<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 1, 1997
REGISTRATION NO. 333-23605
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
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)
------------------------
<TABLE>
<S> <C> <C>
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:
<TABLE>
<S> <C>
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 JULY 1, 1997
1,500,000 SHARES
[IL FORNAIO 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.
<TABLE>
<CAPTION>
==========================================================================================
Proceeds to
Price to Underwriting Proceeds to Selling
Public Discount(1) Company (2) Stockholders
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 ALEX. BROWN & SONS
INCORPORATED
, 1997
<PAGE> 3
[ILLUSTRATIONS]
------------------------
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."
The Company intends to furnish to its stockholders annual reports
containing financial statements audited by its independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited interim financial information.
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.
<PAGE> 4
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 from a
wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a
wood-burning oven, soups, salads and desserts. The Il Fornaio dining experience
is complemented 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 high 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 high
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 approximately $20.93, provide an excellent dining
value.
The Company operates 11 restaurants in California and has most recently
opened two 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 a location in Santa Monica, California, for which
a lease has been signed. The Company expects that most of its planned
restaurants will range in size from 7,000 to 10,000 square feet. The total
investment by the Company per restaurant, net of anticipated landlord
3
<PAGE> 5
contributions, is estimated to be 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.
THE OFFERING
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<S> <C>
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........................................ 5,582,906 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 June 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> 6
SUMMARY FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE, OPERATING AND FOOTNOTE DATA)
<TABLE>
<CAPTION>
YEAR ENDED(1)
---------------------------------------------------------------------------
DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993(2) 1994 1995(3)(4) 1996(5)
------------ ------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Restaurants..................... $ 30,737 $ 42,402 $ 39,485 $ 43,647 $50,599
Wholesale bakeries.............. 4,049 4,328 4,951 5,181 6,016
Retail bakeries................. 3,727 4,866 5,208 5,312 4,137
------- ------- ------- ------- -------
Total revenues.......... 38,513 51,596 49,644 54,140 60,752
Income from operations............ 716 (2,670) 2,300 2,013 2,224
Income (loss) before provision
(benefit) for income taxes...... 687 (2,820) 2,247 2,072 2,351
Provision (benefit) for income
taxes........................... 6 70 332 (2,432) 898
Net income (loss)................. 681 (2,890) 1,915 4,504 1,453
Net income (loss) per share (fully
diluted)........................ $ 0.20 $ (0.67) $ 0.43 $ 1.00 $ 0.32
Weighted average common shares
outstanding (fully diluted)..... 3,424 4,344 4,477 4,499 4,839
OPERATING DATA:
Comparable restaurant sales
increase (decrease)(6).......... 1.5% (4.8%) (3.4%) (1.7%) 4.8%
Restaurants open at end of
period(7)....................... 9 9 9 11 12
Wholesale bakeries open at end of
period.......................... 5 6 6 6 6
Retail bakeries open at end of
period.......................... 6 9 8 8 4
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DECEMBER 29, 1996
------------------------------
ACTUAL AS ADJUSTED(8)
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<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................................. $ 158 $ 8,376
Total assets................................................................. 34,855 43,073
Long-term debt (excluding current portion)................................... -- --
Stockholders' equity......................................................... 22,936 31,154
</TABLE>
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(1) All years reported include 52 weeks, except the year ended December 31,
1995, which includes 53 weeks.
(2) Includes a $2.3 million pre-tax charge associated with the Company's
decision to dispose of its restaurant in Costa Mesa and a free-standing
retail bakery in Los Angeles. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Closure of Non-Core
Operations."
(3) Includes a $932,000 pre-tax charge associated with the default by the buyer
of the Company's Etrusca restaurant. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
(4) Includes a tax benefit of $2.7 million 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."
(5) Reflects the disposition of four of the Company's free-standing retail
bakeries in the third quarter of 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
(6) 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.
(7) 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."
(8) 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> 7
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
the Company's 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 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
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<PAGE> 8
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, historically, weather conditions
have generally had the most significant adverse impact in the first quarter of
each year. Accordingly, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for any year. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Quarterly Results."
A variety of factors 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 to date (with comparable restaurant sales up 6.7%
for the first quarter 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 will raise the minimum wage again 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> 9
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
upon 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
noncancelable. 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 specific 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> 10
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 37% 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,
9
<PAGE> 11
preferences, privileges, rights including voting rights, qualification,
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 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 completion of this offering, the Company will have
outstanding an aggregate of 5,582,906 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 4,082,906 shares of Common Stock are "Restricted Shares" and
are subject to restrictions under the Securities Act. Of these Restricted
Shares, 3,045,953 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. Approximately 3,044,053 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
volume and other limitations of Rule 144 under the Securities Act, and the
remaining Restricted Shares subject to lock-up agreements will become eligible
for sale at various times thereafter pursuant to Rule 144. An additional 503,804
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 425,771 shares will become available for sale
beginning 180 days after the date of this Prospectus. Beginning 90 days after
the date of this Prospectus, approximately 306,636 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.
The remaining 730,317 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 within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended. 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. 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> 12
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
December 29, 1996, (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>
DECEMBER 29, 1996
-----------------------
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,
1,611,766 shares outstanding; $.001 par value, 20,000,000,
shares authorized, 5,524,687 shares outstanding, as
adjusted(1)............................................... 7,980 33,083
Accumulated deficit............................................ (1,929) (1,929)
------- -------
Total stockholders' equity........................... 22,936 31,154
------- -------
Total capitalization................................. $22,936 $31,154
======= =======
</TABLE>
- ---------------
(1) Excludes, as of June 15, 1997, 58,219 shares issued pursuant to employee
benefit plans subsequent to December 29, 1996, 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> 13
DILUTION
The net tangible book value of the Company at December 29, 1996 was
approximately $22.9 million or $5.07 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 December 29, 1996 would have been $31.2 million,
or $5.64 per share. This represents an immediate increase in net tangible book
value of $0.57 per share to existing stockholders and an immediate dilution in
net tangible book value of $4.11 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.......................... $ 5.07
Increase attributable to new investors........................... 0.57
------
Pro forma net tangible book value after offering................... 5.64
------
Dilution to new investors.......................................... $ 4.11
======
</TABLE>
The following table summarizes, on a pro forma basis as of December 29,
1996, 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)............ 4,524,687 81.9% $24,865,000 71.8% $5.50
New investors(2).................... 1,000,000 18.1 9,750,000 28.2 9.75
--------- ----- ----------- -----
Total..................... 5,524,687 100.0% $34,615,000 100.0%
========= ===== =========== =====
</TABLE>
- ---------------
(1) The foregoing computations assume no exercise of outstanding stock options
or warrants and exclude 58,219 shares issued pursuant to employee benefit
plans subsequent to December 29, 1996. As of June 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 June 15, 1997, options to purchase
475,835 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 or warrants 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 4,024,687 shares, or approximately
72.9% of the total shares of Common Stock outstanding as of December 29,
1996, and will increase the number of shares held by new investors to
1,500,000, or approximately 27.1%, of the total shares of Common Stock
outstanding after the offering. See "Principal and Selling Stockholders."
12
<PAGE> 14
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 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)
------------------------------------------------------------------------
DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Revenues:
Restaurants........................... $ 30,737 $ 42,402 $ 39,485 $ 43,647 $ 50,599
Wholesale bakeries.................... 4,049 4,328 4,951 5,181 6,016
Retail bakeries....................... 3,727 4,866 5,208 5,312 4,137
------ ------ ------ ------ ------
Total revenues................. 38,513 51,596 49,644 54,140 60,752
------ ------ ------ ------ ------
Costs and expenses:
Cost of sales......................... 9,320 12,097 11,300 12,772 14,792
Operating expenses.................... 23,121 32,258 29,290 31,036 35,152
Depreciation and amortization......... 2,045 3,512 3,162 3,304 3,860
General and administrative expenses... 3,311 4,060 3,592 4,083 4,724
Provision for store closures(2)(3).... -- 2,339 -- 932 --
------ ------ ------ ------ ------
Total costs and expenses....... 37,797 54,266 47,344 52,127 58,528
------ ------ ------ ------ ------
Income from operations.................. 716 (2,670) 2,300 2,013 2,224
Interest (income) expense, net.......... 29 150 53 (59) (127)
------ ------ ------ ------ ------
Income (loss) before provision (benefit)
for income taxes...................... 687 (2,820) 2,247 2,072 2,351
Provision (benefit) for income
taxes(4).............................. 6 70 332 (2,432) 898
------ ------ ------ ------ ------
Net income (loss)....................... $ 681 $ (2,890) $ 1,915 $ 4,504 $ 1,453
====== ====== ====== ====== ======
Net income (loss) per share (fully
diluted).............................. $ 0.20 $ (0.67) $ 0.43 $ 1.00 $ 0.32
====== ====== ====== ====== ======
Weighted average common shares
outstanding (fully diluted)........... 3,424 4,344 4,477 4,499 4,839
OPERATING DATA:
Comparable restaurant sales increase
(decrease)(5)......................... 1.5% (4.8%) (3.4%) (1.7%) 4.8%
Restaurants open at end of period(6).... 9 9 9 11 12
Wholesale bakeries open at end of
period................................ 5 6 6 6 6
Retail bakeries open at end of
period(7)............................. 6 9 8 8 4
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit)............... $ (9,779) $ (4,602) $ (496) $ 807 $ 158
Total assets............................ 29,623 29,723 30,164 34,194 34,855
Long-term debt (excluding current
portion).............................. -- -- 750 150 --
Stockholders' equity.................... 10,076 14,717 16,678 21,283 22,936
</TABLE>
- ---------------
(1) All years reported include 52 weeks, except the year ended December 31,
1995, which includes 53 weeks.
(2) Includes a $2.3 million pre-tax charge 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. See "Management's
13
<PAGE> 15
Discussion and Analysis of Financial Condition and Results of
Operations -- Closure of Non-Core Operations."
(3) Includes a $932,000 pre-tax charge in 1995 associated with the default by
the buyer of the Company's Etrusca restaurant. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
(4) 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."
(5) 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.
(6) 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."
(7) Reflects the disposition of four of the Company's free-standing retail
bakeries in the third quarter of 1996. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Closure of
Non-Core Operations."
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
As of March 31, 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 6.7% for the first
quarter of 1997. From 1995 through the first quarter 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
the Company's 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> 17
RESULTS OF OPERATIONS
The operating results of the Company expressed as a percentage of total
revenues were as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------------------------------------
DECEMBER 27, DECEMBER 29, DECEMBER 25, DECEMBER 31, DECEMBER 29,
1992 1993 1994 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Revenues:
Restaurants....................... 79.8% 82.2% 79.5% 80.6% 83.3%
Wholesale bakeries................ 10.5 8.4 10.0 9.6 9.9
Retail bakeries................... 9.7 9.4 10.5 9.8 6.8
----- ----- ----- ----- -----
Total revenues............ 100.0 100.0 100.0 100.0 100.0
----- ----- ----- ----- -----
Costs and expenses:
Cost of sales..................... 24.2 23.4 22.8 23.6 24.3
Operating expenses................ 60.0 62.5 59.0 57.3 57.9
Depreciation and amortization..... 5.3 6.9 6.4 6.1 6.3
General and administrative
expenses....................... 8.6 7.9 7.2 7.6 7.8
Provision for store closures...... 0.0 4.5 0.0 1.7 0.0
----- ----- ----- ----- -----
Total costs and
expenses................ 98.1 105.2 95.4 96.3 96.3
----- ----- ----- ----- -----
Income from operations.............. 1.9 (5.2) 4.6 3.7 3.7
Interest (income) expense, net...... 0.1 0.3 0.1 (0.1) (0.2)
----- ----- ----- ----- -----
Income (loss) before provision
(benefit) for income taxes........ 1.8 (5.5) 4.5 3.9 3.8
Provision (benefit) for income
taxes............................. 0.0 0.1 0.7 (4.5) 1.5
----- ----- ----- ----- -----
Net income (loss)................... 1.8% (5.6%) 3.8% 8.4% 2.3%
===== ===== ===== ===== =====
</TABLE>
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.
16
<PAGE> 18
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.
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.
17
<PAGE> 19
Quarterly Results
The following tables set forth certain unaudited financial information by
quarter for 1995 and 1996. 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>
YEAR ENDED DECEMBER 31, 1995 YEAR ENDED DECEMBER 29, 1996
------------------------------------- -------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
------- ------- ------- ------- ------- ------- ------- -------
(IN THOUSANDS)
<S> <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
Costs and expenses:
Cost of sales................... 2,760 3,222 3,123 3,667 3,426 3,847 3,735 3,784
Operating expenses.............. 7,009 7,825 7,674 8,528 8,451 9,118 8,748 8,835
Depreciation and amortization... 726 832 855 891 917 1,017 995 931
General and administrative
expenses...................... 885 979 968 1,251 1,125 1,198 1,203 1,198
Provision for store closures.... -- -- -- 932 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Total costs and
expenses............... 11,380 12,858 12,620 15,269 13,919 15,180 14,681 14,748
------- ------- ------- ------- ------- ------- ------- -------
Income from operations............ 546 932 634 (99) 295 830 491 608
Interest (income) expense, net.... 3 (9) (14) (39) (27) (17) (43) (40)
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before provision
(benefit) for income taxes...... 543 941 648 (60) 322 847 534 648
Provision (benefit) for income
taxes........................... 109 185 266 (2,992) 132 344 222 200
------- ------- ------- ------- ------- ------- ------- -------
Net income........................ $ 434 $ 756 $ 382 $ 2,932 $ 190 $ 503 $ 312 $ 448
======= ======= ======= ======= ======= ======= ======= =======
</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 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 free-standing retail bakery was disposed of in
January 1995 and the Costa Mesa restaurant was disposed of during the second
quarter of 1997. 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 expects that the remaining
reserve is adequate to cover all expenses that will be associated with the
disposition of the Costa Mesa restaurant.
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 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 balance of its
free-standing retail bakeries, all of which were located in Southern California.
18
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
The Company has funded its capital requirements over the past three years
with cash flow from operations. The Company's cash flow from operations was $5.1
million, $4.9 million and $5.0 million for 1994, 1995 and 1996, 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 the three-year period.
Net cash used in financing activities in 1994, 1995 and 1996 was $1.3
million, $702,000 and $400,000, respectively. In all three years, 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 and $5.8 million for 1994,
1995 and 1996, respectively. To date, the Company has opened one restaurant and
one wholesale bakery in 1997 and intends to open one additional restaurant and
to complete a major renovation of one of its existing restaurants 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 most of its planned future restaurants will require 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> 21
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 from a
wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a
wood-burning oven, soups, salads and desserts. The Il Fornaio dining experience
is complemented 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 more than 2,500 Il Fornaio
bakeries in 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.
20
<PAGE> 22
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, 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 6.7% for the first quarter of 1997. From 1995
through the first quarter 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 consists of a variety of dishes, including house-made and imported pasta,
poultry and game from 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 dining experience. Il Fornaio's restaurants have received numerous awards
and commendations, including "Best Italian Restaurant" in the San Francisco Bay
Area for five consecutive years and "Best Restaurant in Santa Clara County" for
three consecutive years as selected by readers of a San Francisco-based
magazine.
Build Brand Awareness. The Company believes that its restaurants,
wholesale bakeries and retail markets work together to reinforce its image as a
provider of high 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
21
<PAGE> 23
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 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 was awarded the grand prize for best new restaurant design worldwide
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 most of its planned future restaurants will 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> 24
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......................................... 1999 13,200
</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 executed for each identified location. The Company
anticipates opening two additional locations in 1998 for which leases have
not 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 a restaurant in Santa Monica, California, for which a lease has been
signed.
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
23
<PAGE> 25
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 currently expects that most of its planned future restaurants
will range in size from 7,000 to 10,000 square feet. The Company's total
investment per restaurant, net of anticipated landlord contributions, is
estimated to be 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 consisting of a variety of dishes, including house-made and imported
pasta, poultry and game from 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 its
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, including "Best
Italian Restaurant" in the San Francisco Bay Area for five consecutive years and
"Best Restaurant in Santa Clara County" for three consecutive years as selected
by readers of a San Francisco-based magazine.
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 31% 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. Four of the restaurants also offer breakfast
service which, during 1996, accounted for approximately 3% 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.
24
<PAGE> 26
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. At each restaurant, servers in white cotton jackets with "Il Fornaio"
embroidered on the lapels take orders and deliver food. 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 was awarded
the grand prize for best new restaurant design worldwide 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
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
25
<PAGE> 27
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 its 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 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.
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<PAGE> 28
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, high-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 80,000 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 dine 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 promotion, 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 weekly operating
statement, which compares both weekly and month-to-date results versus budget.
The Company is also testing a new computerized time management system which
calculates the time worked by
27
<PAGE> 29
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 revenue 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 preference and maximize 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. For 1996, the
Company's total rental expense represented 4.7% of total revenues. Some of the
leases require the Company to pay the costs of insurance, taxes and a portion of
the lessors' operating costs. 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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<PAGE> 30
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 February 28, 1997, the Company employed approximately 1,732 persons, 37
of whom were executive office personnel, 158 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 total 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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<PAGE> 31
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's
restaurants are currently designed to be accessible to the disabled and the
Company intends to continue to comply with the Act and future regulations
relating to accommodating the needs of the disabled.
30
<PAGE> 32
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)..................... 62 Director
W. Howard Lester(1)...................... 61 Director
Pierre W. Mornell(1)..................... 62 Director
T. Gary Rogers(1)........................ 54 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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<PAGE> 33
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. In April 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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<PAGE> 34
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 1991 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, 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, Class II will consist of Mr. Hellman,
Mr. Hislop and Mr. Rogers, and Class III will consist of Mr. Cortopassi and Dr.
Mornell. At each annual meeting of stockholders after the closing of this
offering, the successors to directors whose term will then expire will be
elected to serve from the time of election and qualification until the third
annual meeting following election. Any additional directorships resulting from
an increase in the number of directors will be distributed among the three
classes so that, as nearly as possible, each class will consist of one-third of
the directors. 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, was formed in March 1992 to review the internal
accounting procedures of the Company and consult with and review the services
provided by the Company's independent auditors. The Compensation Committee of
the Board of Directors, currently composed of Mr. Hedrick, Mr. Lester, Dr.
Mornell, and Mr. Rogers, was formed in March 1992 to review and recommend to the
Board the compensation and benefits of all officers of the Company and review
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.
EXECUTIVE COMPENSATION
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> 35
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 OPTIONS
- -------------------------------------------------------- -------- -------- ---------------------
<S> <C> <C> <C>
Laurence B. Mindel...................................... $369,519 $122,500 17,695
Chairman of the Board and
Chief Executive Officer
Michael J. Hislop....................................... 313,615 105,000 15,200
President and Chief Operating Officer
Paul J. Kelley.......................................... 139,495 31,375 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.
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
INDIVIDUAL GRANTS REALIZABLE VALUE
--------------------------------------------------------- AT ASSUMED ANNUAL
NUMBER OF PERCENT OF RATES OF STOCK
SECURITIES TOTAL OPTIONS EXERCISE PRICE APPRECIATION
UNDERLYING GRANTED TO PRICE FOR OPTION TERMS
OPTIONS EMPLOYEES IN PER SHARE EXPIRATION ------------------
NAME GRANTED (1) 1996(2) (3) DATE(4) 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............ 15,200(5) 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.
(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
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<PAGE> 36
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.
AGGREGATED OPTION EXERCISES IN 1996
AND DECEMBER 29, 1996 OPTION VALUES
<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, of which 795,605 shares
are currently subject to outstanding options or were available for future grant
under the Prior Plans. 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 and
consultants of
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<PAGE> 37
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 generally 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 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 June 15, 1997, options to purchase 980,295 shares of Common Stock
were outstanding under the 1997 Plan and predecessor plans of the Company.
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. The Directors' Plan provides that each current non-employee
director will automatically be granted an option to purchase 4,500 shares of
Common Stock upon approval of the Plan by the stockholders, 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 must equal the fair market value of
the Common Stock on the date
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<PAGE> 38
of grant. Options granted under the 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 June 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 predecessor plans of the Company and
held by the Company's non-employee directors. The terms of the options under the
predecessor plans 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 or the
Committee, 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 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.
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<PAGE> 39
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 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.
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<PAGE> 40
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth, as of June 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% 64,540 703,605 12.6%
Building Three, Suite 255
3000 Sand Hill Road
Menlo Park, CA 94025
Sequoia Capital(2)................... 287,799 6.3 24,177 263,622 4.7
Building Four, Suite 280
3000 Sand Hill Road
Menlo Park, CA 94025
Laurence B. Mindel(3)................ 695,515 15.0 -- 695,515 12.4
Michael J. Hislop(4)................. 306,400 6.3 -- 306,400 5.2
Paul J. Kelley(5).................... 46,723 1.0 -- 46,723 *
Michael J. Beatrice(6)............... 10,000 * -- 10,000 *
Dean A. Cortopassi(7)................ 60,794 1.3 -- 60,794 1.1
W. Scott Hedrick(1)(8)............... 779,645 17.0 64,540 715,105 12.8
F. Warren Hellman(9)................. 135,055 2.9 -- 135,055 2.4
W. Howard Lester(10)................. 186,701 4.1 -- 186,701 3.3
Pierre W. Mornell(11)................ 24,497 * -- 24,497 *
T. Gary Rogers(12)................... 52,962 1.2 -- 52,962 *
All executive officers and directors
as a group (10 persons)(13)........ 2,298,292 45.9 64,540 2,223,752 37.0
OTHER SELLING STOCKHOLDERS
- -------------------------------------
Mayfield Fund(14).................... 237,945 5.2 19,991 217,954 3.9
Wells Fargo Capital Markets, Inc..... 219,478 4.8 219,478 -- --
Other Selling Stockholders(15)....... 301,709 6.6 171,814 129,895 2.3
</TABLE>
- ---------------
* Less than one percent
(1) Includes 199,466 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, 19,532 shares held of record by InterWest
Partners 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.
(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. Sequoia
Capital is a general partner of each of these funds.
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<PAGE> 41
(3) Includes 7,195 shares held by the Mindel Family Trust 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.
(4) Includes 306,400 shares issuable upon the exercise of stock options that
are exercisable within 60 days.
(5) Includes 25,986 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(6) Includes 10,000 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(7) 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.
(8) Includes 11,500 shares issuable upon the exercise of stock options that are
exercisable within 60 days.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) Includes 1,031,038 shares held by entities affiliated with directors.
Includes 435,027 shares issuable upon the exercise of stock options that
are exercisable within 60 days.
(14) Includes 228,428 shares held of record by Mayfield V and 9,517 shares held
of record by Mayfield Associates.
(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:
Donald L. Schwarz, Trustee FBO Candice E. Appleton Family Trust (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
(6,310 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 (3,844 shares);
C. Joseph LaBonte Defined Benefit Plan (8,700 shares); Edward N. Levine
(8,000 shares); Mark T. Lindee (6,000); Delaware Charter Guaranteed Trust
Co. FBO Jerry Magnin (3,000 shares); Jerry Allan Magnin and Lois Magnin
Declaration of Trust (12,620); Master Trust Pursuant to Hewlett Packard
Deferred Profit Sharing Plan and Supplemental Pension Plan (25,240 shares);
Joseph and Ann Nadel (3,000); Delaware Charter Guarantee & Trust, Trustee
FBO Donald L. Schwarz IRA (5,000); and Wilderness Associates (10,000
shares).
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<PAGE> 42
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 June 15, 1997, there were 4,582,906 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,
privileges and relative participating, optional or special 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 June 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.
ANTITAKEOVER EFFECTS 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. 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 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,
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<PAGE> 43
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 -- Effects 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, asset
sale 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.
REGISTRATION RIGHTS
Following this offering, the holders of 2,473,947 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
an assignee or transferee who is an affiliate of the transferor 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
The First National Bank of Boston has been appointed as the transfer agent
and registrar for the Company's Common Stock.
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<PAGE> 44
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 5,582,906 shares of Common Stock. Of these shares, all the shares
sold in this offering will be freely tradeable without restrictions or further
registration under the Securities Act and the remaining 4,082,906 shares of
Common Stock held by existing stockholders are "restricted securities" as that
term is defined in Rule 144 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 under 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. Approximately 3,045,953 Restricted Shares are
subject to the Lock-Up Agreements, and approximately 3,044,053 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 volume and other
limitations of Rule 144. The remainder of the Restricted Shares subject to
Lock-Up Agreements will be eligible for sale from time to time thereafter upon
expiration of their respective one-year holding periods.
An additional 503,804 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 425,771 shares
beginning 180 days after the date of this Prospectus. The remainder of the
Restricted Shares subject to Lock-Up Agreements will be eligible for sale from
time to time thereafter upon expiration of their respective one-year holding
periods.
In addition, beginning 90 days after the date of this Prospectus,
approximately 306,636 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. An additional
730,317 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 2,473,947 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 June 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, as in effect as of April 29, 1997, 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
43
<PAGE> 45
immediately after the closing of this offering), or the average weekly trading
volume of the Common Stock on the Nasdaq National Market during 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> 46
UNDERWRITING
The Underwriters named below, represented by Montgomery Securities and
Alex. Brown & Sons 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...........................................
Alex. Brown & Sons 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 3,045,953
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 an 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 disclosed in the Prospectus
or (iii) options granted after the date of this Prospectus under the Company's
option plans described in the Prospectus. See "Shares Eligible for Future Sale."
