<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the quarterly period ended September 27, 1998 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)
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. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of November 5, 1998, there were 5,657,751 shares outstanding of the
Registrant's Common Stock ($.001 par value).
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IL FORNAIO (AMERICA) CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - September 27, 1998 and December 28, 1997 .................................................... 3
Statements of Income-Three months and Nine months ended September 27, 1998 and September 28, 1997 ............ 4
Statements of Cash Flows-Nine months ended September 27, 1998 and September 28, 1997 ......................... 5
Notes to Financial Statements ................................................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ................... 7
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds................................................................ 11
Item 6. Exhibits and Reports on Form 8-K......................................................................... 12
</TABLE>
2
<PAGE> 3
Part I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
September 27, December 28,
1998 1997
--------------- ---------------
<S> <C> <C>
ASSETS
Current assets:
Cash $ 642 $ 557
Cash equivalents 13,626 14,714
Restricted cash 687 518
Accounts receivable, net 1,467 1,291
Note receivable 46 121
Inventories 1,830 1,720
Prepaid expenses and other assets 851 1,420
Deferred tax assets, net 9 125
--------------- ---------------
Total current assets 19,158 20,466
--------------- ---------------
Property and equipment, net 34,246 29,255
Deferred tax assets, net 1,289 1,879
Other assets 485 491
--------------- ---------------
Total assets $ 55,178 $ 52,091
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 4,050 3,085
Accrued expenses 5,088 6,287
--------------- ---------------
Total current liabilities 9,138 9,372
--------------- ---------------
Reserve for store closures 270 374
Deferred lease incentives 5,266 5,219
--------------- ---------------
Total liabilities 14,674 14,965
--------------- ---------------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; no shares issued and outstanding, respectively
Common stock, $.001 par value;
20,000,000 shares authorized;
5,949,052 and 5,818,513 shares issued and
outstanding, respectively 6 6
Additional paid-in-capital 37,304 36,466
Retained earnings 3,194 654
--------------- ---------------
Total stockholders' equity 40,504 37,126
--------------- ---------------
Total liabilities and stockholders' equity $ 55,178 $ 52,091
=============== ===============
</TABLE>
See notes to condensed financial statements
3
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IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three months ended Nine months ended
-------------------------------------- -----------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------------ ------------------ ----------------- ----------------
<S> <C> <C> <C> <C>
Revenues:
Restaurants $ 18,194 $ 16,409 $ 54,750 $ 48,525
Wholesale bakeries 1,901 1,586 5,540 4,736
Retail bakeries - - - 311
------------------ ------------------ ----------------- ----------------
Total revenues 20,095 17,995 60,290 53,572
------------------ ------------------ ----------------- ----------------
Costs and expenses:
Cost of sales 4,730 4,196 14,142 12,546
Operating expenses 11,554 10,405 34,338 31,108
Depreciation and amortization 1,203 951 3,553 2,878
General and administrative expenses 1,659 1,506 4,727 4,462
Provision for store closures - - - (470)
------------------ ------------------ ----------------- ----------------
Total costs and expenses 19,146 17,058 56,760 50,524
------------------ ------------------ ----------------- ----------------
Income from operations 949 937 3,530 3,048
Other (income) expenses:
Interest income (195) (57) (681) (168)
Interest expense 2 - 16 2
------------------ ------------------ ----------------- ----------------
Total other (income) expenses, net (193) (57) (665) (166)
------------------ ------------------ ----------------- ----------------
Income before provision for income taxes 1,142 994 4,195 3,214
Provision for income taxes 456 411 1,655 1,326
------------------ ------------------ ----------------- ----------------
Net income $ 686 $ 583 $ 2,540 $ 1,888
================== ================== ================= ================
Net income per share:
Basic $ 0.12 $ 0.12 $ 0.43 $ 0.41
Diluted $ 0.11 $ 0.11 $ 0.40 $ 0.37
Weighted average shares and common
share equivalents outstanding
Basic 5,947 4,704 5,893 4,606
Diluted 6,382 5,374 6,391 5,142
</TABLE>
See notes to condensed financial statements
4
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IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
Nine months Nine months
ended ended
September 27, September 28,
1998 1997
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,540 $ 1,888
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,553 2,878
Amortization of deferred lease incentives (282) (472)
Provision for store closures - (470)
Gain on sale of property and equipment - (300)
Retirement of fixed assets - 271
Deferred income taxes 706 -
Changes in:
Restricted cash (169) 26
Accounts receivable (176) 125
Inventories (110) (238)
Prepaid expenses 105 707
Other assets 6 (27)
Accounts payable 965 (358)
Accrued expenses (1,199) 1,619
Reserve for store closures (104) -
