-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Db5JZXPOqwopLz3NpBhOMeB9aM449pcwFVtKffDnMW6WHKP/I5xN/m+k0Uz1VAF/ BjyxJ/uZlYXReEEFfHdHsg== 0001047469-98-044799.txt : 19981228 0001047469-98-044799.hdr.sgml : 19981228 ACCESSION NUMBER: 0001047469-98-044799 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19980927 FILED AS OF DATE: 19981222 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNO RESTAURANT CORP CENTRAL INDEX KEY: 0000812075 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-EATING PLACES [5812] IRS NUMBER: 042953702 STATE OF INCORPORATION: DE FISCAL YEAR END: 0929 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-09573 FILM NUMBER: 98773797 BUSINESS ADDRESS: STREET 1: 100 CHARLES PARK RD CITY: WEST ROXBURY STATE: MA ZIP: 02132 BUSINESS PHONE: 6173239200 MAIL ADDRESS: STREET 1: 100 CHARLES PARK ROAD CITY: WEST ROXBURY STATE: MA ZIP: 02132 10-K 1 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 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 27, 1998 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)
(617) 323-9200 Registrant's telephone number, including area code 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 / / 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 27, 1998, was $27,278,146 based on the closing price of $6.375 on that date on the New York Stock Exchange. As of November 27, 1998, 10,342,083 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 23, 1999 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 Annual Report on Form 10-K for the fiscal year ended September 28, 1997, 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, the registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1997 and the registrant's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1998, are incorporated by reference in Part IV of this Report. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- PART I ITEM 1. BUSINESS GENERAL AND DEVELOPMENTS DURING FISCAL YEAR 1998 The Company owns and operates or franchises a total of 163 restaurants, including 94 owned and 63 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. For the fiscal year ended September 27, 1998, Company-owned restaurants averaged $1,854,000 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. Over the last several years the Company has transformed itself to "Pizzeria Uno...Chicago Bar & Grill" to distinguish its restaurants from quick service pizza, pizza and pasta, and full-service Italian restaurants. The culmination of this transformation came in June 1998 as the Company implemented a systemwide rollout of its new menu initiative which was designed to provide enhanced quality and value. This menu provides customers with enhanced value through larger portions of higher quality food that is consistent with the quality service and facilities that they have come to expect in their dining experience at Uno's. The foundation for this strategy was established several years ago when the Company expanded 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 accelerate 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 to provide a high level of energy and excitement for guests and was intended to make the restaurants more consistent with the Company's 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 implementing these strategic initiatives and by keeping its menu offerings fresh and providing a relaxed, yet fun atmosphere for its patrons, guest satisfaction and frequency will be enhanced and its position in the casual dining segment will be strengthened. During the fiscal year ended September 27, 1998, the Company opened four full-service restaurants and closed two full-service restaurants. Five full-service franchised restaurants opened during the fiscal year and eight full-service franchise restaurants closed. During the fiscal year ending October 3, 1999, the Company anticipates opening up to six Company-owned full-service restaurants and up to twelve franchised restaurants. The timing of these planned openings is subject to various factors, including locating satisfactory sites and negotiating leases and franchise agreements. In fiscal 1998 the Company elected to adopt the provisions of Statement of Position (SOP) 98-5 "Reporting the Costs of Start-up Activities" which requires that pre-opening costs be expensed as incurred. In accordance with the SOP, the adoption was reported as a cumulative effect of a change in accounting principle and was recognized in the first quarter of fiscal 1998. The cumulative effect of the change in accounting net of applicable taxes was $636,000, or $0.06 per share on a diluted basis. 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 3 for $8.4 million and a $26.6 million revolving loan due in October, 2002. 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 and are secured by certain real properties owned by the Company. The agreement contains certain financial covenants including a cash flow coverage ratio and consolidated leverage ratio. In December 1997, the Board of Directors authorized the purchase of 500,000 shares of its Common Stock in the open market and in April 1998, the Board increased the authorization to 1,000,000 shares. Under these authorizations, the Company purchased 391,996 shares during the fiscal year. In September 1998, 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 $7.00 nor less than $5.75 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 November 5, 1998, the Company announced that it had repurchased 274,721 shares at a price of $7.00 per share. The total number of shares purchased represented approximately 3% of the shares outstanding at the time. 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 1998, the Company's average check per guest for full service Company-owned restaurants was approximately $10.50. For fiscal 1998, 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 guests. The Company now has 15 of these prototypes open, including seven new restaurant openings during fiscal 1997 and two restaurants in fiscal 1998. 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 latest variations of the Company-owned prototype units have been very encouraging and will continue to be monitored as they 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 4 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 27, 1998, 81 are located in leased facilities and 19 are fee owned properties. See "Item 2. Properties. 5 RESTAURANT LOCATIONS The following tables provide the locations for Company-owned and franchised restaurants as of November 27, 1998. COMPANY-OWNED RESTAURANTS (100) COLORADO (3) Aurora Greenwood (a) Westminster CONNECTICUT (6) Danbury Fairfield Manchester Milford Newington West Hartford FLORIDA (6) Altamonte Daytona Beach Kissimmee Lake Mary (a) Orlando (2)(a) ILLINOIS (10) Aurora Chicago (4)(a)(b) Crestwood Gurnee Mills (a) Lombard Schaumburg Vernon Hills (a) MAINE (2) Bangor Portland (a) MARYLAND (6) Baltimore Bel Air Bethesda Ellicott City (a) Towson Waldorf MASSACHUSETTS (25) Boston (5) Bellingham Braintree Brockton Burlington Cambridge (2) Danvers Dedham Framingham Hanover Hyannis (a) Kingston Lynnfield (a) Newton Revere Springfield Waltham (2)(c) Westborough Woburn MISSOURI (1) St. Louis NEW HAMPSHIRE (3) Concord Manchester Nashua NEW JERSEY (2) Paramus Woodbridge NEW YORK (18) Albany Amherst (a) Henrietta Latham Lynbrook Massapequa New York City Bayside Bay Ridge Forest Hills Manhattan (5) Syracuse Victor Vestal Yonkers OHIO (2) Columbus (2)(a) PENNSYLVANIA (3) Philadelphia (2)(a) Pittsburgh RHODE ISLAND (1) Warwick VERMONT (1) Burlington (a) VIRGINIA (9) Ballston Fairfax Falls Church Merrifield Newport News Norfolk Potomac Mills (a) Reston Williamsburg (a) WASHINGTON, DC (2) Cleveland Park Union Station - ------------------------ See footnotes on next page 6 FRANCHISED RESTAURANTS (69) DOMESTIC (67) ARIZONA (3) Mesa Phoenix Tempe CALIFORNIA (12) Cupertino Fremont Los Angeles Oakland Sacramento San Diego (2) San Francisco (2) Santa Clara Visalia West Hollywood FLORIDA (3) Miami Orlando (2) INDIANA (2) Indianapolis Merrillville KENTUCKY (2) Lexington Louisville MARYLAND (1) Deep Creek MASSACHUSETTS (3) Holyoke Springfield (2)(c) MICHIGAN (2) Birch Run Bloomfield MINNESOTA (2) Minnetonka Edina NEVADA (1) Las Vegas NEW JERSEY (4) Cherry Hill Secaucus South Plainfield Wayne NEW YORK (2) Poughkeepsie White Plains OHIO (6) Cincinnati (3) Cleveland Dayton Mentor OKLAHOMA (1) Tulsa PENNSYLVANIA (7) Doylestown King of Prussia Langhorne Media Philadelphia (2) Plymouth Meeting PUERTO RICO (5) Bayamon Carolina San Juan (2)(c) San Patricio TENNESSEE (1) Bristol TEXAS (4) Addison Arlington Ft. Worth Houston WASHINGTON, DC (1) Georgetown WASHINGTON (2) Lynnwood Spokane WISCONSIN (3) Milwaukee Madison (2) INTERNATIONAL (2) KOREA (2) Seoul (2)(c) - ------------------------ (a) Owned property (b) Includes one Mexican restaurant and one limited seating take-out kiosk. (c) Includes one limited seating, take-out restaurant. 7 UNIT ECONOMICS For the fiscal year ended September 27, 1998, the 90 Company-owned restaurants open for the entire fiscal year generated average restaurant sales of approximately $1,856,000, average restaurant operating income of approximately $229,000 (or 12.3% of sales) and average restaurant operating cash flow of approximately $348,000 (or 18.7% of sales). The 11 Company-owned restaurants opened in fiscal 1997 and fiscal 1998 had an average cash investment of approximately $1.7 million 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 1998, the Company opened four restaurants in existing markets. In fiscal 1999, 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 worldwide, focusing on South America, Southeast Asia, Mexico and Canada. During July 1998, the Company signed an agreement 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. During fiscal 1998, the Company also signed letters of intent for two domestic multi-unit development agreements in the mid-Atlantic region of the United States. In October 1998, the Company signed an area development agreement for the development of 10 Pizzeria Uno restaurants over six and one-half years in North Carolina and South Carolina. In fiscal 1998, five full-service franchised restaurants were opened, in addition to a takery unit in Seoul, Korea, and eight full-service franchised restaurants were closed. During fiscal 1999, the Company expects franchisees to open approximately ten to twelve restaurants. See "Item 1. Franchise Program." OTHER BUSINESS DEVELOPMENTS The Company continues to expand its consumer products business principally through distribution of its deep-dish pizza in the fresh deli and frozen food sections of approximately 1,000 supermarkets and wholesale 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 continues to supply frozen Pizzeria Uno brand, Chicago-style deep-dish pizza to American Airlines for service on its flights. During fiscal 1998, the Company began providing Pizzeria Uno brand, Chicago-style deep-dish pizza for sale to a third party at the Houston Airport. The Company also provides Pizzeria Uno brand pizzas and calzones to over 300 hotel locations and pizza products at the concession areas in approximately 60 General Cinema theaters. Several other branded and private label tests are underway with movie theater chains, hotel chains and major foodservice providers. 8 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 16 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 most 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 1998, the Company spent 2.8% of restaurant and consumer product sales on advertising and marketing. The Company relies primarily on radio, direct mail and print advertising. Through an advertising cooperative fund, the Company prepares regional and local advertising materials and also produces menus and 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, with support from the Company, 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. 9 FRANCHISE PROGRAM As of September 27, 1998, the Company had 63 franchised Pizzeria Uno restaurants and three Uno Pizza Takery's operated by 34 franchisees located in 19 states, the District of Columbia, Puerto Rico and Seoul, Korea. The Company has dedicated significant resources to its franchise program and will continue to aggressively pursue domestic as well as international expansion opportunities. The Company is in continual discussions with existing and prospective franchisees for future development opportunities and expects to grant additional franchises to qualified applicants with restaurant related operating experience and requisite financial resources, both domestically and internationally. 