45
<PAGE> 47
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. Descriptions contained in this Prospectus
relating to the contents of any contract or other
46
<PAGE> 48
document referred to are not necessarily complete and, in each instance,
reference is made to the copy of such contract or other document filed as an
exhibit to the Registration Statement, each such statement 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> 49
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 and December 29, 1996.......................... F-3
Statements of Income for the years ended December 25, 1994, December 31, 1995 and
December 29, 1996................................................................... F-4
Statements of Changes in Stockholders' Equity for the years ended December 25, 1994,
December 31, 1995 and December 29, 1996............................................. F-5
Statements of Cash Flows for the years ended December 25, 1994, December 31, 1995 and
December 29, 1996................................................................... F-6
Notes to Financial Statements......................................................... F-7
</TABLE>
F-1
<PAGE> 50
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
- --------------------------------------
San Francisco, California
March 3, 1997
F-2
<PAGE> 51
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
ASSETS
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
Current assets:
Cash and equivalents................................................... $ 2,375 $ 1,701
Restricted cash........................................................ 315 338
Accounts receivable.................................................... 1,118 1,271
Note receivable........................................................ -- 308
Inventories............................................................ 1,529 1,351
Prepaid expenses....................................................... 774 756
Deferred tax assets, net............................................... 1,372 579
------- -------
Total current assets........................................... 7,483 6,304
------- -------
Property and equipment, net.............................................. 24,881 26,179
Deferred tax assets, net................................................. 1,366 1,927
Other assets............................................................. 464 445
------- -------
Total assets................................................... $34,194 $34,855
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................................... $ 2,107 $ 2,292
Accrued expenses....................................................... 3,969 3,704
Current portion of debt................................................ 600 150
------- -------
Total current liabilities...................................... 6,676 6,146
------- -------
Long-term debt........................................................... 150 --
Reserve for store closures............................................... 255 346
Deferred lease incentives:
Construction allowances................................................ 5,479 5,090
Deferred rent.......................................................... 351 337
------- -------
Total deferred lease incentives..................................... 5,830 5,427
------- -------
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
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
Accumulated deficit.................................................... (3,382) (1,929)
------- -------
Total stockholders' equity.......................................... 21,283 22,936
------- -------
Total liabilities and stockholders' equity..................... $34,194 $34,855
======= =======
</TABLE>
See notes to financial statements
F-3
<PAGE> 52
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurants............................................. $ 39,485 $ 43,647 $ 50,599
Wholesale bakeries...................................... 4,951 5,181 6,016
Retail bakeries......................................... 5,208 5,312 4,137
-------- -------- --------
Total revenues.................................. 49,644 54,140 60,752
-------- -------- --------
Costs and expenses:
Cost of sales........................................... 11,300 12,772 14,792
Operating expenses...................................... 29,290 31,036 35,152
Depreciation and amortization........................... 3,162 3,304 3,860
General and administrative expenses..................... 3,592 4,083 4,724
Provision for store closures............................ -- 932 --
-------- -------- --------
Total costs and expenses........................ 47,344 52,127 58,528
-------- -------- --------
Income from operations.................................... 2,300 2,013 2,224
Other (income) expenses:
Interest income......................................... (71) (157) (167)
Interest expense........................................ 124 98 40
-------- -------- --------
Total other (income) expenses, net................... 53 (59) (127)
-------- -------- --------
Income before provision (benefit)
for income taxes........................................ 2,247 2,072 2,351
Provision (benefit) for income taxes...................... 332 (2,432) 898
-------- -------- --------
Net income................................................ $ 1,915 $ 4,504 $ 1,453
======== ======== ========
Net income per share:
Primary................................................. $ 0.43 $ 1.01 $ 0.32
======== ======== ========
Fully-diluted........................................... $ 0.43 $ 1.00 $ 0.32
======== ======== ========
Weighted average number of common stock and common stock
equivalents
Primary.............................................. 4,467 4,460 4,839
Fully-diluted........................................ 4,477 4,499 4,839
</TABLE>
See notes to financial statements
F-4
<PAGE> 53
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
========= ======= ========= ====== ======= =======
</TABLE>
See notes to financial statements
F-5
<PAGE> 54
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 25, DECEMBER 31, DECEMBER 29,
1994 1995 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income.............................................. $1,915 $4,504 $1,453
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................ 3,162 3,304 3,860
Amortization of deferred lease incentives............ (351) (343) (403)
Provision for store closures......................... -- 932 --
Gain on sale of property and equipment............... -- -- (72)
Retirement of fixed assets........................... -- -- 253
Deferred income taxes................................ -- (2,738) 232
Changes in:
Restricted cash...................................... (110) (65) (23)
Accounts receivable.................................. 181 (299) (153)
Inventories.......................................... (127) (168) 178
Prepaid expenses..................................... 135 (518) (408)
Other assets......................................... 1 (24) 19
Accounts payable..................................... (76) 27 185
Accrued expenses..................................... 231 227 (174)
------ ------ ------
Net cash provided by operating activities............ 4,961 4,839 4,947
------ ------ ------
Cash flows from investing activities:
Capital expenditures.................................... (971) (4,807) (5,847)
Proceeds from sale of property and equipment............ -- -- 626
------ ------ ------
Net cash used in investing activities................ (971) (4,807) (5,221)
------ ------ ------
Cash flows from financing activities:
Payments on debt........................................ (1,331) (600) (600)
Proceeds from the issuance of common stock.............. 42 16 136
Exercise of stock options............................... 22 39 64
Repurchase of common stock.............................. (18) (157) --
------ ------ ------
Net cash used in financing activities................ (1,285) (702) (400)
------ ------ ------
Increase (decrease) in cash and equivalents............... 2,705 (670) (674)
Cash and equivalents, beginning of year................... 340 3,045 2,375
------ ------ ------
Cash and equivalents, end of year......................... $3,045 $2,375 $1,701
====== ====== ======
Interest paid............................................. $ 114 $ 105 $ 45
====== ====== ======
Income taxes paid......................................... $ 187 $ 308 $ 614
====== ====== ======
Noncash investing and financing activities
Issuance of preferred stock for restaurant assets....... $ 203 -- --
Issuance of note receivable for retail bakery assets.... -- -- $ 308
</TABLE>
See notes to financial statements
F-6
<PAGE> 55
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.
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.
F-7
<PAGE> 56
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Advertising costs are expensed as incurred.
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.
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.
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> 57
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> 58
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> 59
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> 60
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 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> 61
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> 62
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 installment 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> 63
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
Unaudited
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.
F-15
<PAGE> 64
======================================================
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 any offer to buy, any securities other than the
Common Stock to which it relates, or an offer to, or a solicitation of, any
person to whom it is unlawful to make such an offer or solicitation in any
jurisdiction. 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
Summary Financial and Operating
Data............................... 5
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
Executive Compensation............... 33
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 obligations 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
ALEX. BROWN & SONS
INCORPORATED
, 1997
======================================================
<PAGE> 65
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*...................................
Blue sky qualification fees and expenses*.................................
Printing and engraving expenses*..........................................
Legal fees and expenses*..................................................
Accounting fees and expenses*.............................................
Transfer agent and registrar fees*........................................
Fee for Custodian for Selling Stockholders*...............................
D&O Securities Act Liability Insurance*...................................
Miscellaneous*............................................................
-------
Total*..........................................................
=======
</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> 66
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, in 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 unnecessary in
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 deemed to be exempt from registration under the
Securities Act by virtue of Section 4(2) and/or Regulation D promulgated
thereunder.
The recipients represented their intention to acquire the securities for
investment purposes only and not with a view to the distribution thereof.
Appropriate legends were affixed to the stock certificates issued in such
transactions. All recipients either received adequate information about the
Registrant or had access, through employment or other 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.
II-2
<PAGE> 67
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 form of related
agreement.
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.
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. Reference is made to pages II-4 and II-5.
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> 68
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> 69
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 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 30th day of
June, 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. 1 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 June 30, 1997
- --------------------------------------------- Chief Executive Officer
Laurence B. Mindel (Principal Executive
Officer)
/s/ PAUL J. KELLEY Vice President, Finance and June 30, 1997
- --------------------------------------------- Chief Financial Officer and
Paul J. Kelley Secretary (Principal
Financial and Accounting
Officer)
/s/ MICHAEL J. HISLOP* Director June 30, 1997
- ---------------------------------------------
Michael J. Hislop
/s/ DEAN A. CORTOPASSI* Director June 30, 1997
- ---------------------------------------------
Dean A. Cortopassi
/s/ W. SCOTT HEDRICK* Director June 30, 1997
- ---------------------------------------------
W. Scott Hedrick
/s/ F. WARREN HELLMAN* Director June 30, 1997
- ---------------------------------------------
F. Warren Hellman
/s/ W. HOWARD LESTER* Director June 30, 1997
- ---------------------------------------------
W. Howard Lester
/s/ PIERRE W. MORNELL* Director June 30, 1997
- ---------------------------------------------
Pierre W. Mornell
/s/ T. GARY ROGERS* Director June 30, 1997
- ---------------------------------------------
T. Gary Rogers
*By /s/ LAURENCE B. MINDEL
- ---------------------------------------------
Laurence B. Mindel
Attorney-in-Fact
</TABLE>
II-5
<PAGE> 70
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
--------- ------------------------------------------------------------ ------------
<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 form of
related agreement.
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.
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER DESCRIPTION OF DOCUMENT PAGE
--------- ------------------------------------------------------------ ------------
<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. Reference is made to pages II-4 and II-5.
27.1** Financial Data Schedule
</TABLE>
- ---------------
* To be filed by amendment.
** Previously filed.
+ Confidential treatment requested for portions of this exhibit.
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER(hereinafter called the "Merger
Agreement") is made as of September ___, 1997 by and between IL FORNAIO
(AMERICA) CORPORATION, a California corporation ("Il Fornaio California"), and
IL FORNAIO (AMERICA) DELAWARE, a Delaware corporation ("Il Fornaio Delaware").
Il Fornaio California and Il Fornaio Delaware are sometimes referred to as the
"Constituent Corporations."
The authorized capital stock of Il Fornaio California consists of
fifteen million (15,000,000) shares of Common Stock and three million five
hundred thousand (3,500,000) shares of Preferred Stock. The authorized capital
stock of Il Fornaio Delaware consists of twenty million (20,000,000) shares of
Common Stock, $.001 par value, and five million (5,000,000) shares of Preferred
Stock, $.001 par value.
The directors of the Constituent Corporations deem it advisable and to
the advantage of said corporations that Il Fornaio California merge into Il
Fornaio Delaware upon the terms and conditions herein provided.
NOW, THEREFORE, the parties do hereby adopt the plan of reorganization
encompassed by this Merger Agreement and do hereby agree that Il Fornaio
California shall merge into Il Fornaio Delaware on the following terms,
conditions and other provisions:
1. TERMS AND CONDITIONS.
(a) MERGER. Il Fornaio California shall be merged with and into
Il Fornaio Delaware (the "Merger"), and Il Fornaio Delaware shall be the
surviving corporation (the "Surviving Corporation") effective upon the date
when this Merger Agreement is filed with the Secretary of State of Delaware
(the "Effective Date").
(b) NAME CHANGE. On the Effective Date, the name of Il Fornaio
Delaware shall be Il Fornaio (America) Corporation.
(c) SUCCESSION. On the Effective Date, Il Fornaio Delaware shall
continue its corporate existence under the laws of the State of Delaware, and
the separate existence and corporate organization of Il Fornaio California,
except insofar as it may be continued by operation of law, shall be terminated
and cease.
(d) TRANSFER OF ASSETS AND LIABILITIES. On the Effective Date,
the rights, privileges, powers and franchises, both of a public as well as of a
private nature, of each of the Constituent Corporations shall be vested in and
possessed by the Surviving Corporation, subject to all of the disabilities,
duties and restrictions of or upon each of the Constituent Corporations; and
all and singular rights, privileges, powers and franchises of each of the
Constituent Corporations, and all property, real, personal and mixed, of each
of the Constituent Corporations, and all debts due to each of the Constituent
Corporations on whatever account, and all things in action or belonging
<PAGE> 2
to each of the Constituent Corporations shall be transferred to and vested in
the Surviving Corporation; and all property, rights, privileges, powers and
franchises, and all and every other interest, shall be thereafter the property
of the Surviving Corporation as they were of the Constituent Corporations, and
the title to any real estate vested by deed or otherwise in either of the
Constituent Corporations shall not revert or be in any way impaired by reason
of the Merger; provided, however, that the liabilities of the Constituent
Corporations and of their stockholders, directors and officers shall not be
affected and all rights of creditors and all liens upon any property of either
of the Constituent Corporations shall be preserved unimpaired, and any claim
existing or action or proceeding pending by or against either of the
Constituent Corporations may be prosecuted to judgment as if the Merger had not
taken place except as they may be modified with the consent of such creditors
and all debts, liabilities and duties of or upon each of the Constituent
Corporations shall attach to the Surviving Corporation, and may be enforced
against it to the same extent as if such debts, liabilities and duties had been
incurred or contracted by it.
(e) COMMON STOCK OF IL FORNAIO CALIFORNIA AND IL FORNAIO DELAWARE.
An the Effective Date, by virtue of the Merger and without any further action
on the part of the Constituent Corporations or their stockholders, (i) each
share of Common Stock of Il Fornaio California issued and outstanding
immediately prior thereto shall be changed and converted into one (1) fully
paid and nonassessable share of Common Stock of Il Fornaio Delaware; and (ii)
each share of Common Stock of Il Fornaio Delaware issued and outstanding
immediately prior thereto shall be canceled and returned to the status of
authorized but unissued shares.
(f) PREFERRED STOCK OF IL FORNAIO CALIFORNIA AND IL FORNAIO
DELAWARE. On the Effective Date, by virtue of the Merger and without any
further action on the part of the Constituent Corporations or their
stockholders, (i) each share of Series A Preferred Stock of Il Fornaio
California issued and outstanding immediately prior thereto shall be changed
and converted into one fully paid and nonassessable share of Series A Preferred
Stock of Il Fornaio Delaware, (ii) each share of Series B Preferred Stock of Il
Fornaio California issued and outstanding immediately prior thereto shall be
changed and converted into one fully paid and nonassessable share of Series B
Preferred Stock of Il Fornaio Delaware, (iii) each share of Series C Preferred
Stock of Il Fornaio California issued and outstanding immediately prior thereto
shall be changed and converted into one fully paid and nonassessable share of
Series C Preferred Stock of Il Fornaio Delaware, (iv) each share of Series D
Preferred Stock of Il Fornaio California issued and outstanding immediately
prior thereto shall be changed and converted into one fully paid and
nonassessable share of Series D Preferred Stock of Il Fornaio Delaware, (v)
each share of Series E Preferred Stock of Il Fornaio California issued and
outstanding immediately prior thereto shall be changed and converted into one
fully paid and nonassessable share of Series E Preferred Stock of Il Fornaio
Delaware, and (vi) each share of Series F Preferred Stock of Il Fornaio
California issued and outstanding immediately prior thereto shall be changed
and converted into one fully paid and non-assessable share of Series F
Preferred Stock of Il Fornaio Delaware.
(g) STOCK CERTIFICATES. On and after the Effective Date, all of
the outstanding certificates which prior to that time represented shares of the
Common Stock and Preferred Stock of Il Fornaio California shall be deemed for
all purposes to evidence ownership of and to represent the shares of Il Fornaio
Delaware into which the shares of Il Fornaio California
2.
<PAGE> 3
represented by such certificates have been converted as herein provided and
shall be so registered on the books and records of the Surviving Corporation or
its transfer agents. The registered owner of any such outstanding stock
certificate shall, until such certificate shall have been surrendered for
transfer or conversion or otherwise accounted for to the Surviving Corporation
or its transfer agent, have and be entitled to exercise any voting and other
rights with respect to and to receive any dividend and other distributions upon
the shares of Il Fornaio Delaware evidenced by such outstanding certificate as
above provided.
(h) WARRANTS OF IL FORNAIO CALIFORNIA. On and after the Effective
Date, the outstanding Warrants which prior to that time represented Warrants of
Il Fornaio California shall be deemed for all purposes to evidence ownership of
and to represent Warrants of Il Fornaio Delaware and shall be so registered on
the books and records of the Surviving Corporation or its transfer agents.
(i) OPTIONS OF IL FORNAIO CALIFORNIA. On the Effective Date, the
Surviving Corporation will assume and continue all of Il Fornaio California's
stock option plans in existence on the Effective Date, including, but not
limited to the 1997 Non-Employee Directors' Stock Option Plan and the 1997
Equity Incentive Plan, and the outstanding options to purchase Common Stock of
Il Fornaio California, including without limitation all options outstanding
under such stock option plans and any other outstanding options, shall become
options to purchase shares of Common Stock of Il Fornaio Delaware, subject to
applicable adjustment provisions with respect to the number of and price per
share, with no other changes in the terms and conditions of such options.
Effective on the Effective Date, Il Fornaio Delaware hereby assumes the
outstanding and unexercised portions of such options and the obligations of Il
Fornaio California with respect thereto.
(j) STOCK PURCHASE PLAN OF IL FORNAIO CALIFORNIA. On the
Effective Date, the Surviving Corporation will assume all obligations of and
continue Il Fornaio California's Employee Stock Purchase Plan.
(k) EMPLOYEE BENEFIT PLANS. On the Effective Date, the Surviving
Corporation shall assume all obligations of Il Fornaio California under any and
all employee benefit plans in effect as of such date. On the Effective Date,
the Surviving Corporation shall adopt and continue in effect all such employee
benefit plans upon the same terms and conditions as were in effect immediately
prior to the Merger and shall reserve that number of shares of Il Fornaio
Delaware Common Stock with respect to each such employee benefit plan as is
equal to the number of shares of Il Fornaio California Common Stock (if any) so
reserved on the Effective Date.
2. CHARTER DOCUMENTS, DIRECTORS AND OFFICERS.
(a) CERTIFICATE OF INCORPORATION AND BYLAWS. The Certificate of
Incorporation and Bylaws of Il Fornaio Delaware in effect on the Effective Date
shall continue to be the Certificate of Incorporation and Bylaws of the
Surviving Corporation, except that Article I of the Certificate of
Incorporation of the Surviving Corporation shall, effective upon the filing of
this Merger
3.
<PAGE> 4
Agreement with the Secretary of the State of Delaware, be amended to read in
its entirety as follows: "The name of this Corporation is Il Fornaio (America)
Corporation."
(b) DIRECTORS. The directors of Il Fornaio California immediately
preceding the Effective Date shall become the directors of the Surviving
Corporation on and after the Effective Date to serve until the expiration of
their terms and until their successors are elected and qualified.
(c) OFFICERS. The officers of Il Fornaio California immediately
preceding the Effective Date shall become the officers of the Surviving
Corporation on and after the Effective Date to serve at the pleasure of its
Board of Directors.
3. MISCELLANEOUS.
(a) FURTHER ASSURANCES. From time to time, and when required by
the Surviving Corporation or by its successors and assigns, there shall be
executed and delivered on behalf of Il Fornaio California such deeds and other
instruments, and there shall be taken or caused to be taken by it such further
and other action, as shall be appropriate or necessary in order to vest or
perfect in or to conform of record or otherwise, in the Surviving Corporation
the title to and possession of all the property, interests, assets, rights,
privileges, immunities, powers, franchises and authority of Il Fornaio
California and otherwise to carry out the purposes of this Merger Agreement,
and the officers and directors of the Surviving Corporation are fully
authorized in the name and on behalf of Il Fornaio California or otherwise to
take any and all such action and to execute and deliver any and all such deeds
and other instruments.
(b) AMENDMENT. At any time before or after approval by the
stockholders of Il Fornaio California, this Merger Agreement may be amended in
any manner (except that, after the approval of the Merger Agreement by the
stockholders of Il Fornaio California, the principal terms may not be amended
without the further approval of the stockholders of Il Fornaio California) as
may be determined in the judgment of the respective Board of Directors of Il
Fornaio Delaware and Il Fornaio California to be necessary, desirable, or
expedient in order to clarify the intention of the parties hereto or to effect
or facilitate the purpose and intent of this Merger Agreement.
(c) CONDITIONS TO MERGER. The obligation of the Constituent
Corporations to effect the transactions contemplated hereby is subject to
satisfaction of the following conditions (any or all of which may be waived by
either of the Constituent Corporations in its sole discretion to the extent
permitted by law):
(i) the Merger shall have been approved by the
stockholders of Il Fornaio California in accordance with applicable provisions
of the General Corporation Law of the State of California; and
(ii) Il Fornaio California, as sole stockholder of Il
Fornaio Delaware, shall have approved the Merger in accordance with the General
Corporation Law of the State of Delaware; and
4.
<PAGE> 5
(iii) any and all consents, permits, authorizations,
approvals, and orders deemed in the sole discretion of Il Fornaio California to
be material to consummation of the Merger shall have been obtained.
(d) ABANDONMENT OR DEFERRAL. At any time before the Effective
Date, this Merger Agreement may be terminated and the Merger may be abandoned
by the Board of Directors of either Il Fornaio California or Il Fornaio
Delaware or both, notwithstanding the approval of this Merger Agreement by the
stockholders of Il Fornaio California or Il Fornaio Delaware or the prior
filing of this Merger Agreement with the Secretary of State of the State of
Delaware, or the consummation of the Merger may be deferred for a reasonable
period of time if, in the opinion of the Boards of Directors of Il Fornaio
California and Il Fornaio Delaware, such action would be in the best interests
of such corporations. In the event of termination of this Merger Agreement,
this Merger Agreement shall become void and of no effect and there shall be no
liability on the part of either Constituent Corporation or its Board of
Directors or stockholders with respect thereto, except that Il Fornaio
California shall pay all expenses incurred in connection with the Merger or in
respect of this Merger Agreement or relating thereto.
(e) COUNTERPARTS. In order to facilitate the filing and recording
of this Merger Agreement, the same may be executed in any number of
counterparts, each of which shall be deemed to be an original.
IN WITNESS WHERETO, this Merger Agreement, having first been fully
approved by the Board of Directors of Il Fornaio California and Il Fornaio
Delaware, is hereby executed on behalf of each said corporation and attested by
their respective officers thereunto duly authorized.
IL FORNAIO (AMERICA) CORPORATION,
ATTEST: a California corporation
By:
- ------------------------------ -------------------------------
Paul J. Kelley Laurence B. Mindel
Secretary Chairman of the Board and
Chief Executive Officer
IL FORNAIO DELAWARE CORPORATION,
ATTEST: a Delaware corporation
By:
- ------------------------------ -------------------------------
Paul J. Kelley Laurence B. Mindel
Secretary Chairman of the Board and
Chief Executive Officer
5.
<PAGE> 1
Exhibit 4.2
IL FORNAIO [LOGO]
<TABLE>
<S> <C> <C>
COMMON STOCK COMMON STOCK
[GRAPHIC WITH CENTER SPACE] IL FORNAIO (AMERICA) CORPORATION [GRAPHIC WITH CENTER SPACE]
FBU INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE SEE REVERSE FOR CERTAIN DEFINITIONS
THIS CERTIFICATE IS TRANSFERABLE AND A STATEMENT AS TO THE POWERS,
IN BOSTON, MA OR NEW YORK, NY PREFERENCES, RESTRICTIONS AND RIGHTS
OF SHARES
CUSIP 451926 10 9
</TABLE>
THIS CERTIFIES THAT
[GRAPHIC OF RESTAURANT PERSONNEL SERVING FOOD]
IS THE OWNER OF
FULLY PAID AND NON ASSESSABLE SHARES OF THE COMMON STOCK, $.001 PAR VALUE, OF
IL FORNAIO (AMERICA) CORPORATION
transferable on the books of the Corporation by the holder hereof in person or
by duly authorized attorney upon surrender of this Certificate properly
endorsed. This Certificate is not valid until countersigned by the Transfer
Agent and registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures of
its duly authorized officers.
Dated:
/s/ Paul J. Kelley
- --------------------------
VICE PRESIDENT, FINANCE
CHIEF FINANCIAL OFFICER & SECRETARY
/s/ Laurence B. Mindel
- --------------------------
CHIEF EXECUTIVE OFFICER &
CHAIRMAN OF THE BOARD
[SEAL]
IL FORNAIO (AMERICA) CORPORATION
CORPORATE
SEAL
DELAWARE
COUNTERSIGNED AND REGISTERED:
THE FIRST NATIONAL BANK OF BOSTON
TRANSFER AGENT AND REGISTRAR
BY /s/ [ILLEGIBLE]
AUTHORIZED SIGNATURE
<PAGE> 2
IL FORNAIO (AMERICA) CORPORATION
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preferences and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of determination,
the number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
from the Secretary of the Corporation at the principal office of the
Corporation.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C>
TEN COM - as tenants in common UNIF GIFT MIN ACT - ..........Custodian.................
TEN ENT - as tenants by the entirities (Cust) (Minor)
JT TEN - as joint tenants with right of under Uniform Gifts to Minors
survivorship and not as tenants Act ................................
in common (State)
UNIF TRF MIN ACT - ..........Custodian (until age.....)
(Cust)
.............under Uniform Transfers
(Minor)
to Minors Act ......................
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, ____________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
______________________________________________________________________________
(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE)
_______________________________________________________________________________
_______________________________________________________________________________
_________________________________________________________________________Shares
of the capital stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
________________________________________________________________________Attorney
to transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated _______________
X ________________________________
X ________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND WITH
THE NAME(S) AS WRITTEN UPON THE
FACE OF THE CERTIFICATE IN EVERY
PARTICULAR, WITHOUT ALTERATION OR
ENLARGEMENT OR ANY CHANGE
WHATEVER.
Signature(s) Guaranteed
By _____________________________________________
THE SIGNATURE(S) SHOULD BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM), PURSUANT TO
S.E.C. RULE 17Ad-15.
<PAGE> 1
EXHIBIT 10.3
IL FORNAIO (AMERICA) CORPORATION
1997 EQUITY INCENTIVE PLAN
ADOPTED MARCH 17, 1997
APPROVED BY STOCKHOLDERS APRIL 23, 1997
INTRODUCTION.
