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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934
For the fiscal year ended December 28, 1997 or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
Commission File Number: 0-29410
IL FORNAIO (AMERICA) CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 94-2766571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
770 TAMALPAIS DRIVE, SUITE 400
CORTE MADERA, CALIFORNIA 94925
(Address of principal executive offices) (Zip Code)
(415) 945-0500
(Registrant's telephone number, including area code)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Registrant's Common Stock on
March 2, 1998, was $52,418,458.*
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of March 2, 1998 there were 5,827,999 shares outstanding of the Registrant's
Common Stock.
* Excludes 1,871,889 shares outstanding at March 2, 1998, of the Registrant's
Common Stock held by directors, executive officers and holders of more than 10%
of the Company's Common Stock. Exclusion of shares held by any person should not
be construed to indicate that such person possesses the power, direct or
indirect, to direct or cause the direction of the management or policies of the
Registrant, or that such person is controlled by or under common control with
the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Registrant's
Annual Meeting of Stockholders to be held on April 24, 1998 have been
incorporated by reference into Part III of this Annual Report on Form 10-K.
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ITEM 1. BUSINESS
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements set forth in or incorporated by reference in this Form
10-K as well as the Company's Annual Report to Stockholders for the year ended
December 28, 1997 constitute "forward-looking statements" within the meaning of
the Private Securities Litigation Act of 1995. These statements include, without
limitation, anticipated store openings and their projected costs and sizes,
planned capital expenditures and trends or expectations regarding the Company's
operations. In addition, words such as "believes," "anticipates," "expects,"
"intends," "estimates" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and
uncertainties. Actual future results, events and trends may differ materially
from those expressed in or implied by such statements depending on a variety of
factors, including, but not limited to those set forth under "Risk Factors" and
elsewhere in this Form 10-K. See "Item 1-Business-Risk Factors."
GENERAL
Il Fornaio owns and operates 15 full-service, white tablecloth Italian
restaurants serving creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The Company's restaurants offer an extensive
menu, featuring house-made and imported pasta, poultry and game roasted over a
wood-fired rotisserie, meat and fresh fish from a charcoal grill, pizza from a
wood-burning oven, soups, salads and desserts. Il Fornaio's menu is
distinguished by fresh, hand-made breads, pastries and other baked goods that
are produced in the Company's restaurants and five wholesale bakeries. Il
Fornaio's wholesale bakeries also sell baked goods to quality grocery stores,
specialty retailers, hotels and other fine restaurants. In addition, the Company
operates a retail market in each restaurant, which sells baked goods, prepared
foods and a variety of Il Fornaio-brand products, allowing guests to recreate
the Il Fornaio experience at home.
The Company's objectives are to offer guests the most authentic Italian
dining experience available outside of Italy and to establish a brand identity
that provides a competitive advantage in every market in which the Company
operates. The Company's strategy to achieve these objectives includes the
following key elements: (i) serve premium quality, authentic regional Italian
cuisine created by native-born Italian chefs and complemented by hand-made Il
Fornaio baked goods; (ii) build brand awareness through its wholesale bakeries
and retail markets, which reinforce the Company's image as a provider of premium
quality, authentic Italian food and enable guests to recreate the Il Fornaio
dining experience at home; (iii) create a distinctive authentic Italian
atmosphere with restaurant designs unique to each location; (iv) consistently
execute Il Fornaio's high standards of food quality, service and cleanliness
through its employee-designed Five Star Service Program; and (v) foster a strong
corporate culture which attracts and retains highly qualified management, chefs
and hourly employees.
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. Since its initial
public offering in September 1997, the Company has opened one restaurant in
Santa Monica, California and another in Denver, Colorado. The Company intends to
open two new restaurants in 1998 located in Walnut Creek, California and
Seattle, Washington.
The Company was incorporated in California in June 1980 and was
reincorporated in Delaware in September 1997 prior to the initial public
offering. The Company's executive office has been relocated to 770 Tamalpais
Drive, Suite 400, Corte Madera, California 94925. The Company's telephone number
is (415) 945-0500.
Il Fornaio and the Il Fornaio logo are registered marks of the Company, and
Festa Regionale and Passaporto are marks used and owned by the Company.
RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
UNCERTAINTIES ASSOCIATED WITH FUTURE GROWTH
The Company has experienced limited growth in recent years, expanding from
nine restaurants at the end of 1993 to 15 restaurants at the end of 1997. The
Company is currently pursuing a more aggressive growth strategy. In 1997, the
Company opened three restaurants and a 12,000-square foot wholesale bakery in
Burlingame, California. The Company expects to open two restaurants in
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1998. The Company's ability to expand successfully will depend on a number of
factors, including the identification and availability of suitable locations,
the negotiation of favorable lease arrangements, timely development and
construction of any new shopping center, hotel or other site in which the
restaurant or bakery may be located, management of the costs of construction and
development of new restaurants and bakeries, securing required governmental
approvals and permits, recruitment of qualified operating personnel
(particularly managers and chefs), general economic conditions and other
factors, some of which are beyond the control of the Company. Moreover, the
opening of additional restaurants and bakeries in the future will depend, in
part, upon the Company's ability to generate sufficient funds from existing
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks in each case, that the Company will be able
to open all of its planned new operations on a timely basis, if at all, or, if
opened, that those operations will be operated profitably. Delays in opening, or
failure to open, planned new restaurants could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's growth strategy may place a strain on the Company's
management, financial and other resources. To manage its growth effectively, the
Company must maintain its high level of quality and service at its existing and
future restaurants, continue to enhance its operational, financial and
management systems, and locate, hire, train and retain experienced and dedicated
operating personnel, particularly managers and chefs. There can be no assurance
that the Company will be able to effectively manage this expansion in any one or
more of these areas, and any failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH SMALL OPERATIONS BASE
The Company currently operates 15 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
Twelve of the Company's 15 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 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 three restaurants located outside of California.
Over the next several years, the Company expects that some of its expansion will
involve opening restaurants in other states. Expansion into new geographic
regions involves a number of risks, in addition to those identified above,
including uncertainties related to local customs, demographics, legal
requirements, wages, costs and other economic conditions, the need to develop
relationships with local distributors and suppliers for fresh produce and other
ingredients, and potential difficulties related to management of operations
located in a number of broadly dispersed locations. There can be no assurance
that the Company will be successful in addressing these risks in each case, that
the Company will be able to open all of its planned new operations on a timely
basis, if at all, or, if opened, that those operations will be operated
profitably. Delays in opening, or failure to open, planned new restaurants could
have a material adverse effect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including general economic conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors,
weather conditions, the timing of new restaurant openings and related expenses,
net sales contributed by new restaurants and increases or decreases in
comparable restaurant revenues. For example, weather conditions have generally
had the most significant adverse impact in the first quarter of each year. Due
to the foregoing factors, results for any one quarter are not necessarily
indicative of results to be expected for any other quarter or for any year and,
from time to time in the future, the Company's results of operations may be
below the expectations of public market analysts and investors.
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A variety of factors also affect the Company's comparable restaurant sales
results, including general economic conditions, consumer confidence in the
economy, changes in consumer preferences, competitive factors, weather
conditions (including, in particular, the unusually adverse weather conditions
experienced this winter and predicted to continue for the remainder of the
season, especially on the West Coast) and the Company's ability to execute its
business strategy. The Company had a 7.1% increase in comparable restaurant
sales in 1997. 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 to $5.75 an hour
effective March 1, 1998. There can be no assurance that similar proposals will
not come before the voters in other jurisdictions in which the Company operates
or seeks to operate. In addition, recent federal legislation increased the
federal minimum wage from $4.25 an hour to $4.75 effective October 1, 1996 and
to $5.15 effective September 1, 1997. Additional minimum wage increases have
recently been proposed. In the fourth quarter of 1996, the Company introduced
its first menu price increase in three years and had another price increase at
the start of the first quarter of 1998 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 "Item 7-Management's Discussion and
Analysis of Financial Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Laurence B. Mindel, the
Company's Chairman of the Board and Chief Executive Officer, and Michael J.
Hislop, the Company's President and Chief Operating Officer. The Company
currently maintains a $5.0 million term life insurance policy covering Mr.
Mindel and a $3.0 million term life insurance policy covering Mr. Hislop. The
Company's success in the future will be dependent on its ability to attract,
retain and motivate qualified management and operating personnel, including
restaurant managers and chefs. Failure by the Company to attract and retain such
key employees in the future could have a material adverse effect on the
Company's business, financial condition and results of operations.
COMPETITION AND INDUSTRY CONDITIONS
The restaurant and bakery industries are each intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many restaurants and bakeries compete with the Company at each of
its locations. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants and bakeries are distinctive in design and
operating concept, other companies may develop restaurants and bakeries that
operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
LONG-TERM, NON-CANCELABLE LEASES; TERMINATION PROVISIONS
The Company's current leases have annual base rents ranging from $60,000 to
$336,000, are non-cancelable and typically have terms of 10 to 20 years. Leases
entered into by the Company in the future will also be long-term and
non-cancelable. If a decision is made to close any restaurant or bakery, the
Company may be committed to perform its obligations under the applicable lease,
which would include, among other things, payment of the base rent for the
balance of the lease term. In 1993 and 1995, the Company
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recorded provisions of $2.3 million and $932,000, respectively, for liabilities
associated with the closure of facilities subject to non-cancelable, long-term
leases. The Company may incur liabilities of this nature in the future if a
decision is made to close one or more restaurants or bakeries, and such
liabilities, if incurred, could have a material adverse effect on the Company's
business, financial condition and results of operations.
