<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 16, 1997
REGISTRATION NO. 333-23605
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 3
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
IL FORNAIO (AMERICA) CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
------------------------
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CALIFORNIA (PRIOR TO
REINCORPORATION)
DELAWARE (AFTER REINCORPORATION) 5812 94-2766571
(STATE OR OTHER JURISDICTION OF (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
</TABLE>
------------------------
1000 SANSOME STREET, SUITE 200
SAN FRANCISCO, CALIFORNIA 94111
(415) 986-1505
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
LAURENCE B. MINDEL
CHAIRMAN OF THE BOARD AND CHIEF EXECUTIVE OFFICER
IL FORNAIO (AMERICA) CORPORATION
1000 SANSOME STREET, SUITE 200
SAN FRANCISCO, CALIFORNIA 94111
(415) 986-1505
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)
------------------------
COPIES TO:
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KENNETH L. GUERNSEY PETER LILLEVAND
CYDNEY S. POSNER LOWELL D. NESS
JAMES R. VIDANO ANDREW P. JOHNSON
LAURA M. RANDALL ORRICK, HERRINGTON & SUTCLIFFE LLP
COOLEY GODWARD LLP 400 SANSOME STREET
ONE MARITIME PLAZA, 20TH FLOOR SAN FRANCISCO, CA 94111
SAN FRANCISCO, CA 94111 (415) 392-1122
(415) 693-2000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the Registration Statement becomes effective.
------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, please check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, please check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement number for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement
becomes effective. This prospectus shall not constitute an offer to sell or
the solicitation of an offer to buy nor shall there be any sale of these
securities in any State in which such offer, solicitation or sale would be
unlawful prior to registration or qualification under the securities laws
of any such State.
SUBJECT TO COMPLETION, DATED SEPTEMBER 16, 1997
1,500,000 SHARES
LOGO
COMMON STOCK
Of the 1,500,000 shares of Common Stock offered hereby, 1,000,000 are being
sold by Il Fornaio (America) Corporation ("Il Fornaio" or the "Company") and
500,000 are being sold by the Selling Stockholders. See "Principal and Selling
Stockholders." The Company will not receive any of the proceeds from the sale of
shares by the Selling Stockholders.
Prior to this offering, there has been no public market for the Common
Stock of the Company. It is currently estimated that the initial public offering
price will be between $9.00 and $10.50 per share. See "Underwriting" for a
discussion of factors to be considered in determining the initial public
offering price. The Common Stock has been approved for quotation on the Nasdaq
National Market under the symbol "ILFO."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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==========================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company (2) Stockholders
- ------------------------------------------------------------------------------------------
Per Share......... $ $ $ $
Total(3).......... $ $ $ $
==========================================================================================
</TABLE>
(1) See "Underwriting" for information concerning indemnification of the
Underwriters and other matters.
(2) Before deducting expenses payable by the Company estimated at $850,000.
(3) The Company has granted to the Underwriters a 30-day option to purchase up
to an additional 225,000 shares of Common Stock solely to cover
over-allotments, if any. If the Underwriters exercise this option in full,
the Price to Public will total $ , the Underwriting Discount will
total $ and the Proceeds to Company will total $ . See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein, subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the office of Montgomery Securities on or about , 1997.
------------------------
MONTGOMERY SECURITIES BT ALEX. BROWN
, 1997
<PAGE> 3
[PHOTOGRAPH OF A TABLE DISPLAYING ASSORTED
BREADS AND PASTRIES, AN ITALIAN NEWSPAPER,
A PAIR OF GLASSES, AN ESPRESSO MACHINE
AND IL FORNAIO BRAND RETAIL PRODUCTS,
INCLUDING PACKAGES OF PASTA AND BOTTLES OF WINE]
IL FORNAIO'S MISSION
IS TO PROVIDE OUR CUSTOMERS WITH
THE MOST AUTHENTIC ITALIAN EXPERIENCE OUTSIDE OF ITALY.
We realize our mission by being students and teachers of Italian
culinary traditions,
preparations and presentations, infusing our heritage into
everything we do.
We realize our mission by putting our employees first so that
our customers can
come first.
We realize our mission by executing a profitable business
strategy that rewards our
shareholders without compromising the quality of our products.
We realize our mission by developing an atmosphere of
camaraderie and fun in all
our endeavors, of celebrating everyday the Italian in all of us.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING STABILIZING BIDS, SYNDICATE COVERING TRANSACTIONS OR THE IMPOSITION OF
PENALTY BIDS. FOR A DISCUSSION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE> 4
[IL FORNAIO LOGO]
[Photograph of main dining room [Photograph of exterior of
in Beverly Hills restaurant] Las Vegas restaurant]
Beverly Hills Las Vegas
[Photograph of main dining room [Photograph of retail bakery in
and bar area in Irvine restaurant] Burlingame restaurant]
Irvine Burlingame
[Photograph of main dining room and [Graphic depictions of
outdoor patio in Portland restaurant] Il Fornaio's Bakerman logo]
Portland
<PAGE> 5
[Photograph of main dining room [Photograph of the loggia in
and sunroom in Carmel restaurant] Sacramento restaurant]
Carmel-by-the-Sea Sacramento
[Photograph of main dining room [Photograph of bar area in
in Corte Madera restaurant] San Jose Restaurant]
Corte Madera San Jose
[Photograph of main dining room
in San Francisco restaurant
overlooking outdoor plaza]
San Francisco
<PAGE> 6
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial statements and notes thereto appearing elsewhere
in this Prospectus. Except as set forth in the financial statements or as
otherwise indicated herein, information in this Prospectus (i) gives effect to
the anticipated reincorporation of the Company from California to Delaware to be
effected prior to the closing of this offering, (ii) reflects the conversion of
all of the Company's outstanding shares of Preferred Stock into shares of Common
Stock, which will occur automatically upon the closing of this offering, and
(iii) assumes that the Underwriters' over-allotment option is not exercised. See
"Description of Capital Stock" and "Underwriting."
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Actual events or results could differ materially from those
anticipated in these forward-looking statements as a result of certain factors,
including those set forth under "Risk Factors" and elsewhere in this Prospectus.
THE COMPANY
Il Fornaio owns and operates 13 full-service, white tablecloth Italian
restaurants serving creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The Company's restaurants offer an extensive
menu, featuring house-made and imported pasta, poultry and game roasted over a
wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a
wood-burning oven, soups, salads and desserts. Il Fornaio's menu is
distinguished by fresh, hand-made breads, pastries and other baked goods that
are produced in the Company's restaurants and five wholesale bakeries. Il
Fornaio's wholesale bakeries also sell baked goods to quality grocery stores,
specialty retailers, hotels and other fine restaurants. In addition, the Company
operates a retail market in each restaurant, which sells baked goods, prepared
foods and a variety of Il Fornaio-brand products, allowing guests to recreate
the Il Fornaio dining experience at home.
The Company's objectives are to offer guests the most authentic Italian
dining experience available outside of Italy and to establish a brand identity
that provides a competitive advantage in every market in which the Company
operates. The Company's strategy to achieve these objectives includes the
following key elements: (i) serve premium quality, authentic regional Italian
cuisine created by native-born Italian chefs and complemented by hand-made Il
Fornaio baked goods; (ii) build brand awareness through its wholesale bakeries
and retail markets, which reinforce the Company's image as a provider of premium
quality, authentic Italian food and enable guests to recreate the Il Fornaio
dining experience at home; (iii) create a distinctive authentic Italian
atmosphere with restaurant designs unique to each location; (iv) consistently
execute Il Fornaio's high standards of food quality, service and cleanliness
through its employee-designed Five Star Service Program; and (v) foster a strong
corporate culture which attracts and retains highly qualified management, chefs
and hourly employees. The Company believes that these elements, combined with an
average check per guest of $20.93, provide an excellent dining value.
The Company operates 11 restaurants in California and has most recently
opened restaurants in Portland and Las Vegas. The Company believes that its
restaurants provide superior unit economics. In 1996, the Company's 10
comparable restaurants generated average sales of approximately $4.5 million and
average cash flow of approximately $884,000, or 19.9% of restaurant sales. Since
1991, the Company's total investment per restaurant, net of landlord
contributions, has averaged approximately $1.7 million, with additional average
pre-opening costs per restaurant of approximately $200,000. The restaurants
range in size from 5,000 to 10,900 square feet, seat between 76 and 220 guests
and serve both lunch and dinner.
Il Fornaio intends to develop restaurants in both existing and new
geographic markets and to locate restaurants at sites in affluent urban and
suburban areas. The flexibility of the Il Fornaio concept enables the Company to
develop successful restaurants in a variety of locations, including residential
neighborhoods, shopping centers, office buildings and hotels. The Company
intends to open one additional restaurant in 1997 in Denver and three new
restaurants in 1998, including locations in Santa Monica and Seattle, for which
leases have been signed. The Company expects that its planned future restaurants
will generally range in size from 7,000 to 10,000 square feet and will require,
on average, a total investment by the Company per restaurant, net
3
<PAGE> 7
of anticipated landlord contributions, of approximately $1.7 million, with
additional average pre-opening costs per restaurant of approximately $200,000.
Il Fornaio's business and expansion strategy has been developed and
implemented by an experienced senior management team with a record of successful
restaurant operations. In 1987, Laurence B. Mindel joined the Company as
Chairman, Chief Executive Officer and President, after spending over 15 years at
Spectrum Foods, where he created and operated innovative restaurants throughout
California, including Chianti, MacArthur Park, Harry's Bar and American Grill,
Ciao, Prego and Guaymas. In 1995, Michael J. Hislop joined the Company as
President and Chief Operating Officer, after serving as Chairman and Chief
Executive Officer of Chevy's Mexican Restaurants for four years and guiding its
expansion from 17 to 63 restaurants. These individuals, along with the seven
other members of senior management, have over 150 years of combined experience
in the restaurant and bakery businesses. Because of the experience level of its
senior management, the Company believes it has a competitive advantage in its
industry with respect to concept development and execution, site selection, unit
operations, training, product quality and service.
The Company was incorporated in California in June 1980, and intends to
reincorporate in Delaware prior to the closing of this offering. The Company's
executive office is located at 1000 Sansome Street, Suite 200, San Francisco,
California 94111. The Company's telephone number is (415) 986-1505.
Il Fornaio(R) and the Il Fornaio logo are registered marks of the Company,
and Festa Regionale and Passaporto are marks used and owned by the Company.
THE OFFERING
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Common Stock offered by the Company............... 1,000,000 shares
Common Stock offered by the Selling
Stockholders.................................... 500,000 shares
Common Stock to be outstanding after the
offering........................................ 5,582,891 shares(1)
Use of proceeds................................... To finance the development of additional
restaurants and for general corporate purposes.
Proposed Nasdaq National Market symbol............ ILFO
</TABLE>
- ---------------
(1) Excludes, as of August 15, 1997, outstanding options to purchase 980,295
shares of Common Stock and outstanding warrants to purchase 32,487 shares of
Common Stock. See "Management -- Employee Benefit Plans" and "Description of
Capital Stock -- Warrants."
4
<PAGE> 8
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, OPERATING AND FOOTNOTE DATA)
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<CAPTION>
SIX MONTHS ENDED
YEAR ENDED(1) ------------------
------------------------------------------------------------------------ JUNE
DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, 29,
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ -------- -------
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STATEMENTS OF OPERATIONS DATA:
Revenues:
Restaurants................. $ 30,737 $ 42,402 $ 39,485 $ 43,647 $ 50,599 $ 24,733 $32,116
Wholesale bakeries.......... 4,049 4,328 4,951 5,181 6,016 2,891 3,150
Retail bakeries............. 3,727 4,866 5,208 5,312 4,137 2,600 311
------- ------- ------- ------- ------- ------- -------
Total revenues....... 38,513 51,596 49,644 54,140 60,752 30,244 35,577
Income (loss) from
operations(2)............... 716 (2,670) 2,300 2,013 2,224 1,125 2,111
Income (loss) before provision
(benefit) for income
taxes....................... 687 (2,820) 2,247 2,072 2,351 1,169 2,220
Provision (benefit) for income
taxes(3).................... 6 70 332 (2,432) 898 476 915
Net income (loss)............. 681 (2,890) 1,915 4,504 1,453 693 1,305
Net income (loss) per share
(fully diluted)............. $ 0.20 $ (0.67) $ 0.43 $ 1.00 $ 0.32 $ 0.16 $ 0.27
Weighted average common shares
outstanding (fully
diluted).................... 3,424 4,344 4,477 4,499 4,839 4,809 5,037
OPERATING DATA:
Comparable restaurant sales
increase (decrease)(4)...... 1.5% (4.8%) (3.4%) (1.7%) 4.8% 2.9% 6.1%
Restaurants open at end of
period(5)................... 9 9 9 11 12 12 13
Wholesale bakeries open at end
of period................... 5 6 6 6 6 6 5
Retail bakeries open at end of
period(6)................... 6 9 8 8 4 8 --
</TABLE>
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<CAPTION>
JUNE 29, 1997
------------------------------
ACTUAL AS ADJUSTED(7)
------------ ---------------
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BALANCE SHEET DATA:
Working capital................................................................... $ 1,116 $ 9,333
Total assets...................................................................... 37,180 45,397
Long-term debt (excluding current portion)........................................ -- --
Stockholders' equity.............................................................. 24,489 32,706
</TABLE>
- ---------------
(1) All years reported include 52 weeks, except the year ended December 31,
1995, which includes 53 weeks.
(2) Includes (i)a $2.3 million pre-tax charge recorded in 1993 associated with
the Company's decision to dispose of its restaurant in Costa Mesa and a
free-standing retail bakery in Los Angeles, (ii) a $932,000 pre-tax charge
recorded in 1995 associated with the default by the buyer of the Company's
Etrusca restaurant and (iii) a $470,000 pre-tax reversal of the 1993 reserve
recorded in the first six months of 1997 associated with the disposition of
the Company's Costa Mesa restaurant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
(3) Includes a tax benefit of $2.7 million recorded in 1995 as a result of the
recognition of deferred tax assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
(4) A new restaurant is included in the calculation of the change in comparable
restaurant sales after the first full month following the eighteenth month
of that restaurant's operation.
(5) During 1993, the Company opened two new restaurants and commenced the
disposition of two existing restaurants that differed from the Il Fornaio
restaurant concept. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Closure of Non-Core Operations."
(6) Reflects the disposition of four of the Company's free-standing retail
bakeries in the third quarter of 1996 and the disposition of the Company's
four remaining free-standing retail bakeries in the first quarter of 1997.
See "Management's Discussion and Analysis of Financial Condition and Results
of Operations -- Closure of Non-Core Operations."
(7) As adjusted to reflect the sale of 1,000,000 shares of Common Stock offered
by the Company hereby at an assumed initial public offering price of $9.75
per share and the application of the estimated net proceeds therefrom.
5
<PAGE> 9
RISK FACTORS
In addition to the other information in this Prospectus, prospective
investors should carefully consider the following risk factors in evaluating an
investment in the Company and its business before purchasing any shares of
Common Stock offered hereby. This Prospectus contains forward-looking statements
which involve risks and uncertainties. Prospective investors are cautioned that
actual events or results may differ materially from those discussed in the
forward-looking statements. Factors that might cause actual events or results to
differ materially from those indicated by such forward-looking statements may
include the matters set forth below and elsewhere in this Prospectus.
UNCERTAINTIES ASSOCIATED WITH FUTURE GROWTH
The Company has experienced limited growth in recent years, expanding from
nine restaurants at the end of 1993 to 12 restaurants at the end of 1996. The
Company is currently pursuing a more aggressive growth strategy. To date in
1997, the Company has opened its Las Vegas restaurant and a 12,000-square foot
wholesale bakery in Burlingame, California. The Company expects to open a
restaurant in Denver in the fourth quarter of 1997 and expects to open three
restaurants in 1998. The Company's ability to expand successfully will depend on
a number of factors, including the identification and availability of suitable
locations, the negotiation of favorable lease arrangements, timely development
and construction of any new shopping center, hotel or other site in which the
restaurant or bakery may be located, management of the costs of construction and
development of new restaurants and bakeries, securing required governmental
approvals and permits, recruitment of qualified operating personnel
(particularly managers and chefs), general economic conditions and other
factors, some of which are beyond the control of the Company. Moreover, the
opening of additional restaurants and bakeries in the future will depend, in
part, upon the Company's ability to generate sufficient funds from existing
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks in each case, that the Company will be able
to open all of its planned new operations on a timely basis, if at all, or, if
opened, that those operations will be operated profitably. Delays in opening, or
failure to open, planned new restaurants could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's growth strategy may place a strain on the Company's
management, financial and other resources. To manage its growth effectively, the
Company must maintain its high level of quality and service at its existing and
future restaurants, continue to enhance its operational, financial and
management systems, and locate, hire, train and retain experienced and dedicated
operating personnel, particularly managers and chefs. There can be no assurance
that the Company will be able to effectively manage this expansion in any one or
more of these areas, and any failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH SMALL OPERATIONS BASE
The Company currently operates 13 restaurants. Because of the relatively
small number of restaurants operated by the Company, adverse results experienced
by any one location could have a material adverse effect on the Company's
business, financial condition and results of operations. The Company's Las Vegas
restaurant opened in January 1997 and has performed at levels above that of any
other restaurant previously opened by the Company. There can be no assurance
that the Las Vegas restaurant will continue to perform at the level achieved to
date. In addition, the results achieved to date by the Company's relatively
small number of restaurants may not be indicative of those restaurants'
long-term performance or the potential market acceptance of restaurants in other
geographic locations.
GEOGRAPHIC CONCENTRATION
Eleven of the Company's 13 restaurants are located in California. Because
of this geographic concentration, the Company is susceptible to local and
regional risks, such as increased government regulation, adverse economic
conditions, adverse weather conditions, earthquakes and other natural disasters,
any of which could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, in light of the
Company's current geographic concentration, adverse publicity relating to the
6
<PAGE> 10
Company's restaurants could have a more pronounced adverse effect on the
Company's overall sales than might be the case if the Company's restaurants were
more broadly dispersed.
The Company has opened only two restaurants located outside of California.
Over the next several years, the Company expects that some of its expansion will
involve opening restaurants in other states. Expansion into new geographic
regions involves a number of risks, in addition to those identified above,
including uncertainties related to local customs, demographics, legal
requirements, wages, costs and other economic conditions, the need to develop
relationships with local distributors and suppliers for fresh produce and other
ingredients, and potential difficulties related to management of operations
located in a number of broadly dispersed locations. There can be no assurance
that the Company will be successful in addressing these risks in each case, that
the Company will be able to open all of its planned new operations on a timely
basis, if at all, or, if opened, that those operations will be operated
profitably. Delays in opening, or failure to open, planned new restaurants could
have a material adverse effect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including general economic conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors,
weather conditions, the timing of new restaurant openings and related expenses,
net sales contributed by new restaurants and increases or decreases in
comparable restaurant revenues. For example, weather conditions have generally
had the most significant adverse impact in the first quarter of each year. Due
to the foregoing factors, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for any year and,
from time to time in the future, the Company's results of operations may be
below the expectations of public market analysts and investors. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
A variety of factors also affect the Company's comparable restaurant sales
results, including general economic conditions, consumer confidence in the
economy, changes in consumer preferences, competitive factors, weather
conditions and the Company's ability to execute its business strategy. The
Company had a 4.8% increase in comparable restaurant sales in 1996. While that
trend has continued in 1997 (comparable restaurant sales were up 6.1% for the
first half of 1997 as compared to the corresponding period in 1996), no
assurance can be given that comparable restaurant sales for any particular
future period will not decrease.
CHANGES IN FOOD AND LABOR COSTS
The Company's profitability is dependent in part on its ability to
anticipate and react to changes in food and labor costs. Various factors beyond
the Company's control, including adverse weather conditions and governmental
regulation, may affect the Company's food costs. There can be no assurance that
the Company will be able to anticipate and react to changing food costs through
its purchasing practices and menu price adjustments in the future, and failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
A substantial number of the Company's employees are subject to various
minimum wage requirements. Many of the Company's employees work in restaurants
located in California and receive salaries equal to the California minimum wage.
In November 1996, California voters approved a proposal that raised the minimum
wage in California to $5.00 an hour effective March 1, 1997 and will increase it
to $5.75 an hour effective March 1, 1998. There can be no assurance that similar
proposals will not come before the voters in other jurisdictions in which the
Company operates or seeks to operate. In addition, recent federal legislation
increased the federal minimum wage from $4.25 an hour to $4.75 effective October
1, 1996 and to $5.15 effective September 1, 1997. In the fourth quarter of 1996,
the Company introduced its first menu price increase in three years due, in
part, to increases in labor costs. There can be no assurance that the Company
will be able to pass additional increases in labor costs through to its guests
in the form of menu price adjustments in the future and, accordingly, such
minimum wage increases could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
7
<PAGE> 11
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Laurence B. Mindel, the
Company's Chairman of the Board and Chief Executive Officer, and Michael J.
Hislop, the Company's President and Chief Operating Officer. The Company
currently maintains a $5.0 million term life insurance policy covering Mr.
Mindel and a $3.0 million term life insurance policy covering Mr. Hislop. The
Company's success in the future will be dependent on its ability to attract,
retain and motivate qualified management and operating personnel, including
restaurant managers and chefs. Failure by the Company to attract and retain such
key employees in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION AND INDUSTRY CONDITIONS
The restaurant and bakery industries are each intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many restaurants and bakeries compete with the Company at each of
its locations. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants and bakeries are distinctive in design and
operating concept, other companies may develop restaurants and bakeries that
operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
LONG-TERM, NON-CANCELABLE LEASES; TERMINATION PROVISIONS
The Company's current leases have annual base rents ranging from $60,000 to
$336,000, are non-cancelable and typically have terms of 10 to 20 years. Leases
entered into by the Company in the future will also be long-term and
non-cancelable. If a decision is made to close any restaurant or bakery, the
Company may be committed to perform its obligations under the applicable lease,
which would include, among other things, payment of the base rent for the
balance of the lease term. In 1993 and 1995, the Company recorded provisions of
$2.3 million and $932,000, respectively, for liabilities associated with the
closure of facilities subject to non-cancelable, long-term leases. The Company
may incur liabilities of this nature in the future if a decision is made to
close one or more restaurants or bakeries, and such liabilities, if incurred,
could have a material adverse effect on the Company's business, financial
condition and results of operations.
In addition, the Las Vegas restaurant lease contains provisions that allow
the hotel landlord to terminate the Company's lease without compensation if,
during any six-month period in which the hotel has achieved a specified
occupancy rate, the restaurant's monthly gross sales average less than a
specified minimum amount. To date, the Las Vegas restaurant's sales have been
more than triple the specified minimum amount, although there can be no
assurance that restaurant sales will continue to exceed the specified minimum.
In addition, the lease contains provisions allowing the landlord to relocate the
Company's restaurant to another site within the hotel possessing retail
characteristics similar to the site currently occupied by the Company. The
landlord may not use the site vacated for restaurant operations. Should the
Company elect not to relocate the restaurant, the lease may be terminated by the
Company and, in that event, the landlord is obligated to reimburse the Company
for the unamortized cost of its improvements to the site and any of the
Company's furniture, fixtures and equipment not removed by the Company. Such
termination or relocation could have a material adverse effect on the Company's
business, financial condition and results of operations. See
"Business -- Properties."
GOVERNMENTAL REGULATION
The Company's operations are subject to regulation by federal agencies and
to licensing and regulation by state and local health, environmental, labor
relations, sanitation, building, zoning, safety, fire and other departments
relating to the development and operation of restaurants and retail
establishments. The Company's activities are also subject to the federal
Americans With Disabilities Act and related regulations,
8
<PAGE> 12
which prohibit discrimination on the basis of disability in public
accommodations and employment. The Company is also subject to state "dram-shop"
laws and regulations, which generally provide that a person injured by an
intoxicated person may seek to recover damages from an establishment that
wrongfully served alcoholic beverages to such person. Changes in any or all of
these laws or regulations, such as government-imposed increases in minimum
wages, paid leaves of absence or mandated health benefits, or increased tax
reporting and tax payment requirements for employees who receive gratuities,
could have a material adverse effect on the Company's business, financial
condition and results of operations. Delays or failures in obtaining or
maintaining the required construction and operating licenses, permits or
approvals could delay or prevent the opening of new restaurants or could
materially and adversely affect the operation of existing restaurants. In
addition, there can be no assurance that the Company will be able to obtain
necessary variances or amendments to required licenses, permits or other
approvals on a cost-effective and timely basis in order to construct and develop
restaurants and bakeries in the future. See "Business -- Governmental
Regulation."
UNINSURED LOSSES
The Company has comprehensive insurance, including general liability, fire
and extended coverage. However, there are certain types of losses that may be
uninsurable or that the Company believes are not economically insurable, such as
earthquakes and other natural disasters. In view of the location of many of the
Company's existing and planned restaurants in California, the Company's
operations are particularly susceptible to damage and disruption caused by
earthquakes. In the event of an earthquake or other natural disaster affecting
the Company's geographic area of operations, the Company could suffer a loss of
the capital invested in, as well as anticipated earnings from, the damaged or
destroyed properties. In addition, the Company does not currently maintain any
insurance coverage for employee-related litigation or the effects of adverse
publicity, and such litigation or adverse publicity could have a material
adverse effect on the Company's business, financial condition and results of
operations.
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
Following the closing of this offering, the Company's directors, officers
and their affiliates will beneficially own approximately 36.9% of the
outstanding Common Stock (assuming exercise of vested stock options). As a
result of such Common Stock ownership, the Company's directors, officers and
their affiliates, if they voted together, would be able to exercise significant
influence over the election of members of the Company's Board of Directors and
other corporate actions requiring stockholder approval. See "Principal and
Selling Stockholders."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
Prior to this offering, there has been no public market for the Common
Stock. There can be no assurance that an active trading market will develop or,
if one develops, that it will be maintained. The initial public offering price
of the Common Stock will be established by negotiation among the Company, the
Selling Stockholders and the Underwriters. See "Underwriting" for factors to be
considered in determining the initial public offering price. The market price of
the shares of Common Stock could be subject to significant fluctuations in
response to the Company's operating results and other factors, including general
economic and market conditions. In addition, the stock market in recent years
has experienced and continues to experience extreme price and volume
fluctuations, which have affected the market price of the stock of many
companies and which have often been unrelated or disproportionate to the
operating performance of these companies. These fluctuations, as well as a
shortfall in sales or earnings compared to securities analysts' expectations,
changes in analysts' recommendations or projections or general economic and
market conditions, may adversely affect the market price of the Common Stock. In
the past, securities class action litigation has often been instituted following
periods of volatility in the market price for a company's securities. Such
litigation could result in substantial costs and a diversion of management
attention and resources, which could have a material adverse effect on the
Company's business, financial condition and results of operations.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") authorizes the Board of Directors to issue up to 5
million shares of Preferred Stock and to determine the powers, preferences,
privileges, rights, including voting rights, qualifications, limitations and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be
9
<PAGE> 13
subject to, and may be adversely affected by, the rights of the holders of any
Preferred Stock that may be issued in the future. The Restated Certificate and
By-laws, among other things, provide for a classified Board of Directors,
require that stockholder actions occur at duly called meetings of the
stockholders, limit who may call special meetings of stockholders, do not permit
cumulative voting in the election of directors and require advance notice of
stockholder proposals and director nominations. These and other provisions could
have the effect of making it more difficult for a third party to acquire a
majority of the outstanding voting stock of the Company, discourage a hostile
bid or delay, prevent or deter a merger, acquisition or tender offer, in which
the Company's stockholders could receive a premium for their shares, or a proxy
contest for control of the Company or other change in the Company's management.
See "Management" and "Description of Capital Stock."
ADDITIONAL SHARES ELIGIBLE FOR FUTURE SALE IN THE PUBLIC MARKET
The sale of a substantial number of shares of Common Stock in the public
market following this offering could adversely affect the market price of the
Common Stock. Upon the closing of this offering, the Company will have
outstanding an aggregate of 5,582,891 shares of Common Stock, assuming no
exercise of outstanding options and warrants.
The 1,500,000 shares of Common Stock sold in this offering will be freely
tradeable without restriction under the Securities Act of 1933, as amended (the
"Securities Act"). The remaining 4,082,891 shares of Common Stock are
"Restricted Shares" and are subject to restrictions under the Securities Act. Of
these Restricted Shares, 3,507,540 are subject to lock-up agreements under which
the holders have agreed not to sell or otherwise dispose of any of their shares
for a period of 180 days after the date of this Prospectus without the prior
written consent of Montgomery Securities. In its sole discretion and at any time
without notice, Montgomery Securities may release all or any portion of the
shares subject to the lock-up agreements. All of the Restricted Shares subject
to lock-up agreements will become available for sale in the public market
immediately following expiration of the 180-day lock-up period, subject (to the
extent applicable) to the volume and other limitations of Rule 144 or Rule 701
under the Securities Act. An additional 416,095 Restricted Shares are subject to
contractual restrictions with the Company similar to those contained in the
lock-up agreements, of which 78,033 shares will become available for sale in the
public market beginning 120 days after the date of this Prospectus and 338,062
shares will become available for sale beginning 180 days after the date of this
Prospectus. In addition, beginning 90 days after the date of this Prospectus,
38,428 Restricted Shares not subject to lock-up agreements or contractual
restrictions will become available for sale in the public market, subject to the
volume and other limitations of Rule 144 or Rule 701. The remaining 120,828
Restricted Shares not subject to lock-up agreements or contractual restrictions
will be eligible for sale in the public market pursuant to Rule 144(k) under the
Securities Act as of the date of this Prospectus. In addition, certain
securityholders of the Company have the right to register shares of Common Stock
for sale in the public market, and the Company intends to register shares of
Common Stock authorized for issuance under the Company's equity incentive plans.
See "Shares Eligible for Future Sale."
DILUTION
The price to the public in this offering is substantially higher than the
book value per share of Common Stock. Investors purchasing shares of Common
Stock in this offering will therefore incur immediate and substantial dilution.
See "Dilution."
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements may be deemed to include the
schedule of anticipated restaurant and wholesale bakery openings, the projected
costs and sizes of future restaurants and bakeries, plans for future wholesale
bakeries, the adequacy of certain reserves and the adequacy of anticipated
sources of cash, including the proceeds from this offering, to fund the
Company's future capital requirements through 1998. Words such as "believes,"
"anticipates," "expects," "intends" and similar expressions are intended to
identify forward-looking statements, but are not the exclusive means of
identifying such statements. Actual results or events could differ materially
from those anticipated in any forward-looking statements for a number of
reasons, including the reasons discussed in other portions of this "Risk
Factors" section and elsewhere in this Prospectus.
10
<PAGE> 14
USE OF PROCEEDS
The net proceeds to the Company from the sale of the 1,000,000 shares of
Common Stock offered by the Company at an assumed initial public offering price
of $9.75 per share are estimated to be approximately $8.2 million ($10.3 million
if the Underwriters' over-allotment option is exercised in full). The Company
will not receive any proceeds from the sale of Common Stock by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company expects to
use the net proceeds of this offering for general corporate purposes, primarily
to finance the development of additional restaurants. Pending application of the
net proceeds as described above, the Company intends to invest the net proceeds
of the offering in short-term, investment-grade, interest-bearing securities.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock. The
Board of Directors intends to retain earnings to support operations and to
finance expansion and does not intend to pay cash dividends on the Common Stock
for the foreseeable future. In addition, certain financial covenants contained
in the Company's bank line of credit restrict the Company's ability to pay cash
dividends.
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
29, 1997, (i) on an actual basis and (ii) as adjusted to give effect to the
conversion of all outstanding shares of Preferred Stock into Common Stock and to
reflect the sale of 1,000,000 shares of Common Stock offered by the Company
hereby at an assumed initial public offering price of $9.75 per share and the
application of the estimated net proceeds therefrom:
<TABLE>
<CAPTION>
JUNE 29, 1997
-----------------------
ACTUAL AS ADJUSTED
------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (excluding current portion)..................... $ -- $ --
Stockholders' equity:
Convertible Preferred Stock, no par value, 3,500,000 shares
authorized, 2,308,196 shares outstanding; $.001 par value,
5,000,000 shares authorized, no shares outstanding, as
adjusted.................................................. 16,885 --
Common Stock, no par value, 15,000,000 shares authorized,
1,669,985 shares outstanding; $.001 par value, 20,000,000,
shares authorized, 5,582,891 shares outstanding, as
adjusted(1)............................................... 8,228 33,330
Accumulated deficit............................................ (624) (624)
------- -------
Total stockholders' equity........................... 24,489 32,706
------- -------
Total capitalization................................. $24,489 $32,706
======= =======
</TABLE>
- ---------------
(1) Excludes, as of August 15, 1997, outstanding options to purchase 980,295
shares of Common Stock and outstanding warrants to purchase 32,487 shares of
Common Stock. See "Management -- Employee Benefit Plans" and "Description of
Capital Stock -- Warrants."
11
<PAGE> 15
DILUTION
The net tangible book value of the Company at June 29, 1997 was
approximately $24.5 million or $5.34 per share of Common Stock. Net tangible
book value per share is equal to the Company's total tangible assets less its
total liabilities divided by the number of shares of Common Stock outstanding.
After giving effect to the sale by the Company of the 1,000,000 shares of Common
Stock offered hereby at an assumed initial public offering price of $9.75 per
share and the receipt of the net proceeds therefrom, the pro forma net tangible
book value of the Company as of June 29, 1997 would have been $32.7 million, or
$5.86 per share. This represents an immediate increase in net tangible book
value of $0.52 per share to existing stockholders and an immediate dilution in
net tangible book value of $3.89 per share to new investors purchasing shares at
the assumed initial public offering price. The following table illustrates this
per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price.............................. $ 9.75
Net tangible book value before offering.......................... $ 5.34
Increase attributable to new investors........................... 0.52
------
Pro forma net tangible book value after offering................... 5.86
------
Dilution to new investors.......................................... $ 3.89
======
</TABLE>
The following table summarizes, on a pro forma basis as of June 29, 1997,
the difference between the number of shares of Common Stock purchased from the
Company, the total consideration paid and the average price per share paid by
the existing stockholders and by the new investors (at an assumed initial public
offering price of $9.75 per share for shares purchased in this offering):
<TABLE>
<CAPTION>
SHARES PURCHASED(1) TOTAL CONSIDERATION
--------------------- ----------------------- AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders(2)............ 4,582,891 82.1% $25,113,000 72.0% $5.48
New investors(2).................... 1,000,000 17.9 9,750,000 28.0 9.75
--------- ----- ----------- -----
Total..................... 5,582,891 100.0% $34,863,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) The foregoing computations assume no exercise of outstanding stock options
or warrants. As of August 15, 1997, options were outstanding to purchase
980,295 shares of Common Stock at a weighted average exercise price of $4.78
per share. At August 15, 1997, options to purchase 448,475 of such shares
were exercisable. At the same date, warrants were outstanding to purchase
32,487 shares of Common Stock at an exercise price of $9.90 per share, all
of which were exercisable. To the extent that outstanding options are
exercised, there will be further dilution to new investors. See
"Management -- Employee Benefit Plans" and "Description of Capital
Stock -- Warrants."
(2) Sales by the Selling Stockholders in the offering will reduce the number of
shares held by existing stockholders to 4,082,891 shares, or approximately
73.1% of the total shares of Common Stock outstanding as of June 29, 1997,
and will increase the number of shares held by new investors to 1,500,000,
or approximately 26.9%, of the total shares of Common Stock outstanding
after the offering. See "Principal and Selling Stockholders."
