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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the fiscal year ended December 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)
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
Common Stock, par value $.001 per share
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes[X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein and will not be contained, to the best
of the Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing price of the Registrant's Common Stock on
February 29, 2000, was $30,425,772.*
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of February 29, 2000 there were 5,703,719 shares outstanding of the
Registrant's Common Stock.
* Excludes 2,583,127 shares outstanding at February 29, 2000, of the
Registrant's Common Stock held by directors, executive officers and holders of
more than 10% of the Company's Common Stock. Exclusion of shares held by any
person should not be construed to indicate that such person possesses the power,
direct or indirect, to direct or cause the direction of the management or
policies of the Registrant, or that such person is controlled by or under common
control with the Registrant.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's definitive Proxy Statement for the Registrant's
Annual Meeting of Stockholders to be held on May 3, 2000 have been incorporated
by reference into Part III of this Annual Report on Form 10-K.
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ITEM 1. BUSINESS
CAUTIONARY STATEMENT PURSUANT TO THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995
Certain statements set forth in or incorporated by reference in this Form
10-K as well as in the Company's Annual Report to Stockholders for the year
ended December 26, 1999 constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Act of 1995. These statements
include, without limitation, the timing of and plans for anticipated restaurant
openings, expansion strategy, the projected investment costs and sizes of future
restaurants, the adequacy of anticipated sources of cash, planned capital
expenditures, the effect of interest rate increases, and trends or expectations
regarding the Company's operations. In addition, words such as "believes,"
"anticipates," "expects," "intends," "estimates" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Such statements are based on currently available
operating, financial and competitive information and are subject to various
risks and uncertainties. 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 future results,
events and trends may differ materially from those expressed in or implied by
such statements depending on a variety of factors, including, but not limited to
those set forth under "Risk Factors" and elsewhere in this Form 10-K. See
"Business -- Risk Factors."
GENERAL
Il Fornaio owns and operates 22 full-service, white tablecloth Italian
restaurants serving creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The Company's restaurants offer an extensive
menu, featuring house-made pasta, poultry and game roasted over a wood-fired
rotisserie, meat and fresh fish from a charcoal grill, pizza from a wood-burning
oven, soups, salads and desserts. Il Fornaio's menu is distinguished by fresh,
hand-made breads, pastries and other baked goods that are produced in the
Company's restaurants and three wholesale bakeries. Il Fornaio's wholesale
bakeries also sell baked goods to quality grocery stores, specialty retailers,
hotels and other fine restaurants. In addition, the Company operates a retail
market in each restaurant, which sells baked goods, prepared foods and a variety
of Il Fornaio-brand products, allowing guests to recreate the Il Fornaio
experience at home.
The Company's objectives are to offer guests the most authentic Italian
dining experience available outside of Italy and to establish a brand identity
that provides a competitive advantage in every market in which the Company
operates. The Company's strategy to achieve these objectives includes the
following key elements: (i) serve premium quality, authentic regional Italian
cuisine created by native-born Italian chefs and complemented by hand-made Il
Fornaio baked goods; (ii) build brand awareness through its bakeries and retail
markets, which reinforce the Company's image as a provider of premium quality,
authentic Italian food and enable guests to recreate the Il Fornaio dining
experience at home; (iii) create a distinctive authentic Italian atmosphere with
restaurant designs unique to each location; (iv) consistently execute Il
Fornaio's high standards of food quality, service and cleanliness through its
employee-designed Five Star Service Program; and (v) foster a strong corporate
culture which attracts and retains highly qualified management, chefs and hourly
employees.
Il Fornaio intends to develop restaurants in both existing and new
geographic markets and to locate restaurants at sites in affluent urban and
suburban areas. The flexibility of the Il Fornaio concept enables the Company to
develop successful restaurants in a variety of locations, including residential
neighborhoods, shopping centers, office buildings and hotels. Since its initial
public offering in September 1997, the Company has opened nine restaurants,
located in California, Colorado, Washington, Georgia and Arizona. The Company
currently intends to open three new restaurants in 2000, including the
Scottsdale, Arizona restaurant, which opened on February 7, 2000.
The Company was incorporated in California in June 1980 and was
reincorporated in Delaware in September 1997 prior to its initial public
offering. The Company's executive office is located at 770 Tamalpais Drive,
Suite 400, Corte Madera, California 94925. The Company's telephone number is
(415) 945-0500.
Il Fornaio and the Il Fornaio logo are registered marks of the Company, and
Festa Regionale and Passaporto are marks used and owned by the Company.
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RISK FACTORS
In addition to the other information in this Annual Report on Form 10-K,
stockholders or prospective investors should carefully consider the following
risk factors:
UNCERTAINTIES ASSOCIATED WITH FUTURE GROWTH
The Company has experienced growth in recent years, expanding from eleven
restaurants at the end of 1995 to 21 restaurants at the end of 1999. In 1999,
the Company opened four new restaurants and currently expects to open three new
restaurants in 2000. The Company's ability to expand successfully will depend on
a number of factors, including the identification and availability of suitable
locations, the negotiation of favorable lease arrangements, timely development
and construction of any new shopping center, hotel or other site in which the
restaurant or bakery may be located, management of the costs of construction and
development of new restaurants and bakeries, securing required governmental
approvals and permits, recruitment of qualified operating personnel
(particularly managers and chefs), general economic conditions and other
factors, some of which are beyond the control of the Company. Moreover, the
opening of additional restaurants and bakeries in the future will depend, in
part, upon the Company's ability to generate sufficient funds from existing
operations or to obtain sufficient equity or debt financing on favorable terms
to support such expansion. There can be no assurance that the Company will be
successful in addressing these risks in each case, that the Company will be able
to open all of its planned new operations on a timely basis, if at all, or, if
opened, that those operations will be operated profitably. Delays in opening, or
failure to open, planned new restaurants could have a material adverse effect on
the Company's business, financial condition and results of operations.
The Company's growth strategy may place a strain on the Company's
management, financial and other resources. To manage its growth effectively, the
Company must maintain its high level of quality and service at its existing and
future restaurants, continue to enhance its operational, financial and
management systems, and locate, hire, train and retain experienced and dedicated
operating personnel, particularly managers and chefs. There can be no assurance
that the Company will be able to effectively manage this expansion in any one or
more of these areas, and any failure to do so could have a material adverse
effect on the Company's business, financial condition and results of operations.
RISKS ASSOCIATED WITH SMALL OPERATIONS BASE
Because of the relatively small number of restaurants operated by the
Company, adverse results experienced by any one location could have a material
adverse effect on the Company's business, financial condition and results of
operations. The results achieved to date by the Company's relatively small
number of restaurants may not be indicative of those restaurants' long-term
performance or the potential market acceptance of restaurants in other
geographic locations.
GEOGRAPHIC CONCENTRATION
Fifteen of the Company's 22 restaurants and all three of the Company's
wholesale bakeries are located in California. Because of this geographic
concentration, the Company is susceptible to local and regional risks, such as
increased government regulation, adverse economic conditions, adverse weather
conditions, earthquakes and other natural disasters, any of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. In addition, in light of the Company's current geographic
concentration, adverse publicity relating to the Company's restaurants could
have a more pronounced adverse effect on the Company's overall sales than might
be the case if the Company's restaurants were more broadly dispersed.
The Company has opened seven restaurants located outside of California.
Over the next several years, the Company expects that some of its expansion will
involve opening restaurants in additional states. Expansion into new geographic
regions involves a number of risks, in addition to those identified above,
including uncertainties related to local customs, demographics, legal
requirements, wages, costs and other economic conditions, the need to develop
relationships with local distributors and suppliers for fresh produce and other
ingredients, and potential difficulties related to management of operations
located in a number of broadly dispersed locations. There can be no assurance
that the Company will be successful in addressing these risks in each case, that
the Company will be able to open all of its planned new operations on a timely
basis, if at all, or, if opened, that those operations will be operated
profitably. Delays in opening, or failure to open, planned new restaurants could
have a material adverse effect on the Company's business, financial condition
and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
The Company's quarterly operating results may fluctuate significantly as a
result of a variety of factors, including general economic conditions, consumer
confidence in the economy, changes in consumer preferences, competitive factors,
weather conditions, the timing of new restaurant openings and related expenses,
net sales contributed by new restaurants, increases or
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decreases in comparable restaurant revenues and fluctuations in inventory and
general and administrative expenses. For example, weather conditions have
generally had the most significant adverse impact in the first quarter of each
year. In addition, in the fourth quarter of 1998, the Company adopted a new
accounting standard, which requires the Company to expense as incurred all
start-up and preopening costs that may not otherwise be capitalized as
long-lived assets. The adoption of this new standard in the past resulted in and
may in the future lead to increased variability in operating results, depending
on the number and timing of restaurant openings. See "Item 7. Management's
Discussion and Analysis of Financial Condition and Results of Operations." 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.
A variety of factors also affect the Company's comparable restaurant sales
results, including general economic conditions, consumer confidence in the
economy, changes in consumer preferences, competitive factors, weather
conditions and the Company's ability to execute its business strategy. No
assurance can be given that comparable restaurant sales for any particular
future period will not decrease.