------------- --------------
Net cash provided by operating activities 5,835 5,649
------------- --------------
Cash flows from investing activities:
Capital expenditures (8,083) (4,793)
Construction allowances received 332 -
Proceeds from sale of property and equipment - 1,081
Collection of note receivable 75 -
------------- --------------
Net cash used in investing activities (7,676) (3,712)
------------- --------------
Cash flows from financing activities:
Payments on debt - (150)
Proceeds from the issuance of common stock, net 562 9,295
Exercise of stock options 276 24
------------- --------------
Net cash provided by financing activities 838 9,169
------------- --------------
Increase (decrease) in cash and cash equivalents (1,003) 11,106
Cash and cash equivalents, beginning of period 15,271 1,003
------------- --------------
Cash and cash equivalents, end of period $ 14,268 $ 12,109
============= ==============
</TABLE>
See notes to condensed financial statements
5
<PAGE> 6
IL FORNAIO (AMERICA) CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
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. As of September 27, 1998, the Company owned and
operated 15 Italian white tablecloth restaurants and five wholesale bakeries in
California; Portland, Oregon; Las Vegas, Nevada; and Denver, Colorado.
The accompanying condensed unaudited financial statements of the Company for the
three months and nine months ended September 27, 1998 and September 28, 1997,
respectively, have been prepared in accordance with generally accepted
accounting principles and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Certain information and footnote disclosures, normally included
in financial statements prepared in accordance with generally accepted
accounting principles, have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these interim condensed financial statements
be read in conjunction with the Company's most recent audited financial
statements and notes thereto included in the Company's Form 10-K for the fiscal
year ended December 28, 1997, filed with the Securities and Exchange Commission.
The balance sheet data presented herein for December 28, 1997 was derived from
the Company's audited financial statements for the fiscal year then ended. In
the opinion of management, all adjustments (which include only normal recurring
adjustments) necessary for a fair presentation of the financial position,
results of operations and cash flows for the interim periods presented have been
made. The interim financial information herein is not necessarily indicative of
results for any future interim periods or for the full fiscal year ending
December 27, 1998.
2. Cash and cash equivalents
Cash-The Company reports all demand deposits and cash on hand as cash.
Cash equivalents-Consist primarily of commercial paper with maturities of three
months or less. Cash equivalents are carried at cost which approximates market
value.
3. Earnings Per Share
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share." The Company 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.
4. 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. As of September 27, 1998 and December 28,
1997 there were 5,000,000 shares authorized and no shares were issued and
outstanding.
5. Recent Accounting Pronouncement
On April 3, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants approved Statement of Position 98-5
("SOP") entitled "Reporting on the Costs of Start-Up Activities." The SOP 98-5
requires entities to expense as incurred all start-up and preopening costs that
are not otherwise capitalizable as long-lived assets. The Company's adoption of
the new accounting standard will involve the recognition of the cumulative
effect of the change in accounting principle required by the SOP, net of any
related income tax effect, retroactive to the beginning of the fiscal year of
adoption. The SOP will be effective for fiscal years beginning after December
15, 1998. The Company is currently considering its options with respect to the
timing of adoption of SOP 98-5. When adopted, preopening costs will be expensed
as incurred.
6
<PAGE> 7
6. Reclassifications-Certain fiscal 1997 amounts have been reclassified to
conform with fiscal 1998 presentations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements that involve risks and
uncertainties. Such forward looking statements may be deemed to include the
timing of and plans for anticipated restaurant openings, the projected
investment and costs required for future restaurants, the adequacy of
anticipated sources of cash to fund the Company's future capital requirements
through 1999, and the costs of the Company's Year 2000 compliance efforts and
dates by which the Company believes it will complete such efforts. Words such as
"believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Readers are cautioned that the forward-looking
statements reflect management's analysis only as of the date hereof, and the
Company assumes no obligation to update these statements. Actual events or
results may differ materially from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those risks and uncertainties discussed below, as well as other
risks set forth under the caption "Risk Factors" in the Company's Annual Report
on Form 10-K for the fiscal year ended December 28, 1997. The following
discussion should be read in conjunction with the Financial Statements and the
Notes thereto included in Item 1 of this Quarterly Report on Form 10-Q and in
the Company's Form 10-K for the fiscal year ended December 28, 1997.
