<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 June 27, 1999 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 August 5, 1999, there were 5,735,424 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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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Balance Sheets - June 27, 1999 and December 27, 1998................................. 3
Statements of Income - Three months and Six months ended June 27, 1999 and
June 28, 1998........................................................................ 4
Statements of Cash Flows - Six months ended June 27, 1999 and June 28, 1998......... 5
Notes to Financial Statements........................................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of
Operations........................................................................... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk........................... 11
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds............................................ 11
Item 4. Submission of Matters to a Vote of Security Holders.................................. 12
Item 6. Exhibits and Reports on Form 8-K..................................................... 12
</TABLE>
2
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Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JUNE 27, DECEMBER 27,
1999 1998
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<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents .................................... $ 8,485 $ 12,296
Restricted cash .............................................. 349 378
Accounts receivable, net ..................................... 1,307 1,495
Note receivable .............................................. -- 19
Inventories .................................................. 2,291 1,871
Prepaid expenses and other assets ............................ 690 920
Deferred tax assets, net ..................................... 245 245
------------- -------------
Total current assets ................................. 13,367 17,224
Property and equipment, net .................................... 43,505 38,620
Deferred tax assets, net ....................................... 1,023 1,023
Other assets ................................................... 517 487
------------- -------------
Total assets ......................................... $ 58,412 $ 57,354
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ............................................. $ 4,376 $ 3,910
Accrued expenses ............................................. 4,896 6,566
------------- -------------
Total current liabilities ............................ 9,272 10,476
Reserve for store closures ..................................... 204 244
Deferred lease incentives ...................................... 7,055 7,125
------------- -------------
Total liabilities .................................... 16,531 17,845
------------- -------------
Stockholders' equity:
Preferred stock, $.001 par value; 5,000,000 shares
authorized; no shares issued .............................. -- --
Common stock, $.001 par value; 20,000,000 shares
authorized; 6,094,894 shares issued and 5,732,494 shares
outstanding at June 27, 1999 and 6,020,961 shares issued
and 5,658,561 shares outstanding at December 27, 1998 ..... 6 6
Additional paid-in-capital ................................... 38,208 37,758
Retained earnings ............................................ 5,701 3,779
------------- -------------
43,915 41,543
Treasury stock, 362,400 shares, at cost ...................... (2,034) (2,034)
------------- -------------
Total stockholders' equity ................................ 41,881 39,509
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Total liabilities and stockholders' equity ........... $ 58,412 $ 57,354
============= =============
</TABLE>
See notes to condensed financial statements
3
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IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Revenues:
Restaurants ............................... $ 21,647 $ 18,606 $ 43,194 $ 36,556
Bakeries .................................. 2,058 1,893 4,044 3,639
---------- ---------- ---------- ----------
Total revenues ...................... 23,705 20,499 47,238 40,195
---------- ---------- ---------- ----------
Costs and expenses:
Cost of sales ............................. 5,549 4,812 11,087 9,412
Operating expenses ........................ 13,416 11,492 27,037 22,784
Depreciation and amortization ............. 1,239 1,035 2,455 2,037
Pre-opening expenses ...................... 301 5 308 5
General and administrative expenses ....... 1,731 1,564 3,502 3,068
---------- ---------- ---------- ----------
Total costs and expenses ............ 22,236 18,908 44,389 37,306
---------- ---------- ---------- ----------
Income from operations ...................... 1,469 1,591 2,849 2,889
Other income (expenses):
Interest income ........................... 126 215 277 486
Interest expense .......................... (2) - (2) (14)
---------- ---------- ---------- ----------
Total other income (expenses), net .. 124 215 275 472
---------- ---------- ---------- ----------
Income before income taxes and change in
accounting principle ...................... 1,593 1,806 3,124 3,361
Provision for income taxes .................. 613 713 1,202 1,319
---------- ---------- ---------- ----------
Income before change in accounting principle 980 1,093 1,922 2,042
Cumulative effect of change in accounting
principle (net of taxes) .................. -- -- -- 326
---------- ---------- ---------- ----------
Net income .................................. $ 980 $ 1,093 $ 1,922 $ 1,716
========== ========== ========== ==========
BASIC EARNINGS PER SHARE