12
<PAGE> 16
SELECTED FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, OPERATING AND FOOTNOTE DATA)
The statement of operations data for each of the years in the three-year
period ended December 29, 1996 and the balance sheet data as of December 31,
1995 and December 29, 1996, have been derived from the audited financial
statements of the Company included elsewhere in this Prospectus that have been
audited by Deloitte & Touche LLP, independent auditors. The balance sheet data
as of December 27, 1992, December 29, 1993 and December 25, 1994 and the
statement of operations data for each of the years in the two-year period ended
December 29, 1993 have been derived from the audited financial statements of the
Company not included in this Prospectus. The statement of operations data for
the six months ended June 30, 1996 and June 29, 1997 and the balance sheet data
as of June 29, 1997 have been derived from unaudited financial statements
included elsewhere in this Prospectus, and the balance sheet data as of June 30,
1996 have been derived from unaudited financial statements not included in this
Prospectus. These unaudited financial statements were prepared on the same basis
as the audited financial statements and, in the opinion of management, contain
all adjustments, consisting only of normal recurring adjustments, necessary for
a fair presentation of the financial position and results of operations for such
periods. The results of operations for the six months ended June 29, 1997 are
not necessarily indicative of results to be expected for the full year. The data
set forth below should be read in conjunction with the Financial Statements of
Il Fornaio (America) Corporation, including the notes thereto, and with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED(1) SIX MONTHS ENDED
------------------------------------------------------------------------ -------------------
DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1992 1993 1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------ -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Restaurants.................... $ 30,737 $ 42,402 $ 39,485 $ 43,647 $ 50,599 $ 24,733 $ 32,116
Wholesale bakeries............. 4,049 4,328 4,951 5,181 6,016 2,891 3,150
Retail bakeries................ 3,727 4,866 5,208 5,312 4,137 2,600 311
------ ------ ------ ------ ------ ------ ------
Total revenues........... 38,513 51,596 49,644 54,140 60,752 30,224 35,577
------ ------ ------ ------ ------ ------ ------
Costs and expenses:
Cost of sales.................. 9,320 12,097 11,300 12,772 14,792 7,273 8,350
Operating expenses............. 23,121 32,258 29,290 31,036 35,152 17,569 20,703
Depreciation and
amortization................. 2,045 3,512 3,162 3,304 3,860 1,934 1,927
General and administrative
expenses..................... 3,311 4,060 3,592 4,083 4,724 2,323 2,956
Provision for store
closures(2).................. -- 2,339 -- 932 -- -- (470)
------ ------ ------ ------ ------ ------ ------
Total costs and
expenses............... 37,797 54,266 47,344 52,127 58,528 29,099 33,466
------ ------ ------ ------ ------ ------ ------
Income (loss) from operations.... 716 (2,670) 2,300 2,013 2,224 1,125 2,111
Interest (income) expense, net... 29 150 53 (59) (127) (44) (109)
------ ------ ------ ------ ------ ------ ------
Income (loss) before provision
(benefit) for income taxes..... 687 (2,820) 2,247 2,072 2,351 1,169 2,220
Provision (benefit) for income
taxes(3)....................... 6 70 332 (2,432) 898 476 915
------ ------ ------ ------ ------ ------ ------
Net income (loss)................ $ 681 $ (2,890) $ 1,915 $ 4,504 $ 1,453 $ 693 $ 1,305
====== ====== ====== ====== ====== ====== ======
Net income (loss) per share
(fully diluted)................ $ 0.20 $ (0.67) $ 0.43 $ 1.00 $ 0.32 $ 0.16 $ 0.27
====== ====== ====== ====== ====== ====== ======
Weighted average common shares
outstanding (fully diluted).... 3,424 4,344 4,477 4,499 4,839 4,809 5,037
OPERATING DATA:
Comparable restaurant sales
increase (decrease)(4)......... 1.5% (4.8%) (3.4%) (1.7%) 4.8% 2.9% 6.1%
Restaurants open at end of
period(5)...................... 9 9 9 11 12 12 13
Wholesale bakeries open at end of
period......................... 5 6 6 6 6 6 5
Retail bakeries open at end of
period(6)...................... 6 9 8 8 4 8 --
BALANCE SHEET DATA (AT END OF
PERIOD):
Working capital (deficit)........ $ (9,779) $ (4,602) $ (496) $ 807 $ 158 $ 1,791 $ 1,116
Total assets..................... 29,623 29,723 30,164 34,194 34,855 34,540 37,180
Long-term debt (excluding current
portion)....................... -- -- 750 150 -- -- --
Stockholders' equity............. 10,076 14,717 16,678 21,283 22,936 21,947 24,489
</TABLE>
13
<PAGE> 17
- ---------------
(1) All years reported include 52 weeks, except the year ended December 31,
1995, which includes 53 weeks.
(2) Includes (i) a $2.3 million pre-tax charge recorded in 1993 associated with
the Company's decision to dispose of its restaurant in Costa Mesa and a
free-standing retail bakery in Los Angeles, (ii) a $932,000 pre-tax charge
recorded in 1995 associated with the default by the buyer of the Company's
Etrusca restaurant and (iii) a $470,000 pre-tax reversal of the 1993 reserve
recorded in the first six months of 1997 associated with the disposition of
the Company's Costa Mesa restaurant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
(3) Includes a tax benefit of $2.7 million in 1995 as a result of the
recognition of deferred tax assets. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Results of
Operations."
(4) A new restaurant is included in the calculation of the change in comparable
restaurant sales after the first full month following the eighteenth month
of that restaurant's operation.
(5) During 1993, the Company opened two new restaurants and commenced the
disposition of two existing restaurants that differed from the Il Fornaio
restaurant concept. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Closure of Non-Core Operations."
(6) Reflects the disposition of four of the Company's free-standing retail
bakeries in the third quarter of 1996 and the disposition of the four
remaining free-standing retail bakeries in the first quarter of 1997. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Closure of Non-Core Operations."
14
<PAGE> 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of June 29, 1997, the Company owned and operated 13 restaurants and five
wholesale bakeries. Eleven of the restaurants and all of the wholesale bakeries
are located in California. One restaurant is located in Portland and one
restaurant is located in Las Vegas.
In 1993, management analyzed the economics of each of the Company's
business units and established criteria for future growth. Based on this
analysis, management developed a strategic plan to focus the Company's
operations on Il Fornaio restaurants and wholesale bakeries. The plan provided
for the disposition of two restaurants that differed from the Il Fornaio
restaurant concept. Management also concluded that, while the Company would
continue to evaluate its existing free-standing retail bakeries, no additional
free-standing retail bakeries would be developed. In 1995, Michael J. Hislop
joined the Company as President and Chief Operating Officer and implemented a
number of new strategic initiatives to accelerate Il Fornaio's restaurant growth
and facilitate its expansion into new geographic markets. Management also took
steps to develop the Company's infrastructure and to increase sales and guest
visit frequency by emphasizing service and implementing new marketing and
training programs. In addition, the decision was made to dispose of the
Company's free-standing retail bakery operations. These initiatives contributed
to comparable restaurant sales increases of 4.8% in 1996 and 6.1% for the first
half of 1997. From 1995 through the first half of 1997, the Company opened four
new full-service restaurants, two in California and one each in Portland and Las
Vegas, as well as a large free-standing wholesale bakery in Burlingame,
California.
The Company's revenues consist of restaurant sales, wholesale bakery sales
and free-standing retail bakery sales. For fiscal 1996, restaurant sales were
approximately 83.3% of total revenues, and wholesale and free-standing retail
bakery sales were 9.9% and 6.8% of total revenues, respectively. In July 1996,
the Company disposed of its four Northern California free-standing retail
bakeries and, in February 1997, sold the balance of its free-standing retail
bakeries, all of which were located in Southern California.
Comparable restaurant sales are calculated to include a new restaurant only
after the first full month following the eighteenth month of its operation.
Comparable restaurant revenues may fluctuate significantly as a result of a
variety of factors. See "Risk Factors -- Fluctuations in Operating Results."
Cost of sales is composed primarily of the cost of food and beverages.
Operating expenses include payroll and fringe benefit costs, occupancy costs,
marketing costs and other store-level costs. The majority of these costs are
variable and are expected generally to increase with sales volume. Occupancy
costs include both a fixed and percentage portion of rent. Depreciation and
amortization includes the amortization of pre-opening costs associated with the
opening of new locations. The Company capitalizes pre-opening expenses for each
of its new units and amortizes such costs over the 12-month period following the
opening of the unit. Pre-opening costs consist of direct costs related to hiring
and training the initial workforce and certain other direct costs related to
opening new restaurants. General and administrative expenses are composed of
expenses associated with all corporate and administrative functions that support
existing operations and provide an infrastructure to support future growth,
including management and staff salaries, employee benefits, travel, information
systems and training and market research. Certain expenses of recruiting and
training unit management personnel are also included as general and
administrative expenses.
This Prospectus contains forward-looking statements that involve risks and
uncertainties related to future events. Prospective investors are cautioned that
actual events or results may differ materially from those discussed in the
forward-looking statements. Factors that might cause actual events or results to
differ materially from those indicated by such forward-looking statements may
include the matters set forth herein, in "Risk Factors" and elsewhere in this
Prospectus.
15
<PAGE> 19
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED
---------------------------------------- --------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ --------- ---------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurants................................. 79.5% 80.6% 83.3% 81.8% 90.3%
Wholesale bakeries.......................... 10.0 9.6 9.9 9.6 8.9
Retail bakeries............................. 10.5 9.8 6.8 8.6 0.8
----- ----- ----- ----- -----
Total revenues...................... 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of sales............................... 22.8 23.6 24.3 24.1 23.5
Operating expenses.......................... 59.0 57.3 57.9 58.1 58.2
Depreciation and amortization............... 6.4 6.1 6.3 6.3 5.4
General and administrative expenses......... 7.2 7.6 7.8 7.7 8.3
Provision for store closures................ 0.0 1.7 0.0 -- (1.3)
----- ----- ----- ----- -----
Total costs and expenses............ 95.4 96.3 96.3 96.2 94.1
----- ----- ----- ----- -----
Income from operations........................ 4.6 3.7 3.7 3.8 5.9
Interest (income) expense, net................ 0.1 (0.1) (0.2) (0.1) (0.3)
----- ----- ----- ----- -----
Income before provision (benefit) for income
taxes....................................... 4.5 3.8 3.9 3.9 6.2
Provision (benefit) for income taxes.......... 0.7 (4.5) 1.5 1.6 2.5
----- ----- ----- ----- -----
Net income.................................... 3.8% 8.3% 2.4% 2.3% 3.7%
===== ===== ===== ===== =====
</TABLE>
Six Months Ended June 29, 1997 Compared to Six Months Ended June 30, 1996
Revenues increased by $5.3 million, or 17.7%, to $35.6 million in the six
months ended June 29, 1997 from $30.2 million in the six months ended June 30,
1996. The increase primarily reflected sales of $6.0 million attributable to the
opening of two new restaurants, including one that opened in January 1997, as
well as a 6.1% increase in comparable restaurant sales and a 9.0% increase in
comparable wholesale bakery sales. These factors more than offset the $2.3
million decrease in revenues attributable to the disposition of four
free-standing retail bakeries in 1996 and the disposition of the four remaining
free-standing retail bakeries in February 1997.
Cost of sales decreased as a percentage of revenues to 23.5% in the six
months ended June 29, 1997 from 24.1% in the six months ended June 30, 1996,
primarily as a result of a menu price increase in December 1996 as well as
improved purchasing capabilities and stable food and beverage prices during the
1997 period.
Operating expenses as a percentage of revenues increased slightly to 58.2%
in the six months ended June 29, 1997 from 58.1% in the six months ended June
30, 1996. Depreciation and amortization decreased as a percentage of revenues to
5.4% in the six months ended June 29, 1997 from 6.4% in the six months ended
June 30, 1996, primarily reflecting increased revenues in the 1997 period.
General and administrative expenses increased as a percentage of revenues
to 8.3% in the six months ended June 29, 1997 from 7.7% in the six months ended
June 30, 1996. This increase was primarily due to the accrual of higher
performance-based management bonuses in the 1997 period and, to a lesser extent,
market research costs.
As a result of the disposition of the Costa Mesa restaurant, in the six
months ended June 29, 1997, the Company recorded a $470,000 pre-tax reversal of
the provision for store closures originally recorded in 1993. See "-- Closure of
Non-Core Operations" below.
16
<PAGE> 20
1996 Compared to 1995
Revenues increased by $6.6 million, or 12.2%, to $60.8 million in 1996 from
$54.1 million in 1995. The increase primarily reflected sales of $5.8 million
attributable to the opening of three new restaurants, two of which opened in
1995 and one of which opened in 1996, as well as a 4.8% increase in comparable
restaurant sales and an 18.4% increase in comparable wholesale bakery sales.
These factors more than offset the decrease in revenues attributable to the
disposition in 1996 of four free-standing retail bakeries and the inclusion of
one additional accounting week in 1995 compared to 1996. The impact of menu
price increases in 1996 was negligible.
Cost of sales increased as a percentage of revenues to 24.3% in 1996 from
23.6% in 1995, primarily as a result of higher food costs that were not passed
through in corresponding menu price adjustments until December 1996.
Operating expenses increased as a percentage of revenues to 57.9% in 1996
from 57.3% in 1995, principally as a result of higher marketing costs associated
with the Festa Regionale marketing program. Depreciation and amortization
increased as a percentage of revenues to 6.3% in 1996 from 6.1% in 1995. This
increase was primarily the result of an increase in pre-opening amortization
related to the opening of two new restaurants (one of which opened in late
1995), offset in part by a decrease in depreciation as a percentage of revenues
as a result of an increase in comparable store revenues.
General and administrative expenses increased as a percentage of revenues
to 7.8% in 1996 from 7.6% in 1995. This increase was largely due to the
continued expansion of management infrastructure and training expenses, which
commenced in mid-1995 to help implement the Company's growth strategy.
In 1995, the Company recorded a $932,000 provision for the write-down of
the fixed assets and rent liability for one restaurant that differed from the Il
Fornaio restaurant concept. See "-- Closure of Non-Core Operations" below.
The effective income tax rate for 1996 was 38.2%, which reflects the
statutory rates, net of investment tax credits. In 1995, in accordance with
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes" ("SFAS 109"), the Company recorded an income tax benefit of $2.7 million,
reflecting the recognition of various deductible deferred assets, including
prior years' net operating loss carryforwards, business tax credits and various
temporary accounting differences.
1995 Compared to 1994
Revenues increased by $4.5 million, or 9.1%, to $54.1 million during 1995
from $49.6 million in 1994. This increase primarily reflected sales of $4.4
million attributable to the opening of two new restaurants in 1995, as well as
revenues of $762,000 attributable to the inclusion of one additional accounting
week in 1995 compared to 1994. These increases more than offset the 1.7%
decrease in comparable restaurant sales. There were no menu price increases in
1995.
Cost of sales increased as a percentage of revenues to 23.6% in 1995 from
22.8% in 1994. This increase was principally a result of higher food costs
associated with the initial year of the Festa Regionale marketing program and
significant increases in coffee prices.
Operating expenses declined as a percentage of revenues to 57.3% in 1995
from 59.0% in 1994, largely as a result of labor efficiencies and reductions in
workers' compensation insurance expense. Depreciation and amortization decreased
to 6.1% in 1995 from 6.4% in 1994, principally as a result of reduced
amortization of pre-opening expenses due to the timing of opening of
restaurants.
General and administrative expenses increased as a percentage of revenues
to 7.6% in 1995 from 7.2% in 1994. This increase reflected compensation expense
associated with the addition of senior management and other key corporate
positions, as well as expenses related to the improvement of management
information systems, all of which were incurred to help implement the Company's
growth strategy.
17
<PAGE> 21
In 1995, the Company recorded a $932,000 provision for the write-down of
the fixed assets and rent liability for one restaurant that differed from the Il
Fornaio restaurant concept.
In 1995, the Company recorded an income tax benefit of $2.7 million,
reflecting the recognition of various deductible deferred assets, including
prior years' net operating loss carryforwards, business tax credits and various
temporary accounting differences.
Quarterly Results
The following tables set forth certain unaudited quarterly information for
1995 and 1996 and for the first half of 1997. This quarterly information has
been prepared on a consistent basis with the audited financial statements and,
in the opinion of management, includes all adjustments, consisting only of
normal recurring adjustments, necessary for a fair presentation of the
information for the periods presented. The Company's quarterly operating results
may fluctuate significantly as a result of a variety of factors, and operating
results for any quarter are not necessarily indicative of results for any future
period. See "Risk Factors -- Fluctuations in Operating Results."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 29, 1996 JUNE 29, 1997
------------------------------------- ------------------------------------- -----------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST SECOND
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................... $11,926 $13,790 $13,254 $15,170 $14,214 $16,010 $15,172 $15,356 $17,682 $17,895
Costs and expenses:
Cost of sales............. 2,760 3,222 3,123 3,667 3,426 3,847 3,735 3,784 4,168 4,182
Operating expenses........ 7,009 7,825 7,674 8,528 8,451 9,118 8,748 8,835 10,245 10,458
Depreciation and
amortization............ 726 832 855 891 917 1,017 995 931 992 935
General and administrative
expenses................ 885 979 968 1,251 1,125 1,198 1,203 1,198 1,425 1,531
Provision for store
closures................ -- -- -- 932 -- -- -- -- -- (470)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses.......... 11,380 12,858 12,620 15,269 13,919 15,180 14,681 14,748 16,830 16,636
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations................ 546 932 634 (99) 295 830 491 608 852 1,259
Interest (income) expense,
net....................... 3 (9) (14) (39) (27) (17) (43) (40) (50) (59)
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before
provision (benefit) for
income taxes.............. 543 941 648 (60) 322 847 534 648 902 1,318
Provision (benefit) for
income taxes.............. 109 185 266 (2,992) 132 344 222 200 375 540
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Net income.................. $ 434 $ 756 $ 382 $2,932 $ 190 $ 503 $ 312 $ 448 $ 527 $ 778
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
CLOSURE OF NON-CORE OPERATIONS
As a result of a strategic review conducted in 1993, the Company decided to
dispose of a free-standing retail bakery located in Los Angeles and restaurants
located in San Francisco and Costa Mesa, California that differed from the Il
Fornaio restaurant concept. In 1993, in connection with the proposed disposition
of the Los Angeles retail bakery and Costa Mesa restaurant, the Company recorded
a $2.3 million provision to cover anticipated write-offs and other expenses
associated with these dispositions. Thereafter, the Company actively sought to
dispose of both of these operations. The results of operations of these two
units have not been included in the Company's statement of operations subsequent
to the end of 1993 as the effect on total revenues, total costs and expenses and
net income (loss) was immaterial for all periods presented. The Company disposed
of the Los Angeles retail bakery in January 1995. In June 1997, the Company
disposed of the Costa Mesa restaurant and recorded a $470,000 pre-tax reversal
of the 1993 reserve.
In 1993, the net assets of the remaining restaurant designated for
disposition, the Etrusca restaurant located in San Francisco, were sold for cash
and a promissory note secured by the assets sold. In 1995, following a default
by the buyer, the Company reclaimed the remaining assets and once again became
primarily obligated on the lease. In connection therewith, the Company recorded
a provision of $932,000 to
18
<PAGE> 22
write off the remaining balance of the assets and recognize the expenses
incurred in connection with the redisposition of this facility in the second
quarter of 1997.
In July 1996, the Company disposed of its four Northern California
free-standing retail bakeries and, in February 1997, sold the four remaining
free-standing retail bakeries, all of which were located in Southern California.
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its capital requirements over the past three and
one-half years with cash flow from operations. The Company's cash flow from
operations was $5.0 million, $4.8 million, $4.9 million and $4.1 million for
1994, 1995, 1996 and the six months ended June 29, 1997, respectively. The
Company also has a credit agreement which provides for a $3.0 million line of
credit. The Company had no borrowings outstanding under the credit line during
these periods.
Net cash used in financing activities in 1994, 1995 and 1996 was $1.3
million, $702,000 and $400,000, respectively. Net cash provided by financing
activities was $98,000 in the six months ended June 29, 1997. In all of these
periods, cash used in financing activities related primarily to repayment of a
term loan held by a commercial bank. This loan, which had a balance of $150,000
as of December 29, 1996, was repaid in full as of March 1, 1997.
Capital expenditures were $971,000, $4.8 million, $5.8 million and $3.0
million for 1994, 1995, 1996 and the six months ended June 29, 1997,
respectively. To date in 1997, the Company has opened one restaurant and one
wholesale bakery and has completed a major renovation of one of its existing
restaurants. The Company intends to open one additional restaurant in 1997.
Total capital expenditures are expected to be approximately $6.0 million in
1997. The Company currently plans to open three restaurants in 1998. The Company
expects that its planned future restaurants will require, on average, a total
investment by the Company per restaurant, net of anticipated landlord
contributions, of approximately $1.7 million, with additional average
pre-opening costs per restaurant of approximately $200,000.
The Company's future capital requirements and the adequacy of its available
funds will depend on many factors, including the pace of expansion, the size of
restaurants developed and the nature of the arrangements negotiated with
landlords. Although no assurance can be given, the Company believes that
anticipated cash flow from operations, borrowings under the credit agreement and
proceeds from this offering will be sufficient to fund its capital requirements,
including planned expansion and ongoing maintenance and renovation of existing
restaurants, at least through 1998. In the event that additional capital is
required, the Company may seek to raise that capital through public or private
equity or debt financings. Future capital funding transactions may result in
dilution to purchasers in this offering. There can be no assurance that such
capital will be available on favorable terms, if at all.
INFLATION
The primary inflationary factors affecting the Company's operations are
food and labor costs. A large number of the Company's restaurant personnel are
paid at rates based on the applicable minimum wage, and increases in the minimum
wage directly affect the Company's labor costs. Minimum wage increases in 1996
led the Company to introduce its first menu price increase in three years. To
date, inflation has not had a material impact on the Company's results of
operations. See "Risk Factors -- Changes in Food and Labor Costs."
19
<PAGE> 23
BUSINESS
Il Fornaio owns and operates 13 full-service, white tablecloth Italian
restaurants serving creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The Company's restaurants offer an extensive
menu, featuring house-made and imported pasta, poultry and game roasted over a
wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a
wood-burning oven, soups, salads and desserts. Il Fornaio's menu is
distinguished by fresh, hand-made breads, pastries and other baked goods that
are produced in the Company's restaurants and five wholesale bakeries. Il
Fornaio's wholesale bakeries also sell baked goods to quality grocery stores,
specialty retailers, hotels and other fine restaurants. In addition, the Company
operates a retail market in each restaurant, which sells baked goods, prepared
foods and a variety of Il Fornaio-brand products, allowing guests to recreate
the Il Fornaio dining experience at home.
BACKGROUND
Il Fornaio, which means "the baker" in Italian, can trace its roots to a
bakers' school founded outside of Milan, Italy in the early 1970s by Carlo
Veggetti. In order to preserve the disappearing craft of Italian artisan baking,
Mr. Veggetti and his family gathered centuries-old recipes from every region in
Italy. The Il Fornaio baking school taught bakers these traditional recipes and
methods and provided them with the materials necessary to open their own
bakeries under the Il Fornaio name. Today, there are numerous Il Fornaio
bakeries located throughout Italy.
The Il Fornaio bakery concept was brought to the United States in 1980 when
the Company acquired the exclusive rights in the United States to the Il Fornaio
trademark, as well as to certain recipes which continue to be central to the Il
Fornaio restaurant and bakery concept. The Company has no other formal
affiliation with Il Fornaio in Italy, although it has discussions from time to
time with the Veggetti family regarding baking techniques and equipment and the
potential hiring of employees from Italy. In addition, Mr. Veggetti holds
approximately 2% of the Company's outstanding equity. From 1980 to 1986, the
Company opened a number of Il Fornaio free-standing retail and wholesale
bakeries in California.
In 1987, Laurence B. Mindel joined Il Fornaio as Chairman, Chief Executive
Officer and President. In 1970, Mr. Mindel co-founded Spectrum Foods, which
created and operated innovative and successful restaurants throughout
California, including Chianti, MacArthur Park, Harry's Bar and American Grill,
Ciao, Prego and Guaymas, all of which remain in operation today. Upon the
acquisition of Spectrum Foods by Saga Corporation in 1984, Mr. Mindel became the
President of Saga Corporation's Restaurant Group, which included Stuart
Anderson's Black Angus, Velvet Turtle, Spoons, Hotel Food Services and the newly
acquired Spectrum Foods restaurants.
Mr. Mindel reorganized the Company and developed a new business strategy
which, in addition to the Company's free-standing retail bakeries, focused on
the development of full-service restaurants that showcased the baked goods
produced by the Company's bakeries and offered a varied menu of premium quality
Italian food and beverages. This strategy was predicated on the development of
an Il Fornaio brand based on Il Fornaio's authentic Italian heritage. The
Company decided to incorporate a retail market into the design of each location
to allow guests to purchase the Company's baked goods, prepared foods and other
branded products for consumption at home. In 1987, the Company opened its first
full-service restaurant in Corte Madera, California and, through the end of
1992, had expanded to include nine full-service restaurants in California.
In 1993, management analyzed the economics of each of the Company's
business units and established criteria for future growth. Based on this
analysis, management developed a strategic plan to focus the Company's
operations on Il Fornaio restaurants and wholesale bakeries. The plan provided
for the disposition of two restaurants that differed from the Il Fornaio
restaurant concept. Management also concluded that, while the Company would
continue to evaluate its existing free-standing retail bakeries, no additional
free-standing retail bakeries would be developed.
In 1995, Michael J. Hislop joined the Company as President and Chief
Operating Officer. From 1991 to 1995, Mr. Hislop had served as the Chairman and
Chief Executive Officer of Chevy's Mexican Restaurants,
20
<PAGE> 24
guiding Chevy's expansion from 17 to 33 units prior to the sale of Chevy's to
PepsiCo in 1993. Mr. Hislop continued to expand Chevy's as part of PepsiCo's
full-service restaurant division, entering new geographic markets and increasing
the number of restaurants to 63, prior to joining Il Fornaio in July 1995.
In 1995, Mr. Hislop implemented a number of new strategic initiatives to
accelerate Il Fornaio's restaurant growth and facilitate its expansion into new
geographic markets. Mr. Hislop also took steps to develop the Company's
infrastructure and to focus on increasing sales and guest visit frequency by
emphasizing service and implementing new marketing and training programs. In
addition, the decision was made to dispose of the Company's free-standing retail
bakery operations. These initiatives contributed to comparable restaurant sales
increases of 4.8% in 1996 and 6.1% for the first half of 1997. From 1995 through
the first half of 1997, the Company opened four new full-service restaurants,
two in California and one each in Portland and Las Vegas, as well as a large
free-standing wholesale bakery in Burlingame, California.
IL FORNAIO CONCEPT AND STRATEGY
The Company's objectives are to develop and operate full-service
restaurants and bakeries that offer guests the most authentic Italian dining
experience available outside of Italy and to establish a brand identity that
provides a competitive advantage in every market in which the Company operates.
To achieve these objectives, the Company has developed the following concept and
strategy:
Offer Premium Quality, Authentic Regional Italian Cuisine. Il Fornaio
seeks to differentiate its restaurants from other restaurants in the Italian
food segment by offering creatively prepared, premium quality Italian cuisine
based on authentic regional recipes. The core menu served at both lunch and
dinner features a variety of dishes, including house-made and imported pasta,
poultry and game roasted over a wood-fired rotisserie, meat and fresh fish from
a charcoal grill, pizza from a wood-burning oven, soups, salads and desserts.
Native-born Italian chefs develop all of the core menu items, which vary
depending on the seasonal availability of raw ingredients. The Company's chefs
also develop special menus each month based on the local cuisine and culinary
style of one of Italy's 20 geographic regions as part of the Company's Festa
Regionale marketing program. Hand-made, preservative-free Il Fornaio baked
goods, based on centuries-old regional Italian recipes, are provided by Il
Fornaio's bakeries for use in a variety of menu items. Fresh breads and rolls
are served with each meal, providing an authentic and high quality complement to
the menus. Il Fornaio's restaurants have received numerous awards and
commendations.
Build Brand Awareness. The Company believes that its restaurants,
wholesale bakeries and retail markets work together to reinforce its image as a
provider of premium quality, authentic Italian food, enhance Il Fornaio's brand
image and reputation and attract guests over a wide variety of occasions for
dining out or dining in. The Company's wholesale bakeries supply the same fresh,
award-winning breads and other baked goods served at the Company's restaurants
to quality grocery stores, specialty retailers, hotels and other fine
restaurants as well as to retail markets within Il Fornaio restaurants. The
restaurants' retail markets offer prepared foods and Il Fornaio brand items,
including fresh baked goods, oakwood-roasted coffee, pasta, risotto, extra
virgin olive oil and balsamic vinegar imported from Modena, Italy, enabling
guests to recreate the Il Fornaio dining experience at home. The retail markets
also offer an Il Fornaio-brand Chianti Classico from a Tuscan vineyard that was
originally planted in the 11th century and is designated for Il Fornaio's
exclusive use. The Company has implemented a number of marketing initiatives
designed to build brand awareness, including monthly mailings of its Festa
Regionale menus, food and wine tastings, baking classes, Italian culture
seminars and the Passaporto program, which rewards frequent guests with
complimentary menu items and commemorative plates.
Create a Distinctive Authentic Italian Atmosphere. The Company seeks to
create a distinctive authentic Italian atmosphere with restaurant designs that
are unique to each location. The restaurants' sophisticated, yet informal and
friendly atmosphere is intended to be suitable for a variety of meal occasions.
Exhibition kitchens with wood-fired rotisseries, charcoal grills and
wood-burning pizza ovens are in full display of the guests and create appealing
cooking aromas that reinforce the guests' perceptions of quality, freshness and
authenticity. Retail markets located at the entrance to each restaurant are
designed to provide an inviting initial impression as well as to enhance the
perception of an authentic Italian dining experience through the prominent
display of
21
<PAGE> 25
Il Fornaio's Italian food. Design elements, which may include terracotta or
European slate floors, marble bars, mahogany trim, outdoor piazzas, hand-painted
ceilings and fine art, are selected to evoke the charm and elegance of a
memorable dining experience in Italy. Il Fornaio's Sacramento restaurant
received the grand prize for best new restaurant design worldwide, one of five
grand prizes in hospitality design awarded in 1994 by a national hospitality
design magazine.
Focus on Five Star Service. The Company believes that its emphasis on
service through the implementation of its Five Star Service Program has been an
important factor in its success. The Company's Five Star Service Program,
designed by the Company's employees, defines Il Fornaio's high standards for
food quality, service and cleanliness. The Company has invested significant
resources in the training of its service personnel and staffs each restaurant
with an experienced management team to ensure attentive guest service and
consistent food quality. Through employee and guest questionnaires, the Company
receives valuable feedback and implements measures designed to reinforce its
commitment to outstanding service and guest satisfaction. Results of the Five
Star Service Program are considered in the evaluation and advancement of
restaurant management.
Foster a Strong Corporate Culture. The Company believes that qualified
employees are critical to its success. The Company believes that, by providing
extensive training, attractive compensation and significant opportunities for
employee feedback and advancement, it fosters a strong corporate culture that
helps to attract and retain highly qualified employees. In 1995, the Company
instituted a Partnership Program, which provides equity participation to chefs
and restaurant managers. The Company also provides medical, dental and other
benefits to hourly employees and believes that the availability of these
benefits contributes to an employee turnover rate that is below the industry
average.
Provide an Attractive Price-Value Relationship. The Company believes that
its restaurants provide guests with excellent value by offering high quality
authentic Italian food, a distinctive atmosphere and superior service, all for
an average check per guest in 1996 of $20.93 (including alcohol). As a result,
the Company's restaurants attract a broad variety of guests who desire a more
authentic Italian experience than may be available from other restaurants in the
Italian food segment, without a substantially higher cost.
UNIT ECONOMICS
For 1996, the Company's 10 restaurants that qualified as comparable
restaurants had average revenues of approximately $4.5 million, average
operating income of approximately $708,000, or 15.9% of restaurant sales, and
average cash flow of approximately $884,000, or 19.9% of restaurant sales. Cash
flow represents operating income before depreciation and amortization. The
Company's restaurants range in size from 5,000 square feet to 10,900 square
feet. Since 1991, the Company's total investment per restaurant, net of landlord
contributions, has averaged approximately $1.7 million, with additional average
pre-opening costs per restaurant of approximately $200,000. The Company expects
that its planned future restaurants will generally range in size from 7,000 to
10,000 square feet and that its total investment and pre-opening costs per
restaurant will be similar to these historical averages.
LOCATIONS
Il Fornaio owns and operates 13 full-service, white tablecloth Italian
restaurants and five wholesale bakeries. Four of these wholesale bakeries are
located adjacent to certain of the Company's restaurants and provide fresh
breads, pastries and other baked goods to the restaurants, as well as to a
variety of quality grocery stores, specialty retailers, hotels and other fine
restaurants. All restaurants and wholesale accounts in the San Francisco Bay
Area are supplied by the Company's recently opened 12,000-square foot wholesale
bakery located in Burlingame, California. Restaurants that cannot be supplied by
one of the Company's wholesale bakeries are designed with an in-house bakery.
All of the restaurants feature a retail market.
22
<PAGE> 26
The following table provides information about the Company's current and
planned operations.
CURRENT OPERATIONS
<TABLE>
<CAPTION>
YEAR SIZE NUMBER OF
LOCATION OPENED (SQ. FT.) SEATS(1)
- --------------------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Restaurants
Corte Madera, CA........................... 1987 5,600 104
San Francisco, CA.......................... 1988 7,800 148
Del Mar, CA................................ 1989 5,700 110
Palo Alto, CA.............................. 1989 7,300 136
Irvine, CA................................. 1991 9,600 220
Beverly Hills, CA.......................... 1992 5,000 76
San Jose, CA............................... 1992 8,000 171
Pasadena, CA............................... 1993 8,000 152
Sacramento, CA............................. 1993 7,900 158
Burlingame, CA............................. 1995 9,200 185
Carmel, CA................................. 1995 7,500 120
Portland, OR............................... 1996 7,300 170
Las Vegas, NV.............................. 1997 10,900 218
Wholesale Bakeries
Beverly Hills, CA.......................... 1983 1,500 --
Irvine, CA................................. 1991 3,400 --
Pasadena, CA............................... 1993 3,400 --
Sacramento, CA............................. 1993 2,500 --
Burlingame, CA(2).......................... 1997 12,000 --
</TABLE>
PLANNED RESTAURANTS (3)
<TABLE>
<CAPTION>
SCHEDULED SIZE
LOCATION OPENING (SQ. FT.)
- ---------------------------------------------------- ------------------- ---------
<S> <C> <C>
Denver, CO.......................................... Fourth Quarter 1997 9,200
Santa Monica, CA.................................... 1998 7,500
Seattle, WA......................................... 1998 13,200
Walnut Creek, CA.................................... 1998 7,500
</TABLE>
- ---------------
(1) Excludes patio seating.
(2) In connection with opening the Burlingame wholesale bakery, the Company
closed its wholesale bakeries in San Francisco and Palo Alto.
(3) Leases have been signed for each identified location except the Walnut Creek
location, for which a letter of intent has been signed.
EXPANSION STRATEGY AND SITE SELECTION
The Company intends to continue to expand its operations by addressing both
existing and new geographic markets. The Company plans to open one additional
restaurant in 1997 to be located in Denver, and construction has commenced at
this site. The Company currently plans to open three new restaurants in 1998,
including restaurants in Santa Monica and Seattle, for which leases have been
signed, and in Walnut Creek, for which a letter of intent has been signed.
23
<PAGE> 27
The Company believes that the location of each restaurant is critical to
its long-term success and devotes significant effort to finding appropriate
sites. The Company's site selection strategy is to locate restaurants in
affluent urban and suburban areas, often located near or on main traffic routes.
The Company takes into account a variety of local factors, including demand and
consumer preferences, competition, availability of suitable locations and
personnel, local demographics and household income levels, as well as specific
site characteristics, such as visibility, accessibility and traffic volume.
Senior management selects each restaurant site. The flexibility of the Il
Fornaio concept enables the Company to develop successful restaurants in a
variety of locations, including residential neighborhoods, shopping centers,
office buildings and hotels.
The Company expects that its planned future restaurants will generally
range in size from 7,000 to 10,000 square feet and will require, on average, a
total investment by the Company per restaurant, net of anticipated landlord
contributions, of approximately $1.7 million, with additional average
pre-opening costs per restaurant of approximately $200,000.
The Company's success in implementing its expansion plans will depend, in
each case, on the Company's ability to effectively address a number of risks.
There can be no assurance that the Company will be able to open all of its new
operations on a timely basis, if at all, or, if opened, that those operations
will be operated profitably. See "Risk Factors."
MENU
The Company's restaurants feature creatively prepared, premium quality
Italian food based on authentic regional recipes. All recipes are created by
native-born Italian chefs. As guests are seated, Il Fornaio breads and rolls are
placed on the table and served with Il Fornaio olive oil. Guests may then select
from a menu featuring a variety of dishes, including house-made and imported
pasta, poultry and game roasted over a wood-fired rotisserie, meat and fresh
fish from a charcoal grill, pizza from a wood-burning oven, soups, salads and
desserts. The core menu includes several flavorful low-salt and low-fat
selections oriented toward health-or diet-conscious guests. The restaurants also
offer Italian appetizers, creative desserts prepared on site, full liquor
service and an award-winning, extensive wine list emphasizing Italian and
California varietals. The wine list includes an Il Fornaio-brand Chianti
Classico from a Tuscan vineyard that was originally planted in the 11th century
and is designated for Il Fornaio's exclusive use. The core menu is virtually
identical at most of Il Fornaio's restaurants. A daily insert, which varies by
restaurant, lists specials developed by chefs at each restaurant, featuring
creative dishes inspired by seasonal availability of fresh local produce, fish,
meats and game. Il Fornaio's restaurants have received numerous awards and
commendations.
In addition, for two weeks of every month, the restaurants feature the
Festa Regionale, innovative menus developed, on a rotating basis, by one of Il
Fornaio's Chef-Partners, based on authentic recipes of one of Italy's 20
geographic regions. Each menu is intended to capture both the unique flavors and
culinary style that characterize that region's local cuisine and includes menu
items based on produce, cheese, meat, poultry and seafood indigenous to the
region. Selected wines of the region are also offered to complement menu items.