This Plan is an amendment and restatement of the Company's existing
1992 Stock Option Plan (the "1992 Plan") and the 1995 Stock Option Plan (the
"1995 Plan"), and shall become effective on the date of approval of this Plan by
the Board (the "Effective Date"). No options shall be granted under the 1992
Plan or the 1995 Plan from and after the Effective Date. Notwithstanding
anything to the contrary, prior to the Listing Date all Stock Awards granted
under this Plan shall comply with all of the requirements set forth in Section
25102(o) of the California Corporate Securities Law of 1968.
1. PURPOSES.
(A) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, all as defined below.
(B) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(C) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
(A) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(B) "BOARD" means the Board of Directors of the Company.
1.
<PAGE> 2
(C) "CODE" means the Internal Revenue Code of 1986, as amended.
(D) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(E) "COMPANY" means Il Fornaio (America) Corporation, a Delaware
corporation.
(F) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(G) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means
the employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(H) "DIRECTOR" means a member of the Board.
(I) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(J) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(K) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(1) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or The Nasdaq Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in Common Stock) on the last market trading day prior to determination,
as reported in the Wall Street Journal or such other source as the Board deems
reliable;
(2) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(L) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
2.
<PAGE> 3
(M) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(N) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(O) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(P) "OFFICER" means a person who is an officer of the Company within
the meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(Q) "OPTION" means a stock option granted pursuant to the Plan.
(R) "OPTION AGREEMENT" means a written agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. Each Option Agreement shall be subject to the terms and conditions of the
Plan.
(S) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan.
(T) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations promulgated under Section 162(m) of the Code), is not a
former employee of the Company or an "affiliated corporation" receiving
compensation for prior services (other than benefits under a tax qualified
pension plan), was not an officer of the Company or an "affiliated corporation"
at any time, and is not currently receiving direct or indirect remuneration from
the Company or an "affiliated corporation" for services in any capacity other
than as a Director, or (ii) is otherwise considered an "outside director" for
purposes of Section 162(m) of the Code.
(U) "PLAN" means this 1997 Equity Incentive Plan.
(V) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
3.
<PAGE> 4
(W) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(X) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(A) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(B) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
or a combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person shall
be permitted to receive stock pursuant to a Stock Award; and the number of
shares with respect to which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section 12.
(4) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(C) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of one or more members of the Board. In the discretion
of the Board, a Committee may consist solely of two (2) or more Outside
Directors, in accordance with Code Section 162(m), or solely of two (2) or more
Non-Employee Directors, in accordance with Rule 16b-3. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board (and
references in this Plan to the Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan.
4.
<PAGE> 5
4. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of Section 11 relating to adjustments
upon changes in stock, the stock that may be issued pursuant to Stock Awards
shall not exceed in the aggregate one million three hundred thousand (1,300,000)
shares of Common Stock. Such share reserve shall consist of (i) the options
granted under the 1992 Plan and the 1995 Plan which are outstanding as of the
Effective Date plus (ii) the shares available for grant under the 1992 Plan and
the 1995 Plan as of the Effective Date plus (iii) an additional five hundred and
four thousand three hundred ninety-five (504,395) shares of common stock. If any
Stock Award shall for any reason expire or otherwise terminate, in whole or in
part, without having been exercised in full (or vested in the case of Restricted
Stock), the stock not acquired under such Stock Award shall revert to and again
become available for issuance under the Plan.
(B) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(A) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options may be granted only to Employees,
Directors or Consultants.
(B) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
(C) Subject to the provisions of Section 11 relating to adjustments
upon changes in stock, no person shall be eligible to be granted Stock Awards
covering more than five hundred thousand (500,000) shares of Common Stock in any
calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(A) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(B) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, and the exercise price
of each Nonstatutory Stock Option shall be not
5.
<PAGE> 6
less than eighty-five percent (85%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted. Notwithstanding the
foregoing, an Option may be granted with an exercise price lower than that set
forth in the preceding sentence if such Option is granted pursuant to an
assumption or substitution for another option in a manner satisfying the
provisions of Section 424(a) of the Code.
(C) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other Common Stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board. In the case of any deferred
payment arrangement, interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement.
(D) TRANSFERABILITY. An Incentive Stock Option shall not be
transferable except by will or by the laws of descent and distribution, and
shall be exercisable during the lifetime of the person to whom the Incentive
Stock Option is granted only by such person. A Nonstatutory Stock Option may be
transferred to the extent provided in the Option Agreement; provided that if the
Option Agreement does not expressly permit the transfer of a Nonstatutory Stock
Option, the Nonstatutory Stock Option shall not be transferable except by will,
by the laws of descent and distribution or pursuant to a domestic relations
order satisfying the requirements of Rule 16b-3, and shall be exercisable during
the lifetime of the person to whom the Option is granted only by such person or
any transferee pursuant to a domestic relations order. Notwithstanding the
foregoing, the person to whom the Option is granted may, by delivering written
notice to the Company, in a form satisfactory to the Company, designate a third
party who, in the event of the death of the Optionee, shall thereafter be
entitled to exercise the Option.
(E) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(F) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option
6.
<PAGE> 7
within such period of time designated by the Board, which shall in no event be
later than the expiration of the term of the Option as set forth in the Option
Agreement (the "Post-Termination Exercise Period") and only to the extent that
the Optionee was entitled to exercise the Option on the date Optionee's
Continuous Status as an Employee, Director or Consultant terminates. In the case
of an Incentive Stock Option, the Board shall determine the Post-Termination
Exercise Period at the time the Option is granted, and the term of such
Post-Termination Exercise Period shall in no event exceed three (3) months from
the date of termination. In addition, the Board may at any time, with the
consent of the Optionee, extend the Post-Termination Exercise Period and provide
for continued vesting; provided however, that any extension of such period by
the Board in excess of three (3) months from the date of termination shall cause
an Incentive Stock Option so extended to become a Nonstatutory Stock Option,
effective as of the date of Board action. If, at the date of termination, the
Optionee is not entitled to exercise his or her entire Option, the shares
covered by the unexercisable portion of the Option shall revert to the Plan. If,
after termination, the Optionee does not exercise his or her Option within the
time specified in the Option Agreement or as otherwise determined above, the
Option shall terminate, and the shares covered by such Option shall revert to
the Plan. Notwithstanding the foregoing, the Board shall have the power to
permit an Option to continue to vest during the Post-Termination Exercise
Period.
(G) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous
Status as an Employee, Director or Consultant terminates as a result of the
Optionee's disability, the Optionee may exercise his or her Option (to the
extent that the Optionee was entitled to exercise it at the date of
termination), but only within such period of time ending on the earlier of (i)
the date twelve (12) months following such termination (or such longer or
shorter period specified in the Option Agreement, which is no event shall be
less than six (6) months), or (ii) the expiration of the term of the Option as
set forth in the Option Agreement. If, at the date of termination, the Optionee
is not entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(H) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a three (3)-month period after the termination of, the Optionee's
Continuous Status as an Employee, Director or Consultant, the Option may be
exercised to the extent vested by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant to
subsection 6(d), but only within the period ending on the earlier of (i) the
date eighteen (18) months following the date of death (or such longer or shorter
period specified in the Option Agreement, which in no event shall be less than
six (6) months), or (ii) the expiration of the term of such Option as set forth
in the Option Agreement. If, at the time of death, the Optionee was not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
7.
<PAGE> 8
(I) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in
such form and shall contain such terms and conditions as the Board or Committee
shall deem appropriate. The terms and conditions of stock bonus or restricted
stock purchase agreements may change from time to time, and the terms and
conditions of separate agreements need not be identical, but each stock bonus or
restricted stock purchase agreement shall include (through incorporation of
provisions hereof by reference in the agreement or otherwise) the substance of
each of the following provisions as appropriate:
(A) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement but in no event shall the purchase
price be less than eighty-five percent (85%) of the stock's Fair Market Value on
the date such award is made. Notwithstanding the foregoing, the Board or
Committee may determine that eligible participants in the Plan may be awarded
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company for its benefit.
(B) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16b-3, so long as stock
awarded under such agreement remains subject to the terms of the agreement.
(C) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or Committee in its discretion. Notwithstanding the foregoing, the Board
or Committee to which administration of the Plan has been delegated may award
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(D) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or Committee.
(E) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock
8.
<PAGE> 9
held by that person which have not vested as of the date of termination under
the terms of the stock bonus or restricted stock purchase agreement between the
Company and such person.
8. COVENANTS OF THE COMPANY.
(A) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(B) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue and sell stock upon exercise of
such Stock Awards unless and until such authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(A) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(B) Neither an Employee, Director nor a Consultant nor any person to
whom a Stock Award is transferred in accordance with the Plan shall be deemed to
be the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such person has satisfied
all requirements for exercise of the Stock Award pursuant to its terms.
(C) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or any
Affiliate, or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-Laws.
9.
<PAGE> 10
(D) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(E) The Company may require any person to whom a Stock Award is
granted, or any person to whom a Stock Award is transferred in accordance with
the Plan, as a condition of exercising or acquiring stock under any Stock Award,
(1) to give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such person is
acquiring the stock subject to the Stock Award for such person's own account and
not with any present intention of selling or otherwise distributing the stock.
The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(F) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject
to any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in
10.
<PAGE> 11
the class(es) and number of shares and price per share of stock subject to such
outstanding Stock Awards. Such adjustments shall be made by the Board or
Committee, the determination of which shall be final, binding and conclusive.
(The conversion of any convertible securities of the Company shall not be
treated as a "transaction not involving the receipt of consideration by the
Company.")
(B) Except as otherwise provided in the Stock Award Agreement, in the
event of: (1) a dissolution, liquidation or sale of substantially all of the
assets of the Company; (2) a merger or consolidation in which the Company is not
the surviving corporation; or (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then to the extent
permitted by applicable law: (i) any surviving corporation (or an Affiliate
thereof shall assume any Stock Awards outstanding under the Plan or shall
substitute similar Stock Awards for those outstanding under the Plan, or (ii)
such Stock Awards shall continue in full force and effect. Except as otherwise
provided in the Stock Award Agreement, in the event any surviving corporation
(or an Affiliate) refuses to assume or continue such Stock Awards, or to
substitute similar Stock Awards for those outstanding under the Plan, then, with
respect to Stock Awards held by persons then performing services as Employees,
Directors or Consultants, the time during which such Stock Awards may be
exercised shall be accelerated and the Stock Awards terminated if not exercised
prior to such event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 11 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(B) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(C) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(D) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
11.
<PAGE> 12
(E) The Board at any time, and from time to time, may amend the terms
of any one or more Stock Award; provided, however, that the rights and
obligations under any Stock Award shall not be impaired by any such amendment
unless (i) the Company requests the consent of the person to whom the Stock
Award was granted and (ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board may suspend or terminate the Plan at any time. Unless
sooner terminated, the Plan shall terminate ten (10) years from the date the
Plan is adopted by the Board or approved by the stockholders of the Company,
whichever is earlier. No Stock Awards may be granted under the Plan while the
Plan is suspended or after it is terminated.
(B) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the consent of the person to whom the Stock Award was granted.
14. STOCKHOLDER APPROVAL.
No Stock Awards granted under the Plan shall be exercisable in whole or
part unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
12.
<PAGE> 13
IL FORNAIO (AMERICA) CORPORATION
STOCK OPTION GRANT NOTICE
(1997 EQUITY INCENTIVE PLAN)
IL FORNAIO (AMERICA) CORPORATION (the "Company"), pursuant to its 1997 Equity
Incentive Plan (the "Plan"), hereby grants to Optionee an option to purchase the
number of shares of the Company's common stock set forth below. This option is
subject to all of the terms and conditions as set forth herein and in
Attachments I, II and III, which are incorporated herein in their entirety.
Optionee: _________________________________
Date of Grant: _________________________________
Vesting Commencement Date: _________________________________
Shares Subject to Option: _________________________________
Exercise Price Per Share: _________________________________
Expiration Date: _________________________________
____ Incentive Stock Option ____ Nonstatutory Stock Option
Exercise Schedule: Exercisable as vested.
Vesting Schedule: 5 equal annual installments commencing on the
first anniversary of the Vesting Commencement
Date.
PAYMENT: Any or a combination of the following: (i) by cash or check, (ii)
pursuant to a Regulation T program, as set forth in the Stock Option Agreement
or (iii) delivering shares of previously-owned common stock, as set forth in the
Stock Option Agreement.
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges receipt
of, and understands and agrees to, this Grant Notice, the Stock Option Agreement
and the Plan. Optionee further acknowledges that as of the Date of Grant, this
Grant Notice, the Stock Option Agreement and the Plan set forth the entire
understanding between Optionee and the Company regarding the acquisition of
stock in the Company and supersedes all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to Optionee under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS: _______________________________________________
_______________________________________________
IL FORNAIO (AMERICA) CORPORATION OPTIONEE:
By:_____________________________ ____________________________________
Signature
Title:__________________________
Date:___________________________ Date:_______________________________
Attachment I: Stock Option Agreement
Attachment II: 1997 Equity Incentive Plan
Attachment III: Notice of Exercise
<PAGE> 14
NONSTATUTORY STOCK OPTION
(CASH EXERCISE CONSIDERATION)
Optionee:
Il Fornaio (America) Corporation (the "Company"), pursuant to its 1995
Stock Option Plan (the "Plan") has this day granted to you, the optionee named
above, an option to purchase shares of the common stock of the Company ("Common
Stock"). This option is not intended to qualify and will not be treated as an
"incentive stock option" within the meaning of Section 422 of the Internal
Revenue Code of 1986, as amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's
employees (including officers, directors and consultants) and is intended to
comply with the provisions of Rule 701 promulgated by the Securities and
Exchange Commission under the Securities Act of 1933, as amended (the "Act").
The details of your option are as follows:
1. (a) The total number of shares of Common Stock subject to this
option is __________________________________________________________ (______).
Subject to the limitations contained herein, this option shall be exercisable
with respect to each installment shown below on or after the date of vesting
(such vesting amount to be at least twenty percent (20%) per year of the total
number of shares subject to this option) applicable to such installment, as
follows:
<TABLE>
<CAPTION>
Number of Shares Date of Earliest Exercise
(Installment) (Vesting)
- ---------------- -------------------------
<S> <C>
</TABLE>
(b) Notwithstanding the foregoing and pursuant to Section 6(e)
of the Plan, in the event of a Change in Control (as defined below), the
unvested portion of this option shall automatically accelerate and Optionee
shall have the right to purchase all or any number of the shares subject to
this option, in addition to any portion of the option exercisable prior to such
event. A "Change of Control" of the Company shall be deemed to have occurred if
(i) the Company sells or otherwise disposes of all or substantially all of its
assets; (ii) there is a merger or consolidation of the Company with any other
corporation or corporations, provided that the shareholders of the Company, as
a group, do not hold, immediately after such event, at least fifty percent
(50%) of the surviving or successor corporation, or (iii) any person or entity,
including any "person" as such term is used
<PAGE> 15
in Section 13(d)(3) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), acquires as the "beneficial owner" (as defined in the Exchange
Act) after the date of this option, more than fifty percent (50%) of the
combined voting power of the voting securities of the Company.
2. (a) The exercise price of this option is (_____) per share, being not
less than 100% of the fair market value of the Common Stock on the date of grant
of this option.
(b) Payment of the exercise price per share is due in full in cash
(including check) upon exercise of all or any part of each installment which
has become exercisable by you. Notwithstanding the foregoing, this option may
be exercised pursuant to a program developed under Regulation T as promulgated
by the Federal Reserve Board which results in the receipt of cash (or check) by
the Company prior to the issuance of Common Stock.
3. In no event may this option be exercised for any number of shares
which would require the issuance of anything other than whole shares.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
5. The term of this option commences on the date hereof and, unless
sooner terminated as set forth below or in the Plan, terminates on July 9, 2005
(which date shall be no more than ten (10) years from the date this option is
granted). In no event may this option be exercised on or after the date on
which it terminates. This option shall terminate prior to the expiration of its
term three (3) months after the termination of your employment with the Company
or an affiliate of the Company (as defined in the Plan) for any reason or for
no reason unless:
(a) such termination of employment is due to your permanent and
total disability (within the meaning of Section 22(e)(3) of the Code), in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months following such termination of employment;
(b) such termination of employment is due to your death, in
which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months after your death; or
(c) during any part of such three (3) month period the option
is not exercisable solely because of the condition set forth in paragraph 4
above, in which event the option shall not terminate until the earlier of the
termination date set forth
2
<PAGE> 16
above or until it shall have been exercisable for an aggregate period of three
(3) months after the termination of employment; or
(d) exercise of the option within three (3) months after
termination of your employment with the Company or with an affiliate would
result in liability under Section 16(b) of the Securities Exchange Act of 1934,
in which case the option will terminate on the earlier of (i) the termination
date set forth above, (ii) the tenth (10th) day after the last date upon which
exercise would result in such liability or (iii) six (6) months and ten (10)
days after the termination of your employment with the Company or an affiliate.
However, this option may be exercised following termination of
employment only as to that number of shares as to which it was exercisable on
the date of termination of employment under the provisions of paragraph 1 of
this option.
6. (a) This option may be exercised, to the extent specified above,
by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require
pursuant to Section 6(f) of the Plan.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the cash payment by you to the Company of any tax withholding
obligation of the Company arising by reason of: (1) the exercise of this
option; (2) the lapse of any substantial risk of forfeiture to which the shares
are subject at the time of exercise; or (3) the disposition of shares acquired
upon such exercise; and
(ii) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters. For purposes of this restriction you
will be deemed to own securities which (i) are owned directly or indirectly by
you, including securities held for your benefit by nominees, custodians,
brokers or pledgees; (ii) may be acquired by you within sixty (60) days of the
Effective Date; (iii) are owned directly or indirectly, by or for your brothers
or sisters (whether by whole or half blood), spouse, ancestors and lineal
descendants; or (iv) are owned, directly or indirectly, by or for a
corporation, partnership, estate or trust of which you are a
3
<PAGE> 17
shareholder, partner or beneficiary, but only to the extent of your
proportionate interest therein as a shareholder, partner or beneficiary
thereof. You further agree that the Company may impose stop-transfer
instructions with respect to securities subject to the foregoing restrictions
until the end of such period.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company. In the event that this option is granted to you in
connection with the performance of services as a consultant or director,
references to employment, employee and similar terms shall be deemed to include
the performance of services as a consultant or a director, as the case may be,
provided, however, that no rights as an employee shall arise by reason of the
use of such terms.
9. Any notices provided for in this option or the Plan shall be given
in writing and shall be deemed effectively given upon receipt or, in the case
of notices delivered by the Company to you, two (2) business days after the
postmark when deposited in the United States mail, postage prepaid, addressed
to you at the address specified below or at such other address as you hereafter
designate by written notice to the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of Section 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated
and adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the _____ day of ________, 199_.
Very truly yours,
IL FORNAIO (AMERICA) CORPORATION
By:
------------------------------------
Duly authorized on behalf of the
Board of Directors
4
<PAGE> 18
ATTACHMENTS:
Il Fornaio (America) Corporation
1995 Stock Option Plan
Form of Exercise
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan;
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of the following agreements only:
NONE
-------------------------
(Initial)
OTHER
-----------------------------------
-----------------------------------
-----------------------------------
-----------------------------------------
Optionee
Address:
---------------------------------
---------------------------------
5
<PAGE> 19
INCENTIVE STOCK OPTION
(CASH EXERCISE CONSIDERATION)
Optionee:
Il Fornaio (America) Corporation (the "Company"), pursuant to its 1995
Stock Option Plan (the "Plan") has this day granted to you, the optionee named
above, an option to purchase shares of the common stock of the Company ("Common
Stock"). This option is intended to qualify as an "incentive stock option"
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code").
The grant hereunder is in connection with and in furtherance of the
Company's compensatory benefit plan for participation of the Company's
employees (including officers and directors) and is intended to comply with the
provisions of Rule 701 promulgated by the Securities and Exchange Commission
under the Securities Act of 1933, as amended (the "Act").
The details of your option are as follows:
1. (a) The total number of shares of Common Stock subject to this
option is One Hundred Eleven Thousand One Hundred Ten (111,110). Subject to the
limitations contained herein, this option shall be exercisable with respect to
each installment shown below on or after the date of vesting (such vesting
amount to be at least twenty percent (20%) per year of the total number of
shares subject to this option):
<TABLE>
<CAPTION>
Number of Shares Date of Earliest Exercise
(Installment) (Vesting)
- ---------------- -------------------------
<S> <C>
</TABLE>
(b) Notwithstanding the foregoing and pursuant to Section 6(e) of the
Plan, in the event of a Change in Control (as defined below), the unvested
portion of this option shall automatically accelerate and Optionee shall have
the right to purchase all or any number of the shares subject to this option,
in addition to any portion of the option exercisable prior to such event. A
"Change of Control" of the Company shall be deemed to have occurred if (i) the
Company sells or otherwise disposes of all or substantially all of its assets;
(ii) there is a merger or consolidation of the Company with any other
corporation or corporations, provided that the shareholders of the Company, as
a group, do not hold, immediately after such event, at least fifty percent
(50%) of the surviving or successor corporation, or (iii)
<PAGE> 20
any person or entity, including any "person" as such term is used in Section
13(d)(3) of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), acquires as the "beneficial owner" (as defined in the Exchange Act)
after the date of this option, more than fifty percent (50%) of the combined
voting power of the voting securities of the Company.
2. (a) The exercise price of this option is ______________________
_____ ($____) per share, being not less than the fair market value of the
Common Stock on the date of grant of this option.
(b) Payment of the exercise price per share is due in full in
cash (including check) upon exercise of all or any part of each installment
which has become exercisable by you. Notwithstanding the foregoing, this option
may be exercised pursuant to a program developed under Regulation T as
promulgated by the Federal Reserve Board which results in the receipt of cash
(or check) by the Company prior to the issuance of Common Stock.
3. In no event may this option be exercised for any number of
shares which would require the issuance of anything other than whole shares.
4. Notwithstanding anything to the contrary contained herein, this
option may not be exercised unless the shares issuable upon exercise of this
option are then registered under the Act or, if such shares are not then so
registered, the Company has determined that such exercise and issuance would be
exempt from the registration requirements of the Act.
5. The term of this option commences on the date hereof and,
unless sooner terminated as set forth below or in the Plan, terminates on July
9, 2005 (which date shall be no more than ten (10) years from the date this
option is granted). In no event may this option be exercised on or after the
date on which it terminates. This option shall terminate prior to the
expiration of its term three (3) months after the termination of your
employment with the Company or an affiliate of the Company (as defined in the
Plan) for any reason or for no reason unless:
(a) such termination of employment is due to your permanent and
total disability (within the meaning of Section 22(e)(3) of the Code), in which
event the option shall terminate on the earlier of the termination date set
forth above or twelve (12) months following such termination of employment; or
(b) such termination of employment is due to your death, in
which event the option shall terminate on the earlier of the termination date
set forth above or twelve (12) months after your death.
2
<PAGE> 21
However, this option may be exercised following termination of
employment only as to that number of shares as to which it was exercisable on
the date of termination of employment under the provisions of paragraph 1 of
this option.
6. (a) This option may be exercised, to the extent specified
above, by delivering a notice of exercise (in a form designated by the Company)
together with the exercise price to the Secretary of the Company, or to such
other person as the Company may designate, during regular business hours,
together with such additional documents as the Company may then require
pursuant to Section 6(f) of the Plan.
(b) By exercising this option you agree that:
(i) the Company may require you to enter an arrangement
providing for the payment by you to the Company of any tax withholding
obligation of the Company arising by reason of (A) the exercise of this option;
(B) the lapse of any substantial risk of forfeiture to which the shares are
subject at the time of exercise; or (C) the disposition of shares acquired upon
such exercise;
(ii) you will notify the Company in writing within fifteen
(15) days after the date of any disposition of any of the shares of the Common
Stock issued upon exercise of this option that occurs within two (2) years
after the date of this option grant or within one (1) year after such shares of
Common Stock are transferred upon exercise of this option; and
(iii) the Company (or a representative of the underwriters)
may, in connection with the first underwritten registration of the offering of
any securities of the Company under the Act, require that you not sell or
otherwise transfer or dispose of any shares of Common Stock or other securities
of the Company during such period (not to exceed one hundred eighty (180) days)
following the effective date (the "Effective Date") of the registration
statement of the Company filed under the Act as may be requested by the Company
or the representative of the underwriters. For purposes of this restriction you
will be deemed to own securities which (1) are owned directly or indirectly by
you, including securities held for your benefit by nominees, custodians,
brokers or pledgees; (2) may be acquired by you within sixty (60) days of the
Effective Date; (3) are owned directly or indirectly, by or for your brothers
or sisters (whether by whole or half blood), spouse, ancestors and lineal
descendants; or (4) are owned, directly or indirectly, by or for a corporation,
partnership, estate or trust of which you are a shareholder, partner or
beneficiary, but only to the extent of your proportionate interest therein as a
shareholder, partner or beneficiary thereof. You further agree that the Company
may impose stop-transfer instructions with respect to securities
3
<PAGE> 22
subject to the foregoing restrictions until the end of such period.
7. This option is not transferable, except by will or by the laws of
descent and distribution, and is exercisable during your life only by you.
8. This option is not an employment contract and nothing in this option
shall be deemed to create in any way whatsoever any obligation on your part to
continue in the employ of the Company, or of the Company to continue your
employment with the Company.
9. Any notices provided for in this option or the Plan shall be given in
writing and shall be deemed effectively given upon receipt or, in the case of
notices delivered by the Company to you, two (2) business days after the
postmark when deposited in the United States mail, postage prepaid, addressed to
you at the address specified below or at such other address as you hereafter
designate by written notice to the Company.