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. During July 1998, the Company signed an agreement 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. During fiscal 1998, the Company also signed letters of intent for two domestic multi-unit development agreements in the mid-Atlantic region of the United States. In October 1998, the Company signed an area development agreement for the development of 10 Pizzeria Uno restaurants over six and one-half years in North Carolina and South Carolina. See "--General and Developments During Fiscal Year 1998" and "--Restaurant Expansion." New domestic franchisees are required to pay at the time the development agreement is signed a non-refundable fee of $22,500 per restaurant committed to be developed, $17,500 of this amount will be applied to the initial franchise fee for each Restaurant described in the development schedule. The Company's current franchise agreement also requires franchisees to pay a unit franchise fee of $35,000 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 27, 1998. 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%. Eleven 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 ongoing basis. Based upon these reports, the Company believes that the average annualized sales for its franchised restaurants in fiscal 1998 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 current franchise agreements have an initial term of 15 years with one successive ten year renewal period at the option of the franchisee, provided that the agreement has not previously been terminated by either party. Upon each renewal, 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. 10 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. This program provides an aggregate of $25 million to the Uno franchise system. Under this agreement, the Company guarantees financing provided by the finance company up to the greater of $1,000,000 or 10% of the aggregate amount funded to qualified franchisees. At September 27, 1998, there were approximately $1.1 million of loans outstanding to franchisees. 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 27, 1998, the Company employed approximately 5,590 persons, 123 of whom were corporate personnel and 366 of whom were field service or restaurant managers and trainees. The remaining employees were restaurant personnel, many of whom were part-time. Of the 123 corporate employees, 66 were in management positions and 57 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," "Pizzeria Due," and "Pizzeria Uno... Chicago Bar & Grill." The Company's registrations of its significant marks are subject to renewal at various times from 1998 to 2007. However, the Company intends to renew its registration of such marks prior to expiration. The Company's policy is to pursue registration 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 received several other international trademark registrations. See "--General and Developments During Fiscal Year 1998" 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." 11 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 clubs. 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................................ 67 Chairman and Director 1979 Craig S. Miller................................. 49 President, Chief Executive Officer and Director 1985 Paul W. MacPhail................................ 35 Executive Vice President and Chief Operating -- Officer Robert M. Brown................................. 51 Senior Vice President-Administration and 1987 Director Alan M. Fox..................................... 51 Senior Vice President-Purchasing, President-Uno -- Foods Inc. Damon M. Liever................................. 44 Senior Vice President-Marketing -- Robert M. Vincent............................... 46 Senior Vice President-Finance, Chief Financial -- Officer and Treasurer
12 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 33 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 since 1986 and was appointed Chief Executive Officer on September 30, 1996. From 1986 to December 1998 he was also Chief Operating Officer. 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 31 years of experience in the restaurant industry. Mr. MacPhail was appointed Executive Vice President and Chief Operating Officer on December 1, 1998. Prior to that Mr. MacPhail had 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 15 years of experience in the restaurant industry. Mr. Brown has been Senior Vice President-Administration since July 1997 and was 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. 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 27 years of experience in the restaurant and food service industries. 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 11 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 22 years experience in accounting and finance. Officers are elected by, and serve at the pleasure of, the Board of Directors. 13 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." 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 concession areas in General Cinema theaters and hotels, as well as fresh, refrigerated pizzas that are sold in approximately 1,000 supermarkets and wholesale club stores throughout New England. This facility provides sufficient capacity to support double the level of sales achieved in fiscal 1998. See "ITEM 1. Other Business Development." As of September 27, 1998, the Company leased 79 and owned 18 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. Restaurant Locations." During fiscal 1998, the Company purchased a property in Vernon Hills, IL for which restaurant operations commenced on November 2, 1998. The Company expects to purchase approximately one or two additional restaurant properties in fiscal 1999. 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. 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 and Mr. Spencer have reached an agreement in principal to extend the lease, and are currently in the stage of finalizing the lease for execution. The Company continues to pay $162,000 of rent per year on a tenancy at will basis in the interim. 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 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 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 are as favorable as 14 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 being used to store Company records and artifacts used in its restaurant properties. ITEM 3. LEGAL PROCEEDINGS As of November 27, 1998, the Company was not a party to any material pending legal proceedings other than ordinary routine litigation incidental to the Company's business. 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"-Registered Trademark- thin crust pizzas who relied upon, and sustained damage as a result of, the alleged misrepresentations. The matter has been settled by the Company reimbursing the Plaintiff for her legal fees not to exceed $5,000. Settlement documents are in the process of being executed. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. 15 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 September 30, 1996 to September 27, 1998:
COMMON STOCK PRICE -------------------- HIGH LOW --------- --------- 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 $ 5.813 FISCAL YEAR ENDED SEPTEMBER 27, 1998 - ----------------------------------------------------------------------------------------------- First Quarter.................................................................................. $ 7.50 $ 6.25 Second Quarter................................................................................. $ 7.375 $ 5.813 Third Quarter.................................................................................. $ 7.688 $ 7.00 Fourth Quarter................................................................................. $ 7.625 $ 5.75
NUMBER OF STOCKHOLDERS As of September 27, 1998, there were approximately 2,300 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. 16 ITEM 6. SELECTED FINANCIAL DATA
FISCAL YEAR ENDED (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) ---------------------------------------------------------- SEPT. 27 SEPT. 28 SEPT. 29 OCT. 1 OCT. 2 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- INCOME STATEMENT DATA: REVENUES Restaurant sales..................................... $ 177,343 $ 164,389 $ 159,581 $ 146,100 $ 112,674 Consumer product sales............................... 9,384 9,115 8,351 8,477 7,418 Franchise income..................................... 4,549 4,516 4,209 4,129 3,973 ---------- ---------- ---------- ---------- ---------- 191,276 178,020 172,141 158,706 124,065 COSTS AND EXPENSES Cost of food and beverages........................... 48,567 43,994 44,064 39,420 30,177 Labor and benefits................................... 58,139 54,183 51,868 47,377 36,935 Occupancy costs...................................... 27,988 27,045 26,339 22,925 18,979 Other operating costs................................ 18,086 16,067 15,890 13,583 10,751 General and administrative........................... 13,661 13,384 12,155 11,229 9,277 Depreciation and amortization........................ 12,183 12,469 12,964 10,795 7,655 Special charges...................................... 4,000 3,937 ---------- ---------- ---------- ---------- ---------- 178,624 171,142 167,217 145,329 113,774 ---------- ---------- ---------- ---------- ---------- OPERATING INCOME..................................... 12,652 6,878 4,924 13,377 10,291 INTEREST AND OTHER EXPENSE........................... 3,661 2,827 2,481 1,944 845 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE INCOME TAXES........................... 8,991 4,051 2,443 11,433 9,446 Provision for income taxes........................... 2,968 1,378 757 4,230 3,690 ---------- ---------- ---------- ---------- ---------- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............................... 6,023 2,673 1,686 7,203 5,756 Cumulative effect of change in accounting principle for pre-opening costs, net of income tax benefit of $313............................................... 636 ---------- ---------- ---------- ---------- ---------- NET INCOME........................................... $ 5,387 $ 2,673 $ 1,686 $ 7,203 $ 5,756 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- NET INCOME PER COMMON SHARE: Income before cumulative effect of change in accounting principle............................... $ 0.55 $ 0.22 $ 0.13 $ 0.60 $ 0.51 Cumulative effect of change in accounting principle.......................................... (0.06) ---------- ---------- ---------- ---------- ---------- Basic net income per common share.................... $ 0.49 $ 0.22 $ 0.13 $ 0.60 $ 0.51 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted net income per common share.................. $ 0.49 $ 0.22 $ 0.13 $ 0.58 $ 0.51 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- WEIGHTED-AVERAGE SHARES OUTSTANDING Basic................................................ 10,873 11,951 12,694 12,079 11,261 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- Diluted.............................................. 10,932 12,008 12,756 12,364 11,360 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
17
FISCAL YEAR ENDED (AMOUNTS IN THOUSANDS, EXCEPT NUMBER OF RESTAURANTS) ---------------------------------------------------------- SEPT. 27 SEPT. 28 SEPT. 29 OCT. 1 OCT. 2 1998 1997 1996 1995 1994 ---------- ---------- ---------- ---------- ---------- BALANCE SHEET DATA: Total assets......................................... $ 143,195 $ 143,732 $ 135,065 $ 125,260 $ 92,153 Long-term debt, net of current portion............... 38,676 42,516 37,085 21,750 17,703 Capital lease obligations, net of current portion.... 666 867 1,056 749 820 Treasury stock....................................... 22,616 19,877 10,653 2,900 Total shareholders' equity........................... 73,669 70,880 77,136 83,127 55,958 OPERATING DATA: SYSTEM-WIDE SALES(a) Company-owned........................................ $ 174,716 $ 160,045 $ 151,178 $ 136,659 $ 110,272 Franchised........................................... 104,723 101,512 94,718 91,670 87,646 ---------- ---------- ---------- ---------- ---------- TOTAL................................................ $ 279,439 $ 261,557 $ 245,896 $ 228,329 $ 197,918 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- AVERAGE RESTAURANT SALES(b) Company-owned........................................ $ 1,854 $ 1,818 $ 1,846 $ 1,925 $ 1,886 Franchised........................................... 1,629 1,579 1,549 1,552 1,488 NUMBER OF RESTAURANTS Company-owned(c)..................................... 97 97 92 87 66 Franchised(d)........................................ 66 69 67 61 61 ---------- ---------- ---------- ---------- ---------- TOTAL AT YEAR END.................................... 163 166 159 148 127 ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