The most popular menu items developed as part of Festa Regionale are frequently
added to the core menu. During 1996, revenues from the Festa Regionale menu
accounted for, on average, approximately 25% of total dinner sales (including
wine) during the periods in which the Festa Regionale menu was offered.
Il Fornaio's bakeries supply the restaurants with over 30 varieties of
breads and rolls, based on centuries-old, regional Italian recipes. Breads
include ciabatta (a long, flat loaf with a porous interior and crunchy crust),
panmarino (a dome-shaped loaf infused with rosemary and sprinkled with coarse
sea salt), filone (a classic Italian white bread with a light crust and soft
interior), pagnotta (a round, rustic loaf with a soft interior), pane all'uva (a
rich, moist bread filled with golden raisins), pane alle olive (a soft-textured
bread studded with green olives) and foccacia (a flat bread brushed with olive
oil and finished with a variety of fresh toppings). Pastries include cornetti
(croissants) and cannelle (cinnamon twists). The Company's authentic Italian
artisan breads have received numerous awards and commendations.
The Company's average check per guest in 1996 at its restaurants, including
alcoholic beverages, was $20.93. Five of the restaurants also offer breakfast
service which, during 1996, accounted for approximately 3%
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of restaurant revenues. During the same period, wine sales represented
approximately 18% of restaurant revenues, while other alcoholic beverages
accounted for approximately 6% of restaurant revenues.
Take-out prepared food and retail brand items accounted for approximately
10% of restaurant revenues in 1996. The restaurants' retail markets enable
guests to recreate the Il Fornaio dining experience at home by offering prepared
foods, including assorted cold pasta and risotto salads, Il Fornaio breads,
green salads, whole roasted chickens, stuffed artichokes, individual pizzette
and assorted Italian sandwiches, as well as Il Fornaio-brand retail items,
including oakwood-roasted coffee, pasta, risotto, extra virgin olive oil,
balsamic vinegar imported from Modena, Italy, and Chianti Classico.
DECOR AND ATMOSPHERE
The Company seeks to create a distinctive, authentic Italian atmosphere
with restaurant designs that are unique to each location. The restaurants'
sophisticated, yet informal and friendly atmosphere is intended to be suitable
for a variety of meal occasions. Exhibition kitchens with wood-fired
rotisseries, charcoal grills and wood-burning pizza ovens in full display of the
guests create appealing cooking aromas that reinforce the guests' perceptions of
quality, freshness and authenticity. Retail markets located at the entrance to
each restaurant are designed to provide an inviting initial impression as well
as to enhance the perception of an authentic Italian dining experience through
the prominent display of Il Fornaio's Italian food. Design elements, which may
include terracotta or European slate floors, marble bars, mahogany trim,
hand-painted ceilings and fine art, are selected to evoke the charm and elegance
of a memorable dining experience in Italy. The tables are a mix of booths and
free-standing tables with chairs. White tablecloths and Italian flatware dress
the tables. Service is intended to be professional and friendly but not
intrusive. In addition to table service, food is available at an indoor or
outdoor liquor/coffee bar, as well as at counter seats overlooking the large
pizza oven and open kitchen. The restaurants range in size from approximately
5,000 to 10,900 square feet with indoor seating ranging from 76 to 220 guests.
Outdoor piazzas provide additional seating during warmer weather. Il Fornaio's
Sacramento restaurant received the grand prize for best new restaurant design
worldwide, one of five grand prizes in hospitality design awarded in 1994 by a
national hospitality design magazine.
OPERATIONS
The Company seeks to create a fine dining experience through the careful
selection, training and supervision of personnel. The staff of a typical
restaurant consists of a Managing Partner, two or three managers, a
Chef-Partner, two or three sous chefs and approximately 65 to 125 hourly
employees, many of whom work part-time. The Managing Partner of each restaurant
is responsible for the day-to-day operation of that restaurant, including
hiring, training and development of personnel, as well as operating results. The
Chef-Partner is responsible for product quality, food costs and kitchen labor
costs. The Company requires its Managing Partners and Chef-Partners to have
significant experience in the full-service restaurant industry.
Comprehensive management manuals exist to ensure consistency in all facets
of restaurant operations, including food, service, safety and accounting.
Working in concert with Managing Partners and Chef-Partners, the Company's
senior management defines operations and performance objectives for each
restaurant and monitors implementation. The Company maintains quality and
consistency in its restaurants through its Five Star Service Program, which
establishes standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. A restaurant survey firm regularly visits
the Company's restaurants and reports to senior management on the effectiveness
of the Five Star Service Program. In addition to the Five Star Service Program,
the Company's senior management regularly visit each restaurant and bakery to
ensure adherence to the Company's concept, strategy and standards of quality in
all aspects of restaurant operations. Senior management also meets once a month
with Managing Partners and Chef-Partners to discuss operational, marketing and
financial issues and to review the Five Star Service Program.
The Company has implemented a comprehensive compensation and benefits
package in order to attract and retain highly qualified personnel. The Company
has a Partnership Program, which provides equity
participation for Managing Partners and Chef-Partners in the form of stock
options, to encourage commitment
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to the long-term success of the restaurants and the Company. The Company
believes that this equity participation differentiates the compensation package
from that of many of its competitors. The Company's bonus program is designed to
reward the restaurant management team for achievement of superior operating
results, and all members of management at the restaurant level are eligible to
participate. The bonus may provide a large percentage of management's total
compensation.
The Company has a comprehensive four-to-six week training program which all
operating management personnel are required to complete. The program emphasizes
the Company's operating strategy, philosophy, procedures and standards. The
training encompasses all aspects of both restaurant and kitchen management. As
part of the training program, a series of written tests is administered to
evaluate the trainee's progress. The trainee must achieve a certain score to
progress to the next section of the program. This training program is
administered by the Company's Director of Training in conjunction with the Vice
President of Operations and Executive Chef. The Managing Partners and
Chef-Partners are responsible for selecting and training employees for each
restaurant. The training period for new hourly employees lasts approximately one
to two weeks and utilizes training manuals and seminars developed by the
Company's training department. To foster a strong corporate culture and
encourage employee commitment and enthusiasm, management regularly solicits
employee suggestions concerning Company operations through extensive employee
feedback surveys.
WHOLESALE BAKERIES
The Company currently has five wholesale bakeries, four of which range in
size from 1,500 to 3,400 square feet and are located adjacent to certain of the
Company's restaurants. Bakery products are sold to quality grocery stores,
specialty retailers, hotels and other fine restaurants, in addition to the
Company's own restaurants. During 1996, the Company's wholesale bakeries
accounted for approximately 10% of gross revenues.
In March 1997, the Company commenced operation of a free-standing
12,000-square foot wholesale bakery, located in Burlingame, California. This
facility provides freshly baked goods to all restaurants and wholesale customers
throughout the San Francisco Bay Area. This bakery is designed to provide
efficiencies in production (both labor and ingredients) and distribution, as
well as the capacity to substantially grow this part of Il Fornaio's business.
This facility permits the Company to employ improved processes, which enhance
quality and consistency, while maintaining the Il Fornaio commitment to
preservative-free, hand-made authentic Italian breads. The Company's total
investment, net of landlord contributions, to construct this bakery, including
leasehold improvements, machinery and equipment, was approximately $800,000.
The Company's bakeries produce over 30 varieties of breads and rolls based
on regional Italian recipes, as well as a wide assortment of Italian cookies,
cakes and pastries. Recipes are standardized to ensure consistency. The
Company's bread doughs, based on centuries-old recipes, are mixed and then
fermented for up to 20 hours to increase flavor. Each loaf is hand-formed,
proofed and baked in European deck ovens that eject steam around the bread at
timed intervals. The Company believes that these processes contribute to a
characteristically irregular-shaped and crusty bread. Bakers create a wide
variety of breads by varying proportions of ingredients, length and number of
risings, temperature of the oven and size and shape of the loaves. Some recipes
include fresh aromatic herbs and spices, such as rosemary or fennel, or other
ingredients, such as parmesan cheese, raisins, nuts and sesame seeds. To
maintain the high quality of its bakery products, the Company maintains strict
criteria for ingredients.
The management staff of a typical wholesale bakery consists of a production
manager, an assistant production manager and a business manager. A wholesale
bakery employs 10 to 45 hourly employees, depending on the bakery's size. The
production manager carries responsibility for day-to-day results of the
wholesale bakery. Each production manager is required to have significant bread
baking experience in addition to other general baking and management skills.
Both the production manager and the assistant production manager are also
trained in the Company's systems, recipes and procedures. The business manager
is responsible for all accounting, including the preparation of sales reports,
which are electronically transmitted to the corporate office on a daily basis.
The business manager is also responsible for customer service and distribution.
Monthly financial statements are prepared by the corporate office and reviewed
with the
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wholesale bakery management team by senior management. The Director of Wholesale
Bakeries spends significant time at each wholesale bakery, monitoring compliance
with recipes and procedures.
The Company maintains a fleet of vehicles for distribution of its products
to wholesale customers and Company locations. A majority of the products are
packed and delivered in the early morning to ensure timely delivery, and a
second delivery is normally scheduled for Company locations to provide
fresh-baked products for late afternoon and evening sale and consumption.
Restaurants that cannot be supplied by one of the Company's wholesale bakeries
are designed with in-house bakeries.
MARKETING
The Company believes that providing an authentic Italian dining experience
by offering quality food and bakery products, distinctive decor, Five Star
Service and an attractive price-value relationship is the most effective
approach to attracting new and repeat guests. Accordingly, Il Fornaio has relied
primarily on reputation, local reviews and awards, and word-of-mouth to promote
its restaurants and bakeries in each community in which it operates. The Company
has also implemented a program of marketing and public relations activities
designed to create awareness of the Il Fornaio name, encourage guests to
associate that name with authentic, premium quality Italian food and increase
the frequency of return visits to Il Fornaio.
To encourage repeat patronage, the Company has developed the Festa
Regionale program. As part of this program, innovative menus are developed
monthly by Chef-Partners, on a rotating basis, based on authentic recipes from
one of Italy's 20 geographic regions. Menu items are accompanied by selected
wines from the region and a regional bread is provided by the Company's
bakeries. Mailers describing each month's Festa Regionale offerings are sent
monthly to over 100,000 households identified by the Company through customer
mailing lists or geographic proximity to an Il Fornaio restaurant. The
Passaporto program also encourages frequent dining at the Company's restaurants
by rewarding those who participate in each month of the six-month program with a
commemorative plate. In addition, guests may receive a complimentary item, such
as a loaf of Il Fornaio bread or a glass of wine, from the regional menu.
The Company has developed a program that focuses marketing efforts on each
restaurant's immediate neighborhood. Under this program, each restaurant is
responsible for the execution of an annual Neighborhood Marketing Plan, which
includes initiatives to build awareness, sales and frequency from the immediate
trade area, typically defined as a one-mile radius around that location. These
initiatives include both on-site and off-site activities, such as large party,
special event and meeting planning, bread and baked goods classes, Italian
culture seminars, food and wine tastings, anniversary parties, community group
fund-raisers as well as programs designed to encourage concierges from local
hotels and office buildings to recommend Il Fornaio to their clients. Restaurant
management, in conjunction with the Director of Neighborhood Marketing, develops
a calendar of events based on quarterly and annual sales objectives. Each
location is provided with a comprehensive Neighborhood Marketing Resource Guide
and Neighborhood Marketing Calendar designed to assist management and staff with
event planning, sales building strategies and guest communication guidance.
These programs and initiatives are specifically tailored to the food service
needs of the current and potential guests that are employed or reside in the
immediate trade areas. Other public relations activities include special events,
such as chef demonstrations at local stores, charitable donations and
participation in community activities, such as fundraisers for schools,
hospitals and other non-profit organizations.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed and recently implemented an integrated management
information system that is utilized in all of its restaurants and bakeries. This
system currently includes a computerized point-of-sale system in its restaurant
operations and a proprietary accounts receivable system in its wholesale
bakeries. The restaurant point-of-sale system facilitates the movement of guest
food and beverage orders between the guest areas and kitchen and bar, controls
cash, handles credit card authorizations and provides management with revenue
data. The integrated system electronically transmits sales and guest counts to
Company headquarters on a daily basis. Additionally, the Company has developed a
proprietary back-office system for processing daily and weekly paperwork (sales,
accounts payable, labor and inventory). This system generates a
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weekly operating statement, which compares both weekly and month-to-date results
versus budget. The Company has completed the installation of a new computerized
time management system at each of its locations. The system calculates the time
worked by each employee, allows management to gather data and schedule labor
hours and produces payroll reports. This system is also integrated with the
Company's point-of-sale system, allowing management to review labor compared
with sales on a real-time basis.
The Company has recently converted from a proprietary accounting system to
a scalable, relational database. The Company's automated restaurant and bakery
point-of-sale, time management and unit accounting system provides data for
posting directly to the Company's centralized system. The centralized database
provides flexibility in generating various management reports against
predetermined operating budgets. Such reporting includes (i) weekly reports of
revenues, cost of revenues and selected controllable operating budgets, (ii)
detailed monthly restaurant and bakery-level performance of revenues and
expenses and (iii) monthly reports of administrative expense performance. The
system allows management to review the mix of menu items in order to better
match guest preferences and improve profitability. Detailed monthly profit and
loss statements are compiled at the corporate office and reviewed with
restaurant and bakery management every month by senior management.
PURCHASING
The Company seeks to obtain ingredients of high quality at competitive
prices from reliable sources. To ensure freshness and quality, maintain low
inventory levels and facilitate the unique preparation of menu items, the
Company purchases most of its ingredients in an unprocessed state. In order to
maximize operating efficiencies and to provide the freshest ingredients for its
food products, the management team of each restaurant and bakery determines the
daily quantities of food items needed and orders accordingly. The Company's
purchasing department seeks to obtain the lowest possible prices available to
the Company by negotiating bulk purchasing contracts for a number of the
ingredients utilized by the restaurants and bakeries. Ingredients and supplies
are shipped directly to the restaurant or bakery, as the Company does not
maintain a central food product warehouse or commissary.
COMPETITION
The restaurant and bakery businesses are each intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many existing restaurants and bakeries compete with the Company at
each of its locations. There are many well-established competitors with
substantially greater financial, marketing, personnel and other resources than
the Company. In addition, many of the Company's competitors are well established
in the markets where the Company's operations are, or in which they may be,
located. While the Company believes that its restaurants and bakeries are
distinctive in design and operating concept, other companies may develop
restaurants and bakeries that operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
PROPERTIES
All of the Company's operations are located in leased facilities. Current
restaurant and bakery leases have expiration dates ranging from 2000 to 2016,
with the majority of the leases providing for five-year options to renew for at
least one additional term. All of the Company's leases provide for a minimum
annual rent, and most leases require additional percentage rent based on sales
volume in excess of minimum levels at the particular location. Some of the
leases require the Company to pay the costs of insurance, taxes and a portion of
the lessors' operating costs. For 1994, 1995 and 1996, the Company's rental
expense represented 5.1%, 5.0% and 4.7% of revenues, respectively. The Company's
lease for its Las Vegas restaurant contains certain termination and relocation
provisions. See "Risk Factors -- Long-Term, Non-Cancelable Leases; Termination
Provisions."
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The Company does not anticipate any difficulties renewing existing leases
as they expire. However, there can be no assurance that the Company will be able
to renew any leases on favorable terms, if at all. Inability of the Company to
renew a particular lease or closure of a facility subject to a long-term,
non-cancelable lease could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's executive offices are located in approximately 6,850 square
feet of leased space in San Francisco, California.
EMPLOYEES
At August 15, 1997, the Company employed approximately 1,752 persons, 39 of
whom were executive office personnel, 160 of whom were unit management personnel
and the remainder of whom were hourly restaurant or wholesale bakery personnel.
None of the Company's employees is covered by a collective bargaining agreement.
The Company considers its employee relations to be good.
TRADEMARKS
The Company has registered and applied for registration with the United
States Patent and Trademark Office for a number of trademarks and service marks
used in connection with its business. The Italian corporation which owned the
rights to the Il Fornaio marks in the United States has assigned to the Company
all of its United States rights and related goodwill. The Company regards its
trademarks and related rights as having substantial value and as being an
important factor in the marketing of its Il Fornaio restaurants and brand items.
GOVERNMENTAL REGULATION
The Company's restaurants are subject to regulation by federal agencies and
to licensing and regulation by state and local health, sanitation, building,
zoning, safety, fire and other departments relating to the development and
operation of restaurants and retail establishments. These regulations include
matters relating to environmental, building construction, zoning requirements
and the preparation and sale of food and alcoholic beverages. The Company's
facilities are licensed and subject to regulation under state and local fire,
health and safety codes, and the operation of its trucks is subject to
Department of Transportation regulations.
The development and construction of additional restaurants and bakeries
will be subject to compliance with applicable zoning, land use and environmental
regulations. There can be no assurance that the Company will be able to obtain
necessary licenses or other approvals on a cost-effective and timely basis in
order to construct and develop restaurants and bakeries in the future. Various
federal and state labor laws govern the Company's operations and its
relationship with its employees, including minimum wage, overtime, working
conditions, fringe benefit and citizenship requirements.
During 1996, approximately 24% of restaurant revenues was attributable to
the sale of alcoholic beverages, primarily wine. The Company is required to
comply with the alcohol licensing requirements of the federal government, states
and municipalities where its restaurants are located. Alcoholic beverage control
regulations require applications to state authorities and, in certain locations,
county and municipal authorities for a license and permit to sell alcoholic
beverages. 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 restaurants, including
minimum age of guests and employees, hours of operation, advertising, wholesale
purchasing, inventory control and handling, storage and dispensing of alcoholic
beverages. Failure to comply with federal, state or local regulations could
cause the Company's licenses to be revoked or force it to terminate the sale of
alcoholic beverages at one or more of its restaurants.
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The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. While the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.
The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
required to comply with the Act and regulations relating to accommodating the
needs of the disabled in connection with the construction of new facilities and
with significant renovations of existing facilities.
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MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
Information with respect to the executive officers and directors of the
Company is set forth below:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- --- -----------------------------------------
<S> <C> <C>
Laurence B. Mindel....................... 59 Chairman of the Board and Chief Executive
Officer
Michael J. Hislop........................ 42 President, Chief Operating Officer and
Director
Paul J. Kelley........................... 41 Vice President, Finance, Chief Financial
Officer and Secretary
Michael J. Beatrice...................... 43 Vice President, Operations
Dean A. Cortopassi(2).................... 59 Director
W. Scott Hedrick(1)...................... 51 Director
F. Warren Hellman(2)..................... 63 Director
W. Howard Lester(1)...................... 62 Director
Pierre W. Mornell(1)..................... 62 Director
T. Gary Rogers(1)........................ 55 Director
</TABLE>
- ---------------
(1) Member of the Compensation Committee
(2) Member of the Audit Committee
Laurence B. Mindel joined the Company as Chairman of the Board, President
and Chief Executive Officer in January 1987. From 1964 to 1970, Mr. Mindel was
President and Chief Executive Officer of Caswell Coffee Company in San
Francisco. In 1970, Mr. Mindel co-founded Spectrum Foods, where he served as
Chairman of the Board, President and Chief Executive Officer. Under Mr. Mindel's
direction, Spectrum created 14 restaurants in Northern and Southern California,
including Chianti, MacArthur Park, Harry's Bar and American Grill, Ciao, Prego
and Guaymas. In 1984, Saga Corporation acquired Spectrum Foods, and from that
time until he joined the Company, Mr. Mindel served as President of the Saga
Restaurant Group, which included Stuart Anderson's Black Angus, Velvet Turtle,
Spoons, Hotel Food Services and the newly acquired Spectrum Foods restaurants.
In 1985, Mr. Mindel became the first person of non-Italian descent and the first
American to be awarded the Caterina di Medici medal. Awarded by the Italian
government, the medal recognizes persons who have excelled in preserving the
Italian heritage outside of Italy.
Michael J. Hislop joined the Company as President and Chief Operating
Officer in July 1995. From April 1991 to May 1995, Mr. Hislop served as Chairman
and Chief Executive Officer of Chevy's Mexican Restaurants which, under his
direction, grew from 17 locations to 63 locations nationwide. From 1982 to 1991,
Mr. Hislop was employed by El Torito Mexican Restaurants, Inc., serving first as
Regional Operator, then as Executive Vice President of Operations and for the
last three years as Chief Operating Officer. From 1979 to 1982, Mr. Hislop was
employed by T.G.I. Fridays Restaurants, Inc. as a Regional Manager.
Paul J. Kelley joined the Company as Vice President, Finance, Chief
Financial Officer and Secretary in April 1991. From 1988 to 1991, he served as
Vice President of Finance of Bon Appetit Management, a contract food service
operator. From 1977 to 1988, he served in a variety of positions for Saga
Corporation, most recently as Vice President and Controller of Velvet Turtle and
Spoons.
Michael J. Beatrice joined the Company as Vice President, Operations, in
April 1996. From 1994 to 1996, Mr. Beatrice was Vice President, Operations, for
an area developer of Boston Chicken, a restaurant company. From 1991 through
1994, he owned and operated an upscale, full-service Italian restaurant north of
Boston. From 1983 to 1991, he served in a variety of positions with El Torito
Mexican Restaurants, Inc., most recently as Regional Vice President.
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Dean A. Cortopassi has been a director of the Company since April 1996. Mr.
Cortopassi founded and has served as Chief Executive Officer of San Tomo Group,
a holding company which owns and operates a number of food processing and
marketing companies, including Stanislaus Food Products, Gilroy Canning Company,
Sierra Quality Canners and Muir Glen Organics. Mr. Cortopassi is also a director
of the National Food Processors Association and Aidells' Sausage Company.
W. Scott Hedrick has been a director of the Company since 1987. Mr. Hedrick
co-founded InterWest Partners, a venture capital management firm, in 1979 and
has been a general partner of that firm since that time. From 1974 to 1979, Mr.
Hedrick was a partner of American-Euro Interfund, a venture capital corporation.
From 1970 to 1974, he was an Assistant Vice President with Small Business
Enterprise Company, a venture capital subsidiary of Bank of America NT & SA. Mr.
Hedrick is also a director of Office Depot, Inc.
F. Warren Hellman has been a director of the Company since 1983. Since
1984, he has been a general partner of Hellman & Friedman, an investment firm.
He has also been a partner of Matrix Partners, a venture capital firm, since
1982 and a partner of FWH Associates, an investment firm, since 1985. From 1962
to 1977, Mr. Hellman was a partner of Lehman Brothers in New York, where he
served at various times as head of Lehman's Investment Banking Division,
President and Director of Lehman Brothers, Inc., and Chairman of Lehman
Corporation, a closed-end investment company. From October 1981 to March 1984,
Mr. Hellman also served as Managing Director of Lehman Brothers Kuhn Loeb. Mr.
Hellman is also a director of Williams-Sonoma, Inc., Levi Strauss Associates
Inc., APL Limited, Eller Media Company, Franklin Resources, MobileMedia
Communications, Osterweis Capital Management, Powerfood, Inc., D.N.& E. Walter &
Co. and Young & Rubicam Holdings, Inc.
W. Howard Lester has been a director of the Company since 1980. Mr. Lester
has served as Chairman of the Board and Chief Executive Officer of
Williams-Sonoma, Inc., a retail kitchen furnishings and housewares company,
since 1978. Mr. Lester is also a director of The Good Guys, Inc., CKE (Carl's)
and Harold's Corporation.
Pierre Mornell has been a director of the Company since 1991. Since 1969,
Dr. Mornell has been a psychiatrist and a consultant in private practice. Since
1985, he has lectured in the IBM Advanced Management Seminar and International
Executive Programs. Dr. Mornell has also lectured at the Stanford University and
Harvard University business schools. Dr. Mornell was a founding director of the
Trust for Public Land. He has served as a consultant to a number of presidents
of organizations, including Northern Telecom (Canada), Intuit Inc. and Kinko's.
T. Gary Rogers has been a director of the Company since 1989. He has been
Chairman of the Board and Chief Executive Officer of Dreyer's Grand Ice Cream,
Inc., a manufacturer and distributor of premium ice cream products, since 1977.
In 1973, he founded Vintage Management Company, a restaurant company operating
Vintage House Restaurants, and served as its President until 1977.
Each officer serves at the discretion of the Board of Directors. The
Company's By-laws permit the Board of Directors to establish by resolution the
authorized number of directors, and the Company currently has eight directors
authorized. There are no family relationships among any of the directors or
executive officers of the Company.
OTHER KEY EMPLOYEES
In addition to directors and executive officers, the Company has the
following key employees:
Maurizio Mazzon joined the Company in 1989 as Chef of Il Fornaio in Palo
Alto. Mr. Mazzon also served as Chef of Il Fornaio in San Jose from 1992 to
1995, when he was promoted to Executive Chef of the Company. In 1997, Mr. Mazzon
was also appointed Vice President. As Vice President and Executive Chef, he is
responsible for all menus, recipes and the supervision of all Chef-Partners and
other kitchen personnel.
Michael Mindel joined the Company in January 1990 as a restaurant manager
and, in February 1992, was promoted to Director of Retail Operations. In 1994,
Mr. Mindel became the Director of Marketing and served in that capacity until
1997, when he was promoted to Vice President of Marketing. His duties include
the
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development and management of marketing programs. Prior to joining the Company,
Mr. Mindel was employed by Chiat/Day Advertising, Inc., a national advertising
firm, as an account manager. Laurence B. Mindel is the father of Michael Mindel.
Mark Walker joined the Company in March 1990 as Vice President, Operations,
a position he held until April 1996, when he assumed his current position as
Vice President, Concept Development. His duties include the management of
purchasing and construction programs. From 1989 to 1990, he served as President
of Hodge Food Services, Inc., a restaurant corporation. From 1981 to 1988, Mr.
Walker was employed at Spectrum Foods, most recently as Vice President,
Operations.
Anne Goldberg joined the Company in December 1995 as Director of Wholesale
Bakeries. Her duties include directly supervising the wholesale bakeries
operations. Prior to joining the Company, Ms. Goldberg was an independent
consultant specializing in the food service industry and, from 1992 to 1995, she
was the general manager of Auntie Pasta, Inc., a manufacturer and retailer of
prepared foods.
Peter Hausback joined the Company in February 1992 as Controller. His
duties at the Company include supervising the accounting and tax functions.
Prior to joining the Company, Mr. Hausback was employed for five years with
Price Waterhouse LLP. He is a certified public accountant.
BOARD COMPOSITION
The Company currently has authorized eight directors. In accordance with
the Company's Certificate of Incorporation, upon the closing of this offering,
the Board of Directors will be divided into three classes with staggered
three-year terms. Class I will consist of Mr. Hedrick, Mr. Lester and Mr.
Mindel, whose terms will expire at the annual stockholders' meeting in 1998,
Class II will consist of Mr. Hellman, Mr. Hislop and Mr. Rogers, whose terms
will expire at the annual stockholders' meeting in 1999, and Class III will
consist of Mr. Cortopassi and Dr. Mornell, whose terms will expire at the annual
stockholders' meeting in 2000. At each annual meeting of stockholders after the
closing of this offering, the successors to directors whose terms will then
expire will be elected to serve for a full term of three years. This
classification of the Board of Directors may have the effect of delaying or
preventing changes in control or management of the Company.
BOARD COMMITTEES
The Audit Committee of the Board of Directors, currently composed of Mr.
Cortopassi and Mr. Hellman, among other things, reviews with senior management
and the Company's independent auditors the Company's financial results, consults
with the independent auditors regarding the internal accounting procedures of
the Company and reviews the engagement of and professional services provided by
the independent auditors. The Compensation Committee of the Board of Directors,
currently composed of Mr. Hedrick, Mr. Lester, Dr. Mornell and Mr. Rogers, among
other things, reviews the compensation and benefits of officers of the Company
and reviews general policy relating to compensation and benefits of employees of
the Company. The Compensation Committee also administers the issuance of stock
options and other awards under the Company's equity incentive and bonus plans.
COMPENSATION OF DIRECTORS
Directors who are not employees of the Company currently receive stock
options as compensation from the Company for their service as members of the
Board of Directors. Non-employee directors are eligible to receive options to
purchase Common Stock pursuant to the Company's 1997 Non-Employee Directors'
Stock Option Plan. See "Employee Benefit Plans -- 1997 Non-Employee Directors'
Stock Option Plan." In March 1996, the Company granted stock options pursuant to
a predecessor to the Plan to each of Mr. Hedrick, Mr. Hellman, Mr. Lester, Dr.
Mornell, Mr. Rogers and Mr. Cortopassi, to purchase 1,500 shares of the
Company's Common Stock at an exercise price of $5.00 per share.
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<PAGE> 37
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth the cash compensation awarded or paid to, or
earned by, the Company's Chief Executive Officer and each of the Company's other
executive officers whose combined salary and bonus for 1996 exceeded $100,000
(the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
---------------------
ANNUAL AWARDS
COMPENSATION(1) ---------------------
------------------- SECURITIES UNDERLYING
NAME AND PRINCIPAL POSITION SALARY BONUS(2) OPTIONS
- -------------------------------------------------------- -------- -------- ---------------------
<S> <C> <C> <C>
Laurence B. Mindel...................................... $369,519 $ -- 17,695
Chairman of the Board and
Chief Executive Officer
Michael J. Hislop....................................... 313,615 -- 15,200
President and Chief Operating Officer
Paul J. Kelley.......................................... 139,495 28,000 6,350
Vice President, Finance, Chief
Financial Officer and Secretary
</TABLE>
- ---------------
(1) In accordance with the rules of the Securities and Exchange Commission (the
"Commission"), the compensation described in this table does not include
medical, group life insurance or other benefits received by the Named
Executive Officers that are available generally to all salaried employees of
the Company, and certain perquisites and other personal benefits received by
the Named Executive Officers that do not exceed the lesser of $50,000 or 10%
of any such officer's salary and bonus disclosed in this table.
(2) Includes bonuses paid in 1997 for services rendered in 1996, but does not
include bonuses paid in 1996 for services rendered in 1995.
OPTION GRANTS IN 1996
The following table sets forth certain information for each grant of stock
options made during 1996 to each of the Named Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE
INDIVIDUAL GRANTS AT ASSUMED ANNUAL
--------------------------------------------------------- RATES OF STOCK
NUMBER OF PERCENT OF PRICE APPRECIATION
SECURITIES TOTAL OPTIONS FOR OPTION
UNDERLYING GRANTED TO EXERCISE TERMS(4)
OPTIONS EMPLOYEES IN PRICE EXPIRATION ------------------
NAME GRANTED(1) 1996(2) PER SHARE(3) DATE 5% 10%
- ----------------------------- ----------- ------------- -------------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Laurence B. Mindel........... 17,695 10.84% $ 5.50 04/25/01 $26,888 $ 59,416
Michael J. Hislop(5)......... 15,200 9.31 5.00 04/25/06 47,728 121,144
Paul J. Kelley............... 6,350 3.89 5.00 04/25/06 19,939 50,610
</TABLE>
- ---------------
(1) Options generally become exercisable on an annual basis at a rate of 20% per
year for five years. Options generally expire 10 years from the date of
grant or earlier upon termination of employment.
(2) Based on options to purchase an aggregate of 163,265 shares of Common Stock
granted to employees and directors of, and consultants to, the Company
during 1996, including the Named Executive Officers.
(3) The exercise price per share of each option was equal to the fair market
value of the Common Stock on the date of grant as determined by the Board of
Directors except that, with respect to the option granted to Mr. Mindel, the
exercise price was equal to 110% of such fair market value.
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<PAGE> 38
(4) The potential realizable value is calculated based on the term of the option
at its date of grant (five years for Mr. Mindel's option and 10 years for
options held by other officers). It is calculated based on the assumption
that the stock price on the date of grant appreciates from the date of grant
at the indicated annual rate compounded annually for the entire term of the
option and that the option is exercised and sold on the last day of its term
for the appreciated stock price. The 5% and 10% assumed rates of
appreciation are derived from the rules of the Commission and do not
represent the Company's estimate or projection of future Common Stock price.
(5) In the event of a change in control of the Company, the unvested portion of
Mr. Hislop's option accelerates and he has the right to exercise all or any
portion of the option.
AGGREGATED OPTION EXERCISES IN 1996 AND DECEMBER 29, 1996 OPTION VALUES
The following table sets forth certain information concerning the number
and value of unexercised stock options held as of December 29, 1996 by each of
the Named Executive Officers.
<TABLE>
<CAPTION>
NUMBER OF SECURITIES VALUE OF UNEXERCISED
UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS AT
OPTIONS AT DECEMBER 29, 1996 DECEMBER 29, 1996 (1)
----------------------------- -----------------------------
NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Laurence B. Mindel......................... 26,665 50,714 $ 140,923 $ 244,919
Michael J. Hislop.......................... 184,000 291,200 966,000 1,521,200
Paul J. Kelley............................. 15,179 38,857 84,192 204,728
</TABLE>
- ---------------
(1) There was no public trading market for the Common Stock as of December 29,
1996. Accordingly, these values have been calculated, in accordance with the
rules of the Commission, on the basis of an assumed initial public offering
price of $9.75 per share minus the applicable exercise price per share.
EMPLOYMENT AGREEMENT
In April 1995, the Company entered into an at-will employment agreement
with Michael J. Hislop as President and Chief Operating Officer. The agreement
provides for a base salary, annual bonus and a monthly car allowance, subject to
annual review. In addition, pursuant to the agreement, in April 1995, the
Company granted Mr. Hislop options to purchase 460,000 shares of Common Stock.
As set forth in the employment agreement, in the event of a change of control
(as defined in the agreement), the unvested portion of the option automatically
accelerates and Mr. Hislop has the right to exercise all or any portion of the
option. The agreement provides further that in the event Mr. Hislop's employment
is involuntarily terminated by the Company for any reason other than death,
disability or cause (as defined in the agreement) or in the event Mr. Hislop
voluntarily terminates his employment within 30 days of a change of control (as
defined in the agreement), Mr. Hislop will receive, in lieu of any severance
benefits which he may otherwise be entitled to receive under any Company
severance plan or program, a cash severance payment in an aggregate amount equal
to 100% of Mr. Hislop's annual base salary at the time of such termination.
EMPLOYEE BENEFIT PLANS
1997 Equity Incentive Plan. In March 1997, the Board of Directors adopted
and, in April 1997, the stockholders approved, the Company's 1997 Equity
Incentive Plan (the "1997 Plan"), as an amendment and restatement of the
Company's existing 1992 Stock Option Plan and 1995 Stock Option Plan
(collectively, the "Prior Plans"). An aggregate of 1,300,000 shares of Common
Stock are authorized for issuance under the 1997 Plan. The terms of options
granted under the Prior Plans are substantially similar to options that may be
granted under the 1997 Plan.
The 1997 Plan provides for the grant of incentive stock options under the
Internal Revenue Code of 1986, as amended (the "Code"), to employees (including
officers and employee-directors) and nonstatutory stock options to employees
(including officers and employee-directors), non-employee directors of and
consultants
35
<PAGE> 39
to the Company. The 1997 Plan is administered by the Board of Directors or a
Committee appointed by the Board (the "Committee"), which determines recipients
and types of options to be granted, including the exercise price, number of
shares subject to the option and the exercisability thereof.
The terms of stock options granted under the 1997 Plan may not exceed 10
years. The exercise price of options granted under the 1997 Plan is determined
by the Board or the Committee, provided that the exercise price for a
nonstatutory stock option cannot be less than 85% of the fair market value of
the Common Stock on the date of the option grant, and the exercise price for an
incentive stock option cannot be less than 100% of the fair market value of the
Common Stock on the date of the option grant. Options granted under the 1997
Plan typically vest annually at the rate at 20% per year over five years. A
nonstatutory stock option may be transferred by the optionee if the stock option
agreement evidencing such option specifically provides for transferability. An
incentive stock option may not be transferred by the optionee other than by will
or the laws of descent or distribution. In addition, an optionee may designate a
beneficiary who may exercise the option (whether a nonstatutory or incentive
stock option) following the optionee's death. An optionee whose relationship
with the Company or any affiliate terminates for any reason (other than by death
or permanent and total disability) may generally exercise his or her options in
the three-month period following such termination (unless such options terminate
or expire sooner by their terms) or in such longer or shorter period as may be
determined by the Board or the Committee and evidenced in the option agreement.
Options may generally be exercised for up to 18 months after an optionee's
relationship with the Company or any affiliate terminates due to death and for
up to 12 months if due to disability.
No incentive stock option may be granted to any person who, at the time of
grant, owns (or is deemed to own) stock possessing more than 10% of the total
combined voting power of the Company or any affiliate of the Company, unless the
option exercise price is at least 110% of the fair market value of the stock
subject to the option on the date of grant and the term of the option does not
exceed five years from the date of grant. The aggregate fair market value,
determined at the time of grant, of the shares of Common Stock with respect to
which incentive stock options are exercisable for the first time by an optionee
during any calendar year (under all such plans of the Company and its
affiliates) may not exceed $100,000.