Basic earnings per share before change in
accounting principle ...................... $ 0.17 $ 0.19 $ 0.34 $ 0.35
Cumulative effect of change in accounting
principle ................................. -- -- -- .06
---------- ---------- ---------- ----------
Basic earnings per share .................... $ 0.17 $ 0.19 $ 0.34 $ 0.29
========== ========== ========== ==========
Basic weighted average shares outstanding ... 5,705 5,904 5,682 5,868
========== ========== ========== ==========
DILUTED EARNINGS PER SHARE
Diluted earnings per share before change in
accounting principle ...................... $ 0.16 $ 0.17 $ 0.32 $ 0.32
Cumulative effect of change in accounting
principle ................................. -- -- -- .05
---------- ---------- ---------- ----------
Diluted earnings per share .................. $ 0.16 $ 0.17 $ 0.32 $ 0.27
========== ========== ========== ==========
Diluted weighted average shares outstanding . 6,138 6,407 6,077 6,392
========== ========== ========== ==========
</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>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 27, JUNE 28,
1999 1998
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income ....................................... $ 1,922 $ 1,716
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization ................ 2,455 2,037
Amortization of deferred lease incentives .... (245) (190)
Change in accounting principle................ 326
Provision for store closures ................. (40) (64)
Retirement of fixed assets ................... 6 --
Deferred income taxes ........................ -- 40
Changes in:
Restricted cash .............................. 29 12
Accounts receivable .......................... 188 (359)
Inventories .................................. (420) (128)
Prepaid expenses ............................. 230 144
Other assets ................................. (30) (7)
Accounts payable ............................. 466 848
Accrued expenses ............................. (1,670) (1,609)
------------ ------------
Net cash provided by operating activities . 2,891 2,766
------------ ------------
Cash flows from investing activities:
Capital expenditures ............................. (7,346) (4,050)
Construction allowance received .................. 175 182
Collection of note receivable .................... 19 53
------------ ------------
Net cash used in investing activities ..... (7,152) (3,815)
------------ ------------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net .. 356 562
Exercise of stock options ........................ 94 222
------------ ------------
Net cash provided by financing activities . 450 784
------------ ------------
Decrease in cash and cash equivalents ............... (3,811) (265)
Cash and cash equivalents, beginning of period ...... 12,296 15,271
============ ============
Cash and cash equivalents, end of period ............ $ 8,485 $ 15,006
============ ============
</TABLE>
See notes to condensed financial statements
5
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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 June 27, 1999, the Company owned and operated
17 Italian white tablecloth restaurants and five bakeries in California;
Portland, Oregon; Las Vegas, Nevada; Denver, Colorado; and Seattle Washington.
The accompanying condensed unaudited financial statements of the Company for
the three months ended June 27, 1999 and June 28, 1998, 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 27, 1998,
filed with the Securities and Exchange Commission. The balance sheet data
presented herein for December 27, 1998 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 26,
1999.
2. Earnings Per Share
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.
The following is a summary of the calculation of the number of shares used in
calculating basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 5,704,756 5,904,430 5,681,715 5,867,504
Add: effect of dilutive securities 433,322 502,813 395,348 524,804
---------- ---------- ---------- ----------
Shares used to compute diluted EPS 6,138,078 6,407,243 6,077,063 6,392,308
========== ========== ========== ==========
</TABLE>
3. Recent Accounting Pronouncement
Pre-opening costs consist of location set-up, employee training and
promotional activities associated with the opening of new locations. Prior to
1998, pre-opening costs were capitalized and then amortized over 12 months
beginning in the month the location commenced operations. In April 1998, the
Accounting Standards Executive Committee of the American Institute of Certified
Public Accountants approved Statement of Position (SOP) 98-5 entitled "Reporting
on the Costs of Start-Up Activities." The SOP requires entities to
expense as incurred all start-up and pre-opening costs that may not otherwise be
capitalized as long-lived assets. The SOP is effective for fiscal years
beginning after December 15, 1998. The Company elected early adoption of SOP
98-5 in the fourth quarter of 1998. The Company's adoption of SOP 98-5 resulted
in a one-time, after-tax charge for fiscal 1998 in the form of a cumulative
effect of a change in accounting principle of $326,000 (net of income taxes of
$209,000) for the unamortized balance of pre-opening costs as of December 28,
1997. Pre-opening costs in 1998 and 1999 reflect costs that were expensed as
incurred. The new expense as incurred
6
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standard may lead to increased variability in the amount of pre-opening costs
recognized, depending on the number and timing of restaurant openings.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 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 manages
on the basis of one business segment with multiple products.