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. See "Factors Affecting Operating Results" below.
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 with sales volume. Occupancy costs include both a fixed
and percentage portion of rent.
Depreciation and amortization includes the amortization of preopening costs
associated with the opening of new locations. To date, the Company has
capitalized preopening expenses for each of its new units and amortized such
costs over the 12-month period following the opening of the unit. Preopening
costs consist of direct costs related to hiring and training the initial
workforce and certain other direct costs related to opening new restaurants. On
April 3, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants approved Statement of Position 98-5
("SOP") entitled "Reporting on the Costs of Start-Up Activities." SOP 98-5
requires entities to expense as incurred all start-up and preopening costs that
are not otherwise capitalizable as long-lived assets. The Company's adoption of
the new accounting standard will involve the recognition of the cumulative
effect of the change in accounting principle required by the SOP, net of any
related income tax effect, retroactive to the beginning of the fiscal year of
adoption. See Note 5 of Notes to Condensed Financial Statements. The new
expense-as-incurred standard may lead to increased quarterly variability in the
amount of preopening costs recognized depending on the number and timing of
restaurant openings. As a result, the Company's quarterly operating results may
fluctuate to a greater extent than under the currently applicable principle.
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.
7
<PAGE> 8
The following table sets forth unaudited operating results for the three and
nine-month periods ended September 27, 1998 and September 28, 1997,
respectively, as a percentage of sales in each of these periods. This data has
been derived from the unaudited financial statements.
<TABLE>
<CAPTION>
Three months ended Nine months ended
--------------------------------------- ------------------------------------
September 27, September 28, September 27, September 28,
1998 1997 1998 1997
------------------ ------------------ ---------------- -----------------
<S> <C> <C> <C> <C>
Revenues:
Restaurants 90.5% 91.2% 90.8% 90.6%
Wholesale bakeries 9.5% 8.8% 9.2% 8.8%
Retail bakeries - - - 0.6%
----------------- ------------------ --------------- -----------------
Total revenues 100.0% 100.0% 100.0% 100.0%
----------------- ------------------ --------------- -----------------
Costs and expenses:
Cost of sales 23.5% 23.3% 23.4% 23.4%
Operating expenses 57.5% 57.8% 57.0% 58.1%
Depreciation and amortization 6.0% 5.3% 5.9% 5.4%
General and administrative expenses 8.3% 8.4% 7.8% 8.3%
Provision for store closures - - - (0.9)%
----------------- ------------------ --------------- -----------------
Total costs and expenses 95.3% 94.8% 94.1% 94.3%
----------------- ------------------ --------------- -----------------
Income from operations 4.7% 5.2% 5.9% 5.7%
Other (income) expenses:
Interest income (1.0)% (0.3)% (1.1)% (0.3)%
Interest expense - - - -
----------------- ------------------ --------------- -----------------
Total other (income) expenses, net (1.0)% (0.3)% (1.1)% (0.3)%
----------------- ------------------ --------------- -----------------
Income before provision for income taxes 5.7% 5.5% 7.0% 6.0%
Provision for income taxes 2.3% 2.3% 2.8% 2.5%
----------------- ------------------ --------------- -----------------
Net income 3.4% 3.2% 4.2% 3.5%
================= ================== =============== =================
</TABLE>
Revenues increased by 11.7% to $20.1 million for the third quarter of 1998 from
$18.0 million for the third quarter of 1997 and by 12.5% to $60.3 million for
the first nine months of 1998 from $53.6 for the first nine months of 1997. The
increases primarily reflected a 0.9% increase in comparable restaurant sales for
the third quarter of 1998 and a 4.0% increase in comparable restaurant sales for
the first nine months of 1998. Additionally, comparable wholesale bakery sales
increased by 19.8% for the third quarter of 1998 and by 17.0% for the first nine
months of 1998. In addition, three noncomparable restaurants, opened in 1997,
contributed $1.6 million to the increase for the third quarter of 1998 and $4.5
million to the increase for the first nine months of 1998. The increase in
restaurant revenues reflects the benefit of a moderate menu price increase
implemented in 1998. These factors more than offset the $311,000 decrease in
revenues for the first nine months of 1998 attributable to the disposition of
the four remaining free-standing retail bakeries in February 1997.