CHANGES IN FOOD AND LABOR COSTS
The Company's profitability is dependent in part on its ability to
anticipate and react to changes in food and labor costs. Various factors beyond
the Company's control, including adverse weather conditions and governmental
regulation, may affect the Company's food costs. There can be no assurance that
the Company will be able to anticipate and react to changing food costs through
its purchasing practices and menu price adjustments in the future, and failure
to do so could have a material adverse effect on the Company's business,
financial condition and results of operations.
A substantial number of the Company's employees are subject to various
minimum wage requirements. Many of the Company's employees work in restaurants
located in California and receive salaries equal to the California minimum wage.
The minimum wage in California was raised to $5.75 an hour effective March 1,
1998. In January 1999, the minimum wage in Oregon increased to $6.50 an hour
from $6.00 an hour. On January 1, 2000, the minimum wage in Washington increased
to $6.50 an hour from $5.70 an hour. There can be no assurance that similar
increases will not be adopted in other jurisdictions in which the Company
operates or seeks to operate. Additional federal minimum wage increases have
recently been proposed. The Company implemented a moderate menu price increase
in 1999 due, in part, to increases in labor costs and cost of goods. There can
be no assurance that the Company will be able to pass additional increases in
labor costs through to its guests in the form of menu price adjustments in the
future and, accordingly, such minimum wage increases could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations."
DEPENDENCE ON KEY PERSONNEL
The success of the Company's business will continue to be highly dependent
on its key operating officers and employees, including Laurence B. Mindel, the
Company's Chairman of the Board, and Michael J. Hislop, the Company's President
and Chief Executive Officer. The Company currently maintains a $5.0 million term
life insurance policy covering Mr. Mindel and a $3.0 million term life insurance
policy covering Mr. Hislop. The Company's success in the future will be
dependent on its ability to attract, retain and motivate qualified management
and operating personnel, including restaurant managers and chefs. Failure by the
Company to attract and retain such key employees in the future could have a
material adverse effect on the Company's business, financial condition and
results of operations.
COMPETITION AND INDUSTRY CONDITIONS
The restaurant and bakery industries are each intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many restaurants and bakeries compete with the Company at each of
its locations. There are many well-established competitors with substantially
greater financial, marketing, personnel and other resources than the Company. In
addition, many of the Company's competitors are well established in the markets
where the Company's operations are, or in which they may be, located. While the
Company believes that its restaurants and wholesale bakeries are distinctive in
design and operating concept, other companies may develop restaurants and
wholesale bakeries that operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business -- Competition."
LONG-TERM, NON-CANCELABLE LEASES; TERMINATION PROVISIONS
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The Company's current leases have annual base rents ranging from $35,000 to
$411,000, are non-cancelable and typically have terms of 10 to 20 years. Leases
entered into by the Company in the future will likely also be long-term and
non-cancelable. If a decision is made to close any restaurant or bakery, the
Company may be committed to perform its obligations under the applicable lease,
which would include, among other things, payment of the base rent for the
balance of the lease term. In 1993 and 1995, the Company recorded provisions of
$2.3 million and $932,000, respectively, for liabilities associated with the
closure of facilities subject to non-cancelable, long-term leases. As of
December 26, 1999, the reserve for store closures was $244,000. The Company may
incur liabilities of this nature in the future if a decision is made to close
one or more restaurants or bakeries, and such liabilities, if incurred, could
have a material adverse effect on the Company's business, financial condition
and results of operations.
In addition, the Las Vegas restaurant lease contains provisions that allow
the hotel landlord to terminate the Company's lease without compensation if,
during any six-month period in which the hotel has achieved a specified
occupancy rate, the restaurant's monthly gross sales average less than a
specified minimum amount. There can be no assurance that restaurant sales will
continue to exceed the specified minimum. In addition, the lease contains
provisions allowing the landlord to relocate the Company's restaurant to another
site within the hotel possessing retail characteristics similar to the site
currently occupied by the Company. The landlord may not use the site vacated for
restaurant operations. Should the Company elect not to relocate the restaurant,
the lease may be terminated by the Company and, in that event, the landlord is
obligated to reimburse the Company for the unamortized cost of its improvements
to the site and any of the Company's furniture, fixtures and equipment not
removed by the Company. Such termination or relocation could have a material
adverse effect on the Company's business, financial condition and results of
operations. See "Item 2. Properties."
GOVERNMENTAL REGULATION
The Company's operations are subject to regulation by federal agencies and
to licensing and regulation by state and local health, environmental, land use,
labor relations, sanitation, building, zoning, safety, fire and other
departments relating to the development and operation of restaurants and retail
establishments. The Company's activities are also subject to the federal
Americans With Disabilities Act and related regulations, which prohibit
discrimination on the basis of disability in public accommodations and
employment. The Company is also subject to state "dram-shop" laws and
regulations, which generally provide that a person injured by an intoxicated
person may seek to recover damages from an establishment that wrongfully served
alcoholic beverages to such person. Changes in any or all of these laws or
regulations, such as government-imposed increases in minimum wages, paid leaves
of absence or mandated health benefits, or increased tax reporting and tax
payment requirements for employees who receive gratuities, could have a material
adverse effect on the Company's business, financial condition and results of
operations. In addition, the Company is required to comply with the alcohol
licensing requirements of the states and municipalities where its restaurants
are or may be located. Delays or failures in obtaining or maintaining the
required construction and operating licenses, permits or approvals could delay
or prevent the opening of new restaurants or could materially and adversely
affect the operation of existing restaurants. In addition, there can be no
assurance that the Company will be able to obtain necessary licenses, permits or
other approvals on a cost-effective and timely basis in order to construct and
develop restaurants and bakeries in the future. See "Business -- Governmental
Regulation."
UNINSURED LOSSES
The Company has comprehensive insurance, including general liability, fire,
extended coverage and employee practices liability coverage. However, there are
certain types of losses that may be uninsurable or that the Company believes are
not economically insurable, such as earthquakes and other natural disasters. In
view of the location of many of the Company's existing and planned restaurants
in California, the Company's operations are particularly susceptible to damage
and disruption caused by earthquakes. In the event of an earthquake or other
natural disaster affecting the Company's geographic area of operations, the
Company could suffer a loss of the capital invested in, as well as anticipated
earnings from, the damaged or destroyed properties. In addition, the Company
does not currently maintain any insurance coverage for the effects of adverse
publicity, and such litigation or adverse publicity could have a material
adverse effect on the Company's business, financial condition and results of
operations.
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RISKS RELATED TO THE 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 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 if 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. Although to date the Year
2000 issue has not posed significant operational problems for the Company, it is
still possible that Year 2000 problems may arise in the future with respect to
the Company or its vendors, which could have a material adverse effect on the
Company. See "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Year 2000 Compliance."
CONTROL BY EXISTING STOCKHOLDERS AND MANAGEMENT
At February 29, 2000, the Company's directors, officers and their
affiliates beneficially owned approximately 31.9% of the outstanding Common
Stock (assuming exercise of vested stock options). As a result of such Common
Stock ownership, the Company's directors, officers and their affiliates, if they
voted together, would be able to exercise significant influence over the
election of members of the Company's Board of Directors and other corporate
actions requiring stockholder approval. See "Item 12. Security Ownership of
Certain Beneficial Owners and Management."
POTENTIAL VOLATILITY OF STOCK PRICE
The market price of the shares of Common Stock may be subject to
significant fluctuations in response to the Company's operating results and
other factors, including general economic and market conditions. In addition,
the stock market in recent years has experienced and continues to experience
extreme price and volume fluctuations, which have affected the market price of
the stock of many companies and which have often been unrelated or
disproportionate to the operating performance of these companies. These
fluctuations, as well as a shortfall in sales or earnings compared to securities
analysts' expectations, changes in analysts' recommendations or projections or
general economic and market conditions, may adversely affect the market price of
the Common Stock. In the past, securities class action litigation has often been
instituted following periods of volatility in the market price for a company's
securities. Such litigation could result in substantial costs and a diversion of
management attention and resources, which could have a material adverse effect
on the Company's business, financial condition and results of operations.
POTENTIAL ANTI-TAKEOVER EFFECT OF CERTAIN CHARTER AND BY-LAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation (the
"Restated Certificate") authorizes the Board of Directors to issue up to five
million shares of Preferred Stock and to determine the powers, preferences,
privileges, rights, including voting rights, qualifications, limitations and
restrictions of those shares without any further vote or action by the
stockholders. The rights of the holders of Common Stock will be subject to, and
may be adversely affected by, the rights of the holders of any Preferred Stock
that may be issued in the future. The Restated Certificate and By-laws, among
other things, provide for a classified Board of Directors, require that
stockholder actions occur at duly called meetings of the stockholders, limit who
may call special meetings of stockholders, do not permit cumulative voting in
the election of directors and require advance notice of stockholder proposals
and director nominations. These and other provisions could have the effect of
making it more difficult for a third party to acquire a majority of the
outstanding voting stock of the Company, discourage a hostile bid or delay,
prevent or deter a merger, acquisition or tender offer, in which the Company's
stockholders could receive a premium for their shares, or a proxy contest for
control of the Company or other change in the Company's management.