Upon certain changes in control of the Company, unless otherwise specified
in the option agreement, all outstanding options under the 1997 Plan will either
be assumed or substituted by the surviving entity. If the surviving entity
determines not to assume or substitute such options then, with respect to
persons then performing services as employees, directors or consultants, the
time during which such options may be exercised shall be accelerated and the
options terminated if not exercised prior to such change in control.
As of August 15, 1997, options to purchase 902,795 shares of Common Stock
were outstanding under the 1997 Plan (including options issued under the Prior
Plans). Shares subject to stock options that have expired or otherwise
terminated without having been exercised in full again become available for the
grant of options under the 1997 Plan. The 1997 Plan will terminate in March 2007
unless sooner terminated by the Board of Directors.
1997 Non-Employee Directors' Stock Option Plan. In March 1997, the Board
of Directors adopted and, in April 1997, the stockholders approved, the 1997
Non-Employee Directors' Stock Option Plan (the "Directors' Plan"), which
provides for the automatic grant of options to purchase shares of Common Stock
to non-employee directors of the Company. The Directors' Plan is administered by
the Board, unless the Board delegates administration to the Committee.
The Directors' Plan provides for the issuance of up to 100,000 shares of
Common Stock. Under the Directors' Plan, each current non-employee director was
automatically granted, in April 1997, an option to purchase 4,500 shares of
Common Stock, and each person who is subsequently elected for the first time to
be a non-employee director will automatically be granted an option to purchase
4,500 shares upon the date of his or her election to the Company's Board of
Directors. On each third anniversary of such grants, each non-employee director
who has continued to serve in that capacity, will automatically be granted an
option to purchase an additional 4,500 shares of Common Stock. Options under the
Directors' Plan have a 10-year term and will vest ratably on an annual basis
over three years. The exercise price of options under the Directors' Plan is
equal to the fair market value of the Common Stock on the date of grant. Options
granted under the
36
<PAGE> 40
Directors' Plan are generally nontransferable. Upon certain changes of control
of the Company, the exercisability of options granted under the Directors' Plan
will be accelerated and the options terminated if not exercised prior to such
change of control. Unless otherwise terminated by the Board of Directors, the
Directors' Plan will terminate in March 2007.
As of August 15, 1997, options to purchase an aggregate of 77,500 shares of
Common Stock with a weighted average exercise price of $4.41 per share were
outstanding under the Directors' Plan and a predecessor non-employee directors'
plan of the Company and held by the Company's non-employee directors. The terms
of the options under the predecessor non-employee directors' plan are
substantially similar to those available under the Plan described above.
1997 Employee Stock Purchase Plan. In March 1997, the Board of Directors
adopted and, in April 1997, the stockholders approved, the 1997 Employee Stock
Purchase Plan (the "Purchase Plan"). The Purchase Plan provides for the issuance
of up to 300,000 shares of Common Stock to employees of the Company. The rights
to purchase Common Stock under the Purchase Plan are intended to qualify as
options issued under an "employee stock purchase plan" as that term is defined
in Section 423(b) of the Code.
The Purchase Plan is administered by the Board of Directors, unless such
authority is delegated to a committee composed of two or more members of the
Board. Subject to certain limitations, the Board has the authority to determine
when and how rights to purchase Common Stock will be granted and the terms of
each offering of such rights, and to amend or revoke the rules and regulations
for the administration of the Purchase Plan. The Board has authorized an initial
offering under the Purchase Plan, which will commence upon the effectiveness of
this public offering.
Under the Purchase Plan, all eligible employees are granted identical
rights to purchase Common Stock for each Board-authorized offering under the
Purchase Plan. Subject to limited exceptions, any person who has been employed
by the Company for at least one year and is customarily employed for at least 20
hours per week and 5 months per calendar year is eligible to participate in an
offering under the Purchase Plan. An eligible employee participates in the
Purchase Plan by authorizing payroll deductions of up to 15% of such employee's
earnings, as such term is defined in the Purchase Plan. The purchase price per
share at which shares are sold in an offering under the Purchase Plan cannot be
less than the lower of (i) 85% of the fair market value of a share of Common
Stock on the date of commencement of the offering or (ii) 85% of the fair market
value of a share of Common Stock on the date of purchase. Rights granted
pursuant to any offering under the Purchase Plan terminate immediately upon
cessation of an employee's employment for any reason and the Company will
distribute to such employee all of his or her net accumulated payroll
deductions. In general, an employee may withdraw from participation in an
offering at any time during the purchase period for such offering. Rights
granted under the Purchase Plan are not transferable and may be exercised only
by the person to whom such rights are granted.
In the event of certain changes of control, the Board of Directors has the
discretion to provide that each right under the Purchase Plan to purchase Common
Stock shall be assumed or substituted with an equivalent right by the acquiring
corporation, or the Board may shorten the offering and provide for all sums
collected to be applied toward the purchase of Common Stock immediately prior to
such change in control.
Bonus Plan. The Company has a bonus plan (the "Bonus Plan"), pursuant to
which certain members of corporate management of the Company are eligible to
receive annual cash bonuses based on a percentage of their respective base
salaries if certain performance targets established by management and approved
by the Board of Directors are met. The bonuses paid under the Bonus Plan are
subject to the approval of the Board of Directors. The bonuses paid to the
executive officers for services rendered in 1996 are included in the Summary
Compensation Table.
Management Incentive Plans. The Company has also established a number of
incentive plans under which restaurant and bakery managers of the Company are
eligible to receive bonuses at the end of each of the Company's fiscal quarters
if certain financial goals, set annually by senior management, are achieved.
37
<PAGE> 41
CERTAIN TRANSACTIONS
INDEMNIFICATION AND LIMITATION OF DIRECTOR AND OFFICER LIABILITY
The Company has entered into indemnity agreements with each of the
Company's directors and executive officers which provide that, subject to
certain limitations, the Company will indemnify against any and all expenses of
the director or executive officer who incurred such expenses because of his or
her status as a director or executive officer, to the fullest extent permitted
by the Company's By-laws and Delaware law. In addition, the Company's By-laws
provide that the Company shall indemnify its directors and executive officers to
the fullest extent not prohibited by Delaware law, subject to certain
limitations, and may also secure insurance, to the fullest extent permitted by
Delaware law, on behalf of any director, officer, employee or agent against any
expense, liability or loss arising out of his or her actions in such capacity.
The Company's Restated Certificate provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for any breach of fiduciary duty as a director, except for liability (i)
for any breach of the director's duty of loyalty to the corporation or its
stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) for unlawful payment
of dividends or unlawful stock repurchases or redemptions, or (iv) for any
transaction from which the director derived an improper personal benefit. If the
Delaware law is amended to authorize corporate action further eliminating or
limiting the personal liability of a director, then the liability of a Company
director shall be eliminated or limited to the fullest extent permitted by the
Delaware law, as so amended. The provision in the Restated Certificate does not
eliminate the duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
38
<PAGE> 42
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of August 15, 1997, certain information
regarding beneficial ownership of the Company's Common Stock by (i) each person
(or group of affiliated persons) who is known by the Company to be the
beneficial owner of more than 5% of the outstanding Common Stock, (ii) each
director of the Company, (iii) each of the Named Executive Officers, (iv) all
directors and executive officers as a group and (v) the Selling Stockholders.
Except as otherwise indicated, the Company believes that the beneficial owners
of the Common Stock listed below, based on information furnished by such owners,
have sole investment and voting power with respect to such shares, subject to
community property laws where applicable.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY
OWNED PRIOR SHARES BENEFICIALLY
TO OFFERING SHARES OWNED AFTER OFFERING
DIRECTORS, EXECUTIVE OFFICERS AND 5% ----------------------- BEING -----------------------
STOCKHOLDERS NUMBER PERCENT OFFERED NUMBER PERCENT
- ------------------------------------- --------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C>
InterWest Partners(1)................ 768,145 16.8% 62,114 706,031 12.7%
Building Three, Suite 255
3000 Sand Hill Road
Menlo Park, CA 94025
Sequoia Capital(2)................... 287,799 6.3 23,268 264,531 4.7
Building Four, Suite 280
3000 Sand Hill Road
Menlo Park, CA 94025
Mayfield Fund(3)..................... 237,945 5.2 19,240 218,705 3.9
2800 Sand Hill Road, Suite 250
Menlo Park, CA 94025
Laurence B. Mindel(4)................ 701,265 15.0 -- 701,265 12.4
Michael J. Hislop(5)................. 279,040 5.7 -- 279,040 4.8
Paul J. Kelley(6).................... 46,723 1.0 -- 46,723 *
Michael J. Beatrice(7)............... 10,000 * -- 10,000 *
Dean A. Cortopassi(8)................ 60,794 1.3 -- 60,794 1.1
W. Scott Hedrick(1)(9)............... 779,645 17.0 62,114 717,531 12.8
F. Warren Hellman(10)................ 135,055 2.9 -- 135,055 2.4
W. Howard Lester(11)................. 186,701 4.1 -- 186,701 3.3
Pierre W. Mornell(12)................ 24,497 * -- 24,497 *
T. Gary Rogers(13)................... 52,962 1.2 -- 52,962 *
All executive officers and directors
as a group (10 persons)(14)........ 2,270,932 45.5 62,114 2,208,818 36.9
OTHER SELLING STOCKHOLDERS
- -------------------------------------
Wells Fargo & Company................ 219,478 4.8 219,478 -- --
Other Selling Stockholders(15)....... 313,019 6.8 175,900 137,119 2.4
</TABLE>
- ---------------
* Less than one percent
(1) Includes 218,998 shares held of record by InterWest Partners I, 220,219
shares held of record by InterWest Partners II, 321,125 shares held of
record by InterWest Partners IV and 7,803 shares held of record by
InterWest Entrepreneurs. HBH Partners I is the general partner of InterWest
Partners I, HBH Partners II is the general partner of InterWest Partners
II, InterWest Management Partners IV is the general partner of InterWest
Partners IV and InterWest Partners II is the general partner of InterWest
Entrepreneurs. Mr. Hedrick is a general partner of HBH Partners I, HBH
Partners II and InterWest Management IV. Mr. Hedrick disclaims beneficial
ownership of shares held by such entities except to the extent of his pro
rata interests in such partnerships.
39
<PAGE> 43
(2) Includes 270,532 shares held of record by Sequoia Capital Growth Fund and
17,267 shares held of record by Sequoia Technology Partners III.
(3) Includes 228,428 shares held of record by Mayfield V and 9,517 shares held
of record by Mayfield Associates.
(4) Includes 7,195 shares held by the Mindel Family Trust 5,750 shares held by
the Trust created for the benefit of Laurence B. Mindel and his family, and
2,587 shares held by The Mindel Living Trust, of which Mr. Mindel is the
trustee. Excludes an aggregate of 195,944 shares held in trusts for five
children of Mr. Mindel, as to which Mr. Mindel is not a trustee and
disclaims beneficial ownership. Includes 42,141 shares issuable upon the
exercise of stock options that are exercisable within 60 days.
(5) Includes 279,040 shares issuable upon the exercise of stock options that
are exercisable within 60 days.
(6) Includes 25,986 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(7) Includes 10,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(8) Includes 57,794 shares held of record by Stanislaus Food Products Company,
a California Corporation. Mr. Cortopassi is Chief Executive Officer and
controlling shareholder of Stanislaus Food Products Company. Includes 3,000
shares issuable upon the exercise of stock options that are exercisable
within 60 days.
(9) Includes 11,500 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(10) Includes 123,555 shares held of record by FWH Associates, a California
Limited Partnership. Mr. Hellman is a general partner of FWH Associates.
Includes 1,500 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(11) Includes 23,535 shares held of record by Williams-Sonoma, Inc. Mr. Lester
is the Chairman of the Board and Chief Executive Officer of
Williams-Sonoma, Inc. Includes 11,500 shares issuable upon the exercise of
stock options that are exercisable within 60 days.
(12) Includes 2,145 shares held of record by an individual retirement account
for the benefit of Dr. Mornell's wife and 4,620 shares held by Pierre
Mornell, M.D., Sole Proprietor Profit Sharing Plan. Includes 11,500 shares
issuable upon the exercise of stock options that are exercisable within 60
days.
(13) Includes 5,487 shares held of record by Rogers Revocable Trust and 35,975
shares held of record by Four Rogers Trust. Mr. Rogers is a trustee of both
Rogers Revocable Trust and Four Rogers Trust. Includes 11,500 shares
issuable upon the exercise of stock options that are exercisable within 60
days.
(14) Includes information contained in the notes above, as applicable. Includes
1,031,038 shares held by entities affiliated with directors. Includes
407,667 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(15) Includes stockholders each of whom owned less than 1% of the Company's
Common Stock prior to the offering and will own less than 1% of the
Company's Common Stock following the offering. Such stockholders (and the
number of shares to be sold by such stockholders in the offering) include:
Candice E. Appleton (5,000 shares); Douglas Appleton (5,000 shares); Andrew
D. Berkey II (3,000 shares); Stephen W. Bershad (12,620 shares); Dennis
Bookshester (6,310 shares); Collingwood Partners (25,240 shares); Dorskind
1982 Trust (3,000 shares); Phyllis and Donald Epstein (5,000 shares); Aaron
Eshman (4,000 shares) Oak Brook Bank, Trustee Cust. FBO Arthur P. Frigo IRA
(6,310 shares); Barry Goldfarb (12,620 shares); Bernard A. Greenberg (3,000
shares); Marilyn Karsten (3,000 shares); C. Joseph LaBonte (3,046 shares);
C. Joseph LaBonte Defined Benefit Plan (6,894 shares); Edward N. Levine
(8,000 shares); Mark T. Lindee (6,000 shares); Delaware Charter Guaranteed
Trust Co. FBO Jerry Magnin (3,000 shares); Jerry Allan Magnin and Lois
Magnin Declaration of Trust (12,620 shares); Master Trust Pursuant to
Hewlett Packard Deferred Profit Sharing Plan and Retirement Plan (25,240
shares); Joseph and Ann H. Nadel Living Trust (3,000); Delaware Charter
Guarantee & Trust, Trustee FBO Donald L. Schwarz IRA (4,000 shares); and
Wilderness Associates (10,000 shares).
40
<PAGE> 44
DESCRIPTION OF CAPITAL STOCK
Upon the closing of this offering, the authorized capital stock of the
Company will consist of 20,000,000 shares of Common Stock, $.001 par value, and
5,000,000 shares of Preferred Stock, $.001 par value.
COMMON STOCK
As of August 15, 1997, there were 4,582,891 shares of Common Stock (after
giving effect to the conversion of Preferred Stock into Common Stock upon the
closing of this offering) outstanding held of record by 230 stockholders.
The holders of Common Stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the stockholders. Subject to
preferences that may be applicable to any outstanding shares of the Preferred
Stock, the holders of Common Stock are entitled to receive ratably such
dividends as may be declared by the Board of Directors out of funds legally
available therefor. See "Dividend Policy." In the event of a liquidation,
dissolution or winding up of the Company, holders of the Common Stock are
entitled to share ratably in all assets remaining after payment of liabilities
and the liquidation preferences of any outstanding shares of Preferred Stock.
Holders of Common Stock have no preemptive rights and no right to convert their
Common Stock into any other securities. There are no redemption or sinking fund
provisions applicable to the Common Stock. All outstanding shares of Common
Stock are, and all shares of Common Stock to be outstanding upon the closing of
this offering will be, fully paid and nonassessable.
PREFERRED STOCK
Pursuant to the Company's Restated Certificate to be effective upon the
closing of this offering, the Board of Directors has the authority, without
further action by the stockholders, to issue up to 5,000,000 shares of Preferred
Stock in one or more series and to fix the designations, powers, preferences and
rights and the qualifications, limitations or restrictions thereof, including
dividend rights, conversion rights, voting rights, terms of redemption and
liquidation preferences, any or all of which may be greater than the rights of
the Common Stock. The Board of Directors, without stockholder approval, can
issue Preferred Stock with voting, conversion or other rights that could
adversely affect the voting power and other rights of the holders of Common
Stock. Preferred Stock could thus be issued quickly with terms calculated to
delay or prevent a change in control of the Company or make removal of
management more difficult. Additionally, the issuance of Preferred Stock may
have the effect of decreasing the market price of the Common Stock and may
adversely affect the voting and other rights of the holders of Common Stock.
Upon the closing of this offering, there will be no shares of Preferred Stock
outstanding and the Company currently has no plans to issue any of its Preferred
Stock.
WARRANTS
As of August 15, 1997, there were warrants outstanding to purchase 32,487
shares of Common Stock at an exercise price of $9.90 per share. The warrants
expire December 31, 1997.
POTENTIAL ANTI-TAKEOVER EFFECT OF PROVISIONS OF CHARTER DOCUMENTS AND DELAWARE
LAW
Charter Documents. The Restated Certificate and By-laws to be effective
upon the closing of this offering include a number of provisions that may have
the effect of deterring hostile takeovers or delaying or preventing changes in
control or management of the Company. First, the Company's Board of Directors
will be classified into three classes of directors. The Restated Certificate
provides that directors may be removed for cause by the vote of the holders of a
majority of the voting power and without cause by the vote of the holders of
66 2/3% of the voting power. The Restated Certificate also provides that
vacancies on the Board of Directors or newly created directorships shall, unless
the Board of Directors determines otherwise or except as otherwise required by
law, be filled only by the affirmative vote of a majority of directors then in
office, even though less than a quorum. See "Management -- Executive Officers
and Directors." In addition, the Restated Certificate provides that all
stockholder action must be effected at a duly called meeting of stockholders and
not by a consent in writing. Further, the By-laws limit who may call special
meetings of the stockholders. The
41
<PAGE> 45
Company's Restated Certificate does not include a provision for cumulative
voting for directors. Under cumulative voting, a minority stockholder holding a
sufficient percentage of a class of shares may be able to ensure the election of
one or more directors. Finally, the By-laws establish procedures, including
advance notice procedures, with regard to stockholder proposals and the
nomination of candidates for election as directors. These and other provisions
of the Restated Certificate and By-laws and Delaware law could discourage
potential acquisition proposals and could delay or prevent a change in control
or management of the Company. See "Risk Factors -- Potential Anti-Takeover
Effect of Certain Charter and By-law Provisions."
Delaware Takeover Statute. The Company is subject to the provisions of
Section 203 of the Delaware General Corporation Law. In general, the statute
prohibits a publicly held Delaware corporation from engaging in a "business
combination" with an "interested stockholder" for a period of three years after
the date of the transaction in which the person became an interested
stockholder, unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a "business combination" includes a merger, certain
sales of stock or assets or other transaction resulting in a financial benefit
to the interested stockholder, and an "interested stockholder" is a person who,
together with affiliates and associates, owns (or within three years prior, did
own) 15% or more of the corporation's voting stock, subject to certain
exceptions.
REGISTRATION RIGHTS
Following this offering, the holders of 2,474,343 shares of Common Stock
(the "Registrable Securities") and warrants to purchase 32,487 shares of Common
Stock are entitled to certain registration rights with respect to such shares.
Subject to certain exceptions, including the right of the Company to defer a
demand registration for a period of 120 days under certain conditions, the
holders of at least 40% of the Registrable Securities may require that the
Company use its best efforts to register for public resale under the Securities
Act beginning six months after the closing of this offering all Registrable
Securities requested to be registered. Subject to certain limitations, the
holders of at least 10% of the outstanding Registrable Securities may require on
two occasions, but not more than once in any 12-month period, that the Company
use its best efforts to register on Form S-3 for public resale all Registrable
Securities requested to be registered. In addition, subject to certain
limitations, in the event the Company elects to register any of its Common Stock
under the Securities Act, either for its own account or for the account of any
other stockholders, the Company is required to notify, and subject to certain
marketing and other limitations, is required to include in such registration the
Registrable Securities of holders requesting registration. The Company is
required to bear all registration expenses incurred in connection with the
registration of Registrable Securities in the one demand registration, in the
two S-3 registrations and in all Company registrations.
Subject to certain limitations, registration rights may be transferred to a
transferee who acquires a minimum number of shares of the transferor's
Registrable Securities. In addition, registration rights may be assigned in
connection with a distribution by a transferor to a partner of the transferor,
former partner or the estate of any such partner regardless of the number of
shares of the transfer's Registrable Securities with notice.
TRANSFER AGENT AND REGISTRAR
BankBoston has been appointed as the transfer agent and registrar for the
Company's Common Stock.
42
<PAGE> 46
SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering, there has been no public market for the Company's
Common Stock. As described herein, only a limited number of shares will be
available for sale shortly after this offering because of certain contractual
and legal restrictions on resale. Sales of substantial amounts of Common Stock
of the Company in the public market after the restrictions lapse could adversely
affect the prevailing market price and the ability of the Company to raise
equity capital in the future.
Upon the closing of this offering, the Company will have outstanding an
aggregate of 5,582,891 shares of Common Stock. Of these shares, all the shares
sold in this offering will be freely tradeable without restriction under the
Securities Act or further registration under the Securities Act and the
remaining 4,082,891 shares of Common Stock held by existing stockholders are
"restricted securities" as that term is defined in Rule 144 under the Securities
Act or were issued pursuant to Regulation S under the Securities Act (the
"Restricted Shares"). Restricted Shares may be sold in the public market only if
registered or if they qualify for an exemption from registration, such as Rules
144, 144(k) or 701 promulgated under the Securities Act.
Each officer, director and certain stockholders of the Company and holders
of options to acquire Common Stock have agreed with the representatives of the
Underwriters for a period of 180 days after the date of this Prospectus, subject
to certain exceptions, not to directly or indirectly sell, offer, contract or
grant any option to sell (including, without limitation, any short sale),
pledge, transfer, establish an open "put equivalent position" or otherwise
dispose of any shares of Common Stock, options or warrants to acquire shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, without the prior written consent of Montgomery Securities
(the "Lock-Up Agreements"). In its sole discretion and at any time without
notice, Montgomery Securities may release all or any portion of the shares
subject to the Lock-Up Agreements. Of the Restricted Shares, 3,507,540 shares
are subject to the Lock-Up Agreements, and all of these shares will become
available for sale in the public market immediately following expiration of the
180-day lock-up period, subject (to the extent applicable) to the volume and
other limitations of Rule 144 or Rule 701.
An additional 416,095 Restricted Shares are subject to contractual
restrictions with the Company similar to those contained in the Lock-Up
Agreements, of which 78,033 shares will become available for sale in the public
market beginning 120 days after the date of this Prospectus and 338,062 shares
beginning 180 days after the date of this Prospectus, subject (to the extent
applicable) to the volume and other limitations of Rule 144 or Rule 701.
In addition, beginning 90 days after the date of this Prospectus, 38,428
Restricted Shares not subject to Lock-Up Agreements or such contractual
restrictions will become available for sale in the public market, subject to the
volume and other limitations of Rule 144 or Rule 701. The remaining 120,828
Restricted Shares not subject to Lock-Up Agreements or such contractual
restrictions will be eligible for sale in the public market pursuant to Rule
144(k) under the Securities Act as of the date of this Prospectus.
The holders of approximately 2,474,343 shares of Common Stock and
outstanding warrants to purchase 32,487 shares of Common Stock have registration
rights with respect to such shares. See "Description of Capital
Stock -- Registration Rights."
As of August 15, 1997, there were 980,295 shares of Common Stock subject to
outstanding options. The Company intends to file, shortly following the closing
of this offering, registration statements under the Securities Act to register
shares of Common Stock reserved for issuance under the Company's employee
benefit plans, thus permitting the sale of such shares by non-affiliates in the
public market without restriction under the Securities Act. Such registration
statements will become effective immediately upon filing.
In general, under Rule 144, beginning 90 days after the date of this
Prospectus, any holder, including an affiliate of the Company, of Restricted
Shares as to which at least one year has elapsed since the later of the date of
acquisition of the shares from the Company or from an affiliate of the Company,
would be entitled within any three-month period to sell a number of shares that
does not exceed the greater of 1% of the then outstanding shares of Common Stock
(approximately 55,800 shares immediately after the closing of this offering), or
the average weekly trading volume of the Common Stock on the Nasdaq National
Market during
43
<PAGE> 47
the four calendar weeks preceding the date on which notice of the sale is filed
with the Commission. Sales under Rule 144 are subject to certain requirements
relating to manner of sale, notice and availability of current public
information about the Company. However, a person (or persons whose shares are
aggregated) who is not deemed to have been an affiliate of the Company at any
time during the 90 days immediately preceding the sale and who beneficially owns
Restricted Shares is entitled to sell such shares under Rule 144(k) without
regard to the limitations described above, provided that at least two years have
elapsed since the later of the date the shares were acquired from the Company or
from an affiliate of the Company. The foregoing is a summary of Rule 144 and is
not intended to be a complete description of it.
Subject to certain conditions, Rule 701 may be relied upon with respect to
the resale of securities originally purchased from the Company by its employees,
directors, officers, consultants or advisers prior to the closing of this
offering, pursuant to written compensatory benefit plans or written contracts
relating to the compensation of such persons. In addition, the Commission has
indicated that Rule 701 will apply to stock options granted by the Company
before this offering, along with the shares acquired upon exercise of such
options. Securities issued in reliance on Rule 701 are deemed to be Restricted
Shares and, beginning 90 days after the date of this Prospectus (unless subject
to the Lock-Up Agreements or other contractual restrictions described above),
may be sold by persons other than affiliates subject only to the manner of sale
provisions of Rule 144 and by affiliates under Rule 144 without compliance with
its one-year minimum holding period requirement.
44
<PAGE> 48
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and BT
Alex. Brown Incorporated (the "Representatives"), have severally agreed, subject
to the terms and conditions set forth in the Underwriting Agreement, to purchase
from the Company and the Selling Stockholders the numbers of shares of Common
Stock indicated below opposite their respective names at the initial public
offering price less the underwriting discount set forth on the cover page of
this Prospectus. The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters are committed to purchase all of such shares if any are purchased.
<TABLE>
<CAPTION>
NUMBER OF
NAME SHARES
---------------------------------------------------------------- ----------
<S> <C>
Montgomery Securities...........................................
BT Alex. Brown Incorporated.....................................
---------
Total................................................. 1,500,000
=========
</TABLE>
The Representatives have advised the Company and the Selling Stockholders
that the Underwriters propose initially to offer the Common Stock to the public
on the terms set forth on the cover page of this Prospectus. The Underwriters
may allow to selected dealers a concession of not more than $ per
share, and the Underwriters may allow, and such dealers may reallow, a
concession of not more than $ per share to certain other dealers. After
the initial public offering, the offering price and other selling terms may be
changed by the Representatives. The Common Stock is offered subject to receipt
and acceptance by the Underwriters and to certain other conditions, including
the right to reject orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of the Underwriting Agreement, to purchase up
to a maximum of 225,000 additional shares of Common Stock to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent that the Underwriters exercise this
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase such additional shares in approximately the same
proportion as set forth in the table above. The Underwriters may purchase such
shares only to cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters against certain liabilities,
including civil liabilities under the Securities Act, or will contribute to
payments the Underwriters may be required to make in respect thereof.
Pursuant to the terms of the Lock-Up Agreements, the holders of 3,507,540
shares of Common Stock have agreed that, for a period of 180 days after the
effective date of this Prospectus, they will not, without the prior written
consent of Montgomery Securities, subject to certain exceptions, directly or
indirectly, sell, offer, contract or grant any option to sell (including,
without limitation, any short sale), pledge, transfer, establish an open "put
equivalent position" or otherwise dispose of any shares of Common Stock, options
or warrants to acquire shares of Common Stock or any securities convertible into
or exchangeable for shares of Common Stock. In addition, the Company has agreed
that for a period of 180 days after the date of this Prospectus, it will not,
without the prior written consent of Montgomery Securities, directly or
indirectly, offer to sell, issue, distribute or otherwise dispose of any equity
securities or securities convertible into or exchangeable for equity securities
or any options, rights or warrants with respect to any equity securities except
for (i) shares of Common Stock offered hereby, (ii) shares of Common Stock
issued pursuant to exercise of outstanding options or warrants disclosed in the
Prospectus or (iii) options granted or stock issued after the date of this
Prospectus under the Company's stock plans or arrangements described in the
Prospectus. See "Shares Eligible for Future Sale."
45
<PAGE> 49
Prior to this offering, there has been no public market for the Common
Stock. Consequently, the initial public offering price will be determined by
negotiations among the Company, the Selling Stockholders and the
Representatives. Among the factors to be considered in such negotiations will be
the history of, and the prospects for, the Company and the industry in which it
competes, an assessment of the Company's management, its past and present
operations, its past and present financial performance, its prospects for future
earnings, the general condition of the securities markets at the time of the
offering and the market prices for publicly traded common stock of comparable
companies in recent periods and other factors deemed relevant.
The Representatives have advised the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of 5% of the shares of Common Stock offered hereby.
The Representatives have advised the Company that, pursuant to Regulation M
under the Securities Act, certain persons participating in this offering may
engage in transactions, including stabilizing bids, syndicate covering
transactions or the imposition of penalty bids, which may have the effect of
stabilizing or maintaining the market price of the Common Stock at a level above
that which might otherwise prevail in the open market. A "stabilizing bid" is a
bid for or the purchase of the Common Stock on behalf of the Underwriters for
the purpose of fixing or maintaining the price of the Common Stock. A "syndicate
covering transaction" is the bid for or the purchase of the Common Stock on
behalf of the Underwriters to reduce a short position incurred by the
Underwriters in connection with this offering. A "penalty bid" is an arrangement
permitting the Representatives to reclaim the selling concession otherwise
accruing to an Underwriter or syndicate member in connection with this offering
if the Common Stock originally sold by such Underwriter or syndicate member is
purchased by the Representatives in a syndicate covering transaction and has
therefore not been effectively placed by such Underwriter or syndicate member.
The Representatives have advised the Company that such transactions may be
effected on the Nasdaq National Market or otherwise and, if commenced, may be
discontinued at any time.
As of the date of this Prospectus, Montgomery Securities beneficially owned
3,537 shares of Common Stock of the Company.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby is being passed
upon for the Company by its counsel, Cooley Godward LLP ("Cooley Godward"), San
Francisco, California. Certain legal matters relating to the offering will be
passed upon for the Underwriters by Orrick, Herrington & Sutcliffe LLP, San
Francisco, California. As of the date of this Prospectus, GC&H Investments, an
investment partnership composed of certain partners of and persons associated
with Cooley Godward, beneficially owned 3,693 shares of Common Stock of the
Company and Cooley Godward beneficially owned 4,310 shares of Common Stock of
the Company.
EXPERTS
The financial statements as of December 29, 1996 and December 31, 1995 and
for each of the three years in the period ended December 29, 1996 included in
this Prospectus have been audited by Deloitte & Touche LLP, independent
auditors, as stated in their report appearing herein and have been so included
in reliance upon the report of such firm given upon their authority as experts
in accounting and auditing.
ADDITIONAL INFORMATION
A Registration Statement on Form S-1, including amendments thereto,
relating to the shares of Common Stock offered hereby has been filed by the
Company with the Commission under the Securities Act. This Prospectus does not
contain all of the information set forth in the Registration Statement and the
exhibits and schedules thereto. In each instance of the description of or
reference to the contents of any contract or
46
<PAGE> 50
document herein, reference is made to the copy of such contract or other
document filed as an exhibit to the Registration Statement, each such
description or reference being qualified in all respects by such reference. For
further information with respect to the Company and the Common Stock offered
hereby, reference is made to such Registration Statement, exhibits and
schedules. A copy of the Registration Statement may be inspected by anyone
without charge at the public reference facilities maintained by the Commission
at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549, and copies
of all or any part thereof may be obtained from those offices upon the payment
of certain fees prescribed by the Commission. The Commission maintains a World
Wide Web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission.
The address of the site is http://www.sec.gov.
47
<PAGE> 51
[INTENTIONALLY LEFT BLANK]
<PAGE> 52
IL FORNAIO (AMERICA) CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Balance Sheets as of December 31, 1995, December 29, 1996, and June 29, 1997.......... F-3
Statements of Income for the years ended December 25, 1994, December 31, 1995,
December 29, 1996, and the six months ended June 30, 1996 and June 29, 1997......... F-4
Statements of Changes in Stockholders' Equity for the years ended December 25, 1994,
December 31, 1995, December 29, 1996, and the six months ended June 29, 1997........ F-5
Statements of Cash Flows for the years ended December 25, 1994, December 31, 1995,
December 29, 1996, and the six months ended June 30, 1996 and June 29, 1997......... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 53
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Il Fornaio (America) Corporation:
We have audited the accompanying balance sheets of Il Fornaio (America)
Corporation (the "Company") as of December 29, 1996 and December 31, 1995, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 29, 1996. 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, such financial statements present fairly, in all material
respects, the financial position of Il Fornaio (America) Corporation at December
29, 1996 and December 31, 1995, and the results of its operations and its cash
flows for each of the three years in the period ended December 29, 1996 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
March 3, 1997
F-2
<PAGE> 54
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 29, JUNE 29,
1995 1996 1997
---------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and equivalents............................... $ 2,375 $ 1,701 $ 3,449
Restricted cash.................................... 315 338 329
Accounts receivable................................ 1,118 1,271 1,122
Note receivable.................................... -- 308 977
Inventories........................................ 1,529 1,351 1,352
Prepaid expenses................................... 774 756 489
Deferred tax assets, net........................... 1,372 579 579
------- ------- -------
Total current assets....................... 7,483 6,304 8,297
------- ------- -------
Property and equipment, net.......................... 24,881 26,179 26,148
Deferred tax assets, net............................. 1,366 1,927 1,927
Other assets......................................... 464 445 808
------- ------- -------
Total assets............................... $ 34,194 $ 34,855 $ 37,180
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................... $ 2,107 $ 2,292 $ 2,027
Accrued expenses................................... 3,969 3,704 5,154
Current portion of debt............................ 600 150 --
------- ------- -------
Total current liabilities.................. 6,676 6,146 7,181
------- ------- -------
Long-term debt....................................... 150 -- --
Reserve for store closures........................... 255 346 476
Deferred lease incentives:
Construction allowances............................ 5,479 5,090 4,702
Deferred rent...................................... 351 337 332
------- ------- -------
Total deferred lease incentives................. 5,830 5,427 5,034
------- ------- -------
Commitments (Note 10)
Stockholders' equity:
Convertible preferred stock, no par value;
3,500,000 shares authorized; 2,316,296 and
2,308,196 shares issued and outstanding;
aggregate liquidation preference of $17,722 and
$17,671 respectively............................ 16,936 16,885 16,885
Common stock, no par value; 15,000,000 shares
authorized; 1,532,359 and 1,611,766 shares
issued and outstanding respectively............. 7,729 7,980 8,228
Accumulated deficit................................ (3,382) (1,929) (624)
------- ------- -------
Total stockholders' equity...................... 21,283 22,936 24,489
------- ------- -------
Total liabilities and stockholders'
equity................................... $ 34,194 $ 34,855 $ 37,180
======= ======= =======
</TABLE>
See notes to financial statements
F-3
<PAGE> 55
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------------ -------------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurants............................ $ 39,485 $ 43,647 $ 50,599 $ 24,733 $ 32,116
Wholesale bakeries..................... 4,951 5,181 6,016 2,891 3,150
Retail bakeries........................ 5,208 5,312 4,137 2,600 311
------- ------- ------- ------- -------
Total revenues................. 49,644 54,140 60,752 30,224 35,577
------- ------- ------- ------- -------
Costs and expenses:
Cost of sales.......................... 11,300 12,772 14,792 7,273 8,350
Operating expenses..................... 29,290 31,036 35,152 17,569 20,703
Depreciation and amortization.......... 3,162 3,304 3,860 1,934 1,927
General and administrative expenses.... 3,592 4,083 4,724 2,323 2,956
Provision for store closures........... -- 932 -- -- (470)
------- ------- ------- ------- -------
Total costs and expenses....... 47,344 52,127 58,528 29,099 33,466
------- ------- ------- ------- -------
Income from operations................... 2,300 2,013 2,224 1,125 2,111
Other (income) expenses:
Interest income........................ (71) (157) (167) (73) (111)
Interest expense....................... 124 98 40 29 2
------- ------- ------- ------- -------
Total other (income) expenses,
net............................... 53 (59) (127) (44) (109)
------- ------- ------- ------- -------
Income before provision (benefit)
for income taxes....................... 2,247 2,072 2,351 1,169 2,220
Provision (benefit) for income taxes..... 332 (2,432) 898 476 915
------- ------- ------- ------- -------
Net income............................... $ 1,915 $ 4,504 $ 1,453 $ 693 $ 1,305
======= ======= ======= ======= =======
Net income per share:
Primary................................ $ 0.43 $ 1.01 $ 0.32 $ 0.16 $ 0.27
======= ======= ======= ======= =======
Fully-diluted.......................... $ 0.43 $ 1.00 $ 0.32 $ 0.16 $ 0.27
======= ======= ======= ======= =======
Weighted average number of common stock
and common stock equivalents
Primary............................. 4,467 4,460 4,839 4,809 5,037
Fully-diluted....................... 4,477 4,499 4,839 4,809 5,037
</TABLE>
See notes to financial statements
F-4
<PAGE> 56
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------- ------------------ ACCUMULATED
SHARES AMOUNT SHARES AMOUNT DEFICIT TOTAL
--------- ------- --------- ------ ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 26, 1993.......... 2,296,486 $16,733 1,531,476 $7,785 $(9,801) $14,717
Issuance of common stock............ 10,756 42 42
Exercise of common stock options.... 8,859 22 22
Repurchase of common stock.......... (5,400) (18) (18)
Net income.......................... 1,915 1,915
--------- ------- --------- ------ ------- -------
BALANCE, DECEMBER 25, 1994.......... 2,296,486 16,733 1,545,691 7,831 (7,886) 16,678
Issuance of preferred stock......... 19,810 203 203
Issuance of common stock............ 3,450 16 16
Exercise of common stock options.... 18,209 39 39
Repurchase of common stock.......... (34,991) (157) (157)
Net income.......................... 4,504 4,504
--------- ------- --------- ------ ------- -------
BALANCE, DECEMBER 31, 1995.......... 2,316,296 16,936 1,532,359 7,729 (3,382) 21,283
Issuance of common stock............ 30,210 136 136
Conversion of preferred to common... (8,100) (51) 10,222 51
Exercise of common stock options.... 38,975 64 64
Net income.......................... 1,453 1,453
--------- ------- --------- ------ ------- -------
BALANCE, DECEMBER 29, 1996.......... 2,308,196 16,885 1,611,766 7,980 (1,929) 22,936
(unaudited)
Issuance of common stock............ 44,775 224 224
Exercise of common stock options.... 13,444 24 24
Net income.......................... 1,305 1,305
--------- ------- --------- ------ ------- -------
BALANCE, JUNE 29, 1997.............. 2,308,196 $16,885 1,669,985 $8,228 $ (624) $24,489
========= ======= ========= ====== ======= =======
</TABLE>
See notes to financial statements
F-5
<PAGE> 57
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED YEAR ENDED YEAR ENDED ENDED ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 30, JUNE 29,
1994 1995 1996 1996 1997
------------ ------------ ------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income............................... $1,915 $4,504 $1,453 $ 693 $1,305
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization......... 3,162 3,304 3,860 1,934 1,927
Amortization of deferred lease
incentives.......................... (351) (343) (403) (184) (393)
Provision for store closures.......... -- 932 -- -- (470)
Gain on sale of property and
equipment........................... -- -- (72) -- (60)
Retirement of fixed assets............ -- -- 253 180 266
Deferred income taxes................. -- (2,738) 232 -- --
Changes in:
Restricted cash....................... (110) (65) (23) (37) 9
Accounts receivable................... 181 (299) (153) 30 149
Note receivable....................... -- -- -- -- 34
Inventories........................... (127) (168) 178 138 (1)
Prepaid expenses...................... 135 (518) (408) 25 477
Other assets.......................... 1 (24) 19 16 (363)
Accounts payable...................... (76) 27 185 14 (265)
Accrued expenses...................... 231 227 (174) (205) 1,450
------ ------ ------ ------ ------
Net cash provided by operating
activities.......................... 4,961 4,839 4,947 2,604 4,065
------ ------ ------ ------ ------
Cash flows from investing activities:
Capital expenditures..................... (971) (4,807) (5,847) (2,379) (3,026)
Proceeds from sale of property and
equipment............................. -- -- 626 -- 611
------ ------ ------ ------ ------
Net cash used in investing
activities.......................... (971) (4,807) (5,221) (2,379) (2,415)
------ ------ ------ ------ ------
Cash flows from financing activities:
Payments on debt......................... (1,331) (600) (600) (300) (150)
Proceeds from the issuance of common
stock................................. 42 16 136 133 224
Exercise of stock options................ 22 39 64 -- 24
Repurchase of common stock............... (18) (157) -- -- --
------ ------ ------ ------ ------
Net cash provided by (used in)
financing activities................ (1,285) (702) (400) (167) 98
------ ------ ------ ------ ------
Increase (decrease) in cash and
equivalents.............................. 2,705 (670) (674) 58 1,748
Cash and equivalents, beginning of
period................................... 340 3,045 2,375 $2,375 1,701
------ ------ ------ ------ ------
Cash and equivalents, end of period........ $3,045 $2,375 $1,701 $2,433 $3,449
====== ====== ====== ====== ======
Interest paid.............................. $ 114 $ 105 $ 45 $ 22 $ 3
====== ====== ====== ====== ======
Income taxes paid.......................... $ 187 $ 308 $ 614 $ 375 $ 864
====== ====== ====== ====== ======
Noncash investing and financing activities
Issuance of preferred stock for
restaurant assets..................... $ 203 -- -- -- --
Issuance of note receivable for retail
bakery and restaurant assets.......... -- -- $ 308 -- $ 704
</TABLE>
See notes to financial statements
F-6
<PAGE> 58
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and nature of operations -- Il Fornaio (America) Corporation
(the "Company") is engaged in restaurant operations and the production and sale
of Italian bakery products for the wholesale and retail market. At December 29,
1996, the Company owned and operated 12 Italian white tablecloth restaurants,
four free-standing retail bakeries and six wholesale bakeries in California and
Portland, Oregon. In January 1997, the Company opened a new restaurant in Las
Vegas, Nevada and in February 1997, the Company disposed of its remaining four
free-standing retail bakeries.