4. Reclassifications-Certain fiscal 1998 amounts have been reclassified to
conform with fiscal 1999 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 under "Factors
Affecting Operating Results" and elsewhere in this Quarterly Report on Form
10-Q, 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 27,
1998. 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 27,
1998.
OVERVIEW
The Company's revenues consist of restaurant sales and 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.
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. Prior to 1998, the Company capitalized pre-opening expenses for
each of its new units and amortized the costs over the 12-month period following
the opening of the unit. On April 3, 1998, the Accounting Standards Executive
Committee of the American Institute of Certified Public Accountants approved
Statement of Position (SOP) 98-5 entitled "Reporting on the Costs of Start-Up
Activities." SOP 98-5 requires entities to expense as incurred all start-up and
pre-opening costs that may not otherwise be capitalized as long-lived assets,
and is effective for fiscal years beginning after December 15, 1998. The Company
elected early adoption of SOP 98-5 in the fourth quarter of 1998. The Company's
adoption of SOP 98-5 resulted in a one-time, after-tax charge for fiscal 1998 in
the form of a cumulative effect of a change in accounting principle of $326,000
for the unamortized balance of pre-opening costs as of December 28, 1997.
Pre-opening costs in the first quarter of 1998 and 1999 reflect costs that were
expensed as incurred. The new expense as incurred standard may lead to increased
variability in the amount of pre-opening costs recognized, depending on the
number and timing of restaurant openings. As a result, the Company's operating
results may fluctuate to a greater extent than under the previously applied
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-month and six-month periods ended June 27, 1999 and June 28, 1998,
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 SIX MONTHS ENDED
--------------------------- ---------------------------
JUNE 27, JUNE 28, JUNE 27, JUNE 28,
1999 1998 1999 1998
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants 91.3% 90.8% 91.4% 90.9%
Bakeries 8.7% 9.2% 8.6% 9.1%
---------- ---------- ---------- ----------
Total revenues 100.0% 100.0% 100.0% 100.0%
---------- ---------- ---------- ----------
Costs and expenses:
Costs of sales 23.4% 23.5% 23.5% 23.4%
Operating expenses 56.6% 56.1% 57.2% 56.7%
Depreciation and amortization (1) 5.2% 5.0% 5.2% 5.1%
Pre-opening expenses (1) 1.3% 0.0% 0.7% 0.0%
General and administrative expenses 7.3% 7.6% 7.4% 7.6%
---------- ---------- ---------- ----------
Total costs and expenses 93.8% 92.2% 94.0% 92.8%
---------- ---------- ---------- ----------
Income from operations 6.2% 7.8% 6.0% 7.2%
Interest income (expense), net 0.5% 1.0% 0.6% 1.2%
---------- ---------- ---------- ----------
Income before income taxes and change in
accounting principle 6.7% 8.8% 6.6% 8.4%
Provision for income taxes 2.6% 3.5% 2.5% 5.1%
---------- ---------- ---------- ----------
Cumulative effect of change in accounting
principle (net of taxes)(1) 0.0% 0.0% 0.0% 0.8%
---------- ---------- ---------- ----------
Net income 4.1% 5.3% 4.1% 4.3%
========== ========== ========== ==========
</TABLE>
(1) Reflects adoption of SOP 98-5, "Reporting on the Costs of Start-up
Activities," in 1998. See Note 3 to Condensed Financial Statements.