Cost of sales increased slightly as a percentage of revenues to 23.5% for the
third quarter of 1998 compared to 23.3% for the third quarter of 1997 primarily
as a result of an increase in dairy prices. Cost of sales as a percentage of
revenues was 23.4% for both the first nine months of 1998 and the first nine
months of 1997, as the increase in dairy prices in 1998 was offset by improved
purchasing capabilities during the 1998 period along with the menu price
increase.
8
<PAGE> 9
Operating expenses as a percentage of revenues decreased to 57.5% for the third
quarter of 1998 and 57.0% for the first nine months of 1998 compared to 57.8%
and 58.1% for the respective comparable periods in 1997. These decreases are the
result of a decrease in total occupancy costs as a percentage of revenues,
partially offset by higher labor costs due to minimum wage increases and the
resulting upward pressure on the wage scale for other unit staff positions, and
for the nine-month periods, the effect of expenses related to the remodel of one
restaurant in the second quarter of 1997. Depreciation and amortization
increased as a percentage of revenues to 6.0% and 5.9% for both the third
quarter of 1998 and first nine months of 1998, respectively, compared to 5.3%
and 5.4% for the respective comparable periods in 1997, primarily reflecting
increased pre-opening expenses related to the opening of two new restaurants in
the fourth quarter of 1997.
General and administrative expenses decreased as a percentage of revenues to
8.3% and 7.8% for both the third quarter of 1998 and first nine months of 1998,
respectively, compared to 8.4% and 8.3% for the respective comparable periods in
1997. These decreases were primarily due to higher performance-based management
bonuses in the 1997 periods, partially offset in the third quarter of 1998 by
increased travel and training expenses related to two new restaurants scheduled
to open in fourth quarter of 1998.
As a result of the disposition of the Costa Mesa restaurant in June 1997, the
Company recorded in the nine months ended September 28, 1997, a $470,000 pre-tax
reversal of the provision for store closures originally recorded in 1993.
Interest income increased in both the third quarter of 1998 and first nine
months of 1998 compared to the corresponding respective periods in 1997,
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.
The provisions for income taxes for the nine months ended September 27, 1998 and
September 28, 1997 reflected expected income taxes due at federal statutory
rates and state income tax rates, net of the tax benefits. The effective income
tax rates were 39.9% for the third quarter of 1998 and 39.5% for the first nine
months of 1998 compared to 41.3% for both the respective comparable periods in
1997. This decrease in effective income tax rates is due to the planned use of
various deductible tax assets and other tax credits.
Net income for the third quarter of 1998 increased by $103,000, or 17.8%, to
$686,000 from $583,000 for the third quarter of 1997. Net income per share
(diluted) for the third quarter of 1998 was $0.11 per share versus $0.11 per
share recorded for the third quarter of 1997.
For the first nine months of 1998, net income increased by $652,000, or 34.5%,
to $2.5 million from $1.9 million for the same period of 1997. Net income per
share (diluted) for the first nine months of 1998 was $0.40 per share versus
$0.37 per share for the comparable period in 1997.
FACTORS AFFECTING OPERATING RESULTS
The Company's business is subject to a number of challenges and risks 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,
potentially adverse weather conditions, and the impact of potential governmental
regulation, risks related to the Company's dependence on its key personnel,
uncertainties related to the intensely competitive nature of the restaurant
business, as well as potential liabilities associated with long-term leases. The
Company's plans for new restaurant locations and timing of openings depend upon,
among other things, timely project development and restaurant construction,
obtaining appropriate regulatory approvals, management of costs and recruitment
of qualified operating personnel.
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, fluctuations in inventory and general and administrative
expenses, 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 results may also vary from period to period as a result of
similar factors. These and other risk factors are discussed in more detail in
the Company's Form 10-K for the fiscal year ended December 28, 1997 under the
caption "Risk Factors."
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At September 27, 1998, the Company had $15.0 million in cash, restricted cash
and cash equivalents, including approximately $10.3 million remaining in net
proceeds from the Company's initial public offering.
For the periods presented, the Company has funded its capital requirements
primarily with cash flow generated from new and existing restaurant operations.