10. This option is subject to all the provisions of the Plan, a copy of
which is attached hereto and its provisions are hereby made a part of this
option, including without limitation the provisions of Section 6 of the Plan
relating to option provisions, and is further subject to all interpretations,
amendments, rules and regulations which may from time to time be promulgated and
adopted pursuant to the Plan. In the event of any conflict between the
provisions of this option and those of the Plan, the provisions of the Plan
shall control.
Dated the ____ day of ________, 199_.
Very truly yours,
IL FORNAIO (AMERICA) CORPORATION
By:
--------------------------------------
Duly authorized on behalf of the
Board of Directors
ATTACHMENTS:
Il Fornaio (America) Corporation
1995 Stock Option Plan
Form of Exercise
4
<PAGE> 23
The undersigned:
(a) Acknowledges receipt of the foregoing option and the attachments
referenced therein and understands that all rights and liabilities with respect
to this option are set forth in the option and the Plan; and
(b) Acknowledges that as of the date of grant of this option, it sets
forth the entire understanding between the undersigned optionee and the Company
and its affiliates regarding the acquisition of stock in the Company and
supersedes all prior oral and written agreements on that subject with the
exception of the following agreements only:
NONE __________________________
(Initial)
OTHER _____________________________
_____________________________
_____________________________
____________________________________
Optionee
Address:
5
<PAGE> 1
EXHIBIT 10.4
IL FORNAIO (AMERICA) CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
ADOPTED MARCH 17, 1997
APPROVED BY THE STOCKHOLDERS ON APRIL 23, 1997
1. PURPOSE.
(A) The purpose of this 1997 Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of Il Fornaio (America) Corporation, a
Delaware corporation (the "Company"), and its Affiliates, as defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be
given an opportunity to purchase stock of the Company.
(B) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(C) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(D) The Company intends that the rights to purchase stock of the
Company granted under the Plan be considered options issued under an "employee
stock purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(A) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(B) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(I) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(II) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(III) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the
1.
<PAGE> 2
exercise of this power, may correct any defect, omission or inconsistency in the
Plan, in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.
(IV) To amend the Plan as provided in paragraph 13.
(V) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(C) The Board may delegate administration of the Plan to a Committee
composed of two (2) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(A) Subject to the provisions of paragraph 12 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to rights granted
under the Plan shall not exceed in the aggregate three hundred thousand
(300,000) shares of the Company's common stock (the "Common Stock"). If any
right granted under the Plan shall for any reason terminate without having been
exercised, the Common Stock not purchased under such right shall again become
available for the Plan.
(B) The stock subject to the Plan may be unissued shares or
reacquired shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(A) The Board or the Committee may from time to time grant or provide
for the grant of rights to purchase Common Stock of the Company under the Plan
to eligible employees (an "Offering") on a date or dates (the "Offering
Date(s)") selected by the Board or the Committee. Each Offering shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all employees granted rights to purchase stock under
the Plan shall have the same rights and privileges. The terms and conditions of
an Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the document comprising the Offering or otherwise) the
period during which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in paragraphs 5 through 8, inclusive.
2.
<PAGE> 3
(B) If an employee has more than one right outstanding under the
Plan, unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.
5. ELIGIBILITY.
(A) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(B) The Board or the Committee may provide that each person who,
during the course of an Offering, first becomes an eligible employee of the
Company or designated Affiliate will, on a date or dates specified in the
Offering which coincides with the day on which such person becomes an eligible
employee or occurs thereafter, receive a right under that Offering, which right
shall thereafter be deemed to be a part of that Offering. Such right shall have
the same characteristics as any rights originally granted under that Offering,
as described herein, except that:
(I) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(II) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(III) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.
(C) No employee shall be eligible for the grant of any rights under
the Plan if, immediately after any such rights are granted, such employee owns
stock possessing five percent (5%) or more of the total combined voting power or
value of all classes of stock of the Company or of any Affiliate. For purposes
of this subparagraph 5(c), the rules of Section 424(d) of the Code shall apply
in determining the stock ownership of any employee, and stock
3.
<PAGE> 4
which such employee may purchase under all outstanding rights and options shall
be treated as stock owned by such employee.
(D) An eligible employee may be granted rights under the Plan only
if such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
(E) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan, provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(A) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding fifteen percent (15%) of
such employee's Earnings (as defined in subparagraph 7(a)) during the period
which begins on the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the date stated in
the Offering, which date shall be no later than the end of the Offering. The
Board or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(B) In connection with each Offering made under the Plan, the Board
or the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(C) The purchase price of stock acquired pursuant to rights granted
under the Plan shall be not less than the lesser of:
(I) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Offering Date; or
4.
<PAGE> 5
(II) an amount equal to eighty-five percent (85%) of the fair
market value of the stock on the Purchase Date.
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(A) An eligible employee may become a participant in the Plan
pursuant to an Offering by delivering a participation agreement to the Company
within the time specified in the Offering, in such form as the Company provides.
Each such agreement shall authorize payroll deductions of up to the maximum
percentage specified by the Board or the Committee of such employee's Earnings
during the Offering. "Earnings" is defined as an employee's regular salary or
wages (including amounts thereof elected to be deferred by the employee, that
would otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), which shall include or exclude (as provided for each Offering) the
following items of compensation: bonuses, commissions, overtime pay, incentive
pay, profit sharing, other remuneration paid directly to the employee, the cost
of employee benefits paid for by the Company or an Affiliate, education or
tuition reimbursements, imputed income arising under any group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company or an Affiliate under any employee benefit plan, and similar items of
compensation, as determined by the Board or Committee. The payroll deductions
made for each participant shall be credited to an account for such participant
under the Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(B) At any time during an Offering, a participant may terminate his
or her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(C) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of a participant's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of
5.
<PAGE> 6
his or her accumulated payroll deductions (reduced to the extent, if any, such
deductions have been used to acquire stock for the terminated employee), under
the Offering, without interest.
(D) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
8. EXERCISE.
(A) On each Purchase Date specified in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(B) No rights granted under the Plan may be exercised to any extent
unless the shares to be issued upon such exercise under the Plan (including
rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act of 1933, as amended (the "Securities Act") and
the Plan is in material compliance with all applicable state, foreign and other
securities and other laws applicable to the Plan. If on a Purchase Date in any
Offering hereunder the Plan is not so registered or in such compliance, no
rights granted under the Plan or any Offering shall be exercised on such
Purchase Date, and the Purchase Date shall be delayed until the Plan is subject
to such an effective registration statement and such compliance, except that the
Purchase Date shall not be delayed more than twelve (12) months and the Purchase
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If on the Purchase Date of any Offering hereunder, as delayed to the
maximum extent permissible, the Plan is not registered and in such compliance,
no rights granted under the Plan or any Offering shall be exercised and all
payroll deductions accumulated during the Offering (reduced to the extent, if
any, such deductions have been used to acquire stock) shall be distributed to
the participants, without interest.
6.
<PAGE> 7
9. COVENANTS OF THE COMPANY.
(A) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
(B) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any
of the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shares acquired upon exercise
of rights hereunder are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(A) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(B) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company
7.
<PAGE> 8
or any Affiliate of the Company) of the beneficial ownership (within the meaning
of Rule 13d-3 promulgated under the Exchange Act, or comparable successor rule)
of securities of the Company representing at least fifty percent (50%) of the
combined voting power entitled to vote in the election of directors, then, as
determined by the Board in its sole discretion (i) any surviving or acquiring
corporation may assume outstanding rights or substitute similar rights for those
under the Plan, (ii) such rights may continue in full force and effect, or (iii)
participants' accumulated payroll deductions may be used to purchase Common
Stock immediately prior to the transaction described above and the participants'
rights under the ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(A) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment if such amendment requires stockholder approval in order for the Plan
to obtain employee stock purchase plan treatment under Section 423 of the Code
or to comply with the requirements of Rule 16b-3 promulgated under the Exchange
Act.
(B) The Board may amend the Plan in any respect the Board deems
necessary or advisable to provide eligible employees with the maximum benefits
provided or to be provided under the provisions of the Code and the regulations
promulgated thereunder relating to employee stock purchase plans and/or to bring
the Plan and/or rights granted under it into compliance therewith.
(C) Rights and obligations under any rights granted before amendment
of the Plan shall not be altered or impaired by any amendment of the Plan,
except with the consent of the person to whom such rights were granted, or
except as necessary to comply with any laws or governmental regulations, or
except as necessary to ensure that the Plan and/or rights granted under the Plan
comply with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(A) A participant may file a written designation of a beneficiary who
is to receive any shares and cash, if any, from the participant's account under
the Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(B) Such designation of beneficiary may be changed by the participant
at any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the
8.
<PAGE> 9
spouse or to any one or more dependents or relatives of the participant, or if
no spouse, dependent or relative is known to the Company, then to such other
person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
(A) The Board in its discretion, may suspend or terminate the Plan at
any time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(B) Rights and obligations under any rights granted while the Plan is
in effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the Company's initial public
offering of shares of common stock (the "Effective Date"), but no rights granted
under the Plan shall be exercised unless and until the Plan has been approved by
the stockholders of the Company within twelve (12) months before or after the
date the Plan is adopted by the Board or the Committee, which date may be prior
to the Effective Date.
9.
<PAGE> 10
IL FORNAIO (AMERICA) CORPORATION
EMPLOYEE STOCK PURCHASE PLAN OFFERING
ADOPTED BY THE BOARD OF DIRECTORS ON MARCH 17, 1997
AMENDED BY THE BOARD OF DIRECTORS ON APRIL 23, 1997
1. GRANT; OFFERING DATE.
(A) The Board of Directors (the "Board") of Il Fornaio (America)
Corporation (the "Company"), pursuant to the Company's Employee Stock Purchase
Plan (the "Plan"), hereby authorizes the grant of rights to purchase shares of
the common stock of the Company ("Common Stock") to all Eligible Employees (an
"Offering"). The first Offering shall begin on the effective date of the initial
public offering of the Company's Common Stock and end on October 31, 1999 (the
"Initial Offering"). Thereafter, an Offering shall begin on November 1 every
two (2) years, beginning with calendar year 1999, and shall end on the day prior
to the second anniversary of its Offering Date. The first day of an Offering is
that Offering's "Offering Date."
(B) Notwithstanding anything to the contrary, in the event that the
fair market value of a share of Common Stock on any Purchase Date during an
Offering is less than the fair market value of a share of Common Stock on the
Offering Date of the Offering, then following the purchase of Common Stock on
such Purchase Date (i) the Offering shall terminate, (ii) a new Offering shall
commence on the day following the Purchase Date and shall end on the day prior
to the second anniversary of such new Offering's Offering Date, and (iii) all
participants in the just-terminated Offering shall automatically be enrolled in
the new Offering.
(C) Prior to the commencement of any Offering, the Board (or the
committee described in subparagraph 2(c) of the Plan, if any) may change any or
all terms of such Offering and any subsequent Offerings. The granting of rights
pursuant to each Offering hereunder shall occur on each respective Offering Date
unless, prior to such date (a) the Board (or such Committee) determines that
such Offering shall not occur, or (b) no shares remain available for issuance
under the Plan in connection with the Offering.
2. ELIGIBLE EMPLOYEES.
(A) All employees of the Company and each of its Affiliates (as
defined in the Plan) incorporated in the United States shall be granted rights
to purchase Common Stock under each Offering on the Offering Date of such
Offering, provided that each such employee otherwise meets the employment
requirements of subparagraph 5(a) of the Plan (an "Eligible Employee").
Notwithstanding the foregoing, the following employees shall not be Eligible
Employees or be granted rights under an Offering: (i) any person who has
employed by the Company for a period of less than twelve continuous months, (ii)
part-time or seasonal employees whose customary
1.
<PAGE> 11
employment is less than twenty (20) hours per week or five (5) months per
calendar year or (iii) 5% stockholders (including ownership through unexercised
options) described in subparagraph 5(c) of the Plan. An Eligible Employee as of
the Offering Date who does not commence participation in the Plan at such time
may participate in the Plan effective any November 1 or May 1 within an
Offering. The exercise price for such Eligible Employee shall be determined with
reference to the Offering Date of such Offering, and not the date such Eligible
Employee actually commenced participation.
(B) Each person who first becomes an Eligible Employee during any
Offering and at least six (6) months prior to the final Purchase Date of the
Offering will, on the next May 1 or November 1 during that Offering, receive
a right under such Offering, which right shall thereafter be deemed to be a part
of the Offering. Such right shall have the same characteristics as any rights
originally granted under the Offering except that:
(1) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right; and
(2) the Offering for such right shall begin on its Offering
Date and end coincident with the end of the ongoing Offering.
Such newly-eligible Eligible Employee who does commence participation in the
Plan at such time of initial eligibility may participate in the Plan effective
any November 1 or May 1 within an Offering. The exercise price for such Eligible
Employee shall be determined with reference to such Eligible Employee's deemed
Offering Date (in accordance with subsection (b)(1) above), and not the date
such Eligible Employee actually commenced participation.
3. RIGHTS.
(A) Subject to the limitations contained herein and in the Plan, on
each Offering Date each Eligible Employee shall be granted the right to purchase
the number of shares of Common Stock purchasable with up to fifteen percent
(15%) of such employee's Earnings paid during the period of such Offering
beginning after such Eligible Employee first commences participation; provided,
however, that no employee may purchase Common Stock on a particular Purchase
Date that would result in more than fifteen percent (15%) of such employee's
Earnings in the period from the Offering Date to such Purchase Date having been
applied to purchase shares under all ongoing Offerings under the Plan and all
other Company plans intended to qualify as "employee stock purchase plans" under
Section 423 of the Internal Revenue Code of 1986, as amended (the "Code"). For
this Offering, "Earnings" means the total compensation paid to an employee,
including all salary, wages (including amounts elected to be deferred by the
employee, that would otherwise have been paid, under any cash or deferred
arrangement established by the Company), overtime pay, commissions, bonuses, and
other remuneration paid directly to the employee, but excluding profit sharing,
the cost of employee benefits paid for by the Company, education or tuition
reimbursements, imputed income arising under any Company group insurance or
benefit program, traveling expenses, business and moving expense
2.
<PAGE> 12
reimbursements, income received in connection with stock options, contributions
made by the Company under any employee benefit plan, and similar items of
compensation.
(B) Notwithstanding the foregoing, the maximum number of shares of
Common Stock an Eligible Employee may purchase on any Purchase Date in an
Offering shall be such number of shares as has a fair market value (determined
as of the Offering Date for such Offering) equal to (x) $25,000 multiplied by
the number of calendar years in which the right under such Offering has been
outstanding at any time, minus (y) the fair market value of any other shares of
Common Stock (determined as of the relevant Offering Date with respect to such
shares) which, for purposes of the limitation of Section 423(b)(8) of the Code,
are attributed to any of such calendar years in which the right is outstanding.
The amount in clause (y) of the previous sentence shall be determined in
accordance with regulations applicable under Section 423(b)(8) of the Code based
on (i) the number of shares previously purchased with respect to such calendar
years pursuant to such Offering or any other Offering under the Plan, or
pursuant to any other Company plans intended to qualify as "employee stock
purchase plans" under Section 423 of the Code, and (ii) the number of shares
subject to other rights outstanding on the Offering Date for such Offering
pursuant to the Plan or any other such Company plan.
(C) The maximum aggregate number of shares available to be purchased
by all Eligible Employees under an Offering shall be the number of shares
remaining available under the Plan on the Offering Date. If the aggregate
purchase of shares of Common Stock upon exercise of rights granted under the
Offering would exceed the maximum aggregate number of shares available, the
Board shall make a pro rata allocation of the shares available in a uniform and
equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date, in each case rounded up to the nearest
whole cent per share. For the Initial Offering, the fair market value of the
Common Stock at the time when the Offering commences shall be the price per
share at which shares of Common Stock are first sold to the public in the
Company's initial public offering as specified in the final prospectus with
respect to that offering.
5. PARTICIPATION.
(A) Except as otherwise provided in this paragraph 5 or in the Plan,
an Eligible Employee may elect to participate in an Offering only at the
beginning of the Offering or as of the day following a Purchase Date during such
Offering. An Eligible Employee shall become a participant in an Offering by
delivering an agreement authorizing payroll deductions. Such deductions must be
in whole percentages of Earnings, with a minimum percentage of one percent (1%)
and a maximum percentage of fifteen percent (15%). A participant may not make
additional payments into his or her account. The agreement shall be made on such
enrollment
3.
<PAGE> 13
form as the Company provides, and must be delivered to the Company prior to the
date participation is to be effective, unless a later time for filing the
enrollment form is set by the Company for all Eligible Employees with respect to
a given participation date. For the Initial Offering, the time for filing an
enrollment form and commencing participation for individuals who are Eligible
Employees on the Offering Date for the Initial Offering shall be determined by
the Company and communicated to such Eligible Employees.
(B) A participant may decrease his or her participation level during
the course of a six (6)-month purchase interval one (1) time, and only by
delivering notice to the Company at least ten (10) days in advance of the
Purchase Date in such form as the Company prescribes; provided that a
participant may (i) reduce his or her deductions to zero percent (0%) upon ten
(10) days' prior notice by delivering a notice in such form as the Company
provides, (ii) may increase or decrease his or her participation level at any
time to become effective on the day following the next subsequent Purchase Date
or (iii) may withdraw from an Offering and receive his or her accumulated
payroll deductions from the Offering (reduced to the extent, if any, such
deductions have been used to acquire Common Stock for the participant on any
prior Purchase Dates) without interest, at any time prior to the end of the
Offering, excluding only each ten (10) day period immediately preceding a
Purchase Date, by delivering a withdrawal notice to the Company in such form as
the Company provides. A participant who has withdrawn from an Offering shall not
again participate in such Offering, but may participant in subsequent Offerings
under the Plan in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date,
each participant's accumulated payroll deductions (without any increase for
interest) shall be applied to the purchase of whole shares of Common Stock, up
to the maximum number of shares permitted under the Plan and the Offering.
"Purchase Date" shall be defined as each [April 30] and [October 31], except
that the first Purchase Date under this Offering shall be [April 30, 1998], and
not [October 31, 1997].
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code and to
comply with the requirements of exemption
4.
<PAGE> 14
from potential liability under Section 16(b) of the Securities Exchange Act of
1934, as amended (the "Exchange Act") set forth in Rule 16b-3 promulgated under
the Exchange Act.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
5.
<PAGE> 1
EXHIBIT 10.11
RESTAURANT LEASE
This Restaurant Lease ("Lease") is made and entered into this 21st day
of November, 1991 ("Effective Date") , by and between HOTEL SAINTE CLAIRE
PARTNERS, L.P., a California limited partnership ("Landlord"), and IL FORNAIO
(AMERICA) CORPORATION, a California corporation ("Tenant"), who agree as
follows:
ARTICLE 1
BASIC LEASE PROVISIONS
The following basic lease provisions supplement and summarize provisions
elsewhere in this Lease. They are presented to facilitate convenient reference
by the parties to this Lease, subject to further definition and discussion in
the referenced sections and elsewhere in this Lease. Although the basic lease
provisions are part of this Lease, if there is any conflict between the basic
lease provisions and provisions contained in the balance of this Lease, the
provisions contained elsewhere will control.
<TABLE>
<S> <C> <C>
Use: Restaurant (Sec. 5.1)
Tenant's Trade Name: Il Fornaio (Sec. 5.1)
Hotel - Name: Hotel Sainte Claire (Sec. 2.2)
- Location: San Jose (Sec. 2.2)
Santa Clara County
California
Premises - Address: 302 So. Market Street (Sec. 2.1)
San Jose, California (Sec. 2.1)
Term - Primary Term: 20 year (Sec. 3.2)
- Option Periods: 2 x 5 year (Sec. 3.3)
Landlord Contribution: * (Exh. "C")
Tenant Contribution: $1,550,000 (Exh. "C")
</TABLE>
* Confidential treatment requested.
<PAGE> 2
<TABLE>
<S> <C> <C>
Rent - Initial Minimum Rent: * (Sec. 4.2)
- Percentage Rent: * (Sec. 4.3)
Exhibits: "A" Floor Plan
"B" Confirmation of Term
"C" Initial Construction
</TABLE>
ARTICLE 2
PREMISES
2.1 Leased Property. Landlord leases to Tenant and Tenant leases
from Landlord those portions of the Hotel St. Claire located in San Jose,
California ("Hotel") which are situated on the ground floor thereof and
designated as "Restaurant Area" and "Main Kitchen Area" on the floor plan
attached hereto as Exhibit "A" and which are situated on the roof thereof and
designated as the "Roof Area" on the floor plan attached hereto as Exhibit
"A-1" (collectively, "Premises").
2.2 Appurtenant Rights; Food Service Operations Agreement.
Tenant shall have the right, in connection with the operation of a restaurant or
restaurants (in accordance with Article 5) within the Premises, to utilize any
and all nonexclusive easements which the Hotel has retained for deliveries,
maintenance and related functions. Tenant's restaurant guests shall have the
right to use the ground floor common public areas of the Hotel to the extent
such uses are consistent with the patronage of Tenant's restaurant(s) within the
Premises.
Landlord shall also provide to Tenant additional areas within the
Hotel for storage, locker and restroom facilities for Tenant's employees and an
office for sales and banquet activities (collec-
2
* Confidential treatment requested.
<PAGE> 3
tively, "Incidental Areas"). The location and dimensions of the Incidental
Areas are set forth in the plan attached hereto as Exhibit "A-2". The
Incidental Areas may be relocated in equivalent space in the Hotel as Landlord
shall reasonably determine from time to time.
Concurrently with the execution of this Lease, Landlord's affiliated
corporation, MOBEDSHAHI HOTEL GROUP, INC. ("MHG"), and Tenant have entered into
a "Food Service Operations Agreement" providing for Tenant's performance of
services in connection with the operation of food and beverage functions
throughout portions of the Hotel which are not part of the Premises ("Food
Service Operations Agreement"). Landlord hereby guarantees the performance of
all obligations of MHG under the Food Service Operations Agreement. In the
event of a default, bankruptcy, or other event that prevents MHG from
discharging its obligations under the Food Service Operations Agreement,
Landlord shall enter into an identical agreement directly with Tenant.
2.3 Landlord's Title and Authority. Tenant acknowledges that
Landlord's interest in the real property on which the Hotel is located
consists, or will consist, of a leasehold interest granted to Tenant pursuant
to that certain Ground Lease ("Ground Lease") entered into, or to be entered
into, by and between the Redevelopment Agency of the City of San Jose
("Agency"), as ground lessor, and Landlord, as ground lessee. Tenant hereby
acknowledges that all of Tenant's rights, obligations, and interests in this
Lease shall be subject to the Ground Lease and subordinated to the rights and
interests of the Agency thereunder. The Landlord represents and warrants that
Landlord's interest in the Ground Lease and in
3
<PAGE> 4
the real property upon which it is located shall be, and at all times shall
remain, free and clear of all liens and encumbrances, other than (a) those
exceptions listed in that certain title binder issued by First American Title
Insurance Company #505630 on August 30, 1991 (the "Title Binder"), (b) any
matter created by Tenant, (c) any refinancing of loans encumbering the Hotel,
and (d) any other matter arising in the ordinary course of Landlord's ownership
and operation of the Hotel to the extent such matters do not or will not have a
material impact on tenant's rights under this Lease. Landlord hereby
represents and warrants that none of the encroachments or other matters set
forth in Item 10 of the Title Binder will have a material and adverse impact on
the renovations, uses, or operations contemplated by the DDA, the Ground
Lease, or this Lease. Landlord has the full right and lawful authority to make
this Lease. At all times during the Lease Term, Landlord agrees to abide by
and perform all its obligations under the Ground Lease, the Acquisition
Disposition and Development Agreement with the Redevelopment Agency of the City
of San Jose with respect to the Hotel (the "DDA") , and the Hotel Operating
Agreement with Mobedshahi Hotel Group, including the continuous operation of
the Hotel in a first class manner as required by Sections 302 and 305 of the
Ground Lease.
2.4 Quiet Enjoyment. So long as Tenant is not in default under
the terms of this Lease, Tenant will have full, quiet, and peaceful possession
of the Premises for Tenant's use and enjoyment of the Premises and all rights
granted in this Lease without interference or interruption, including the
exclusive right to sell
4
<PAGE> 5
and serve food and beverages in the Hotel as provided in the Food Service
Operations Agreement.
2.5 Landlord's Access. Landlord will have the right to enter upon
the Premises for the purposes of inspection, serving or posting notices, making
any necessary repairs to the Premises, complying with laws, ordinances, or
regulations, protecting the Premises, or any other lawful purpose.
Landlord will exercise such rights reasonably, upon reasonable advance
notice (except in the case of emergencies), during ordinary business hours,
and in such manner as not to interfere unreasonably with the business of
Tenant.
ARTICLE 3
TERM
3.1 Commencement Date. This Lease will be effective upon its
execution by the last of the parties to so execute and the delivery to each
party of a fully executed original. If all of the conditions set forth in
Section 3.4 have been timely satisfied or waived pursuant to Section 3.6, the
term of this Lease and Tenant's obligation to pay rent will commence on the
date which is the date on which Tenant opens the Premises for business to the
public ("Commencement Date"). Tenant agrees to use its best efforts to open
for business on or before October 1, 1992. When the Commencement Date is
ascertained, the parties will promptly execute a confirmation of the term,
including options, substantially in the form and content of Exhibit "B"
("Confirmation of Term").
3.2 Primary Term. The main term ("Primary Term") will be for a
period of twenty (20) years beginning on the Commencement Date. If the
Commencement Date is not the first day of a calendar
5
<PAGE> 6
month, the Primary Term will be extended for the number of days remaining in
the month in which the Commencement Date occurs.