Revenues increased by 15.6% to $23.7 million for the second quarter of 1999
from $20.5 million for the second quarter of 1998 and by 17.5% to $47.2 million
for the first six months of 1999 from $40.2 million for the first six months of
1998. The increases primarily reflected a 3.3% increase in comparable restaurant
sales for the second quarter of 1999 and 4.2% for comparable restaurants for the
first six months of 1999. This increase in restaurant revenues also reflects the
benefit of a moderate menu price increase implemented late in the second quarter
of 1999. Additionally, comparable wholesale bakery sales increased by 8.7% for
the second quarter of 1999 and by 11.1% for the first six months of 1999. In
addition, four non-comparable restaurants, two opened at the end of 1997 and two
at the end of 1998, contributed $2.8 million to the increase for the second
quarter of 1999 and $5.6 million to the increase for the first six months of
1999.
Cost of sales decreased slightly as a percentage of revenues to 23.4% for the
second quarter of 1999 compared to 23.5% for the second quarter of 1998,
primarily as a result of the leveling off of dairy and flour prices along with
the effect of a moderate menu price increase. Cost of sales for the first six
months of 1999 was 23.5% compared to 23.4% for the same period in 1998,
reflecting the increase in the first quarter of 1999 of dairy prices, as well
as, to a lesser extent, a slight shift in the sales mix.
Operating expenses as a percentage of revenues increased to 56.6% for the
second quarter of 1999 and to 57.2% for the first six months of 1999 compared to
56.1% and 56.7% for the comparable periods in 1998. These increases are
primarily attributable to increases in minimum wage in certain restaurants
(Portland and Seattle) and the corresponding indirect pressure on other wages.
Depreciation and amortization increased slightly as a percentage of revenues to
5.2% for both the second quarter of 1999 and the first six months of 1999,
compared to 5.0% and 5.1% for the respective comparable periods in 1998,
primarily reflecting increased depreciation related to new unit construction
costs.
Prior to 1998, pre-opening expenses for each of its new units were
capitalized and amortized over the 12-month period following the opening of the
unit. With the adoption of SOP 98-5, pre-opening costs in 1998 and 1999 were
expensed as incurred. This change is discussed in more detail in the "Overview"
above. The pre-opening costs of $301,000 expensed in the second quarter of 1999
were
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incurred primarily in connection with the opening of the Company's eighteenth
restaurant, which opened on June 28, 1999. Total pre-opening costs for the first
six months of 1999 were $308,000 compared to $5,000 for the same period in 1998.
In 1998, the Company did not open any new restaurants until the fourth quarter.
General and administrative expenses decreased to 7.3% for the second quarter
of 1999 compared to 7.6% for the second quarter of 1998 and 7.4% for the first
six months of 1999 versus 7.6% for the same period in 1998, primarily reflecting
stable administrative staffing expense levels.
Interest income decreased to $126,000 in the second quarter of 1999 from
$215,000 in the corresponding period in 1998, reflecting interest on lower
average cash balances as a result of the use of cash in the second quarter of
1999 to fund the construction of new restaurants. The construction of new
restaurants was funded primarily from the proceeds of the Company's initial
public offering in September 1997.
The provisions for income taxes for the three months and six months ended
June 27, 1999 and June 28, 1998 reflected expected income taxes due at federal
statutory rates and state income tax rates, net of tax benefits. The effective
income tax rates were 38.5% for both the second quarter and first six months of
1999 compared to 39.5% and 39.2% for the respective comparable periods in 1998.
This decrease in the effective income tax rate is due to the planned use of
various deductible tax assets and other tax credits and the tax effect of
opening the restaurant in Seattle, Washington at the end of 1998.
The Company's adoption of SOP 98-5 resulted in a one-time, after-tax charge
in the first quarter of 1998 in the form of a cumulative effect of a change in
accounting principle of $326,000 (net of income taxes of $209,000) for the
unamortized balance of pre-opening costs as of December 28, 1997 and is
reflected in the six months ended June 28, 1998.
