uno Restaurant Corporation 1987 Employee Stock Option Plan, as amended, filed as Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 22, 1994.* ** (f) Uno Restaurant Corporation 1989 Non-Qualified Stock Option Plan for Non- Employee Directors, filed as Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 8, 1995.* ** (g) Uno Restaurant Corporation 1993 Non-Qualified Stock Option Plan for Non- Employee Directors, as amended. ** (h) Uno Restaurant Corporation 1997 Employee Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1997.* ** (i) Form of Indemnification Agreement between the Company and its Directors filed as Exhibit 10.6 to the 1987 Registration Statement.* ** (j) Variable Royalty Plan for Franchises, filed as Exhibit 10(l) to the 1991 Annual Report on Form 10-K.* (k) Interest Rate Swap Agreement between Fleet Bank of Massachusetts, N.A. and Uno Restaurants, Inc. Dated October 25, 1995, filed as Exhibit 10(k) to the 1995 Annual Report on Form 10-K.* (l) Note between the Company and Craig S. Miller dated January 23, 1996, filed as Exhibit 10(l) to the 1996 Annual Report on Form 10-K * ** (m) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and Mr. Spencer and Mr. Miller. ** (n) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its Senior Vice Presidents. ** (o) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its other officers. ** (p) Master Lease-Purchase Agreement between ORIX Credit Alliance, Inc., as Lessor, and Massachusetts Industrial Finance Agency, as Lessee, dated April 19, 1994, and Master Sublease-Purchase Agreement between Massachusetts Industrial Finance Agency, as Sublessor, and Uno Foods Inc. as Sublessee, dated April 19, 1994 filed as Exhibit 10(s) to the 1994 Annual Report on Form 10-K.* -29- 30 (q) MetLife Capital Financial Corporation Mortgage Notes: $1,875,000 8.75% Note dated December 23, 1996 of 8250 International Drive Corporation, $825,000 8.75% Note dated December 23, 1996 of Saxet Corporation, $900,000 8.75% Note dated December 23, 1996 of Saxet Corporation, $675,000 8.75% Note dated January 30, 1997 of Saxet Corporation, $825,000 8.75% Note dated February 27, 1997 of Saxet Corporation, each payable to the order of MetLife Capital Financial Corporation. (r) Note between the Company and Craig S. Miller dated April 1, 1997. ** (s) $55,000,000 Revolving Credit and Term Loan Agreement dated as of November 4, 1997 by and among Uno Restaurants, Inc. and Saxet Corp., as Borrower, Uno Foods Inc., Pizzeria Uno Corporation, URC Holding Company, Inc. and Uno Restaurant Corporation, as Guarantors, and Fleet National Bank, as Agent and BankBoston, N.A. as Co-Agent (without exhibits). (11) Statement Re: Computation of Per Share Earnings. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule. - ------------------------ * In accordance with Rule 12b-23 and Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. ** Management Contract -30- 31 (b) REPORTS ON FORM 8-K During the fiscal year ended September 28, 1997, the Company filed a Current Report on Form 8-K dated July 3, 1997 reporting under "Item 5. Other Events" a $4.0 million pre-tax charge for the fiscal quarter ended June 29, 1997. -31- 32 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. (Registrant) Uno Restaurant Corporation ------------------------------------- By (Signature and Title) /s/ Robert M. Vincent ------------------------------------------- Robert M. Vincent, Senior Vice President Date December 19, 1997 ----------------- Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated. By (Signature and Title) /s/ Aaron D. Spencer ------------------------------------------- Aaron D. Spencer, Chairman and Director Date December 19, 1997 ----------------- By (Signature and Title) /s/ Craig S. Miller ------------------------------------------- Craig S. Miller, President, Chief Executive Officer, Chief Operating Officer and Director (Principal Executive Officer) Date December 19, 1997 ----------------- By (Signature and Title) /s/ Robert M. Vincent ------------------------------------------- Robert M. Vincent, Senior Vice President-Finance, Chief Financial Officer and Treasurer (Principal Financial Officer) Date December 19, 1997 ----------------- By (Signature and Title) /s/ Robert M. Brown ------------------------------------------- Robert M. Brown, Senior Vice President-Administration and Director Date December 19, 1997 ----------------- By (Signature and Title) /s/ John T. Gerlach ------------------------------------------- John T. Gerlach, Director Date December 19, 1997 ----------------- By (Signature and Title) /s/ S. James Coppersmith ------------------------------------------- S. James Coppersmith, Director Date December 19, 1997 ----------------- By (Signature and Title) /s/ Stephen J. Sweeney ------------------------------------------- Stephen J. Sweeney, Director Date December 19, 1997 ----------------- By (Signature and Title) /s/ James F. Carlin ------------------------------------------- James F. Carlin, Director Date December 19, 1997 ----------------- -32- 33 Report of Independent Auditors The Board of Directors Uno Restaurant Corporation We have audited the accompanying consolidated balance sheets of Uno Restaurant Corporation and subsidiaries (the Company) as of September 28, 1997 and September 29, 1996, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 28, 1997. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Uno Restaurant Corporation and subsidiaries at September 28, 1997 and September 29, 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 28, 1997, in conformity with generally accepted accounting principles. As discussed in Note 2 to the consolidated financial statements, in fiscal year 1996, the Company adopted Statement of Financial Accounting Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Ernst & Young LLP Boston, Massachusetts November 4, 1997 33 34 Uno Restaurant Corporation and Subsidiaries Consolidated Balance Sheets SEPTEMBER 28 1997 SEPTEMBER 29 1996 ------------------------------------------ (In thousands) ASSETS Current assets: Cash $ 1,486 $ 1,828 Royalties receivable 728 710 Consumer products receivable 844 322 Inventory 2,326 2,333 Deferred pre-opening costs 949 470 Prepaid expenses and other assets 1,959 2,387 ------------------------------------------ Total current assets 8,292 8,050 Property, equipment and leasehold improvements, net 125,357 120,510 Deferred income taxes 6,599 3,613 Liquor licenses and other assets 3,484 2,892 ------------------------------------------ $143,732 $135,065 ========================================== SEPTEMBER 28 1997 SEPTEMBER 29 1996 ------------------------------------------ (Dollar amounts in thousands, except share data) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable $ 6,966 $ 6,009 Accrued expenses 7,563 5,033 Accrued compensation and taxes 2,641 2,187 Income taxes payable 2,076 1,581 Current portions of long-term debt and capital lease obligations 3,132 178 ------------------------------------------ Total current liabilities 22,378 14,988 Long-term debt, net of current portion 42,516 37,085 Capital lease obligations, net of current portion 867 1,056 Other liabilities 7,091 4,800 Commitments and contingencies Shareholders' equity: Preferred Stock, $1.00 par value, 1,000,000 shares authorized, no shares issued or outstanding Common Stock, $.01 par value, 25,000,000 shares authorized, 13,754,480 shares in 1997 and 13,697,526 shares in 1996 issued 138 137 Additional paid-in capital 53,803 53,509 Retained earnings 36,816 34,143 ------------------------------------------ 90,757 87,789 Treasury Stock (2,790,597 shares in 1997 and 1,500,000 shares in 1996, at cost) (19,877) (10,653) ------------------------------------------ Total shareholders' equity 70,880 77,136 ------------------------------------------ $143,732 $135,065 ========================================== See accompanying notes. 34 35 Uno Restaurant Corporation and Subsidiaries Consolidated Statements of Income YEAR ENDED ---------------------------------------------- SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ---------------------------------------------- (Amounts in thousands, except per share data) Revenues: Restaurant sales $164,389 $159,581 $146,100 Consumer product sales 9,115 8,351 8,477 Franchise income 4,516 4,209 4,129 ---------------------------------------------- 178,020 172,141 158,706 Costs and expenses: Cost of food and beverages 43,994 44,064 39,420 Labor and benefits 54,183 51,868 47,377 Occupancy costs 27,045 26,339 22,925 Other operating costs 16,067 15,890 13,583 General and administrative 13,384 12,155 11,229 Depreciation and amortization 12,469 12,964 10,795 Special charges 4,000 3,937 ---------------------------------------------- 171,142 167,217 145,329 ---------------------------------------------- Operating income 6,878 4,924 13,377 Other expense: Interest expense 2,695 2,358 1,924 Other expense 132 123 20 ---------------------------------------------- 2,827 2,481 1,944 ---------------------------------------------- Income before income taxes 4,051 2,443 11,433 Provision for income taxes 1,378 757 4,230 ---------------------------------------------- Net income $ 2,673 $ 1,686 $ 7,203 ============================================== Earnings per common share $ .22 $ .13 $ .58 ============================================== Weighted-average number of common shares 12,008 12,756 12,364 ============================================== See accompanying notes. 