3.3 Options. Tenant will have options to extend the Primary Term
for two (2) consecutive, five (5) year periods ("Option Periods") on all the
provisions contained in this Lease, including the adjustment of Minimum Rent,
by giving Landlord written notice of the exercise of the option at least one
hundred eighty (180) days prior to the expiration of the Primary Term or the
then-current Option Period. Tenant's exercise of an option is conditioned upon
the Lease being in effect without existing default on the part of Tenant (a)
when notice of exercise is given, and (b) on the date immediately preceding the
first day of the subject Option Period.
3.4 Conditions to Commencement. The Commencement Date is
conditioned upon the following conditions:
(a) Permits and Licenses. Receipt by Tenant, within sixty
(60) days of the Effective Date, of all permits and licenses necessary for
Tenant to construct its improvements. The permits and licenses are to be
validly and irrevocably granted on terms and conditions reasonably satisfactory
to Tenant and no longer subject to appeal. Landlord agrees to execute any
applications or other documents reasonably requested by Tenant in order to
obtain the permits and licenses. Tenant will defend, indemnify and hold
Landlord harmless from all claims and liabilities arising from Landlord's
execution of the documents. Tenant will proceed with its best efforts to
secure the permits and licenses as soon as possible following the Effective
Date, at Tenant's sole cost and expense.
6
<PAGE> 7
(b) Landlord's Construction. Completion of Landlord's Work
(as defined in Section 6.1); provided, however, that Landlord shall only be
required, for the purpose of this condition, to have two (2) floors of guest
rooms completed as part of Landlord's Work.
(c) Possession. Delivery of possession of the Premises for
commencement of Tenant's construction of its improvements within ten (10)
business days following the Effective Date.
3.5 Conditions to Lease. The effectiveness of this Lease and
Tenant's obligations hereunder are subject to the approval by Tenant, on or
before December 31, 1991, of each and all of the following.
(a) The Lease by Tenant's Board of Directors.
(b) Non-disturbance Agreement from Agency.
(c) Non-disturbance Agreement from the Bank of
California.
(d) A title insurance policy for the benefit of Agency
as required by the DDA.
(e) The Disbursement Agreement between Landlord, Tenant
and Agency with respect to all funds needed for the renovation to the Hotel and
all Landlord's Work and Tenant's Work, as defined below.
(f) All consents and approvals of Agency to this Lease,
including Tenant's Work, the right of first refusal, and the Tenant's share of
profits on sale.
3.6 Satisfaction of Conditions. If any of the conditions set
forth in Section 3.4 or 3.5 are not satisfied by the particular time specified,
Tenant will have the right to notify Landlord within five (5) days, and this
Lease will be terminated as of
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Tenant's notice, or at Tenant's option, the Commencement Date shall be extended
until such conditions are satisfied. Tenant may waive satisfaction of any of
the conditions, each of which is for the benefit of Tenant. Failure to notify
Landlord timely of the failure of any of the conditions to be satisfied will be
deemed a waiver of the condition.
ARTICLE 4
RENT
4.1 Lease Year. The term "Lease Year" means a period of twelve
(12) consecutive full calendar months. The first Lease Year will begin on the
Commencement Date if the Commencement Date occurs on the first day of a
calendar month; if not, the first Lease Year will commence on the first day of
the calendar month next following the Commencement Date. Each succeeding Lease
Year will commence upon the anniversary of the first Lease Year.
4.2 Minimum Rent.
(a) Tenant will pay to Landlord for each Lease Year, as
minimum yearly base rent ("Minimum Rent"), without deduction, setoff, or prior
notice or demand, the sum of * (subject to adjustment as provided in (b)
below), payable in twelve (12) equal monthly installments, each in advance on or
before the first day of each and every calendar month. Notwithstanding the
foregoing, there shall be no Minimum Rent due and payable for any Lease Year, or
any portion of a Lease Year, until the 1st day of the month following the month
during which Gross Sales have cumulatively, since the Commencement Date, totaled
* . At such time, the Minimum Rent, as provided herein, shall commence. The
Minimum Rent during each
* Confidential Treatment Requested
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Option Period will be * percent * of the total of (a) the
average Minimum Rent for the three (3) Lease Years immediately preceding the
subject Option Period and (b) the average yearly Percentage Rent collected for
the three (3) Lease Years immediately preceding the subject Option Period, but
in no event less than the Minimum Rent in effect immediately prior to the
Option Period. On the first day of the second Lease Year of each such Option
Period, and on the first day of each Lease Year thereafter during said Option
Period, the Minimum Rent shall be adjusted as provided in Section 4.2(b) below.
(b) Commencing on the first day of the second Lease Year
and on the first day of each Lease Year thereafter (each an "Adjustment Date")
during the term of this Lease (including any Option Periods, if applicable), the
Minimum Rent shall be increased in accordance with the percentage increase, if
any, occurring over the twelve (12) month period preceding each Adjustment Date
in the Consumer Price Index-Urban Wage Earners and Clerical Workers (San
Francisco-Oakland-San Jose Area; Base 1982-84 = 100) ("Index") , as published by
the United States Department of Labor, Bureau of Labor Statistics; provided,
however, that in no event shall the percentage increase for any such twelve (12)
month period exceed five percent (5%) of the Minimum Rent amount in effect
prior to the applicable Adjustment Date. In no event shall the Minimum Rent, as
adjusted, be less than the Minimum Rent for the immediately preceding Lease
Year. Should the Bureau of Labor Statistics discontinue the publication of the
Index, publish the same less frequently or alter the same in some other manner,
then a substi-
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tute index or procedure which reasonably reflects and monitors consumer prices
shall be used.
4.3 Percentage Rent. Tenant shall pay to Landlord for each
Accounting Year, without deduction, setoff, or prior notice or demand,
"Percentage Rent" in an amount equal to * percent * of Gross Sales (as defined
in section 4.4 below) until Gross Sales, from the Commencement Date, have on a
cumulative basis exceeded *, at which time the Percentage Rent shall be *
percent * of Gross Sales. Percentage Rent shall be credited with the amount of
any Minimum Rent paid by Tenant in the Accounting Year in question. Percentage
Rent shall be paid on a monthly basis within ten (10) business days following
the end of each calendar month. At such time as the year-end statement is
provided by Tenant to Landlord pursuant to Section 4.5 below, Tenant shall pay
to Landlord any additional sums required to be paid as Percentage Rent to the
extent such sums have not been paid during the course of the previous Accounting
Year.
4.4 Gross Sales. The term Gross Sales means the gross selling
price of all food, beverages, goods, and services sold in or from the Premises
and Hotel by Tenant, its permitted subtenants, licensees, or concessionaires,
whether for cash or on credit (whether collected or not), including the gross
amount received by reason of orders taken on the Premises although filled
elsewhere, and whether made by employees or vending machines, and the value of
any food or beverage items, goods or services provided in exchange or trade for
other goods and services received by Tenant, and all Gross Revenues, as defined
in the Food Service Operations Agreement. Gross Sales do not include, or if
included there will be
*Confidential treatment requested
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deducted therefrom (but only to the extent included), the following: (i) cash or
credit refunds to customers; (ii) goods returned to sources or transferred to
other locations owned by or affiliated with Tenant when such exchange is not
made for the purpose of consummating a sale made in, at, or from the Premises;
(iii) refundable deposits and gift certificates or similar vouchers except as
converted into by a sale by redemption; (iv) sales of fixtures, machinery,
equipment, or other property which are not for sale or trade in the ordinary
course of Tenant's business; (v) sums or credits received in settlement of
claims for loss or damage to Tenant's goods; (vi) receipts from cigarette
vending machines and other machines and devices selling goods or services beyond
Tenant's net receipts; (vii) the value of meals furnished to Tenant's employees;
(viii) allowances, complimentary meals, coupons, and discounts in the ordinary
course of business to the extent there is no receipt of payment, goods or
services therefor; (ix) gratuities or service charges in lieu thereof given to
Tenant's employees; (x) taxes of whatever nature imposed on the sale of goods or
services, (xi) service charges paid to financial institutions on account of
credit card, debit card, or similar noncash purchases by customers; and (xii)
the value of food or services donated or sold, at an amount not exceeding the
approximate cost, for charitable purposes or non-profit community functions.
4.5 Statement of Gross Sales. Tenant will furnish to
Landlord statements of Gross Sales within thirty (30) days after the close of
each Accounting Quarter and an annual statement certified as accurate by an
officer of Tenant within ninety (90)
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days after the close of each Accounting Year. The annual statements will show
the determination of the Percentage Rent based on the Gross Sales of Tenant and
any sums paid to Landlord as Percentage Rent for the Accounting year. Tenant
will also furnish to Landlord an audited annual statement for each fiscal year
of Tenant promptly following the completion of said audit.
4.6 Records. Tenant will keep full and accurate books, records,
and other pertinent data which would normally be examined by an independent
accountant pursuant to generally accepted auditing standards in performing an
audit of Tenant's Gross Sales. All such books, records, and data will be
retained and preserved for at least thirty-six (36) months after the end of the
Accounting Year to which they relate. All statements provided pursuant to
Section 4.5 above shall be certified by an officer of Tenant as true and
correct.
4.7 Audit. Landlord is entitled, at any time and from time to
time during the term of this Lease, but no more frequently than one time per
year, and once after the expiration or termination of this Lease, to an
independent audit by an auditor designated by Landlord of Tenant's books,
records, and other pertinent data to determine Tenant's Gross Sales. The audit
may be at any reasonable time upon at least twenty (20) days' prior written
notice to Tenant, will be limited to the determination of Gross Sales, and will
be conducted during normal business hours at a mutually agreeable location.
Tenant will promptly pay to Landlord any deficiency or Landlord will promptly
refund to Tenant any overpayment, as the case may be, which is established by
the audit. The costs of the audit will be borne by Landlord unless the audit
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shows that Tenant understated Gross Sales by more than three percent (3%) for
the period examined, in which case the costs will be borne by Tenant. Any
previous understatements which have been disclosed and paid by Tenant will be
credited and thereby eliminated from a subsequent determination of
understatement. Any funds to be paid or refunded, as set forth herein, shall
be paid with interest at the rate set forth in Section 15.6 below, accruing
from the date of overpayment or underpayment, as the case may be.
4.8 Confidentiality of Information. Landlord will maintain the
confidentiality of and not disclose to third parties the information furnished
or revealed as the result of Sections 4.3 through 4.7 except as may be required
for the exercise of Landlord's rights under this Lease, or as may be required
by the Ground Lease with the Agency, by law, or for disclosure to prospective
lenders or purchasers, provided that any such recipients execute a
confidentiality agreement reasonably satisfactory to Tenant.
4.9 Accounting Year. For purposes of this Lease, the term
"Accounting Quarter" shall be defined as the quarterly time period beginning on
the first day of Tenant's fiscal year (the day following the last Sunday in
May) and continuing for thirteen (13) weeks thereafter, with each successive
thirteen (13) week quarter to be considered an Accounting Quarter, and the term
"Accounting Year" shall be defined as Tenant's fiscal year, which is each
approximate twelve (12) month period during the term ending on the last Sunday
in May, provided that the first Accounting Year shall commence on the
Commencement Date and shall end on the last Sunday
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in May following the Commencement Date, and the last Accounting Year shall end
upon the expiration of the Term. The Minimum Rent shall be prorated as of the
commencement and termination of each Accounting Year for the purposes of
determining Percentage Rental payable by Tenant during such Accounting Year of
the Term. In the event Tenant changes its Accounting Quarter or the day on
which the Accounting Quarter ends, Landlord and Tenant shall equitably adjust
the Accounting Year, the dates upon which it ends, and the due dates of all
statements and payments due Landlord hereunder.
4.10 Abatement. For each day following the Commencement Date that
the Hotel does not operate, Tenant may cease to operate or, if Tenant elects
to continue operations, minimum Rent shall abate and Percentage Rate shall be
* percent * of Gross Sales.
ARTICLE 5
USE
5.1 Use. The Premises will continuously (subject to the terms
hereof) be used for the operation of a public restaurants and any purposes
incidental to such purpose. Landlord acknowledges that Tenant intends to
operate an Italian restaurant in the Restaurant Area of the Premises ("Ground
Floor Restaurant") and a restaurant in the Roof Area of the Premises ("Roof Top
Restaurant"). Such restaurants will include the service of alcoholic beverages
to the extent permitted by law. Tenant will not use or permit the Premises to
be used for any other purpose or under any other trade name without Landlord's
consent. Tenant shall operate the aforesaid restaurants in a first class
manner with service predominately oriented to seated dining service by
*Confidential treatment requested
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uniformly attired waiters, waitresses and/or wine stewards. Tenant shall not
operate on the Premises any game machines, pinball machines, pool tables or
other form of gaming. Tenant shall only have such entertainment on the
Premises which is consistent with a first class dining establishment. The
Ground Floor Restaurant shall, at all times, be operated under a name that
includes "Il Fornaio," which name shall not be changed without the prior
written consent of Landlord, which consent shall not be unreasonably withheld.
The name of the Roof Top Restaurant shall be subject to the reasonable approval
of Landlord. Operation of the restaurants in accordance with the foregoing
provisions is sometimes hereinafter referred to as the "First Class Standard".
Tenant shall not deviate from the First Class Standard as established in this
section without the prior written consent of Landlord, which consent may be
withheld in Landlord's reasonable discretion.
5.2 Compliance with Laws. Tenant will comply with all laws
concerning the use, condition, and occupancy of the Premises during the term.
Tenant shall, at its sole cost and expense, obtain and maintain any and all
permits to operate its business on the Premises, including, without limitation,
any conditional use permits and liquor licenses. Landlord agrees, however,
that Tenant may, without cost or expense to Landlord, and by appropriate
proceedings diligently conducted in good faith, contest the validity or
application of any law or instrument of record affecting the Premises, provided
neither Landlord nor the Premises would be in any danger of civil or criminal
liability or the filing and foreclosure of any lien for noncompliance.
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5.3 Conduct of Business. Subject to the First Class Standard set
forth above, Tenant will during the entire Term conduct its business upon the
Premises in accordance with its discretion as to the normal and customary
operation of its business and prudent business judgment so as to maximize its
profitability. Tenant will offer breakfast, lunch, and dinner daily at
locations and times to be established from time to time by Tenant. Unless it
elects to do so, Tenant will not operate in the Premises (i) if it is prevented
from doing so because of force majeure considerations, (ii) while refurbishment
or alterations are being made to the Premises, (iii) on legal holidays,
Thanksgiving, the day after Thanksgiving, Christmas and one other selected day
per Lease Year, and (iv) for a reasonable period of time to facilitate
inventory and at the end of the term to facilitate moving out, restoration, and
other activities incidental to Tenant winding up business at the Premises.
Tenant will carry on its business at all times in an efficient, quality, and
reputable manner for the type of business for which the Premises are leased,
including maintenance of an adequate number of employees and sufficient
inventory. Tenant will not use the Premises in any manner that will constitute
waste, nuisance, or unreasonable annoyance to other guests or patrons of the
Hotel, or which is inconsistent with the provisions of the Ground Lease with
the Agency. Landlord agrees that noise, odors and exhaust incidental to a
restaurant, excluding odors of deteriorating food, will not be deemed a
nuisance or objectionable.
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ARTICLE 6
IMPROVEMENTS
6.1 Landlord's Work. Landlord, at its sole cost and expense, will
construct the improvements described in Section 1.1 of Exhibit "C" ("Landlord's
Work"), subject to the terms thereof.
6.2 Tenant's Work. Tenant will construct the improvements and
provide the fixtures, furnishings, and equipment described in Section 1.2 of
Exhibit "C" ("Tenant's Work"), subject to the terms thereof.
6.3 Signs. Tenant will have the right to erect and maintain
upon the Premises any signs Tenant deems appropriate to the normal conduct
of its business, subject to compliance with applicable laws, including
approvals required by such laws, and the prior approval of the Agency and
Landlord. Landlord makes no representation with respect to the availability
of such approvals. Landlord's approval shall not be unreasonably withheld.
Tenant shall, at its sole cost, maintain and repair all of its signs consistent
with the First Class Standard.
6.4 Alterations. Tenant will not make any alterations, additions,
or improvements (collectively, "Alterations") to the Premises without the prior
written consent of Landlord, except that Tenant may make any nonstructural
Alterations to the Premises which do not diminish the then fair market value of
the Premises and do not exceed a cost of Twenty-five Thousand Dollars
($25,000.00) per Lease Year (as adjusted for inflation as provided in Section
4.2(b) during the Lease Term) without the prior written consent of Landlord if
such Alterations are internal to the Premises and do not alter, modify, or
affect the outside aesthetics of the
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Building. Except as otherwise provided for in this Lease, all Alterations which
may be made or installed upon the Premises will remain upon and be surrendered
with the Premises and become the property of Landlord at the termination of
this Lease. If Landlord requests removal of any Alterations at the time such
Alterations are approved by Landlord, or if approval is not required and
Landlord gives notice to Tenant at least one hundred eighty (180) days prior to
termination of this Lease, Tenant will remove the same at Tenant's expense.
6.5 Work Standards. All construction work done by Landlord and
Tenant will be performed in a good and workmanlike manner, in compliance with
all governmental requirements, with due diligence, and in such manner as to
cause a minimum of interference with other construction in progress and with
the transaction of business in the Hotel.
6.6 Mechanics' Liens.
(a) Discharge of Lien. Neither Landlord or Tenant shall
create or permit or suffer to be created or to remain, and will discharge, any
lien (including, but not limited to, the liens of mechanics, laborers,
materialmen, suppliers or vendors for work or materials alleged to be done or
furnished in connection with the Premises or the Hotel and the improvements
thereon), encumbrances or other charges upon the Premises or the Hotel and the
improvements thereon, or any part thereof, or upon the Ground Lease or Tenant's
leasehold interest; provided, however, that neither party shall be required to
discharge any such liens, encumbrances or charges as may be placed upon the
Premises or the Hotel by the act of the other party.
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(b) Right to Contest Liens. Landlord and Tenant shall
each have the independent right to contest in good faith and by appropriate
legal proceedings the validity or amount of any mechanics', laborers',
materialmen's, suppliers' or vendors' lien or claimed lien; provided that the
party contesting such claim shall utilize all reasonable means (including the
posting of adequate security for payment) to protect the Premises and the Hotel
and any part thereof or improvements thereon against foreclosure, and shall
indemnify and hold harmless the other party from any adverse effects resulting
from such lien.
(c) Protection of Landlord. Nothing in this Lease shall
be construed as constituting the consent of Landlord expressed or implied, to
the performance of any labor or the furnishing of any materials or any specific
improvements, alterations of or repairs to the Premises or the Hotel or the
improvements thereon, or any part thereof, by any contractor, subcontractor,
laborer or materialman, nor as giving Tenant or any other person any right,
power or authority to act as agent of or to contract for, or permit the
rendering of, any services or the furnishing of any materials in such manner as
would give rise to the filing of mechanics' liens or other claims against the
fee of the Premises or the Hotel or the improvements thereon, or the Ground
Lease. Landlord shall have the right at all times to post, and keep posted, on
the Premises any notices which Landlord may deem necessary for the protection
of Landlord and of the Premises and the Hotel and the improvements thereon from
mechanics' liens or other claims. In addition, but subject to Section 6.6(b)
hereof, Tenant shall make, or cause to be made, prompt payment of all
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monies due and legally owing to all persons doing any work or furnishing any
materials or supplies to Tenant or any of its contractors or subcontractors in
connection with the Premises and the improvements thereon.
ARTICLE 7
MAINTENANCE OF PREMISES
7.1 Tenant's obligations. Subject to the provisions of this Lease
concerning Landlord's maintenance and repair obligations and concerning
destruction and condemnation and any required approvals of Landlord, Tenant
will make all necessary repairs and replacements to maintain the Premises in
good order, condition, and repair, reasonable wear and tear excepted, and in
accordance with the First Class Standard. This obligation includes service
areas located on the Premises. Except as provided below, Landlord does not
have any responsibility to maintain the Premises and Tenant waives the
provisions of California Civil Code Sections 1941 and 1942.
7.2 Landlord's Right to Make Repairs. If Tenant fails to perform
its maintenance obligations within thirty (30) days after written notice from
Landlord, Landlord may perform such maintenance and Tenant will promptly
reimburse (as additional rent under this Lease) Landlord for its expenses
within ten (10) days after delivery of a statement reasonably detailing such
expenses.
7.3 Landlord's Obligations. Subject to the provisions of this
Lease concerning destruction and condemnation, Landlord, at its expense, shall
maintain the foundations, bearing and exterior walls, concrete sub-floors and
roofs of the Hotel, the loading dock, electrical, plumbing, and HVAC systems
that serve the
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Premises, elevators, the sidewalk in front of the Premises (except any sidewalk
repair or maintenance which is the responsibility of a person or entity other
than Landlord or Tenant) in good repair (collectively, the "Structural
Portions") ; except that Landlord (a) shall not be required to repair any
damage to the Structural Portions caused by the act or omission of Tenant or
its representatives, (b) shall not be required to maintain or repair any
specialized systems, components, or structure within the Premises which are
dedicated solely for providing and/or preparing food and beverages, and (c)
shall not be required to maintain or repair any items which are the
responsibility of Tenant under the Food Service Operations Agreement. Subject
to the foregoing, Landlord shall also maintain or repair all other portions of
the Hotel, other than the Premises and the Incidental Areas, including without
limitation, all public areas and the adjacent parking structure for as long as
Landlord has the right to use such structure.
7.4 Emergency Repairs. In the event of any life or property
threatening emergency, Landlord will have the immediate right to enter the
Premises to effect emergency repairs without prior notice to Tenant.
ARTICLE 8
COMMON AREAS
8.1 Definition. The term Common Areas means all public areas and
facilities within the Hotel that are provided for and designated by Landlord
from time to time for the common use of Hotel guests and patrons.
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8.2 Development. Landlord will use its best efforts to complete
its renovation of the ground floor Common Areas by October 1, 1992.
8.3 Modifications. Landlord may make no material changes to or on
the portion of the Common Areas demarcated as Tenant's Area of Control on the
Floor Plan without Tenant's prior written consent. Landlord will refrain from
doing or permitting to be done any act which would in any way materially impair
the visibility of or access to the Premises.
8.4 Tenant's Right to Use. Landlord gives Tenant and its
representatives, customers, and invitees the nonexclusive right to use the
Common Areas in common with Hotel guests and others to whom Landlord has
granted or will grant a similar right. Tenant and Tenant's employees shall
only use those portions of the Hotel not used by Hotel guests or patrons or
which are otherwise designated for "Hotel Staff."
8.5 Landlord's Maintenance and Management. At all times Landlord
will adequately insure the Common Areas and, except as set forth in Article 7
and as to items maintained by Tenant under the Food Service Operations
Agreement, maintain the Common Areas in good condition, including keeping the
Common Areas neat and clean, properly lighted (through the expected departure
of Tenant's employees after Tenant's normal business hours) and repaired.
Landlord will have the exclusive right to:
(a) Rules and Regulations. Establish and enforce
reasonable rules and regulations applicable to all non-Hotel guests and patrons
concerning the maintenance, management, use, and operation of the Common Areas.
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(b) Maintenance Closure. Close temporarily any of the
Common Areas for maintenance. Landlord will, however, use its best efforts to
maintain free access to the Premises during Tenant's normal business hours and
to minimize any disruption to Tenant's business operations.
(c) Dedication Avoidance. Close any of the Common Areas
to whatever extent required, in the opinion of Landlord's counsel, to prevent a
dedication of any of the Common Areas or the accrual of any rights of any
person or of the public to the Common Areas.
(d) Contracts. Enter into contracts with third parties
to insure and maintain the Common Areas.
(e) Management Agreements. Enter into operating
agreements with third parties to manage the maintenance, operation, and
security of the Common Areas in Landlord's behalf upon such terms and
conditions as Landlord elects in exercise of reasonable business judgment.
(f) Make Changes. Subject to Section 8.3, make changes
to the Common Areas.
ARTICLE 9
UTILITIES
9.1 Utilities. Tenant will pay the appropriate suppliers for all
water, electricity, gas, telephone, and other utility and communication
services used by Tenant on the Premises during the term. All such services
will be separately metered and billed to Tenant. If any such services are not
separately metered and billed to Tenant directly by suppliers, then, within
thirty (30) days following substantial completion of the improvements within
the
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Premises, and every year thereafter, Landlord and Tenant shall meet and confer
in good faith to establish Tenant's percentage of utilities that are not
separately metered. If the parties are unable to agree within thirty (30)
days, they shall engage an energy consultant reasonably acceptable to both
Landlord and Tenant for purposes of determining Tenant's use or expected use of
such services and establishing Tenant's percentage share of the same.
Thereafter, Tenant shall pay to Landlord as additional rent Tenant's percentage
share of the cost of such services within ten (10) days of Landlord's written
demand therefor. The cost of the energy consultant shall be shared equally by
Landlord and Tenant.
ARTICLE 10
TAXES AND ASSESSMENTS
10.1 Personal Property. Tenant will pay all taxes levied and
assessed against furnishings, trade fixtures, equipment, and other personal
property of Tenant kept upon the Premises that become payable during the term.
The parties will seek to cause Tenant's personal property to be assessed and
billed separately from Landlord's real property. If Tenant's personal property
is assessed and taxed with Landlord's real property, Tenant will pay Landlord
- -the portion of such taxes attributable to Tenant's personal property.
Landlord will furnish Tenant with a copy of the tax bill, a written statement
setting forth the amount of personal property taxes due from Tenant, and the
method of calculation of such amount. Tenant will thereafter pay the amount of
its taxes to Landlord not later than ten (10) days prior to the date of
delinquency or thirty (30) days after receipt of the billing from Landlord,
whichever is later.
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10.2 Real Property.
(a) Obligation. In each Lease Year and as additional
rent, Tenant will pay fourteen percent (14%) of all Real Property Taxes
(defined in (b) below) levied and assessed against the Hotel not later than ten
(10) days prior to the date of delinquency or, if tax bills are not sent
directly to Tenant from the tax collector, thirty (30) days after receipt of
the bill from Landlord, whichever is later.