In addition, the Las Vegas restaurant lease contains provisions that allow
the hotel landlord to terminate the Company's lease without compensation if,
during any six-month period in which the hotel has achieved a specified
occupancy rate, the restaurant's monthly gross sales average less than a
specified minimum amount. To date, the Las Vegas restaurant's sales have been
more than triple the specified minimum amount, although there can be no
assurance that restaurant sales will continue to exceed the specified minimum.
In addition, the lease contains provisions allowing the landlord to relocate the
Company's restaurant to another site within the hotel possessing retail
characteristics similar to the site currently occupied by the Company. The
landlord may not use the site vacated for restaurant operations. Should the
Company elect not to relocate the restaurant, the lease may be terminated by the
Company and, in that event, the landlord is obligated to reimburse the Company
for the unamortized cost of its improvements to the site and any of the
Company's furniture, fixtures and equipment not removed by the Company. Such
termination or relocation could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Item 2 --
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, 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
At March 2, 1998, the Company's directors, officers and their affiliates
will beneficially own approximately 36.1% 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 "Part III, Item 12-Security Ownership of
Certain Beneficial Owners and Management."
ABSENCE OF PRIOR TRADING MARKET; POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock may 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'
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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 five
million shares of Preferred Stock and to determine the powers, preferences,
privileges, rights, including voting rights, qualifications, limitations and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be 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.
IL FORNAIO CONCEPT AND STRATEGY
Offer Premium Quality, Authentic Regional Italian Cuisine. Il Fornaio seeks
to differentiate its restaurants from other restaurants in the Italian food
segment by offering creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The core menu served at both lunch and dinner
features a variety of dishes, including house-made and imported pasta, poultry
and game roasted over a wood-fired rotisserie, meat and fresh fish from a
charcoal grill, pizza from a wood-burning oven, soups, salads and desserts.
Native-born Italian chefs develop all of the core menu items, which vary
depending on the seasonal availability of raw ingredients. The Company's chefs
also develop special menus each month based on the local cuisine and culinary
style of one of Italy's 20 geographic regions as part of the Company's Festa
Regionale marketing program. Hand-made, preservative-free baked goods, based on
centuries-old regional Italian recipes, are provided by Il Fornaio's bakeries
for use in a variety of menu items. Fresh breads and rolls are served with each
meal, providing an authentic and high quality complement to the menus. Il
Fornaio's restaurants have received numerous awards and commendations.
Build Brand Awareness. The Company believes that its restaurants, wholesale
bakeries and retail markets work together to reinforce its image as a provider
of premium quality, authentic Italian food, enhance Il Fornaio's brand image and
reputation and attract guests over a wide variety of occasions for dining out or
dining in. The Company's wholesale bakeries supply the same fresh, award-winning
breads and other baked goods served at the Company's restaurants to quality
grocery stores, specialty retailers, hotels and other fine restaurants as well
as to retail markets within Il Fornaio restaurants. The restaurants' retail
markets offer prepared foods and Il Fornaio brand items, including fresh baked
goods, oakwood-roasted coffee, pasta, risotto, extra virgin olive oil and
balsamic vinegar imported from Modena, Italy, enabling guests to recreate the Il
Fornaio dining experience at home. The retail markets also offer an Il
Fornaio-brand Chianti Classico from a Tuscan vineyard that was originally
planted in the 11th century and is designated for Il Fornaio's exclusive use.
The Company has implemented a number of marketing initiatives designed to build
brand awareness, including monthly mailings of its Festa Regionale menus, food
and wine tastings, baking classes, Italian culture seminars and the Passaporto
program, which rewards frequent guests with complimentary menu items and
commemorative plates.
Create a Distinctive Authentic Italian Atmosphere. The Company seeks to
create a distinctive authentic Italian atmosphere with restaurant designs that
are unique to each location. The restaurants' sophisticated, yet informal and
friendly atmosphere is intended to be suitable for a variety of meal occasions.
Exhibition kitchens with wood-fired rotisseries, charcoal grills and
wood-burning pizza ovens are in full display of the guests and create appealing
cooking aromas that reinforce the guests' perceptions of quality, freshness and
authenticity. Retail markets located at the entrance to each restaurant are
designed to provide an inviting initial impression as well as to enhance the
perception of an authentic Italian dining experience through the prominent
display of Il Fornaio's Italian food. Design elements, which may include
terracotta or European slate floors, marble bars, mahogany trim, outdoor
piazzas, hand-painted ceilings and fine art, are selected to evoke the charm and
elegance of a memorable dining experience in Italy. Il Fornaio's Sacramento
restaurant received the grand prize for best new restaurant design worldwide,
one of five grand prizes in hospitality design awarded in 1994 by a national
hospitality design magazine.
Focus on Five Star Service. The Company believes that its emphasis on
service through the implementation of its Five Star Service Program has been an
important factor in its success. The Company's Five Star Service Program,
designed by the Company's employees, defines Il Fornaio's high standards for
food quality, service and cleanliness. The Company has invested significant
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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 general 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 1997 of $21.12 (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 1997, the Company's 11 restaurants that were opened prior to 1996 (which
excludes data from restaurants in their first year of operation) had average
revenues of approximately $4.6 million, average operating income of
approximately $730,000, or 15.7% of restaurant sales, and average cash flow of
approximately $934,000, or 20.1% of restaurant sales. Cash flow represents
operating income before depreciation and amortization. The Company's restaurants
range in size from 5,000 square feet to 10,900 square feet. Since 1991, the
Company's total investment per restaurant, net of landlord contributions, has
averaged approximately $1.7 million, with additional average pre-opening costs
per restaurant of approximately $200,000. The Company expects that its planned
future restaurants will generally range in size from 7,000 to 10,000 square feet
and that its total investment and pre-opening costs per restaurant will be
approximately $1.8 million and $250,000, based upon adjustments for inflation
and the geographic locations of future restaurants.
LOCATIONS
Il Fornaio owns and operates 15 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 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.
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
</TABLE>
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<TABLE>
<CAPTION>
<S> <C> <C> <C>
Santa Monica, CA.................. 1997 7,500 150
Denver, CO........................ 1997 9,200 175
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.................... 1997 12,000 --
</TABLE>
PLANNED RESTAURANTS (2)
<TABLE>
<CAPTION>
SCHEDULED SIZE
LOCATION OPENING (SQ. FT.)
- ------------------------------------------------ --------
<S> <C> <C>
Seattle, WA......................... 1998 13,200
Walnut Creek, CA.................... 1998 8,700
Coronado Island, CA................. 1999 8,800
</TABLE>
- ----------
(1) Excludes patio seating.
(2) Leases have been signed for each of these planned restaurant locations.
EXPANSION STRATEGY AND SITE SELECTION
The Company intends to continue to expand its operations by addressing both
existing and new geographic markets. The Company currently plans to open two new
restaurants in 1998, including restaurants in Seattle, Washington, and Walnut
Creek, California.
The Company believes that the location of each restaurant is critical to its
long-term success and devotes significant effort to finding appropriate sites.
The Company's site selection strategy is to locate restaurants in affluent urban
and suburban areas, often located near or on main traffic routes. The Company
takes into account a variety of local factors, including demand and consumer
preferences, competition, availability of suitable locations and personnel,
local demographics and household income levels, as well as specific site
characteristics, such as visibility, accessibility and traffic volume. Senior
management selects each restaurant site. The flexibility of the Il Fornaio
concept enables the Company to develop successful restaurants in a variety of
locations, including residential neighborhoods, shopping centers, office
buildings and hotels.
The Company expects that its planned future restaurants will generally range
in size from 7,000 to 10,000 square feet and will require, on average, a total
investment by the Company per restaurant, net of anticipated landlord
contributions, of approximately $1.8 million, with additional average
pre-opening costs per restaurant of approximately $250,000.
The Company's success in implementing its expansion plans will depend, in
each case, on the Company's ability to effectively address a number of risks.
There can be no assurance that the Company will be able to open all of its new
operations on a timely basis, if at all, or, if opened, that those operations
will be operated profitably. See "Risk Factors."
MENU
The Company's restaurants feature creatively prepared, premium quality
Italian food based on authentic regional recipes. All recipes are created by
native-born Italian chefs. As guests are seated, Il Fornaio breads and rolls are
placed on the table and served with Il Fornaio olive oil. Guests may then select
from a menu featuring a variety of dishes, including house-made and imported
pasta, poultry and game roasted over a wood-fired rotisserie, meat and fresh
fish from a charcoal grill, pizza from a wood-burning oven, soups, salads and
desserts. The core menu includes several flavorful low-salt and low-fat
selections oriented toward health-or diet-conscious guests. The restaurants also
offer Italian appetizers, creative desserts prepared on site, full liquor
service and an award-winning, extensive wine list emphasizing Italian and
California varietals. The wine list includes an Il Fornaio-brand Chianti
Classico from a Tuscan vineyard that was originally planted in the 11th century
and is designated for Il Fornaio's exclusive use. The core menu is virtually
identical at most of Il Fornaio's restaurants. A daily insert, which varies by
restaurant, lists specials developed by chefs at each restaurant, featuring
creative dishes inspired by seasonal availability of fresh local produce, fish,
meats and game. Il Fornaio's restaurants have received numerous awards and
commendations.