Fiscal year -- The Company operates on a 52/53-week fiscal year ending on
the last Sunday in December. The fiscal year ended December 29, 1996 contained
52 weeks and the fiscal years ended December 31, 1995 and December 25, 1994
contained 53 and 52 weeks of operations, respectively.
Pre-opening costs consist of location setup, employee training and
promotion associated with the opening of new locations and are amortized over 12
months beginning in the month the location commences operations.
Cash and equivalents -- The Company considers all highly liquid debt
instruments with a maturity at the time of purchase of three months or less to
be cash equivalents.
Restricted cash represents cash restricted for the Company's voluntary
disability insurance plan.
Accounts receivable consist primarily of amounts due from wholesale
customers, which are net of allowances for doubtful accounts of $52,000 and
$42,000 as of December 29, 1996 and December 31, 1995, respectively.
Inventories, consisting primarily of wine, liquor, grocery products and
operating supplies, are stated at the lower of first-in, first-out method (FIFO)
cost or market.
Property and equipment are stated at cost and include interest on funds
borrowed to finance construction. Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
leasehold improvements -- lesser of lease term or life of improvements;
furniture, fixtures and equipment -- 5 to 10 years. Leasehold improvements
reimbursed by the landlord through construction allowances are capitalized as
leasehold improvements. Such leasehold improvements and related construction
allowances are amortized on a straight-line basis over the lease term.
Deferred rent -- Certain leases contain fixed escalations of the minimum
annual lease payment during the original term of the lease. For these leases,
the Company recognizes rental expense on a straight-line basis and records the
difference between rent expense and the amount currently payable under the lease
as deferred rent.
Net income per share is based on the weighted average number of shares of
common stock outstanding and the dilutive effect of common stock equivalents,
which consist of preferred stock and common stock options, using the modified
treasury stock method.
Long-lived assets and long-lived assets to be disposed of -- In 1996, the
Company adopted Statement of Financial Accounting Standards No. 121 "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of." SFAS No. 121 requires that long-lived assets and certain identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable and that long-lived assets and certain identifiable
intangibles to be disposed of be reported at the lower of carrying amount or
fair value less cost to sell. The implementation of this accounting standard did
not have an impact on the 1996 financial statements.
Advertising costs are expensed as incurred.
F-7
<PAGE> 59
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Accounting estimates -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual amounts could differ from those estimates.
Income taxes are accounted for using the liability method, under which
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Reserve for store closures includes management's best estimates of the net
costs to be incurred on the sale or disposal of the reserved store. The accrual
consists of future rentals on leases, to the extent they are not offset by
estimated sub-lease rentals, and other estimated costs directly associated with
the decision to close the stores. The costs the Company will ultimately incur
could differ materially from the amounts assumed in arriving at the reserve for
store closures.
Stock-based compensation -- The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Bulletin No. 25, Accounting for Stock Issued to Employees.
Unaudited Interim Information -- The financial information with respect to
the six-month periods ended June 29, 1997 and June 30, 1996 is unaudited. In the
opinion of management, such information contains all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of the
results of such periods. The results of operations for the six months ended June
29, 1997 are not necessarily indicative of the results to be expected for the
full year.
Reclassifications -- Certain fiscal 1994 and 1995 amounts have been
reclassified to conform with fiscal 1996 presentations.
2. NOTE RECEIVABLE
On July 28, 1996, the Company sold the net assets of four of its
free-standing retail bakeries for cash and a promissory note. The note bears
interest at 8%. Interest is due monthly from December 1996 to July 1997 when the
principal balance is due in full. The note is collateralized by the assets of
the retail bakeries. A gain of $72,000 was recognized as a result of this
transaction (see Note 11).
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Leasehold improvements................................. $ 21,821 $ 22,090
Machinery and equipment................................ 12,375 12,660
Furniture and fixtures................................. 3,508 3,817
Construction in progress............................... 584 3,415
-------- --------
Total........................................ 38,288 41,982
Less -- accumulated depreciation and amortization...... (13,407) (15,803)
-------- --------
Property and equipment -- net.......................... $ 24,881 $ 26,179
======== ========
</TABLE>
F-8
<PAGE> 60
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Accrued payroll and related benefits....................... $2,323 $1,856
Gift certificates.......................................... 332 393
Accrued rent............................................... 353 385
Accrued taxes.............................................. 444 483
Other...................................................... 517 587
------ ------
Total accrued expenses..................................... $3,969 $3,704
====== ======
</TABLE>
5. DEBT
Debt consisted of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996
----- -----
<S> <C> <C>
Note payable................................................ $ 750 $ 150
Less: current portion....................................... (600) (150)
----- -----
Long-term portion........................................... $ 150 $ --
===== =====
</TABLE>
The Company's note payable to the bank is to be repaid with monthly
installments of $50,000. The note bears interest at 1% above the bank's
reference rate and is paid monthly. The Company has a $3,000,000 revolving line
of credit with a letter of credit sub-facility which expires on April 1, 1998
and bears interest at the bank's reference rate. There were no borrowings under
the credit line at December 29, 1996. The credit agreement requires compliance
with certain financial covenants and prohibits the payment of cash dividends.
The line of credit and note payable are collateralized by accounts receivable,
inventory, and property and equipment.
6. PROVISION FOR STORE CLOSURES
On October 15, 1993, the Company sold the net assets of one of its
restaurants for cash and a promissory note of $700,000. The note was
collateralized by the restaurant and shares of common stock of the debtor. The
debtor failed to make the required payments under the note agreement, including
sublease rental payments. In March 1995, the Company called the note and
regained control of the restaurant assets. The note was then reclassified to
property and equipment at the carrying value of the note receivable which is
less than the estimated fair value of the collateral. In December 1995, the
Company wrote off the non-performing asset and accrued for rent liability of
$232,000.
F-9
<PAGE> 61
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. STOCKHOLDERS' EQUITY
The Company's authorized, issued and outstanding common and preferred stock
as of December 29, 1996 were as follows (dollars in thousands):
<TABLE>
<CAPTION>
ISSUED
AGGREGATE AND
LIQUIDATION AUTHORIZED OUTSTANDING
ISSUE PREFERENCE SHARES SHARES
----------------------------------------- ----------- ---------- ---------
<S> <C> <C> <C>
Common Stock............................. $ -- 15,000,000 1,611,766
========= =========
Preferred -- Series B.................... 2,443 542,225 529,884
Series C.................... 2,250 521,739 391,340
Series D.................... 750 521,739 130,399
Series E.................... 3,869 450,000 441,099
Series F.................... 8,359 825,000 815,474
Series not designated....... -- 639,297 --
------- --------- ---------
Total.................................... $17,671 3,500,000 2,308,196
======= ========= =========
</TABLE>
Preferred Stock -- In 1996, 5,600 shares of Series B preferred stock were
converted to 7,067 shares of common stock and 2,500 shares of Series F preferred
stock were converted to 3,155 shares of common stock.
In 1995, the Company issued 19,810 shares of Series F preferred stock for
$10.25 per share to purchase the assets of a restaurant.
Each outstanding share of Series B, C, E and F preferred stock is
convertible into 1.262 shares of common stock at the holder's option or
automatically upon the occurrence of a public offering meeting specific
criteria. Each share of Series D preferred stock is convertible into one share
of Series C preferred stock. The holders of Series B, C, E and F preferred stock
have voting rights equal in number to the shares of common stock issuable upon
conversion. All preferred shares are entitled to receive non-cumulative
dividends equivalent to any dividend declared on common shares.
Warrants -- As of December 29, 1996, there were warrants outstanding to
purchase 32,487 shares of Common Stock at an exercise price of $9.90 per share.
The warrants expire December 31, 1997.
8. STOCK PLANS
1988 Stock Option Plan -- The 1988 Plan, covering 103,680 shares of common
stock, provides for the granting of stock options to key employees. The exercise
price must equal at least 85% of the fair market value of the common stock, as
determined by the Board of Directors. Options vest over three to six years and
expire after five years.
1991 Incentive Stock Option Plan -- The 1991 Plan covers 126,200 shares of
common stock. Options are granted to officers and key employees at the fair
market value of such stock, as determined by the Board of Directors, on the day
preceding the date of the grant. Options vest over five years and expire after
five years. This Plan terminates upon an initial public offering.
1992 Stock Option Plan -- The 1992 Plan covers 300,000 shares of common
stock. The Plan provides for the grant of both incentive and nonstatutory stock
options. The exercise price of incentive options must equal at least the fair
market value of the common stock on the date of grant. Options vest over five
years and expire after ten years.
1995 Stock Option Plan -- The 1995 Plan covers 500,000 shares of common
stock. The Plan provides for the grant of both incentive and nonstatutory stock
options. The exercise price of incentive options must equal
F-10
<PAGE> 62
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
at least the fair market value of the common stock on the date of grant. Options
vest over five years and expire after ten years.
Non-employee Directors' Stock Option Plan -- In 1992, the Directors' Plan
was adopted to provide for the automatic grant of options to purchase up to
100,000 shares of common stock to non-employee directors of the Company. The
exercise price of the options must equal the fair market value of the common
stock on the date of grant. Options granted under the Plan are not subject to
any vesting restrictions and are fully exercisable as of the date of grant.
Options granted under the plan are immediately exercisable and expire ten years
from the date of grant.
The following table reflects the activity under the Company's stock option
plans: At December 29, 1994 and December 31, 1995, 97,282 and 207,210 stock
options, respectively, were exercisable under the plans.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS AVERAGE PRICE
--------- -------------
<S> <C> <C>
Balance, December 26, 1993........................... 191,646 $2.98
Granted.............................................. 48,905 4.12
Exercised............................................ (8,859) 2.44
Cancelled............................................ (30,554) 3.54
------- -----
Balance, December 25, 1994........................... 201,138 3.19
Granted.............................................. 529,045 4.51
Exercised............................................ (18,209) 2.11
Cancelled............................................ (3,240) 4.00
------- -----
Balance, December 31, 1995........................... 708,734 4.20
Granted.............................................. 163,265 5.05
Exercised............................................ (38,975) 1.64
Cancelled............................................ (3,200) 4.81
------- -----
Balance, December 29, 1996........................... 829,824 $4.49
======= =====
</TABLE>
Additional information regarding options outstanding as of December 29,
1996 was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
-------------------------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING ------------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ------------- --------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$ 1.58-3.00 21,588 1.9 $2.25 30,615 $ 2.36
4.00-4.50 642,171 5.7 4.44 265,107 4.27
4.95-5.50 166,065 7.0 5.03 15,153 4.99
------- -------
1.58-5.50 829,824 5.9 $4.49 310,875 4.12
======= =======
</TABLE>
At December 29, 1996, the number of shares available for future grants
under the various plans were as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE
FOR
GRANT
-------
<S> <C>
1988 stock option plan..................... --
1991 incentive stock option plan........... 14,638
1992 stock option plan..................... 70,440
Non-employee directors' stock option
plan..................................... 28,000
1995 stock option plan..................... 24,800
</TABLE>
F-11
<PAGE> 63
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Additional Stock Plan Information -- As discussed in Note 1, the Company
continues to account for its stock-based awards using the intrinsic value method
in accordance with Accounting Principles Board No. 25, Accounting for Stock
Issued to Employees and its related interpretations. Accordingly, no
compensation expense has been recognized in the financial statements for
employee stock arrangements.
Statement of Financial Accounting Standards No. 123, Accounting for
Stock-Based Compensation, (SFAS 123) requires the disclosure of pro forma net
income and earnings per share had the Company adopted the fair value method as
of the beginning of fiscal 1995. Under SFAS 123, the fair value of stock-based
awards to employees is calculated through the use of option pricing models, even
though such models were developed to estimate the fair value of freely
tradeable, fully transferable options without vesting restrictions, which
significantly differ from the Company's stock option awards. These models also
require subjective assumptions, including future stock price volatility and
expected time to exercise, which greatly affect the calculated values. The
Company's calculations were made using the Black-Scholes option pricing model
with the following weighted average assumptions: expected life, 120 months
following vesting, stock volatility, 1% in 1996 and 1995, respectively due to
non-public status of Company's stock; risk free interest rates, 6.3% in 1996 and
6.5% in 1995; and no dividends during the expected term. The Company's
calculations are based on a multiple option valuation approach and forfeitures
are recognized as they occur. If the computed fair values of the 1995 and 1996
awards had been amortized to expense over the vesting period of the awards, pro
forma net income would have been as follows:
<TABLE>
<CAPTION>
1995 1996
------ ------
<S> <C> <C>
Net income (in thousands):
As reported.............................................. $4,504 $1,453
Pro forma................................................ 4,391 1,189
Primary earnings per share:
As reported.............................................. $ 1.01 $ 0.32
Pro forma................................................ 0.98 0.26
Fully diluted earnings per share:
As reported.............................................. $ 1.00 $ 0.32
Pro forma................................................ 0.98 0.26
</TABLE>
However, the impact of outstanding non-vested stock options granted prior
to 1995 has been excluded from the pro forma calculation; accordingly, the 1995
and 1996 pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
F-12
<PAGE> 64
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change
in the deferred tax liability during the year. Deferred income taxes reflect the
net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) operating loss and tax credit carryforwards.
Significant components of the Company's net deferred tax balances as of December
29, 1996 and December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996
------------ ------------
<S> <C> <C>
Deferred tax assets:
Payroll related.................................... $ 346 $ 310
Reserves for store closures........................ 512 616
Deferred rent liability............................ 140 135
Net operating loss carryforwards................... 954 278
Tax credit carryforwards........................... 906 1,512
Other.............................................. 177 120
------ ------
Total deferred tax assets....................... 3,035 2,971
------ ------
Deferred tax liabilities:
Fixed assets....................................... (196) (348)
Pre-opening expenses............................... (101) (117)
------ ------
Total deferred tax liabilities.................. (297) (465)
------ ------
Valuation allowance.................................. -- --
------ ------
Net deferred tax assets.............................. $2,738 $2,506
====== ======
</TABLE>
The Company provided no valuation allowance against deferred tax assets
recorded as of December 29, 1995 and 1996, as the Company believes it is
"more-likely-than-not" that all deferred assets will be fully realized in future
periods.
As of December 29, 1996, the Company has available net operating loss
carryforwards for federal tax purposes of approximately $817,000. The net
operating loss carryforwards begin to expire in the year 2000. In addition, the
Company has unused investment and general business tax credits of approximately
$681,000 and alternative minimum tax credit carryforwards of approximately
$831,000. The investment tax credits will begin to expire in 1998. The Company's
utilization in any one year of the above net operating losses is limited under
the provisions of the Tax Reform Act of 1986 to $1,400,000 per year and may be
further limited if there are additional corporate ownership changes in the
future.
The components of income tax expense (benefit) for the years ended December
29, 1996 and December 31, 1995 were as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
---- ------- ----
<S> <C> <C> <C>
Current provision:
Federal.......................................... $ 60 $ 179 $461
State............................................ 272 127 205
---- ------- ----
Total current................................. 332 306 666
Deferred tax assets, net........................... -- (2,738) 232
---- ------- ----
Income tax expense (benefit)....................... $332 $(2,432) $898
==== ======= ====
</TABLE>
F-13
<PAGE> 65
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
The reconciliation between the Company's effective tax rate on earnings
before income taxes (benefits) and the statutory federal income tax rate of 34%
for the years ended December 26, 1996 and December 31, 1995 were as follows (in
thousands):
<TABLE>
<CAPTION>
1994 1995 1996
----- ------- ----
<S> <C> <C> <C>
Federal income tax at 34% statutory rate.......... $ 768 $ 705 $801
State income tax.................................. 135 124 141
Investment and other tax credits.................. (113) (102) (71)
Valuation allowance............................... (447) (3,174) --
Other............................................. (11) 15 27
----- ------- ----
Total............................................. $ 332 $(2,432) $898
===== ======= ====
</TABLE>
10. COMMITMENTS
The Company leases all restaurant, retail bakery, production bakery and
office space under operating leases which extend through year 2017. Certain
leases require increased rental payments, generally related to changes in the
Consumer Price Index and increases in property taxes and certain leases also
provide for additional rent based on a percentage of sales. Total rent expense
for all operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Minimum rentals.................................. $1,754 $1,971 $2,076
Contingent rentals............................... 786 732 772
------ ------ ------
Total rental expense............................. $2,540 $2,703 $2,848
====== ====== ======
</TABLE>
At December 29, 1996, future minimum lease payments under long-term
operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING DECEMBER
-------------------------------------------
<S> <C>
1997..................................... $ 2,301
1998..................................... 2,228
1999..................................... 2,183
2000..................................... 2,119
2001..................................... 2,130
Thereafter............................... 14,485
-------
Total.................................... $25,446
=======
</TABLE>
11. SUBSEQUENT EVENTS
On February 14, 1997, the Company sold the net assets of its four remaining
free-standing retail bakeries for $815,000 which includes a promissory note of
$204,000. The note bears interest at 8.25% and is payable in twenty-four equal
monthly installments starting March 15, 1997. The note is collateralized by the
assets of the retail bakeries. The sales price approximates the carrying value
of the assets sold.
F-14
<PAGE> 66
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unaudited
Stock Plans -- In March 1997, the Board of Directors adopted and, in April
1997, the stockholders approved, an Equity Incentive Plan (the "1997 Incentive
Plan"), a Non-Employee Directors' Stock Option Plan (the "1997 Directors Plan")
and an Employee Stock Purchase Plan (the "1997 Purchase Plan," and collectively,
the "1997 Plans"). The 1997 Incentive Plan amends and restates the 1992 Stock
Option Plan and 1995 Stock Option Plan (see Note 8). A summary of factors
associated with the 1997 Plans is as follows:
<TABLE>
<CAPTION>
OPTIONS CURRENTLY
AUTHORIZED OUTSTANDING UNDER
NUMBER OF PRIOR PLANS AT PLAN
SHARES DECEMBER 31, 1996 TERMS TERMINATION
--------- ----------------- -------- -----------
<S> <C> <C> <C> <C>
1997 Incentive Plan.................. 1,300,000 795,605 10 Years March 2007
1997 Directors Plan.................. 100,000 -- 10 Years March 2007
1997 Purchase Plan................... 300,000 -- -- --
</TABLE>
All other provisions of the 1997 Incentive Plan are similar to the
provisions of the prior plans that the 1997 Incentive Plan amends and restates.
Sale of the Costa Mesa Restaurant -- In June 1997, the Company disposed of
its Costa Mesa restaurant and recorded a pre-tax reversal of $470,000 against
the provision for store closures originally recorded in 1993.
Impact of New Accounting Standard -- In February 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 128, Earnings per Share ("SFAS 128"). The Company is required to adopt SFAS
128 in the fourth quarter of fiscal 1997 and will restate at that time earnings
per share (EPS) data for prior periods to conform with SFAS 128. Earlier
application is not permitted. SFAS 128 requires dual presentation of basic EPS
and diluted EPS on the face of all income statements issued after December 15,
1997 for all entities with complex capital structures. Basic EPS excludes
dilution and is computed as net income divided by the weighted average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur from common shares issuable through stock options,
warrants and other convertible securities. The pro forma effect, assuming
adoption of SFAS 128 at the beginning of each period, is presented below:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
------------------------------------------ -------------
DECEMBER 25, DECEMBER 31, DECEMBER 29, JUNE 29,
1994 1995 1996 1997
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Pro forma
EPS:
Basic....................... $ 0.43 $ 1.01 $ 0.32 $0.29
Diluted..................... $ 0.43 $ 1.00 $ 0.32 $0.28
</TABLE>
F-15
<PAGE> 67
[First page of menu is a graphic depiction of the Company's Bakerman Logo]
WE BAKE OUR BREADS FROM SCRATCH EACH DAY AND POUR OUR OWN EXTRA VIRGIN OLIVE OIL
IMPORTED FROM ITALY. BOTH ARE AVAILABLE AT OUR BAKERY TO TAKE HOME.
<TABLE>
<CAPTION>
<S> <C>
ANTIPASTI
BRUSCHETTA AL POMODORO................................................................................ 4.95
Filone bread grilled with garlic and olive oil, chilled fresh roma tomatoes with olive oil and
basil
MELANZANE AL FORMAGGIO DI CAPRA....................................................................... 5.75
Thinly sliced grilled eggplant, goat cheese, sun-dried tomatoes, sweet onions, capers; balsamic
vinegar
CARPACCIO............................................................................................. 6.95
Thinly sliced beef, shaved grana cheese, capers, baby arugula
MOZZARELLA ALLA CAPRESE............................................................................... 6.50
Fresh "bocconcini" mozzarella, vine-ripened tomatoes, fresh basil, oregano, extra virgin olive oil
CALAMARETTI FRITTI.................................................................................... 7.50
Baby squid, lightly floured, served with a spicy marinara
ANTIPASTO DELLA CASA....................................................................... per person 7.95
Sampling of Bruschetta, Calamaretti Fritti, Mozzarella Caprese and cured meats, zucchini
"scapece", asparagus, roasted bell peppers - for 2 or more people
MINESTRE E INSALATE
PAPPA COL POMODORO................................................................................... 3.95
Tuscan tomato soup with Il Fornaio bread, herbs, extra virgin olive oil
MINESTRONE DI VERDURE................................................................................ 4.95
Fresh seasonal vegetable soup (made with vegetable stock)
INSALATA DEL FORNAIO................................................................................. 5.75
Mixed greens, garlic croutons, shaved parmesan cheese; house vinaigrette
INSALATA AL BALSAMICO................................................................................ 4.50
Organic baby lettuces; balsamic vinaigrette
INSALATA RUCHETTA.................................................................................... 6.25
Sliced vine-ripened yellow tomatoes, arugula, red onions, aged ricotta, red wine vinaigrette
INSALATA DI SPINACI.................................................................................. 6.75
Warm spinach salad with aged ricotta, red onions, applewood smoked bacon, fresh mushrooms
and toasted walnuts; red wine vinaigrette
INSALATA DI POLLO DAL GIRARROSTO..................................................................... 8.95
Mixed greens, rotisserie chicken, applewood smoked bacon, shaved parmesan cheese, tomatoes,
garlic croutons; house vinaigrette
PIZZA DAL FORNO A LEGNA
PIZZA MARGHERITA..................................................................................... 7.95
Mozzarella, oregano, fresh basil, tomato sauce
PIZZA VEGETARIANA (CON FORMAGGIO O SENZA FORMAGGIO).................................................. 8.95
Artichokes, grilled zucchini, sliced tomatoes, red onions, sweet peppers, tomato sauce (with or
without cheese)
PIZZA QUATTRO STAGIONI............................................................................... 9.75
Prosciutto cotto, asparagus, artichokes, mushrooms, mozzarella, basil, tomato sauce
PIZZA CON LA LUGANEGA................................................................................ 9.75
Italian sausage, roasted mixed bell peppers, mozzarella, oregano, tomato sauce
CALZONE.............................................................................................. 10.50
Folded pizza filled with mozzarella, ricotta, mushrooms, ham and tomato sauce
</TABLE>
<PAGE> 68
<TABLE>
<CAPTION>
<S> <C>
PASTA
PENNE ALL'ARRABBIATA................................................................................. 8.95
Pasta tubes, marinara, red chili flakes, garlic, olive oil
MANICHE AL POLLO..................................................................................... 11.75
Elbow pasta, chicken breast, fresh broccoli, sun-dried tomatoes, roasted garlic, trebbiano wine
SPAGHETTINI ALLA BOLOGNESE........................................................................... 8.95
Imported thin spaghetti with meat ragu and parmesan
FETTUCCINE ALLA FRIULANA............................................................................. 10.95
Homemade fettuccine with Italian sausage, onions, marinara and Montepulciano wine
CAPELLINI AL POMODORO NATURALE....................................................................... 9.95
Angel hair pasta, chopped fresh roma tomatoes, basil, garlic, olive oil
RAVIOLI DI VERDURA CON POMODORO E CARCIOFI........................................................... 12.75
Homemade pasta filled with spinach, swiss chard, parmesan, pinenuts and basil;
fresh Castroville baby artichokes and marinara
TURTEI CON ARAGOSTA.................................................................................. 13.95
Homemade ravioli filled with fresh Maine lobster in a lobster cream sauce topped with shrimp
PAGLIA E FIENO CON GAMBERETTI........................................................................ 12.95
Homemade spinach and egg linguine, fresh rock shrimp, chopped tomato, garlic, red chili flakes,
parsley
LINGUINE MARE CHIARO................................................................................. 14.95
Thin flat pasta with fresh clams, mussels, prawns and scallops; seasoned with tomatoes,
crushed red pepper, garlic and trebbiano wine
CONCHIGLIE CON MELANZANE............................................................................. 9.95
Pasta shells baked with smoked and fresh mozzarella, eggplant ragu, tomato, crushed red pepper,
oregano
LASAGNA FERRARESE.................................................................................... 10.95
Spinach pasta layered with meat ragu, porcini mushrooms, parmesan and bechamel
GRIGLIA, GIRARROSTO E SPECIALITA
POLLO TOSCANO........................................................................................ 11.95
Fresh local chicken roasted from the wood-burning rotisserie; fresh vegetables and mashed potatoes
BISTECCA ALLA FIORENTINA............................................................................. 21.50
Certified Angus Porterhouse steak (22 oz.), marinated in olive oil and rosemary; Tuscan white
beans, sauteed fresh spinach and roasted potatoes
SCALOPPINE AI CARCIOFI E LIMONE...................................................................... 14.95
Veal scaloppine with fresh Castroville baby artichokes and lemon; fresh vegetables and roasted
potatoes
POLLO AL MATTONE..................................................................................... 12.50
Half chicken marinated with lemon and herbs, cooked on the wood-fired grill under a hot brick;
sauteed fresh spinach and Tuscan white beans
TAGLIATA CHIANINA.................................................................................... 14.50
Sirloin steak grilled rare and sliced, seasoned with rosemary, green peppercorns and balsamic
vinegar; fresh vegetables and roasted potatoes
LOMBATA DI VITELLO AL CARBONE........................................................................ 17.95
Large mesquite-grilled veal chop with sage and rosemary; fresh vegetables and roasted potatoes
POLLO ALL'AGLIO E ROSMARINO (senza burro o olio) .................................................... 11.95
Grilled chicken breast with puree of roasted garlic and rosemary; served on a bed of
steamed spinach (no butter or oil)
</TABLE>
GIFT CERTIFICATES ARE AVAILABLE IN ANY DENOMINATION.
<PAGE> 69
<TABLE>
<CAPTION>
<S> <C>
VINI BIANCHI
VERDICCHIO CLASSICO
Villa Beatrice, Marche, 1995.......... 19.00
VERNACCIA DI SANGIMIGNANO
Conti Serristori, Toscana, 1995....... 22.50
SOAVE
Pieropan, Veneto, 1995................ 24.00
ORVIETO
Antinori, Umbria, 1995................ 19.50
PINOT GRIGIO
Zenato, Veneto, 1995.................. 18.00
Alois Lageder, Alto Adige, 1995
1/2 bottle 12.50/ 24.00
St. Michael Eppon, Alto Adige, 1995... 22.50
Russiz Superiore, Friuli, 1995........ 29.50
Livon, Braide Grande, Torino, 1993.... 29.50
Santa Margherita, Alto Adige, 1995.... 34.00
GAVI DI GAVI
Costa di Bussia, Piemonte, 1994....... 27.00
GRECO DI TUFO
Feudi di San Gregorio, Campania, 1995. 28.00
WHITE ZINFANDEL
Shenandoah, Amador County, 1996....... 16.00
CHENIN BLANC
Chappellet, Old Vine Cuvee, Napa, 1994 22.50
RIESLING
Fess Parker, Santa Barbara, 1996...... 25.00
SAUVIGNON BLANC
Honig, Napa, 1995..................... 20.50
Mayacamas, Napa, 1995................. 28.00
Matanzas Creek, Sonoma, 1995.......... 29.00
PINOT GRIS
King Estate, Oregon, 1995............. 24.00
CHARDONNAY
Saintsbury, Carneros, 1995 1/2 bottle 16.50
Il Fornaio, Sonoma, 1995.. glass 4.95/ 18.50
Fallenleaf, Carneros, 1994............ 21.75
Sebastiani, Sonoma, 1995.............. 22.75
Zaca Mesa, Santa Barbara, 1996........ 27.50
Bernardus, Carmel Valley, 1995........ 31.00
Lungarotti, Umbria, 1995.............. 25.50
Sterling, Napa, 1995 1/2 bottle 14.50/ 28.00
Sonoma-Cutrer, Russian River, 1995.... 30.00
ZD, Napa, 1995.......1/2 bottle 18.00/ 35.00
Arrowood, Sonoma, 1995................ 36.00
Far Niente, Napa, 1995................ 54.00
Talbott, Monterey, 1994............... 52.00
Kistler, Sonoma, 1995................. 49.00
SPUMANTI
BLANC DE BLANCS,
Schramsberg, 1993 1/2 bottle.......... 38.00
BRUT, Rotari, Riserva, 1992............. 24.00
BRUT, Mumm Cuvee Napa, Napa, NV......... 27.00
BLANC DE NOIRS, Schramsberg, Napa, 1989. 38.00
BRUT, Ferrari, Giulio Riserva
del Fondatore, 1995 .................. 46.00
BRUT, Taittinger, Reims, NV............. 53.00
DOM PERIGNON, Moet & Chandon, 1988...... 125.00
VINI ROSSI
SANGIOVESE
Il Fornaio, Sonoma, 1994....glass 4.75 18.00
Umberto Cesari, Riserva, Romagna, 1993 18.00
DOLCETTO D'ALBA
Fontanafredda, Piemonte, 1995......... 25.00
VALPOLICELLA
"Mara", Cesare, Veneto, 1993.......... 23.00
RUBESCO
Lungarotti, Umbria, 1993.............. 26.00
CHIANTI CLASSICO
Il Fornaio, Toscana, 1995
glass 5.75; 1/2 bottle 11.50/ 22.00
Nozzole, Riserva, Toscana, 1993....... 28.75
Macchiavelli, Riserva, Toscana, 1991.. 29.00
Antinori, Riserva, Toscana, 1994...... 30.00
Nippozana, Riserva, Toscana, 1993..... 31.00
Cortevecchia, Riserva, Toscana, 1993.. 35.00
Ruffino "Gold Label", Toscana, 1988... 45.50
BARBERA
Chiarlo, Piemonte, 1994............... 20.50
Costa di Bussia, Piemonte, 1994....... 22.00
GATTINARA
Villa Claudia, Piemonte, 1990......... 32.00
LEVOLTE
Lodovico Antinori, Toscana, 1995...... 31.00
SER NICCOLO
Conti Serristori, Toscana, 1987....... 33.00
AMARONE RECIOTO DELLA VALPOLICELLA
Cesari, Veneto, 1990.................. 31.00
BAROLO
Costa di Bussia, Piemonte, 1991....... 37.00
Ceretto, Zonchera, Piemonte, 1992..... 37.00
Chiarlo, Piemonte, 1992............... 41.00
Cordero di Montezemolo, Piemonte, 1992 48.50
BARBARESCO
Batasiolo, Piemonte, 1991............. 32.00
BRUNELLO DI MONTALCINO
Col D' Orcia, Toscana, 1991........... 54.00
Canalicchio, Toscana, 1991............ 44.00
ZINFANDEL
Kenwood, Mazzoni, Sonoma, 1994........ 34.00
Ridge, Sonoma, 1994................... 33.00
PINOT NOIR
Domaine Drouhin, Oregon, 1994
1/2 bottle......... 29.00
Robert Mondavi, Napa, 1994............ 29.00
Saintsbury, Carneros, 1995............ 32.00
SYRAH
Karly, Amador, 1995........1/2 bottle 17.50
PETITE SYRAH
Stags' Leap Winery, Napa, 1994........ 35.00
MERLOT
Benziger, Sonoma, 1995................ 28.00
Geyser Peak, Sonoma, 1995............. 29.00
Sterling, Napa, 1994.................. 32.00
Mazzocco, Dry Creek Valley, 1994...... 34.00
Havens, Napa, 1995..1/2 bottle 18.00.. 35.00
Duckhorn, Napa, 1994.................. 41.50
Georis, Carmel Valley, 1993
1/2 bottle 22.00... 43.00
CABERNET SAUVIGNON
J. Lohr, Paso Robles, 1994
1/2 bottle 13.50... 23.50
Beringer, Knights Valley, 1993........ 31.00
Chateau Montelena, Calistoga
Cuvee, Napa, 1995................... 32.00
Franciscan, Napa, 1994................ 33.00
Joseph Phelps, Napa, 1994............. 36.00
Trefethen, Napa, 1994................. 38.00
Mondavi, Oakville, 1994............... 43.00
Jordan, Alexander Valley, 1993........ 46.00
Chateau Montelena, Napa, 1992......... 54.00
Silver Oak, Alexander Valley, 1993.... 62.00
</TABLE>
<PAGE> 70
[Appearing as a border around this page are the following words:
antipasti, pane, cappuccino, griglia, pasta, risotto, vini, pizza,
olio d'oliva, mozzarella, dolci, biscotti, panini, espresso, parmigiano
reggiano, insalata, pasticceria, aceto balsamico,]
[Photograph of angel hair pasta
with tomato and basil] [Photograph of pizza with ham,asparagus,
artichokes and mushrooms.]