35 36 Uno Restaurant Corporation and Subsidiaries Consolidated Statements of Shareholders' Equity COMMON STOCK ADDITIONAL ------------------ PAID-IN RETAINED TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK TOTAL ---------------------------------------------------------------------------- (Amounts in thousands) Balance at October 2, 1994 9,072 $ 91 $30,613 $25,254 $55,958 Net income 7,203 7,203 Five-for-four stock split 2,275 23 (23) Sale of Common Stock, net of offering costs 2,300 23 22,541 22,564 Exercise of stock options 35 226 226 Purchase of Treasury Stock $ (2,900) (2,900) Tax benefit from exercise of nonqualified stock options 76 76 ----------------------------------------------------------------------------- Balance at October 1, 1995 13,682 137 53,433 32,457 (2,900) 83,127 Net income 1,686 1,686 Exercise of stock options 16 63 63 Purchase of Treasury Stock (7,753) (7,753) Tax benefit from exercise of nonqualified stock options 13 13 ----------------------------------------------------------------------------- Balance at September 29, 1996 13,698 137 53,509 34,143 (10,653) 77,136 Net income 2,673 2,673 Exercise of stock options 57 1 257 258 Purchase of Treasury Stock (9,224) (9,224) Tax benefit from exercise of nonqualified stock options 37 37 ----------------------------------------------------------------------------- Balance at September 28, 1997 13,755 $138 $53,803 $36,816 $(19,877) $70,880 ============================================================================= See accompanying notes. 36 37 Uno Restaurant Corporation and Subsidiaries Consolidated Statements of Cash Flows YEAR ENDED ------------------------------------------------ SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ------------------------------------------------ (In thousands) OPERATING ACTIVITIES Net income $ 2,673 $ 1,686 $ 7,203 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 12,573 13,064 10,896 Deferred income taxes (2,986) (2,462) 291 Provision for deferred rent 612 688 637 Loss (gain) on disposal of equipment (15) 19 (28) Special charges 4,000 3,937 Changes in operating assets and liabilities, net of effects from business acquisitions: Royalties receivable (18) 15 (172) Inventory 7 (107) (482) Prepaid expenses and other assets (1,888) (903) (3,736) Accounts payable and other liabilities 4,620 1,157 2,055 Income taxes payable 495 1,455 (528) ------------------------------------------------ Net cash provided by operating activities 20,073 18,549 16,136 INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements (19,982) (22,909) (39,864) Proceeds from sale of fixed assets 300 144 42 Purchase of business, net of cash acquired (316) ------------------------------------------------ Net cash used in investing activities (19,682) (22,765) (40,138) FINANCING ACTIVITIES Proceeds from revolving line of credit 71,193 53,103 60,950 Principal payments on debt and capital lease obligations (62,997) (40,687) (56,570) Issuance of Common Stock 22,564 Purchase of Treasury Stock (9,224) (7,753) (2,900) Exercise of stock options 295 76 302 ------------------------------------------------ Net cash (used) provided by financing activities (733) 4,739 24,346 ------------------------------------------------ Increase (decrease) in cash (342) 523 344 Cash at beginning of year 1,828 1,305 961 ------------------------------------------------ Cash at end of year $ 1,486 $ 1,828 $ 1,305 ================================================ See accompanying notes. 37 38 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements September 28, 1997 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company owns and operates 92 "Pizzeria Uno...Chicago Bar & Grill" casual dining, full-service restaurants primarily from New England to Virginia, as well as Florida, Chicago and Denver, and franchises 66 units in 18 states, the District of Columbia, Puerto Rico and Seoul, Korea. The Company also operates a Mexican restaurant in Chicago, several take-out and quick-serve Uno units in test, and a refrigerated and frozen consumer foods division. The consumer foods business supplies American Airlines, movie theaters, hotels, supermarket and wholesale club chains with both frozen and refrigerated Pizzeria Uno brand products, as well as certain private label products. BASIS OF PRESENTATION The consolidated financial statements include the accounts of Uno Restaurant Corporation and its wholly-owned subsidiaries (the Company). All intercompany accounts and transactions have been eliminated in consolidation. FISCAL YEAR The Company's fiscal year ends on the close of business on the Sunday closest to September 30 in each year. INVENTORY Inventory, which consists of food, beverages and store supplies, is stated at the lower of cost (first-in, first-out method) or market. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements are recorded at cost. The Company provides for depreciation of buildings and equipment using the straight-line method over 25 and 7 years, respectively. Leasehold improvements are amortized over the shorter of their estimated useful lives or the term of the lease (generally 20 years) using the straight-line method. -38- 39 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) REVENUE RECOGNITION-FRANCHISE FEES The Company defers franchise fees until the franchisee opens the restaurant and all services have been substantially performed; at that time, the fee is recorded as income. Royalty income is recorded as earned based on rates provided by the respective franchise agreements. Expenses related to franchise activities amounted to approximately $3,441,000, $3,409,000 