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<PAGE> 9
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.
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 1997 at its restaurants, including
alcoholic beverages, was $21.12. Six of the restaurants also offer breakfast
service which, during 1997, 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.
Take-out prepared food and retail brand items accounted for approximately
10% of restaurant revenues in 1997. The restaurants' retail markets enable
guests to recreate the Il Fornaio dining experience at home by offering prepared
foods, including assorted cold pasta and risotto salads, Il Fornaio breads,
green salads, whole roasted chickens, stuffed artichokes, individual pizzette
and assorted Italian sandwiches, as well as Il Fornaio-brand retail items,
including oakwood-roasted coffee, pasta, risotto, extra virgin olive oil,
balsamic vinegar imported from Modena, Italy, and Chianti Classico.
DECOR AND ATMOSPHERE
The Company seeks to create a distinctive, authentic Italian atmosphere with
restaurant designs that are unique to each location. The restaurants'
sophisticated, yet informal and friendly atmosphere is intended to be suitable
for a variety of meal occasions. Exhibition kitchens with wood-fired
rotisseries, charcoal grills and wood-burning pizza ovens in full display of the
guests create appealing cooking aromas that reinforce the guests' perceptions of
quality, freshness and authenticity. Retail markets located at the entrance to
each restaurant are designed to provide an inviting initial impression as well
as to enhance the perception of an authentic Italian dining experience through
the prominent display of Il Fornaio's Italian food. Design elements, which may
include terracotta or European slate floors, marble bars, mahogany trim,
hand-painted ceilings and fine art, are selected to evoke the charm and elegance
of a memorable dining experience in Italy. The tables are a mix of booths and
free-standing tables with chairs. White tablecloths and Italian flatware dress
the tables. Service is intended to be professional and friendly but not
intrusive. In addition to table service, food is available at an indoor or
outdoor liquor/coffee bar, as well as at counter seats overlooking the large
pizza oven and open kitchen. The restaurants range in size from approximately
5,000 to 10,900 square feet with indoor seating ranging from 76 to 220 guests.
Outdoor piazzas provide additional seating during warmer weather. Il Fornaio's
Sacramento restaurant received the grand prize for best new restaurant design
worldwide, one of five grand prizes in hospitality design awarded in 1994 by a
national hospitality design magazine.
OPERATIONS
The Company seeks to create a fine dining experience through the careful
selection, training and supervision of personnel. The staff of a typical
restaurant consists of a Managing Partner, two or three managers, a
Chef-Partner, two or three sous chefs and approximately 65 to 125 hourly
employees, many of whom work part-time. The Managing Partner of each restaurant
is responsible for the day-to-day operation of that restaurant, including
hiring, training and development of personnel, as well as operating results. The
Chef-Partner is responsible for product quality, food costs and kitchen labor
costs. The Company requires its Managing Partners and Chef-Partners to have
significant experience in the full-service restaurant industry.
Comprehensive management manuals exist to ensure consistency in all facets
of restaurant operations, including food, service, safety and accounting.
Working in concert with Managing Partners and Chef-Partners, the Company's
senior management defines operations and performance objectives for each
restaurant and monitors implementation. The Company maintains quality and
consistency in its restaurants through its Five Star Service Program, which
establishes standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. A restaurant survey firm regularly visits
the Company's restaurants and reports to senior management on the effectiveness
of the Five Star Service Program. In addition to the Five Star Service Program,
the Company's senior management regularly visit each restaurant and bakery to
ensure adherence to the Company's concept, strategy
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<PAGE> 10
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
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 1997, the Company's wholesale bakeries
accounted for approximately 9% 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 to construct this bakery, including leasehold improvements, machinery
and equipment, was approximately $800,000.
The Company's bakeries produce over 30 varieties of breads and rolls based
on regional Italian recipes, as well as a wide assortment of Italian cookies,
cakes and pastries. Recipes are standardized to ensure consistency. The
Company's bread doughs, based on centuries-old recipes, are mixed and then
fermented for up to 20 hours to increase flavor. Each loaf is hand-formed,
proofed and baked in European deck ovens that eject steam around the bread at
timed intervals. The Company believes that these processes contribute to a
characteristically irregular-shaped and crusty bread. Bakers create a wide
variety of breads by varying proportions of ingredients, length and number of
risings, temperature of the oven and size and shape of the loaves. Some recipes
include fresh aromatic herbs and spices, such as rosemary or fennel, or other
ingredients, such as parmesan cheese, raisins, nuts and sesame seeds. To
maintain the high quality of its bakery products, the Company maintains strict
criteria for ingredients.
The management staff of a typical wholesale bakery consists of a production
manager, an assistant production manager and a business manager. A wholesale
bakery employs 10 to 45 hourly employees, depending on the bakery's size. The
production manager carries responsibility for day-to-day results of the
wholesale bakery. Each production manager is required to have significant bread
baking experience in addition to other general baking and management skills.
Both the production manager and the assistant production manager are also
trained in the Company's systems, recipes and procedures. The business manager
is responsible for all accounting, including the preparation of sales reports,
which are electronically transmitted to the corporate office on a daily basis.
The business manager is also responsible for customer service and distribution.
Monthly financial statements are prepared by the corporate office and reviewed
with the wholesale bakery management team by senior management. The Director of
Wholesale Bakeries spends significant time at each wholesale bakery, monitoring
compliance with recipes and procedures.
The Company maintains a fleet of vehicles for distribution of its products
to wholesale customers and Company locations. A majority of the products are
packed and delivered in the early morning to ensure timely delivery, and a
second delivery is normally
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<PAGE> 11
scheduled for Company locations to provide fresh-baked products for late
afternoon and evening sale and consumption. Restaurants that cannot be supplied
by one of the Company's wholesale bakeries are designed with in-house bakeries.
MARKETING
The Company believes that providing an authentic Italian dining experience
by offering quality food and bakery products, distinctive decor, Five Star
Service and an attractive price-value relationship is the most effective
approach to attracting new and repeat guests. Accordingly, Il Fornaio has relied
primarily on reputation, local reviews and awards, and word-of-mouth to promote
its restaurants and bakeries in each community in which it operates. The Company
has also implemented a program of marketing and public relations activities
designed to create awareness of the Il Fornaio name, encourage guests to
associate that name with authentic, premium quality Italian food and increase
the frequency of return visits to Il Fornaio.
To encourage repeat patronage, the Company has developed the Festa Regionale
program. As part of this program, innovative menus are developed monthly by
Chef-Partners, on a rotating basis, based on authentic recipes from one of
Italy's 20 geographic regions. Menu items are accompanied by selected wines from
the region and a regional bread is provided by the Company's bakeries. Mailers
describing each month's Festa Regionale offerings are sent monthly to over
100,000 households identified by the Company through customer mailing lists or
geographic proximity to an Il Fornaio restaurant. The Passaporto program also
encourages frequent dining at the Company's restaurants by rewarding those who
participate in each month of the six-month program with a commemorative plate.
In addition, guests receive a complimentary item such as an appetizer or a
dessert from the regional menu.
The Company has developed a program that focuses marketing efforts on each
restaurant's immediate neighborhood. Under this program, each restaurant is
responsible for the execution of an annual Neighborhood Marketing Plan, which
includes initiatives to build awareness, sales and frequency from the immediate
trade area, typically defined as a one-mile radius around that location. These
initiatives include both on-site and off-site activities, such as large party,
special event and meeting planning, bread and baked goods classes, Italian
culture seminars, food and wine tastings, anniversary parties, community group
fund-raisers as well as programs designed to encourage concierges from local
hotels and office buildings to recommend Il Fornaio to their clients. Restaurant
management, in conjunction with the Director of Neighborhood Marketing, develops
a calendar of events based on quarterly and annual sales objectives. Each
location is provided with a comprehensive Neighborhood Marketing Resource Guide
and Neighborhood Marketing Calendar designed to assist management and staff with
event planning, sales building strategies and guest communication guidance.
These programs and initiatives are specifically tailored to the food service
needs of the current and potential guests that are employed or reside in the
immediate trade areas. Other public relations activities include special events,
such as chef demonstrations at local stores, charitable donations and
participation in community activities, such as fundraisers for schools,
hospitals and other non-profit organizations.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed 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. The Company has installed a new computerized time management system
at each of its locations. The system calculates the time worked by each
employee, allows management to gather data and schedule labor hours and produces
payroll reports. 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.
In early 1997, the Company converted from a proprietary accounting system to
a scalable, relational database. The Company's automated restaurant and bakery
point-of-sale, time management and unit accounting system provides data for
posting directly to the Company's centralized system. The centralized database
provides flexibility in generating various management reports against
predetermined operating budgets. Such reporting includes (i) weekly reports of
revenues, cost of revenues and selected controllable operating budgets, (ii)
detailed monthly restaurant and bakery-level performance of revenues and
expenses and (iii) monthly reports of administrative expense performance. The
system allows management to review the mix of menu items in order to better
match guest preferences and improve profitability. Detailed monthly profit and
loss statements are compiled at the corporate office and reviewed with
restaurant and bakery management every month by senior management.
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<PAGE> 12
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.