Cappellini al Pomodoro
Pizza Quattro Stagioni
Each day the bakers of Il Fornaio [Photograph of basket of assorted
hand-craft regional Italian breads breads, bottle of wine and olive oil]
from scratch. At every meal, a
basket of freshly sliced bread is
placed on the table, and extra
virgin olive oil for dipping
is poured generously. From crusty
ciabatta ("slipper bread") to
panini olive (olive rolls) to
grissini (breadsticks) these
authentic breads tell the story
of generations of traditional
Italian bread making.
[Photograph of grilled chicken with [Photograph of vanilla bean ice cream
spinach and Tuscan white beans] with espresso and whipped cream]
Pollo al Mattone Affogato al Cafe
<PAGE> 71
======================================================
No dealer, sales representative or any other person has been authorized to
give any information or to make any representation not contained in this
Prospectus, and if given or made, such information or representation must not be
relied upon as having been authorized by the Company, the Selling Stockholders
or any of the Underwriters. This Prospectus does not constitute an offer to
sell, or a solicitation of an offer to buy, any securities other than the Common
Stock to which it relates, or an offer to, or a solicitation of, any person in
any jurisdiction in which such an offer or solicitation would be unlawful.
Neither the delivery of this Prospectus nor any offer or sale made hereunder
shall, under any circumstances, create any implication that there has been no
change in the affairs of the Company or that the information contained herein is
correct at any time after the date hereof.
----------------------------
TABLE OF CONTENTS
----------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary................... 3
Risk Factors......................... 6
Use of Proceeds...................... 11
Dividend Policy...................... 11
Capitalization....................... 11
Dilution............................. 12
Selected Financial and Operating
Data............................... 13
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 15
Business............................. 20
Management........................... 31
Certain Transactions................. 38
Principal and Selling Stockholders... 39
Description of Capital Stock......... 41
Shares Eligible for Future Sale...... 43
Underwriting......................... 45
Legal Matters........................ 46
Experts.............................. 46
Additional Information............... 46
Index to Financial Statements........ F-1
</TABLE>
----------------------------
Until , 1997 (25 days after the date of this Prospectus),
all dealers effecting transactions in the registered securities, whether or not
participating in this distribution, may be required to deliver a Prospectus.
This is in addition to the obligation of dealers to deliver a Prospectus when
acting as underwriters and with respect to their unsold allotments or
subscriptions.
======================================================
======================================================
1,500,000 SHARES
[IL FORNAIO LOGO]
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
MONTGOMERY SECURITIES
BT ALEX. BROWN
, 1997
======================================================
<PAGE> 72
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the Common Stock being registered. All the amounts shown are estimates except
for the registration fee and the NASD filing fee.
<TABLE>
<S> <C>
SEC registration fee...................................................... $ 5,489
NASD filing fee........................................................... 2,312
Nasdaq National Market application fee*................................... 30,429
Blue sky qualification fees and expenses*................................. 5,000
Printing and engraving expenses*.......................................... 120,000
Legal fees and expenses*.................................................. 375,000
Accounting fees and expenses*............................................. 80,000
Transfer agent and registrar fees*........................................ 5,000
Fee for Custodian for Selling Stockholders*............................... 2,500
D&O Securities Act Liability Insurance*................................... 300,000
Miscellaneous*............................................................ 24,270
-------
Total........................................................... $950,000
=======
</TABLE>
- ---------------
* To be supplied by amendment.
ITEM 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
As permitted by Section 145 of the Delaware General Corporation Law, the
By-laws of the Company provide that (i) the Company is required to indemnify its
directors and executive officers to the fullest extent not prohibited by the
Delaware General Corporation Law, (ii) the Company may, in its discretion,
indemnify other officers, employees and agents as set forth in the Delaware
General Corporation Law, (iii) the Company is required to advance all expenses
incurred by its directors and executive officers in connection with certain
legal proceedings (subject to certain exceptions), (iv) the rights conferred in
the By-laws are not exclusive, (v) the Company is authorized to enter into
indemnification agreements with its directors, officers, employees and agents
and (vi) the Company may not retroactively amend the By-laws provisions relating
to indemnity.
The Company has entered into agreements with its directors and executive
officers that require the Company to indemnify such persons against expenses,
judgments, fines, settlements and other amounts that such person becomes legally
obligated to pay (including expenses of a derivative action) in connection with
any proceeding, whether actual or threatened, to which any such person may be
made a party by reason of the fact that such person is or was a director or
officer of the Company or any of its affiliated enterprises, provided such
person acted in good faith and in a manner such person reasonably believed to be
in or not opposed to the best interests of the Company. The indemnification
agreements also set forth certain procedures that will apply in the event of a
claim for indemnification thereunder.
The Underwriting Agreement filed as Exhibit 1.1 to this Registration
Statement provides for indemnification by the Underwriters of the Registrant and
its officers and directors for certain liabilities arising under the Securities
Act of 1933, as amended (the "Securities Act"), or otherwise.
The Company maintains a directors and officers insurance policy. The policy
insures directors and officers against certain losses. The policy contains
various exclusions, none of which relate to the offering hereunder.
II-1
<PAGE> 73
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
Since December 29, 1993 the Registrant has sold and issued the following
unregistered securities:
1. During the period, the Company granted incentive and nonstatutory
stock options to key employees, officers and directors under its 1991
Incentive Stock Option Plan, 1992 Stock Option Plan, 1992 Nonemployee
Directors' Stock Option Plan, and 1995 Stock Option Plan (collectively,
"The Plans") covering an aggregate of 866,687 shares (net of cancellations)
of the Company's Common Stock, at an average exercise price ranging from
$4.00 to $6.60. These options vest over a period of time following their
respective dates of grant. The Company sold an aggregate of 79,487 shares
of its Common Stock to employees and directors of the Company for
consideration in the aggregate amount of $172,236 pursuant to the exercise
of stock options granted under the Plans. The Company subsequently
repurchased 5,400 shares at a price of $3.33 per share.
2. During the period, the Company issued 84,191 shares of Common Stock
to key employees as stock bonuses in consideration of services previously
performed for the Company. The Company subsequently repurchased 34,991
shares at prices ranging from $4.00 to $5.00 per share.
3. On May 8, 1995, the Company issued 19,810 shares of Series F
Preferred Stock for $10.25 per share in consideration of the assets of a
restaurant.
4. On March 6, 1996, the Company issued 10,222 shares of Common Stock
upon the conversion of 5,600 shares of Series B Preferred Stock and 2,500
shares of Series F Preferred Stock held by Seymour S. Mindel.
The Company claimed exemption from registration under the Securities Act
for the sales and issuances in the transactions described in paragraphs (1) and
(2) above under Rule 701 promulgated under the Securities Act on the basis that
they were issued pursuant to a written compensatory benefit plan, as provided by
Rule 701.
With respect to the grant of stock options described in paragraph (1)
above, exemption from registration under the Securities Act was also claimed by
the Company to be unnecessary on the basis that none of such transactions
involved a "sale" of securities as such term is used in Section 2(3) of the
Securities Act.
The sales and issuances of securities in the transactions described in
paragraph (3) above were claimed by the Company to be exempt from registration
under the Securities Act by virtue of Section 4(2) and/or Regulation D
promulgated thereunder. The recipient made representations with respect to its
intention to acquire the securities for investment purposes only and not with a
view to the distribution thereof and its experience in business matters.
Appropriate legends were affixed to the stock certificates issued in such
transactions. The recipient represented that it either received adequate
information about the Registrant or had access, through business relationships,
to such information.
The Company claimed exemption from registration under the Securities Act
for the issuance described in paragraph (4) above under Section 3(a)(9) of the
Securities Act on the basis that the recipient was an existing security holder
and no commission was paid in connection with such transaction.
II-2
<PAGE> 74
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- -------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
2.1** Form of Agreement and Plan of Merger to be used in connection with the
Registrant's Reincorporation in Delaware.
3.1** Registrant's Certificate of Incorporation.
3.2** Restated Certificate of Incorporation to be effective upon closing of
this offering.
3.3** Restated By-laws to be effective upon closing of this offering.
4.1** Reference is made to Exhibits 3.1 and 3.2.
4.2** Specimen stock certificate.
5.1 Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement between the Company and each executive
officer and director.
10.2** Summary of Bonus Plan.
10.3** 1997 Equity Incentive Plan and forms of related agreements.
10.4** 1997 Employee Stock Purchase Plan and form of offering related thereto.
10.5** 1997 Non-Employee Director Stock Option Plan and forms of related
agreements.
10.6** Form of Series F Preferred Stock Purchase Agreement with Schedule of
additional Preferred Stock Purchase Agreements attached.
10.7** Form of Warrant to purchase shares of Series F Preferred Stock of the
Registrant.
10.8** Revised License Agreement, dated December 11, 1986 and Stock Purchase
Agreement dated March 6, 1987, between the Company and Veggetti S.r.1.
10.9** Assignment of Trademark Registrations Nunc Pro Tunc executed by Veggetti
S.r.1.
10.10+** Lease Agreement, dated December 22, 1988, and Amendment, dated October 4,
1989, between the Company and Cowper Square Partners, for Palo Alto
Restaurant.
10.11+** Lease Agreement, dated November 21, 1991, between the Company and Hotel
Sainte Claire Partners, L.P., for Hotel Sainte Claire, San Jose.
10.12+** Lease Agreement dated April 15, 1996, between the Company and New York -
New York Hotel, LLC, for the Las Vegas Restaurant.
10.13** Food Service Operations Agreement dated November 21, 1991 between the
Company and Mobedshahi Hotel Group, Inc.
10.14** Loan Agreement dated October 30, 1996, between the Company, Bank of
America National Trust and Savings Association.
10.15** Employment Agreement dated April 1995, between the Company and Michael J.
Hislop.
10.16** 1991 Incentive Stock Option Plan and form of related agreement.
11.1** Calculation of net income per share.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit 5.1.
24.1** Power of Attorney.
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested for portions of this exhibit.
(b) SCHEDULES
All schedules are omitted because they are not required, are not
applicable, or the information is included in the consolidated financial
statements or notes thereto.
II-3
<PAGE> 75
ITEM 17. UNDERTAKINGS.
The Registrant hereby undertakes to provide the Underwriters at the closing
specified in the Underwriting Agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers, and controlling persons of the
Registrant pursuant to the provisions described in Item 14 or otherwise, the
Registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, officer, or controlling
person of the Registrant in the successful defense of any action, suit, or
proceeding) is asserted by such director, officer, or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
The undersigned Registrant undertakes that: (1) for purposes of determining
any liability under the Securities Act of 1933, the information omitted from the
form of prospectus as filed as part of the registration statement in reliance
upon Rule 430A and contained in the form of prospectus filed by the Registrant
pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be
deemed to be part of the registration statement as of the time it was declared
effective, and (2) for the purpose of determining any liability under the
Securities Act of 1933, each posteffective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
II-4
<PAGE> 76
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 3 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of San
Francisco, County of San Francisco, State of California, on the 16th day of
September, 1997.
IL FORNAIO (AMERICA) CORPORATION
By /s/ LAURENCE B. MINDEL
------------------------------------
Laurence B. Mindel
Chairman of the Board of Directors
and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 3 to the Registration Statement has been signed below by the following
persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- ------------------------------------------ ----------------------------- -------------------
<C> <S> <C>
/s/ LAURENCE B. MINDEL Chairman of the Board and September 16, 1997
- ------------------------------------------ Chief Executive Officer
Laurence B. Mindel (Principal Executive
Officer)
/s/ PAUL J. KELLEY Vice President, Finance and September 16, 1997
- ------------------------------------------ Chief Financial Officer and
Paul J. Kelley Secretary (Principal
Financial and Accounting
Officer)
/s/ MICHAEL J. HISLOP* Director September 16, 1997
- ------------------------------------------
Michael J. Hislop
/s/ DEAN A. CORTOPASSI* Director September 16, 1997
- ------------------------------------------
Dean A. Cortopassi
/s/ W. SCOTT HEDRICK* Director September 16, 1997
- ------------------------------------------
W. Scott Hedrick
/s/ F. WARREN HELLMAN* Director September 16, 1997
- ------------------------------------------
F. Warren Hellman
/s/ W. HOWARD LESTER* Director September 16, 1997
- ------------------------------------------
W. Howard Lester
/s/ PIERRE W. MORNELL* Director September 16, 1997
- ------------------------------------------
Pierre W. Mornell
/s/ T. GARY ROGERS* Director September 16, 1997
- ------------------------------------------
T. Gary Rogers
*By /s/ LAURENCE B. MINDEL
- ------------------------------------------
Laurence B. Mindel
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 77
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- ------------------------------------------------------------
<C> <S> <C>
1.1 Form of Underwriting Agreement.
2.1** Form of Agreement and Plan of Merger to be used in
connection with the Registrant's Reincorporation in
Delaware.
3.1** Registrant's Certificate of Incorporation.
3.2** Restated Certificate of Incorporation to be effective upon
closing of this offering.
3.3** Restated By-laws to be effective upon closing of this
offering.
4.1** Reference is made to Exhibits 3.1 and 3.2.
4.2** Specimen stock certificate.
5.1 Opinion of Cooley Godward LLP.
10.1** Form of Indemnity Agreement between the Company and each
executive officer and director.
10.2** Summary of Bonus Plan.
10.3** 1997 Equity Incentive Plan and forms of related agreements.
10.4** 1997 Employee Stock Purchase Plan and form of offering
related thereto.
10.5** 1997 Non-Employee Director Stock Option Plan and forms of
related agreements.
10.6** Form of Series F Preferred Stock Purchase Agreement with
Schedule of additional Preferred Stock Purchase Agreements
attached.
10.7** Form of Warrant to purchase shares of Series F Preferred
Stock of the Registrant.
10.8** Revised License Agreement, dated December 11, 1986 and Stock
Purchase Agreement dated March 6, 1987, between the Company
and Veggetti S.r.1.
10.9** Assignment of Trademark Registrations Nunc Pro Tunc executed
by Veggetti S.r.1.
10.10+** Lease Agreement, dated December 22, 1988, and Amendment,
dated October 4, 1989, between the Company and Cowper Square
Partners, for Palo Alto Restaurant.
10.11+** Lease Agreement, dated November 21, 1991, between the
Company and Hotel Sainte Claire Partners, L.P., for Hotel
Sainte Claire, San Jose.
10.12+** Lease Agreement dated April 15, 1996, between the Company
and New York - New York Hotel, LLC, for the Las Vegas
Restaurant.
10.13** Food Service Operations Agreement dated November 21, 1991
between the Company and Mobedshahi Hotel Group, Inc.
10.14** Loan Agreement dated October 30, 1996, between the Company,
Bank of America National Trust and Savings Association.
10.15** Employment Agreement dated April 1995, between the Company
and Michael J. Hislop.
10.16** 1991 Incentive Stock Option Plan and form of related
agreement.
</TABLE>
<PAGE> 78
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF DOCUMENT
--------- ------------------------------------------------------------
<C> <S> <C>
11.1** Calculation of net income per share.
23.1 Consent of Deloitte & Touche LLP.
23.2 Consent of Cooley Godward LLP. Reference is made to Exhibit
5.1.
24.1** Power of Attorney.
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested for portions of this exhibit.
<PAGE> 1
EXHIBIT 1.1
1,500,000 SHARES
IL FORNAIO (AMERICA) CORPORATION
COMMON STOCK
UNDERWRITING AGREEMENT
DATED SEPTEMBER ___, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
Section 1. Representations and Warranties................................................. 2
(A) Representations and Warranties of the Company.................................. 2
Compliance with Registration Requirements................................... 2
Offering Materials Furnished to Underwriters................................ 3
Distribution of Offering Material By the Company............................ 3
The Underwriting Agreement.................................................. 3
Authorization of the Common Shares.......................................... 3
No Applicable Registration or Other Similar Rights.......................... 4
No Material Adverse Change.................................................. 4
Independent Accountants..................................................... 4
Preparation of the Financial Statements..................................... 4
Incorporation and Good Standing of the Company.............................. 5
Capitalization and Other Capital Stock Matters.............................. 5
Stock Exchange Listing...................................................... 5
Non-Contravention of Existing Instruments; No Further Authorizations or
Approvals Required................................................... 6
No Material Actions or Proceedings.......................................... 6
Intellectual Property Rights................................................ 6
All Necessary Permits, etc.................................................. 7
Title to Properties......................................................... 7
Tax Law Compliance.......................................................... 7
Company Not an "Investment Company."........................................ 7
Insurance................................................................... 7
No Price Stabilization or Manipulation...................................... 8
Related Party Transactions.................................................. 8
(B) Representations and Warranties of the Selling Stockholders.................... 8
The Underwriting Agreement.................................................. 8
The Custody Agreement and Power of Attorney................................. 8
Title to Common Shares to be Sold; All Authorizations Obtained.............. 9
Delivery of the Common Shares to be Sold.................................... 9
Non-Contravention; No Further Authorizations or Approvals Required.......... 9
No Registration or Other Similar Rights..................................... 9
No Further Consents, etc.................................................... 10
Disclosure Made by Such Selling Stockholder in the Prospectus............... 10
No Price Stabilization or Manipulation...................................... 10
Section 2. Purchase, Sale and Delivery of the Common Shares............................... 10
The Firm Common Shares...................................................... 10
The First Closing Date...................................................... 11
The Optional Common Shares; the Second Closing Date......................... 11
Public Offering of the Common Shares........................................ 12
Payment for the Common Shares............................................... 12
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
Delivery of the Common Shares............................................... 12
Delivery of Prospectus to the Underwriters.................................. 13
Section 3. Additional Covenants........................................................... 13
(A) Covenants of the Company...................................................... 13
Representatives' Review of Proposed Amendments and Supplements.............. 13
Securities Act Compliance................................................... 13
Amendments and Supplements to the Prospectus and Other Securities Act
Matters.............................................................. 14
Copies of any Amendments and Supplements to the Prospectus.................. 14
Blue Sky Compliance......................................................... 14
Use of Proceeds............................................................. 14
Transfer Agent.............................................................. 15
Earning Statement........................................................... 15
Periodic Reporting Obligations.............................................. 15
Agreement Not To Offer or Sell Additional Securities........................ 15
Future Reports to the Representatives....................................... 16
(B) Covenants of the Selling Stockholders......................................... 16
Agreement Not to Offer or Sell Additional Securities........................ 16
Delivery of Forms W-8 and W-9............................................... 16
Section 4. Payment of Expenses............................................................ 17
Section 5. Conditions of the Obligations of the Underwriters.............................. 17
Accountants' Comfort Letter................................................. 18
Compliance with Registration Requirements; No Stop Order; No
Objection from NASD.................................................. 18
No Material Adverse Change.................................................. 19
Opinion of Counsel for the Company.......................................... 19
Opinion of Counsel for the Underwriters..................................... 19
Officers' Certificate....................................................... 19
Bring-down Comfort Letter................................................... 19
Opinion of Counsel for the Selling Stockholders............................. 20
Selling Stockholders' Certificate........................................... 20
Selling Stockholders' Documents............................................. 20
Lock-Up Agreement from Stockholders of the Company.......................... 20
Additional Documents........................................................ 20
Section 6. Reimbursement of Underwriters' Expenses........................................ 21
Section 7. Indemnification................................................................ 21
Indemnification of the Underwriters......................................... 21
Indemnification by the Underwriters......................................... 23
Notifications and Other Indemnification Procedures.......................... 24
Settlements................................................................. 25
</TABLE>
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<PAGE> 4
<TABLE>
<S> <C> <C>
Section 8. Contribution.................................................................. 25
Section 9. Default of One or More of the Several Underwriters............................ 27
Section 10. Termination of this Agreement................................................. 27
Section 11. Representations and Indemnities to Survive Delivery........................... 28
Section 12. Notices....................................................................... 28
Section 13. Successors.................................................................... 29
Section 14. Partial Unenforceability...................................................... 29
Section 15. Governing Law Provisions...................................................... 30
Governing Law............................................................... 30
Consent to Jurisdiction..................................................... 30
Section 16. Failure of One or More of the Selling Stockholders to Sell and Deliver
Common Shares................................................................. 30
Section 17. General Provisions............................................................ 31
</TABLE>
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<PAGE> 5
UNDERWRITING AGREEMENT
September ___, 1997
MONTGOMERY SECURITIES
BT ALEX. BROWN INCORPORATED
As Representatives of the several Underwriters
c/o MONTGOMERY SECURITIES
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Il Fornaio (America) Corporation, a California
corporation to be reincorporated as a Delaware corporation prior to the First
Closing Date (the "Reincorporation") (references herein to the "Company" shall
mean the California corporation prior to the Reincorporation and the Delaware
corporation immediately after the Reincorporation), proposes to issue and sell
to the several underwriters named in Schedule A (the "Underwriters") an
aggregate of 1,000,000 shares of its Common Stock, no par value (the "Common
Stock"); and the stockholders of the Company named in Schedule B (collectively,
the "Selling Stockholders") severally propose to sell to the Underwriters an
aggregate of 500,000 shares of Common Stock. The 1,000,000 shares of Common
Stock to be sold by the Company and the 500,000 shares of Common Stock to be
sold by the Selling Stockholders are collectively called the "Firm Common
Shares." In addition, the Company has granted to the Underwriters an option to
purchase up to an additional 225,000 shares (the "Optional Common Shares") of
Common Stock, as provided in Section 2 hereof. The Firm Common Shares and, if
and to the extent such option is exercised, the Optional Common Shares are
collectively called the "Common Shares." Montgomery Securities and BT Alex.
Brown Incorporated have agreed to act as representatives of the several
Underwriters (in such capacity, the "Representatives") in connection with the
offering and sale of the Common Shares.
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-23605), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements, exhibits
and schedules thereto, in the form in which it was declared effective by the
Commission under the Securities Act of 1933, as amended, and the rules and
regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement." Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b)
<PAGE> 6
Registration Statement," and from and after the date and time of filing of the
Rule 462(b) Registration Statement the term "Registration Statement" shall
include the Rule 462(b) Registration Statement. Such prospectus, in the form
first used by the Underwriters to confirm sales of the Common Shares, is called
the "Prospectus"; provided, however, if the Company has, with the consent of
Montgomery Securities, elected to rely upon Rule 434 under the Securities Act,
the term "Prospectus" shall mean the Company's prospectus subject to completion
(each, a "preliminary prospectus") dated August 22, 1997 (such preliminary
prospectus is called the "Rule 434 preliminary prospectus"), together with the
applicable term sheet (the "Term Sheet") prepared and filed by the Company with
the Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the date
of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus,
the Prospectus or the Term Sheet, or any amendments or supplements to any of
the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR").
The Company and each of the Selling Stockholders hereby confirm
their respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
(A) REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company hereby
represents, warrants and covenants to each Underwriter as follows:
(i) Compliance with Registration Requirements. The Registration
Statement and any Rule 462(b) Registration Statement have been declared
effective by the Commission under the Securities Act. The Company
warrants that it has complied to the Commission's satisfaction with all
requests of the Commission for additional or supplemental information.
The Company warrants that no stop order suspending the effectiveness of
the Registration Statement or any Rule 462(b) Registration Statement is
in effect and no proceedings for such purpose have been instituted or
are pending or, to the best knowledge of the Company, are contemplated
or threatened by the Commission.
Each preliminary prospectus and the Prospectus when filed
complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be
permitted by Regulation S-T under the Securities Act), was identical to
the copy thereof delivered to the Underwriters for use in connection
with the offer and sale of the Common Shares. Each of the Registration
Statement, any Rule 462(b) Registration Statement and any
post-effective amendment thereto, at the time it became effective
complied, and through the Prospectus Delivery Period (as defined in
Section 3(A)(i) hereof) will comply, in all material respects with the
Securities Act and
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<PAGE> 7
did not and will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary
to make the statements therein not misleading. The Prospectus, as
amended or supplemented, as of its date did not, and through the
Prospectus Delivery Period will not, contain any untrue statement of a
material fact or omit to state a material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading. The representations and warranties
set forth in the two immediately preceding sentences do not apply to
statements in or omissions from the Registration Statement, any Rule
462(b) Registration Statement, or any post-effective amendment thereto,
or the Prospectus, or any amendments or supplements thereto, made in
reliance upon and in conformity with information relating to any
Underwriter furnished to the Company in writing by the Representatives
expressly for use therein. There are no contracts or other documents
required by the Securities Act to be described in the Prospectus or to
be filed as exhibits to the Registration Statement which have not been
described or filed as required.
(ii) Offering Materials Furnished to Underwriters. The Company
has delivered to the Representatives two complete manually signed copies
of the Registration Statement and of each consent and certificate of
experts filed as a part thereof, and conformed copies of the
Registration Statement (without exhibits) and preliminary prospectuses
and the Prospectus, as amended or supplemented, in such quantities and
at such places as the Representatives have reasonably requested for each
of the Underwriters.
(iii) Distribution of Offering Material By the Company. The
Company has not distributed and will not distribute, prior to the later
of the Second Closing Date (as defined below) and the completion of the
Underwriters' distribution of the Common Shares, any offering material
in connection with the offering and sale of the Common Shares other than
a preliminary prospectus, the Prospectus or the Registration Statement.
(iv) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms,
except as rights to indemnification hereunder may be limited by
applicable law and except as the enforcement hereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting the rights and remedies of creditors or by
general equitable principles.
(v) Authorization of the Common Shares. The Common Shares to be
purchased by the Underwriters from the Company have been duly authorized
for issuance and sale pursuant to this Agreement and, when issued and
delivered by the Company and paid for by the Underwriters pursuant to
this Agreement, will be validly issued, fully paid and nonassessable.
3
<PAGE> 8
(vi) No Applicable Registration or Other Similar Rights. There
are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement,
except for such rights as have been duly waived.
(vii) No Material Adverse Change. Except as otherwise disclosed
in the Prospectus, subsequent to the respective dates as of which
information is given in the Prospectus: (i) there has been no material
adverse change, or any development that could reasonably be expected to
result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects,
whether or not arising from transactions in the ordinary course of
business, of the Company (any such change is called a "Material Adverse
Change") (other than, for purposes of this representation and warranty
only, adverse changes resulting solely from general economic conditions
or conditions affecting generally the industry in which the Company
operates); (ii) the Company has not incurred any material liability or
obligation, indirect, direct or contingent, not in the ordinary course
of business nor entered into any material transaction or agreement not
in the ordinary course of business; and (iii) there has been no dividend
or distribution of any kind declared, paid or made by the Company on any
class of capital stock or repurchase or redemption by the Company of any
class of capital stock.
(viii) Independent Accountants. Deloitte & Touche LLP, who have
expressed their opinion with respect to the financial statements (which
term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the
Registration Statement and included in the Prospectus, are independent
public or certified public accountants as required by the Securities
Act.
(ix) Preparation of the Financial Statements. The financial
statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the financial
position of the Company as of and at the dates indicated and the results
of its operations and cash flows for the periods specified. The
supporting schedules included in the Registration Statement present
fairly the information required to be stated therein. Such financial
statements and supporting schedules have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis throughout the periods involved, except as may be expressly stated
in the related notes thereto. No other financial statements or
supporting schedules are required to be included in the Registration
Statement. The financial data set forth in the Prospectus under the
captions "Prospectus Summary--Summary Financial and Operating Data,"
"Selected Financial and Operating Data" and "Capitalization" fairly
present the information set forth therein on a basis consistent with
that of the audited financial statements contained in the Registration
Statement.
4
<PAGE> 9
(x) Incorporation and Good Standing of the Company. The Company
has been duly incorporated and is validly existing as a corporation in
good standing under the laws of the jurisdiction of its incorporation
and has corporate power and authority to own, lease and operate its
properties and to conduct its business as described in the Prospectus
and, in the case of the Company, to enter into and perform its
obligations under this Agreement. The Company is duly qualified as a
foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required (including
California (after the Reincorporation), Colorado, Nevada, Oregon and
Washington) whether by reason of the ownership or leasing of property or
the conduct of business, except for such jurisdictions (other than
California, Colorado, Nevada, Oregon and Washington) where the failure
to so qualify or to be in good standing would not, individually or in
the aggregate, result in a Material Adverse Change. The Company has no
subsidiaries. The Company will be reincorporated in Delaware prior to
the First Closing Date.
(xi) Capitalization and Other Capital Stock Matters. The
authorized, issued and outstanding capital stock of the Company is as
set forth in the Prospectus under the caption "Capitalization" (other
than for subsequent issuances, if any, pursuant to employee benefit
plans described in the Prospectus or upon exercise of outstanding
warrants described in the Prospectus), except as described in the
opinion dated January 27, 1993, issued by Cooley Godward LLP in
connection with the sale of 730,664 shares of the Company's Series F
Preferred Stock (the "Exceptions"). The Common Stock (including the
Common Shares) conforms in all material respects to the description
thereof contained in the Prospectus. Except for the Exceptions, all of
the issued and outstanding shares of Common Stock (including the shares
of Common Stock owned by Selling Stockholders) have been duly authorized
and validly issued, are fully paid and nonassessable and have been
issued in compliance with federal and state securities laws. None of the
outstanding shares of Common Stock were issued in violation of any
preemptive rights, rights of first refusal or other similar rights to
subscribe for or purchase securities of the Company, except as described
in the Exceptions. There are no authorized or outstanding options,
warrants, preemptive rights, rights of first refusal or other rights to
purchase, or equity or debt securities convertible into or exchangeable
or exercisable for, any capital stock of the Company other than those
accurately described in the Prospectus. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted thereunder, set forth in the Prospectus
accurately and fairly presents in all material respects the information
required by the Securities Act to be shown with respect to such plans,
arrangements, options and rights.
(xii) Stock Exchange Listing. The Common Shares have been
approved for inclusion on the Nasdaq National Market, subject only to
official notice of issuance.
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<PAGE> 10
(xiii) Non-Contravention of Existing Instruments; No Further
Authorizations or Approvals Required. The Company is not in violation of
its charter or by-laws or in default (or, with the giving of notice or
lapse of time, would be in default) ("Default") under any indenture,
mortgage, loan or credit agreement, note, contract, franchise, lease or
other instrument to which the Company is a party or by which it may be
bound, or to which any of the property or assets of the Company is
subject (each, an "Existing Instrument"), except for such Defaults as
would not, individually or in the aggregate, result in a Material
Adverse Change. The Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus (i) have been duly authorized by all necessary
corporate action and will not result in any violation of the provisions
of the charter or by-laws of the Company, (ii) will not conflict with or
constitute a breach of, or Default under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company pursuant to, or require the consent of any other
party to, any Existing Instrument, except for such conflicts, breaches,
Defaults, liens, charges or encumbrances as would not, individually or
in the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company. No consent,
approval, authorization or other order of, or registration or filing
with, any court or other governmental or regulatory authority or agency,
is required for the Company's execution, delivery and performance of
this Agreement and consummation of the transactions contemplated hereby
and by the Prospectus, except such as have been obtained or made by the
Company and are in full force and effect under the Securities Act, and
except applicable state securities or blue sky laws and from the
National Association of Securities Dealers, Inc. (the "NASD").
(xiv) No Material Actions or Proceedings. There are no legal or
governmental actions, suits or proceedings pending or, to the best of
the Company's knowledge, threatened (i) against or, to the Company's
knowledge, affecting the Company, (ii) which has as the subject thereof
any officer or director (with respect to actions or inactions in his
capacity as officer or director) of, or property owned or leased by, the
Company or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company
and (B) any such action, suit or proceeding, if so determined adversely,
would reasonably be expected to result in a Material Adverse Change or
adversely affect the consummation of the transactions contemplated by
this Agreement. No labor dispute with the employees of the Company
exists or, to the best of the Company's knowledge, is threatened or
imminent which would reasonably be expected to result in a Material
Adverse Change.
(xv) Intellectual Property Rights. The Company owns or possesses
sufficient trademarks, trade names, patent rights, copyrights, licenses,
approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct its
business as now conducted; and the expected expiration of any of such
Intellectual Property Rights would not result in a Material Adverse
Change. The Company has not received any notice of infringement or
conflict with asserted
6
<PAGE> 11
Intellectual Property Rights of others, which infringement or conflict,
if the subject of an unfavorable decision, would result in a Material
Adverse Change.
(xvi) All Necessary Permits, etc. The Company possesses such
valid and current certificates, authorizations or permits issued by the
appropriate state, federal or foreign regulatory agencies or bodies
necessary to conduct its business, and the Company has not received any
notice of proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit
which, singly or in the aggregate, if the subject of an unfavorable
decision, ruling or finding, would reasonably be expected to result in a
Material Adverse Change.
(xvii) Title to Properties. The Company has good and marketable
title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(A)(ix) above (or
elsewhere in the Prospectus), in each case free and clear of any
security interests, mortgages, liens, encumbrances, equities, claims
and other defects, except such as do not materially and adversely
affect the value of such property and do not materially interfere with
the use made or proposed to be made of such property by the Company.
The real property, improvements, equipment and personal property held
under lease by the Company are held under valid and enforceable leases,
with such exceptions as are not material and do not materially
interfere with the use made or proposed to be made of such real
property, improvements, equipment or personal property by the Company.
(xviii) Tax Law Compliance. The Company has filed all necessary
federal, state and foreign income and franchise tax returns and has paid
all taxes shown as due thereon and any taxes required to have been paid
by it in any subsequent period and, if due and payable, any related or
similar assessment, fine or penalty levied against it. To the best of
the Company's knowledge, the Company has made adequate charges, accruals
and reserves in the applicable financial statements referred to in
Section 1(A)(ix) above in respect of all federal, state and foreign
income and franchise taxes for all periods as to which the tax
liability of the Company has not been finally determined.
(xix) Company Not an "Investment Company." The Company has been
advised of the rules and requirements under the Investment Company Act
of 1940, as amended (the "Investment Company Act"). The Company is not,
and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and
will use its commercially reasonable efforts to conduct its business in
a manner so that it will not become subject to the Investment Company
Act.
(xx) Insurance. The Company is insured by recognized institutions
with policies in such amounts and with such deductibles and covering
such risks as are generally deemed adequate and customary for its
business, except as disclosed in the Prospectus. The Company has no
reason to believe that it will not be able (i) to renew its existing
insurance coverage as and when such policies expire or (ii) to obtain
comparable coverage from similar institutions as may be necessary or
appropriate to conduct its business as now conducted and at a cost that
would not result in a Material
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<PAGE> 12
Adverse Change. The Company has not been denied any insurance coverage
which it has sought or for which it has applied.
(xxi) No Price Stabilization or Manipulation. The Company has not
taken and will not take, directly or indirectly, any action designed to
or that might be reasonably expected to cause or result in stabilization
or manipulation of the price of the Common Stock to facilitate the sale
or resale of the Common Shares.
(xxii) Related Party Transactions. There are no business
relationships or related-party transactions involving the Company or any
other person required to be described in the Prospectus which have not
been described as required.
Any certificate signed by an officer of the Company and delivered
to the Representatives or to counsel for the Underwriters expressly for use in
connection with the Closing shall be deemed to be a representation and warranty
by the Company to each Underwriter as to the matters set forth therein.
(B) REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. Each
Selling Stockholder represents, warrants and covenants to each Underwriter as
follows:
(i) The Underwriting Agreement. This Agreement has been duly
authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights
to indemnification hereunder may be limited by applicable law and except
as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or
affecting the rights and remedies of creditors or by general equitable
principles.
