<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 26, 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 November 5, 1999 there were 5,768,451 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 - September 26, 1999 and December 27, 1998...... 3
Statements of Income- Three months and Nine months ended
September 26, 1999 and September 27, 1998...................... 4
Statements of Cash Flows- Nine months ended September 26,
1999 and September 27, 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... 12
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................... 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>
SEPTEMBER 26, DECEMBER 27,
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 7,642 $ 12,296
Restricted cash .......................................... 515 378
Accounts receivable, net ................................. 1,390 1,495
Note receivable .......................................... -- 19
Inventories .............................................. 2,256 1,871
Prepaid expenses and other assets ........................ 813 920
Deferred tax assets, net ................................. 245 245
-------- --------
Total current assets ............................. 12,861 17,224
Property and equipment, net ................................ 47,199 38,620
Deferred tax assets, net ................................... 1,023 1,023
Other assets ............................................... 527 487
-------- --------
Total assets ..................................... $ 61,610 $ 57,354
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ......................................... $ 5,341 $ 3,910
Accrued expenses ......................................... 6,126 5,662
Income taxes payable ..................................... 608 904
-------- --------
Total current liabilities ........................ 12,075 10,476
Reserve for store closures ................................. 192 244
Deferred lease incentives .................................. 6,953 7,125
-------- --------
Total liabilities ................................ 19,220 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; 6,130,071 shares issued and 5,767,671 shares
outstanding at September 26, 1999 and 6,020,961
shares issued and 5,658,561 shares
outstanding at December 27, 1998 ....................... 6 6
Additional paid-in-capital ............................... 38,303 37,758
Retained earnings ........................................ 6,115 3,779
-------- --------
44,424 41,543
Treasury stock, 362,400 shares, at cost .................. (2,034) (2,034)
-------- --------
Total stockholders' equity ............................ 42,390 39,509
-------- --------
Total liabilities and stockholders' equity ....... $ 61,610 $ 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 NINE-MONTHS ENDED
---------------------------------------------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues:
Restaurants .............................. $ 23,478 $ 18,194 $ 66,672 $ 54,750
Bakeries ................................. 1,941 1,901 5,985 5,540
-------- -------- -------- --------
Total revenues ..................... 25,419 20,095 72,657 60,290
-------- -------- -------- --------
Costs and expenses:
Cost of sales ............................ 6,061 4,730 17,148 14,142
Operating expenses ....................... 14,862 11,554 41,899 34,338
Depreciation and amortization ............ 1,362 1,052 3,817 3,089
Pre-opening expenses ..................... 191 59 499 64
General and administrative expenses ...... 2,364 1,659 5,866 4,727
-------- -------- -------- --------
Total costs and expenses ........... 24,840 19,054 69,229 56,360
-------- -------- -------- --------
Income from operations ..................... 579 1,041 3,428 3,930
Other income (expenses):
Interest income .......................... 105 195 382 681
Interest expense ......................... (11) (2) (13) (16)
-------- -------- -------- --------
Total other income (expenses), net . 94 193 369 665
-------- -------- -------- --------
Income before income taxes and change in
accounting principle ................... 673 1,234 3,797 4,595
Provision for income taxes ................. 259 493 1,461 1,812
-------- -------- -------- --------
Income before change in accounting principle 414 741 2,336 2,783
Cumulative effect of change in accounting
principle (net of taxes) ................. -- -- -- 326
-------- -------- -------- --------
Net income ................................. $ 414 $ 741 $ 2,336 $ 2,457
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Basic earnings per share before change in
accounting principle .................... $ 0.07 $ 0.12 $ 0.41 $ 0.47
Cumulative effect of change in accounting
principle .................................. -- -- -- .06
-------- -------- -------- --------
Basic earnings per share ................... $ 0.07 $ 0.12 $ 0.41 $ 0.41
======== ======== ======== ========
Basic weighted average shares outstanding .. 5,744 5,947 5,703 5,893
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Diluted earnings per share before change in
accounting principle ..................... $ 0.07 $ 0.12 $ 0.38 $ 0.44
Cumulative effect of change in accounting
principle ................................ -- -- -- 0.05
-------- -------- -------- --------
Diluted earnings per share ................. $ 0.07 $ 0.12 $ 0.38 $ 0.39
======== ======== ======== ========
Diluted weighted average shares outstanding 6,233 6,382 6,127 6,391
======== ======== ======== ========
</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 26, SEPTEMBER 27,
1999 1998
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income ..................................... $ 2,336 $ 2,457
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization .............. 3,817 3,089
Amortization of deferred lease incentives .. (347) (282)
Change in accounting principle ............. -- 326