EMPLOYEES
At February 23, 1998, the Company employed approximately 1,992 persons, 45
of whom were executive office personnel, 155 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 1997, approximately 24% of restaurant revenues was attributable to
the sale of alcoholic beverages, primarily wine. The Company is required to
comply with the alcohol licensing requirements of the federal government, states
and municipalities where its restaurants are located. Alcoholic beverage control
regulations require applications to state authorities and, in certain locations,
county and municipal authorities for a license and permit to sell alcoholic
beverages. Typically, licenses must be renewed annually and may be revoked or
suspended for cause at any time. Alcoholic beverage control regulations relate
to numerous aspects of the daily operations of the restaurants, including
minimum age of guests and employees, hours of operation, advertising, wholesale
purchasing,
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<PAGE> 13
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.
The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. While the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.
The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
required to comply with the Act and regulations relating to accommodating the
needs of the disabled in connection with the construction of new facilities and
with significant renovations of existing facilities.
EXECUTIVE OFFICERS OF THE REGISTRANT
Laurence B. Mindel, age 60, 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, MacArhur Park, Harry's Bar and American Grill, 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, age 43, 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, age 42, 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 a variety of positions for Saga
Corporation, most recently as Vice President and Controller of Velvet Turtle and
Spoons.
Michael J. Beatrice, age 44, 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 to 1994, he owned and operated an upscale, full-service Italian restaurant
north of Boston. From 1983 to 1991, he served a variety of positions with El
Torito Mexican Restaurant, Inc., most recently as Regional Vice President.
ITEM 2. PROPERTIES
All of the Company's operations are located in leased facilities. Current
restaurant and bakery leases have expiration dates ranging from 2000 to 2017,
with the majority of the leases providing for five-year options to renew for at
least one additional term. All of the Company's leases provide for a minimum
annual rent, and most leases require additional percentage rent based on sales
volume in excess of minimum levels at the particular location. Some of the
leases require the Company to pay the costs of insurance, taxes and a portion of
the lessor's operating costs. See Note 9 to Financial Statements for information
regarding aggregate minimum and percentage rentals paid by the Company for
recent periods and information regarding the Company's obligation to pay minimum
rentals in future periods. 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."
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.
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The Company's executive offices are located in approximately 8,110 square
feet of leased space in Corte Madera, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
which the Company believes will have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
(a) The Company's Common Stock (Nasdaq symbol "ILFO") is traded on the
Nasdaq National Market. The following table presents quarterly
information on the price range of the Company's Common Stock,
indicating the high and low sale prices reported by the Nasdaq National
Market. These prices do not include retail markups, markdowns or
commissions.
<TABLE>
<CAPTION>
Fiscal Quarter Ended: HIGH LOW
--------------------- ---- ---
<S> <C> <C>
September 28, 1997......................... $15.63 $13.88
(commencing September 19, 1997)
December 28, 1997.......................... $17.00 $12.75
</TABLE>
At March 2, 1998, there were 654 holders of record of the Company's Common
Stock. 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.
RECENT SALES OF UNREGISTERED SECURITIES
Since December 29, 1996 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 1992 Stock
Option Plan, 1995 Stock Option Plan, 1997 Equity Incentive Plan and
1997 Non-Employee Directors' Stock Option Plan (collectively, the
"Plans") covering an aggregate of 169,555 shares (net of cancellations)
of the Company's Common Stock, at an average exercise price ranging
from $6.00 to $11.00. These options vest over a period of time
following their respective dates of grant. The Company sold an
aggregate of 13,704 shares of its Common Stock to employees and
directors of the Company for consideration in the aggregate amount of
$43,721 pursuant to the exercise of stock options granted under
the Plans.
2. During the period, the Company sold 44,775 shares of Common Stock to
key employees and officers, at an average price per share varying from
$4.00 to $5.00, for an aggregate purchase price of $223,875.
3. During the period, the Company issued 10,362 shares of Common Stock
upon the exercise of warrants to purchase shares of Series F Preferred
Stock, for an aggregate purchase price of $18,725.
The Company claimed exemption from registration under the Securities
Act of 1933, as amended (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. The Company claimed exemption from registration under the
Securities Act for the sales and issuances in the transactions
described in paragraph (3) above under 4(2) and/or Regulation D
promulgated under the Securities Act. Legends were affixed to the stock
certificates as appropriate.
USE OF PROCEEDS
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<PAGE> 15
(b) The Company's Registration Statement on Form S-1 covering the sale of
1,725,000 shares of Common Stock (No. 333-23605) (the "Registration
Statement") was declared effective by the Commission on September 18,
1997. The offering commenced on September 19, 1997. All of the shares
registered under the Registration Statement were sold prior to
termination of the offering. The managing underwriters of the offering
were Montgomery Securities and BT Alex Brown. The shares were sold to
the public at a price of $11.00 per share. The number and aggregate
offering price to the public of shares sold for the accounts of the
Company and certain selling stockholders of the Company was as follows:
<TABLE>
<CAPTION>
Shares Sold Aggregate Offering Price
----------- ------------------------
<S> <C> <C>
For the account of the Company* 1,225,000 $13,475,000
For the account of the selling stockholders 500,000 $ 5,550,000
</TABLE>
- ----------
* Includes 225,000 shares on October 1, 1997 upon the exercise of the
underwriters' over-allotment option for an aggregate offering to the public of
$2,475,000.
The aggregate amount of expenses incurred for the Company's account in
connection with the issuance and distribution of the Common Stock registered
(including shares issued upon exercise of the underwriters' over-allotment
option on October 1, 1997) was as follows:
<TABLE>
<CAPTION>
<S> <C>
Underwriting discounts and commissions............ $ 943,250
Other expenses.................................... 1,211,009
----------
Total expenses............................... $2,154,259
==========
</TABLE>
None of such expenses were paid to affiliates, directors or officers of the
Company, associates or officers or directors or persons or entities owning 10%
or more of any class of equity securities of the Company.
The estimated net proceeds to the Company of the offering (including the net
proceeds from the sale of shares issued upon exercise of the underwriters
over-allotment option on October 1, 1997) were $11.3 million. From the effective
date of the offering to March 2, 1998, all of the net proceeds were invested in
short-term, investment-grade, interest-bearing securities.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the financial
statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR
------------------------------------------------------------------------
1993 1994 1995 1996 1997
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
INCOME STATEMENT DATA:
Revenues:
Restaurants $ 42,402 $ 39,485 $ 43,647 $ 50,599 $ 65,525
Wholesale bakeries 4,328 4,951 5,181 6,016 6,284
Retail bakeries 4,866 5,208 5,312 4,137 311
------------------------------------------------------------------------
Total revenues 51,596 49,644 54,140 60,752 72,120
------------------------------------------------------------------------
Costs and expenses:
Costs of sales 12,097 11,300 12,772 14,792 16,993
Operating expenses 32,258 29,290 31,036 35,152 41,800
Depreciation and amortization 3,512 3,162 3,304 3,860 3,949
General and administrative 4,060 3,592 4,083 4,724 6,012
Provision for store closures 2,339 -- 932 -- (470)
------------------------------------------------------------------------
Total costs and expenses 54,266 47,344 52,127 58,528 68,284
------------------------------------------------------------------------
Income (loss) from operations (2,670) 2,300 2,013 2,224 3,836
Interest (income) expense, net 150 53 (59) (127) (398)
------------------------------------------------------------------------
Income (loss) before provision (benefit)
for income taxes (2,820) 2,247 2,072 2,351 4,234
Provision (benefit) for income taxes 70 332 (2,432) 898 1,651
------------------------------------------------------------------------
Net income (loss) $ (2,890) $ 1,915 $ 4,504 $ 1,453 $ 2,583
========================================================================
Net income (loss) per share-diluted (1) $ (0.67) $ 0.43 $ 1.00 $ 0.32 $ 0.48
Weighted average shares and
common share equivalents outstanding 4,344 4,477 4,499 4,570 5,433
BALANCE SHEET DATA (AT YEAR END):
Working capital (deficit) $ (4,602) $ (496) $ 807 $ 158 $ 11,094
Total assets 29,723 30,164 34,194 34,855 52,091
Long-term debt (excluding current portion) -- 750 150 -- --
Stockholders' equity $ 14,717 $ 16,678 $ 21,283 $ 22,936 $ 37,126
</TABLE>
- -----------
(1) Net income (loss) per share - diluted for 1996 and prior years have been
restated to reflect the adoption by the Company of Statement of Financial
Accounting Standards No. 128.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues consist of restaurant sales and wholesale bakery sales
and, prior to February 1997, free-standing retail bakery sales. Comparable
restaurant sales are calculated to include a new restaurant only after its first
full month following the eighteenth month of its operation. Comparable
restaurant revenues may fluctuate significantly as a result of a variety of
factors.
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 to increase generally with sales volume and with the
addition of new locations. 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.