(ii) The Custody Agreement and Power of Attorney. Each of the (i)
Custody Agreement signed by such Selling Stockholder and the First
National Bank of Boston, as custodian (the "Custodian"), relating to the
deposit of the Common Shares to be sold by such Selling Stockholder (the
"Custody Agreement") and (ii) Power of Attorney appointing certain
individuals named therein as such Selling Stockholder's
attorneys-in-fact (each, an "Attorney-in-Fact") to the extent set forth
therein relating to the transactions contemplated hereby and by the
Prospectus (the "Power of Attorney"), of such Selling Stockholder has
been duly authorized, executed and delivered by or on behalf of such
Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights
to indemnification thereunder may be limited by applicable law and
except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, moratorium or other similar laws relating to
or affecting the rights and remedies of creditors or by general
equitable principles.
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<PAGE> 13
(iii) Title to Common Shares to be Sold; All Authorizations
Obtained. Such Selling Stockholder has, and on the First Closing Date
will have, good and valid title to all of the Common Shares which may be
sold by such Selling Stockholder pursuant to this Agreement on such date
and the legal right and power, and all authorizations and approvals
required by law and under its charter or by-laws, partnership agreement,
trust agreement or other organizational documents to enter into this
Agreement and its Custody Agreement and Power of Attorney, to sell,
transfer and deliver all of the Common Shares which may be sold by such
Selling Stockholder pursuant to this Agreement and to comply with its
other obligations hereunder and thereunder.
(iv) Delivery of the Common Shares to be Sold. Delivery of and
payment for the Common Shares which are sold by such Selling Stockholder
pursuant to this Agreement will pass good and valid title to such Common
Shares, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or other claim.
(v) Non-Contravention; No Further Authorizations or Approvals
Required. The execution and delivery by or on behalf of such Selling
Stockholder of, and the performance by such Selling Stockholder of its
obligations under, this Agreement, the Custody Agreement and the Power
of Attorney will not contravene or conflict with, result in a breach of,
or constitute a Default under, or require the consent of any other party
to, the charter or by-laws, partnership agreement, trust agreement or
other organizational documents of such Selling Stockholder or any other
agreement or instrument to which such Selling Stockholder is a party or
by which it is bound or under which it is entitled to any right or
benefit, any provision of applicable law or any judgment, order, decree
or regulation applicable to such Selling Stockholder of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Stockholder, except where any of
the foregoing shall not have an adverse effect on the Selling
Stockholder's ability to validly transfer to the Underwriters title to
the Common Shares free and clear of any security interest, mortgage,
pledge, lien, encumbrance or other claim, or to otherwise perform its
obligations hereunder. No consent, approval, authorization or other
order of, or registration or filing with, any court or other
governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in this
Agreement, except such as have been obtained or made and are in full
force and effect under the Securities Act, and except applicable state
securities or blue sky laws and from the NASD.
(vi) No Registration or Other Similar Rights. Such Selling
Stockholder does not have any registration or other similar rights to
have any equity or debt securities registered for sale by the Company
under the Registration Statement or included in the offering
contemplated by this Agreement.
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<PAGE> 14
(vii) No Further Consents, etc. No consent, approval or waiver is
required under any instrument or agreement to which such Selling
Stockholder is a party or by which it is bound or under which it is
entitled to any right or benefit, in connection with the offering, sale
or purchase by the Underwriters of any of the Common Shares which may be
sold by such Selling Stockholder under this Agreement or the
consummation by such Selling Stockholder of any of the other
transactions contemplated hereby, except where any of the foregoing
shall not have an adverse effect on the Selling Stockholder's ability to
validly transfer to the Underwriters title to the Common Shares free and
clear of any security interest, mortgage, pledge, lien, encumbrance or
other claim, or to otherwise perform its obligations hereunder.
(viii) Disclosure Made by Such Selling Stockholder in the
Prospectus. All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement
and Prospectus is, and on the First Closing Date and the Second Closing
Date will be, true, correct, and complete in all material respects, and
does not, and on the First Closing Date and the Second Closing Date will
not, contain any untrue statement of a material fact or omit to state
any material fact necessary to make such information not misleading.
Such Selling Stockholder confirms as accurate the number of shares of
Common Stock set forth opposite such Selling Stockholder's name in the
Prospectus under the caption "Principal and Selling Stockholders" (both
prior to and after giving effect to the sale of the Common Shares).
(ix) No Price Stabilization or Manipulation. Such Selling
Stockholder has not taken and will not take, directly or indirectly, any
action designed to or that might be reasonably expected to cause or
result in stabilization or manipulation of the price of the Common Stock
to facilitate the sale or resale of the Common Shares.
Any certificate signed by or on behalf of any Selling Stockholder
and delivered to the Representatives or to counsel for the Underwriters
expressly for use in connection with the Closing shall be deemed to be a
representation and warranty by such Selling Stockholder to each Underwriter as
to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
(A) The Firm Common Shares. Upon the terms herein set forth, (i)
the Company agrees to issue and sell to the several Underwriters an aggregate
of 1,000,000 Firm Common Shares and (ii) each Selling Stockholder agrees to
sell to the several Underwriters, severally and not jointly, that number of
Firm Common Shares set forth opposite such Selling Stockholder's name on
Schedule B. On the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein set
forth, the Underwriters agree, severally and not jointly, to purchase from the
Company and the Selling Stockholders the respective number of Firm Common
Shares set forth opposite their names on Schedule A. The purchase price per
Firm Common Share to be paid by the several Underwriters to the Company and the
Selling Stockholders shall be $[___] per share.
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(B) The First Closing Date. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall be
made at the offices of Montgomery Securities, 600 Montgomery Street, San
Francisco, California (or such other place as may be agreed to by the Company
and the Representatives) at 6:00 a.m. San Francisco time, on [___],(2) or such
other time and date not later than 10:30 a.m. San Francisco time, on [___](3) as
the Representatives shall designate by notice to the Company (the time and date
of such closing are called the "First Closing Date"). The Company and the
Selling Stockholders hereby acknowledge that circumstances under which the
Representatives may provide notice to postpone the First Closing Date as
originally scheduled include, but are in no way limited to, any determination by
the Company or the Representatives to recirculate to the public copies of an
amended or supplemented Prospectus or a delay as contemplated by the provisions
of Section 9 hereof.
(C) The Optional Common Shares; the Second Closing Date. In
addition, on the basis of the representations, warranties and agreements herein
contained, and upon the terms but subject to the conditions herein set forth,
the Company hereby grants an option to the several Underwriters to purchase,
severally and not jointly, up to an aggregate of 225,000 Optional Common Shares
from the Company at the purchase price per share to be paid by the Underwriters
for the Firm Common Shares. The option granted hereunder is for use by the
Underwriters solely in covering any over-allotments in connection with the sale
and distribution of the Firm Common Shares. The option granted hereunder may be
exercised at any time (but not more than once) upon notice by the
Representatives to the Company, which notice may be given at any time within 30
days from the date of this Agreement. Such notice shall set forth (i) the
aggregate number of Optional Common Shares as to which the Underwriters are
exercising the option, (ii) the names and denominations in which the
certificates for the Optional Common Shares are to be registered and (iii) the
time, date and place at which such certificates will be delivered (which time
and date may be simultaneous with, but not earlier than, the First Closing Date;
and in such case the term "First Closing Date" shall refer to the time and date
of delivery of certificates for the Firm Common Shares and the Optional Common
Shares). Such time and date of delivery, if subsequent to the First Closing
Date, is called the "Second Closing Date" and shall be determined by the
Representatives and shall not be earlier than three nor later than five full
business days after delivery of such notice of exercise. If any Optional Common
Shares are to be purchased, (a) each Underwriter agrees, severally and not
jointly, to purchase the number of Optional Common Shares (subject to such
adjustments to eliminate fractional shares as the Representatives may determine)
that bears the same proportion to the total number of Optional Common Shares to
be purchased as the number of Firm Common Shares set forth on Schedule A
opposite the name of such Underwriter bears to the total number of Firm Common
Shares and (b) the Company agrees to sell the number of Optional Common
- --------
(2) Although a later date may be agreed to by the Representatives and
the Company, generally the settlement date would be the fourth full business day
after the date of this Agreement, unless the pricing occurs at a time earlier
than 4:30 p.m., East Coast time, in which case the settlement date would be the
third full business day after the date of this Agreement.
(3) Ten business days following the original contemplated First Closing
Date.
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Shares to be purchased by the Underwriters. The Representatives may cancel the
option at any time prior to its expiration by giving written notice of such
cancellation to the Company.
(D) Public Offering of the Common Shares. The Representatives
hereby advise the Company and the Selling Stockholders that the Underwriters
intend to offer for sale to the public, as described in the Prospectus, their
respective portions of the Common Shares as soon after this Agreement has been
executed and the Registration Statement has been declared effective as the
Representatives, in their sole judgment, have determined is advisable and
practicable.
(E) Payment for the Common Shares. Payment for the Common Shares
to be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Common Shares to be
sold by the Selling Stockholders shall be made at the First Closing Date by wire
transfer of immediately available funds to the order of the Custodian.
It is understood that the Representatives have been authorized,
for their own accounts and the accounts of the several Underwriters, to accept
delivery of and receipt for, and make payment of the purchase price for, the
Firm Common Shares and any Optional Common Shares the Underwriters have agreed
to purchase. Montgomery Securities, individually and not as a Representative of
the Underwriters, may (but shall not be obligated to) make payment for any
Common Shares to be purchased by any Underwriter whose funds shall not have been
received by the Representatives by the First Closing Date or the Second Closing
Date, as the case may be, for the account of such Underwriter, but any such
payment shall not relieve such Underwriter from any of its obligations under
this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay all
stock transfer taxes, stamp duties and other similar taxes, if any, payable in
connection with the sale or delivery of the Common Shares to be sold by such
Selling Stockholder to the several Underwriters, or otherwise in connection with
the performance of such Selling Stockholder's obligations hereunder and (ii) the
Custodian is authorized to deduct for such payment any such amounts from the
proceeds to such Selling Stockholder hereunder and to hold such amounts for the
account of such Selling Stockholder with the Custodian under the Custody
Agreement.
(F) Delivery of the Common Shares. The Company and the Selling
Stockholders shall deliver, or cause to be delivered, to the Representatives for
the accounts of the several Underwriters certificates for the Firm Common Shares
to be sold by them at the First Closing Date, against the irrevocable release of
a wire transfer of immediately available funds for the amount of the purchase
price therefor. The Company shall also deliver, or cause to be delivered, to the
Representatives for the accounts of the several Underwriters, certificates for
the Optional Common Shares the Underwriters have agreed to purchase at the First
Closing Date or the Second Closing Date, as the case may be, against the
irrevocable release of a wire transfer of immediately available funds for the
amount of the purchase price therefor. The certificates for the Common Shares
shall be in definitive form and registered in such names and denominations as
the Representatives shall have requested at least two full business days prior
to the First Closing Date (or the Second Closing Date, as the case may be) and
shall be made
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available for inspection on the business day preceding the First Closing Date
(or the Second Closing Date, as the case may be) at a location in New York, New
York as the Representatives may designate. Time shall be of the essence, and
delivery at the time and place specified in this Agreement is a further
condition to the obligations of the Underwriters.
(G) Delivery of Prospectus to the Underwriters. Not later than
12:00 p.m. on the second business day following the date the Common Shares are
released by the Underwriters for sale to the public, the Company shall deliver
or cause to be delivered copies of the Prospectus in such quantities and at such
places as the Representatives shall request.
SECTION 3. ADDITIONAL COVENANTS.
(A) COVENANTS OF THE COMPANY. The Company further covenants and agrees
with each Underwriter as follows:
(i) Representatives' Review of Proposed Amendments and
Supplements. During such period beginning on the date hereof and ending
on the later of (1) the First Closing Date, (2) the date 25 days after
the offering date, as such term is defined in Rule 174(d) under the
Securities Act, or (3) such date, as in the opinion of counsel for the
Underwriters, the Prospectus is no longer required by law to be
delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under
Rule 462(b) under the Securities Act) or the Prospectus, the Company
shall furnish to the Representatives for review a copy of each such
proposed amendment or supplement, and the Company shall not file any
such proposed amendment or supplement to which the Representatives
reasonably object.
(ii) Securities Act Compliance.(4) After the date of this
Agreement, the Company shall promptly advise the Representatives in
writing (i) of the receipt of any comments of, or requests for
additional or supplemental information from, the Commission, (ii) of the
time and date of any filing of any post-effective amendment to the
Registration Statement or any amendment or supplement to any preliminary
prospectus or the Prospectus, (iii) of the time and date that any
post-effective amendment to the Registration Statement becomes effective
and (iv) of the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement or any post-effective
amendment thereto or of any order preventing or suspending the use of
any preliminary prospectus or the Prospectus, or of any proceedings to
remove, suspend or terminate from listing or quotation the Common Stock
from any securities exchange upon which it is listed for trading or
included or designated for quotation, or of the threatening or
initiation of any proceedings for any of such purposes. If the
Commission shall enter any such stop order at any time, the Company will
use its best
- --------
(4) This covenant will need to be revised if this Agreement is signed
prior to effectiveness of the Registration Statement.
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<PAGE> 18
efforts to obtain the lifting of such order at the earliest possible
moment. Additionally, the Company agrees that it shall comply with the
provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a
timely manner by the Commission.
(iii) Amendments and Supplements to the Prospectus and Other
Securities Act Matters. If, during the Prospectus Delivery Period, any
event shall occur or condition exist as a result of which it is
necessary to amend or supplement the Prospectus in order to make the
statements therein, in the light of the circumstances when the
Prospectus is delivered to a purchaser, not misleading, or if in the
opinion of the Representatives or counsel for the Underwriters it is
otherwise necessary to amend or supplement the Prospectus to comply
with law, the Company agrees to promptly prepare (subject to Section
3(A)(i) hereof), file with the Commission and furnish at its own
expense to the Underwriters and to dealers, amendments or supplements
to the Prospectus so that the statements in the Prospectus as so
amended or supplemented will not, in the light of the circumstances
when the Prospectus is delivered to a purchaser, be misleading or so
that the Prospectus, as amended or supplemented, will comply with law.
(iv) Copies of any Amendments and Supplements to the Prospectus.
The Company agrees to furnish the Representatives, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus
and any amendments and supplements thereto as the Representatives may
reasonably request.
(v) Blue Sky Compliance. The Company shall cooperate with the
Representatives and counsel for the Underwriters to qualify or register
the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or Canadian
provincial securities laws of those jurisdictions designated by the
Representatives, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as
required for the distribution of the Common Shares. The Company shall
not be required to qualify as a foreign corporation or to take any
action that would subject it to general service of process in any such
jurisdiction where it is not presently qualified or where it would be
subject to taxation as a foreign corporation. The Company will advise
the Representatives promptly of the suspension of the qualification or
registration of (or any such exemption relating to) the Common Shares
for offering, sale or trading in any jurisdiction or any initiation or
threat of any proceeding for any such purpose, and in the event of the
issuance of any order suspending such qualification, registration or
exemption, the Company shall use its best efforts to obtain the
withdrawal thereof at the earliest possible moment.
(vi) Use of Proceeds. The Company shall apply the net proceeds
from the sale of the Common Shares sold by it in the manner described
under the caption "Use of Proceeds" in the Prospectus.
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<PAGE> 19
(vii) Transfer Agent. The Company shall engage and maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(viii) Earning Statement. As soon as practicable, the Company
will make generally available to its security holders and to the
Representatives an earning statement (which need not be audited)
covering the twelve-month period ending September 30, 1998 that
satisfies the provisions of Section 11(a) of the Securities Act.
(ix) Periodic Reporting Obligations. During the Prospectus
Delivery Period the Company shall file, on a timely basis, with the
Commission and the Nasdaq National Market all reports and documents
required to be filed under the Securities and Exchange Act of 1934, as
amended (the "Exchange Act"). Additionally, the Company shall file with
the Commission all reports on Form SR as may be required under Rule 463
under the Securities Act.
(x) Agreement Not To Offer or Sell Additional Securities. During
the period of 180 days following the date of the Prospectus, the Company
will not, without the prior written consent of Montgomery Securities
(which consent may be withheld at the sole discretion of Montgomery
Securities), directly or indirectly, sell, offer, contract or grant any
option to sell, pledge, transfer or establish an open "put equivalent
position" within the meaning of Rule 16a-1(h) under the Exchange Act, or
otherwise dispose of or transfer, or announce the offering of, or file
any registration statement under the Securities Act in respect of, any
shares of Common Stock, options or warrants to acquire shares of the
Common Stock or securities exchangeable or exercisable for or
convertible into shares of Common Stock (other than as contemplated by
this Agreement with respect to the Common Shares); provided, however,
that the Company may file a registration statement on Form S-8 with
respect to, and may issue shares of its Common Stock or options to
purchase its Common Stock, or Common Stock upon exercise of options or
warrants, pursuant to any stock option, stock bonus or other stock plan
or arrangement described in the Prospectus, but only if the holders of
such shares, options, warrants or shares issued upon exercise of such
options or warrants, agree in writing not to, directly or indirectly,
sell, offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of (including by devise or descent
unless such devisees or descendants take subject to such agreement) any
such shares or options during such 180 day period without the prior
written consent of Montgomery Securities (which consent may be withheld
at the sole discretion of the Montgomery Securities) (a "Lock-Up
Agreement"); provided, further that, notwithstanding the foregoing
proviso, the Company may issue shares of its Common Stock upon exercise
of outstanding options or warrants disclosed in the Prospectus without
having first obtained a Lock-Up Agreement from such option or warrant
holder, so long as the Company shall have used its commercially
reasonable efforts to obtain such Lock-Up Agreement from such holder
prior to such exercise.
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<PAGE> 20
(xi) Future Reports to the Representatives. During the period of
five years hereafter the Company will furnish to the Representatives at
600 Montgomery Street, San Francisco, CA 94111 Attention: Karl L.
Matthies: (i) as soon as practicable after the end of each fiscal year,
copies of the Annual Report of the Company containing the balance sheet
of the Company as of the close of such fiscal year and statements of
income, stockholders' equity and cash flows for the year then ended and
the opinion thereon of the Company's independent public or certified
public accountants; (ii) as soon as practicable after the filing
thereof, copies of each proxy statement, Annual Report on Form 10-K,
Quarterly Report on Form 10-Q, Current Report on Form 8-K or other
report filed by the Company with the Commission, the NASD or any
securities exchange; and (iii) as soon as available, copies of any
report or communication of the Company mailed generally to holders of
its Common Stock.
(B) COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling Stockholder
further covenants and agrees with each Underwriter:
(i) Agreement Not to Offer or Sell Additional Securities. Such
Selling Stockholder will not, without the prior written consent of
Montgomery Securities (which consent may be withheld at the sole
discretion of Montgomery Securities), directly or indirectly, sell,
offer, contract or grant any option to sell (including without
limitation any short sale), pledge, transfer, establish an open "put
equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of (including by devise or descent
unless such devisees or descendants take subject to such agreement) any
shares of Common Stock, options or warrants to acquire shares of Common
Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under the Exchange Act) by the
undersigned, or publicly announce the undersigned's intention to do any
of the foregoing, for a period commencing on the date hereof and
continuing through the close of trading on the date 180 days after the
date of the Prospectus.
The foregoing paragraph shall not prohibit (i) bona fide gifts
made to any person or entity or (ii) distributions by a Selling
Stockholder to its partners (if the Selling Stockholder is a
partnership) or shareholders (if the Selling Stockholder is a
corporation); provided that such donee or distributee agrees in writing
to be bound by th provisions of this subsection 3(B)(i) as if it were
the Selling Stockholder named therein, which written agreement shall
have been executed and delivered to Montgomery Securities prior to such
gift or distribution.
(ii) Delivery of Forms W-8 and W-9. To deliver to the
Representatives prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Stockholder is a non-United States person) or Form W-9 (if the Selling
Stockholder is a United States Person).
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Montgomery Securities, on behalf of the several Underwriters,
may, in its sole discretion, waive in writing the performance by the Company or
any Selling Stockholder of any one or more of the foregoing covenants or extend
the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company agrees to pay all
costs, fees and expenses incurred in connection with the performance of its and
the Selling Stockholders' obligations (other than the Selling Stockholders'
obligations relating to underwriting discounts and commissions applicable to
sales by the Selling Stockholders, transfer taxes, personal taxes and any fees
and expenses of counsel engaged by the Selling Stockholders other than Cooley
Godward LLP, which discounts and commissions, transfer taxes, personal taxes and
fees of such counsel shall be paid by such Selling Stockholders) hereunder and
in connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the Common
Shares (including all printing and engraving costs), (ii) all fees and expenses
of the registrar and transfer agent of the Common Stock, (iii) all necessary
issue, transfer and other stamp taxes in connection with the issuance and sale
of the Common Shares to the Underwriters, (iv) all fees and expenses of the
Company's counsel, independent public or certified pubic accountants and other
advisors, (v) all costs and expenses incurred in connection with the
preparation, printing, filing, shipping and distribution of the Registration
Statement (including financial statements, exhibits, schedules, consents and
certificates of experts), each preliminary prospectus and the Prospectus, and
all amendments and supplements thereto, and this Agreement, (vi) all filing
fees, attorneys' fees and expenses incurred by the Company or the Underwriters
in connection with qualifying or registering (or obtaining exemptions from the
qualification or registration of) all or any part of the Common Shares for offer
and sale under the state securities or blue sky laws or the provincial
securities laws of Canada, and, if requested by the Representatives, preparing
and printing a "Blue Sky Survey" or memorandum, and any supplements thereto,
advising the Underwriters of such qualifications, registrations and exemptions,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and approval
of the Underwriters' participation in the offering and distribution of the
Common Shares, (viii) the fees and expenses associated with including the Common
Stock on the Nasdaq National Market, and (ix) all other fees, costs and expenses
referred to in Item 13 of Part II of the Registration Statement. Except as
provided in this Section 4, Section 6, Section 7 and Section 8 hereof, the
Underwriters shall pay their own expenses, including the fees and disbursements
of their counsel.
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the Company,
on the one hand, and the Selling Stockholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. The
obligations of the several Underwriters to purchase and pay for the Common
Shares as provided herein on the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date, shall be subject to the
accuracy of the representations and warranties (except that, with respect to
clause (i) of Section 1(A)(vii) hereof, subsequent to the respective dates as of
which
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information is given in the Prospectus, there shall not have been any Material
Adverse Change, except as otherwise disclosed in the Prospectus or in the
certificate delivered pursuant to Section 5(F) hereof, which exception shall not
affect the availability of the condition set forth in Section 5(C) hereof) on
the part of the Company and the Selling Stockholders set forth in Sections 1(A)
and 1(B) hereof as of the date hereof and as of the First Closing Date as though
then made and, with respect to the Optional Common Shares, as of the Second
Closing Date as though then made, to the timely performance by the Company and
the Selling Stockholders of their respective covenants and other obligations
hereunder, and to each of the following additional conditions:
(A) Accountants' Comfort Letter. On the date hereof, the
Representatives shall have received from Deloitte & Touche LLP, independent
public or certified public accountants for the Company, a letter dated the date
hereof addressed to the Underwriters, in form and substance satisfactory to the
Representatives, containing statements and information of the type ordinarily
included in accountant's "comfort letters" to underwriters, delivered according
to Statement of Auditing Standards No. 72 (or any successor bulletin), with
respect to the audited and unaudited financial statements and certain financial
information contained in the Registration Statement and the Prospectus (and the
Representatives shall have received an additional [___] conformed copies of such
accountants' letter for each of the several Underwriters).
(B) Compliance with Registration Requirements; No Stop Order; No
Objection from NASD. As of the First Closing Date and, with respect to the
Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the Prospectus with the
Commission (including the information required by Rule 430A under the
Securities Act) in the manner and within the time period required by
Rule 424(b) under the Securities Act; or the Company shall have filed a
pre- or post-effective amendment to the Registration Statement
containing the information required by such Rule 430A, and such pre- or
post-effective amendment shall have become effective; or, if the Company
elected to rely upon Rule 434 under the Securities Act and obtained the
Representatives' consent thereto, the Company shall have filed a Term
Sheet with the Commission in the manner and within the time period
required by such Rule 424(b);
(ii) no stop order suspending the effectiveness of the
Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in
effect and no proceedings for such purpose shall have been instituted or
threatened by the Commission; and
(iii) the NASD shall have raised no objection to the
fairness and reasonableness of the underwriting terms and arrangements.
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(C) No Material Adverse Change. For the period from and after the
date of this Agreement and prior to the First Closing Date and, with respect to
the Optional Common Shares, the Second Closing Date, in the judgment of the
Representatives there shall not have occurred any Material Adverse Change that
makes it impracticable to market the Common Shares in the manner and on the
terms described in the Prospectus.
(D) Opinion of Counsel for the Company. On each of the First
Closing Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Cooley Godward LLP, counsel for the Company, dated as
of such Closing Date, the form of which is attached as Exhibit A (and the
Representatives shall have received an additional [___] conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(E) Opinion of Counsel for the Underwriters. On each of the First
Closing Date and the Second Closing Date the Representatives shall have received
the favorable opinion of Orrick, Herrington & Sutcliffe LLP, counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs [(i), (vi), (vii), (viii), (ix) and (x)] and [the
next-to-last paragraph] of Exhibit A (and the Representatives shall have
received an additional [___] conformed copies of such counsel's legal opinion
for each of the several Underwriters).
(F) Officers' Certificate. On each of the First Closing Date and
the Second Closing Date the Representatives shall have received a written
certificate executed by the Chairman of the Board and Chief Executive Officer of
the Company and the Vice President, Finance, Chief Financial Officer and
Secretary of the Company, dated as of such Closing Date, to the effect set forth
in subsection 5(B)(ii) hereof, and further to the effect that:
(i) except as otherwise stated in such certificate, for
the period from and after the date of this Agreement and prior to such
Closing Date, there has not occurred any Material Adverse Change;
(ii) the representations, warranties and covenants of the
Company set forth in Section 1(A) of this Agreement are true and
correct with the same force and effect as though expressly made on and
as of such Closing Date, except, with respect solely to clause (i) of
Section 1(A)(vii), as otherwise stated in such certificate; and
(iii) the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied at
or prior to such Closing Date.
(G) Bring-down Comfort Letter. On each of the First Closing Date
and the Second Closing Date the Representatives shall have received from
Deloitte & Touche LLP, independent public or certified public accountants for
the Company, a letter dated such date, in form and substance satisfactory to the
Representatives, to the effect that they reaffirm the statements made in the
letter furnished by them pursuant to subsection 5(A) hereof, except that the
specified date referred to therein for the carrying out of procedures shall be
no more than three business days prior to the First Closing Date or Second
Closing Date, as the case may be
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(and the Representatives shall have received an additional [___] conformed
copies of such accountants' letter for each of the several Underwriters).
(H) Opinion of Counsel for the Selling Stockholders. On the First
Closing Date the Representatives shall have received the favorable opinion of
Cooley Godward LLP, counsel for those Selling Stockholders who are individuals,
and the favorable opinions of the respective counsels of each of the other
Selling Stockholders, each dated as of such Closing Date, the forms of which are
attached as Exhibit B-1 and Exhibit B-2, respectively (and the Representatives
shall have received an additional [___] conformed copies of each such counsel's
legal opinion for each of the several Underwriters).
(I) Selling Stockholders' Certificate. On the First Closing Date
the Representatives shall have received a written certificate executed by the
Attorney-in-Fact of each Selling Stockholder, dated as of such Closing Date, to
the effect that:
(i) the representations, warranties and covenants of such
Selling Stockholder set forth in Section 1(B) of this Agreement are true
and correct with the same force and effect as though expressly made by
such Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with all the
agreements and satisfied all the conditions on its part to be performed
or satisfied at or prior to such Closing Date.
(J) Selling Stockholders' Documents. On or before the date
hereof, the Company and the Selling Stockholders shall have furnished for review
by the Representatives copies of the Powers of Attorney and Custody Agreements
executed by each of the Selling Stockholders and such further information,
certificates and documents as the Representatives may reasonably request.
(K) Lock-Up Agreement from Stockholders of the Company. On or
before the date hereof, the Company shall have furnished to the Representatives
an agreement in the form of Exhibit C hereto from each director and officer and
from beneficial owners of Common Stock, options or warrants to purchase Common
Stock or any securities convertible into Common Stock representing ___% of the
Common Stock on a fully diluted basis and such agreements shall be in full force
and effect on each of the First Closing Date and the Second Closing Date.
(L) Additional Documents. On or before each of the First Closing
Date and the Second Closing Date, the Representatives and counsel for the
Underwriters shall have received such information, documents and opinions as
they may reasonably require for the purposes of enabling them to pass upon the
issuance and sale of the Common Shares as contemplated herein, or in order to
evidence the accuracy of any of the representations and warranties, or the
satisfaction of any of the conditions or agreements, herein contained.
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If any condition specified in this Section 5 hereof is not
satisfied when and as required to be satisfied, this Agreement may be terminated
by the Representatives by notice to the Company and the Selling Stockholders at
any time on or prior to the First Closing Date and, with respect to the Optional
Common Shares, at any time prior to the Second Closing Date, which termination
shall be without liability on the part of any party to any other party, except
that Section 4, Section 6, Section 7 and Section 8 hereof shall at all times be
effective and shall survive such termination.
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this
Agreement is terminated by the Representatives pursuant to Section 5, Section
10(i)(a), (iv), (v) or Section 16 hereof, or if the sale to the Underwriters of
the Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Representatives and the other
Underwriters, severally, upon demand for all out-of-pocket expenses that shall
have been reasonably incurred by the Representatives and the Underwriters in
connection with the proposed purchase and the offering and sale of the Common
Shares, including but not limited to reasonable fees and disbursements of
counsel, printing expenses, travel expenses, postage, facsimile and telephone
charges. Notwithstanding the foregoing sentence, the Representatives and the
other Underwriters shall not be entitled to such reimbursement of expenses in
the event that this Agreement is terminated by the Representatives (i) pursuant
to Section 5(C) or 10(iv), as a result of adverse changes resulting solely from
general economic conditions or conditions affecting generally the industry in
which the Company operates, or (ii) pursuant to Section 10(v), so long as the
event causing such termination shall not have interfered or be reasonably likely
to interfere materially with the conduct of the business and operations of the
Company regardless of whether or not such loss shall have been insured.
SECTION 7. INDEMNIFICATION.
(A) Indemnification of the Underwriters. The Company agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage, liability
or expense, as incurred, to which such Underwriter or such controlling person
may become subject, under the Securities Act, the Exchange Act or other federal
or state statutory law or regulation, or at common law or otherwise (including
in settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of or
is based (i) upon any untrue statement or alleged untrue statement of a material
fact contained in the Registration Statement, or any amendment thereto,
including any information deemed to be a part thereof pursuant to Rule 430A or
Rule 434 under the Securities Act, or the omission or alleged omission therefrom
of a material fact required to be stated therein or necessary to make the
statements therein not misleading; or (ii) upon any untrue statement or alleged
untrue statement of a material fact contained in any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto), or the omission or
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alleged omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading; or (iii) in whole or in part upon any inaccuracy in the
representations and warranties of the Company or the Selling Stockholders
contained herein (provided that, for purposes of the indemnification set forth
herein, the representations and warranties given in Section 1(A)(xi)hereof shall
be deemed to have been made, in each case, without reference to the Exceptions
(as defined therein)); or (iv) in whole or in part upon any failure of the
Company or the Selling Stockholders to perform their respective obligations
hereunder or under law; and to reimburse each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) as such expenses are
reasonably incurred by such Underwriter or such controlling person in connection
with investigating, defending, settling, compromising or paying any such loss,
claim, damage, liability, expense or action; provided, however, that the
foregoing indemnity agreement shall not apply to any loss, claim, damage,
liability or expense to the extent, but only to the extent, arising out of or
based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company and the Selling Stockholders by the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Common Shares, or any person controlling such Underwriter, if copies
of the Prospectus were timely delivered to the Underwriter pursuant to Section 2
hereof and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense.
Each Selling Stockholder, severally and not jointly, agrees to
indemnify and hold harmless the Company, each Underwriter, the directors,
officers, employees and agents of the Company and each Underwriter, and each
person, if any, who controls the Company or any Underwriter within the meaning
of the Securities Act or the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which the Company, such Underwriter or
such controlling person may become subject, under the Securities Act, the
Exchange Act or other federal or state statutory law or regulation, or at common
law or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of such Selling Stockholder), insofar as
such loss, claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement or
alleged untrue statement of a material fact contained in any information
provided by such Selling Stockholder specifically for use in the preparation of
the Registration Statement, or any amendment thereto, including any information
deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the
Securities Act, or the omission or alleged omission therefrom of a material fact
required to be stated therein or necessary to make the statements therein not
misleading; or (ii) upon any untrue statement or alleged untrue statement of a
material fact contained in any information provided by such Selling Stockholder
specifically for use in the
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<PAGE> 27
preparation of any preliminary prospectus or the Prospectus (or any amendment or
supplement thereto), or the omission or alleged omission therefrom of a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading; or (iii) in whole or
in part upon any inaccuracy in the representations and warranties of such
Selling Stockholder contained herein; or (iv) in whole or in part upon any
failure of the such Selling Stockholder to perform its obligations hereunder or
under law; and to reimburse the Company, each Underwriter and each such
controlling person for any and all expenses (including the fees and
disbursements of counsel chosen by Montgomery Securities) as such expenses are
reasonably incurred by the Company, such Underwriter or such controlling person
in connection with investigating, defending, settling, compromising or paying
any such loss, claim, damage, liability, expense or action; provided, however,
that the foregoing indemnity agreement shall not apply to any loss, claim,
damage, liability or expense to the extent, but only to the extent, arising out
of or based upon any untrue statement or alleged untrue statement or omission or
alleged omission made in reliance upon and in conformity with written
information furnished to the Company and the Selling Stockholders by the
Representatives expressly for use in the Registration Statement, any preliminary
prospectus or the Prospectus (or any amendment or supplement thereto); and
provided, further, that with respect to any preliminary prospectus, the
foregoing indemnity agreement shall not inure to the benefit of any Underwriter
from whom the person asserting any loss, claim, damage, liability or expense
purchased Common Shares, or any person controlling such Underwriter, if copies
of the Prospectus were timely delivered to the Underwriter pursuant to Section 2
hereof and a copy of the Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto) was not sent
or given by or on behalf of such Underwriter to such person, if required by law
so to have been delivered, at or prior to the written confirmation of the sale
of the Common Shares to such person, and if the Prospectus (as so amended or
supplemented) would have cured the defect giving rise to such loss, claim,
damage, liability or expense; and provided, further, that the liability of each
Selling Stockholder to the Company, the Underwriters or any other person shall
be limited to an amount equal to the net proceeds received (after deducting
underwriters' discounts and commissions) by such Selling Stockholder from the
sale of the Common Shares contemplated hereby.
The indemnity agreement set forth in this Section 7(A) shall be
in addition to any liabilities that the Company and the Selling Stockholders may
otherwise have.
(B) Indemnification by the Underwriters. Each Underwriter agrees,
severally and not jointly, to indemnify and hold harmless the Company, each of
its directors, each of its officers who signed the Registration Statement, the
Selling Stockholders and each person, if any, who controls the Company or any
Selling Stockholder within the meaning of the Securities Act or the Exchange
Act, against any loss, claim, damage, liability or expense, as incurred, to
which the Company, or any such director, officer, Selling Stockholder or
controlling person may become subject, under the Securities Act, the Exchange
Act, or other federal or state statutory law or regulation, or at common law or
otherwise (including in settlement of any litigation, if such settlement is
effected with the written consent of such Underwriter), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based upon any untrue or alleged untrue
statement of a material fact contained in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or
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<PAGE> 28
supplement thereto), or arises out of or is based upon the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, in each case to the
extent, but only to the extent, that such untrue statement or alleged untrue
statement or omission or alleged omission was made in the Registration
Statement, any preliminary prospectus, the Prospectus (or any amendment or
supplement thereto), in reliance upon and in conformity with written information
furnished to the Company and the Selling Stockholders by the Representatives
expressly for use therein; and to reimburse the Company, or any such director,
officer, Selling Stockholder or controlling person for any legal and other
expense reasonably incurred by the Company, or any such director, officer,
Selling Stockholder or controlling person in connection with investigating,
defending, settling, compromising or paying any such loss, claim, damage,
liability, expense or action. Each of the Company and each of the Selling
Stockholders, hereby acknowledges that the only information that the
Underwriters have furnished to the Company and the Selling Stockholders
expressly for use in the Registration Statement, any preliminary prospectus or
the Prospectus (or any amendment or supplement thereto) are the statements set
forth (A) as the first paragraph on the inside front cover page of the
Prospectus concerning stabilization by the Underwriters and (B) in the table in
the first paragraph and as the second paragraph, the third sentence of the sixth
paragraph, the seventh paragraph, the eight paragraph and the ninth paragraph
under the caption "Underwriting" in the Prospectus; and the Underwriters confirm
that such statements are correct. The indemnity agreement set forth in this
Section 7(B) shall be in addition to any liabilities that each Underwriter may
otherwise have.