(b) Definition. The term Real Property Taxes includes
any form of real estate taxes, general or special assessments, and any license
fee, commercial rental tax, improvement bonds, levy, or tax imposed on the
Premises by any authority having the direct power to tax, including any city,
county, state, or federal government or any school, agricultural, sanitary,
fire, street, drainage, or other improvement or assessment district of the
governmental authority, as against (i) the legal or equitable interest of
Landlord in the Premises and the Hotel, (ii) Landlord's right to rent or other
income from the Premises, (iii) the act of entering into this Lease, or (iv)
the occupancy of the Premises by Tenant. If at any time during the term the
laws concerning Real Property Taxes are changed such that any other
governmental imposition, however described, including a so-called value-added
tax, is imposed on the Premises, the Hotel, or Landlord as a direct
substitution, in whole or in part, for, or in addition to, any Real Property
Taxes, Tenant will pay such imposition in the same manner and Tenant's
allocation of liability for any such imposition will be substantially the same
as Tenant's allocation liability for Real Property Taxes as provided in this
Lease.
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(c) Exclusions. Tenant will have no obligation to pay
(i) for penalties and interest other than those attributable to Tenant's
failure to comply timely with its payment obligations pursuant to this Lease,
(ii) any tax which may be levied upon net income, profits, or business of
Landlord or any personal property taxes, gift, franchise, inheritance, estate,
succession, capital levy, or transfer taxes which may be levied against any
estate or interest of Landlord, (iii) land development fees and assessments for
utilities and special improvements installed in connection with the development
of the Premises and the Hotel exclusive of Tenant's hook-up charges, or (iv)
increases in Real Property Taxes (whether the increases result from increased
rate, valuation, or both) attributable to (a) additional improvements to the
Hotel unless constructed for any food and/or beverage service area, or (b) a
transfer or sale by Landlord of any interest in the property upon which the
Hotel is located.
10.3 Apportionment. Any and all personal property taxes and Real
Property Taxes will be prorated and apportioned according to the number of days
in the fiscal tax year which were included in the Lease term.
10.4 Right to Contest. Tenant, at its own expense, may contest by
appropriate proceedings the amount of such taxes required to be paid by Tenant
pursuant to this Article and Tenant may endeavor at any time or times by
appropriate proceedings to obtain a reduction in the assessed valuation of the
Premises for tax purposes, and in any such event Landlord agrees, at the
request of Tenant, to join with Tenant, at Tenant's expense, in the
proceedings, and Landlord agrees to sign and deliver such papers
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and instruments as may be necessary to prosecute such proceedings. Tenant will
have the right to contest the amount of any such tax and to withhold payment of
the tax if the statute under which Tenant is contesting the tax so permits. In
the event of any such contest, Tenant will indemnify and hold Landlord harmless
with respect to any cost, damage, or expense, including attorneys' fees, in
connection with any such proceedings. Tenant, upon final determination of such
contest, will immediately pay and discharge any judgment rendered against it,
together with all costs and incidental charges.
10.5 Obligation of Landlord. Except to the extent Tenant fails to
comply with this Article 10, any taxes not directly payable by Tenant to the
tax collector relating to the Premises and Common Areas will be timely paid by
Landlord so as not to jeopardize Tenant's quiet enjoyment of the Premises
pursuant to the provisions of this Lease.
ARTICLE 11
INDEMNITY AND INSURANCE
11.1 Landlord Exculpation. Landlord will not be liable to Tenant
for any damage to Tenant or Tenant's property from any cause, and Tenant waives
all claims against Landlord for damage to person or property arising from any
reason, except that Landlord will be liable to Tenant for damage to Tenant
resulting from the negligence or willful misconduct of Landlord or its
representatives.
11.2 Tenant's Indemnity. Tenant will defend, indemnify, and hold
Landlord and its representatives harmless from and against any and all costs,
expenses (including attorneys' fees and court
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costs), losses, liabilities, damages, claims, and demands of every kind or
nature (collectively, "Losses"), arising in any way from (i) construction on or
use or occupancy of the Hotel by Tenant or any person claiming under Tenant,
(ii) the conduct of Tenant's business and any activity, work, or thing done at
the direction of Tenant in or about the Hotel, (iii) negligence or willful
misconduct of Tenant or its representatives, or (iv) any breach or default in
the performance of any obligation on Tenant's part to be performed under this
Lease. Tenant will defend any such action or proceeding brought against
Landlord or its representatives at Tenant's expense with counsel reasonably
satisfactory to Landlord. Tenant's foregoing indemnity obligation will,
however, exclude Losses arising in any way from the negligence or willful
misconduct of Landlord or its representatives.
11.3 Landlord's Indemnity. Landlord will defend, indemnify, and
hold Tenant and its representatives harmless from and against any and all
Losses arising in any way from (i) construction on or use of the Common Areas
and/or the Hotel (excluding the Premises and the Incidental Areas), (ii) the
management of the Common Areas and/or the Hotel and any activity, work, or
thing done or permitted by Landlord in or about the Common Areas and/or the
Hotel (excluding any activity, work or thing done by Tenant under the Food
Service Operations Agreement), (iii) negligence or willful misconduct of
Landlord or its representatives, or (iv) any breach or default in the
performance of any obligation on Landlord's part to be performed under this
Lease. Landlord will defend any such action or proceeding brought against
Tenant or its representatives at Landlord's expense with counsel reasonably
satisfactory to
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Tenant. Landlord's foregoing indemnity obligation will, however, exclude
Losses arising in any way from the negligence or willful misconduct of Tenant
or its representatives.
11.4 Tenant's Insurance. Tenant will, at all times after the
delivery of the Premises to Tenant, carry at its expense:
(a) Liability Insurance. Comprehensive general liability
insurance providing bodily injury and property damage including dram
shop/liquor liability coverage in the amount of the greater of the maximum
coverage currently maintained by Tenant or at least Two Million Dollars
($2,000,000.00) combined single limit insuring against all legal liability
(subject to usual policy exclusions, terms, and conditions) of Tenant and its
representatives arising out of the use, occupancy, or condition of the
Premises. Such insurance will name Landlord as an additional insured for the
specified amount. Tenant will have the right to effect all or any part of such
insurance by endorsement on any general liability insurance maintained by or on
behalf of Tenant or by a separate policy or policies of insurance. Not more
frequently than each three (3) years if, in Landlord's reasonable opinion, the
limit for general liability insurance coverage at that time is materially
inadequate, Tenant will increase such insurance coverage to an amount not to
exceed the amount of insurance coverage customarily required for like
businesses and properties.
(b) Fire Insurance. Insurance providing against loss or
damage to the Premises and Tenant's personal property, improvements, and
alterations in, on, or about the Premises (including, without limit, all of
Tenant's Work as described in Exhibit "C" and all of Tenant's FF&E (as defined
in Exhibit "C")) by (i) fire, (ii)
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perils included in the Extended Coverage endorsement in common use for
commercial structures, (iii) vandalism & malicious mischief, and (iv) sprinkler
leakage coverage, in an amount not less than the full replacement value. The
insurance policy will cover Tenant, Landlord, and their lenders, as their
interests may appear.
(c) Worker's Compensation. Worker's compensation
insurance as required by law.
(d) Business Interruption. Business interruption or
rental loss insurance providing for the payment of Minimum Rent and Percentage
Rent (calculated as the average of Percentage Rent in the two previous Lease
Years, but in no event less than the then applicable amount of Minimum Rent)
for a period of not less than twelve (12) months for any period in which the
Premises are inoperable due to a casualty to be insured pursuant to the
insurance described in subparagraph (b) above.
11.5 Certificates. Tenant will deliver to Landlord, prior to
delivery of possession of the Premises to Tenant, a certificate or certificates
of insurance evidencing the types of coverage, carriers, limits, and effective
dates of coverage. Each policy will be with insurance carriers reasonably
satisfactory to Landlord and will provide not less than ten (10) days' prior
notice to Landlord of cancellation, nonrenewal, or material modification of
that insurance. Tenant will provide current certificates or other satisfactory
evidence of renewal to Landlord throughout the term of this Lease.
11.6 Waivers of Subrogation. Landlord and Tenant hereby release
any rights each may have against the other in connection with any of the damage
occasioned to Landlord or Tenant, as the
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case may be, to their respective property, the Premises, or its contents or to
other portions of the Hotel arising from any risk generally covered by fire,
Extended Coverage endorsement, vandalism & malicious mischief, and sprinkler
leakage coverage. In addition, the parties each, on behalf of their respective
insurance companies insuring the property or its contents of either Landlord or
Tenant against any such damage, waive any right of subrogation that it may have
against Landlord or Tenant, as the case may be.
ARTICLE 12
ASSIGNMENT AND SUBLETTING
12.1 General Prohibition. Tenant will not voluntarily, by
operation of law, or otherwise, assign or sublet all or any portion of the
Premises or Tenant's interest in this Lease or suffer or permit all or any part
of the Premises to be operated, managed, or otherwise used by a third party
without Landlord's prior written consent. An "assignment or sublet" shall
include any sale, transfer, assignment, encumbrance or hypothecation of the
Premises, or all or any portion of Tenant's interest therein or in the Lease.
Tenant hereby acknowledges that Landlord has entered into this Lease with
Tenant because of Tenant's unique experience and expertise in the restaurant
business. For this reason, Tenant acknowledges that, except as expressly
provided in this Article 12, any proposed assignment or sublet by Tenant is
subject to Landlord's prior written consent, which consent may not be
unreasonably withheld. In this regard, Landlord will be deemed to have
reasonably rejected or denied any proposed assignment or sublet where it has
not been demonstrated that the proposed transferee (a) holds the requisite
experience and expertise to operate a restau-
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rant and food and beverage service throughout the Hotel in accordance with the
First Class Standard, (b) has other operating restaurants similar to those
operated on the Premises which are operating profitably, and (c) will staff the
Premises with management personnel possessing at least ten (10) years
experience in operating first class restaurants. The foregoing is not intended
to limit grounds upon which Landlord may reasonably reject any proposed
assignment or sublet.
12.2 Landlord's Consent Not Required. Landlord's consent is not
required for Tenant to assign this Lease or sublet the Premises to any entity
which (i) is Tenant's parent organization, (ii) is any corporation a majority
of whose voting stock is owned, directly or indirectly, by Tenant or Tenant's
parent organization, (iii) as a result of consolidation, merger, or other
reorganization with Tenant or Tenant's parent organization, will own all or
substantially all of the voting stock of Tenant or Tenant's parent corporation,
(iv) acquires all or substantially all of the voting stock of Tenant, (v)
acquires all or substantially all of the assets of Tenant, or (vi) acquires
three or more separate restaurant locations of Tenant in one transaction.
12.3 Information. When requesting Landlord's consent pursuant to
this Article 12, Tenant will submit in writing to Landlord (i) the name,
address, and legal composition of the proposed assignee or subtenant (ii) the
proposed effective date, (iii) the nature of the assignee's or subtenant's
business to be carried on at the Premises, (iv) the terms and provisions of the
proposed assignment or sublease, (v) reasonable financial information as
Landlord may request concerning the proposed assignee or
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subtenant, and (vi) such other information as Landlord may reasonably request
to determine the character and financial responsibility of the proposed
assignee or subtenant. Each assignment or sublease to which there has been
consent will be in writing and in a form reasonably satisfactory to Landlord.
12.4 No waiver or Release. Except as Landlord may otherwise agree
in writing, Landlord's consent to any assignment or sublease will neither waive
the requirement of Landlord's consent to any subsequent assignment or sublease
nor release Tenant from Tenant's payment and performance obligations in this
Lease. Tenant will remain jointly and severally liable for such payment and
performance. Any assignment or sublease requiring but lacking Landlord's prior
written consent will be void at Landlord's option.
12.5 Collection. Any rental payments or other sums received and
accepted by Landlord from Tenant or any other person in connection with
Tenant's obligations under this Lease will be conclusively presumed to have
been paid by Tenant or on Tenant's behalf. Tenant hereby assigns to Landlord
all rent or other sums received from any subletting of the Premises for
application by Landlord pursuant to the provisions of Article 15; provided,
however, that until the occurrence of any such default, Tenant will have the
right to collect such sums.
ARTICLE 13
DAMAGE AND DESTRUCTION
13.1 Obligation to Repair. In the event of (i) the partial or
total damage or destruction of the Premises or (ii) the Premises being declared
unfit or unsafe for occupancy by any authorized public authority, Tenant will,
at its sole cost and expense,
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promptly commence and diligently prosecute to completion such repairs as are
necessary to restore the Premises to substantially the same condition as it was
in immediately prior to such damage or destruction, but only if any insurance
proceeds Tenant receives for such damage are adequate to complete such repairs,
provided Tenant has complied with all insurance requirements in this Lease.
Likewise, Landlord will promptly commence and diligently prosecute to
completion such repairs as are necessary to correct any damage or destruction
of portions of the Hotel which render the Hotel totally or partially
inaccessible, unusable, or which materially and adversely affect Tenant's
business, but only if any insurance proceeds Landlord receives are adequate to
complete such repairs, provided Landlord has complied with the insurance
requirements of this Lease.
13.2 Option to Terminate.
(a) By Landlord. If the Hotel is damaged or destroyed
during (i) the last five (5) years of the term (unless Tenant exercises an
option, if any, such that a minimum of five (5) years remains in the term of
this Lease) or (ii) at any time during the term by a casualty which is not
ordinarily insurable, in either case to an extent in excess of thirty percent
(30%) of the replacement cost of the Hotel (exclusive of foundations and
footings), then Landlord may terminate this Lease by written notice to Tenant
given within thirty (30) days following the date such damage or destruction
occurs.
(b) By Either Party. If Landlord's and Tenant's repairs
cannot be made and completed within one hundred eighty (180) days after such
damage or destruction, then either party may
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terminate this Lease by written notice to the other given within thirty (30)
days following the date such damage or destruction occurs. In such event, this
Lease will be deemed terminated as of the date such damage occurred and all
rental will be prorated as of such date.
13.3 Insurance Proceeds. If either party elects to terminate this
Lease as allowed under Section 13.2, Tenant will deliver the Premises to
Landlord in its damaged condition and neither party will have any obligation to
repair or rebuild. In such event, Tenant's insurance proceeds, if any, will
belong to Landlord except any portion covering loss of or damage to Tenant's
personal property or loss of income. If this Lease is not so terminated, any
insurance proceeds remaining after complying with the provisions of this
Article 13 will be Tenant's sole property.
13.4 Continued Operation. Unless this Lease is terminated pursuant
to Section 13.2, Tenant will continue the operation of its business during any
such period to the extent reasonably practicable from the standpoint of prudent
and profitable business management. Unless this Lease is so terminated, there
will be no abatement or reduction of rent.
13.5 Statutory Waiver. Tenant waives the provisions of any statute
including California Civil Code Sections 1932(2) and 1933(4), with respect to
any rights or obligations concerning damage or destruction in absence of any
express agreement among the parties, and any similar statute now or hereafter
in effect will have no application to this Lease for any damage or
destruction to all or any part of the Premises.
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13.6 Deemed Sale of Building. In the event that Landlord elects to
terminate this Lease as provided in 13.2(a) or (b), any insurance proceeds
actually received by the Landlord shall be deemed to be gross cash proceeds
received from the sale of an interest in the Hotel within the meaning of
Section 18.3 and Landlord shall either immediately list the Hotel for sale and
use its best efforts to market and sell the Hotel in a commercially reasonable
manner, or have the then fair market value of the Hotel determined by an
appraiser appointed by the Agency which shall be deemed to be sales proceeds.
ARTICLE 14
EMINENT DOMAIN
14.1 Definitions. The term taking means (i) the exercise of any
governmental power, by legal proceedings or otherwise, by any public or
quasi-public authority or private corporation or individual in the exercise of
eminent domain and (ii) the voluntary sale or transfer under the threat of
exercise of eminent domain. The term date of taking means the earlier of the
date of taking of actual physical possession by the condemning authority or the
date the condemning authority gives notice that it is deemed to have taken
possession. The term total taking means a taking of so much of the Premises or
Hotel as, in Tenant's reasonable opinion, to render the Premises to be
unsuitable for Tenant's continued use as a restaurant. The term partial taking
means a taking of the Premises or Hotel which does not constitute a total
taking. The term temporary taking means a taking for less than one hundred
eighty (180) days.
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14.2 Determination of Taking. If there is a total taking, this
Lease will terminate on the date of taking. Within sixty (60) days after the
date the nature and extent of the taking are finally determined and Tenant
receives notice of such determination, Tenant must notify Landlord that Tenant
considers, in its sole discretion, a taking of less than the entire Premises or
Hotel to be a total taking; otherwise the taking will be deemed to be a partial
taking.
14.3 Partial Taking. If there is a partial taking, this Lease will
terminate as to the portion of the Premises taken and continue in full force
and effect as to the remainder of the Premises. Rent paid prior to the taking
with respect to the portion of the Premises taken will be promptly returned to
Tenant by Landlord. Rent, except Percentage Rent, after a partial taking will
be equitably reduced based on the extent to which the taking, including
restoration activity, interferes with Tenant's business on the Premises. To
the extent of any condemnation award paid to Landlord, Landlord will promptly
make all necessary repairs or alterations to make the remaining Premises a
complete architectural element and will promptly restore the Common Areas as
appropriate.
14.4 Temporary Taking. If there is a temporary taking, this Lease
will not terminate but rent, except Percentage Rent, will be equitably reduced
based on the extent to which the taking interferes with Tenant's business in
the Premises.
14.5 Award. In the event of any taking, Landlord and Tenant may
separately pursue their claims against the condemning authority. Tenant will
be entitled to receive, and Landlord will have no right to pursue for itself,
any award for claims based on (i) the adjusted book value (deemed to be
the unamortized or
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undepreciated value for book purposes) of construction of the Premises (except
to the extent paid for by Landlord under the Lease) and Alterations which
Tenant has no right to remove pursuant to the provisions of this Lease, (ii)
the value of Tenant's Alterations to the Premises which Tenant has the right to
remove pursuant to the provisions of this Lease but elects not to remove, (iii)
loss of or damage to Tenant's personal property, (iv) loss to Tenant because
of interruption of business, (v) Tenant's loss of goodwill, and (vi) Tenant's
cost of removal and relocation. Tenant will have no right to pursue a claim
based upon the residual value of the Land or pursue claims or retain any award
to which Landlord is entitled so as to diminish Landlord's award, except as
provided in Section 18.3.
14.6 Notice to Tenant. After Landlord has knowledge of the
intention of any authority to effect a taking, Landlord will promptly give
notice of such to Tenant.
ARTICLE 15
DEFAULT
15.1 Events of Default. The occurrence of any of the following
will constitute a default by Tenant:
(a) Abandonment. Abandonment of the Premises by Tenant
or vacation of the Premises by Tenant for ten (10) consecutive days, except as
permitted in Section 5.3.
(b) Nonpayment of Rent. Failure by Tenant to pay rent
when due if the failure continues for ten (10) days after written notice has
been given to Tenant that the rent is delinquent. "Rent" includes Minimum
Rent, Percentage Rent, and any and all
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items described herein as "additional rent" or which are otherwise payable by
Tenant to Landlord.
(c) Other Obligations. Failure by Tenant to perform any
provision of this Lease required of it other than (a) and (b) above if the
failure is not cured within a reasonable time not to exceed thirty (30) days
after notice has been given to Tenant. If, however, the failure cannot
reasonably be cured within the cure period, Tenant will not be in default of
this Lease if Tenant commences to cure the failure within the cure period and
diligently and in good faith continues to cure the failure.
(d) General Assignment. A general assignment for the
benefit of creditors by Tenant.
(e) Bankruptcy. A petition to have Tenant adjudicated a
bankrupt, or a petition for reorganization or arrangement under the federal
bankruptcy laws is filed by Tenant or against Tenant and not be dismissed
within sixty (60) days from the date of such filing.
(f) Receivership. The assumptions of the assets of
Tenant or of the business conducted by Tenant on the Premises by a trustee,
receiver, or other person where possession is not restored to Tenant within
thirty (30) days.
(g) Attachment. The attachment, execution, or other
judicial seizure of substantially all of Tenant's assets located at the
Premises or Tenant's interest in the Lease, where such seizure is not
discharged within thirty (30) days.
(h) Insolvency. The admission by Tenant of its inability
to pay its debts as they become due.
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Notices given under this Section 15.1 will (i) specify the
alleged breach and the applicable Lease provisions and (ii) demand that Tenant
perform the provisions of this Lease or pay the rent that is delinquent, as the
case may be, within the applicable period of time, or quit the Premises. No
such notice will be deemed a forfeiture or a termination of this Lease unless
Landlord so elects in the notice. The purpose of the notice requirements in
this Section 15.1 is to extend the notice requirements of the unlawful detainer
statutes. Such notice will not be in lieu of, but are in addition to, any
notice required under the unlawful detainer statutes.
15.2 Landlord's Remedies. Landlord will have the following
remedies if Tenant commits a default. These remedies are not exclusive; they
are cumulative in addition to any remedies now or later allowed by law.
(a) Recover Possession. Landlord can terminate Tenant's
right to possession of the Premises at any time. No act by Landlord other than
giving notice to Tenant will terminate this Lease. Acts of maintenance,
efforts to relet the Premises, or the appointment of a receiver on Landlord's
initiative to protect Landlord's interest under this Lease will not constitute
a termination of Tenant's right to possession. On termination, Landlord has
the right to recover from Tenant:
(b) The worth, at the time of the award, of the unpaid
rent that had been earned at the time of termination of this Lease.
(c) The worth, at the time of the award, of the amount by
which the unpaid rent that would have been earned after
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the date of termination of this Lease until the time of award exceeds the
amount of the loss of rent that Tenant proves could have been reasonably
avoided.
(d) The worth, at the time of the award, of the
amount by which unpaid rent for the balance of the term after the time of award
exceeds the amount of the loss of rent that Tenant proves could have been
reasonably avoided.
(e) Any other amount, including court costs,
necessary to compensate Landlord for all detriment proximately caused by
Tenant's default.
The phrase "worth at the time of the award" as used in (i) and (ii)
above is to be computed by allowing interest at the prime commercial rate being
charged by the Bank of America N.T. & S.A. plus two percent (2%) per annum, but
not to exceed the then maximum legal rate of interest. The same phrase as used
in (iii) above is to be computed by discounting the amount at the discount rate
of the Federal Reserve Bank of San Francisco at the time of the award, plus one
percent (1%).
(f) Continuation of Lease. Landlord can continue this
Lease in full force and effect, and the Lease will continue in effect as long
as Landlord does not terminate Tenant's right to possession, and Landlord will
have the right to collect rent when due. During the period Tenant is in
default, Landlord can enter the Premises and relet them, or any part of them,
to third parties for Tenant's account. Tenant will be liable immediately to
Landlord for all costs Landlord incurs in reletting the Premises, including
brokers' commissions, and expenses of remodeling the Premises required to make
it rentable, but not improvements for a new
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tenant. Reletting can be for a period shorter or longer than the remaining
term of the Lease. Tenant will pay to Landlord the Minimum Rent due under this
Lease on the dates the rent is due, less the rent Landlord receives from any
reletting. No act by Landlord allowed by this Section 15.2(b) will terminate
this Lease unless Landlord notifies Tenant that Landlord elects to terminate
this Lease. After Tenant's default and for as long as Landlord does not
terminate Tenant's right to possession of the Premises, if Tenant obtains
Landlord's consent, Tenant will have the right to assign or sublet its interest
in this Lease, but Tenant will not be released from liability under this Lease.
If Landlord elects to relet the Premises as provided in this Section 15.2(b),
rent that Landlord receives from reletting will be applied to the payment of:
(i) first, any indebtedness from Tenant to Landlord other than rent due from
Tenant; (ii) second, all costs, including for maintenance, incurred by Landlord
in reletting; (iii) third, rent due and unpaid under the Lease. After
deducting the payments referred to in this Section 15.2(b), any sum remaining
from the rent Landlord receives from reletting will be held by Landlord and
applied in payment of future rent as rent becomes due under this Lease. In no
event will Tenant be entitled to any excess rent received by Landlord. If, on
the date rent is due under this Lease, the rent received from the reletting is
less than the Minimum Rent due on that date, Tenant will pay to Landlord, in
addition to the remaining minimum Rent due, all costs, including for
maintenance, Landlord incurred in reletting which remain after applying the
rent received from the reletting.
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(g) Right to Remedy. Landlord may, after expiration of
Tenant's cure period in Section 15.1(c) unless there is an emergency, correct
or remedy any failure of Tenant not timely cured. The reasonable cost paid by
Landlord to correct or remedy any such default will immediately become due and
payable to Landlord as additional rent.
15.3 Default by Landlord. Landlord will commit a default if
Landlord fails to perform any provision of this Lease required of it and the
failure is not cured within a reasonable time not to exceed thirty (30) days
after notice has been given to Landlord. If, however, the failure cannot
reasonably be cured within the cure period, Landlord will not be in default of
this Lease if Landlord commences to cure the failure within the cure period and
diligently and in good faith continues to cure the failure. Notices given
under this Section 15.3 will specify the alleged breach and the applicable
Lease provisions. Tenant may, after expiration of the cure period unless there
is an emergency, correct or remedy any failure of Landlord not timely cured and
the reasonable cost paid by Tenant will immediately become due and payable to
Tenant by Landlord.
15.4 Mitigation. Landlord and Tenant will each exercise best
efforts to mitigate the damages caused by the other party's breach of this
Lease. Efforts to mitigate damages will not be construed as a waiver of the
nonbreaching party's right to recover damages.
15.5 Lender's Right to Cure. The respective lenders of each party
will have the right, in the party's behalf, to cure the party's alleged breach
within the same time period allocated under this Lease.