RESULTS OF OPERATIONS FOR FISCAL YEARS 1995, 1996 AND 1997
The following table sets forth operating results as a percentage of total
revenues for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE INCREASE
FISCAL YEAR (DECREASE)
-----------------------------------------------------------------
1995 1996 1997 1996 vs. 1995 1997 vs. 1996
-----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants 80.6% 83.3% 90.9% 15.9% 29.5%
Wholesale bakeries 9.6% 9.9% 8.7% 16.1% 4.5%
Retail bakeries 9.8% 6.8% 0.4% -22.1% -92.5%
--------------------------------
Total revenues 100.0% 100.0% 100.0% 12.2% 18.7%
--------------------------------
Costs and expenses:
Costs of sales 23.6% 24.3% 23.6% 15.8% 14.9%
Operating expenses 57.3% 57.9% 58.0% 13.3% 18.9%
Depreciation and amortization 6.1% 6.3% 5.5% 16.8% 2.3%
General and administrative 7.6% 7.8% 8.3% 15.7% 27.3%
Provision for store closures 1.7% 0.0% -0.7% -100.0% 100.0%
--------------------------------
Total costs and expenses 96.3% 96.3% 94.7% 12.3% 16.7%
--------------------------------
Income (loss) from operations 3.7% 3.7% 5.3% 10.5% 72.5%
Interest (income) expense, net -0.1% -0.2% -0.6% 115.3% 213.4%
--------------------------------
Income (loss) before provision (benefit)
for income taxes 3.8% 3.9% 5.9% 13.5% 80.1%
Provision (benefit) for income taxes -4.5% 1.5% 2.3% -136.9% 83.9%
--------------------------------
Net income (loss) 8.3% 2.4% 3.6% -67.7% 77.8%
================================
</TABLE>
17
<PAGE> 18
FISCAL 1997 COMPARED TO FISCAL 1996
REVENUES
Total revenues increased by $11.4 million, or 18.7%, to $72.1 million in 1997
from $60.8 million in 1996. The increase primarily reflected sales of $11.5
million attributable to (i) the opening of four new restaurants, one of which
opened in April 1996, one in January 1997 and another two in late 1997, and (ii)
a 7.1% increase in comparable restaurant sales and a 4.8% increase in comparable
wholesale bakery sales. Comparable restaurant sales are calculated to include a
new restaurant only after the first full month following the eighteenth month of
its operation. The impact of menu price increases in the restaurant sales in
1997 was approximately 3.5%. These factors more than offset the $3.8 million
decrease in revenues attributable to the disposition of four retail bakeries in
1996 and the remaining four in February 1997.
COST OF SALES
Cost of sales decreased as a percentage of revenues to 23.6% in 1997 from
24.3% in 1996, primarily as a result of a menu price increase in December 1996
as well as improved purchasing capabilities and stable food and beverage prices
during the 1997 period.
OPERATING EXPENSES
Operating expenses include all restaurant and bakery operating and occupancy
costs, the major components of which are labor, rent, operating supplies,
repairs and maintenance, marketing and utilities. Operating expenses increased
as a percentage of revenues slightly to 58.0% in 1997 from 57.9% in 1996. The
slight increase is attributable to two increases in minimum wage affecting 1997
results, offset in part by declines in several other areas.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses decreased as a percentage of revenues
to 5.5% in 1997 from 6.3% in 1996, primarily reflecting increased revenues and a
declining depreciable asset base for older units, which offset increases related
to new unit construction costs. The amortization of pre-opening costs remained
consistent between 1997 and 1996 at $431,000 and $426,000, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses increased as a percentage of revenues to
8.3% in 1997 from 7.8% in 1996. This increase was largely due to expansion of
the management infrastructure, the accrual of higher performance-based
management bonuses as a result of an improvement in pre-tax income in 1997 and,
to a lesser extent, higher market research costs.
PROVISION FOR STORE CLOSURE
As a result of the disposition of the Costa Mesa restaurant in June 1997, the
Company recorded a $470,000 pre-tax reversal in 1997 of the provision for store
closures originally recorded in 1993.
INTEREST (INCOME) EXPENSE
Interest income increased in 1997 to $402,000 from $168,000 in 1996,
reflecting interest on higher average cash balances as a result of both cash
generated from operations and the proceeds of the Company's initial public
offering in September 1997.
INCOME TAX PROVISION
The Company's effective tax rate increased slightly for fiscal 1997 to 39.0%
from 38.2% for fiscal 1996.
18
<PAGE> 19
FISCAL 1996 COMPARED TO FISCAL 1995
REVENUES
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 the
first and fourth quarters of 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
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 (dairy, coffee,
produce and flour) that were not passed through in corresponding menu price
adjustments until December 1996.
OPERATING EXPENSES
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
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
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.
PROVISION FOR STORE CLOSURE
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.
INCOME TAX PROVISION
The effective 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 ("SFAS") No. 109, "Accounting for Income Taxes,"
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.
19
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
At December 28, 1997, the Company had $15.8 million in cash, cash equivalents
and short-term investment securities, including approximately $11.3 million in
net proceeds from the Company's initial public offering.
For the periods presented, the Company has funded its capital expansion
primarily with cash flow generated from new and existing restaurant operations.
The cash flow from operations increased to $8.2 million for fiscal 1997 from
$5.0 million in fiscal 1996. At December 28, 1997, the Company's working capital
totaled $11.1 million compared to $158,000 at December 29, 1996. As of December
28, 1997, the Company had a credit agreement that provided for a $5.0 million
line of credit. The Company had no borrowings outstanding under the credit line
during these periods.
Net cash provided by financing activities was $11.5 million for 1997 as
compared with the use of $400,000 in cash for 1996. The difference related
primarily to the receipt of $11.3 million in net proceeds from the initial
public offering. The term loan held by a commercial bank was repaid in full in
March 1997.
Capital expenditures were $7.9 million for 1997 as compared to $5.8 million
for 1996. In 1997, the Company opened three new restaurants (located in Las
Vegas, Santa Monica and Denver) and one new production bakery facility and
completed a major renovation of one of its existing restaurants. The Company
intends to open two additional restaurants in 1998. Total capital expenditures
are expected to be approximately $7.0 million in 1998. The Company also
anticipates incurring additional expenditures to enhance certain of its existing
restaurants. The Company expects that its planned future restaurants will
require, on average, a total investment by the Company per restaurant, net of
anticipated landlord contributions, of approximately $1.8 million, with
additional average pre-opening costs per restaurant of approximately $250,000.
The Company intends to finance these capital expenditures through a combination
of cash provided by operations, cash and investment securities on hand, and
landlord construction contributions (when available).
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 the initial public 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. There can be no assurance that such
capital will be available on favorable terms, if at all.
YEAR 2000 COMPLIANCE
The Company utilizes various computer software packages as tools in its units
and the corporate finance and accounting group. In July 1996, the Emerging
Issues Task Force of the Financial Accounting Standards Board reached a
consensus on Issue 96-14, "Accounting for the Costs Associated with Modifying
Computer Software for the Year 2000," which requires that costs associated with
modifying computer software for the year 2000 be expensed as incurred. Based
upon its internal review and other factors, management does not anticipate any
material costs associated with year 2000 software requirements. The Company is
also currently in discussion with its major vendors to ensure compliance.
20
<PAGE> 21
FACTORS AFFECTING OPERATING RESULTS AND QUARTERLY RESULTS
This Management's Discussion and Analysis contains forward-looking statements
relating to future events, including the timing of anticipated restaurant
openings, the amount of investment and pre-opening costs required for future
restaurants, the costs related to year 2000 compliance, the amount of projected
capital expenditures and adequacy of anticipated sources of cash to fund future
capital requirements. The Company's business is subject to a number of
challenges and risks that may cause results to differ materially from those
expressed or implied by these statements, including, among other things, the
risks associated with the Company's pursuit of a more aggressive growth
strategy, risks related to the Company's relatively small operations base and
the geographic concentration of the Company's restaurants, uncertainties
associated with possible changes in food and labor costs and the potential
impact of governmental regulation, risks related to the Company's dependence of
its key personnel, uncertainties related to the intensely competitive nature of
the restaurant business, as well as potential liabilities associated with
long-term leases and potential negative effect of the unusually adverse weather
conditions experienced this winter, especially on the West Coast, which are
predicted to continue for the remainder of the season. These and other risks are
discussed in more detail in the Company's Annual Report on Form 10-K under the
heading "Risk Factors."
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, the Company's ability to execute its
business strategy, the Company's ability to find optimal restaurant locations at
favorable lease rates, and increases or decreases in comparable restaurant
revenues. Due to the foregoing factors, results for any one quarter are not
necessarily indicative of results to be expected for any other quarter or for
any year and, from time to time in the future, the Company's results of
operations may be below the expectations of public market analysts and
investors. Comparable restaurant sales may also vary from period to period as a
result of similar factors.
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. To date, inflation has not had a
material impact on the Company's operations. The minimum wage increased under
recent federal legislation to $5.15 an hour in September 1997 and increased in
California to $5.75 an hour in March 1998. Additional minimum wage increases
have recently been proposed.
IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS
The Company has adopted SFAS No. 128, "Earnings per Share," in the fourth
quarter of 1997. As a result, the earnings per share (EPS) data for the prior
periods have been restated to conform with SFAS 128's requirement of dual
presentation of basic EPS and diluted EPS on the face of all income statements
issued after December 15, 1997 for all entities with complex capital structures.
(See Note 1 to the Company's Financial Statements.)
SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information," were
issued in 1997 and are effective for fiscal years beginning after December 15,
1997. SFAS 130 establishes standards for the reporting and display of
comprehensive income, which includes net income and changes in equity except
those resulting from investments by, or distributions to stockholders. SFAS 131
establishes standards for disclosures related to business operating segments.
The adoption of these standards will not have an effect on the Company's
financial position, results of operations, earnings per share, or cash flows,
but will impact financial statement disclosure.