Provision for store closures ............... (52) (104)
Retirement of fixed assets ................. 290 --
Deferred income taxes ...................... -- 706
Changes in:
Restricted cash ............................ (137) (169)
Accounts receivable ........................ 105 (176)
Inventories ................................ (385) (110)
Prepaid expenses ........................... 107 169
Other assets ............................... (40) 6
Accounts payable ........................... 1,431 965
Accrued expenses ........................... 168 (1,042)
-------- --------
Net cash provided by operating activities 7,293 5,835
-------- --------
Cash flows from investing activities:
Capital expenditures ........................... (12,686) (8,083)
Construction allowance received ................ 175 332
Collection of note receivable .................. 19 75
-------- --------
Net cash used in investing activities ... (12,492) (7,676)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net 356 562
Exercise of stock options ...................... 189 276
-------- --------
Net cash provided by financing activities 545 838
-------- --------
Decrease in cash and cash equivalents ............. (4,654) (1,003)
Cash and cash equivalents, beginning of period .... 12,296 15,271
======== ========
Cash and cash equivalents, end of period .......... $ 7,642 $ 14,268
======== ========
</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 September 26, 1999, the Company owned and
operated 19 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 September 26, 1999 and September 27, 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 NINE MONTHS ENDED
------------------------------- --------------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS....... 5,744,074 5,947,076 5,702,502 5,893,039
Add: effect of dilutive securities..... 488,888 435,274 424,087 497,677
--------- --------- --------- ---------
Shares used to compute diluted EPS..... 6,232,962 6,382,350 6,126,589 6,390,716
========= ========= ========= =========
</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
6
<PAGE> 7
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
standard may lead to increased variability in the amount of pre-opening costs
recognized, depending on the number and timing of restaurant openings.
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
information that is not historical, including without limitations, 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, 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 or implied by 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 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 nine-month periods ended September 26, 1999 and September 27,
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 NINE-MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 26, SEPTEMBER 27, SEPTEMBER 26, SEPTEMBER 27,
1999 1998 1999 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants ........................... 92.4% 90.5% 91.8% 90.8%
Bakeries .............................. 7.6% 9.5% 8.2% 9.2%
----- ----- ----- -----
Total revenues ..................... 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Costs of sales ........................ 23.8% 23.5% 23.6% 23.5%
Operating expenses .................... 58.4% 57.5% 57.7% 57.0%
Depreciation and amortization (1) ..... 5.4% 5.2% 5.2% 5.1%
Pre-opening expenses (1) .............. 0.8% 0.3% 0.7% 0.1%
General and administrative expenses.... 9.3% 8.3% 8.1% 7.8%
----- ----- ----- -----
Total costs and expenses ............ 97.7% 94.8% 95.3% 93.5%
----- ----- ----- -----
Income from operations .................. 2.3% 5.2% 4.7% 6.5%
Interest income (expense), net .......... 0.3% 1.0% 0.5% 1.1%
----- ----- ----- -----
Income before income taxes and change
in accounting principle ................. 2.6% 6.2% 5.2% 7.6%
Provision for income taxes .............. 1.0% 2.5% 2.0% 3.0%
----- ----- ----- -----
Net income before effect of change
in accounting principle ................. 1.6% 3.7% 3.2% 4.6%
Cumulative effect of change in
accounting principle (net of taxes) (1) 0.0% 0.0% 0.0% 0.5%
----- ----- ----- -----
Net income .............................. 1.6% 3.7% 3.2% 4.1%
===== ===== ===== =====
</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 26.5% to $25.4 million for the third quarter of 1999
from $20.1 million for the third quarter of 1998 and by $12.4 million or 20.5%
to $72.7 million for the first nine months of 1999 from $60.3 million for the
first nine months of 1998. The increases primarily reflect a 1.1% increase in
comparable restaurant sales for the third quarter of 1999 and a 1.5% increase in
comparable restaurants sales for the first nine months of 1999. These increases
in restaurant revenues also reflect the benefit of a moderate menu price
increase implemented late in the second quarter of 1999. Additionally,
comparable wholesale bakery sales increased by 2.1% for the third quarter of
1999 and by 8.0% for the first nine months of 1999. In addition, four
non-comparable restaurants, two opened in fourth quarter 1998 and two opened in
the third quarter 1999 contributed an aggregate of $5.0 million to the increase
for the third quarter of 1999 and $11.1 million to the increase for the first
nine months of 1999.
Cost of sales increased as a percentage of revenues to 23.8% for the third
quarter of 1999 compared to 23.5% for the third quarter of 1998. This increase
was primarily the result of higher initial cost of sales for the two new
restaurants opened during third quarter 1999. Cost of sales for same store
restaurants as a percentage of sales remained unchanged at 25.5% for third
quarter 1999 compared to the same period 1998 and 25.6% for the first nine
months of 1999 versus the same period 1998. Wholesale bakery costs dropped .7%
to 24.3% for the third quarter of 1999 compared to 25.0% for third quarter 1998.