- ------------------------ (a) Pizzeria Uno full-service restaurants. (b) Pizzeria Uno full-service restaurants, annualized. (c) Includes one Mexican restaurant and two quick-service Uno units in 1998; one Mexican restaurant and 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. (d) Includes three quick-service Uno units in 1998; three quick-service Uno units in 1997; four quick-service Uno units in 1996; two quick-service units in 1995 and 1994. 18 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 9/27/98 9/28/97 9/29/96 ----------- ----------- ----------- REVENUES: Restaurant sales............................................................. 92.7% 92.4% 92.7% Consumer product sales....................................................... 4.9 5.1 4.9 Franchise income............................................................. 2.4 2.5 2.4 ----- ----- ----- Total...................................................................... 100.0 100.0 100.0 COSTS AND EXPENSES: Cost of food and beverages (1)............................................... 26.0 25.4 26.2 Labor and benefits (1)....................................................... 31.1 31.2 30.9 Occupancy costs (1).......................................................... 15.0 15.6 15.7 Other operating costs (1).................................................... 9.7 9.3 9.5 General and administrative................................................... 7.1 7.5 7.1 Depreciation and amortization(1)............................................. 6.5 7.2 7.7 Special charges (1).......................................................... 2.3 2.3 OPERATING INCOME............................................................. 6.6 3.9 2.9 INTEREST AND OTHER EXPENSE................................................... (1.9) (1.6) (1.5) ----- ----- ----- INCOME BEFORE INCOME TAXES................................................... 4.7 2.3 1.4 Provision for income taxes................................................... 1.6 .8 .4 ----- ----- ----- INCOME BEFORE CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE............ 3.1 1.5 1.0 Cumulative effect of change in accounting principle for pre-opening costs, net of income tax benefit.................................................. .3 ----- ----- ----- NET INCOME................................................................... 2.8% 1.5% 1.0% ----- ----- ----- ----- ----- -----
- ------------------------ (1) Percentage of restaurant and consumer product sales FISCAL YEAR 1998 COMPARED TO FISCAL YEAR 1997 Total revenues increased 7.4% to $191.3 million in fiscal 1998 from $178.0 million in the prior year. Company-owned restaurant sales increased 7.9% to $177.3 million from $164.4 million in the prior year, due primarily to a 7.0% increase in operating weeks of full-service Pizzeria Uno restaurants resulting from the addition of four restaurants during the past four quarters. Comparable store sales for the 52 weeks ended September 27, 1998 increased by 1.3%, while average weekly sales, which includes sales at comparable stores as well as new units, were 2.0% above last year. Sales levels for the Company's latest variations of the new prototype units, of which there are currently seven open, were 23% above the Company system average for the year, partially due to increased sales volumes associated with the honeymoon period following a new store opening. Consumer product sales increased 3.0% to $9.4 million from $9.1 million in fiscal 1997. Sales in the foodservice category have increased significantly as sales to hotel chains increased approximately 54% during fiscal 1998. Also the addition of new business due to the expansion of movie theater programs and a 19 non-branded program with a national restaurant chain have 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 as the competition for shelf space has intensified and the presence of fresh prepared food venues has proliferated over the last several years. The Company continues to test several branded and private label products with various movie theater chains, hotel chains and foodservice providers. See "Item 1 Business--Other Business Developments." Franchise income increased 0.7% to $4.5 million in fiscal 1998. Royalty income increased 1.9% in fiscal 1998, as average weekly sales increased by 2.3%. Operating weeks were essentially flat versus last year, as five new full-service restaurants opened and eight full-service units closed in fiscal 1998. Initial franchise fees totaled $133,300 for fiscal 1998 compared to $182,500 in fiscal 1997. In fiscal 1998 the Company elected to adopt the provisions of SOP 98-5 "Reporting the Costs of Start-up Activities" which requires that pre-opening costs be expensed as incurred. In accordance with the SOP, the adoption is reported as a cumulative effect of a change in accounting and is recognized in the first quarter of fiscal 1998. The cumulative effect of the change in accounting net of applicable taxes was $636,000, or $0.06 per share on a diluted basis. In 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 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. Operating income was $12.7 million which represents an operating margin of 6.6% for fiscal year 1998. For fiscal year 1997, operating income was $6.9 million which represents an operating margin of 3.9%. Fiscal year 1997 operating income, exclusive of the special charges, was $10.9 million which represents an operating margin of 6.1%. The improvement in operating income and operating margin in fiscal 1998 was primarily due to sales leverage gains in occupancy, depreciation and overhead cost categories. Cost of food and beverages as a percentage of restaurant and consumer product sales increased to 26.0% for fiscal 1998 from 25.4% the prior year. This increase primarily reflects higher cheese costs and cost increases associated with the system-wide rollout of the new menu initiative. Labor and benefits as a percentage of restaurant and consumer product sales decreased slightly to 31.1% for fiscal 1998 from 31.2% the prior year, as an increase in the average hourly wage rate and increasing salaries for entry level managers were offset by productivity gains in restaurant operations and lower benefit expense. Occupancy costs as a percentage of restaurant and consumer product sales decreased to 15.0% for fiscal 1998 from 15.6% the prior year due to sales leverage gains and lower security expense. Other operating costs increased as a percentage of restaurant and consumer product sales to 9.7% for fiscal 1998 from 9.3% the prior year, primarily due to the inclusion of $938,000 of current year pre-opening costs. Previously in fiscal 1997 these costs were included in the depreciation and amortization category. General and administrative expenses as a percentage of total revenues for fiscal year 1998 decreased to 7.1% from 7.5% in fiscal 1997. This decrease was due to leverage gains associated with higher sales volumes. Depreciation and amortization expense as a percentage of restaurant and consumer product sales decreased to 6.5% for fiscal 1998 from 7.2% the prior year, due to the change in accounting for pre-opening amortization. Excluding this accounting change, depreciation and amortization expense would have been down 0.2% as a percentage of sales due to sales leverage gains. 20 Other expense increased to $3.7 million or 1.9% as a percentage of total revenues in fiscal 1998 from $2.8 million or 1.6% 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 repurchase of 1.2 million shares under the 1997 "Dutch Auction" tender offer. The effective income tax rate decreased to 33% for fiscal 1998 from 34% in fiscal 1997, primarily due to reductions in unfavorable permanent differences. 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 fiscal 1997. 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 prior year. Sales levels for the Company's new prototype units were 5% above the Company system average for fiscal 1997. Consumer product sales increased 9.2% to $9.1 million in fiscal 1997 from $8.4 million in fiscal 1996. Sales in the foodservice category 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 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 of fiscal 1997 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 supermarket and foodservice providers. See "Item 1 Business--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. In 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 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 Pizzeria 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 in fiscal 1997 and $8.9 million in fiscal 1996, which represents an operating margin of 6.1% and 5.1%, respectively. 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. 21 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 and 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 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. LIQUIDITY AND SOURCES OF CAPITAL The following table (000's omitted) presents a summary of the Company's cash flows for fiscal 1998. Net cash provided by operating activities.......................................... $ 18,403 Net cash used in investing activities.............................................. (12,115) Net cash used in financing activities.............................................. (5,744) --------- Increase in cash................................................................... $ 544 --------- ---------
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 1998, the Company's investment in property, equipment and leasehold improvements was $12.1 million. 22 The Company opened four restaurants during fiscal 1998 and currently expects to open six restaurants in fiscal 1999. The Company projects 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 27, 1998, the Company had outstanding indebtedness of $37.8 million under its $55 million credit facility (the "$55 million facility"), $4.8 million under its MetLife Capital mortgage program, and $0.9 million in capital lease obligations. The $55 million facility consists of three components, a $26.6 million revolver, a $20 million mortgage facility and a $8.4 million loan. The $26.6 million revolver is due in October 2002. The $20 million 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 with final maturity due in October 2002. 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 and are secured by certain real properties owned by the Company. The Company anticipates using the revolver portion of the $55 million facility for the development of additional restaurants and for working capital needs. 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 July 1998, the Company entered into a three 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 $10 million. 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 these agreements in order to manage interest costs and risks associated with fluctuating interest rates and does not enter into these contracts for trading purposes. In September 1998, 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 $7.00 nor less then $5.75 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 October 30, 1998 the Company completed the repurchase of 274,721 shares at a price of $7.00 per share. The total number of shares purchased represented approximately 3% of the shares outstanding at the time. The Company used a portion of its $55 million credit facility to purchase the shares tendered. 