The cash flow from operations increased slightly to $5.8 million for the first
nine months of 1998 from $5.6 million during the same period in 1997, due
primarily to the net effect of an increase in net income offset in part by
timing differences in the collection and disbursement of working capital
components.
Net cash provided by financing activities was $838,000 for the first nine months
of 1998 as compared with $9.2 million for the same period in 1997. The
difference related primarily to the receipt of $9.3 million in net proceeds from
the initial public offering in September 1997. In 1998, $276,000 in cash was
realized from the issuance of common stock upon exercise of stock options and
$562,000 from the issuance of common stock under the Company's employee stock
purchase plan.
The Company has a credit agreement, which provides for a $5.0 million revolving
line of credit and which expires on March 31, 2000. At September 27, 1998, there
were no amounts outstanding under the credit line.
Capital expenditures, net of received construction allowances, were $7.8 million
for the first nine months of 1998 as compared to $4.8 million for the first nine
months of 1997. The Company is currently in the process of constructing two
additional restaurants which it intends to open in the fourth quarter of 1998. A
portion of the proceeds from the Company's initial public offering have been
used to fund these investments. Total capital expenditures, net of received
construction allowances, are expected to be approximately $10.0 million in 1998.
The Company expects that its planned future restaurants will require, on
average, a total investment by the Company per restaurant, net of anticipated
landlord contributions, of approximately $1.8 million, with additional average
preopening costs per restaurant of approximately $250,000. The Company also
anticipates incurring additional expenditures to enhance certain of its existing
restaurants.
In October 1998, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. Repurchases may be made in the
open market at prevailing prices or in negotiated off-market transactions.
Through November 5, 1998, the Company had repurchased approximately 362,400
shares of common stock in the open market for an aggregate of approximately $2.0
million.
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, existing cash balances and borrowings
under the credit agreement will be sufficient to fund its capital requirements,
including planned expansion and ongoing maintenance and renovation of existing
restaurants, at least through 1999. 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.
INFLATION
The primary inflationary factors affecting the Company's operations are food and
labor costs. Many 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. In addition, increases in the minimum wage
have resulted in indirect pressure on other wage levels. To date, inflation
(except for the impact of minimum wage increases) has not had a material impact
on the Company's operations. The minimum wage increased under federal
legislation to $5.15 an hour in September 1997 and increased in California to
$5.75 an hour in March 1998. The minimum wage in Oregon will increase to $6.50
an hour in January 1999.
10
<PAGE> 11
YEAR 2000
The Year 2000 issue is the result of computer programs being written using two
digits rather than four to define the applicable year. The Company's computer
equipment and software and devices with embedded technology that are
time-sensitive may recognize a date using "00" as the year 1900 rather than the
year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
The Company's Year 2000 preparations began in fiscal 1997. The preparations
include identification and assessment of all software, hardware, equipment, and
non-information technology ("IT") systems that could be affected by the Year
2000 issue and remedial action, where necessary, followed by further testing.
Analysis to identify internal Year 2000 deficiencies has been completed. Based
upon its identification and assessment efforts to date, the Company has
identified one main software system, its bakery group software system, that will
require replacement. This system had already been identified as a system that
was to be replaced in the ordinary course of business. The Company expects to
replace the current bakery group software with a system that is Year
2000-compliant. To date, the Company has identified and assessed the replacement
software and plans to have the new software tested and in operation by mid-1999.
The Company currently estimates that the costs of that software will be
approximately $75,000. Furthermore, based on its assessment to date, the Company
believes that future costs associated with its Year 2000 compliance effort will
not be material. However, because both IT and non-IT systems may contain
embedded technology, this may complicate the Company's Year 2000 identification,
assessment, remediation and testing efforts.
The Company also intends to contact critical suppliers of products and services
to determine the extent to which the Company may be vulnerable to such
suppliers' failures to resolve their own Year 2000 compliance issues. The
Company has obtained verbal assurances and is in the process of obtaining
written verification of Year 2000 compliance from the third parties that have
provided licensed software for such systems as accounting and point-of-sale and
payroll services.
As part of the Year 2000 readiness efforts, the Company intends to develop
contingency plans to identify activities which will need to be performed in the
event of system failures. The contingency plans are expected to be completed by
July 31, 1999. Based on its assessment to date, the Company presently believes
that the Year 2000 issue will not pose significant operational problems for the
Company. However, the failure to correct a material Year 2000 problem could
result in an interruption in, or failure of, certain normal business operations.