IL FORNAIO CONCEPT AND STRATEGY
Offer Premium Quality, Authentic Regional Italian Cuisine. Il Fornaio seeks
to differentiate its restaurants from other restaurants in the Italian food
segment by offering creatively prepared, premium quality Italian cuisine based
on authentic regional recipes. The core menu served at both lunch and dinner
features a variety of dishes, including house-made pasta, poultry and game
roasted over a wood-fired rotisserie, meat and fresh fish from a charcoal grill,
pizza from a wood-burning oven, soups, salads and desserts. Native-born Italian
chefs develop all of the core menu items, which vary depending on the seasonal
availability of raw ingredients. The Company's chefs also develop special menus
each month based on the local cuisine and culinary style of one of Italy's 20
geographic regions as part of the Company's Festa Regionale marketing program.
Hand-made, preservative-free baked goods, based on centuries-
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old regional Italian recipes, are provided by Il Fornaio's wholesale bakeries
for use in a variety of menu items. Fresh breads and rolls are served with each
meal, providing an authentic and high quality complement to the menus. Il
Fornaio's restaurants have received numerous awards and commendations.
Build Brand Awareness. The Company believes that its restaurants, wholesale
bakeries and retail markets work together to reinforce its image as a provider
of premium quality, authentic Italian food, enhance Il Fornaio's brand image and
reputation and attract guests over a wide variety of occasions for dining out or
dining in. The Company's wholesale bakeries supply the same fresh, award-winning
breads and other baked goods served at the Company's restaurants to quality
grocery stores, specialty retailers, hotels and other fine restaurants as well
as to retail markets within Il Fornaio restaurants. The restaurants' retail
markets offer prepared foods and Il Fornaio brand items, including fresh baked
goods, oakwood-roasted coffee, pasta, risotto, extra virgin olive oil and
balsamic vinegar imported from Modena, Italy, enabling guests to recreate the Il
Fornaio dining experience at home. The retail markets also offer an Il
Fornaio-brand Chianti Classico from a Tuscan vineyard that was originally
planted in the 11th century and is designated for Il Fornaio's exclusive use.
The Company has implemented a number of marketing initiatives designed to build
brand awareness, including monthly mailings of its Festa Regionale menus, food
and wine tastings, baking classes, Italian culture seminars and the Passaporto
program, which rewards frequent guests with complimentary menu items and
commemorative plates.
Create a Distinctive Authentic Italian Atmosphere. The Company seeks to
create a distinctive authentic Italian atmosphere with restaurant designs that
are unique to each location. The restaurants' sophisticated, yet informal and
friendly atmosphere is intended to be suitable for a variety of meal occasions.
Exhibition kitchens with wood-fired rotisseries, charcoal grills and
wood-burning pizza ovens are in full display of the guests and create appealing
cooking aromas to reinforce the guests' perceptions of quality, freshness and
authenticity. Retail markets located at the entrance to each restaurant are
designed to provide an inviting initial impression as well as to enhance the
perception of an authentic Italian dining experience through the prominent
display of Il Fornaio's Italian food. Design elements, which may include
terracotta or European slate floors, marble bars, mahogany trim, outdoor
piazzas, hand-painted ceilings and fine art, are selected to evoke the charm and
elegance of a memorable dining experience in Italy. Il Fornaio's Sacramento
restaurant received the grand prize for best new restaurant design worldwide,
one of five grand prizes in hospitality design awarded in 1994 by a national
hospitality design magazine.
Focus on Five Star Service. The Company believes that its emphasis on
service through the implementation of its Five Star Service Program has been an
important factor in its success. The Company's Five Star Service Program,
designed by the Company's employees, defines Il Fornaio's high standards for
food quality, service and cleanliness. The Company has invested significant
resources in the training of its service personnel and staffs each restaurant
with an experienced management team to ensure attentive guest service and
consistent food quality. Through employee and guest questionnaires, the Company
receives valuable feedback and implements measures designed to reinforce its
commitment to outstanding service and guest satisfaction. Results of the Five
Star Service Program are considered in the evaluation and advancement of
restaurant management.
Foster a Strong Corporate Culture. The Company believes that qualified
employees are critical to its success. The Company believes that, by providing
extensive training, attractive compensation and significant opportunities for
employee feedback and advancement, it fosters a strong corporate culture that
helps attract and retain highly qualified employees. In 1995, the Company
instituted a Partnership Program, which provides equity participation to chefs
and restaurant general managers. The Company also provides medical, dental and
other benefits to hourly employees and believes that the availability of these
benefits contributes to an employee turnover rate that is below the industry
average.
Provide an Attractive Price-Value Relationship. The Company believes that
its restaurants provide guests with excellent value by offering high quality
authentic Italian food, a distinctive atmosphere and superior service, all for
an average check per guest in 1999 of $21.03 (including alcohol). As a result,
the Company's restaurants attract a broad variety of guests who desire a more
authentic Italian experience than may be available from other restaurants in the
Italian food segment, without a substantially higher cost.
UNIT ECONOMICS
For 1999, the Company's 17 restaurants that were opened prior to 1999
(which excludes data from restaurants in their first year of operation) had
average revenues of approximately $5.1 million, average operating income of
approximately $736,000, or 14.5% of restaurant sales, and average operating
income before depreciation and amortization of approximately $981,000, or 19.3%
of restaurant sales. The Company's restaurants range in size from 5,000 square
feet to 14,000 square feet. Since 1991, the Company's total investment per
restaurant, net of landlord contributions, has averaged approximately $2.2
million, with additional average pre-opening costs per restaurant of
approximately $250,000. The Company expects that its planned future restaurants
will generally range in size from 7,000 to 10,000 square feet and that its total
investment and pre-opening costs per restaurant will be approximately $2.0
million and $250,000, respectively, based upon adjustments for inflation and the
geographic locations of future restaurants.
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LOCATIONS
Il Fornaio owns and operates 22 full-service, white tablecloth Italian
restaurants and three wholesale bakeries. The wholesale bakeries provide fresh
breads, pastries and other baked goods to the restaurants, as well as to a
variety of quality grocery stores, specialty retailers, hotels and other fine
restaurants. All Il Fornaio restaurants and wholesale accounts in the San
Francisco Bay Area are supplied by the Company's 12,000-square foot bakery
located in Burlingame, California. The restaurants and wholesale accounts in
Southern California are supplied by the Company's 15,000-square foot bakery
located in Gardena, California. In addition, the Il Fornaio restaurant and
wholesale accounts located in the Sacramento area of California are supplied by
the Company's bakery located adjacent to the Company's Sacramento restaurant.
Restaurants that cannot be supplied by one of the Company's wholesale bakeries
are designed with an in-house bakery. All of the restaurants feature a retail
market, which sells baked goods, prepared foods and a variety of Il
Fornaio-brand products, allowing guests to recreate the Il Fornaio experience at
home.
The following table provides information about the Company's current and
planned operations.
CURRENT OPERATIONS
<TABLE>
<CAPTION>
YEAR SIZE NUMBER OF
LOCATION OPENED (SQ. FT.) SEATS(1)
--------------------------------- ------ --------- ---------
<S> <C> <C> <C>
Restaurants
Corte Madera, CA .............. 1987 5,600 104
San Francisco, CA ............. 1988 7,800 148
Del Mar, CA ................... 1989 5,700 110
Palo Alto, CA ................. 1989 7,300 136
Irvine, CA .................... 1991 9,600 220
Beverly Hills, CA ............. 1992 5,000 76
San Jose, CA .................. 1992 8,000 171
Pasadena, CA .................. 1993 8,000 152
Sacramento, CA ................ 1993 7,900 158
Burlingame, CA ................ 1995 9,200 185
Carmel, CA .................... 1995 7,500 120
Portland, OR .................. 1996 7,300 170
Las Vegas, NV ................. 1997 10,900 218
Santa Monica, CA .............. 1997 7,500 150
Denver, CO .................... 1997 9,200 175
Seattle, WA ................... 1998 13,200 269
Walnut Creek, CA .............. 1998 8,700 210
Las Vegas, NV (The Venetian) .. 1999 14,000 282
Atlanta, GA ................... 1999 8,500 175
Coronado Island, CA ........... 1999 9,100 180
Manhattan Beach, CA ........... 1999 8,000 180
Scottsdale, AZ ................ 2000 9,000 175
Wholesale Bakeries
Sacramento, CA ................ 1993 2,500 --
Burlingame, CA ................ 1997 12,000 --
Gardena, CA ................... 1999 15,000 --
</TABLE>
PLANNED RESTAURANTS (2)
<TABLE>
<CAPTION>
SCHEDULED SIZE
LOCATION OPENING (SQ. FT.)
------------------------------------- --------- ---------
<S> <C> <C>
Denver, CO .......................... 2000 9,000
Roseville, CA ....................... 2000 7,500
</TABLE>
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(1) Excludes patio seating.
(2) Leases have been signed for each of these planned restaurant locations.
EXPANSION STRATEGY AND SITE SELECTION
The Company intends to continue to expand its operations by addressing both
existing and new geographic markets. The Company currently plans to open three
new restaurants in 2000, including its new restaurant located in Scottsdale,
Arizona, which opened on February 7, 2000.