and $1,889,000 in fiscal years 1997, 1996 and 1995, respectively. A summary of full-service franchise unit activity is as follows: YEAR ENDED ------------------------------------- SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ------------------------------------- Units operating at beginning of year 63 59 59 Units opened 6 5 5 Units closed (3) (1) (5) ------------------------------------- Units operating at end of year 66 63 59 ===================================== PRE-OPENING COSTS Pre-opening costs consist principally of labor costs associated with the hiring and training of operating personnel as well as initial food and beverage purchases. These costs are deferred until the restaurants open and are amortized over 12 months from that point using the straight-line method. INCOME TAXES Deferred income taxes are determined utilizing the liability method. Under this method, deferred tax assets and liabilities are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. 40 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON SHARE Earnings per common share amounts are calculated based upon the weighted-average number of shares outstanding, giving effect to the dilutive effect of stock options. USE OF ESTIMATES The preparation of the consolidated financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and costs and expenses during the reporting period. Actual results could differ from those estimates. IMPAIRMENT OF LONG-LIVED ASSETS In the second quarter of fiscal 1996, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," which establishes criteria for the recognition and measurement of impairment losses associated with long-lived assets (see Note 2). STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB No. 25) in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under SFAS No. 123, "Accounting for Stock-Based Compensation," as this alternative requires the use of option valuation models that were not developed for use in valuing employee stock options. Under APB No. 25, since the exercise price of options granted under these plans equals the market price of the underlying stock on the date of grant, no compensation expense is required. 41 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING PRONOUNCEMENTS In February 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 128, "Earnings Per Share" which simplifies the calculation of earnings per share and creates a standard of comparability to the recently issued International Accounting Standard No. 33, "Earnings Per Share." Since early application is not permitted, the Company will adopt this standard in the first quarter of fiscal 1998. The Company believes the adoption of this standard will not have a material impact on the Company's consolidated results of operations. In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information." Both SFAS No. 130 and SFAS No. 131 are effective for fiscal years beginning after December 15, 1997. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's consolidated financial statements. RECLASSIFICATIONS Certain amounts in the accompanying financial statements have been reclassified to conform with the 1997 presentation. 2. SPECIAL CHARGES During the third quarter of fiscal 1997, the Company recorded a special charge in the amount of $4.0 million, consisting of an asset impairment charge of $3.3 million and store closing costs of $0.7 million. The $3.3 million asset impairment charge was recorded to reduce the carrying value of equipment and leaseholds at two full-service Uno restaurants to their fair market value and resulted from weak operating results and continuing negative cash flow. The store closure costs represent remaining minimum lease payments of one full-service Uno restaurant which was closed during 1997. As discussed in Note 1, the Company adopted SFAS No. 121 in the second quarter of fiscal 1996, and recorded a pre-tax charge of $3.9 million to adjust the carrying value of those assets identified as impaired. The charge consisted of $1.0 million for three Uno 42 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. SPECIAL CHARGES (CONTINUED) Pizza Bakery's, $1.6 million for one full-service Uno restaurant and $1.3 million for certain assets of three Bay Street restaurants. The assets written down include the Bay Street trademark and leasehold improvements and equipment of the aforementioned stores. Based upon operating and cash flow results, management believed that these units would likely continue to generate cash flow losses and therefore reduced the carrying value of the impaired assets to fair market value. 