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. YEAR 2000 COMPLIANCE The Company has completed its initial assessment of its computer systems to identify the systems that could be affected by the "Year 2000" issue and has developed an implementation and compliance plan to resolve the issue. The Company's current plan calls for implementation to be completed during fiscal year 1999. The Year 2000 problem is a result of computer programs being written using two digits rather than four to define the applicable year. Any of the Company's programs that have time sensitive software may 23 recognize the date using "00" as the year 1900 rather than the year 2000, which could result in system failures or miscalculations using existing software. In addition to the assessment of in-house computer systems, the Company is in the process of assessing the readiness of its vendors, franchise partners and non-information technology equipment for the Year 2000 issue. The Company has begun discussions with its major distributor regarding Year 2000 issues and has verified that its credit card processing vendor is Year 2000 compliant. Contingency plans will be developed in the event that business-critical vendors or franchise partners do not provide the Company with satisfactory evidence of their Year 2000 readiness. The Company intends to make every reasonable effort to assess the Year 2000 readiness of these critical business partners and to create action plans to address the identified risks. The Company has determined that the most reasonably likely worst case scenario would result from the inability to acquire food supplies from our foodservice distributors. The Company is currently assessing this possibility and will develop a contingency plan to assure that there is adequate inventory on-hand to provide service until an alternative source of supplies becomes available. The Company believes its operations will not be significantly disrupted if other third parties with whom the Company has relationships with are not year 2000 compliant. The Company also believes that it will not have any material liability to third parties as a result of any potential non-compliance with Year 2000 issues. All maintenance and modification costs will be expensed as incurred, while the cost of new software, if material, is being capitalized and depreciated over its expected useful life. Testing and remediation of all the Company's systems and applications is expected to cost approximately $250,000, of which approximately $100,000 has been incurred as of the end of fiscal 1998. Of the expected total cost of testing and remediation approximately $60,000 relates to repair issues and the remainder to replacement of equipment. All estimated costs have been budgeted and are expected to be funded by cash flows from operations. No information technology projects have been deferred due to Year 2000 compliance efforts. The Company is not pursing independent verification of its systems as it believes that any effort would be as costly as the remediation effort and is not warranted at this time. The Company does not believe the costs related to the Year 2000 compliance project will be material to its financial position or results of operations. However, the cost of the project and the date on which the Company plans to complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events including the continued availability of certain resources, third party modification plans, and other factors. Unanticipated failures by critical vendors, franchise partners, as well as the failure by the Company to execute its own remediation efforts could have a material adverse effect on the cost of the project and its completion date. As a result, there can be no assurance that these forward-looking estimates will be achieved and the actual cost and vendor compliance could differ materially from those plans, resulting in material financial risk. 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 24 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). ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKS The Company has market risk exposure to interest rates on its fixed and variable rate debt obligations and manages this exposure through the use of interest rate swaps. The Company does not enter into contracts for trading purposes. The information below summarizes the Company's market risk associated with debt obligations and derivative financial instruments as of September 27, 1998. For debt obligations, the table presents principal cash flows and related average interest rates by expected fiscal year of maturity. For variable rate debt obligations, the average variable rates are based on implied forward rates as derived from appropriate quarterly spot rate observations as of the fiscal year end. For interest rate swaps, the table presents the notional amounts and related weighted average interest rates by fiscal year of maturity. The average variable rates are the implied forward rates as derived from appropriate quarterly spot rate observations as of the fiscal year end. EXPECTED FISCAL YEAR OF MATURITY (US$ in millions)
1999 2000 2001 2002 2003 THEREAFTER --------- --------- --------- --------- --------- ------------- Liabilities: Fixed Rate........................................ $ 0.2 $ 0.2 $ 0.2 $ 0.3 $ 0.3 $ 3.6 Average Interest Rate............................. 8.75% 8.75% 8.75% 8.75% 8.75% Variable rate..................................... $ 3.7 $ 3.7 $ 3.7 $ 3.7 $ 14.5 $ 8.5 Average Interest Rate............................. 6.28% 6.21% 6.50% 6.75% 6.97% Interest Rate Swaps: Receive Variable/Pay Fixed........................ $ 30.0 $ 30.0 $ 30.0 Weighted Average Pay Rate....................... 5.96% 5.96% 5.84% -- -- -- Average Receive Rate............................ 4.78% 4.71% 4.96% FAIR VALUE 9/27/98 ----------- Liabilities: Fixed Rate........................................ $ 4.8 Average Interest Rate............................. Variable rate..................................... $ 37.8 Average Interest Rate............................. Interest Rate Swaps: Receive Variable/Pay Fixed........................ $ (0.8) Weighted Average Pay Rate....................... Average Receive Rate............................
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. 25 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 12 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. 26 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......................................................... 31 Consolidated Balance Sheets--September 27, 1998 and September 28, 1997................. 32 Consolidated Statements of Income--Years ended September 27, 1998, September 28, 1997, and September 29, 1996............................................................... 33 Consolidated Statements of Shareholders' Equity--Years ended September 27, 1998, September 28, 1997, and September 29, 1996........................................... 34 Consolidated Statements of Cash Flows--Years ended September 27, 1998, September 28, 1997, and September 29, 1996......................................................... 35 Notes to Consolidated Financial Statements............................................. 36
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.* (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.* 27 (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, filed as Exhibit 10(g) to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997 (the "1997 Annual Report on Form 10-K").* ** (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) Uno Restaurant Corporation 1997 Key Officer Stock Option Plan, filed as Exhibit A to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1998.* ** (j) Uno Restaurant Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors, filed as Exhibit B to the Company's Proxy Statement for the Annual Meeting of Stockholders held on February 26, 1998.* ** (k) Form of Indemnification Agreement between the Company and its Directors filed as Exhibit 10.6 to the 1987 Registration Statement.* ** (l) Variable Royalty Plan for Franchises, filed as Exhibit 10(l) to the 1991 Annual Report on Form 10-K.* (m) 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 Company's Annual Report on Form 10-K for the fiscal year ended October 1, 1995 (the "1995 Annual Report on Form 10-K").* (n) Interest Rate Swap Agreement between Fleet Bank of Massachusetts, N.A. and Uno Restaurants, Inc. Dated July 21, 1998. (o) Note between the Company and Craig S. Miller dated January 23, 1996, filed as Exhibit 10(l) 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").* ** (p) Note between the Company and Craig S. Miller dated April 1, 1997, filed as Exhibit 10(r) to the Company's Annual Report on Form 10-K for the fiscal year ended September 28, 1997 (the "1997 Annual Report on Form 10-K"),* and Amendment to Promissory Note and Revised Debt Agreement dated April 7, 1998, and Second Amendment to Promissory Note and Revised Debt Agreement dated September 27, 1998.** (q) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and Mr. Spencer and Mr. Miller, filed as Exhibit 10(m) to the 1997 Annual Report on Form 10-K.* ** (r) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its Senior Vice Presidents, filed as Exhibit 10(n) to the 1997 Annual Report on Form 10-K.* ** 28 (s) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its other officers, filed as Exhibit 10(o) to the 1997 Annual Report on Form 10-K.* ** (t) 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 Company's Annual Report on Form 10-K for the fiscal year ended October 2, 1994 (the "1994 Annual Report on Form 10-K").* (u) 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, filed as Exhibit 10(q) to the 1997 Annual Report on Form 10-K.* (v) $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 Borrowers, 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), filed as Exhibit 10(s) to the 1997 Annual Report on Form 10-K.* (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 (B) REPORTS ON FORM 8-K During the fiscal quarter ended September 27, 1998, the Company did not file any Current Reports on Form 8-K. 29 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. UNO RESTAURANT CORPORATION By: /s/ ROBERT M. VINCENT ----------------------------------------- Robert M. Vincent, SENIOR VICE PRESIDENT Date: December 22, 1998
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.
NAME TITLE DATE - ------------------------------ -------------------------- ------------------- /s/ AARON D. SPENCER - ------------------------------ Chairman and Director December 22, 1998 Aaron D. Spencer President, Chief Executive /s/ CRAIG S. MILLER Officer and Director - ------------------------------ (Principal Executive December 22, 1998 Craig S. Miller Officer) Senior Vice /s/ ROBERT M. VINCENT President-Finance, Chief - ------------------------------ Financial Officer and December 22, 1998 Robert M. Vincent Treasurer (Principal Financial Officer) /s/ ROBERT M. BROWN Senior Vice - ------------------------------ President-Administration December 22, 1998 Robert M. Brown and Director /s/ JOHN T. GERLACH - ------------------------------ Director December 22, 1998 John T. Gerlach /s/ STEPHEN J. SWEENEY - ------------------------------ Director December 22, 1998 Stephen J. Sweeney /s/ JAMES F. CARLIN - ------------------------------ Director December 22, 1998 James F. Carlin
30 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 27, 1998 and September 28, 1997, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended September 27, 1998. 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 27, 1998 and September 28, 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended September 27, 1998, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, during fiscal year 1998, the Company adopted the provisions of the American Institute of Certified Public Accountants' Statement of Position 98-5, "Reporting the Costs of Start-up Activities." /s/ Ernst & Young LLP Boston, Massachusetts November 3, 1998 31 UNO RESTAURANT CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
SEPTEMBER SEPTEMBER 27 28 1998 1997 ----------- ----------- (IN THOUSANDS) ASSETS Current assets: Cash.............................................................. $ 2,030 $ 1,486 Accounts receivable, net.......................................... 1,784 2,823 Inventory......................................................... 2,296 2,326 Prepaid expenses and other assets................................. 815 809 Deferred pre-opening costs........................................ 949 ----------- ----------- Total current assets................................................ 6,925 8,393 Property, equipment and leasehold improvements, net................. 125,323 125,357 Deferred income taxes............................................... 7,450 6,599 Liquor licenses and other assets.................................... 3,497 3,383 ----------- ----------- $ 143,195 $ 143,732 ----------- ----------- ----------- -----------