The Company believes that the location of each restaurant is critical to
its long-term success and devotes significant effort to finding appropriate
sites. The Company's site selection strategy is to locate restaurants in
affluent urban and suburban areas, often located near or on main traffic routes.
The Company takes into account a variety of local factors, including demand and
consumer preferences, competition, availability of suitable locations and
personnel, local demographics and household income levels, as well as specific
site characteristics, such as visibility, accessibility and traffic volume.
Senior management selects each restaurant site. The flexibility of the Il
Fornaio concept enables the Company to develop successful restaurants in a
variety of locations, including residential neighborhoods, shopping centers,
office buildings and hotels.
The Company's success in implementing its expansion plans will depend, in
each case, on the Company's ability to effectively address a number of risks.
There can be no assurance that the Company will be able to open all of its new
operations on a timely basis, if at all, or, if opened, that those operations
will be operated profitably. See "Business -- Risk Factors."
MENU
The Company's restaurants feature creatively prepared, premium quality
Italian food based on authentic regional recipes. All recipes are created by
native-born Italian chefs. As guests are seated, Il Fornaio breads and rolls are
placed on the table and served with Il Fornaio olive oil. Guests may then select
from a menu featuring a variety of dishes, including house-made pasta, poultry
and game roasted over a wood-fired rotisserie, meat and fresh fish from a
charcoal grill, pizza from a wood-burning oven, soups, salads and desserts. The
core menu includes several flavorful low-salt and low-fat selections oriented
toward health- or diet-conscious guests. The restaurants also offer Italian
appetizers, creative desserts prepared on site, full liquor service and an
award-winning, extensive wine list emphasizing Italian and California varietals.
The wine list includes an Il Fornaio-brand Chianti Classico from a Tuscan
vineyard that was originally planted in the 11th century and is designated for
Il Fornaio's exclusive use. The core menu is virtually identical at most of Il
Fornaio's restaurants. A daily insert, which varies by restaurant, lists
specials developed by chefs at each restaurant, featuring creative dishes
inspired by seasonal availability of fresh local produce, fish, meats and game.
Il Fornaio's restaurants have received numerous awards and commendations.
In addition, for two weeks of every month, the restaurants feature the
Festa Regionale, innovative menus developed, on a rotating basis, by one of Il
Fornaio's Chef-Partners, based on authentic recipes of one of Italy's 20
geographic regions. Each menu is intended to capture both the unique flavors and
culinary style that characterize that region's local cuisine and includes menu
items based on produce, cheese, meat, poultry and seafood indigenous to the
region. Selected wines of the region are also offered to complement menu items.
The most popular menu items developed as part of Festa Regionale are frequently
added to the core menu.
Il Fornaio's wholesale bakeries supply the restaurants with over 30
varieties of breads and rolls, based on centuries-old, regional Italian recipes.
Breads include ciabatta (a long, flat loaf with a porous interior and crunchy
crust), panmarino (a dome-shaped loaf infused with rosemary and sprinkled with
coarse sea salt), filone (a classic Italian white bread with a light crust and
soft interior), pagnotta (a round, rustic loaf with a soft interior), pane
all'uva (a rich, moist bread filled with golden raisins), pane alle olive (a
soft-textured bread studded with green olives) and foccacia (a flat bread
brushed with olive oil and finished with a variety of fresh toppings). Pastries
include cornetti (croissants) and cannelle (cinnamon twists). The Company's
authentic Italian artisan breads have received numerous awards and
commendations.
The Company's average check per guest in 1999 at its restaurants, including
alcoholic beverages, was $21.03. Nine of the restaurants also offer breakfast
service which, during 1999, accounted for approximately 3% of restaurant
revenues. During the same period, wine sales represented approximately 18% of
restaurant revenues, while other alcoholic beverages accounted for approximately
6% of restaurant revenues.
Take-out prepared food and retail brand items accounted for approximately
10% of restaurant revenues in 1999. The restaurants' retail markets enable
guests to recreate the Il Fornaio dining experience at home by offering prepared
foods, including assorted cold pasta and risotto salads, Il Fornaio breads,
green salads, whole roasted chickens, stuffed artichokes, individual pizzette
and assorted
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<PAGE> 10
Italian sandwiches, as well as Il Fornaio-brand retail items, including
oakwood-roasted coffee, pasta, risotto, extra virgin olive oil, balsamic vinegar
imported from Modena, Italy, and Chianti Classico.
In November of 1998, the Company opened Il Fornaio Risotteria, a full
service restaurant in Pacific Place, an entertainment and shopping center in
downtown Seattle. Risotteria features authentic Italian foods simply presented
at lower price points than a typical Il Fornaio restaurant. The casual setting
is designed for quicker, more informal service, with all menu items priced below
$10. While the Company has no current plans to expand the Risotteria concept to
other markets, it is possible that the Company may build other Risotterias in
the future in appropriate locations.
In June 1999, the Company opened Canaletto, a full service restaurant located in
the Venetian Resort Hotel and Casino in Las Vegas, Nevada. Canaletto's menu
focuses on the authentic foods of Venice and its surrounding regions of
Trentino-Alto Adige and Friuli-Venezia Giulia. The menu price points at
Canaletto are generally comparable to those at the Company's Il Fornaio
restaurants.
DECOR AND ATMOSPHERE
The Company seeks to create a distinctive, authentic Italian atmosphere
with restaurant designs that are unique to each location. The restaurants'
sophisticated, yet informal and friendly atmosphere is intended to be suitable
for a variety of meal occasions. Exhibition kitchens with wood-fired
rotisseries, charcoal grills and wood-burning pizza ovens in full display of the
guests create appealing cooking aromas that reinforce the guests' perceptions of
quality, freshness and authenticity. Retail markets located at the entrance to
each restaurant are designed to provide an inviting initial impression as well
as to enhance the perception of an authentic Italian dining experience through
the prominent display of Il Fornaio's Italian food. Design elements, which may
include terracotta or European slate floors, marble bars, mahogany trim,
hand-painted ceilings and fine art, are selected to evoke the charm and elegance
of a memorable dining experience in Italy. The tables are a mix of booths and
free-standing tables with chairs. White tablecloths and Italian flatware dress
the tables. Service is intended to be professional and friendly but not
intrusive. In addition to table service, food is available at an indoor or
outdoor liquor/coffee bar, as well as at counter seats overlooking the large
pizza oven and open kitchen. The restaurants range in size from approximately
5,000 to 14,000 square feet with indoor seating ranging from 76 to 282 guests.
Outdoor piazzas provide additional seating during warmer weather. Il Fornaio's
Sacramento restaurant received the grand prize for best new restaurant design
worldwide, one of five grand prizes in hospitality design awarded in 1994 by a
national hospitality design magazine.
OPERATIONS
The Company seeks to create a fine dining experience through the careful
selection, training and supervision of personnel. The staff of a typical
restaurant consists of a Managing Partner, two or three managers, a
Chef-Partner, two or three sous chefs and approximately 65 to 125 hourly
employees, many of whom work part-time. The Managing Partner of each restaurant
is responsible for the day-to-day operation of that restaurant, including
hiring, training and development of personnel, as well as operating results. The
Chef-Partner is responsible for product quality, food costs and kitchen labor
costs. The Company requires its Managing Partners and Chef-Partners to have
significant experience in the full-service restaurant industry.
Comprehensive management manuals exist to ensure consistency in all facets
of restaurant operations, including food, service, safety and accounting.
Working in concert with Managing Partners and Chef-Partners, the Company's
senior management defines operations and performance objectives for each
restaurant and monitors implementation. The Company maintains quality and
consistency in its restaurants through its Five Star Service Program, which
establishes standards relating to food and beverage preparation, maintenance of
facilities and conduct of personnel. A restaurant survey firm regularly visits
the Company's restaurants and reports to senior management on the effectiveness
of the Five Star Service Program. In addition to the Five Star Service Program,
the Company's senior management regularly visit each restaurant and bakery to
ensure adherence to the Company's concept, strategy and standards of quality in
all aspects of restaurant operations. Senior management also meets once a
quarter with Managing Partners and Chef-Partners to discuss operational,
marketing and financial issues and to review the Five Star Service Program.
The Company has implemented a comprehensive compensation and benefits
package in order to attract and retain highly qualified personnel. The Company
has a Partnership Program, which provides equity participation for Managing
Partners and Chef-Partners in the form of stock options, to encourage commitment
to the long-term success of the restaurants and the Company. The Company
believes that this equity participation differentiates its compensation package
from that of many of its competitors. The Company's bonus program is designed to
reward the restaurant management team for achievement of superior operating
results, and all members of management at the restaurant level are eligible to
participate. The bonus may provide a large percentage of management's total
compensation.
The Company has a comprehensive four-to-six week training program, which
all operating management personnel are required to complete. The program
emphasizes the Company's operating strategy, philosophy, procedures and
standards. The training
10
<PAGE> 11
encompasses all aspects of both restaurant and kitchen management. As part of
the training program, a series of written tests is administered to evaluate the
trainee's progress. The trainee must achieve a certain score to progress to the
next section of the program. This training program is administered by the
Company's Director of Training in conjunction with the Vice President of
Operations and Executive Chef. The Managing Partners and Chef-Partners are
responsible for selecting and training employees for each restaurant. The
training period for new hourly employees lasts approximately one to two weeks
and utilizes training manuals and seminars developed by the Company's training
department. To foster a strong corporate culture and encourage employee
commitment and enthusiasm, management regularly solicits employee suggestions
concerning Company operations through extensive employee feedback surveys.