This decrease is primarily due to lower flour costs as a result of bulk
purchasing at lower per unit costs. For the first nine months of 1999 wholesale
bakery costs rose slightly to 23.6% compared to 23.5% for the first nine months
of 1998. Overall cost of sales increased .1% for the first nine months of 1999
to 23.6% compared to 23.5% 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.
8
<PAGE> 9
Operating expenses as a percentage of revenues increased to 58.4% for the
third quarter of 1999 and to 57.7% for the first nine months of 1999 compared to
57.5% and 57.0% for the comparable periods in 1998. These increases are
primarily attributable to increases in minimum wage rates applicable at certain
restaurants (Portland and Seattle) and the corresponding indirect pressure on
other wages, as well as a non-recurring charge of approximately $154,000 related
to the disposition of equipment from two wholesale bakeries as a result of the
consolidation of certain bakery operations. Depreciation and amortization
increased slightly as a percentage of revenues to 5.4% for the third quarter of
1999 and to 5.2% for the first nine months of 1999, compared to 5.2% 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 the Company's 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 $191,000 expensed in the third quarter of 1999
were primarily incurred in connection with the opening of the Coronado Island,
California restaurant. Additional pre-opening costs were incurred for two
restaurants and one wholesale bakery scheduled to open in fourth quarter 1999.
Total pre-opening costs for the first nine months of 1999 were $499,000 compared
to $64,000 the same period in 1998. In 1998, the Company did not open any new
restaurants until the fourth quarter. 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 nine months ended September 27,
1998.
General and administrative expenses increased as a percentage of revenues to
9.3% for the third quarter of 1999 compared to 8.3% for the third quarter of
1998 and to 8.1% for the first nine months of 1999 versus 7.8% for the same
period in 1998. The increases reflect non-recurring charges of approximately
$400,000 associated with the Company's review of financial and strategic
alternatives to enhance stockholder value. In addition, preliminary costs of
$84,000 were incurred with respect to evaluation and negotiation of leases for
two potential sites, that the Company subsequently decided not to pursue.
Interest income decreased to $105,000 in the third quarter of 1999 from
$195,000 in the corresponding period in 1998, reflecting interest on lower
average cash balances as a result of the use of cash in the third quarter of
1999 to fund the construction of new restaurants.
The provisions for income taxes for the three months and nine months ended
September 26, 1999 and September 27, 1998 reflected expected income taxes due at
federal statutory rates and state income tax rates, net of tax benefits. The
effective income tax rate was 38.5% for the third quarter and for the first nine
months of 1999 compared to 39.9% and 39.4% 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.
Income from operations decreased by 44.4% to $579,000 for the quarter ended
September 26, 1999 compared to $1.0 million for the comparable period of the
prior year, primarily as a result of the non-recurring charges discussed above.
Without these non-recurring charges, income from operations would have increased
in the third quarter of 1999 by 8.7% to $1.1 million compared to $1.0 million
for the third quarter of 1998. Income from operations was adversely impacted by
the performance of certain of the Company's new restaurants.
Net income for the third quarter of 1999 decreased by $327,000 or 44.1% to
$414,000 from $741,000 for the third quarter of 1998. The decrease is primarily
the result of increased operating as well as general and administrative expenses
related to the non-recurring charges discussed above. Net income per share
(diluted) for the third quarter of 1999 was $0.07 versus $0.12 recorded for the
third quarter in 1998.
Net income for the first nine months of 1999 decreased by $121,000 to
$2,336,000 from $2,457,000 for the same period in 1998. Net income per share
(diluted) for the first nine months of 1999 was $0.38 compared to $0.39 per
share (diluted) for the first nine 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.
9
<PAGE> 10
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 its 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, 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, successful completion of lease negotiations, 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."
LIQUIDITY AND CAPITAL RESOURCES
At September 26, 1999, the Company had $7.6 million in cash and cash
equivalents. All proceeds from the Company's initial public offering have been
used to fund its expansion.
The cash flow from operations increased by $1.5 million to $7.3 million for
the first nine months of 1999 from $5.8 million during the same period in 1998,
primarily due to the net effect of timing differences in the collection and
disbursement of working capital components.
Net cash provided by financing activities was $545,000 for the first nine
months of 1999 as compared with $838,000 for the same period in 1998. The
Company received $189,000 in cash from the issuance of common stock upon the
exercise of stock options during the first nine months of 1999 compared to
$276,000 for the corresponding period in 1998. Additionally, the Company
received $356,000 in cash from the issuance of common stock under the Company's
employee stock purchase plan during the first nine months of 1999 versus
$562,000 received under the plan for 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 September 26,
1999, there were no amounts outstanding under the credit line.