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15.6 Interest Charges. Any amount not paid by one party to the
other when due to the other party will bear interest from the date due at the
lesser of (i) the prime commercial rate being charged by the Bank of America N.
T. & S. A. in effect on the date due plus two percent (2%) per annum or (ii)
the maximum rate permitted by law.
15.7 Late Charges. If either party fails to pay any amount due to
the other within ten (10) days after notice the amount is delinquent, the
delinquent party will pay to other party, as a late charge and in consideration
of the additional costs and record keeping incurred or required by the other, a
sum equal to $150. Such late charge shall be due in addition to interest
payable on delinquent amounts.
15.8 Limitation of Landlord's Liability. If Landlord is in default
of this Lease and as a consequence Tenant recovers a money judgment against
Landlord, the judgment will be satisfied only out of the proceeds of sale
received on execution of the judgment and levy against the right, title, and
interest of Landlord in the land and improvements which constitute the Hotel
and out of rent or other income from such real property receivable by Landlord
following occurrence of the default or out of the net consideration, after
payment of the first lien mortgage and reasonable costs of sale, received by
Landlord from the sale or other disposition of all or any part of Landlord's
right, title, and interest in the land and improvements which constitute the
Hotel. The foregoing limitations shall apply only in the event that the
Landlord has not placed, or suffered to be placed upon the Hotel parcel or
Landlord's leasehold estate in the Ground Lease,
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any lien or other encumbrance except as allowed under Section 902 of the Ground
Lease without the Ground Lessor's approval. In the event Landlord places or
allows an encumbrance to be placed upon the Hotel parcel or Landlord's
leasehold estate in the Ground Lease that would otherwise invalidate the
limitations in this Section 15.8, Landlord may at the time of Landlord's
agreement to such encumbrance, agree to permit Tenant to deduct and set off any
out-of-pocket expenses or judgments that Tenant may obtain against rent
otherwise due under this Lease, despite the prohibition against such a
deduction or offset found in Sections 4.2 and 4.3 of this Lease; provided,
however, that Landlord's right to so agree to the deduction and offset will be
effective only if the Minimum Rent thereafter due under the remaining term of
the Lease (or an option if the Tenant has exercised such option) equals or
exceeds the out-of-pocket expenses or judgments, if any, that Tenant then seeks
to recover against Landlord. Landlord's right to allow a deduction or offset,
as provided above, shall be exercisable in Landlord's sole discretion and, upon
such exercise, the limits of liability in the first sentence of this Section
15.8 shall apply notwithstanding encumbrances on the Hotel.
ARTICLE 16
SUBORDINATION, ESTOPPEL
16.1 Subordination. The Lease is and will be subordinate to any
encumbrance now of record and any encumbrance recorded after the date of this
Lease affecting the Premises and Hotel, subject to any written agreement that
provides that if Tenant is not in default under this Lease, Tenant will not be
disturbed in its
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peaceful enjoyment of the Premises pursuant to the provisions of this Lease.
16.2 Attornment. Provided the successor executes a non-disturbance
agreement reasonably approved by Tenant, Tenant will attorn to the successor in
interest of Landlord following any transfer of such interest, either
voluntarily or by operation of law, and recognize such successor as Landlord
under this Lease. If, however, any lender elects to have the Lease prior to
its encumbrance, the Lease will be deemed prior in lien to such encumbrance.
16.3 Documentation. Tenant will execute the written agreement and
any other documents required by the encumbrancer to accomplish the purposes of
Sections 16.1 and 16.2.
16.4 Successor Liability. Notwithstanding any other provision in
this Lease, if any lender or its successor in title succeeds to the interest of
Landlord under this Lease, the liability of such lender or successor will exist
only for matters relating to the duration it is the owner of any interest in
the Premises or is tenant under the Ground Lease.
16.5 Estoppel Certificates. Each party, within twenty (20) days
after notice from the other party, will execute and deliver to the other
party, or such other addressee as the other party may designate, a statement
certifying that the Lease is unmodified and in full force and effect, or in
full force and effect as modified and stating the modifications, and certifying
as to such other matters relating to the Lease and in such form, as the party
may reasonably request. Any such statement may be relied upon by any lender,
purchaser, or other interested party, other than the party requesting same.
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16.6 Quitclaim Deed. Tenant will execute in recordable form and
deliver to Landlord on the termination of this Lease, promptly after Landlord's
presentation, a quitclaim deed to the Premises designating Landlord as
transferee.
ARTICLE 17
ARBITRATION
17.1 Submission to Arbitration. Any disputes which arise between
Landlord and Tenant under this Lease as to any matter concerning the granting
or withholding of an approval or consent by a party (including, without
limitation, any matter involving a party's discretion), or any matter in
which the only issue is whether a party has complied with a non-monetary
covenant or condition of this Lease and does not involve a claim of monetary
damages (other than reasonable out-of-pocket expenses arising out of the cure
of a non-monetary default), shall be subject to final, binding arbitration upon
written request by either party in accordance with this Article 17. The
dispute will be submitted before the American Arbitration Association ("AAA")
within thirty (30) days after the requesting notice in accordance with the
Commercial Rules of the AAA as modified by this Article; a decision will be
issued within thirty (30) days after the close of the record; and judgment upon
the award may be entered in any court having jurisdiction over the judgment.
The substantive law of the state where the Premises are located will be applied
by the arbitrator, and this requirement will be deemed jurisdictional. This
arbitration provision will be deemed self-executing. If either party fails to
appear at any properly noticed arbitration proceeding, an award may be entered
against such party notwith-
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standing such failure to appear. Following any determination that a party has
failed to comply with a non-monetary covenant, the other party may pursue any
remedies provided in this Lease or at law or in equity.
17.2 Selection of Arbitrator. If the parties disagree on the
choice for an arbitrator, the parties will jointly request the AAA to furnish a
list of five available attorneys, businessmen, or both, experienced generally
in commercial matters. After receipt of such list and an opportunity to
consider the names, each party may designate in writing to the AAA not more
than two names to be eliminated from the selection process. If more than one
name remains after such eliminations are made, the selection of the arbitrator
will be made by lot from the remaining names.
17.3 Location. If either party makes demand upon the other for
arbitration, the arbitration will be conducted at the AAA offices in the city
nearest to the Premises in which the AAA maintains an office. The parties may
mutually agree to another location.
17.4 Costs. The expenses, wages, and other compensation of any
witnesses called before the arbitrator will be borne by the party calling the
witnesses. Other expenses incurred, including wages of participants, and
preparation of briefs and data to be presented to the arbitrator, will be borne
separately by the respective parties. The fee for the arbitration, the
arbitrator's fees and expenses, the cost of any hearing room, and the cost of a
shorthand or similar reporter and the original transcript will be borne by
Landlord and Tenant equally.
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ARTICLE 18
SALE, RIGHT OF FIRST REFUSAL, WORKING CAPITAL
18.1 Right of First Refusal. Notwithstanding any other term or
provision of this Lease, in the event that during the Lease term, Tenant
receives a bona fide offer (which it intends to accept) to acquire Tenant's
interest in the restaurants operated on the Premises (and no other assets or
interests of Tenant), or Landlord receives a bona fide offer (which it intends
to accept) to acquire Landlord's interest in the Hotel, then the party
receiving the offer ("Offering Party") shall submit such offer ("Bona Fide
offer") to the other party. The other party shall have a period of twenty (20)
business days in which to accept the Bona Fide Offer submitted by the Offering
Party. If the other party so accepts the Bona Fide Offer, then the Offering
Party shall sell the offered interest to the other party at a price and in
accordance with the terms and provisions set forth in the Bona Fide Offer. If
the other party rejects the Bona Fide Offer or fails to respond to the Offering
Party within the aforesaid twenty (20) business day period, then the Offering
Party shall be free to transfer the offered interest to the third party
originally submitting the Bona Fide Offer in accordance with the terms and
provisions thereof, provided that such transfer is consummated within one
Hundred Eighty (180) days following the end of the aforesaid twenty (20) day
period. If the Offering Party does not consummate a transaction pursuant to
the Bona Fide Offer on substantially the same terms (with no more than a five
percent (5%) reduction in the purchase price), within the aforesaid One Hundred
Eighty (180) days, then any contemplated transfer thereafter shall be subject
to
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the terms and provisions of this Section 18.1. In the event Landlord rejects
any offer from Tenant pursuant to this Section 18.1, Tenant's right thereafter
to transfer any interest in the Premises to a third party shall nevertheless be
subject to the terms and provisions of Article 12 above.
18.2 Working Capital Reserves. Commencing with the Commencement
Date, Tenant shall commit or make available, as the case may be, in connection
with the restaurants in the Premises and all of the food and beverage services
contemplated under the Food Service Operations Agreement, (i) not less than One
Hundred Fifty Thousand Dollars ($150,000) for pre-opening costs and expenses,
(ii) not less than One Hundred Thousand Dollars ($100,000) for inventories, and
(iii) not less than Four Hundred Thousand Dollars ($400,000) as working capital
to cover any operating deficits in the restaurants and the food and beverage
operations for the Hotel until Tenant's business at the Premises has been
profitable for a calendar quarter.
18.3 Hotel Sale Proceeds. If Landlord, at any time during the
Lease Term, hypothecates, encumbers, sells or agrees to sell or transfer all or
any portion of its interest in the Hotel to any party other than Tenant, or of
the Hotel is condemned, all proceeds shall be disbursed as provided below and
thereafter Tenant shall be entitled to receive an amount equal to 5.3% of
either the Net Financing Proceeds or the Net Sale Proceeds (both as defined
below), as received by Landlord or any affiliate of Landlord in connection with
such transaction. "Net Financing Proceeds" shall mean the gross cash proceeds
received from a mortgage, deed of trust, or other encumbrance placed against
the Hotel, less (a) all
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amounts required to pay any and all encumbrances permitted under Section 902 of
the Ground Lease that do not require the consent of the Lessor under the Ground
Lease or encumbrances the proceeds of which were used to reduce the amounts of
(a) through (d) hereof or the net proceeds from which Tenant received a share
as provided herein, (b) the sum of $1,350,000 plus interest at the rate of
twelve percent (12%) per annum from February 28, 1991, minus any previous
distributions, to the partners of Landlord, (c) all amounts due to the Agency
pursuant to the Ground Lease, (d) all commissions, fees and other costs of the
financing, and (e) to Tenant the sum of (i) $1,000,000, reduced by $250,000 on
each anniversary of the Effective Date of this Lease, plus interest at the rate
of twelve percent (12%) per annum from the date Tenant has expended $1,000,000
on Tenant's Initial Work (minus any previous distributions to Tenant on account
of this item (e)(i)), and (ii) $550,000 minus the product of one and one-half
percent (1 1/2%) times the Gross Sales from the Commencement Date to the date
of such financing or sale ("Tenant's Preferred Return"). "Net Sales Proceeds"
shall mean the gross cash proceeds (or the cash equivalent of any property)
received from a sale or transfer of an interest in the Hotel, less (a) all
amounts required to pay any and all encumbrances permitted under Section 902 of
the Ground Lease that do not require the consent of the Lessor under the Ground
Lease, or encumbrances the proceeds of which were used to reduce the amounts of
(a) through (d) hereof or from which Tenant has received a share of Net
Financing Proceeds, (b) the sum of $1,350,000 plus interest at the rate of
twelve percent (12%) per annum from February 28, 1991, minus any previous
distributions, to
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the partners of Landlord, (c) all amounts due to the Agency pursuant to the
Ground Lease, (d) all commissions and other costs of the sale, and (e) to
Tenant, Tenant's Preferred Return. In the event that there is more than one
financing or a sale of partial interests, this provision shall apply to each
such financing and/or sale on a cumulative basis.
In the event of a financing or sale of the Hotel by Landlord, the
proceeds of any such financing or sales shall be disbursed in accordance with
the priority established in the foregoing definitions. In the event that
Tenant receives the Tenant's Preferred Return, then the Minimum Rent shall be
as provided in Section 4.2 above, irrespective of the then cumulative amount of
Gross Sales to date, commencing in the first calendar month following the
closing of such financing or sale, and the Percentage Rent provided for in
Section 4.3 above shall, commencing in the first calendar month following the
closing of such financing or sale, be increased to five percent (5%)
irrespective of the then cumulative amount of Gross Sales.
18.4 Sale of Premises. If Landlord sells or otherwise transfers
all of its interest in the Premises, excluding a transfer for security purposes
only, Landlord will be relieved of all liability accruing after the
consummation of the transfer under the Lease on the part of Landlord for acts,
occurrences, or omissions which occur after the consummation of the transfer if
the transferee has assumed in writing, for the benefit of Tenant, Landlord's
obligations under the Lease. The foregoing limitations shall apply only in the
event that the Landlord has not placed, or suffered to be placed upon the Hotel
parcel or Landlord's leasehold estate in
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the Ground Lease, any lien or other encumbrance except as allowed under Section
902 of the Ground Lease without the Ground Lessor's approval. In the event
Landlord places or allows an encumbrance to be placed upon the Hotel parcel or
Landlord's leasehold estate in the Ground Lease that would otherwise invalidate
the limitations in this Section 18.4, Landlord may nevertheless be relieved of
liability as provided above if at the time of Landlord's agreement to such
encumbrance, Landlord agrees to permit Tenant to deduct and set off any
out-of-pocket expenses or judgments resulting from a breach by Landlord of its
obligations under this Lease against rent otherwise due under this Lease,
despite the prohibition against such a deduction or offset found in Sections
4.2 and 4.3 of this Lease; provided, however, that Landlord's right to so agree
to the deduction and offset will be effective only if the minimum Rent
thereafter due under the remaining term of the Lease (or an option if the
Tenant has exercised such option) equals or exceeds the out-of-pocket expenses
or judgments, if any, that Tenant then seeks to recover against Landlord.
18.5 Surrender of Premises. Upon termination of this Lease, Tenant
will surrender the Premises to Landlord in good and clean condition, ordinary
wear and tear and damage not required to be repaired excepted. Tenant will
remove all of its furnishings, trade fixtures, and other personal property and,
if applicable, those Alterations designated to be removed by Landlord pursuant
to Section 6.4, and may remove or reasonably alter or obliterate evidence of
its trademarks and distinctive trade dress. Tenant will correct any damage
arising from its removal activity.
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18.6 Holding over. Any holding over after the termination of this
Lease without Landlord's consent will be construed as a tenancy from
month-to-month at the rents specified in this Lease plus twenty-five percent
(25%) of the Minimum Rent and otherwise upon the terms and conditions specified
in the Lease, so far as applicable. The foregoing sentence will not be
construed as Landlord's consent for Tenant to hold over.
ARTICLE 19
INTEGRATION OF AGREEMENT
19.1 Entire Agreement. This Lease constitutes the entire agreement
between the parties on the subject matter of this Lease and supersedes any
prior negotiation, understanding, representation, or agreement.
19.2 Amendment. This Lease may not be amended orally, but may be
amended only by a written instrument signed by both parties.
ARTICLE 20
HAZARDOUS SUBSTANCES
20.1 Tenant shall not cause or permit the following to occur:
(a) Any violation of any federal, state, or local law, ordinance
or regulation now or hereafter enacted, related to environmental conditions on,
under, or about the Premises, or arising, from Tenant's use or occupancy of the
Premises, including, but not limited to, soil and ground water conditions; or
(b) Any violation of any federal, state, or local law, ordinance
or regulation now or hereafter enacted, relating to the use, generation,
release, manufacture, refining, production, processing, storage or disposal of
any hazardous substances, petroleum products and other petrochemicals,
asbestos, polychlorin-
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ated biphenyls, or any other hazardous or toxic materials or waste
(hereinafter collectively referred to as "Hazardous Substances") on, under, or
about the Premises, or the transportation to or from the Premises of any
Hazardous Substances.
Tenant shall, at Tenant's sole cost and expense, comply with all laws,
ordinances and regulations regulating the use, generation, storage,
transportation, or disposal of Hazardous Substances ("Laws"). Tenant shall, at
Tenant's own expense, make all submissions to, provide all information required
by, and comply with all requirements of all governmental authorities
("Authorities") under the Laws. Should any Authorities or any third party
demand that a cleanup plan be prepared and that a cleanup be undertaken because
of any deposit, spill, discharge or other release of Hazardous Substances that
occurs during the term of this Lease, at or from the Premises, or which arises
at any time from Tenant's use or occupancy of the Premises, then Tenant shall,
at Tenant's sole cost and expense, prepare and submit the required plans and
all related bonds and other financial assurances; and Tenant shall carry out
all such cleanup plans at Tenant's sole cost and expense.
Tenant shall promptly provide all information regarding the use,
generation, storage, transportation or disposal of Hazardous Substances that
Tenant intends to use. If Tenant fails to fulfill any duty imposed under this
Article 20 within a reasonable time, Landlord may do so; and in such case,
Tenant shall cooperate with Landlord in order to prepare all documents Landlord
deems necessary or appropriate to determine the applicability of the Laws to
the Premises and Tenant's use thereof, and of compliance therewith, and
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Tenant shall execute all documents promptly upon Landlord's request. No such
action by Landlord and no attempt made by Landlord to mitigate damages under
any Laws shall constitute a waiver of any of Tenant's obligations under this
Article 20.
Tenant shall indemnify, defend, and hold harmless Landlord, the
manager of the property, and their respective officers, directors,
beneficiaries, shareholders, partners, agents and employees from any and all
damages, losses, liabilities, obligations, penalties, claims, litigation,
demands, defenses, judgments, suits, proceedings, costs, disbursements and
expenses of any kind or of any nature whatsoever (including, without
limitation,, attorneys and experts fees and disbursements) which may at any
time be imposed upon, incurred by or asserted or warranted against Landlord
arising from or out of any deposit, spill, discharge, or other release of
Hazardous Substances that occurs during the term of this Lease, at or from the
Premises, or which arises at any time from Tenant's use or occupancy of the
Premises, or from Tenant's failure to provide all information, make all
submissions, and take all steps required by all Authorities under the Laws and
all other environmental laws, unless such discharge was caused by Landlord or
the act or omission of an agent or representative of Landlord. Tenant's
obligations and liabilities under this Article 20 shall survive the expiration
or sooner termination of this Lease.
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ARTICLE 21
MISCELLANEOUS
21.1 Limitation on Other Restaurants. During the term of this
Lease, Tenant, or any subsidiary of Tenant shall not own, operate or manage any
full service restaurant for or on behalf of itself, or a subsidiary of Tenant,
within a three (3) mile radius of the Hotel if such restaurant uses in its
trade name "Il Fornaio." Nothing herein shall prevent Tenant from operating a
cafe or Veloce-style business within such restricted area.
21.2 Notices. Any notice, request, or other communication required
or permitted by this Lease will be in writing and will be deemed given if
personally delivered, mailed by registered or certified mail (return receipt
requested), delivered by national overnight delivery courier, or sent by
facsimile or similar transmission which is confirmed by mail or the recipient,
addressed as follows:
To Landlord: ___________________________________
___________________________________
___________________________________
Attention:_________________________
FAX:___________________________________
To Tenant: ___________________________________
___________________________________
Attention:_________________________
FAX:___________________________________
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with copy to: __________________________________
__________________________________
__________________________________
FAX: __________________________________
and: __________________________________
__________________________________
__________________________________
FAX: __________________________________
Service by registered or certified mail will be deemed given three business
days after mailing absent proof of sooner delivery. Service by national
overnight delivery courier will be deemed given the next business day. Either
party, by written notice, may change the place or places for future notices.
Each recipient must have a street address for notice purposes.
21.3 Construction and Interpretation.
(a) Governing Law. This Lease is to be construed in
accordance with the laws of the state within which the Premises are located.
(b) Captions. Exhibits. The titles and subtitles of the
various articles and sections of this Lease are inserted for convenience and
will not be deemed to affect the meaning or construction of this Lease in any
way. The Exhibits are made part of this Lease by the respective references to
them.
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(c) Plain Meaning. Unless defined otherwise, the words
used in this Lease will be construed according to their plain meaning in the
English language. The language used in this Lease will not be interpreted
strictly for or against either party. The word will is used as a command. The
word including is used in a nonexclusive sense. The word law includes federal,
state, and local constitutions, statutes, orders, writs, injunction, decrees,
ordinances, requirements, laws, rules and regulations. The word termination is
used in an all inclusive sense, that is, it includes the concepts of the
expiration of this Lease by lapse of time, rescission, and ending by reason of
default. The word transfer is used in an all inclusive sense, that is, it
includes each and every manner of disposing of any interest in or rights,
privileges, or obligations under any part of this Lease, including any sale,
gift, or assignment. The word notice means notices, request demands, and other
communications and includes all payments to be made and all materials to be
submitted for review or approval and all approvals or disapprovals. The term
rent means Minimum Rent, Percentage Rent and all other sums required to be paid
by Tenant pursuant to the terms of this Lease. The term representative means
officers, directors, partners, employees, agents, and authorized contractors of
a party when acting in such capacity.
(d) Conflicting Construction. If any provision of this
Lease is capable of two constructions, one of which would render the provision
void and the other of which would render the provision valid, then the
provision will have the meaning that renders it valid.
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(e) Singular and Plural, Gender. The singular includes
the plural and vice versa, and the masculine includes the feminine and neuter,
whenever the context so requires.
21.4 Time of Essence. Time is of the essence of each provision of
this Lease.
21.5 Severability. Nothing in this Lease will be construed as
requiring the commission of any act contrary to law. If there is any conflict
between any provision of this Lease and any present or future law, such
provision will be limited only to the extent necessary to bring it within the
requirement of the law. If any part of this Lease is held to be indefinite,
invalid, or otherwise unenforceable, the balance of this Lease will continue in
full force and effect. This Lease will be valid and enforceable and the
parties agree to be bound by and perform it.
21.6 Effect of Waiver. The failure of either party to exercise any
power reserved to it by this Lease or to insist on strict compliance by the
other party with any obligation or condition under the Lease, and no custom or
practice of the parties at variance with the terms of the Lease, will
constitute a waiver of the party's right to demand exact compliance thereafter
with each term of this Lease. Waiver by either party of any default by the
other will not affect or impair the waiving party's rights with respect to any
other default of a like, similar, or different nature. Any delay, forbearance,
or omission of a party to exercise any power or right arising out of any
default by the other of any provision of this Lease will not affect or impair
the party's rights to declare any subsequent default and to terminate this
Lease.
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21.7 Counterparts. This Lease may be executed in any number of
counterparts, each of which will be deemed to be an original and all of which
together will be deemed to be one and the same instrument.
21.8 Brokers. Each party represents and warrants that it has not
dealt with or taken any other action with any party in a manner so as to give
rise to any valid claim against either party for a broker's commission or
finder's fee in connection with the execution of this Lease. Each of the
party's will defend, indemnify, and hold the other harmless from and against
all liabilities from any other claims for broker's commissions or finder's fees
arising out of its breach of the foregoing representation and warranty.
21.9 Attorneys' Fees. If any action or proceeding is necessary to
enforce the provisions of this Lease, including any claim or demand or
declaratory relief action to interpret this Lease, the prevailing party will be
entitled to reasonable attorneys' fees, costs, and necessary disbursements, as
may be fixed by the court having jurisdiction over the matter, in addition to
any other relief to which it may otherwise be entitled.
21.10 Force Majeure. Except for payment obligations imposed
pursuant to this Lease, if there is any prevention, delay, or stoppage of an
act required of a party pursuant to this Lease because of strikes, lockouts,
other labor disputes, material shortages, embargoes, civil unrest, governmental
regulations, governmental controls, enemy or hostile governmental action,
judicial order, public emergency, fire, earthquake, other Acts of God, and
other causes beyond the reasonable control of the party
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obligated to perform, performance of the act will be excused for the period of
the delay.
21.11 Consent. Whenever the consent or approval of either party is
required pursuant to this Lease, such consent or approval will not be
unreasonably withheld or delayed. The failure to respond to a request for
consent or approval within the time period specified within this Lease or, if
none is specified, fifteen (15) days after the requesting notice, will be
deemed to be consent or approval of the request.
21.12 Relationship of Parties. This Lease, including the method of
computing rent, is not intended to create any relationship of partnership,
joint venture, principal-and-agent, or otherwise than the relationship of
landlord and tenant.
21.13 Successors. This Lease will be binding on and inure to the
benefit of the parties and their successors and assigns, subject to the
restrictions as to assignment pursuant to this Lease.
21.14 No Merger. The surrender of this Lease by Tenant, the mutual
cancellation of this Lease by agreement, or the termination of this Lease on
account of Tenant's default, will not work a merger and will, at Landlord's
option, terminate any subtenancies or operate as an assignment of any such
subtenancies to Landlord.
21.15 Nondiscrimination. Tenant herein covenants by and for itself,
its heirs, executors, administrators and assigns, and all persons claiming
under or through it, and this Lease is made and accepted upon and subject to
the following conditions:
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That there shall be no discrimination against or segregation of any person or
group of persons on account of race, color, creed, religion, sex, marital
status, age, handicap, ancestry or national origin in the leasing, subleasing,
transferring, use, occupancy, tenure or enjoyment of the Premises, nor shall
the Tenant itself, or any person claiming under or through it, establish or
permit any such practice or practices of discrimination or segregation with
reference to the selection, location, number, use or occupancy of tenants,
lessees, sublessees, subtenants or vendees in the Premises.
21.16 Memorandum of Lease. The parties shall execute a memorandum
of lease in recordable form upon the execution of this Lease.
21.17 Parking. Landlord shall, either directly or through MHG,
provide parking for employees, patrons and guests of Tenant in the adjacent
parking structure and/or the convention center as provided in Section 11 of the
Food Service Operations Agreement.
21.18 Submission. The submission of this document for consideration
does not vest legal rights in either party. This document will become
effective as of the Effective Date only after mutual execution and delivery of
this document to each party.