WHOLESALE BAKERIES
The Company currently has three wholesale bakeries, which range in size
from 2,500 to 15,000 square feet. One of these bakeries is located adjacent to
one of the Company's restaurants. The Company's original heritage was based on
bakeries and bakery products, which remain an integral part of the Il Fornaio
restaurant concept. In addition to the Company's own restaurants, bakery
products are sold to quality grocery stores, specialty retailers, hotels and
other fine restaurants. The Company's wholesale bakeries accounted for
approximately 8% of gross revenues during 1999. For segment information, see
Part II, Item 8. Financial Statements and Supplementary Data - Note 11 of Notes
to Financial Statements.
The Company operates a free-standing 12,000-square foot wholesale bakery,
located in Burlingame, California, to provide freshly baked goods to all Il
Fornaio restaurants and wholesale customers throughout the San Francisco Bay
Area. In October 1999, the Company consolidated bakery operations in Southern
California with the opening of a new 15,000 square foot wholesale bakery and
training facility in Gardena, California. These wholesale bakeries are designed
to provide efficiencies in production (both labor and ingredients) and
distribution. These facilities permit the Company to employ improved processes,
which enhance quality and consistency, while maintaining the Il Fornaio
commitment to preservative-free, hand-made authentic Italian breads.
The Company's wholesale bakeries produce over 50 varieties of breads and
rolls based on regional Italian recipes, as well as a wide assortment of Italian
cookies, cakes and pastries. Recipes are standardized to ensure consistency. The
Company's bread doughs, based on centuries-old recipes, are mixed and then
fermented for up to 20 hours to increase flavor. Each loaf is hand-formed,
proofed and baked in European deck ovens that eject steam around the bread at
timed intervals. The Company believes that these processes contribute to a
characteristically irregular-shaped and crusty bread. Bakers create a wide
variety of breads by varying proportions of ingredients, length and number of
risings, temperature of the oven and size and shape of the loaves. Some recipes
include fresh aromatic herbs and spices, such as rosemary or fennel, or other
ingredients, such as parmesan cheese, raisins, nuts and sesame seeds. To
maintain the high quality of its bakery products, the Company maintains strict
criteria for ingredients.
The management staff of a typical bakery consists of a production manager,
an assistant production manager and a business manager. A bakery employs 10 to
45 hourly employees, depending on the bakery's size. The production manager
carries responsibility for day-to-day results of the bakery. Each production
manager is required to have significant bread baking experience in addition to
other general baking and management skills. Both the production manager and the
assistant production manager are also trained in the Company's systems, recipes
and procedures. The business manager is responsible for all accounting,
including the preparation of sales reports, which are electronically transmitted
to the corporate office on a daily basis. The business manager is also
responsible for customer service and distribution.
The Company maintains a fleet of vehicles for distribution of its products
to wholesale customers and Company locations. A majority of the products are
packed and delivered in the early morning to ensure timely delivery, and a
second delivery is normally scheduled for Company locations to provide
fresh-baked products for late afternoon and evening sale and consumption.
MARKETING
The Company believes that providing an authentic Italian dining experience
by offering quality food and bakery products, distinctive decor, Five Star
Service and an attractive price-value relationship is the most effective
approach to attracting new and repeat guests. Accordingly, Il Fornaio has relied
primarily on reputation, local reviews and awards and word-of-mouth to promote
its restaurants and bakeries in each community in which it operates. The Company
has also implemented a program of marketing and public relations activities
designed to create awareness of the Il Fornaio name, to encourage guests to
associate that name with authentic, premium quality Italian food and to increase
the frequency of return visits to Il Fornaio.
To encourage repeat patronage, the Company has developed the Festa
Regionale program. As part of this program, innovative menus are developed
monthly by Chef-Partners, on a rotating basis, based on authentic recipes from
one of Italy's 20 geographic regions. Menu items are accompanied by selected
wines from the region and a regional bread is provided by the Company's
bakeries. Mailers describing each month's Festa Regionale offerings are sent
monthly to over 120,000 households identified by the Company
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<PAGE> 12
through customer mailing lists or geographic proximity to an Il Fornaio
restaurant. The Passaporto program also encourages frequent dining at the
Company's restaurants by rewarding those who participate in each month of the
six-month program with a commemorative plate. In addition, guests receive a
complimentary item such as an appetizer or a dessert from the regional menu.
The Company has developed a program that focuses marketing efforts on each
restaurant's immediate neighborhood. Under this program, each restaurant is
responsible for the execution of an annual Neighborhood Marketing Plan, which
includes initiatives to build awareness, sales and frequency from the immediate
trade area, typically defined as a one-mile radius around that location. These
initiatives include both on-site and off-site activities, such as large party,
special event and meeting planning, bread and baked goods classes, Italian
culture seminars, food and wine tastings, anniversary parties, community group
fund-raisers as well as programs designed to encourage concierges from local
hotels and office buildings to recommend Il Fornaio to their clients. Restaurant
management, in conjunction with the Director of Neighborhood Marketing, develops
a calendar of events based on quarterly and annual sales objectives. Each
location is provided with a comprehensive Neighborhood Marketing Resource Guide
and Neighborhood Marketing Calendar designed to assist management and staff with
event planning, sales building strategies and guest communication guidance.
These programs and initiatives are specifically tailored to the food service
needs of the current and potential guests that are employed or reside in the
immediate trade areas. Other public relations activities include special events,
such as chef demonstrations at local stores, charitable donations and
participation in community activities, such as fundraisers for schools,
hospitals and other non-profit organizations.
MANAGEMENT INFORMATION SYSTEMS
The Company has developed an integrated management information system that
is utilized in all of its restaurants and wholesale bakeries. This system
currently includes a computerized point-of-sale system in its restaurant
operations and a proprietary accounts receivable system in its wholesale
bakeries. The restaurant point-of-sale system facilitates the movement of guest
food and beverage orders between the guest areas and kitchen and bar, controls
cash, handles credit card authorizations and provides management with revenue
data. The integrated system electronically transmits sales and guest counts to
Company headquarters on a daily basis. The Company has a computerized time
management system at each of its locations. The system calculates the time
worked by each employee, allows management to gather data and schedule labor
hours and produces payroll reports. Additionally, the Company has developed a
proprietary back-office system for processing daily and weekly paperwork (sales,
accounts payable, labor and inventory). This system generates a weekly operating
statement, which compares both weekly and month-to-date results versus budget.
The Company's accounting system includes a scalable, relational database.
The Company's automated restaurant and bakery point-of-sale, time management and
unit accounting system provides data for posting directly to the Company's
centralized system. The centralized database provides flexibility in generating
various management reports against predetermined operating budgets. Such
reporting includes (i) weekly reports of revenues, cost of revenues and selected
controllable operating budgets, (ii) detailed monthly performance of revenues
and expenses and (iii) monthly reports of administrative expense performance.
The system allows management to review the mix of menu items in order to better
match guest preferences and improve profitability. Detailed monthly profit and
loss statements are compiled at the corporate office and reviewed with unit
management every month by senior management.
PURCHASING
The Company seeks to obtain ingredients of high quality at competitive
prices from reliable sources. To ensure freshness and quality, maintain low
inventory levels and facilitate the unique preparation of menu items, the
Company purchases most of its ingredients in an unprocessed state. In order to
maximize operating efficiencies and to provide the freshest ingredients for its
food products, the management team of each restaurant and wholesale bakery
determines the daily quantities of food items needed and orders accordingly. The
Company's purchasing department seeks to obtain the lowest possible prices
available to the Company by negotiating bulk purchasing contracts for a number
of the ingredients utilized by the restaurants and wholesale bakeries.
Ingredients and supplies are shipped directly to the restaurant or wholesale
bakery, as the Company does not maintain a central food product warehouse or
commissary.
COMPETITION
The restaurant and wholesale bakery business is intensely competitive with
respect to food quality, price-value relationships, ambiance, service and
location, and many existing restaurants and bakeries compete with the Company at
each of its locations. There are many well-established competitors with
substantially greater financial, marketing, personnel and other resources than
the Company. In addition, many of the Company's competitors are well established
in the markets where the Company's operations are, or in which they may be,
located. While the Company believes that its restaurants and wholesale bakeries
are distinctive in design and operating concept, other companies may develop
restaurants and bakeries that operate with similar concepts.
The restaurant business is often affected by changes in consumer tastes,
national, regional or local economic conditions, demographic trends, consumer
confidence in the economy, discretionary spending priorities, weather
conditions, tourist travel, traffic patterns, and the type, number and location
of competing restaurants. Changes in these factors could have a material adverse
effect on the Company's business, financial condition and results of operations.
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EMPLOYEES
At January 28, 2000, the Company employed approximately 2,791 persons, 46
of whom were executive office personnel, 200 of whom were unit management
personnel and the remainder of whom were hourly restaurant or wholesale bakery
personnel. None of the Company's employees is covered by a collective bargaining
agreement. The Company considers its employee relations to be good.