SEPTEMBER 27 SEPTEMBER 28 1998 1997 ------------ ------------ (IN THOUSANDS, EXCEPT PER SHARE DATA) LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities: Accounts payable................................................................... $ 6,589 $ 6,966 Accrued expenses................................................................... 7,949 7,563 Accrued compensation and taxes..................................................... 2,666 2,641 Income taxes payable............................................................... 995 2,076 Current portions of long-term debt and capital lease obligations................... 4,081 3,132 ------------ ------------ Total current liabilities............................................................ 22,280 22,378 Long-term debt, net of current portion............................................... 38,676 42,516 Capital lease obligations, net of current portion.................................... 666 867 Other liabilities.................................................................... 7,904 7,091 Commitments and contingencies Shareholders' equity: Preferred Stock, $1.00 par value; 1,000 shares authorized; no shares issued or outstanding Common Stock, $.01 par value, 25,000 shares authorized; 13,776 shares in 1998 and 13,755 shares in 1997 issued........................... 138 138 Additional paid-in capital......................................................... 53,944 53,803 Retained earnings.................................................................. 42,203 36,816 ------------ ------------ 96,285 90,757 Treasury Stock (3,175 shares in 1998 and 2,791 shares in 1997, at cost)............ (22,616) (19,877) ------------ ------------ Total shareholders' equity........................................................... 73,669 70,880 ------------ ------------ $ 143,195 $ 143,732 ------------ ------------ ------------ ------------
See accompanying notes. 32 UNO RESTAURANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME
YEAR ENDED ------------------------------------- SEPTEMBER SEPTEMBER SEPTEMBER 27 28 29 1998 1997 1996 ----------- ----------- ----------- (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA) Revenues: Restaurant sales...................................... $ 177,343 $ 164,389 $ 159,581 Consumer product sales................................ 9,384 9,115 8,351 Franchise income...................................... 4,549 4,516 4,209 ----------- ----------- ----------- 191,276 178,020 172,141 Costs and expenses: Cost of food and beverages............................ 48,567 43,994 44,064 Labor and benefits.................................... 58,139 54,183 51,868 Occupancy costs....................................... 27,988 27,045 26,339 Other operating costs................................. 18,086 16,067 15,890 General and administrative............................ 13,661 13,384 12,155 Depreciation and amortization......................... 12,183 12,469 12,964 Special charges....................................... 4,000 3,937 ----------- ----------- ----------- 178,624 171,142 167,217 ----------- ----------- ----------- Operating income........................................ 12,652 6,878 4,924 Other expense: Interest expense...................................... 3,527 2,695 2,358 Other expense......................................... 134 132 123 ----------- ----------- ----------- 3,661 2,827 2,481 ----------- ----------- ----------- Income before income taxes.............................. 8,991 4,051 2,443 Provision for income taxes.............................. 2,968 1,378 757 ----------- ----------- ----------- Income before cumulative effect of change in accounting principle............................................. 6,023 2,673 1,686 Cumulative effect of change in accounting principle for pre-opening costs, net of income tax benefit of $313.................................................. 636 ----------- ----------- ----------- Net income.............................................. $ 5,387 $ 2,673 $ 1,686 ----------- ----------- ----------- ----------- ----------- ----------- Basic and Diluted Earnings per Share: Income before cumulative effect of change in accounting principle............................................. $ .55 $ .22 $ .13 Cumulative effect of change in accounting principle, net of income tax benefit................................. (.06) ----------- ----------- ----------- Net income.............................................. $ .49 $ .22 $ .13 ----------- ----------- ----------- ----------- ----------- ----------- Weighted-average shares outstanding: Basic................................................. 10,873 11,951 12,694 ----------- ----------- ----------- ----------- ----------- ----------- Diluted............................................... 10,932 12,008 12,756 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. 33 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 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 Net income.................................. 5,387 5,387 Exercise of stock options................... 21 127 127 Purchase of Treasury Stock.................. (2,791) (2,791) Contribution of Treasury Stock to 401(k) Savings and Employee Stock Ownership Retirement Plan........................... 2 52 54 Tax benefit from exercise of nonqualified stock options............................. 12 12 --------- ----------- ----------- --------- --------- --------- Balance at September 27, 1998................. 13,776 $ 138 $ 53,944 $ 42,203 $ (22,616) $ 73,669 --------- ----------- ----------- --------- --------- --------- --------- ----------- ----------- --------- --------- ---------
See accompanying notes. 34 UNO RESTAURANT CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED ------------------------------------- SEPTEMBER SEPTEMBER SEPTEMBER 27 28 29 1998 1997 1996 ----------- ----------- ----------- (IN THOUSANDS) OPERATING ACTIVITIES Net income.............................................. $ 5,387 $ 2,673 $ 1,686 Adjustments to reconcile net income to net cash provided by operating activities: Cumulative effect of change in accounting principle... 636 Depreciation and amortization......................... 12,292 12,573 13,064 Deferred income taxes................................. (851) (2,986) (2,462) Contribution of Treasury Stock to 401(k) Savings and Employee Stock Ownership Retirement Plan..................................... 54 Provision for deferred rent........................... 147 612 688 Loss (gain) on disposal of equipment.................. (26) (15) 19 Special charges....................................... 4,000 3,937 Changes in operating assets and liabilities: Accounts receivable................................. 1,039 (367) (195) Inventory........................................... 30 7 (107) Prepaid expenses and other assets................... (237) (1,539) (693) Accounts payable and other liabilities.............. 700 4,620 1,157 Income taxes payable................................ (768) 495 1,455 ----------- ----------- ----------- Net cash provided by operating activities............... 18,403 20,073 18,549 INVESTING ACTIVITIES Additions to property, equipment and leasehold improvements.......................................... (12,141) (19,982) (22,909) Proceeds from sale of fixed assets...................... 26 300 144 ----------- ----------- ----------- Net cash used in investing activities................... (12,115) (19,682) (22,765) FINANCING ACTIVITIES Proceeds from revolving line of credit.................. 50,790 71,193 53,103 Principal payments on debt and capital lease obligations........................................... (53,882) (62,997) (40,687) Purchase of Treasury Stock.............................. (2,791) (9,224) (7,753) Exercise of stock options............................... 139 295 76 ----------- ----------- ----------- Net cash provided by (used in) financing activities..... (5,744) (733) 4,739 ----------- ----------- ----------- Increase (decrease) in cash............................. 544 (342) 523 Cash at beginning of year............................... 1,486 1,828 1,305 ----------- ----------- ----------- Cash at end of year..................................... $ 2,030 $ 1,486 $ 1,828 ----------- ----------- ----------- ----------- ----------- -----------
See accompanying notes. 35 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SEPTEMBER 27, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES DESCRIPTION OF BUSINESS The Company owns and operates 94 "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 63 units in 19 states, the District of Columbia, Puerto Rico and Seoul, Korea. The Company also operates a Mexican restaurant in Chicago and a refrigerated and frozen consumer foods division. The consumer foods business supplies American Airlines, movie theaters, hotel restaurants, supermarkets 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. PRE-OPENING COSTS In the third quarter of fiscal 1998, the Company adopted Statement of Position (SOP) 98-5 "Reporting the Costs of Start-up Activities" which requires that pre-opening costs be expensed as incurred. In accordance with SOP 98-5, the adoption is reported as a cumulative effect of a change in accounting principle and has been recognized retroactively to the first quarter of fiscal 1998. The cumulative effect of the change in accounting principle was $636,000, net of the income tax benefit of $313,000. The impact of adoption on fiscal 1998 results of operations was not material. INVENTORY Inventory, which consists of food, beverages and 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. 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 36 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) activities amounted to approximately $3,280,000, $3,441,000 and $3,409,000 in fiscal years 1998, 1997 and 1996, respectively. A summary of full-service franchise unit activity is as follows:
YEAR ENDED ------------------------------------------------------- SEPTEMBER 27 SEPTEMBER 28 SEPTEMBER 29 1998 1997 1996 ----------------- ----------------- ----------------- Units operating at beginning of year.................................. 66 63 59 Units opened.......................................................... 5 6 5 Units closed.......................................................... (8) (3) (1) -- -- -- Units operating at end of year........................................ 63 66 63 -- -- -- -- -- --
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. ADVERTISING The Company records advertising expense as incurred. Advertising expense was $5,257,000, $4,897,000 and $5,242,000 for fiscal years 1998, 1997 and 1996, respectively. EARNINGS PER SHARE Basic earnings per share represents net income divided by the weighted average shares of common stock outstanding during the period. Weighted average shares used in diluted earnings per share include 59,000, 57,000 and 61,000 for fiscal years 1998, 1997 and 1996, respectively, of common stock equivalents arising from stock options using the treasury stock method. 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. STOCK-BASED COMPENSATION The Company has elected to follow Accounting Principles Board Opinion (APB) No. 25, "Accounting for Stock Issued to Employees" in accounting for its stock-based compensation plans, rather than the alternative fair value accounting method provided for under Statement of Financial Accounting Standard (SFAS) No. 123, "Accounting for Stock-Based Compensation," as this alternative requires the use of 37 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 recognized. ACCOUNTING PRONOUNCEMENTS In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No. 130, "Reporting Comprehensive Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," which are effective for fiscal year 1999. The Company believes that the adoption of these new accounting standards will not have a material impact on the Company's consolidated financial statements. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which is effective for fiscal year 2000. This statement requires all derivatives to be carried on the balance sheet as assets or liabilities at fair value. The accounting for changes in the fair value of the derivatives would depend on the hedging relationship and would be reported in the income statement, or as a component of comprehensive income. The Company believes that the adoption of this new accounting standard 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 1998 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 represented remaining minimum lease payments of one full-service Uno restaurant which was closed during 1997. In the second quarter of fiscal 1996, the Company adopted SFAS No. 121 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 Pizza Takery'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. 38 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 3. PROPERTY, EQUIPMENT AND LEASEHOLD IMPROVEMENTS Property, equipment and leasehold improvements consist of the following:
SEPTEMBER 27 SEPTEMBER 28 1998 1997 ------------ ------------ (IN THOUSANDS) Land................................................................................. $ 16,874 $ 15,883 Buildings............................................................................ 27,823 25,265 Equipment............................................................................ 52,536 49,802 Leasehold improvements............................................................... 93,324 87,047 Construction in progress............................................................. 3,309 4,201 ------------ ------------ 193,866 182,198 Less allowances for depreciation and amortization.................................... 68,543 56,841 ------------ ------------ $ 125,323 $ 125,357 ------------ ------------ ------------ ------------
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 $505,000 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 Chief Executive Officer and his brother own and operate four franchised restaurants and pay royalties to the Company under standard franchise agreements. 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 27, 1998 and September 28, 1997. Accumulated amortization amounted to $747,000 at September 27, 1998 and $613,000 at September 28, 1997. Capital lease asset amortization is included in depreciation and amortization. At September 27, 1998, the minimum rental 39 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 5. LEASES (CONTINUED) 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) 1999..................................................................... $ 260 $ 9,337 2000..................................................................... 223 9,289 2001..................................................................... 75 9,384 2002..................................................................... 42 9,452 2003..................................................................... 42 9,107 Thereafter............................................................... 1,167 73,357 ----- ---------- 1,809 $ 119,926 ---------- ---------- Less amount representing interest........................................ 942 ----- Present value of net minimum lease payments.............................. 867 Less current portion of obligation under capital leases.................. 201 ----- Long-term obligation under capital leases................................ $ 666 ----- -----
Total expenses for all operating leases were as follows:
MINIMUM CONTINGENT FISCAL YEAR LEASE RENTALS RENTALS TOTAL - -------------------------------------------------------- ------------- ------------- --------- (IN THOUSANDS) --------------------------------------- 1998.................................................... $ 13,010 $ 689 $ 13,699 1997.................................................... 12,641 811 13,452 1996.................................................... 12,105 956 13,061
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 $4,743,000 at September 27, 1998 and $4,596,000 at September 28, 1997. 40 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 6. FINANCING ARRANGEMENTS Long-term debt consists of the following:
SEPTEMBER SEPTEMBER 27 28 1998 1997 ----------- ----------- (IN THOUSANDS) Revolving credit and note agreement............................................. $ 37,760 $ 40,480 8.75%, 15-year secured mortgage notes payable................................... 4,796 4,979 ----------- ----------- 42,556 45,459 Less current portion............................................................ 3,880 2,943 ----------- ----------- $ 38,676 $ 42,516 ----------- ----------- ----------- -----------
In November 1997, the Company amended its credit facility from $50 million to $55 million, which includes a $26.6 million 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 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. Amounts borrowed under the credit facility are secured by certain real properties owned by the Company. At September 27, 1998, interest rates on outstanding borrowings under the revolving line of credit ranged from 7.16% to 8.75%. A commitment fee of approximately 0.38% 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 27, 1998, the carrying value of the Company's long-term debt approximated fair market value. Annual principal payments of debt are as follows (in thousands):
FISCAL YEAR - ----------------------------------------------------------------------------------- 1999............................................................................... $ 3,880 2000............................................................................... 3,898 2001............................................................................... 3,918 2002............................................................................... 3,940 2003............................................................................... 14,835 Thereafter......................................................................... 12,085 --------- $ 42,556 --------- ---------
The Company has two interest rate swap agreements which 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 amounts and fair market value under the swap agreements amount to $30 million and ($0.8) million, respectively. The terms range from three to five years with fixed interest rates ranging from 5.80% to 6.04%. The differentials to be paid or received are accrued as interest rates change and are recognized as an adjustment to interest expense related to the debt. 41 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 6. FINANCING ARRANGEMENTS (CONTINUED) The Company made cash payments of interest of $3,598,000, $3,044,000 and $2,845,000 during fiscal years 1998, 1997 and 1996, respectively. The Company capitalized interest during the construction period of new restaurants which amounted to $127,000 in fiscal year 1998, $313,000 in fiscal year 1997 and $290,000 in fiscal year 1996 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 27, 1998. 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. 7. COMMON STOCK TRANSACTIONS On September 29, 1998, the Company initiated a Dutch Auction self-tender offer for up to 1,000,000 shares of the Company's common stock and under 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 $5.75 to $7.00 per share. On October 30, 1998, the Company completed the tender offer for 274,721 shares of its common stock at $7.00 per share. 8. PREPAID EXPENSES AND OTHER ASSETS Prepaid expenses and other assets consist of the following:
SEPTEMBER 27 SEPTEMBER 28 1998 1997 --------------- --------------- (IN THOUSANDS) Prepaid rent......................................................................... $ 442 $ 220 Prepaid operating costs.............................................................. 234 159 Prepaid insurance.................................................................... 139 430 ----- ----- $ 815 $ 809 ----- ----- ----- -----
42 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 9. ACCRUED EXPENSES Accrued expenses consist of the following:
SEPTEMBER 27 SEPTEMBER 28 1998 1997 ------------- ------------- (IN THOUSANDS) Accrued store closure............................................ $ 1,826 $ 1,618 Accrued rent..................................................... 1,372 1,334 Accrued insurance................................................ 793 1,103 Accrued utilities................................................ 785 760 Accrued vacation................................................. 680 632 Accrued advertising.............................................. 557 561 Franchise fee deposits........................................... 486 334 Other............................................................ 1,450 1,221 ------ ------ $ 7,949 $ 7,563 ------ ------ ------ ------
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 $214,000, $229,000 and $161,000 in fiscal years 1998, 1997 and 1996, respectively. The 1998 contributions included $54,000 of Uno Restaurant Corporation common stock previously held in Treasury. 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 $880,000 at September 27, 1998 and $727,000 at September 28, 1997 is included in other liabilities in the accompanying balance sheet. Deferred compensation expense in the amounts of $153,000, $161,000 and $140,000 were recorded in fiscal years 1998, 1997 and 1996, respectively. 43 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 11. INCOME TAXES Deferred taxes are attributable to the following temporary differences:
SEPTEMBER 27 SEPTEMBER 28 1998 1997 ------------- ------------- (IN THOUSANDS) Deferred tax assets: Excess book over tax depreciation.............................. $ 2,327 $ 1,113 Deferred rent.................................................. 1,937 1,842 Accrued expenses............................................... 1,467 1,738 Asset impairment charge........................................ 1,211 1,630 Franchise fees................................................. 627 291 Other.......................................................... 376 309 ------ ------ Total deferred tax assets........................................ 7,945 6,923 Deferred tax liabilities: Other.......................................................... 495 324 ------ ------ Total deferred tax liabilities................................... 495 324 ------ ------ Net deferred tax assets.......................................... $ 7,450 $ 6,599 ------ ------ ------ ------
The provision (credit) for income taxes consisted of the following:
YEAR ENDED ------------------------------------------- SEPTEMBER 27 SEPTEMBER 28 SEPTEMBER 29 1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS) Current: Federal............................................................. $ 2,941 $ 3,448 $ 2,532 State............................................................... 878 916 687 ------ ------ ------ 3,819 4,364 3,219 Deferred: Federal............................................................. (713) (2,435) (1,995) State............................................................... (138) (551) (467) ------ ------ ------ (851) (2,986) (2,462) ------ ------ ------ Income tax expense.................................................... $ 2,968 $ 1,378 $ 757 ------ ------ ------ ------ ------ ------
44 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 11. INCOME TAXES (CONTINUED) A reconciliation of the effective tax rates with the federal statutory rates is as follows:
YEAR ENDED ------------------------------------------------- SEPTEMBER 27 SEPTEMBER 28 SEPTEMBER 29 1998 1997 1996 --------------- --------------- --------------- Federal statutory rate................................................ 34.0% 34.0% 34.0% State income taxes, net of federal income tax benefit................. 4.6 4.6 5.0 Tax credits........................................................... (6.5) (7.1) (9.8) Other................................................................. .9 2.5 1.8 --- --- --- Effective income tax rate............................................. 33.0% 34.0% 31.0% --- --- --- --- --- ---