(C) Notifications and Other Indemnification Procedures. Promptly
after receipt by an indemnified party under this Section 7 of notice of the
commencement of any action, such indemnified party will, if a claim in respect
thereof is to be made against an indemnifying party under this Section 7, notify
the indemnifying party in writing of the commencement thereof, but the omission
so to notify the indemnifying party will not relieve it from any liability which
it may have to any indemnified party for contribution or otherwise than under
the indemnity agreement contained in this Section 7 or to the extent it is not
prejudiced as a proximate result of such failure. In case any such action is
brought against any indemnified party and such indemnified party seeks or
intends to seek indemnity from an indemnifying party, the indemnifying party
will be entitled to participate in, and, to the extent that it shall elect,
jointly with all other indemnifying parties similarly notified, by written
notice delivered to the indemnified party promptly after receiving the aforesaid
notice from such indemnified party, to assume the defense thereof with counsel
reasonably satisfactory to such indemnified party; provided, however, if the
defendants in any such action include both the indemnified party and the
indemnifying party and the indemnified party shall have reasonably concluded
that a conflict may arise between the positions of the indemnifying party and
the indemnified party in conducting the defense of any such action or that there
may be legal defenses available to it and/or other indemnified parties which are
different from or additional to those available to the indemnifying party, the
indemnified party or parties shall have the right to select separate counsel to
assume such legal defenses and to otherwise participate in the defense of such
action on behalf of such indemnified party or parties. Upon receipt of notice
from the indemnifying party to such indemnified party of such indemnifying
party's election so to assume the defense of such action and approval by the
indemnified party of counsel, the indemnifying party will not be liable to such
indemnified party under this Section 7 for any legal or other expenses
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subsequently incurred by such indemnified party in connection with the defense
thereof unless (i) the indemnified party shall have employed separate counsel in
accordance with the proviso to the next preceding sentence (it being understood,
however, that the indemnifying party shall not be liable for the expenses of
more than one separate counsel (together with local counsel), approved by the
indemnifying party (Montgomery Securities in the case of Section 7(B) and
Section 8 hereof), representing the indemnified parties who are parties to such
action) or (ii) the indemnifying party shall not have employed counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of commencement of the action, in
each of which cases the fees and expenses of counsel shall be at the expense of
the indemnifying party.
(D) Settlements. The indemnifying party under this Section 7
shall not be liable for any settlement of any proceeding effected without its
written consent, but if settled with such consent or if there be a final
judgment for the plaintiff, the indemnifying party agrees to indemnify the
indemnified party against any loss, claim, damage, liability or expense by
reason of such settlement or judgment. Notwithstanding the foregoing sentence,
if at any time an indemnified party shall have requested an indemnifying party
to reimburse the indemnified party for reasonable fees and expenses of counsel
as contemplated by Section 7(C) hereof, the indemnifying party agrees that it
shall be liable for any reasonable settlement of any proceeding effected without
its written consent if (i) such settlement is entered into more than 60 days
after receipt by such indemnifying party of the aforesaid request and 30 days
after receipt of notice of the terms of such settlement and (ii) such
indemnifying party shall not have reimbursed the indemnified party in accordance
with such request prior to the date of such settlement; provided that, the
indemnified party shall promptly reimburse any amounts paid to or on behalf of
such indemnified party in the event such indemnification obligation is
ultimately determined to be improper whether by a court or is in excess of
amounts agreed upon through negotiation between the parties. No indemnifying
party shall, without the prior written consent of the indemnified party, effect
any settlement, compromise or consent to the entry of judgment in any pending or
threatened action, suit or proceeding in respect of which any indemnified party
is or could have been a party and indemnity was or could have been sought
hereunder by such indemnified party, unless such settlement, compromise or
consent includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such action, suit or
proceeding.
SECTION 8. CONTRIBUTION.
If the indemnification provided for in Section 7 hereof is for
any reason held to be unavailable to or otherwise insufficient to hold harmless
an indemnified party in respect of any losses, claims, damages, liabilities or
expenses referred to therein, then each indemnifying party shall contribute to
the aggregate amount paid or payable by such indemnified party, as incurred, as
a result of any losses, claims, damages, liabilities or expenses referred to
therein (i) in such proportion as is appropriate to reflect the relative
benefits received by the Company and each Selling Stockholder severally and not
jointly, on the one hand, and the Underwriters, on the other hand, from the
offering of the Common Shares pursuant to this Agreement or (ii) if the
allocation provided by clause (i) above is not permitted by applicable law, in
such proportion
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as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company and each Selling
Stockholder severally and not jointly, on the one hand, and the Underwriters, on
the other hand, in connection with the statements or omissions or inaccuracies
in the representations and warranties herein which resulted in such losses,
claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations provided, however, that in no case shall any Selling
Stockholder be liable or responsible for any amount in excess of the net
proceeds received (after deducting the Underwriters' discounts and commissions)
by such Selling Stockholder in the offering, provided, further, that the Company
shall be responsible for any amounts that would have been allocable to a Selling
Stockholder but for such limitation. The relative benefits received by the
Company and the Selling Stockholders, on the one hand, and the Underwriters, on
the other hand, in connection with the offering of the Common Shares pursuant to
this Agreement shall be deemed to be in the same respective proportions as the
total net proceeds from the offering of the Common Shares pursuant to this
Agreement (before deducting expenses) received by the Company and the Selling
Stockholders, and the total underwriting discount received by the Underwriters,
in each case as set forth on the front cover page of the Prospectus (or, if Rule
434 under the Securities Act is used, the corresponding location on the Term
Sheet) bear to the aggregate initial public offering price of the Common Shares
as set forth on such cover. The relative fault of the Company and each Selling
Stockholder, on the one hand, and the Underwriters, on the other hand, shall be
determined by reference to, among other things, whether any such untrue or
alleged untrue statement of a material fact or omission or alleged omission to
state a material fact or any such inaccurate or alleged inaccurate
representation or warranty relates to information supplied by the Company or a
Selling Stockholder, on the one hand, or the Underwriters, on the other hand,
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the losses,
claims, damages, liabilities and expenses referred to above shall be deemed to
include, subject to the limitations set forth in Section 7(C) hereof, any legal
or other fees or expenses reasonably incurred by such party in connection with
investigating or defending any action or claim. The provisions set forth in
Section 7(C) hereof with respect to notice of commencement of any action shall
apply if a claim for contribution is to be made under this Section 8; provided,
however, that no additional notice shall be required with respect to any action
for which notice has been given under Section 7(C) hereof for purposes of
indemnification.
The Company, the Selling Stockholders and the Underwriters agree
that it would not be just and equitable if contribution pursuant to this Section
8 were determined by pro rata allocation (even if the Underwriters were treated
as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to in this Section 8.
Notwithstanding the provisions of this Section 8, no Underwriter
shall be required to contribute any amount in excess of the underwriting
discount received by such Underwriter in connection with the Common Shares
underwritten by it. No person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. The
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Underwriters' obligations to contribute pursuant to this Section 8 are several,
and not joint, in proportion to their respective underwriting commitments as set
forth opposite their names in Schedule A. For purposes of this Section 8, each
officer and employee of an Underwriter and each person, if any, who controls an
Underwriter within the meaning of the Securities Act and the Exchange Act shall
have the same rights to contribution as such Underwriter, and each director of
the Company, each officer of the Company who signed the Registration Statement,
and each person, if any, who controls the Company with the meaning of the
Securities Act and the Exchange Act shall have the same rights to contribution
as the Company.
SECTION 9. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS.
If, on the First Closing Date or the Second Closing Date, as the case may be,
any one or more of the several Underwriters shall fail or refuse to purchase
Common Shares that it or they have agreed to purchase hereunder on such date,
and the aggregate number of Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase does not exceed 10% of the
aggregate number of the Common Shares to be purchased on such date, the other
Underwriters shall be obligated, severally, in the proportions that the number
of Firm Common Shares set forth opposite their respective names on Schedule A
bears to the aggregate number of Firm Common Shares set forth opposite the names
of all such non-defaulting Underwriters, or in such other proportions as may be
specified by the Representatives with the consent of the non-defaulting
Underwriters, to purchase the Common Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase on such date. If, on the
First Closing Date or the Second Closing Date, as the case may be, any one or
more of the Underwriters shall fail or refuse to purchase Common Shares and the
aggregate number of Common Shares with respect to which such default occurs
exceeds 10% of the aggregate number of Common Shares to be purchased on such
date, and arrangements satisfactory to the Representatives and the Company for
the purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 6, Section 7 and
Section 8 hereof shall at all times be effective and shall survive such
termination. In any such case either the Representatives or the Company shall
have the right to postpone the First Closing Date or the Second Closing Date, as
the case may be, but in no event for longer than seven days in order that the
required changes, if any, to the Registration Statement and the Prospectus or
any other documents or arrangements may be effected.
As used in this Agreement, the term "Underwriter" shall be deemed
to include any person substituted for a defaulting Underwriter under this
Section 9. Any action taken under this Section 9 shall not relieve any
defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 10. TERMINATION OF THIS AGREEMENT. Prior to the First
Closing Date this Agreement may be terminated by the Representatives by notice
given to the Company and the Selling Stockholders if at any time (i)(a) trading
or quotation in any of the Company's securities shall have been suspended or
limited by the Commission or by the Nasdaq Stock Market, or (b) trading in
securities generally on either the Nasdaq Stock Market or the New
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York Stock Exchange shall have been suspended or limited, or minimum or maximum
prices shall have been generally established on any of such stock exchanges by
the Commission or the NASD; (ii) a general banking moratorium shall have been
declared by any of federal, New York, Delaware or California authorities; (iii)
there shall have occurred any outbreak or escalation of national or
international hostilities or any crisis or calamity, or any change in the United
States or international financial markets, or any substantial change or
development involving a prospective substantial change in United States' or
international political, financial or economic conditions, as in the judgment of
the Representatives is material and adverse and makes it impracticable to market
the Common Shares in the manner and on the terms described in the Prospectus or
to enforce contracts for the sale of securities; (iv) in the judgment of the
Representatives there shall have occurred any Material Adverse Change that makes
it impracticable to market the Common Shares in the manner and on the terms
described in the Prospectus; or (v) the Company shall have sustained a loss by
strike, fire, flood, earthquake, accident or other calamity of such character as
in the judgment of the Representatives would be reasonably likely to interfere
materially with the conduct of the business and operations of the Company
regardless of whether or not such loss shall have been insured. Any termination
pursuant to this Section 10 shall be without liability on the part of (a) the
Company or the Selling Stockholders to any Underwriter, except that the Company
shall be obligated to reimburse the expenses of the Representatives and the
Underwriters pursuant to Sections 4 and 6 hereof, (b) any Underwriter to the
Company or the Selling Stockholders, or (c) any party hereto to any other party
except that the provisions of Section 7 and Section 8 hereof shall at all times
be effective and shall survive such termination.
SECTION 11. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY.
The respective indemnities, agreements, representations, warranties and other
statements of the Company, its officers, the Selling Stockholders and the
several Underwriters set forth in or made pursuant to this Agreement will remain
in full force and effect, regardless of any investigation made by or on behalf
of any Underwriter or the Company or any of its or their partners, officers or
directors or any controlling person, or the Selling Stockholders, as the case
may be, and will survive delivery of and payment for the Common Shares sold
hereunder and any termination of this Agreement.
SECTION 12. NOTICES. All communications hereunder shall be in
writing and shall be mailed, hand delivered or telecopied and confirmed to the
parties hereto as follows:
If to the Representatives:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: 415-249-5558
Attention: Richard A. Smith
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with a copy to:
Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Il Fornaio (America) Corporation
1000 Sansome Street
San Francisco, California 94111
Facsimile: (415) 956-2879
Attention: Laurence B. Mindel
If to the Selling Stockholders:
BankBoston
150 Royall Street
Mail Stop 45-02-62
Canton, MA 02021
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by giving
written notice to the others.
SECTION 13. SUCCESSORS. This Agreement will inure to the benefit
of and be binding upon the parties hereto, including any substitute Underwriters
pursuant to Section 9 hereof, and to the benefit of the employees, officers and
directors and controlling persons referred to in Section 7 and Section 8 hereof,
and in each case their respective successors, and personal representatives, and
no other person will have any right or obligation hereunder. The term
"successors" shall not include any purchaser of the Common Shares as such from
any of the Underwriters merely by reason of such purchase.
SECTION 14. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement shall
not affect the validity or enforceability of any other Section, paragraph or
provision hereof. If any Section, paragraph or provision of this Agreement is
for any reason determined to be invalid or unenforceable, there shall be deemed
to be made such minor changes (and only such minor changes) as are necessary to
make it valid and enforceable.
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SECTION 15. GOVERNING LAW PROVISIONS.
(A) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF CALIFORNIA
APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH STATE.
(B) Consent to Jurisdiction. Any legal suit, action or proceeding
arising out of or based upon this Agreement or the transactions contemplated
hereby ("Related Proceedings") may be instituted in the federal courts of the
United States of America located in the City and County of San Francisco or the
courts of the State of California in each case located in the City and County of
San Francisco (collectively, the "Specified Courts"), and each party irrevocably
submits to the exclusive jurisdiction (except for proceedings instituted in
regard to the enforcement of a judgment of any such court (a "Related
Judgment"), as to which such jurisdiction is non-exclusive) of such courts in
any such suit, action or proceeding. Service of any process, summons, notice or
document by mail to such party's address set forth above shall be effective
service of process for any suit, action or other proceeding brought in any such
court. The parties irrevocably and unconditionally waive any objection to the
laying of venue of any suit, action or other proceeding in the Specified Courts
and irrevocably and unconditionally waive and agree not to plead or claim in any
such court that any such suit, action or other proceeding brought in any such
court has been brought in an inconvenient forum. Each party not located in the
United States irrevocably appoints CT Corporation System, which currently
maintains a San Francisco office at 49 Stevenson Street, San Francisco,
California 94105, United States of America, as its agent to receive service of
process or other legal summons for purposes of any such suit, action or
proceeding that may be instituted in any state or federal court in the City and
County of San Francisco.
SECTION 16. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO
SELL AND DELIVER COMMON SHARES. If (A) one or more of the Selling Stockholders
shall fail to sell and deliver to the Underwriters the Common Shares to be sold
and delivered by such Selling Stockholders at the First Closing Date pursuant to
this Agreement and (B) the Company shall fail or be unable to sell and deliver
to the Underwriters an additional amount of Common Shares equal to the number of
Common Shares to be sold and delivered by such Selling Stockholder at the First
Closing Date without delay, then the Underwriters may at their option, by
written notice from the Representatives to the Company and the Selling
Stockholders, either (i) terminate this Agreement without any liability on the
part of any Underwriter or, except as provided in Sections 4, 6, 7 and 8 hereof,
the Company or the Selling Stockholders, or (ii) purchase the shares which the
Company and other Selling Stockholders have agreed to sell and deliver in
accordance with the terms hereof. If one or more of the Selling Stockholders
shall fail to sell and deliver to the Underwriters the Common Shares to be sold
and delivered by such Selling Stockholders pursuant to this Agreement at the
First Closing Date, then the Underwriters shall have the right, by written
notice from the Representatives to the Company and the Selling Stockholders, to
postpone the First Closing Date, but in no event for longer than seven days in
order that the required changes, if any, to the Registration Statement and the
Prospectus or any other documents or arrangements may be effected.
30
<PAGE> 35
SECTION 17. GENERAL PROVISIONS. This Agreement constitutes the
entire agreement of the parties to this Agreement and supersedes all prior
written or oral and all contemporaneous oral agreements, understandings and
negotiations with respect to the subject matter hereof. This Agreement may be
executed in two or more counterparts, each one of which shall be an original,
with the same effect as if the signatures thereto and hereto were upon the same
instrument. This Agreement may not be amended or modified unless in writing by
all of the parties hereto, and no condition herein (express or implied) may be
waived unless waived in writing by each party whom the condition is meant to
benefit. The Table of Contents and the Section headings herein are for the
convenience of the parties only and shall not affect the construction or
interpretation of this Agreement.
Each of the parties hereto acknowledges that it is a
sophisticated business person who was adequately represented by counsel during
negotiations regarding the provisions hereof, including, without limitation, the
indemnification provisions of Section 7 hereof and the contribution provisions
of Section 8 hereof, and is fully informed regarding said provisions. Each of
the parties hereto further acknowledges that the provisions of Sections 7 and 8
hereof fairly allocate the risks in light of the ability of the parties to
investigate the Company, its affairs and its business in order to assure that
adequate disclosure has been made in the Registration Statement, any preliminary
prospectus and the Prospectus (and any amendments and supplements thereto), as
required by the Securities Act and the Exchange Act.
[Signature Page Next]
31
<PAGE> 36
If the foregoing is in accordance with your understanding of our
agreement, kindly sign and return to the Company and the Custodian the enclosed
copies hereof, whereupon this instrument, along with all counterparts hereof,
shall become a binding agreement in accordance with its terms.
Very truly yours,
IL FORNAIO (AMERICA) CORPORATION
By:
-----------------------------------------
Laurence B. Mindel
Chairman of the Board and
Chief Executive Officer
SELLING STOCKHOLDERS
By:
-----------------------------------------
(Attorney-in-fact)
32
<PAGE> 37
The foregoing Underwriting Agreement is hereby confirmed and accepted by
the Representatives in San Francisco, California as of the date first above
written.
MONTGOMERY SECURITIES
BT ALEX. BROWN INCORPORATED
Acting as Representatives of the
several Underwriters named in
the attached Schedule A.
By: MONTGOMERY SECURITIES
By:
--------------------------------------
Authorized Signatory
33
<PAGE> 38
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON
SHARES TO BE
UNDERWRITERS PURCHASED
<S> <C>
Montgomery Securities.......................... [ ]
---------
BT Alex. Brown Incorporated.................... [ ]
---------
[_____]........................................ [ ]
---------
[_____]........................................ [ ]
---------
[_____]........................................ [ ]
---------
[_____]........................................ [ ]
---------
Total........................... [1,500,000]
=========
</TABLE>
<PAGE> 39
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
FIRM COMMON
SHARES TO BE
SELLING STOCKHOLDER SOLD
<S> <C>
Selling Stockholder #1
[address]
Attention: [_____].......................................... [ ]
-------
Selling Stockholder #2
[address]
Attention: [_____].......................................... [ ]
--------
Total........................................ [500,000]
========
</TABLE>
<PAGE> 40
EXHIBIT A(5)
Opinion of counsel for the Company to be delivered pursuant to
Section 5(D) of the Underwriting Agreement.
References to the Prospectus in this Exhibit A include any
supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Delaware.
(ii) The Company has the requisite corporate power and authority
to own, lease and operate its property and assets and to conduct its
business as described in the Prospectus and to enter into and perform
its obligations under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in California, Colorado,
Nevada, Oregon and Washington and, to the best of such counsel's
knowledge, is not required to qualify as a foreign corporation to do
business in any other jurisdiction in the United States (other than
California, Colorado, Nevada, Oregon and Washington) where the failure
to so qualify or to be in good standing would, individually or in the
aggregate, result in a Material Adverse Change.
(iv) The Company has __________ authorized shares of capital
stock, consisting of __________ shares of Common Stock and __________
shares of Preferred Stock. Immediately prior to the date of this opinion
letter, there were __________ shares of Common Stock, __________ shares
of Series A Preferred Stock, __________ shares of Series B Preferred
Stock, __________ shares of Series C Preferred Stock, __________ shares
of Series D Preferred Stock, __________ shares of Series E Preferred
Stock and __________ shares of Series F Preferred Stock issued and
outstanding. Except as described in Section 1(A)(xi) "Capitalization and
Other Stockholder Matters" in the Underwriting Agreement (the
"Exceptions"), all of the outstanding shares of Common Stock (including
the shares of Common Stock owned by Selling Stockholders) have been duly
authorized and validly issued, are fully paid and nonassessable. The
form of certificate used to evidence shares of the Company's common
stock included as Exhibit 4.2 to the Registration Statement is in due
and proper form under Delaware law, and complies with all applicable
requirements of the certificate of incorporation and by-laws of the
Company and the General Corporation Law of the State of Delaware.
- --------
(5) The final opinion in draft form must be attached as Exhibit A at the
time this Agreement is executed.
A-1
<PAGE> 41
(v) Except as disclosed in the Prospectus and the Exceptions, to
the best of such counsel's knowledge, there are no outstanding options,
warrants or other rights calling for the issuance of, and no commitments
to issue any shares of capital stock of the Company or any security
convertible into or exchangeable for capital stock of the Company.
(vi) Except as described in the Exceptions, no stockholder of the
Company or any other person has any preemptive right, right of first
refusal or other similar right to subscribe for or purchase securities
of the Company arising (i) by operation of the certificate of
incorporation or by-laws of the Company or under the General Corporation
Law of the State of Delaware or, (ii) to the best of such counsel's
knowledge, under any agreement to which the Company is a party.
(vii) The Underwriting Agreement has been duly authorized,
executed and delivered by, and is a valid and binding agreement of, the
Company, enforceable in accordance with its terms, except as rights to
indemnification and contribution thereunder may be limited by applicable
laws and except as the enforcement thereof may be limited by bankruptcy,
insolvency, reorganization, arrangement, moratorium or other similar
laws relating to or affecting creditors' rights generally and subject to
general equity principles and to limitations on availability of
equitable relief, including specific performance.
(viii) The [Firm] Common Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and
sale pursuant to the Underwriting Agreement and, when issued and
delivered by the Company pursuant to the Underwriting Agreement against
payment of the consideration set forth therein, will be validly issued,
fully paid and nonassessable.
(ix) [Each of] the Registration Statement [and the Rule 462(b)
Registration Statement, if any,] has been declared effective by the
Commission under the Securities Act of 1933, as amended, including the
rules and regulations promulgated thereunder (collectively, the
"Securities Act"). To the best knowledge of such counsel, no stop order
suspending the effectiveness of [either of] the Registration Statement
[or the Rule 462(b) Registration Statement, if any,] has been issued
under the Securities Act and no proceedings for such purpose have been
instituted or are pending or threatened by the Commission. Any required
filing of the Prospectus [and any supplement thereto] pursuant to Rule
424(b) under the Securities Act has been made in the manner and within
the time period required by such Rule 424(b).
(x) The Registration Statement[, including any Rule 462(b)
Registration Statement,] the Prospectus, and each amendment or
supplement to the Registration Statement and the Prospectus, as of their
respective effective or issue dates (other than the financial
statements, notes thereto and related statements, schedules and other
financial and statistical information included therein or in exhibits to
or excluded from the Registration Statement, as to which no opinion need
be rendered) comply as to form in all material respects with the
applicable requirements of the Securities Act.
A-2
<PAGE> 42
(xi) The Common Shares have been approved for inclusion on the
Nasdaq National Market, subject only to official notice of issuance.
(xii) The statements (i) in the Prospectus under the captions
"Management--Board Composition," "Management--Board Committees,"
"Management--Employment Agreement," "Management--Employee Benefit
Plans," "Certain Transactions," "Description of Capital Stock" and
"Shares Eligible for Future Sale" and (ii) in Item 14 of the
Registration Statement, insofar as such statements constitute matters of
law, summaries of legal matters, the Company's certificate of
incorporation or by-law provisions, documents or legal proceedings, or
legal conclusions, has been reviewed by such counsel and fairly
summarize, to the extent required under the Securities Act the matters
referred to therein.
(xiii) To the best knowledge of such counsel, there are no legal
or governmental actions, suits or proceedings pending or threatened
which are required, under the Securities Act, to be disclosed in the
Registration Statement, other than those disclosed therein.
(xiv) To the best knowledge of such counsel, there are no
Existing Instruments required to be described or referred to in the
Registration Statement or to be filed as exhibits thereto under the
Securities Act other than those described or referred to therein or
filed as exhibits thereto.
(xv) No consent, approval, authorization or other order of, or
registration or filing with, any court or other governmental authority
or agency, is required for the Company's execution, delivery and
performance of the Underwriting Agreement and the Company's consummation
of the transactions contemplated thereby and by the Prospectus, except
as required under the Securities Act, applicable state securities or
blue sky laws and the clearance of such offering with the NASD.
(xvi) The execution and delivery of the Underwriting Agreement by
the Company and the performance by the Company of its obligations
thereunder (other than performance by the Company of its obligations
under the indemnification and contribution sections of the Underwriting
Agreement, as to which no opinion need be rendered) (i) have been duly
authorized by all necessary corporate action on the part of the Company;
(ii) will not result in any violation of the provisions of the charter
or by-laws of the Company; (iii) will not constitute a material breach
of, or material Default under or result in the creation or imposition of
any material lien, charge or encumbrance upon any property or assets of
the Company under any material Existing Instrument; or (iv) to the best
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable
to the Company, which would materially and adversely affect the Company,
its assets, financial condition or operations.
(xvii) No persons have registration or other similar rights under
the Company's certificate of incorporation, by-laws or any agreement or
contract, known to such counsel
A-3
<PAGE> 43
and to which the Company is a party, to have any equity or debt
securities registered for sale under the Registration Statement or
included in the offering contemplated by the Underwriting Agreement.
(xviii) To the best knowledge of such counsel, the Company is not
in violation of its Certificate of Incorporation or by-laws.
In addition, such counsel shall state that they have participated
in conferences with officers and other representatives of the Company,
representatives of the independent public or certified public accountants for
the Company and with representatives of the Underwriters at which the contents
of the Registration Statement and the Prospectus, and any supplements or
amendments thereto, and related matters were discussed and, although such
counsel is not passing upon and does not assume any responsibility for the
accuracy, completeness or fairness of the statements contained in the
Registration Statement or the Prospectus (other than as specified in paragraph
above), and any supplements or amendments thereto, on the basis of the
foregoing, nothing has come to their attention which would lead them to believe
that [either] the Registration Statement [or any amendments thereto], at the
time the Registration Statement [or such amendments] became effective, contained
an untrue statement of a material fact or omitted to state a material fact
required to be stated therein or necessary to make the statements therein not
misleading or that the Prospectus, as of its date or at the First Closing Date
or the Second Closing Date, as the case may be, contained an untrue statement of
a material fact or omitted to state a material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading (it being understood that such counsel need express no
belief as to the financial statements schedules and other financial and
statistical information, included in the Registration Statement or the
Prospectus or any amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law of
the State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date or the Second Closing Date, as the case may be,
shall be satisfactory in form and substance to the Underwriters, shall expressly
state that the Underwriters may rely on such opinion as if it were addressed to
them and shall be furnished to the Representatives) of other counsel of good
standing whom they believe to be reliable and who are satisfactory to counsel
for the Underwriters; provided, however, that such counsel shall further state
that they believe that they and the Underwriters are justified in relying upon
such opinion of other counsel, and (B) as to matters of fact, to the extent they
deem proper, on certificates of responsible officers of the Company and public
officials.
A-4
<PAGE> 44
EXHIBIT B-1(6)
Opinion for Individual Selling Stockholders
The opinion of such counsel pursuant to Section 5(H) shall be
rendered to the Representatives at the request of the Company and shall so
state therein. References to the Prospectus in this Exhibit B-1 include any
supplements thereto at the Closing Date.
(i) The Underwriting Agreement has been duly executed and
delivered by or on behalf of, and is a valid and binding agreement of,
each Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification and contribution thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally and
subject to general equity principles and to limitations on availability
of equitable relief, including specific performance.
(ii) To the best of such counsel's knowledge, the execution and
delivery by each Selling Stockholder of, and the performance by such
Selling Stockholder of its obligations under, the Underwriting Agreement
and its Custody Agreement and its Power of Attorney will not violate or
contravene any provision of applicable law or regulation (except for
applicable state securities or blue sky laws as to which no opinion need
be expressed).
(iii) To the best of such counsel's knowledge, each Selling
Stockholder has record title to all of the Common Shares which may be
sold by such Selling Stockholder under the Underwriting Agreement.
(iv) Each of the Custody Agreement and Power of Attorney of each
Selling Stockholder has been executed and delivered by such Selling
Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights
to indemnification and contribution thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and subject to
general equity principles and to limitations on availability of
equitable relief, including specific performance.
(v) Assuming that the Underwriters purchase the Common Shares
which are sold by each Selling Stockholder pursuant to the Underwriting
Agreement for value, in good faith and without notice of any adverse
claim, the delivery of such Common Shares pursuant to the Underwriting
Agreement will pass good and valid title to such Common Shares, free and
clear of any adverse claim.
- --------
(6) The final opinion in draft form must be attached as Exhibit B-1 at
the time this Agreement is executed.
B-1-1
<PAGE> 45
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for the
consummation by each Selling Stockholder of the transactions
contemplated in the Underwriting Agreement, except as required under the
Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, applicable state securities or blue sky laws,
and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law of
the State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion, upon the opinion (which shall be
dated the First Closing Date shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Representatives) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; provided,
however, that such counsel shall further state that they believe that they and
the Underwriters are justified in relying upon such opinion of other counsel,
and (B) as to matters of fact, to the extent they deem proper, on certificates
of the Selling Stockholders and public officials.
B-1-2
<PAGE> 46
EXHIBIT B-2(7)
Opinion for Corporate Selling Stockholders
(to be rendered by such entity's regular counsel
acceptable to the Underwriters)
The opinion of such counsel pursuant to Section 5(H) shall be
rendered to the Representatives at the request of the Company and shall so state
therein. References to the Prospectus in this Exhibit B-2 include any
supplements thereto at the Closing Date.
(i) The Underwriting Agreement has been duly authorized, executed
and delivered by or on behalf of, and is a valid and binding agreement
of, each Selling Stockholder, enforceable in accordance with its terms,
except as rights to indemnification and contribution thereunder may be
limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting creditors' rights generally and
subject to general equity principles and to limitations on availability
of equitable relief, including specific performance.
(ii) The execution and delivery by each Selling Stockholder of,
and the performance by such Selling Stockholder of its obligations
under, the Underwriting Agreement and its Custody Agreement and its
Power of Attorney will not contravene or conflict with, result in a
breach of, or constitute a default under, the charter or by-laws,
partnership agreement, trust agreement or other organizational
documents, as the case may be, of such Selling Stockholder, or, to the
best of such counsel's knowledge, violate or contravene any provision of
applicable law or regulation (except for the Securities Act, applicable
state securities or blue sky laws as to which no opinion need be
expressed), or, to the best of such counsel's knowledge, violate, result
in a breach of or constitute a default under the terms of any other
agreement or instrument to which such Selling Stockholder is a party or
by which it is bound, or any judgment, order or decree applicable to
such Selling Stockholder of any court, regulatory body, administrative
agency, governmental body or arbitrator having jurisdiction over such
Selling Stockholder.
(iii) To the best of such counsel's knowledge, each Selling
Stockholder has record title to all of the Common Shares which may be
sold by such Selling Stockholder under the Underwriting Agreement and
has the corporate, partnership or trust right and power, and all
authorizations and approvals required under its charter and by-laws,
partnership agreement, trust agreement or other organizational
documents, as the case may be, to enter into the Underwriting Agreement
and its Custody Agreement and its Power of Attorney, to sell, transfer
and deliver all of the Common Shares which may sold by such Selling
Stockholder under the Underwriting Agreement and to comply with
- --------
(7) The final opinion in draft form must be attached as Exhibit B-2 at
the time this Agreement is executed.
B-2-1
<PAGE> 47
its other obligations under the Underwriting Agreement, its Custody
Agreement and its Power of Attorney.
(iv) Each of the Custody Agreement and Power of Attorney of each
Selling Stockholder has been duly authorized, executed and delivered by
such Selling Stockholder and is a valid and binding agreement of such
Selling Stockholder, enforceable in accordance with its terms, except as
rights to indemnification and contribution thereunder may be limited by
applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally and subject to
general equity principles and to limitations on availability of
equitable relief, including specific performance.
(v) Assuming that the Underwriters purchase the Common Shares
which are sold by each Selling Stockholder pursuant to the Underwriting
Agreement for value, in good faith and without notice of any adverse
claim, the delivery of such Common Shares pursuant to the Underwriting
Agreement will pass good and valid title to such Common Shares, free and
clear of any adverse claim.
(vi) To the best of such counsel's knowledge, no consent,
approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for the
consummation by each Selling Stockholder of the transactions
contemplated in the Underwriting Agreement, except as required under the
Securities Act of 1933, as amended, the rules and regulations
promulgated thereunder, applicable state securities or blue sky laws,
and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law of
the [state or commonwealth of the entity's organization] or the federal law of
the United States, to the extent they deem proper and specified in such opinion,
upon the opinion (which shall be dated the First Closing Date shall be
satisfactory in form and substance to the Underwriters, shall expressly state
that the Underwriters may rely on such opinion as if it were addressed to them
and shall be furnished to the Representatives) of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters; provided, however, that such counsel shall further state that they
believe that they and the Underwriters are justified in relying upon such
opinion of other counsel, and (B) as to matters of fact, to the extent they deem
proper, on certificates of the Selling Stockholders and public officials
B-2-2
<PAGE> 48
EXHIBIT C
[Date]
Montgomery Securities
BT Alex. Brown Incorporated
As Representatives of the Several Underwriters
c/o Montgomery Securities
600 Montgomery Street
San Francisco, California 94111
RE: Il Fornaio (America) Corporation (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into or
exchangeable or exercisable for Common Stock. The Company proposes to carry out
a public offering of Common Stock (the "Offering") for which you will act as the
representatives of the underwriters. The undersigned recognizes that the
Offering will be of benefit to the undersigned and will benefit the Company by,
among other things, raising additional capital for its operations. The
undersigned acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of Montgomery Securities
(which consent may be withheld at the sole discretion of Montgomery Securities),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Securities Exchange Act of 1934, or otherwise dispose of (other than by devise
or descent) any shares of Common Stock, options or warrants to acquire shares of
Common Stock, or securities exchangeable or exercisable for or convertible into
shares of Common Stock currently or hereafter owned either of record or
beneficially (as defined in Rule 13d-3 under Securities Exchange Act of 1934, as
amended) by the undersigned, or publicly announce the undersigned's intention to
do any of the foregoing, for a period commencing on the date hereof and
continuing through the close of trading on the date 180 days after the date of
the Prospectus. The foregoing paragraph shall not prohibit (i) bona fide gifts
made to any person or entity or (ii) distributions by the undersigned to its
partners (if the undersigned is a partnership) or shareholders (if the
undersigned is a corporation); provided that such donee or distributee agrees in
writing to be bound by the provisions of this letter as if it were the
undersigned referred to herein, which written agreement shall have been executed
and delivered to Montgomery Securities prior to such gift or distribution. The
undersigned also agrees and consents to the entry of stop transfer instructions
with the Company's transfer agent and registrar against the transfer of shares
of
C-1
<PAGE> 49
Common Stock or securities convertible into or exchangeable or exercisable for
Common Stock held by the undersigned except in compliance with the foregoing
restrictions.
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of 1933, as amended, of
any Common Stock owned either of record or beneficially by the undersigned,
including any rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
- ------------------------------------
Printed Name of Holder
By:
---------------------------------
Signature
- ------------------------------------
Printed Name of Person Signing
(and indicate capacity of person signing if
signing as custodian, trustee, or on behalf
of an entity)
C-2
<PAGE> 1
Exhibit 5.1
September 15, 1997
Il Fornaio (America) Corporation
1000 Sansome Street
San Francisco, CA 94111
Ladies and Gentlemen:
You have requested our opinion with respect to certain matters in connection
with the filing by Il Fornaio (America) Corporation (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission, including a related prospectus filing with
the Registration Statement (the "Prospectus"), and the public offering of up to
1,725,000 shares of the Company's common stock, including up to 225,000 shares
that may be sold pursuant to the exercise of an over-allotment option, and up
to 500,000 shares that may be sold by certain selling stockholders
(collectively, the "Shares").
In connection with this opinion, we have examined the Registration Statement
and related Prospectus, your Certificate of Incorporation and By-laws, as
amended, and such other documents, records, certificates, memoranda and other
instruments as we deem necessary as a basis for this opinion. We have assumed
the genuineness and authenticity of all documents submitted to us as originals,
the conformity to originals of all documents submitted to us as copies
thereof, the due execution and delivery of all documents where due execution and
delivery are a prerequisite to the effectiveness thereof, and that the Shares
will be sold to the Underwriters at a price established by the Pricing Committee
of the Company's Board of Directors.
On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the Shares to be sold by the selling stockholders are validly issued,
fully paid and non-assessable and that the Shares to be sold by the Company,
when sold and issued in accordance with the Registration Statement and related
Prospectus, will be validly issued, fully paid, and nonassessable.
We consent to the reference to the reference to our firm under the caption
"Legal Matters" in the Prospectus included in the Registration Statement and to
the filing of to this opinion as an exhibit to the Registration Statement.
Very truly yours,
COOLEY GODWARD LLP
/s/ KENNETH L. GUERNSEY
- --------------------------
Kenneth L. Guernsey
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 3 to Registration Statement No.
333-23605 of Il Fornaio (America) Corporation of our report dated March 3, 1997
appearing in the Prospectus, which is a part of such Registration Statement, and
to the reference to us under the headings "Selected Financial Data" and
"Experts" in such Prospectus.
/s/ DELOITTE & TOUCHE LLP
- --------------------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
September 12, 1997