3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following: SEPTEMBER 28 SEPTEMBER 29 1997 1996 -------------------------- (In thousands) Land $ 15,883 $ 14,796 Buildings 25,265 22,037 Equipment 49,802 45,690 Leasehold improvements 87,047 82,013 Construction in progress 4,201 2,120 -------------------------- 182,198 166,656 Less allowances for depreciation and amortization 56,841 46,146 -------------------------- $125,357 $120,510 ========================== 4. RELATED-PARTY TRANSACTIONS The Company leases three buildings from its principal shareholder for a restaurant and corporate office space. Rent expense in the amount of approximately $455,000 was charged to operations in each of the fiscal years presented. The Company believes that the terms of these leases approximate fair rental value. The Company's President and his brother own and operate four franchised restaurants and one of the directors of the Company has a partnership interest in a franchised restaurant. These franchisees pay royalties to the Company under standard franchise agreements. 43 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. LEASES The Company conducts the majority of its operations in leased facilities, which are accounted for as capital or operating leases. The leases typically provide for a base rent plus real estate taxes, insurance and other expenses, plus additional contingent rent based upon revenues of the restaurant. Assets held under capital leases were $2,881,000 at September 28, 1997 and September 29, 1996. Accumulated amortization amounted to $613,000 at September 28, 1997 and $480,000 at September 29, 1996. Capital lease asset amortization is included in depreciation and amortization. At September 28, 1997, the minimum rental commitments under all noncancelable capital and operating leases with initial or remaining terms of more than one year are as follows: CAPITAL OPERATING FISCAL YEAR LEASES LEASES --------------------- (In thousands) 1998 $ 260 $ 9,420 1999 260 9,321 2000 223 9,236 2001 75 9,311 2002 42 9,365 Thereafter 1,209 78,331 -------------------- 2,069 $124,984 Less amount representing interest 1,013 ======== ------ Present value of net minimum lease payments 1,056 Less current portion of obligation under capital leases 189 ====== Long-term obligation under capital leases $ 867 ====== Total expenses for all operating leases were as follows: MINIMUM CONTINGENT FISCAL YEAR LEASE RENTALS RENTALS TOTAL --------------------------------------- (In thousands) 1997 $12,641 $ 811 $13,452 1996 12,105 956 13,061 1995 10,492 1,017 11,509 44 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. LEASES (CONTINUED) Certain operating lease agreements contain free rent inducements and scheduled rent increases which are being amortized over the terms of the agreements, ranging from 15 to 20 years, using the straight-line method. The deferred rent liability, included in other liabilities, amounted to $4,596,000 at September 28, 1997 and $3,984,000 at September 29, 1996. 6. FINANCING ARRANGEMENTS Long-term debt consists of the following: SEPTEMBER 28 SEPTEMBER 29 1997 1996 -------------------------- (In thousands) Revolving credit and note agreement $40,480 $37,085 8.75%, 15-year secured mortgage notes payable 4,979 -------------------------- 45,459 37,085 Less current portion 2,943 -------------------------- $42,516 $37,085 ========================== On November 4, 1997, the Company entered into a new $55,000,000 credit facility, which includes a $26.6 million unsecured revolver due in October, 2002, a $8.4 million term loan due in 20 quarterly installments of $420,000 plus interest commencing on January 31, 1998 and a $20.0 million secured mortgage facility due in 27 quarterly installments of $500,000 plus interest also commencing on January 31, 1998 with a final payment due in October, 2004. The Company is entitled to borrow, at its discretion, amounts which accrue interest at variable rates based on either the LIBOR or prime rate. At September 28, 1997, interest on outstanding borrowings under the previous revolving line of credit ranged from 6.875% to 8.50%. A commitment fee of approximately .375% is accrued on unused borrowings under the new credit agreement. The note agreements contain certain financial and operating covenants, including maintenance of certain levels of net worth and income. At September 28, 1997, the carrying value of the Company's long-term debt approximated fair market value. 45 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 6. FINANCING ARRANGEMENTS (CONTINUED) Annual principal payments of debt are as follows (in thousands): Year ---- 1998 $ 2,943 1999 3,880 2000 3,898 2001 3,918 2002 3,940 Thereafter 26,880 ------- $45,459 ======= In October 1995, the Company entered into a five-year interest rate swap agreement to convert a portion of its floating rate debt to a fixed-rate basis, thereby reducing the potential impact of interest rate increases on future income. The notional amount of this interest rate swap agreement was $20 million and the fixed swap rate was 6.04%. The differential to be paid or received is accrued as interest rates change and recognized as an adjustment to interest expense related to the debt. The Company made cash payments of interest of $3,044,000, $2,845,000 and $2,445,000 during fiscal years 1997, 1996 and 1995, respectively. The Company capitalized interest during the construction period of new restaurants which amounted to $313,000 in fiscal year 1997, $290,000 in fiscal year 1996 and $509,000 in fiscal year 1995 and included those amounts in leasehold improvements. The Company provides certain limited lease financing to qualified franchisees through an agreement with an unaffiliated finance company. The Company's maximum guarantee under the agreement was $1,000,000 at September 28, 1997. The Company has also guaranteed up to a maximum of $400,000 of future lease payments in the event of default by a specific franchisee. 