Net income for the second quarter of 1999 decreased by $113,000 or 10.3% to
$980,000 from $1,093,000 for the second quarter of 1998. The decrease is
primarily the result of pre-opening expenses incurred for the second Las Vegas
restaurant which opened on June 28, 1999. Net income per share (diluted) for the
second quarter of 1999 was $0.16 verses $0.17 recorded for the second quarter in
1998.
Net income for the first six months of 1999 increased by $206,000 or 12.0% to
$1,922,000 from $1,716,000 for the same period in 1998. Net income per share
(diluted) for the first six months of 1999 was $0.32 compared to $0.27 per share
(diluted) for the first six months of 1998. As explained in Note 3, the Company
elected early adoption of SOP 98-5 in the fourth quarter of 1998. The Company's
adoption of SOP 98-5 resulted in a one-time, after-tax charge in the first
quarter of fiscal 1998 in the form of a cumulative effect of a change in
accounting principle of $326,000, or $0.05 per share (diluted). This amount
represented the unamortized balance of pre-opening costs as of December 28,
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 27, 1998 under the
caption "Risk Factors."
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LIQUIDITY AND CAPITAL RESOURCES
At June 27, 1999, the Company had $8.5 million in cash and cash equivalents,
including approximately $2.9 million remaining in net proceeds from the
Company's initial public offering.
The cash flow from operations increased slightly to $2.9 million for the
first six months of 1999 from $2.8 million during the same period in 1998,
primarily due to the net effect of an increase in net income offset by timing
differences in the collection and disbursement of working capital components.
Net cash provided by financing activities was $450,000 for the first six
months of 1999 as compared with $784,000 for the same period in 1998. The
difference is related to the receipt of $356,000 in cash from the issuance of
common stock under the Company's employee stock purchase plan during the first
six-months of 1999 versus $562,000 received under that plan for the same period
in 1998. In addition, the Company received $94,000 in cash from the issuance
of common stock upon the exercise of stock options for the first six-months of
1999 versus $222,000 received from the issuance of common stock options during
the same period in 1998.
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 June 27, 1999,
there were no amounts outstanding under the credit line.
Capital expenditures were $7.4 million for the first six months of 1999 as
compared to $4.0 million for the first six months of 1998. This increase
primarily represents the construction costs for the company's second Las Vegas
restaurant in addition to expenditures for a wholesale production facility
scheduled to open in the third quarter 1999 as well as three additional
restaurants the company intends to open in late 1999. On June 28, 1999 the
Company opened its eighteenth restaurant in the Venetian Resort Hotel and Casino
in Las Vegas, Nevada. The Company also anticipates incurring additional
expenditures to enhance certain of its existing restaurants. To date, these
investments have been funded primarily by the proceeds from the Company's
initial public offering. Total capital expenditures, net of received
construction allowances, are expected to be approximately $12.0 million in 1999.
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 $2.0 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 and cash
equivalents on hand, cash provided by operations, and landlord construction
contributions (when available).
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 June 27, 1999, 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. The Company from time to time has experienced significant
volatility in the cost of certain food-related commodities, such as butter and
manufacturing cream. 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 in California to $5.75
an hour in March 1998. In January 1999, the minimum wage increased to $6.50 an
hour in Oregon and to $5.70 an hour in Washington. Beginning January 1, 2000,
the minimum wage will increase to $6.50 an hour in Washington. Additional
increases to the minimum wage have been proposed.
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 software system, which 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 software with a system that is Year 2000-compliant.
To date, the Company has identified and assessed the replacement software and
has plans to have the new software tested and in operation in the second half of
1999. The Company has spent $30,000 to date on the replacement software, and
estimates that the remaining cost of that software will be approximately
$35,000. 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 intends to fund Year
2000 compliance costs through cash provided by operations.
The Company has contacted critical suppliers of products and services to
determine the extent to which the Company may be vulnerable to certain
suppliers' failures to resolve their own Year 2000 compliance issues. The
Company has obtained verbal and written assurances from major third party
licensed software providers for accounting, point-of-sale and payroll services
and is in the process of obtaining written verification of Year 2000 compliance
from other third party licensed software providers.