TRADEMARKS
The Company has registered and applied for registration with the United
States Patent and Trademark Office for a number of trademarks and service marks
used in connection with its business. The Italian corporation that owned the
rights to the Il Fornaio marks in the United States has assigned to the Company
all of its United States rights and related goodwill. The Company regards its
trademarks and related rights as having substantial value and as being an
important factor in the marketing of its Il Fornaio restaurants and brand items.
GOVERNMENTAL REGULATION
The Company's restaurants are subject to regulation by federal agencies and
to licensing and regulation by state and local health, sanitation, building,
zoning, safety, fire and other departments relating to the development and
operation of restaurants and retail establishments. These regulations include
matters relating to environmental, building construction, zoning requirements
and the preparation and sale of food and alcoholic beverages. The Company's
facilities are licensed and subject to regulation under state and local fire,
health and safety codes, and the operation of its trucks is subject to
Department of Transportation regulations. Delays or failures in obtaining or
maintaining the required construction and operating licenses, permits and
approvals could delay or prevent the opening of new restaurants or could
materially and adversely affect the operation of existing restaurants.
The development and construction of additional restaurants and wholesale
bakeries will be subject to compliance with applicable zoning, land use,
environmental and licensing regulations. There can be no assurance that the
Company will be able to obtain necessary licenses or other approvals on a
cost-effective and timely basis in order to construct and develop restaurants
and wholesale bakeries in the future. Various federal and state labor laws
govern the Company's operations and its relationship with its employees,
including minimum wage, overtime, working conditions, fringe benefit and
citizenship requirements.
During 1999, approximately 24% of restaurant revenues was attributable to
the sale of alcoholic beverages, primarily wine. The Company is required to
comply with the alcohol licensing requirements of the federal government, states
and municipalities where its restaurants are located. For each new location,
alcoholic beverage control regulations require applications to state authorities
and, in certain locations, county and municipal authorities for a license and
permit to sell alcoholic beverages. Typically, licenses must be renewed annually
and may be revoked or suspended for cause at any time. Alcoholic beverage
control regulations relate to numerous aspects of the daily operations of the
restaurants, including minimum age of guests and employees, hours of operation,
advertising, wholesale purchasing, inventory control and handling, storage and
dispensing of alcoholic beverages. Failure to comply with federal, state or
local regulations could cause the Company's licenses to be revoked or force it
to terminate the sale of alcoholic beverages at one or more of its restaurants.
The Company is subject to state "dram-shop" laws and regulations, which
generally provide that a person injured by an intoxicated person may seek to
recover damages from an establishment that wrongfully served alcoholic beverages
to such person. While the Company carries liquor liability coverage as part of
its existing comprehensive general liability insurance, there can be no
assurance that it will not be subject to a judgment in excess of such insurance
coverage or that it will be able to obtain or continue to maintain such
insurance coverage at reasonable costs, or at all.
The federal Americans With Disabilities Act prohibits discrimination on the
basis of disability in public accommodations and employment. The Company is
required to comply with the Act and regulations relating to accommodating the
needs of the disabled in connection with the construction of new facilities and
with significant renovations of existing facilities.
EXECUTIVE OFFICERS OF THE REGISTRANT
Laurence B. Mindel, age 62, joined the Company as Chairman of the Board,
President and Chief Executive Officer in January 1987. Mr. Mindel currently
serves as Chairman of the Board, having resigned as President in 1995 and as
Chief Executive Officer in 1998. From 1964 to 1970, Mr. Mindel was President and
Chief Executive Officer of Caswell Coffee Company in San Francisco. In 1970, Mr.
Mindel co-founded Spectrum Foods, where he served as Chairman of the Board,
President and Chief Executive Officer. Under Mr. Mindel's direction, Spectrum
created 14 restaurants in Northern and Southern California, including Chianti,
MacArthur Park, Harry's Bar and American Grill, Prego and Guaymas. In 1984, Saga
Corporation acquired Spectrum Foods, and from that time until he joined the
Company, Mr. Mindel served as President of the Saga Restaurant Group, which
included Stuart Anderson's Black
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Angus, Velvet Turtle, Spoons, Hotel Food Services and the newly acquired
Spectrum Foods restaurants. In 1985, Mr. Mindel became the first person of
non-Italian descent and the first American to be awarded the Caterina di Medici
medal. Awarded by the Italian government, the medal recognizes persons who have
excelled in preserving the Italian heritage outside of Italy. In 1998, Mr.
Mindel became one of a select group of restaurant industry leaders to receive
the International Foodservice Manufacturers Association's Foodservice Operator
of the Year and Gold Plate Award.
Michael J. Hislop, age 45, joined the Company as President and Chief
Operating Officer in July 1995 and was promoted to Chief Executive Officer and
President in 1998. From April 1991 to May 1995, Mr. Hislop served as Chairman
and Chief Executive Officer of Chevy's Mexican Restaurants which, under his
direction, grew from 17 locations to 63 locations nationwide. From 1982 to 1991,
Mr. Hislop was employed by El Torito Mexican Restaurants, Inc., serving first as
Regional Operator, then as Executive Vice President of Operations and for the
last three years as Chief Operating Officer. From 1979 to 1982, Mr. Hislop was
employed by T.G.I. Fridays Restaurants, Inc. as a Regional Manager.
Peter P. Hausback, age 40, was appointed Chief Financial Officer and
Secretary on December 1, 1999. Mr. Hausback is also Vice President of Finance
and has held that position since May 1999. From April 1998 to May 1999, Mr.
Hausback was the Vice President of Planning and Analysis and from February 1992
to April 1998 he was Controller. Prior to joining the Company, Mr. Hausback was
employed at Price Waterhouse.
Michael J. Beatrice, age 46, joined the Company as Vice President,
Operations, in April 1996 and was promoted to Chief Operating Officer in 1998.
From 1994 to 1996, Mr. Beatrice was Vice President, Operations, for an area
developer of Boston Chicken, a restaurant company. From 1991 to 1994, he owned
and operated an upscale, full-service Italian restaurant north of Boston. From
1983 to 1991, he served a variety of positions with El Torito Mexican
Restaurant, Inc., most recently as Regional Vice President.
ITEM 2. PROPERTIES
All of the Company's operations are located in leased facilities. Current
restaurant and wholesale bakery leases have expiration dates ranging from 2000
to 2017, with the majority of the leases providing for five-year options to
renew for at least one additional term. All of the Company's leases provide for
a minimum annual rent, and most leases require additional percentage rent based
on sales volume in excess of minimum levels at the particular location. Some of
the leases require the Company to pay the costs of insurance, taxes and a
portion of the lessor's operating costs. See Note 10 to Financial Statements for
information regarding aggregate minimum and percentage rentals paid by the
Company for recent periods and information regarding the Company's obligation to
pay minimum rentals in future periods. The Company's lease for its Las Vegas
restaurant contains certain termination and relocation provisions. See "Item 1.
Business -- Risk Factors -- Long-Term, Non-Cancelable Leases; Termination
Provisions."
The Company does not anticipate any difficulties renewing existing leases as
they expire. However, there can be no assurance that the Company will be able to
renew any leases on favorable terms, if at all. Inability of the Company to
renew a particular lease or closure of a facility subject to a long-term,
non-cancelable lease could have a material adverse effect on the Company's
business, financial condition and results of operations.
The Company's executive offices are located in approximately 8,110 square
feet of leased space in Corte Madera, California.
ITEM 3. LEGAL PROCEEDINGS
The Company is a party to various legal proceedings arising in the ordinary
course of its business, but is not currently a party to any legal proceeding
which the Company believes will have a material adverse effect on the Company's
business, financial condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
(a) The Company's Common Stock (Nasdaq symbol "ILFO") is traded on the Nasdaq
National Market. The following table presents quarterly information on the
price range of the Company's Common Stock, indicating the high and low sale
prices reported by the Nasdaq National Market. These prices do not include
retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
FISCAL QUARTER ENDED: HIGH LOW
------ ------
<S> <C> <C>
1998
----
March 29, 1998 ................. $15.88 $12.13
June 28, 1998 .................. $14.94 $11.00
September 27, 1998 ............. $13.75 $ 4.50
December 27, 1998 .............. $ 8.25 $ 5.13
1999
----
March 28, 1999 ................. $11.25 $ 6.38
June 27, 1999 .................. $15.00 $ 8.63
September 26, 1999 ............. $15.13 $ 9.38
December 26, 1999 .............. $10.00 $ 5.50
</TABLE>
At February 29, 2000, there were 489 holders of record of the Company's
Common Stock. The Company has never paid any cash dividends on its Common Stock.
The Board of Directors intends to retain earnings to support operations and to
finance expansion and does not intend to pay cash dividends on the Common Stock
for the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Since December 27, 1998, the Registrant has sold and issued the following
unregistered securities:
1. During the period, the Company granted incentive stock options to key
employees, officers and directors under its 1997 Equity Incentive
Plan (the "Plan") covering an aggregate of 373,367 shares of the
Company's Common Stock, at an average exercise price ranging from
$7.00 to $11.14. During the period, the Company granted non-qualified
stock options to officers under the Plan covering an aggregate of
88,557 shares of the Company's Common Stock, at an average exercise
price ranging from $7.00 to $10.13. 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
option grants described above in that the Company believes such
grants were not "sales" within the meaning of the Securities Act.