21
<PAGE> 22
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IL FORNAIO (AMERICA) CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report....................................................................................... 23
Balance Sheets as of December 29, 1996 and December 28, 1997....................................................... 24
Statements of Income for the years ended December 31, 1995, December 29, 1996,
and December 28, 1997.............................................................................................. 25
Statements of Stockholders' Equity for the years ended December 31, 1995,
December 29, 1996, and December 28, 1997........................................................................... 26
Statements of Cash Flows for the years ended December 31, 1995, December 29, 1996,
and December 28, 1997.............................................................................................. 27
Notes to Financial Statements ..................................................................................... 28
</TABLE>
22
<PAGE> 23
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 28, 1997 and December 29, 1996, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 28, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Il Fornaio (America) Corporation at December
28, 1997 and December 29, 1996, and the results of its operations and its cash
flows for each of the three years in the period ended December 28, 1997 in
conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- ------------------------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
February 6, 1998
23
<PAGE> 24
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
December 29, December 28,
1996 1997
----------------------------
<S> <C> <C>
ASSETS
Current assets:
Cash and equivalents $ 1,003 $ 557
Restricted cash 338 518
Short-term investment securities 698 14,714
Accounts receivable, net 1,271 1,291
Note receivable 308 121
Inventories 1,351 1,720
Prepaid expenses and other assets 756 1,420
Deferred tax assets, net 579 125
----------------------------
Total current assets 6,304 20,466
----------------------------
Property and equipment, net 26,179 29,255
Deferred tax assets, net 1,927 1,879
Other assets 445 491
----------------------------
Total assets $ 34,855 $ 52,091
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 2,292 $ 3,085
Accrued expenses 3,704 6,287
Current portion of debt 150 --
----------------------------
Total current liabilities 6,146 9,372
----------------------------
Reserve for store closures 346 374
Deferred lease incentives 5,427 5,219
Commitments (Note 9)
Stockholders' equity:
Preferred stock, no par value and $.001 par value; 3,500,000 and 5,000,000
shares authorized; 2,308,196 and no shares issued and
outstanding, respectively 16,885 --
Common stock, no par value and $.001 par value;
15,000,000 and 20,000,000 shares authorized;
1,611,766 and 5,818,513 shares issued and
outstanding, respectively 7,980 6
Additional paid-in-capital -- 36,466
Retained earnings (Accumulated deficit) (1,929) 654
----------------------------
Total stockholders' equity 22,936 37,126
----------------------------
Total liabilities and stockholders' equity $ 34,855 $ 52,091
============================
</TABLE>
The accompanying notes are an integral part of these financial statements.
24
<PAGE> 25
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
December 31, December 29, December 28,
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C>
REVENUES:
Restaurants $ 43,647 $ 50,599 $ 65,525
Wholesale bakeries 5,181 6,016 6,284
Retail bakeries 5,312 4,137 311
--------------------------------------------
Total revenues 54,140 60,752 72,120
--------------------------------------------
COSTS AND EXPENSES:
Cost of sales 12,772 14,792 16,993
Operating expenses 31,036 35,152 41,800
Depreciation and amortization 3,304 3,860 3,949
General and administrative expenses 4,083 4,724 6,012
Provision for store closures 932 -- (470)
--------------------------------------------
Total costs and expenses 52,127 58,528 68,284
--------------------------------------------
INCOME FROM OPERATIONS 2,013 2,224 3,836
OTHER (INCOME) EXPENSES:
Interest income (157) (167) (400)
Interest expense 98 40 2
--------------------------------------------
Total other (income) expenses, net (59) (127) (398)
--------------------------------------------
INCOME BEFORE PROVISION (BENEFIT)
FOR INCOME TAXES 2,072 2,351 4,234
Provision (benefit) for income taxes (2,432) (2,432) 898 1,651
--------------------------------------------
NET INCOME $ 4,504 $ 1,453 $ 2,583
============================================
Net income per share:
Basic $ 1.01 $ 0.32 $ 0.53
============================================
Diluted $ 1.00 $ 0.32 $ 0.48
============================================
Weighted average shares and common share
equivalents outstanding
Basic 4,452 4,485 4,908
Diluted 4,499 4,570 5,433
</TABLE>
The accompanying notes are an integral part of these financial statements.
25
<PAGE> 26
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
Additional Retained Earnings
Paid-in (accumulated
Preferred Stock Common Stock Capital deficit)
- ------------------------------------------------------------------------------------------------------------------------------------
Shares Amount Shares Amount Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
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
Par value adjustment (7,978) 7,978 --
Issuance of common stock,
net of offering expenses 1,269,775 1 11,544 11,545
Warrants converted to common 10,362 -- 18 18
Conversion of preferred
to common (2,308,196) (16,885) 2,912,906 3 16,882 --
Exercise of common stock
options 13,704 -- 44 44
Net income 2,583 2,583
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 28, 1997 0 $ 0 5,818,513 $ 6 $ 36,466 $ 654 $ 37,126
====================================================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
26
<PAGE> 27
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands, except share data)
<TABLE>
<CAPTION>
Year Ended
--------------------------------------------
December 31, December 29, December 28,
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 4,504 $ 1,453 $ 2,583
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation and amortization 3,304 3,860 3,949
Amortization of deferred lease
incentives (343) (403) (558)
Provision for store closures 932 -- 28
Gain on sale of property and
equipment -- (72) (300)
Retirement of fixed assets -- 253 567
Deferred income taxes (2,738) 232 502
Changes in:
Restricted cash (65) (23) (180)
Accounts receivable (299) (153) (20)
Note receivable -- -- (204)
Inventories (168) 178 (369)
Prepaid expenses and other assets (518) (408) (1,095)
Other assets (24) 19 (46)
Accounts payable 27 185 793
Accrued expenses 227 (174) 2,583
--------------------------------------------
Net cash provided by operating
activities 4,839 4,947 8,233
--------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of short-term investments -- (698) (14,016)
Construction allowances received -- -- 350
Capital expenditures (4,807) (5,847) (7,942)
Proceeds from sale of property and
equipment -- 626 1,081
Collection of note receivable -- -- 391
--------------------------------------------
Net cash used in investing activities (4,807) (5,919) (20,136)
--------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on debt (600) (600) (150)
Net proceeds from the issuance of common
stock 16 136 11,545
Exercise of stock options 39 64 44
Warrants converted to common stock -- -- 18
Repurchase of common stock (157) -- --
--------------------------------------------
Net cash provided by (used in)
financing activities (702) (400) 11,457
--------------------------------------------
Increase (decrease) in cash and
equivalents (670) (1,372) (446)
Cash and equivalents, beginning of year 3,045 2,375 1,003
--------------------------------------------
CASH AND EQUIVALENTS, END OF YEAR $ 2,375 $ 1,003 $ 557
============================================
Interest paid $ 105 $ 45 $ 3
============================================
Income taxes paid $ 308 $ 614 $ 1,730
============================================
Noncash investing and financing activities
Issuance of note receivable for retail
bakery and restaurant assets -- $ 308 $ 704
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 28
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 28,
1997, the Company owned and operated 15 Italian white tablecloth restaurants
and five wholesale bakeries in California, Portland, Oregon, Las Vegas,
Nevada, and Denver, Colorado.
FISCAL YEAR - The Company operates on a 52/53-week fiscal year ending on the
last Sunday in December. The fiscal years ended December 28, 1997 and
December 29, 1996 each contained 52 weeks and the fiscal year ended December
31, 1995 contained 53 weeks of operations.
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 and contributions to the employee stock purchase
plan.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying amounts of cash and cash
equivalents, accounts receivable, notes receivable, accounts payable, accrued
liabilities and revolving credit borrowings are reasonable estimates of the
fair values of these financial instruments.
INVESTMENTS - Cash and cash equivalents are comprised of cash and short-term
commercial paper readily convertible to cash. Cash equivalents are carried at
cost which approximates market value. For purposes of the Statements of Cash
Flows, all highly liquid cash equivalents with an original maturity of three
months or less are considered cash equivalents.
ACCOUNTS RECEIVABLE consist primarily of amounts due from wholesale
customers, which are net of allowances for doubtful accounts of $52,000 and
$104,000 as of December 29, 1996 and December 28, 1997, 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.
ADVERTISING COSTS are expensed as incurred.
28
<PAGE> 29
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 a reserved store. The accrual
consists of future payments on leases and other estimated costs directly
associated with the decision to close the stores.
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."
REVENUE RECOGNITION - Revenue from restaurant sales is recognized when food
and beverage products are sold. Revenue from bakery sales is recognized when
the bakery products are shipped.
RECENT ACCOUNTING PRONOUNCEMENTS - In February 1997, the Financial Accounting
Standards Board (FASB) issued Statement of Financial Accounting Standards
("SFAS") No. 128, "Earnings per Share." The Company has adopted SFAS 128 in
the fourth quarter of 1997. As a result, the earnings per share (EPS) data
for prior periods have been restated to conform with SFAS 128's requirement
of dual presentation of basic EPS and diluted EPS for all entities with
complex capital structures. Basic EPS is computed as net income divided by
the weighted average number of common shares outstanding for the period.
Diluted EPS reflects the potential dilution that could occur from common
shares issuable through stock options, warrants and other convertible
securities.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components (revenue, expenses, gains and losses along with non-owner
sources of comprehensive income) in a full set of general-purpose financial
statements. The Company will adopt SFAS 130 in fiscal 1998.
In June 1997, the FASB issued SFAS 131, "Disclosure About Segments of an
Enterprise and Related Information," which changes the way public companies
report information about operating segments. This statement, which is based
on the management approach to segment reporting, establishes requirements to
report selected segment information quarterly and to report entity-wide
disclosures about products and services and major customers. The Company will
adopt SFAS 131 in fiscal 1998.