If Year 2000 issues are not properly identified, or assessment, remediation and
testing are not effected timely with respect to Year 2000 problems that are
identified, the Year 2000 problem could materially adversely impact the
Company's results of operations and adversely affect the Company's relationships
with customers, vendors, or others. Additionally, there can be no assurance that
the Year 2000 problems of other entities will not have a material adverse effect
on the Company's systems or results of operations.
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(d) 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 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
September 27, 1998, the Company has used approximately $1.0 million to fund the
construction of new restaurants (architect fees, permits and a limited amount of
building construction). 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 remainder of the net proceeds were invested in short-term, investment-grade,
interest-bearing securities.
11
<PAGE> 12
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Calculation of net income per share
27.1 Financial Data Schedule
(b) Reports on Form 8-K. None.
SIGNATURES
Pursuant to the requirements 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.
Il Fornaio (America) Corporation
Date: November 5, 1998 By: /s/ MICHAEL J. HISLOP
----------------------------------------
Michael J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 5, 1998 By: /s/ PAUL J. KELLEY
----------------------------------------
Paul J. Kelley
Vice President, Finance and Secretary
(Principal Financial and Accounting Officer)
12
<PAGE> 1
EXHIBIT 11.1
IL FORNAIO
CALCULATION OF NET INCOME PER SHARE
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
--------------------------------------- ------------------------------------------
SEPTEMBER 27, SEPTEMBER 28, SEPTEMBER 27, SEPTEMBER 28,
1998 1997 1998 1997
------------------- ------------------- -------------------- -------------------
<S> <C> <C> <C> <C>
Net income available to common stockholders $ 686,000 $ 583,000 $ 2,540,000 $ 1,888,000
Basic EPS
Weighted average shares outstanding 5,947,076 4,703,803 5,893,039 4,606,026
------------------ ------------------- -------------------- -------------------
Net income per share-Basic $ 0.12 $ 0.12 $ 0.43 $ 0.41
================== =================== ==================== ===================
Diluted EPS
Weighted average shares outstanding 5,947,076 4,703,803 5,893,039 4,606,026
Add: dilutive stock options 435,274 670,592 497,677 536,061
------------------ ------------------- -------------------- -------------------
Total 6,382,350 5,374,395 6,390,716 5,142,087
------------------ ------------------- -------------------- -------------------
Net income per share-Diluted $ 0.11 $ 0.11 $ 0.40 $ 0.37
================== =================== ==================== ===================
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> JUN-29-1998
<PERIOD-END> SEP-27-1998
<EXCHANGE-RATE> 1
<CASH> 14,955
<SECURITIES> 0
<RECEIVABLES> 1,629
<ALLOWANCES> 116
<INVENTORY> 1,830
<CURRENT-ASSETS> 19,158
<PP&E> 53,068
<DEPRECIATION> 18,822
<TOTAL-ASSETS> 55,178
<CURRENT-LIABILITIES> 9,138
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 40,498
<TOTAL-LIABILITY-AND-EQUITY> 55,178
<SALES> 20,095
<TOTAL-REVENUES> 20,095
<CGS> 4,730
<TOTAL-COSTS> 19,146
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 1,142
<INCOME-TAX> 456
<INCOME-CONTINUING> 686
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 686
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-28-1997
<PERIOD-START> JUN-30-1997
<PERIOD-END> SEP-28-1997
<EXCHANGE-RATE> 1
<CASH> 487
<SECURITIES> 12,320
<RECEIVABLES> 1,244
<ALLOWANCES> 98
<INVENTORY> 1,589
<CURRENT-ASSETS> 17,311
<PP&E> 42,305
<DEPRECIATION> 15,273
<TOTAL-ASSETS> 46,742
<CURRENT-LIABILITIES> 7,257
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 34,142
<TOTAL-LIABILITY-AND-EQUITY> 46,742
<SALES> 17,995
<TOTAL-REVENUES> 17,995
<CGS> 4,196
<TOTAL-COSTS> 17,058
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 994
<INCOME-TAX> 411
<INCOME-CONTINUING> 583
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 583
<EPS-PRIMARY> .12
<EPS-DILUTED> .11
</TABLE>