USE OF PROCEEDS
(b) The Company's Registration Statement on Form S-1 covering the sale of
1,725,000 shares of Common Stock (No. 333-23605) (the "Registration
Statement") was declared effective by the Commission on September 18,
1997. The net proceeds to the Company of the offering (including the
net proceeds from the sale of shares issued upon exercise of the
underwriters' overallotment option on October 1, 1997) were $11.3
million. From the effective date of the offering to December 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.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data have been derived from the financial
statements of the Company. The data set forth below should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's financial statements and notes
thereto.
<TABLE>
<CAPTION>
FISCAL YEAR
-----------------------------------------------------------------
1995 1996 1997 1998 1999
-------- ------- -------- ------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants $ 43,647 $50,599 $ 65,525 $75,523 $ 92,266
Wholesale bakeries 5,181 6,016 6,284 7,615 8,167
Retail bakeries 5,312 4,137 311 -- --
-------- ------- -------- ------- ---------
Total revenues 54,140 60,752 72,120 83,138 100,433
-------- ------- -------- ------- ---------
Costs and expenses:
Costs of sales 12,772 14,792 16,993 19,594 23,806
Operating expenses 31,036 35,152 41,800 47,589 58,011
Depreciation and amortization 3,173 3,434 3,517 4,258 5,271
Preopening expenses(1) 131 426 432 534 1,077
General and administrative expenses 4,083 4,724 6,012 6,299 7,728
Provision for store closures 932 -- (470) -- --
-------- ------- -------- ------- ---------
Total costs and expenses 52,127 58,528 68,284 78,274 95,893
-------- ------- -------- ------- ---------
Income from operations 2,013 2,224 3,836 4,864 4,540
Interest income (expense), net 59 127 398 811 433
-------- ------- -------- ------- ---------
Income before income taxes and change
In accounting principle 2,072 2,351 4,234 5,675 4,973
Provision (benefit) for income taxes (2,432) 898 1,651 2,224 1,914
-------- ------- -------- ------- ---------
Income before change in accounting principle 4,504 1,453 2,583 3,451 3,059
Cumulative effect of change in accounting
Principle (net of taxes)(1) -- -- -- 326 --
-------- ------- -------- ------- ---------
Net income $ 4,504 $ 1,453 $ 2,583 $ 3,125 $ 3,059
======== ======= ======== ======= =========
Basic earnings per share before change in
Accounting principle $ 1.01 $ 0.32 $ 0.53 $ 0.59 $ 0.54
Cumulative effect of change in accounting
Principle -- -- -- 0.06 --
-------- ------- -------- ------- ---------
Basic earnings per share $ 1.01 $ 0.32 $ 0.53 $ 0.53 $ 0.54
======== ======= ======== ======= =========
Basic weighted average shares outstanding 4,452 4,485 4,908 5,846 5,713
======== ======= ======== ======= =========
Diluted earnings per share before change in
Accounting principle $ 1.00 $ 0.32 $ 0.48 $ 0.55 $ 0.50
Cumulative effect of change in accounting
Principle -- -- -- 0.05 --
-------- ------- -------- ------- ---------
Diluted earnings per share $ 1.00 $ 0.32 $ 0.48 $ 0.50 $ 0.50
======== ======= ======== ======= =========
Diluted weighted average shares outstanding 4,499 4,570 5,433 6,298 6,097
======== ======= ======== ======= =========
BALANCE SHEET DATA (AT YEAR END):
Working capital (deficit) $ 807 $ 158 $ 11,094 $ 6,748 $ (3,391)
Total assets 34,194 34,855 52,091 57,354 65,158
Long-term debt (excluding current portion) 150 -- -- -- --
Stockholders' equity 21,283 22,936 37,126 39,509 42,578
</TABLE>
(1) Reflects adoption of SOP 98-5, "Reporting on the Costs of Start-up
Activities," in 1998. See Note 2 to Financial Statements.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
OVERVIEW
The Company's revenues consist of restaurant sales and wholesale bakery
sales and, prior to February 1997, free-standing retail bakery sales. Comparable
restaurant sales are calculated to include a new restaurant only after its first
full month following the eighteenth month of its operation. Comparable
restaurant revenues may fluctuate significantly as a result of a variety of
factors. 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.
Preopening costs consist of direct costs related to hiring and training the
initial workforce, promotion and certain other direct costs related to opening
new restaurants. Prior to 1998, the Company capitalized preopening 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 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 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 preopening costs as of December 28, 1997.
Preopening costs in 1999 and 1998 were expensed as incurred. The new
expense-as-incurred standard has in the past resulted in and may in the future
lead to increased variability in the amount of preopening 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.
17
<PAGE> 18
RESULTS OF OPERATIONS FOR FISCAL YEARS 1997, 1998 AND 1999
The following table sets forth operating results as a percentage of total
revenues and the percentage change in amounts for the periods indicated.
<TABLE>
<CAPTION>
PERCENTAGE OF TOTAL REVENUES PERCENTAGE INCREASE
FISCAL YEAR (DECREASE)
------------------------------ ----------------------------
1997 1998 1999 1998 VS. 1997 1999 VS. 1998
------ ------ ------ ------------- -------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants 90.9% 90.8% 91.9% 15.3% 22.2%
Wholesale bakeries 8.7% 9.2% 8.1% 21.2% 7.2%
Retail bakeries 0.4% 0.0% 0.0% -100.0% -0.0%
------ ------ ------ ------ ------
Total revenues 100.0% 100.0% 100.0% 15.3% 20.8%
------ ------ ------ ------ ------
Costs and expenses:
Costs of sales 23.6% 23.6% 23.7% 15.3% 21.5%
Operating expenses 58.0% 57.2% 57.8% 13.8% 21.9%
Depreciation and amortization 4.9% 5.1% 5.2% 21.1% 23.8%
Preopening expenses(1) 0.6% 0.6% 1.1% 23.6% 101.7%
General and administrative expenses 8.3% 7.6% 7.7% 4.8% 22.7%
Provision for store closures -0.7% 0.0% 0.0% -100.0% 0.0%
------ ------ ------ ------ ------
Total costs and expenses 94.7% 94.1% 95.5% 14.6% 22.5%
------ ------ ------ ------ ------
Income from operations 5.3% 5.9% 4.5% 26.8% -6.7%
Interest income (expense), net 0.6% 1.0% 0.4% 103.8% -46.6%
------ ------ ------ ------ ------
Income before income taxes and change
in accounting principle 5.9% 6.9% 4.9% 34.0% -12.4%
Provision for income taxes 2.3% 2.7% 1.9% 34.7% -13.9%
------ ------ ------ ------ ------
Income before change in accounting
Principle 3.6% 4.2% 3.0% 33.6% -11.4%
Cumulative effect of change in accounting
principle (net of tax)(1) 0.0% 0.4% 0.0% 100.0% -100.0%
------ ------ ------ ------ ------
Net income 3.6% 3.8% 3.0% 21.0% -2.1%
====== ====== ====== ====== ======
</TABLE>
(1) Reflects adoption of SOP 98-5, "Reporting on the Costs of Start-up
Activities," in 1998. See Note 2 to Financial Statements.
FISCAL 1999 COMPARED TO FISCAL 1998
REVENUES
Total restaurant revenues increased by $16.7 million, or 22.2%, to $92.3
million in 1999 from $75.5 million in 1998. The increase was primarily
attributable to (i) the opening of four new restaurants in 1999 as well as two
new restaurants opened late in 1998 and (ii) a 3.1% increase in comparable
restaurant sales. Comparable restaurant sales are calculated to include a new
restaurant only after the first full month following the eighteenth month of its
operation. The increase in restaurant revenues also reflects the benefit of a
moderate menu price increase implemented in the second quarter of 1999. Total
wholesale bakery revenues increased by $552,000, or 7.2%, to $8.2 million in
1999 from $7.6 million in 1998. The increase was attributable to the continued
addition of new wholesale accounts as well as increased sales to existing
accounts.
COST OF SALES
Cost of sales as a percentage of revenues was 23.7% for 1999 and 23.6% for
1998. The slight increase was due to higher initial cost of sales for the four
new restaurants opened in 1999.
OPERATING EXPENSES
Operating expenses include all restaurant and wholesale bakery operating and
occupancy costs, the major components of which are labor, rent, operating
supplies, repairs and maintenance, marketing and utilities. Operating expenses
as a percentage of revenues increased to 57.8% from 57.2% in 1998. This increase
was primarily attributable to increases in minimum wage rates applicable at
18
<PAGE> 19
certain restaurants (Portland and Seattle) and the corresponding indirect
pressure on other wages, as well as non-recurring charges related to the
disposition of equipment from two wholesale bakeries as a result of the
consolidation of certain bakery operations during 1999.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses as a percentage of revenues increased
slightly to 5.2% in 1999 from 5.1% in 1998, primarily reflecting increased
depreciation related to new unit construction costs.
PREOPENING EXPENSES
Prior to 1998, preopening 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, preopening costs in 1998 were expensed as
incurred. This change is discussed in more detail in the "Overview" above.