46 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. COMMON STOCK TRANSACTIONS In June 1997, the Company initiated a Dutch Auction self-tender offer for up to 1,000,000 shares of the Company's common stock and in certain circumstances, reserved the right to purchase in excess of 1,000,000 shares. Under the terms of the offer, the Company invited stockholders to tender their shares at prices ranging from $6.00 to $7.50 per share. In July 1997, the Company completed the tender offer for 1,207,624 shares of its common stock at $7.00 per share. In July 1995, the Board of Directors authorized the purchase of up to 500,000 shares of the Company's common stock, of which 358,100 shares were purchased in fiscal 1995. In October 1995, the Board of Directors increased its authorization to purchase up to 1.5 million shares of the Company's stock, of which the balance of 1,141,900 shares were purchased in fiscal 1996. In January 1997, the Board of Directors authorized the purchase of up to 500,000 additional shares of the Company's common stock, of which 82,973 shares were purchased in fiscal 1997, prior to the Dutch Auction. 8. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other current assets consist of the following: SEPTEMBER 28 SEPTEMBER 29 1997 1996 -------------------------- (In thousands) Prepaid insurance $ 430 $ 422 Product rebates receivable 402 342 Prepaid rent 220 328 Prepaid operating costs 58 213 Other accounts receivable 849 1,082 -------------------------- $1,959 $2,387 ========================== 47 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. ACCRUED EXPENSES Accrued expenses consist of the following: SEPTEMBER 28 SEPTEMBER 29 1997 1996 ---------------------------- (In thousands) Accrued store closure $1,618 $ 413 Accrued rent 1,334 1,379 Accrued insurance 1,103 962 Accrued utilities 760 768 Accrued vacation 632 489 Accrued advertising 561 308 Accrued professional fees 413 172 Franchise fee deposit 348 117 Other 794 425 ---------------------------- $7,563 $5,033 ============================ 10. EMPLOYEE BENEFIT PLANS The Company maintains a 401(k) Savings and Employee Stock Ownership Retirement Plan (the Plan) for all of its eligible employees. The Plan is maintained in accordance with the provisions of Section 401(k) of the Internal Revenue Code and allows all employees with at least one year of service to make annual tax-deferred voluntary contributions up to 15% of their salary. Under the Plan, the Company matches a specified percentage of the employees contributions, subject to certain limitations. Total contributions made to the plan were $229,000, $161,000 and $153,000 in fiscal years 1997, 1996 and 1995, respectively. The Company sponsors a Deferred Compensation Plan which allows officers to defer up to 20% of their annual compensation. These assets are placed in a "rabbi trust" and are presented as assets of the Company in the accompanying balance sheet as they are available to the general creditors of the Company in the event of the Company's insolvency. The related liability of $727,000 at September 28, 1997 and $566,000 at September 29, 1996 is included in other liabilities in the accompanying balance sheet. Deferred compensation expense in the amounts of $161,000, $140,000 and $173,000 were recorded in fiscal years 1997, 1996 and 1995 respectively. 48 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. INCOME TAXES Deferred taxes are attributable to the following temporary differences: SEPTEMBER 28 SEPTEMBER 29 1997 1996 ---------------------------- (In thousands) Deferred tax assets: Deferred rent $1,842 $1,604 Accrued expenses 1,738 715 Asset impairment charge 1,630 1,123 Depreciation 1,113 123 Franchise fees 291 148 Other 309 261 ----------------------------- Total deferred tax assets 6,923 3,974 Deferred tax liabilities: Deferred pre-opening costs 217 243 Other 107 118 ----------------------------- Total deferred tax liabilities 324 361 ----------------------------- Net deferred tax assets $6,599 $3,613 ============================= 49 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. INCOME TAXES (CONTINUED) The provision (credit) for income taxes consisted of the following: YEAR ENDED ------------------------------------------ SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ------------------------------------------ (In thousands) Current: Federal $ 3,448 $ 2,532 $3,098 State 916 687 841 ------------------------------------------ 4,364 3,219 3,939 Deferred: Federal (2,435) (1,995) 228 State (551) (467) 