Capital expenditures were $12.7 million for the first nine months of 1999 as
compared to $8.1 million for the first nine months of 1998. This increase
primarily represented the construction costs for the Company's second Las Vegas
restaurant and its Coronado, California restaurant, both opened during the third
quarter of 1999. In addition, the increase reflects expenditures for a wholesale
production facility and two additional restaurants the Company intends to open
in the fourth quarter 1999. The Company opened its eighteenth and nineteenth
restaurants during the third quarter of 1999. On June 28, 1999 the Company
opened Canaletto restaurant in the Venetian Resort Hotel and Casino in Las
Vegas, Nevada. On September 3, 1999 the Company opened its second restaurant in
San Diego County on Coronado Island, California. The Company also anticipates
incurring additional expenditures to enhance some 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 $14.0 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).
10
<PAGE> 11
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 September 26, 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 2000. In the event that additional capital is
required, the Company may seek to raise that capital through public or private
equity or debt financing. 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.
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
included 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, the Company has
identified one main software system, its bakery software system, which required
replacement. This system had already been identified as a system that was to be
replaced in the ordinary course of business. The Company has selected a new
bakery software that is Year 2000-compliant. To date, the Company has begun
implementation and testing of the replacement software and plans to have the new
software completely operational in the fourth quarter 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.
11
<PAGE> 12
As part of the Year 2000 readiness efforts, the Company has developed
contingency plans to identify activities that will need to be performed in the
event of system failures. These plans, for example, include procedures for the
use of manual checks and credit card vouchers in place of the point-of-sale
system in the restaurants, manual invoicing for wholesale production and sales,
as well as a list of alternative purveyors who are Year 2000 compliant from
which to purchase supplies. 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 December 28, 1998 to September 26, 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 297,423
shares of the Company's Common Stock, at exercise prices ranging from
$7.00 to $11.14 per share. These options vest over a period of time
following their 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 September 26, 1999, the Company has used
all available funds for 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule - Period Ended September 26, 1999
27.1 Financial Data Schedule - Period Ended September 27, 1998
(b) Reports on Form 8-K. None.
12
<PAGE> 13
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 9, 1999 By: /s/ MICHAEL J. HISLOP
--------------------------------------
Michael J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)
Date: November 9, 1999 By: /s/ PAUL J. KELLEY
--------------------------------------
Paul J. Kelley
Chief Financial Officer and Secretary
(Principal Financial and
Accounting Officer)
13
<PAGE> 14
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
- ----------- -----------
<S> <C>
27 Financial Data Schedule - Period Ended September 26, 1999
27.1 Financial Data Schedule - Period Ended September 27, 1998
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> JUN-28-1999
<PERIOD-END> SEP-26-1999
<CASH> 8,157
<SECURITIES> 0
<RECEIVABLES> 1,519
<ALLOWANCES> 129
<INVENTORY> 2,256
<CURRENT-ASSETS> 12,861
<PP&E> 69,971
<DEPRECIATION> 22,772
<TOTAL-ASSETS> 61,610
<CURRENT-LIABILITIES> 12,075
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 44,418
<TOTAL-LIABILITY-AND-EQUITY> 61,610
<SALES> 25,419
<TOTAL-REVENUES> 25,419
<CGS> 6,061
<TOTAL-COSTS> 24,840
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 13
<INTEREST-EXPENSE> 11
<INCOME-PRETAX> 673
<INCOME-TAX> 259
<INCOME-CONTINUING> 414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414
<EPS-BASIC> .07
<EPS-DILUTED> .07
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-27-1998
<PERIOD-START> JUN-29-1998
<PERIOD-END> SEP-27-1998
<CASH> 14,955
<SECURITIES> 0
<RECEIVABLES> 1,629
<ALLOWANCES> 116
<INVENTORY> 1,830
<CURRENT-ASSETS> 19,023
<PP&E> 53,068
<DEPRECIATION> 18,822
<TOTAL-ASSETS> 55,043
<CURRENT-LIABILITIES> 9,086
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 40,415
<TOTAL-LIABILITY-AND-EQUITY> 55,043
<SALES> 20,095
<TOTAL-REVENUES> 20,095
<CGS> 4,730
<TOTAL-COSTS> 19,054
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 24
<INTEREST-EXPENSE> 2
<INCOME-PRETAX> 1,234
<INCOME-TAX> 493
<INCOME-CONTINUING> 741
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 741
<EPS-BASIC> .12
<EPS-DILUTED> .12
</TABLE>