As part of the Year 2000 readiness efforts, the Company intends to develop
contingency plans to identify activities that will need to be performed in the
event of system failures. The contingency plans are expected to be completed by
September 30, 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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash and cash equivalents are subject to interest rate risk.
The Company invests primarily on a short-term basis. The financial instrument
holdings at quarter-end were analyzed to determine their sensitivity to interest
rate changes. The fair values of these instruments were determined by net
present values. In our sensitivity analysis, the same change in interest rate
was used for all maturities. All other factors were held constant. If interest
rates increased by 10%, the expected effect on net income related to the
Company's financial instruments would be immaterial.
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) From March 29, 1999 to June 27, 1999, the Registrant has sold and issued the
following unregistered securities:
1. During the period, the Company granted incentive and non-qualified stock
options to key employees, officers and directors under its 1997 Equity
Incentive Plan (the "Plan") covering an aggregate of 229,663 shares of
the Company's Common Stock, at exercise prices ranging from $10.13 to
$11.14 per share. These options vest over a period of time following
their
11
<PAGE> 12
respective dates of grant. The Company claimed exemption from
registration under the Securities Act for these grants in that the
Company believes such grants were not "sales" within the meaning of the
Securities Act.
(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 June 27, 1999, the Company has used
approximately $8.4 million to fund the construction of new restaurants
(architect fees, permits and 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 primarily short-term investments with maturities of three months
or less.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 6, 1999 (the
"Annual Meeting"). At the Annual Meeting, the Company's stockholders elected
the two directors nominated by the Board by the votes indicated:
<TABLE>
<CAPTION>
Nominee Votes in Favor Votes Withheld
------- -------------- --------------
<S> <C> <C>
F. Warren Hellman 4,547,843 26,986
Michael J. Hislop 4,547,603 27,226
</TABLE>
The proposal to approve the Company's 1997 Equity Incentive Plan, as amended,
to increase the aggregate number of shares of Common Stock authorized for
issuance under such plan by 500,000 shares was approved with 2,659,836
affirmative votes, 546,896 negative votes, 64,795 abstentions and 1,303,302
broker non-votes.
The proposal to ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 26, 1999
was approved with 4,573,274 affirmative votes, 815 negative votes, 740
abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedules
(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: August 10, 1999 By: /s/ MICHAEL J. HISLOP
--------------------------------------
Michael J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 10, 1999 By: /s/ PAUL J. KELLEY
--------------------------------------
Paul J. Kelley
Chief Financial Officer and Secretary
(Principal Financial and Accounting
Officer)
12
<PAGE> 13
EXHIBIT INDEX
Exhibit
Number Description
- ------- -----------
27.1 Financial Data Schedules
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 3-MOS
<FISCAL-YEAR-END> DEC-27-1998 DEC-26-1999
<PERIOD-START> MAR-30-1998 MAR-29-1999
<PERIOD-END> JUN-28-1998 JUN-27-1999
<CASH> 15,512 8,834
<SECURITIES> 0 0
<RECEIVABLES> 1,846 1,431
<ALLOWANCES> 128 124
<INVENTORY> 1,848 2,291
<CURRENT-ASSETS> 20,014 13,367
<PP&E> 49,094 64,955
<DEPRECIATION> 17,829 21,450
<TOTAL-ASSETS> 53,546 58,412
<CURRENT-LIABILITIES> 8,402 9,272
<BONDS> 0 0
0 0
0 0
<COMMON> 6 6
<OTHER-SE> 39,620 43,909
<TOTAL-LIABILITY-AND-EQUITY> 53,546 58,412
<SALES> 20,499 23,705
<TOTAL-REVENUES> 20,499 23,705
<CGS> 4,812 5,549
<TOTAL-COSTS> 18,908 22,236
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 39 (50)
<INTEREST-EXPENSE> 0 2
<INCOME-PRETAX> 1,806 1,593
<INCOME-TAX> 713 613
<INCOME-CONTINUING> 1,093 980
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 1,093 980
<EPS-BASIC> .19 .17
<EPS-DILUTED> .17 .16
</TABLE>