63 ------------------------------------------ (2,986) (2,462) 291 ------------------------------------------ Income tax expense $ 1,378 $ 757 $4,230 ========================================== A reconciliation of the effective tax rates with the federal statutory rates is as follows: YEAR ENDED ------------------------------------------ SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ------------------------------------------ Federal statutory rate 34.0% 34.0% 34.1% State income taxes, net of federal income tax benefit 4.6 5.0 4.9 Tax credits (7.1) (9.8) (2.6) Other 2.5 1.8 .6 ------------------------------------------ Effective income tax rate 34.0% 31.0% 37.0% ========================================== The Company made income tax payments of $3,936,000, $2,416,000 and $3,667,000 during fiscal years 1997, 1996 and 1995, respectively. 50 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION During 1997, the Company established the 1997 Employee Stock Option Plan (the Plan) which provides for the granting of options to purchase up to 1.0 million shares of common stock. Options may be granted at an exercise price not less than fair market value on the date of grant. All options vest at a rate of 20% per year beginning one year after the date of grant. All options terminate ten years after the date of grant. The Company's 1987 Employee Stock Option Plan which contains similar provisions to the 1997 Plan was terminated during fiscal 1997. The 1.3 million options granted under that plan will continue to vest at a rate of 20% per year beginning one year after the date of grant, with the exception of 93,750 options granted to the President of the Company, which vest immediately at the date of grant. All options terminate ten years after the date of grant, with the exception of the 112,500 options granted to the Chairman, which terminate five years after the date of grant. The 1989 and 1993 Non-Qualified Stock Option Plans for Non-Employee Directors (the Directors' Plans) provide for up to 101,563 shares of Common Stock issuable upon exercise of options granted under the Directors' Plans. The 1989 and 1993 Directors' Plans terminate on November 10, 1999 and August 17, 2002, but such termination shall not affect the validity of options granted prior to the dates of termination. Options are to be granted at an exercise price equal to the fair market value of the shares of Common Stock at the date of grant. Options granted under the Directors' Plans may be exercised commencing one year after the date of grant and ending ten years from the date of grant. In August 1997, the Company's Board of Directors authorized an executive stock option program which allows for the granting of options to purchase up to 1.2 million shares of common stock. Options will vest upon the achievement of certain financial targets. The plan is subject to stockholder approval. Pro forma information regarding net income and earnings per share is required by SFAS No. 123, and has been determined as if the Company had accounted for its employee stock options under the fair value method of that statement. The Company determined that the pro forma information for fiscal 1996 and fiscal 1997 was not material to the Company's consolidated results of operations, however, the effects of expensing the estimated fair value of stock options are not necessarily indicative of the effects on reporting results of operations for future years as the pro forma calculations only include one and two years, respectively, of option grants under the Company's plans. 51 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. STOCK-BASED COMPENSATION (CONTINUED) The fair value for these options was estimated at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal 1997 and fiscal 1996: risk-free interest rates of 6.6% and 7.0%, respectively, no dividend yield, the volatility factor of the expected market price of the Company's common stock was 38.2% and a weighted-average expected life of the options of five years. Information regarding the Company's stock option plans is summarized below: YEAR ENDED ---------------------------------------------------------------------- SEPTEMBER 28 SEPTEMBER 29 OCTOBER 1 1997 1996 1995 ---------------------------------------------------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------------------------------------------------------------------- Outstanding at beginning of period 1,289,248 $7.28 1,200,287 $7.61 1,043,735 $7.33 Granted 211,609 6.59 295,508 6.42 277,489 8.46 Exercised (55,667) 4.44 (15,256) 4.74 (41,400) 5.43 Canceled (207,783) 7.06 (191,291) 8.21 (79,537) 8.08 ---------------------------------------------------------------------- Outstanding at end of period 1,237,407 $7.33 1,289,248 $7.28 1,200,287 $7.61 ====================================================================== Options exercisable at end of period 691,491 612,526 538,932 ========= ========= ========= Options available for grant at end of period 854,248 377,279 481,496 ========= ========= ========= Exercise prices for options outstanding ranged from $4.74 to $14.50. Between $4.74 and $7.41, 753,556 and 365,482 options were outstanding and exercisable, respectively, and between $7.42 and $14.50, 483,851 and 326,009 were outstanding and exercisable, respectively. The weighted-average contractual life of the options is 7.1 years. The Company has 2.1 million shares of common stock reserved for issuance at September 28, 1997. 