The Company made income tax payments of $4,545,000, $3,936,000 and $2,416,000 during fiscal years 1998, 1997 and 1996, respectively. 12. STOCK-BASED COMPENSATION During 1998, the Company's shareholders ratified the 1997 Key Officer Stock Option Plan (the Key Officer Plan) under which options were granted for 1.0 million shares of Common Stock at an exercise price of $7.50 per share. Options vest based on the attainment of certain financial goals by the Company. The Key Officer Plan will terminate on August 25, 2007. During 1998, the Company also established the 1997 Non Qualified Stock Option Plan for Non-Employee Directors (the 1997 Directors' Plan) which provides for the granting of options to purchase up to 75,000 shares of Common Stock. 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 and vest one year after date of grant. The 1997 Directors' Plan will terminate on February 26, 2008. The Company also has the 1997 Employee Stock Option Plan (the Employee 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 vested 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 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. 45 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 12. STOCK-BASED COMPENSATION (CONTINUED) Information regarding the Company's stock option plans is summarized below:
SEPTEMBER 27 SEPTEMBER 28 SEPTEMBER 29 1998 1997 1996 ----------------------- ----------------------- ----------------------- YEAR ENDED WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE ---------- ----------- ---------- ----------- ---------- ----------- Outstanding at beginning of period................ 1,237,407 $ 7.33 1,289,248 $ 7.28 1,200,287 $ 7.61 Granted........................................... 1,381,735 7.36 211,609 6.59 295,508 6.42 Exercised......................................... (18,414) 7.51 (55,667) 4.44 (15,256) 4.74 Canceled.......................................... (102,172) 6.83 (207,783) 7.06 (191,291) 8.21 ---------- ----------- ---------- ----- ---------- ----- Outstanding at end of period...................... 2,498,556 $ 7.37 1,237,407 $ 7.33 1,289,248 $ 7.28 ---------- ----------- ---------- ----- ---------- ----- ---------- ----------- ---------- ----- ---------- ----- Options exercisable at end of period.............. 938,238 691,491 612,526 ---------- ---------- ---------- ---------- ---------- ---------- Options available for grant at end of period...... 593,486 854,248 377,279 ---------- ---------- ---------- ---------- ---------- ----------
The weighted-average fair value of options granted during fiscal years 1998, 1997 and 1996, were $3.01, $2.81 and $2.83, respectively. The Company has 3.1 million shares of common stock reserved for the exercise of stock options at September 27, 1998. The following table presents information about significant option groups outstanding at September 27, 1998:
WEIGHTED- AVERAGE WEIGHTED- REMAINING AVERAGE OPTIONS CONTRACTUAL OPTIONS EXERCISABLE EXERCISE PRICE OUTSTANDING LIFE EXERCISABLE PRICE - -------------------------------------------------------- ----------- --------------- ----------- ------------- $4.74-$7.25............................................. 1,031,933 7.7 years 440,574 $ 6.38 $7.50-$11.80............................................ 1,466,623 7.7 years 497,664 $ 8.56
Pursuant to the requirements of SFAS No. 123, the following are the pro forma net income and earnings per share for fiscal year 1998, 1997 and 1996 as if the compensation cost for the stock option plans had been determined based on the fair value at the grant date for grants in fiscal year 1998, 1997 and 1996:
YEAR ENDED ------------------------------------------- SEPTEMBER 27 SEPTEMBER 28 SEPTEMBER 29 1998 1997 1996 ------------- ------------- ------------- (IN THOUSANDS, EXCEPT PER SHARE INFORMATION) Net income--as reported............................................... $ 5,387 $ 2,673 $ 1,686 Net income--pro forma................................................. $ 5,024 $ 2,590 $ 1,668 Basic and diluted earnings per share--as reported..................... $ .49 $ .22 $ .13 Basic and diluted earnings per share--pro forma....................... $ .46 $ .22 $ .13
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 years 1998, 1997 and 1996, respectively: risk-free interest rates of 5.0%, 6.6% and 7.0%; no dividend yield; the volatility factors of the 46 UNO RESTAURANT CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) SEPTEMBER 27, 1998 12. STOCK-BASED COMPENSATION (CONTINUED) expected market price of the Company's common stock was 37%, 40% and 42%; and a weighted-average expected life of the options of five years. The effects on fiscal year 1998, 1997 and 1996 pro forma net income and earnings per share of expensing the fair value of stock options are not necessarily representative of the effects on reported results of operations for future years as the periods presented include only three, two and one years, respectively, of option grants under the Company's plans. 13. QUARTERLY FINANCIAL DATA (UNAUDITED)
QUARTER ENDED -------------------------------------------------- DECEMBER 28 MARCH 29 JUNE 28 SEPTEMBER 27 1997 1998 1998 1998 ------------ ----------- --------- ------------ (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE INFORMATION.) (1) Revenues....................................................... $ 44,968 $ 46,682 $ 48,953 $ 50,673 Gross profit (2)............................................... 8,786 8,939 10,208 11,271 Operating income............................................... 2,726 2,286 3,524 4,116 Income before income taxes..................................... 1,803 1,351 2,561 3,276 Income before cumulative effect of change in accounting principle.................................................... 1,208 904 1,717 2,194 Net income..................................................... 572 904 1,717 2,194 Basic and diluted earnings per common share: Before cumulative effect..................................... .11 .08 .16 .20 Net income................................................... .05 .08 .16 .20
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 (2)............................................... 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 Basic and diluted earnings per common share .09 .07 (.09) .16
- ------------------------ (1) The quarter ended December 28, 1997 reflects retroactive application of the cumulative change in accounting principle adopted in the third quarter of fiscal 1998 (see Note 1--Pre-opening Costs). (2) Restaurant and consumer product sales, less cost of food and beverages, labor and benefits, occupancy and other operating expenses, excluding advertising expenses. 47 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) Uno Restaurant Corporation 1997 Key Officer Stock Plan * (10)(j) Uno Restaurant Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors * (10)(k) Form of Indemnification Agreement between the Company and its Directors * (10)(l) Variable Royalty Plan for Franchises. * (10)(m) Interest Rate Swap Agreement between Fleet Bank of Massachusetts, N.A. and Uno Restaurants, Inc. Dated October 25, 1995. * (10)(n) Interest Rate Swap Agreement between Fleet Bank of Massachusetts, N.A. and Uno Restaurants, Inc. Dated July 21, 1998. (10)(o) Note between the Company and Craig S. Miller dated January 23, 1996. * (10)(p) Note between the Company and Craig S. Miller dated April 1, 1997, and Amendment to Promissory Note and Revised Debt Agreement dated April 7, 1998, and Second Amendment to Promissory Note and Revised Debt Agreement dated September 27, 1998.
48
EXHIBIT NUMBER PAGE - --------- ----- (10)(q) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and Mr. Spencer and Mr. Miller. * (10)(r) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its Senior Vice Presidents. * (10)(s) Form of Change in Control Protection Agreements between Uno Restaurant Corporation and its other officers. * (10)(t) 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)(u) 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)(v) $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 Borrowers, 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). * (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. 49 EX-10.(N) 2 EX-10.(N) Exhibit 10(n) FLEET 21 Jul 98 Uno's Restaurants, Inc. 100 Charles Park Rd. West Roxbury, MA USA, 02132 Fax: 617-325-6744 Re: Interest Rate Swap Transaction (Trans/Trade No. 2088/2359) Dear Bob Vincent: The purpose of this letter agreement is to confirm the terms and conditions of the Swap Transaction entered into between us on The Trade Date referred to below (the "Swap Transaction"). This letter agreement constitutes a "Confirmation" as referred to in the ISDA Master Agreement specified below. The definitions and provisions contained in the 1991 ISDA Definitions (as published by the International Swaps and Derivatives Association, Inc.) are incorporated into this Confirmation. In the event of any inconsistency between those definitions and provisions and this Confirmation, this Confirmation will govern. 1. This Confirmation evidences a complete binding agreement between you and us as to the terms of the Transaction to which this Confirmation relates. In addition, you and we agree to use all reasonable efforts promptly to negotiate, execute and deliver an agreement in the form of the ISDA Master Agreement (Multicurrency-Cross Border) (the "ISDA Form"), with such modifications as you and we will in good faith agree. If the ISDA Form is not executed and returned to Fleet National Bank within 45 days of the date that it is sent, Fleet National Bank may, at its option, terminate this transaction. Upon the execution by you and us of such an agreement, this Confirmation will supplement, form part of, and be subject to that agreement. All provisions contained or incorporated by reference in that agreement upon its execution will govern this Confirmation except as expressly modified below. Until we execute and deliver that agreement, this Confirmation, together with all other documents referring to the ISDA Form (each a "Confirmation") confirming transactions (each a "Transaction") entered into between us (notwithstanding anything to the contrary in a Confirmation), shall supplement, form a part of, and be subject to an agreement in the form of the ISDA Form as if we had executed an agreement in such form (but without any Schedule) on the Trade Date of the first such Transaction between us. In the event of any inconsistency between the provisions of that agreement and this Confirmation, this Confirmation will prevail for the purpose of this Transaction. 2. The terms of the particular Swap Transaction to which this Confirmation relates are as follows: Notional Amount: USD 10,000,000.00 Trade Date: 20 JUL 98 Effective Date: 20 JUL 98 Termination Date: 20 JUL 01 subject to adjustment in accordance with the Modified Following Business Day Convention.
FLOATING AMOUNTS: - --------------------------- Floating Rate Payer: FLEET NATIONAL BANK Floating Rate Payment monthly, commencing on 20 Aug 98 and ending on the Dates: Termination Date, subject to adjustment in accordance with the Modified Following Business Day Convention. Floating Rate for initial 5.65625% Calculation Period: Floating Rate Option: USD-LIBOR-BBA Designated Maturity: 1 MONTH Spread: None Compounding: Inapplicable Reset Dates: The first day of each Floating Rate Calculation Period. Floating Rate Day Count Actual/360 Fraction: Business Days: London, New York City FIXED AMOUNTS: - --------------------------- Fixed Rate Payer: UNO'S RESTAURANTS, INC. Fixed Rate Payment Dates: monthly, commencing on 20 Aug 98 and ending on the Termination Date, subject to adjustment in accordance With the Modified Following Business Day Convention. Fixed Rate: 5.795% Fixed Rate Day Count Actual/360 Fraction: Business Days: London, New York City Governing Law: New York State law (without reference to choice of law doctrine) Calculation Agent: Fleet National Bank ACCOUNT DETAILS: - --------------------------- Payments to FLEET NATIONAL BANK: Fleet National Bank will debit the net payment from: DDA MA9373023222 Payments to UNO'S RESTAURANTS, INC.: Fleet National Bank will credit the net payments to: DDA MA9373023222