Management believes that the adoption of these new standards will not have a
material impact on the Company's financial position or results of operations,
and the impact will be limited to the form and content of their disclosures.
RECLASSIFICATIONS - Certain fiscal 1995 and 1996 amounts have been
reclassified to conform with fiscal 1997 presentations.
29
<PAGE> 30
2. NOTE RECEIVABLE
On February 14, 1997, the Company sold the net assets of its four remaining
free-standing retail bakeries for $815,000, including a promissory note in
the principal amount of $204,000. The note bears interest at 8.25% and is
payable in 24 equal monthly installments starting March 15, 1997. The note is
collateralized by the assets of the retail bakeries. The sale price
approximates the carrying value of the assets sold. On July 28, 1996, the
Company sold the net assets of four of its free-standing retail bakeries for
cash and a promissory note. Interest was due monthly from December 1996 to
July 1997 at which time the principal balance was paid in full.
3. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
1996 1997
------------------------
<S> <C> <C>
Leasehold improvements $ 22,090 $ 26,009
Machinery and equipment 12,660 13,758
Furniture and fixtures 3,817 4,700
Construction in progress 3,415 941
------------------------
Total 41,982 45,408
Less - accumulated depreciation and amortization (15,803) (16,153)
------------------------
Property and equipment - net $ 26,179 $ 29,255
========================
</TABLE>
4. PREPAID EXPENSES AND ACCRUED EXPENSES
Prepaid expenses and accrued expenses consisted of the following (in
thousands):
<TABLE>
<CAPTION>
Prepaid expenses: 1996 1997
------------------------
<S> <C> <C>
Pre-opening expenses $ 293 $ 535
Prepaid taxes 140 351
Prepaid rent 219 275
Other 104 259
------------------------
Total prepaid expenses $ 756 $ 1,420
========================
</TABLE>
<TABLE>
<CAPTION>
Accrued expenses: 1996 1997
------------------------
<S> <C> <C>
Accrued payroll and related benefits $ 1,856 $ 3,443
Gift certificates 393 528
Accrued rent 385 486
Accrued taxes 483 1,127
Other 587 703
------------------------
Total accrued expenses $ 3,704 $ 6,287
========================
</TABLE>
30
<PAGE> 31
5. DEBT
The Company has a $5,000,000 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. The Company expects to renew the line of credit for
approximately the same amount and terms with a different financial
institution prior to the expiration of the current line of credit. There were
no borrowings under the credit line at December 28, 1997. The credit
agreement requires compliance with certain financial covenants and prohibits
the payment of cash dividends. The line of credit is collateralized by
accounts receivable, inventory, and property and equipment.
6. PROVISION FOR STORE CLOSURES
As a result of the disposition of the Costa Mesa restaurant in June 1997, the
Company recorded a $470,000 pre-tax reversal of the provision for store
closures originally recorded in 1993.
7. STOCKHOLDERS' EQUITY
PREFERRED STOCK
On September 24, 1997, each outstanding share of Series B, C E and F
preferred stock was converted into 1.262 shares of common stock upon the
completion of the Company's initial public offering.
COMMON STOCK
The Company issued and sold an aggregate of 1.0 million shares of common
stock pursuant to an initial public offering at $11.00 per share, which
closed on September 24, 1997. The net proceeds to the Company, after payment
of underwriting fees and offering expenses were approximately $9.0 million.
On October 1, 1997, the Company issued and sold an aggregate of 225,000
shares of Common Stock at $11.00 per share pursuant to the exercise by the
underwriters of their over-allotment option under the Underwriting Agreement.
The net proceeds to the Company were approximately $2.3 million.
STOCK PLANS
The Company maintains several stock option plans under which the Company may
grant incentive stock options and nonqualified stock options to employees and
non-employee directors. Stock options have been granted at prices at or above
the fair market value on the date of the grant. Options vest and expire
according to terms established at the grant date.
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.
EMPLOYEE STOCK PURCHASE PLAN
During fiscal 1997, the Company implemented the 1997 Purchase Plan. The
Company's 1997 Purchase Plan provides that eligible employees may contribute
up to 15% of their base earnings toward bi-annual purchase of the Company's
common stock with a value up to $25,000. The employee's purchase price is 85%
of the lesser of the fair market value of the stock on the first date of
commencement of the offering or the date of purchase. No compensation expense
is recorded in connection with the Plan. The total number of shares issuable
under the plan is 300,000. No shares will be issued under the plan until the
first offering date on April 30, 1998.
31
<PAGE> 32
The following table reflects the activity under the Company's stock option
plans: At December 31, 1995 and December 29, 1996, options to acquire 207,210
and 310,875 shares, respectively, were exercisable under the plans.
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
SHARES AVERAGE PRICE
-----------------------------
<S> <C> <C>
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
Granted 169,555 6.15
Exercised (13,704) 3.19
Cancelled (5,890) 5.12
-----------------------------
Balance, December 28, 1997 979,785 $ 4.79
===========================
</TABLE>
The weighted average fair values per share of options granted during 1996 and
1997 were $2.27 and $2.33 respectively.
Additional information regarding options outstanding as of December 28, 1997
was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
------------------------------------------
WEIGHTED AVG.
OPTIONS EXERCISABLE
REMAING ---------------------------------
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>
$ 2.38-3.00 24,600 3.8 $2.45 24,080 $2.43
4.00-4.50 616,201 6.4 4.44 381,037 4.43
4.95-5.50 172,329 8.2 5.05 46,019 5.03
6.00-11.00 166,655 9.3 6.15 0 0.00
------- -------
2.38-11.00 979,785 7.3 $4.79 451,136 $4.38
======= =======
</TABLE>
At December 28, 1997, the numbers of shares available for future grants under
the various plans were as follows:
<TABLE>
<CAPTION>
SHARES AVAILABLE
FOR GRANT
----------------
<S> <C>
1997 Directors' Plan 73,000
1997 Incentive Plan 458,320
1997 Purchase Plan 300,000
</TABLE>
32
<PAGE> 33
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. No compensation expense has been recognized in the
financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation," 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. In
accordance with 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, 7.30 years for 1997
and 10 years for 1996, stock volatility, .47% and 1% in 1997 and 1996, risk
free interest rates, 5.48% in 1997 and 6.3% in 1996; 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 1996 and 1997 awards had been amortized to
expense over the vesting period of the awards, pro forma net income would
have been as follows:
<TABLE>
<CAPTION>
1996 1997
-------------------------
<S> <C> <C>
Net income (in thousands):
As reported $ 1,453 $ 2,583
Pro forma 1,189 2,301
Basic earnings per share:
As reported $ 0.32 $ 0.53
Pro forma 0.26 0.47
Diluted earnings per share:
As reported $ 0.32 $ 0.48
Pro forma 0.26 0.42
</TABLE>
However, the impact of outstanding unvested stock options granted prior to
1995 has been excluded from the pro forma calculation; accordingly, the 1996
pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
As a result of the adoption of SFAS 128, the earnings per share calculations
are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------------------------------------------
<S> <C> <C> <C>
Net income available to common stockholders $4,504,000 $1,453,000 $2,583,000
Basic EPS
Weighted average shares outstanding 4,451,774 4,485,006 4,907,875
--------------------------------------------
Net income per share - Basic $ 1.01 $ 0.32 $ 0.53
============================================
Diluted EPS
Weighted average shares outstanding 4,451,774 4,485,006 4,907,875
Add: dilutive stock options 47,249 84,642 525,316
--------------------------------------------
Total 4,499,023 4,569,648 5,433,191
--------------------------------------------
Net income per share - Diluted $ 1.00 $ 0.32 $ 0.48
============================================
</TABLE>
33
<PAGE> 34
8. 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 28, 1997 and December 29, 1996 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1997
----------------------
<S> <C> <C>
Deferred tax assets:
Compensation related $ 310 $ 289
Reserves for store closures 616 188
Deferred rent liability 135 147
Net operating loss carryforwards 278 --
Tax credit carryforwards 1,512 1,557
Other 120 47
----------------------
Total deferred tax assets 2,971 2,228
Deferred tax liabilities:
Fixed assets (348) --
Pre-opening expenses (117) (224)
----------------------
Total deferred tax liabilities (465) (224)
----------------------
Net deferred tax assets $ 2,506 $ 2,004
======================
</TABLE>
The Company provided no valuation allowance against deferred tax assets
recorded as of December 28, 1997 and December 29, 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 28, 1997, the Company has no
remaining and no expired net operating loss carryforwards for federal tax or
state tax purposes. The Company has unused investment and general business
tax credits of approximately $636,000 and alternative minimum tax credits of
approximately $921,000. The investment tax credits will begin to expire in
1998 and the minimum tax credits have an indefinite carryforward period. The
provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
------------------------------------
<S> <C> <C> <C>
Current provision:
Federal $ 179 $ 461 $ 826
State 127 205 323
------------------------------------
Total current 306 666 1,149
Deferred tax assets, net (2,738) 232 502
------------------------------------
Income tax expense (benefit) $(2,432) $ 898 $ 1,651
====================================
</TABLE>
The reconciliation between the Company's effective tax rate on earnings
before income taxes (benefits) and the statutory federal income tax rate of
34% was as follows (in thousands):
<TABLE>
<CAPTION>
1995 1996 1997
-------------------------------------
<S> <C> <C> <C>
Federal income tax at 34% statutory rate $ 705 $ 801 $ 1,440
State income tax 124 141 243
FICA tip credit and other business credits (102) (71) (159)
Valuation allowance (3,174) -- --
Other accrual -- -- 85
Permanent items and other 15 27 42
-------------------------------------
Total $(2,432) $ 898 $ 1,651
=====================================
</TABLE>
34
<PAGE> 35
9. COMMITMENTS
The Company leases all restaurant, 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>
1995 1996 1997
--------------------------------
<S> <C> <C> <C>
Minimum rentals $1,971 $2,076 $2,339
Contingent rentals 732 772 1,347
--------------------------------
Total rental expense $2,703 $2,848 $3,686
================================
</TABLE>
At December 28, 1997, future minimum lease payments under long-term operating
leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING DECEMBER
----------------
<S> <C>
1998 $ 2,664
1999 3,171
2000 3,182
2001 3,253
2002 3,172
Thereafter 21,596
---------
Total $ 37,038
=========
</TABLE>
10. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal years 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------------------------------------------------
<S> <C> <C> <C> <C>
1997 quarter:
Total revenues $17,682 $17,895 $17,995 $18,548
Income from operations 852 1,259 937 788
Net income 527 778 583 695
Net income per share - diluted $ 0.11 $ 0.16 $ 0.11 $ 0.11
1996 quarter:
Total revenues $14,214 $16,010 $15,172 $15,356
Income from operations 295 830 491 608
Net income 190 503 312 448
Net income per share - diluted $ 0.04 $ 0.11 $ 0.07 $ 0.10
</TABLE>
35
<PAGE> 36
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's definitive Proxy Statement related to the
Annual Meeting of Stockholders to be held April 24, 1998, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").