52 Uno Restaurant Corporation and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. QUARTERLY FINANCIAL DATA (UNAUDITED) QUARTER ENDED --------------------------------------------------------- DECEMBER 29 MARCH 30 JUNE 29 SEPTEMBER 28 1996 1997 1997 1997 --------------------------------------------------------- (Amounts in thousands, except per share information.) Revenues $42,164 $42,711 $45,387 $47,758 Gross profit (1) 8,345 8,618 9,604 10,545 Operating income (loss) 2,265 1,899 (908) 3,622 Income (loss) before income taxes 1,655 1,233 (1,619) 2,782 Net income (loss) 1,092 815 (1,070) 1,836 Earnings per common share .09 .07 (.09) .16 QUARTER ENDED --------------------------------------------------------- DECEMBER 31 MARCH 31 JUNE 30 SEPTEMBER 1995 1996 1996 29 1996 --------------------------------------------------------- (Amounts in thousands, except per share information.) Revenues $40,560 $40,287 $44,694 $46,600 Gross profit (1) 7,754 7,268 9,417 10,574 Operating income (loss) 1,472 (3,525) 2,963 4,014 Income (loss) before income taxes 852 (4,129) 2,308 3,412 Net income (loss) 545 (2,642) 1,477 2,306 Earnings per common share .04 (.21) .12 .19 (1) Restaurant and consumer product sales, less cost of food and beverages, labor and benefits, occupancy and other operating expenses, excluding advertising expenses. 53 EXHIBIT INDEX ------------- EXHIBIT NUMBER PAGE - -------------- ---- (3)(a) Restated Certificate of Incorporation * (3)(b) By-laws * (4)(a) Specimen Certificate of Common Stock * (10)(a) Lease between the Company and Aaron D. Spencer dated March 30, 1987 for premises in West Roxbury, Massachusetts * (10)(b) Lease between the Company and Aaron D. Spencer dated March 30, 1987 for premises in Boston, Massachusetts * (10)(c) Lease between Uno Restaurants, Inc. and Lisa S. Cohen and Mark N. Spencer dated February 1, 1990 for premises in West Roxbury, Massachusetts * (10)(d) Form of Franchise Agreement and Area Franchise Agreement * (10)(e) Uno Restaurant Corporation 1987 Employee Stock Plan, and As Amended * (10)(f) Uno Restaurant Corporation 1989 Non-Qualified Stock Option Plan for Non-Employee Directors * (10)(g) Uno Restaurant Corporation 1993 Non-Qualified Stock Option Plan for Non-Employee Directors as amended (10)(h) Uno Restaurant Corporation 1997 Employee Stock Option Plan * (10)(I) Form of Indemnification Agreement between the Company and its Directors * (10)(j) Variable Royalty Plan for Franchises. * (10)(k) Interest Rate Swap Agreement between Fleet Bank of Massachusetts, N.A. and Uno Restaurants, Inc. Dated October 25, 1995. * (10)(l) Note between the Company and Craig S. Miller dated January 23, 1996. * (10)(m) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and Mr. Spencer and Mr. Miller. (10)(n) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its Senior Vice Presidents. (10)(o) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its other officers. (10)(p) Master Lease-Purchase Agreement between ORIX Credit Alliance, Inc., as Lessor, and Massachusetts Industrial Finance Agency, as Lessee, dated April 19, 1994, and Master Sublease-Purchase Agreement between Massachusetts Industrial Finance Agency, as Sublessor, and Uno Foods, Inc. as Sublessee, dated April 19, 1994. * (10)(q) MetLife Capital Financial Corporation Mortgage Notes: $1,875,000 8.75% Note dated December 23, 1996 of 8250 International Drive Corporation, $825,000 8.75% Note dated December 23, 1996 of Saxet Corporation, $900,000 8.75% Note dated December 23, 1996 of Saxet Corporation, $675,000 8.75% Note dated January 30, 1997 of Saxet Corporation, $825,000 8.75% Note dated February 27, 1997 of Saxet Corporation, each payable to the order of MetLife Capital Financial Corporation. (10)(r) Note between the Company and Craig S. Miller dated April 1, 1997. -53- 54 (10)(s) $55,000,000 Revolving Credit and Term Loan Agreement dated as of November 4, 1997 by and among Uno Restaurants, Inc. and Saxet Corp., as Borrower, Uno Foods Inc., Pizzeria Uno Corporation, URC Holding Company, Inc. and Uno Restaurant Corporation, as Guarantors, and Fleet National Bank, as Agent and BankBoston, N.A. as Co-Agent (without exhibits). (11) Statement Re: Computation of Per Share Earnings. (21) Subsidiaries of the Registrant. (23) Consent of Ernst & Young LLP, Independent Auditors. (27) Financial Data Schedule. *In accordance with Rule 12b-23 and Rule 12b-32 under the Securities Exchange Act of 1934, as amended, reference is made to the documents previously filed with the Securities and Exchange Commission, which documents are hereby incorporated by reference. -54-