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The undersigned parties have caused this Agreement to be signed on the
respective dates set forth below.
LANDLORD: HOTEL SAINTE CLAIRE TENANT: IL FORNAIO (AMERICA)
PARTNERS, L.P., a CORPORATION
California Limited
Partnership
By: Manco Investment, a
California Corporation
By: /s/ Manouchehr Mobedshahi By: /s/ Laurence B. Mindel
------------------------------ --------------------------------
Manouchehr Mobedshahi Laurence B. Mindel
President Chairman of the Board
Date 11/21/1991 Date 11/21/1991
----------------------------- -------------------------------
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EXHIBIT A
[Floor plan of main Kitchen and Restaurant.]
<PAGE> 66
Exhibit A-1
Floor Plan of Roof Garden
<PAGE> 67
Exhibit A2
(page 1 of 2)
Floor Plan of Il Fornaio
Basement Area.
<PAGE> 68
Exhibit A-2
(page 2 of 2)
[Floor Plan of Second Floor,
identifying pantry, banquet
storage and sales office.]
<PAGE> 69
EXHIBIT "B"
CONFIRMATION OF TERM
This Confirmation of Term, dated for reference purposes
_________________________ 19___, is by and between ___________________________
("Landlord") and _________________________ ("Tenant").
1. Landlord and Tenant have entered into a lease dated
_____________________, 19__ ("Lease") for the Premises (as defined in
Section 2.1 of the Lease) commonly known as ________________________________.
2. Commencement Date (as defined in Section 3.1 of the Lease) is
_____________________, 19__, and the Primary Term (as defined in Section 3.2 of
the Lease) expires on __________________________.
3. Tenant has 2 options to extend the Primary Term of the Lease
for two (2) consecutive, five (5) year periods.
Landlord and Tenant have executed this Confirmation of Term as of the
respective dates set forth below.
LANDLORD:________________________ TENANT:___________________________
_________________________________ __________________________________
By_______________________________ By________________________________
Its______________________________ Its_______________________________
Date_____________________________ Date______________________________
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EXHIBIT "C"
INITIAL CONSTRUCTION
1. CONSTRUCTION.
1.1 Landlord. Landlord shall, at its sole cost and expense, and
except for the items which are included within Tenant's Work (as described in
Section 1.2 below), carry out the work of renovation of the Hotel in accordance
with the plans and specifications as approved by the Agency pursuant to the
Ground Lease, including Section 216 of the DDA with Agency ("Landlord's Work").
The items set forth in Exhibit C-1 are those items within the Premises which
are included within Landlord's Work.
1.2 By Tenant. Except for those items in Exhibit C-1 that are
part of Landlord's Work, Tenant shall carry out all work of improvement
necessary to construct within the Premises a fully fixturized, furnished and
equipped Ground Floor Restaurant and the Roof Top Restaurant, which restaurants
shall be constructed in compliance with the First Class Standard and in
accordance with plans and specifications which have been reviewed and approved
by Landlord ("Tenant's Work"). Tenant's Work as it relates to all portions of
the Premises, excluding the Roof Top Restaurant, is referred to as the
"Tenant's Initial Work."
2. COST OF CONSTRUCTION
2.1 Landlord's Contribution.
(a) Tenant's Initial Work. Landlord will be responsible
in the manner provided below, but not otherwise, for *
of Tenant's cost of construction
of the Tenant's Initial Work ("Landlord's Initial Contribution") . Landlord's
Initial Contribution shall be available
1
* Confidential Treatment Requested
<PAGE> 71
for Tenant's Initial Work in the manner provided in the Disbursement Agreement
(defined below).
(b) Roof Top Restaurant. Landlord will be responsible in
the manner provided below, but not otherwise, for Two hundred Eighty Thousand
Dollars ($280,000) of Tenant's cost of construction of the Roof Top Restaurant
("Landlord's Roof Top Contribution").
2.2 Included Costs of Construction. As used in this
Lease, "cost of construction" for Tenant's Initial Work shall include the
following:
(a) The actual direct construction costs for labor and
materials to Tenant for the building of Tenant's Work;
(b) Plans and specifications (including reproduction
costs), fees, permits, licenses, inspection fees, plan check fees and
certificates required for the improvements by any governmental authority;
architects', engineers', surveyors' and consultants' fees and expenses; the
cost to install and hook up all utilities to serve Tenant's Work; and
(c) Costs for all of Tenant's Fixtures, Furnishings &
Equipment ("FF&E") included within Tenant's Work.
2.3 Excluded Costs of Construction. Landlord shall purchase and
install an elevator to the Roof Garden as part of Landlord's Work. Cost of
construction for the purpose of this Lease will not include any other items
paid or incurred by Tenant which will be the sole responsibility and expense of
Tenant, including the following: any costs of financing Tenant's share of the
cost of construction, attorneys' fees, or any amounts attributable to the work
to be performed by Landlord under Section 1.1 above.
*Confidential Treatment Requested
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3. PLANS AND SPECIFICATIONS.
3.1 Plans and Specifications for Tenant's Initial Work. The
Tenant's Initial Work shall be carried out in accordance with plans and
specifications prepared by Tenant's architect, which plans and specifications
are subject to review and approval by Landlord and the Agency (in accordance
with the DDA).
3.2 Plans and Specifications for Roof Top Restaurant. Plans and
specifications for the Roof Top Restaurant shall be prepared by Tenant's
architect, which plans and specifications are subject to the review and
approval by Landlord and the Agency. Tenant shall prepare the plans and
specifications for the Roof Top Restaurant and submit the same to Landlord and
the Agency for review and approval not later than six (6) months following the
opening date of the Ground Floor Restaurant. Tenant's costs and expenses
incurred in connection with preparation of the plans and specifications for the
Roof Top Restaurant shall be a credit to Tenant's Roof Top Contribution.
3.3 Change Orders. Tenant will be entitled, subject to Landlord's
approval to the extent that the cost of the change will exceed $25,000, to make
such changes as it may reasonably desire in the plans and specifications for
Tenant's Work, but the cost of construction will be adjusted to reflect such
changes by, as applicable, adding the cost of all such changes and by deducting
any appropriate credits; provided, however, that any resulting increase in the
cost of construction shall not increase Landlord's Contribution.
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4. COURSE OF CONSTRUCTION
4.1 Time for Completion for Tenant's Initial Work. Tenant will
use its best efforts to cause construction to be commenced by Tenant's general
contractor (which contractor shall be previously approved by Landlord) by a
date ("Construction Commencement Date") that will enable final completion of
the Tenant's Initial Work, fixturization, and opening for business by not later
than October 1, 1992, and, following the commencement of such construction,
will at all times continuously cause the construction to be prosecuted to final
completion with all due diligence. Notwithstanding the preceding sentence to
the contrary, if Tenant is unable to cause construction to be completed for
opening of business by October 1 1992 due to causes beyond the reasonable
control of Tenant, Tenant shall at all times continue to cause such
construction to be prosecuted to final completion with all due diligence and
otherwise in strict compliance with this Agreement.
4.2 Time for Completion of Roof Top Restaurant. Tenant shall use
its best efforts to cause construction of the Roof Top Restaurant to be
commenced by a date that will enable the final completion of the Roof Top
Restaurant, fixturization, and opening f or business not later than twelve (12)
months following the opening of the Ground Floor Restaurant and, following the
commencement of such construction, will at all times continuously cause such
construction to be prosecuted to final completion with all due diligence.
4.3 Permits and Approvals. Tenant will be responsible, at its
sole cost and expense, for obtaining all governmental approvals of the plans
and specifications to the full extent necessary for
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the issuance of a building permit for the improvements based upon such plans
and specifications. The actual cost of issuance of such building permit will
be included in the "cost of construction" as defined in Section 2.2 above.
Upon request of Tenant, Landlord will join, without cost or liability to
Landlord, in any and all applications for the building permit. Thereafter,
Tenant will also cause to be obtained all other necessary approvals and permits
from all governmental agencies having authority over the construction and
installation of the improvements in accordance with the approved plans and
specifications, and will undertake all things necessary to ensure that the
construction of the improvements is accomplished in strict compliance with all
laws applicable to such construction and the requirements and standards of any
insurance carrier who will provide insurance coverage on the Premises pursuant
to the Lease. Tenant shall also be responsible, at its sole cost and expense,
to assure that Tenant's Work is designed, developed and constructed in
accordance with the terms and provisions of the Ground Lease with the Agency.
Tenant shall also be responsible, at its sole cost and expense, for obtaining
any and all other permits and licenses (including any conditional use permits
and any on-sale liquor licenses) which are or may be necessary-in connection
with the operation of a food and beverage service in the Premises.
4.4 Workmanship. All work will be done in a good and workmanlike
manner with appropriate materials and in strict accordance with the approved
plans and specifications.
4.5 Inspections by Landlord. Landlord, through its agents and/or
architect, will have the right to inspect the construction
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work to be conducted by Tenant during its progress. If Landlord gives notice
of faulty construction or any other material deviation from the plans and
specifications, Tenant will cause its contractors or subcontractors to make
corrections promptly. However, neither this privilege granted to Landlord to
make such inspections, nor the making of such inspections by Landlord, will
operate as a waiver of any right of Landlord to require good and workmanlike
construction and improvements erected in accordance with the plans and
specifications.
4.6 Temporary Signs. Subject to the Ground Lease and any
applicable governmental requirements, Tenant may install temporary advertising
signs prior to or during the course of construction and will remove them within
a reasonable time after the installation of Tenant's permanent signs. All
signs are subject to approval of Landlord prior to installations.
4.7 Fixturization by Tenant. Tenant will promptly, upon
substantial completion of the Tenant's Initial Work and the Roof Top
Restaurant, at Tenant's sole cost and expense, install in and affix to the
completed areas such furnishings, fixtures, equipment,
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and signs as Tenant may deem desirable. All such furnishings, fixtures,
equipment, and signs, including additions and replacements, will be and remain
the sole property of Tenant and not subject to any lien or encumbrance which
may be placed upon the Premises by Landlord, even if such property is attached
to the realty, and may be removed by Tenant at any time. This Lease does not
grant a contractual lien or any other security interest to Landlord with
respect to Tenant's property. Landlord agrees from time to time during the
term, upon written request from Tenant, to execute and deliver any instrument,
release, or other document that may be required by any equipment supplier or
vendor whereby Landlord waives and/or releases any rights it may have or
acquire with respect to any equipment or trade fixtures which may be affixed to
the Premises and agrees that the same do not constitute realty regardless of
the manner some are attached.
5. COMPLETION OF CONSTRUCTION
5.1 Substantial Completion. "Substantial completion" means with
respect to Tenant's Work, that all construction in accordance with the plans
and specifications approved by Landlord and the Agency have been completed so
as to make the Premises ready for the installation of FF&E, subject to punch
list items.
5.2 Final Completion. Upon final completion of Tenant's Work in
good condition and repair, Tenant will furnish (a) a final certificate executed
by Tenant's architect or engineer certifying the final completion of the entire
work of improvement, and (b) a certificate of occupancy or its equivalent
providing that the Premises can be occupied lawfully by Tenant for the purposes
set forth in the Lease. "Final completion" means, as to Tenant's Work,
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that the entire work of improvement has been fully completed in accordance with
the plans and specifications approved by Landlord and the Agency.
6. FINANCING CONSTRUCTION OF THE IMPROVEMENTS.
6.1 Funding Contributions; Disbursements.
(a) Tenant's Initial Work. Upon the Effective Date of this Lease,
Landlord shall cause the funding of Landlord's Initial Contribution so that
such contribution will be available and ready for distribution to Tenant in
connection with Tenant's Initial Work at the time and in the manner provided in
the Disbursement Agreement. Tenant acknowledges that Landlord may fund
Landlord's Initial Contribution from funds advanced by the Agency pursuant to
the DDA. Upon the removal of all conditions set forth in Section 3.5 of the
Lease, Tenant shall provide to the Agency Tenant's Financial Confirmations (as
defined below) and, upon the commencement of construction of the Tenant's
Initial Work, Tenant shall be obligated to, in a prompt and timely manner, pay
all costs of construction related to such work. At such time as Tenant has
expended one Million Five Hundred Fifty Thousand Dollars ($1,550,000) in
connection with costs of construction for the Tenant's Initial Work, Tenant
shall provide an appropriate verification thereof to Landlord and the Agency.
Tenant shall be thereafter entitled to submit draw requests for Landlord's
Initial Contribution, which requests will be made and paid pursuant to the
Disbursement Agreement.
(b) Roof Top Restaurant. Upon the commencement of construction of
the Roof Top Restaurant, Landlord shall deposit Landlord's Roof Top
contribution into a joint account or accounts
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established pursuant to the Disbursement Agreement for the funding of
construction costs of the Roof Top Restaurant. Likewise, upon the commencement
of construction of the Roof Top Restaurant, the amount, if any, of Landlord's
Initial Contribution that remains undisbursed according to the Disbursement
Agreement after the completion of Tenant's Initial Work may be used for the
funding of construction costs of the Roof Top Restaurant.
6.2 Tenant's Financial Confirmations. Upon the removal of all
conditions set forth in Section 3.5 of the Lease (the "Conditions"), Tenant
shall provide to Landlord and the Agency the following items (collectively,
"Tenant's Financial Confirmations");
(a) Confirmation from Security Pacific Bank that Tenant
has an established and available line of credit to fund construction costs for
the Tenant's Initial Work in an amount not less than One Million Five Hundred
Fifty Thousand Dollars ($1,550,000);
(b) The audited financial statements of Tenant for its
fiscal year ended May 31, 1991;
(c) A letter of credit from Security Pacific Bank showing
the Agency as beneficiary in the amount of One Million Five Hundred Fifty
Thousand Dollars ($1,550,000) ("Tenant's Letter of Credit"), which letter of
credit shall: (i) be irrevocable and stand-by for a period of not less than
one year following the commencement of construction of the Tenant's Initial
Work; (ii) provide for the right on the part of the Agency to draw upon the
letter of credit on October 1, 1992, of the difference between One Million Five
Hundred Fifty Thousand Dollars ($1,550,000) and amounts actually expended by
Tenant in connection with the Tenant's Initial work; (iii) provide that the
balance of the face amount of
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the letter of credit will decline in accordance with funds expended by Tenant
pursuant to 6.1(a) above. The cost of the Letter of Credit shall be paid by
Landlord.
(d) Landlord agrees that the Letter of Credit may be
amended monthly as Tenant completes Tenant's Initial Work. Upon the submission
by Tenant to Landlord of evidence of the payment by Tenant for such work (in
the form required by the Disbursement Agreement) , Landlord shall execute an
amendment to the Letter of Credit reducing the amount of the Letter of Credit
by the amount paid by Tenant.
6.3 Landlord's Financial confirmations. Upon the Effective Date,
Landlord shall provide to Tenant either of the following items ("Landlord's
Financial Confirmations");
(a) The personal guaranty of Manou Mobedshahi in a form
reasonably acceptable to Tenant for Landlord's Roof Top Contribution; or
(b) A letter of credit from Security Pacific Bank or an
equivalent national bank reasonably acceptable to Tenant showing the Tenant as
beneficiary in the amount of Two Hundred Eighty Thousand Dollars ($280,000),
which letter of credit shall: (i) be irrevocable and stand-by for a period of
not less than one year following the commencement of construction of the Roof
Top Restaurant; (ii) provide for the right on the part of the Tenant to draw
upon the letter of credit in the event Landlord does not make the deposit
required by Section 6.2(b) above; and (iii) provide that any funds drawn on the
letter of credit be paid into the appropriate account established in the
Disbursement Agreement.
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6.4 Compliance with Disbursement Agreement. Tenant will timely
comply with the requirements of the Agency for the funding of amounts pursuant
to the Disbursement Agreement, such as submittal of draw requests approved by
appropriate architects and engineers, certificates of Tenant's contractor as to
amounts due and payment of subcontractors and materialmen, title insurance date
downs, conditional lien releases during the course of construction and
unconditional lien waivers upon final completion.
6.5 Financing of Construction by Tenant and Tenant Responsibility
for all Costs of Constructing the Improvements in Excess of Landlord's
Contribution. Except as provided in Section 1.1 and 2.1 above, Tenant will be
responsible, at Tenant's sole cost and expense, for the full cost of
constructing Tenant's Work. By reason of the foregoing, Tenant shall be
responsible for all costs of construction (together with those costs which, as
provided in Section 2.3 above, are not regarded as "costs of construction")
associated with the Tenant's Initial Work which are in excess of the Two
Million Four Hundred Thirty-Two Thousand Dollars ($2,432,000) and, further,
Tenant shall be responsible for all costs of construction (together with those
costs which, as provided in Section 2.3 above are not regarded as "costs of
construction") relating to the Roof Top Restaurant which are in excess of the
amount funded as provided in Section 6.1 (b) above. Tenant will have no
authority, express or implied, to create or place any lien or encumbrance, of
any kind or nature whatsoever, upon, or in any manner to bind the interest of
Landlord in the Premises or to change the rentals payable hereunder for any
claim in favor of any person dealing with Tenant, including those who may
furnish
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materials or perform labor for any construction or repairs. Rather, each such
claim will affect and each such lien will attach to, if at all, only the
leasehold interest granted to Tenant by this Lease and will be inferior and
subject to the rights, titles, and interests of Landlord. Any right or
authority given to Tenant in accordance with any of the provisions of this
instrument to erect or cause to be erected, the improvements on the Premises,
or to make any alterations or repairs to the improvements, will not constitute
an express or implied agency in Tenant to bind Landlord's interest in any way.
Tenant will pay or cause to be paid all sums legally due and payable by it, or
in the alternative post a bond, on account of any labor performed on the
Premises on which any lien is or can validly and legally be asserted against
its leasehold interest in the Premises or the improvements and that it will
save Landlord harmless from any and all asserted claims or liens against the
leasehold estate or against the rights, titles, and interests of Landlord in
the Premises or under the terms of this Lease which are created by, under, or
through Tenant. Notwithstanding the foregoing or anything to the contrary
herein, the improvements (exclusive of FF&E) will at all times belong to and be
the property of Landlord.
6.6 Cost Verification. Tenant will deliver or cause to be
delivered to Landlord copies of invoices to Tenant by the general contractor
and all other persons or firms whose labor, material, or service are part of
the cost of construction of the improvements and who will bill Tenant directly
for such cost and, in addition, any changes, additions, or deletions in the
invoices.
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6.7 General Contractors. Landlord has given Tenant pre-approval
to proceed to contract on a negotiated basis with as general contractor for
the improvements. If any other general contractor will be engaged to
construct the improvements, Tenant must obtain Landlord's prior approval.
LANDLORD: HOTEL SAINTE CLAIRE TENANT: IL FORNAIO (AMERICA)
PARTNERS, L.P., a CORPORATION
California Limited
Partnership
By: Manco Investment, a
California Corporation
By: /s/ MANOUCHEHR MOBEDSHAHI By: /s/ LAWRENCE B. MINDEL
------------------------------ -----------------------------------
Manouchehr Mobedshahi Lawrence B. Mindel
President Chairman of the Board
Date 11/21/1991 Date 11/21/91
----------------------------- --------------------------------
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LANDLORD'S WORK - EXCLUSIVE OF $2,423,000 BUDGET:
1. Build-out of 3,600 square feet of basement area for employee lounge and
restrooms, also shared with hotel staff, storage rooms, employee locker
rooms, storage rooms to Il Fornaio operational needs and Santa Clara
County Health Department requirements. Build-out of basement garbage area
for location of Il Fornaio's trash compactor. Build-out of upstairs
banquet pantry ready for Il Fornaio's equipment installation. Total
allocated budget for these improvements to be $77,000, bringing the
total restaurant budget to $2,500,000. Improvement costs in excess of
$77,000 for this work to be Landlord responsibility and not attributable
to restaurant budget.
2. 800 Amp, 208 Volt, 3-phase, 4-wire electrical service, separately metered,
to Il Fornaio basement area with pull cords in conduits from stub-out
location to step-down transformer, if required, which is to be located
outside tenant's premises. If roof garden is added, electrical service to
be 1,000 Amp capacity.
3. *Separately metered natural gas service sized to Il Fornaio's requirements
and stubbed to tenant's premises at a location mutually agreed upon.
4. *Separately metered two-inch domestic water service stubbed to premises at
a location designated by Il Fornaio.
5. Six-inch sanitary sewer line stubbed to premises at a location which is
mutually agreed upon. Il Fornaio shall be allowed to route any
appropriate waste lines to kitchen's existing grease trap.
6. Fire sprinkler system of sufficient capacity for a minimum of Ordinary
Hazard Group II rating throughout tenant's premises.
7. (2) 1-inch diameter conduits with pull cords from building's main
telephone back board to a location designated by Il Fornaio.
8. Location in the laundry room area adjacent to the existing remote
refrigeration rack for placement of Il Fornaio's remote refrigeration
rack. Il Fornaio to take out existing units in said area and provide
appropriate air intake.
9. If any governmental agency requires that kitchen exhaust be "scrubbed" by
means of electronic precipitators, charcoal filtration, or any other
"scrubbing" device, said equipment, including periodic on-going
maintenance thereof, to be provided and installed and maintained by Il
Fornaio and located outside of tenant's premises. If the Landlord requires
that kitchen exhaust be "scrubbed", as defined above, equipment and
periodic on-going maintenance will be provided, installed and maintained
by Landlord.
10. Architecture budget of $75,000 is based upon total architectural fees
which include reimbursibles and liability insurance surcharge.
Architectural fee above the $75,000 level to be a Landlord cost not
attributable to restaurant budget.
* If separate meters are not installed, then an energy audit will be
conducted to ascertain utility use.
EXHIBIT "C-1"
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November 21, 1991
Il Fornaio (America) Corporation, Inc.
1000 Sansome Street, Suite 200
San Francisco, CA 94111
ATTN: Lawrence Mindel
Re: Hotel St. Claire ("Hotel")
Dear Mr. Mindel:
This letter is being provided in connection with the execution by and
between Hotel St. Claire Partners, L.P. ("St. Claire") and Il Fornaio (America)
Corporation, Inc. ("Il Fornaio") of a Restaurant Lease and a Food Service
Operations Agreement for the purpose of confirming the following understandings:
(a) Each party shall be responsible for all labor negotiations
respecting the personnel hired by each party to operate their respective
facilities within the Hotel and to perform services under the Restaurant Lease
and Food Service Operations Agreement;
(b) Prior to either party negotiating with any labor union or entering
into any collective bargaining agreement with any labor union in connection
with such party's employees, such party shall provide prior written notice of
such action to the other party;
(c) Neither party, in connection with negotiations with any labor
union, shall enter into any agreement therewith which in any way binds the
employees of the other party, or otherwise materially adversely impacts the
facility operations to be conducted by the other party pursuant to the
Restaurant Lease and/or Food Service Operations Agreement.
<PAGE> 85
Il Fornaio (America) Corporation, Inc.
November 21, 1991
Please signify your agreement to the foregoing by executing a copy of
this letter where indicated below.
HOTEL ST. CLAIRE PARTNERS L.P., a
California limited partnership
BY: MANCO INVESTMENT, a California
corporation
BY: /s/ Manouchehr Mobedshami,
--------------------------
Manouchehr Mobedshami,
President
The terms of the aforesaid letter are hereby agreed and accepted on
this 21st day of November, 1991.
IL FORNAIO (AMERICA) CORPORATION, INC.
BY: /s/ Laurence B. Mindel
---------------------------------
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GUARANTEE
1. In consideration of the execution by IL FORNAIO (AMERICA)
CORPORATION, a California corporation ("Il Fornaio") of that certain restaurant
lease dated November 21, 1991 by and between Il Fornaio, as "Tenant," and Hotel
Sainte Claire Partners, L.P., a California Limited Partnership, as "Landlord,"
(the "Lease") and subject to the terms and conditions hereof, Manouchehr
Mobedshahi ("Guarantor") does hereby guarantee unconditionally to Il Fornaio,
its successors and assigns, Landlord's contribution of Two Hundred Eighty
Thousand Dollars ($280,000) at the time and in the manner set forth in Section
6.1(b) of Exhibit "C" to the Lease (the "Obligation").
2. This Guarantee shall not be affected by a deviation from or
alteration of the terms, covenants or conditions of the Lease or by any
assignment or other transfer by Landlord of its rights under the Lease except
to the extent that, in connection with such an assignment or transfer, Il
Fornaio agrees to release Landlord from the Obligation or from its obligations
under the Lease. This Guarantee shall not be released, extinguished, modified
or in any way affected by failure on the part of Il Fornaio to enforce any or
all of its rights or remedies whether pursuant to the terms of the Lease or at
law or in equity.
3. This Guarantee shall become effective upon the date set forth below
and shall terminate upon the earlier of (a) the performance of the Obligation,
or (b) the termination of the Lease. Guarantor waives notice of acceptance by
Il Fornaio of this Guarantee.
4. Guarantor agrees that Il Fornaio may from time to time extend the
time for performance or otherwise modify, alter or change the Lease and any or
all of the provisions thereof without in any way releasing or discharging
Guarantor from its obligations under this Guarantee.
5. Guarantor further consents that it shall not be necessary for Il
Fornaio, in order to enforce this Guarantee, to institute suit or exhaust its
legal remedies against Landlord.
6. This Guarantee may be immediately enforced upon any default by
Landlord in the performance of the Obligation and upon the giving of notice to
Guarantor of such default.
7. In the event that any action should be commenced by Il Fornaio
against Guarantor to enforce any of the terms or conditions of this Guarantee,
the prevailing party in any such action shall be entitled to recover from the
opposing party reasonable attorneys' fees which shall be fixed as part of the
costs by the court in which the action is pending.
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INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-23605 of I1 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
San Francisco, California
July 1, 1997