3. UNO'S RESTAURANTS, Inc. shall deliver to FLEET NATIONAL BANK, at the time of its execution of this Confirmation, evidence of the specimen signature and incumbency of each person who is executing the Confirmation on behalf of UNO'S RESTAURANTS, INC.. 4. Each party has entered into this Swap Transaction solely in reliance on its own judgment. Neither party has any fiduciary obligation to the other party relating to this Swap Transaction. In addition, neither party has held itself out as advising, or has held out any of its employees or agents as having the authority to advise, the other party as to whether or not the other party should enter into this Swap Transaction, any subsequent actions relating to this Swap Transaction or any other matters relating to this Swap Transaction. Neither party shall have any responsibility or liability whatsoever in respect of any advice of this nature given, or views expressed, by it or any such persons to the other party relating to this Swap Transaction, whether or not such advice is given or such views are expressed at the request of the other party. Please confirm that the foregoing correctly sets forth the terms of our agreement by executing the copy of this Confirmation enclosed for that purpose and returning it to us via fax 617-241-1987 or mail to: Fleet Services Corporation Attn: Interest Rate Products Mailstop: MAMLSFTTOP P.O. Box 2197 Boston, MA 02106-2197 We are delighted to have completed this transaction with you. If you have any questions regarding this Confirmation, please call 617-241-1761. FLEET NATIONAL BANK By:
/s/ KEVON J. ZEHNER ----------------------------------------- Name: Title:
Accepted and confirmed as of the date first written above: UNO'S RESTAURANTS, INC. By: /s/ ROBERT M. VINCENT ----------------------------------------- Authorized Signatory Name: Title:
EX-10.(P) 3 EX-10.(P) EXHIBIT 10(P) AMENDMENT TO PROMISSORY NOTE AND REVISED DEBT AGREEMENT This Amendment to Promissory Note and Revised Debt Agreement dated April 7, 1998, does hereby amend and supplement the terms of that certain Note dated April 1, 1997, by and between Craig S. Miller, as "Maker" and Uno Restaurants, Inc., as "Holder." For value received, the undersigned parties agree as follows: 1. Section 2.2 of the Note, a copy of which is appended hereto as Exhibit A for reference, is amended to provide that the "Maturity Date" of the Note shall be the earlier to occur of (i) the date on which Maker's employment with Holder or its affiliates shall terminate, or (ii) at such time as the value of Uno Restaurant Corporation stock shall be equal to or greater than $9.00 per share for at least 30 days, or (iii) September 27, 1998. 2. In all other respects, the Note is hereby ratified, affirmed and unchanged. 3. The requirement to make principal payments prior to September 27, 1998 is waived. IN WITNESS WHEREOF, the undersigned parties have evidenced their agreement by written signatures shown below. April 7, 1998. Witness: MAKER: /s/ MAUREEN TOWLE /s/ CRAIG. S. MILLER - ------------------------------------------- --------------------------------------------- Printed Name: Maureen Towle Craig. S. Miller UNO RESTAURANTS, INC. By: /s/ ROBERT M. VINCENT ----------------------------------------- Robert M. Vincent Senior Vice President
SECOND AMENDMENT TO PROMISSORY NOTE AND REVISED DEBT AGREEMENT This Second Amendment to Promissory Note and Revised Debt Agreement dated September 27, 1998, does hereby further amend and supplement the terms of that certain Note dated April 1, 1997, by and between Craig S. Miller, as "Maker" and Uno Restaurants, Inc., as "Holder," as amended on April 7, 1998. For value received, the undersigned parties agree as follows: 1. Section 2.2 of the Note, a copy of which is appended hereto as Exhibit A for reference, is further amended to provide that the "Maturity Date" of the Note shall be the earlier to occur of (i) the date on which Maker's employment with Holder or its affiliates shall terminate, or (ii) at such time as the value of Uno Restaurant Corporation stock shall be equal to or greater than $9.00 per share for at least 30 days, or (iii) October 3, 1999. 2. In all other respects, the Note is hereby ratified, affirmed and unchanged. IN WITNESS WHEREOF, the undersigned parties have evidenced their agreement by written signatures shown below. Witness: MAKER: /s/ MAUREEN TOWLE /s/ CRAIG. S. MILLER - ------------------------------------------- --------------------------------------------- Printed Name: Maureen Towle Craig. S. Miller UNO RESTAURANTS, INC. By: /s/ ROBERT M. VINCENT ----------------------------------------- Robert M. Vincent Senior Vice President
EX-21 4 EX-21 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT
SUBSIDIARIES JURISDICTION OF INCORPORATION - -------------------------------------------------------- -------------------------------------------------------- URC Holding Company, Inc................................ Delaware SUBSIDIARIES OF URC HOLDING COMPANY, INC. - -------------------------------------------------------- B.S. Acquisition Corp................................... New Jersey Pizzeria Uno Corporation................................ Delaware Uno Restaurants, Inc.................................... Massachusetts Uno Foods Inc........................................... Massachusetts SUBSIDIARIES OF B.S. ACQUISITION CORP. - -------------------------------------------------------- B.S. of Woodbridge, Inc................................. New Jersey Uno Bay, Inc............................................ Pennsylvania SUBSIDIARIES OF UNO RESTAURANTS, INC. - -------------------------------------------------------- 8250 International Drive Corporation.................... Florida Aurora Uno, Inc......................................... Colorado Fairfax Uno, Inc........................................ Virginia Franklin Mills Pizzeria, Inc............................ Pennsylvania Grayborn Buena Vista, Inc............................... Florida Herald Center Uno Rest. Inc............................. New York Kissimmee Uno, Inc...................................... Florida Marketing Services Group, Inc........................... Massachusetts Marlborough Takery, Inc................................. Massachusetts Newington Uno, Inc...................................... Connecticut Newport News Uno, Inc................................... Virginia Newton Takery, Inc...................................... Massachusetts Paramus Uno, Inc........................................ New Jersey Pizzeria Due, Inc....................................... Illinois Pizzeria Uno, Inc....................................... Illinois Pizzeria Uno of Albany, Inc............................. New York Pizzeria Uno of Altamonte Springs, Inc.................. Florida Pizzeria Uno of Annapolis, Inc.......................... Maryland Pizzeria Uno of Ballston, Inc........................... Virginia Pizzeria Uno of Bay Ridge, Inc.......................... New York Pizzeria Uno of Bayside, Inc............................ New York Pizzeria Uno of Bethesda, Inc........................... Maryland Pizzeria Uno of Brockton, Inc........................... Massachusetts Pizzeria Uno of Buena Vista, Inc........................ Florida Pizzeria Uno of Buffalo, Inc............................ New York Pizzeria Uno of Columbus Avenue, Inc.................... New York Pizzeria Uno of Dock Square, Inc........................ Massachusetts Pizzeria Uno of East Village Inc........................ New York Pizzeria Uno of 86th Street, Inc........................ New York Pizzeria Uno of Fair Oaks, Inc.......................... Virginia Pizzeria Uno of Fairfield, Inc.......................... Missouri Pizzeria Uno of Forest Hills, Inc....................... New York Pizzeria Uno of Harbor Place, Inc....................... Maryland Pizzeria Uno of Kingston, Inc........................... Massachusetts
1 of 2 SUBSIDIARIES OF UNO RESTAURANTS, INC. JURISDICTION OF INCORPORATION Pizzeria Uno of Lynbrook Inc............................ New York Pizzeria Uno of Norfolk, Inc............................ Virginia Pizzeria Uno of Paramus, Inc............................ New Jersey Pizzeria Uno of Penn Center, Inc........................ Pennsylvania Pizzeria Uno of Reston, Inc............................. Virginia Pizzeria Uno of South Street Seaport, Inc............... New York Pizzeria Uno of Springfield, Inc........................ Massachusetts Pizzeria Uno of Syracuse, Inc........................... New York Pizzeria Uno of Tennessee, Inc.......................... Tennessee Pizzeria Uno of Union Station, Inc...................... District of Columbia Pizzeria Uno of Washington, DC, Inc..................... District of Columbia Pizzeria Uno of Westfarms, Inc.......................... Delaware Plizzettas of Burlington, Inc........................... Vermont Plizzettas of Concord, Inc.............................. New Hampshire Plizzettas of North Attleboro, Inc...................... Massachusetts Plizzettas of Paoli, Inc................................ Pennsylvania Sewell Corporation...................................... Illinois Su Casa, Inc............................................ Illinois Tiffany Uno, Inc........................................ Colorado Uno of Aurora, Inc...................................... Illinois Uno of Bangor, Inc...................................... Maine Uno of Crestwood, Inc................................... Illinois Uno of Daytona, Inc..................................... Florida Uno of Falls Church, Inc................................ Virginia Uno of Georgesville, Inc................................ Ohio Uno of Greenwood, Inc................................... Colorado Uno of Gurnee Mills, Inc................................ Illinois Uno of Henrietta, Inc................................... New York Uno of Lombard, Inc..................................... Illinois Uno of Manchester, Inc.................................. Connecticut Uno of Schaumburg, Inc.................................. Illinois Uno of Smoketown, Inc................................... Virginia Uno of Victor, Inc...................................... New York Uno Restaurant of Columbus, Inc......................... Ohio Uno Restaurant of Great Neck, Inc....................... New York Uno Restaurant of Shrewsbury, Inc....................... Massachusetts Uno Restaurant of St. Charles, Inc...................... Maryland Uno Restaurant of Tampa, Inc............................ Florida Uno Restaurant of Woburn, Inc........................... Massachusetts Uno Restaurants of New York Inc......................... New York Waltham Uno, Inc........................................ Massachusetts Westminster Uno, Inc.................................... Colorado SUBSIDIARY OF SEWELL CORPORATION - -------------------------------------------------------- Saxet Corporation....................................... Delaware SUBSIDIARY OF UNO RESTAURANTS OF NEW YORK INC. - -------------------------------------------------------- Pizzeria Uno Massachusetts Business Trust............... Massachusetts
2 of 2 EX-23 5 EX-23 Exhibit 23 Consent of Ernst & Young LLP, Independent Auditors We consent to the incorporation by reference in the Registration Statements (Form S-8 No. 33-80584 and Post-Effective Amendment No. 2 to Form S-8 No. 33-22875) pertaining to the Uno Restaurant Corporation 1987 Employee Stock Option Plan (Form S-8 No. 33-80586) pertaining to the Uno Restaurant Corporation 1989 Non-Qualified Stock Option Plan for Non-Employee Directors (Form S-8 No. 33-80664) pertaining to the Uno Restaurant Corporation 1993 Non-Qualified Stock Option Plan for Non-Employee Directors (Form S-8 No. 333-23101) pertaining to the Uno Restaurant Corporation 1997 Employee Stock Option Plan (Form S-8 No. 333-23103) pertaining to the Uno Restaurant Corporation Restricted Stock Program and (Form S-8 No. 333-49627) pertaining to the Uno Restaurant Corporation 1997 Key Officer Stock Option Plan and the Uno Restaurant Corporation 1997 Non-Qualified Stock Option Plan for Non-Employee Directors of our report dated November 3, 1998, with respect to the consolidated financial statements of the Uno Restaurant Corporation included in the Annual Report (Form 10-K) for the year ended September 27, 1998. /s/ Ernst & Young LLP Boston, Massachusetts December 22, 1998 EX-27 6 FINANCIAL DATA SCHEDULE EX-27
5 0000812075 UNO RESTAURANT 1,000 YEAR SEP-27-1998 SEP-29-1997 SEP-27-1998 2,030 0 1,784 0 2,296 6,925 193,866 68,543 143,195 22,280 47,246 0 0 138 73,531 143,195 191,276 191,276 48,567 178,624 134 0 3,527 8,991 2,968 0 0 0 636 5,387 0.49 0.49 Net of Treasury Stock
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