Identification of Executive Officers
The information required by this Item concerning the Company's executive
officers is set forth in Part 1 of this Report.
Compliance with Section 16(a) of the Exchange Act
The information required by this item is incorporated by reference from the
section captioned "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.
36
<PAGE> 37
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.
- Index to Financial Statements
- Independent Auditors' Report
- Balance Sheets at December 29, 1996 and December 28, 1997
- Statements of Income for the years ended December 31, 1995, December -
29, 1996 and December 28, 1997
- Statements of Stockholders' Equity for the years ended December 31,
1995, December 29, 1996 and December 28, 1997
- Statements of Cash Flows for the years ended December 31, 1995, December
29, 1996 and December 28, 1997
- Notes to Financial Statements
2. All schedules are omitted because they are not required, are not
applicable or the information is included in the financial statements or
notes thereto.
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 By-laws, as amended. (2)
3.3 Reference is made to Exhibits 3.1 and 3.2.
4.2 Speciman stock certificate. (4)
10.1* Form of Indemnity Agreement between the Company and each
executive officer and director.(3)
10.2* Summary of Bonus Plan.
10.3* 1997 Equity Incentive Plan and forms of related
agreements.(5)
10.4* 1997 Employee Stock Purchase Plan and form of offering
related thereto.(4)
10.5* 1997 Non-Employee Stock Purchase Plan and form of
offering related thereto.(5)
10.6 Form of Series F Preferred Stock Purchase Agreement with
Schedule of additional Preferred Stock Purchase
Agreements attached. (3)
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
<S> <C>
10.7 Form of Warrant to purchase shares of Series F Preferred
Stock of the Registrant.(3)
10.8 Revised License Agreement, dated December 11, 1986 and
Stock Purchase Agreement dated March 6, 1987, between
the Company and Vegetti S.r.1.(3)
10.9 Assignment of Trademark Registrations Nunc Pro Tunc
executed by Vegetti S.r.1.(3)
10.10+ Lease Agreement, dated December 22, 1988, and Amendment,
dated October 4, 1989, between the Company and Cowper
Square Partners, for the Palo Alto restaurant. (3)
10.11+ Lease Agreement, dated November 21, 1991, between the
Company and Hotel Sainte Claire Partners, L.P., for
the San Jose Restaurant. (3)
10.12+ Lease Agreement dated April 15, 1996, between the
Company and New York-New York Hotel, LLC, for the Las
Vegas Restaurant. (3)
10.13 Food Service Operations Agreement dated November 21,
1991, between the Company and Mobedshahi Hotel Group,
Inc.(3)
10.14 Loan Agreement dated October 30, 1996, between the
Company, Bank of America National Trust and Savings
Association. (3)
10.15* Employment Agreement dated April 1995, between the
Company and Michael J. Hislop.(3)
10.16* 1991 Incentive Stock Option Plan and form of related
agreement.(1)
10.17* 1992 Non-Employee Directors' Stock Option Plan and form
of related agreement.(1)
10.18* 1988 Stock Option Plan and form of related agreement.(1)
10.19 Underwriting Agreement dated September 18, 1997 between
the Company and the Representatives of the
Underwriters.(2)
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney, Reference is made to the signature
page.
27.1 Financial Data Schedule.
- ----------
(1) Filed as an exhibit to the Registrant's Form S-8 (File
No. 333-46421), and incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report
on Form 10-Q for the quarter ended September 28, 1997
(0-29410), and incorporated herein by reference.
(3) Filed as an exhibit to the Registrant's Registration
Statement on Form S-1 (File No. 333-23605), and
incorporated herein by reference.
(4) Filed as an exhibit to Amendment No. 1 to the Form S-1
Registration Statement (File No. 333-23605), and
incorporated herein by reference.
(5) Filed as an exhibit to Amendment No. 2 to the Form S-1
Registration Statement (File No. 333-23605), and
incorporated herein by reference.
* Indicates management contracts or compensatory plans or
arrangements filed pursuant to Item 601(b)(10) of
Regulation S-K and incorporated by reference.
+ Certain confidential information has been deleted from
this exhibit.
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed for the quarter
ended December 28, 1997.
</TABLE>
38
<PAGE> 39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized.
Date: March 25, 1998 Il Fornaio (America) Corporation
By: /s/ LAURENCE B. MINDEL
----------------------------------------------
Laurence B. Mindel
Chairman of the Board and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints Laurence B. Mindel and Paul J. Kelley and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution, for him, and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, and any of them, or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LAURENCE B. MINDEL Chairman of the Board and March 25, 1998
- ----------------------------------- Chief Executive Officer
Laurence B. Mindel (Principal Executive Officer)
/s/ PAUL J. KELLEY Vice President, Finance and March 25, 1998
- ----------------------------------- Chief Financial Officer
Paul J. Kelley (Principal Financial and Accounting
Officer)
/s/ MICHAEL J. HISLOP Director March 25, 1998
- -----------------------------------
Michael J. Hislop
/s/ DEAN A. CORTOPASSI Director March 25, 1998
- -----------------------------------
Dean A. Cortopassi
/s/ W. SCOTT HEDRICK Director March 25, 1998
- -----------------------------------
W. Scott Hedrick
/s/ F. WARREN HELLMAN Director March 25, 1998
- -----------------------------------
F. Warren Hellman
/s/ W. HOWARD LESTER Director March 25, 1998
- -----------------------------------
W. Howard Lester
/s/ PIERRE W. MORNELL Director March 25, 1998
- -----------------------------------
Pierre W. Mornell
/s/ T. GARY ROGERS Director March 25, 1998
- -----------------------------------
T. Gary Rogers
</TABLE>
39
<PAGE> 1
EXHIBIT 10.2
SUMMARY OF BONUS PLAN
IL Fornaio (America) Corporation (the "Company") has a bonus plan (the
"Bonus Plan") pursuant to which certain officers are eligible to receive annual
cash bonuses in amounts ranging from 25% to 50% of their respective base
salaries if certain performance targets established by management and approved
by the Board of Directors are met. Such performance targets may include, among
other things, the overall profitability of the Company and of particular
components of the Company's business, the completion of special projects or the
achievements of certain cost efficiencies. Prior to payment of any bonuses, the
Board of Directors must approve such amounts.
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in the Registration Statement
dated February 17, 1998 on Form S-8 regarding the following stock plans (1997
Equity Incentive Plan, 1997 Employee Stock Purchase Plan, 1997 and 1992
Non-Employee Directors' Stock Option Plans, 1991 Stock Option Plan and the 1998
Stock Option Plan) of our report dated February 6, 1998 included in the Annual
Report on Form 10-K of Il Fornaio (America) Corporation for the year ended
December 28, 1997.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Francisco, California
March 25, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> DEC-30-1996
<PERIOD-END> DEC-28-1997
<CASH> 557
<SECURITIES> 0
<RECEIVABLES> 1,516
<ALLOWANCES> 104
<INVENTORY> 1,720
<CURRENT-ASSETS> 20,466
<PP&E> 45,408
<DEPRECIATION> 16,153
<TOTAL-ASSETS> 52,091
<CURRENT-LIABILITIES> 9,372
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 37,120
<TOTAL-LIABILITY-AND-EQUITY> 52,091
<SALES> 72,120
<TOTAL-REVENUES> 72,120
<CGS> 16,993
<TOTAL-COSTS> 16,993
<OTHER-EXPENSES> 51,761
<LOSS-PROVISION> 97
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 4,234
<INCOME-TAX> 1,651
<INCOME-CONTINUING> 2,583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,583
<EPS-PRIMARY> .53
<EPS-DILUTED> .48
</TABLE>