Preopening expenses as a percentage of revenues were 1.1% for 1999 and 0.6% for
1998. This increase in preopening costs was due to the opening of four new
restaurants in 1999 versus two new restaurants in 1998.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of revenues increased
to 7.7% in 1999 from 7.6% in 1998. The slight increase was primarily due to
non-recurring charges associated with the Company's review of financial and
strategic alternatives to enhance stockholder value, and costs incurred with
respect to the evaluation and negotiation of leases for two potential sites,
that the Company subsequently decided not to pursue, offset by stable
administrative staffing expense levels.
INTEREST INCOME (EXPENSE)
Interest income decreased to $464,000 from $844,000 in 1998, reflecting
interest on lower average cash balances as a result of the use of cash to fund
the construction of new restaurants.
INCOME TAX PROVISION
The Company's effective tax rate decreased for fiscal 1999 to 38.5% from
39.2% for fiscal 1998, reflecting the planned use of various deductible tax
assets and FICA credits.
FISCAL 1998 COMPARED TO FISCAL 1997
REVENUES
Total restaurant revenues increased by $10.0 million, or 15.3%, to $75.5
million in 1998 from $65.5 million in 1997. The increase was primarily
attributable to (i) the opening of four new restaurants, two of which opened in
late 1997 and another two in late 1998, and (ii) a 3.2% increase in comparable
restaurant sales. The increase in restaurant revenues also reflects the benefit
of a moderate menu price increase implemented in 1998. As a result of the
disposition of the Company's four remaining free-standing retail bakeries in
February 1997, the Company had no retail bakery revenues in 1998. Total
wholesale bakery revenues increased by $1.3 million, or 21.2%, to $7.6 million
in 1998 from $6.3 million in 1997. The increase was attributable to the addition
of new wholesale accounts as well as increased sales to existing accounts.
COST OF SALES
Cost of sales as a percentage of revenues was 23.6% for both 1998 and 1997,
as the increase in dairy prices in 1998 was offset by improved purchasing
capabilities along with the menu price increase in 1998.
19
<PAGE> 20
OPERATING EXPENSES
Operating expenses include all restaurant and bakery operating and
occupancy costs, the major components of which are labor, rent, operating
supplies, repairs and maintenance, marketing and utilities. Operating expenses
as a percentage of revenues decreased to 57.2% in 1998 from 58.0% in 1997. This
decrease was 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. Operating expenses in 1997 also reflected expenses related to
the remodel of one restaurant in the second quarter of 1997.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization expenses as a percentage of revenues increased
slightly to 5.1% in 1998 from 4.9% in 1997, primarily reflecting increased
depreciation related to new unit construction costs, partially offset by a
declining depreciable asset base for older units.
PREOPENING EXPENSES
Prior to 1998, preopening expenses for each of the Company's units were
capitalized and amortized over the 12-month period following the opening of the
unit. With the adoption of SOP 98-5, preopening costs in 1998 were expensed as
incurred. This change is discussed in more detail in the "Overview" above.
Preopening costs in both 1997 and 1998 related to the opening of two new
restaurants. Preopening expenses as a percentage of revenues were 0.6% for both
1998 and 1997, as the increase in preopening costs in 1998 was offset by
increased revenues.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses as a percentage of revenues decreased
to 7.6% in 1998 from 8.3% in 1997, primarily due to lower management bonuses in
1998.
PROVISION FOR STORE CLOSURES
As a result of the disposition of the Costa Mesa restaurant in June 1997,
the Company recorded a $470,000 pre-tax reversal in 1997 of the provision for
store closures originally recorded in 1993.
INTEREST INCOME (EXPENSE)
Interest income increased to $844,000 in 1998 from $400,000 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. For 1998, interest income included interest on the
proceeds from the initial public offering for a full year, while interest income
for 1997 included interest on the proceeds from the initial public offering for
only part of the year.
INCOME TAX PROVISION
The Company's effective tax rate was 39.2% for fiscal 1998 and 39.0% for
fiscal 1997.
LIQUIDITY AND CAPITAL RESOURCES
At December 26, 1999, the Company had $5.1 million in cash and cash
equivalents.
For the periods presented, the Company has funded its capital expansion
primarily from the proceeds of the Company's initial public offering in
September 1997, as well as with cash flow generated from new and existing
restaurant operations. All proceeds from the Company's initial public offering
have been used to fund its expansion. The cash flow from operations increased to
$10.9 million for fiscal 1999 from $8.9 million in fiscal 1998. At December 26,
1999, the Company had a working capital deficit of $3.4 million compared to
working capital of $6.7 million at December 27, 1998. The Company's working
capital deficit is primarily attributable to the timing of the payment of the
Company's current payables along with a decrease in cash as a result of funding
its capital expansion.
Net cash provided by financing activities was $10,000 for 1999 as compared
to cash used of $742,000 in 1998. In October 1998, the Board of Directors
authorized the repurchase of up to 500,000 shares of the Company's common stock.
Repurchases were made in the open market at prevailing prices or in negotiated
off-market transactions. Through December 26, 1999, the Company had
20
<PAGE> 21
repurchased 499,400 shares of common stock in the open market for an aggregate
of approximately $3.0 million. On December 9, 1999, the Board of Directors
authorized the repurchase of an additional 250,000 shares of the Company's
common stock. As of February 29, 2000, no additional shares had been
repurchased. In addition, during 1999, the Company received $712,000 in cash
from the issuance of common stock under the Company's employee stock purchase
plan and $281,000 from the issuance of common stock upon exercise of stock
options.
The Company has a credit agreement, which provides for a $5.0 million
revolving line of credit and which expires on June 30, 2000. At December 26,
1999, there were no amounts outstanding under the credit line. The Company
intends to seek to renew the line of credit. The credit line requires that
certain financial ratios be maintained. As of December 26, 1999, the Company was
not in compliance with one of these covenants. The bank waived non-compliance
with one of the bank loan covenants at December 26, 1999, and provided for
waiver of compliance until March 24, 2000.
Capital expenditures, net of construction allowances received, were $18.1
million for 1999 as compared to $11.3 million for 1998. This increase primarily
reflected construction costs for the Company's four new restaurants and new
wholesale bakery facility opened in 1999. The Company also anticipates incurring
additional expenditures to enhance some of its existing restaurants. To date,
these expenditures have been funded primarily by the proceeds from the Company's
initial public offering and cash flow generated from new and existing restaurant
and bakery operations. 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 $2.2 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).
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 financings. There can be no assurance that such capital will be
available on favorable terms, if at all.
YEAR 2000 COMPLIANCE
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 to date, the Company
identified one main software system, its wholesale bakery group software system
that required replacement. This system had already been identified as a system
that was to be replaced in the ordinary course of business. In 1999, the Company
replaced the current wholesale bakery group software with a system that is Year
2000 compliant.
The Company contacted critical suppliers of products and services to
determine the extent to which the Company could be vulnerable to such suppliers'
failures to resolve their own Year 2000 compliance issues. The Company obtained
verbal assurances and 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.
21
<PAGE> 22
To date, the Year 2000 issue has not posed 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. 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.
FACTORS AFFECTING OPERATING RESULTS AND QUARTERLY RESULTS
Certain statements set forth in this Managements' Discussion and Analysis
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Act of 1995. These statements include, without limitation,
the timing of and plans for anticipated restaurant openings, expansion strategy,
the projected investment costs and sizes of future restaurants, the adequacy of
anticipated sources of cash, planned capital expenditures, the effect of
interest rate increases, and trends or expectations regarding the Company's
operations. In addition, words such as "believes," "anticipates," "expects,"
"intends," "estimates" and similar expressions are intended to identify
forward-looking statements, but are not the exclusive means of identifying such
statements. Such statements are based on currently available operating,
financial and competitive information and are subject to various risks and
uncertainties. 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 future results, events and trends
may differ materially from those expressed in or implied by such statements
depending on a variety of factors, including, but not limited to those set forth
under "Risk Factors" and elsewhere in this Form 10-K. See "Business -- Risk
Factors."
The Company's business is subject to a number of challenges and risks
including, among other things, the risks associated with the Company's 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 may also vary from period to period as a result of similar
factors.
INFLATION
The primary inflationary factors affecting the Company's operations are food
and labor costs. 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. On January 1, 2000, the
minimum wage increased to $6.50 an hour in Washington. Additional increases in
the federal minimum wage have also been proposed. There can be no assurance that
the Company will be able to pass the additional increases through to its guests
in the form of menu price adjustments in the future and, accordingly, such
minimum wage increases could have a material adverse effect on the Company's
business, financial condition and results of operations.
22
<PAGE> 23
ITEM 7A. 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 year-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.
23
<PAGE> 24
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
IL FORNAIO (AMERICA) CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Independent Auditors' Report................................................................. 25
Balance Sheets as of December 27, 1998 and December 26, 1999................................. 26
Statements of Income for the years ended December 28, 1997, December 27, 1998,
and December 26, 1999........................................................................ 27
Statements of Stockholders' Equity for the years ended December 28, 1997,
December 27, 1998, and December 26, 1999..................................................... 28
Statements of Cash Flows for the years ended December 28, 1997, December 27, 1998,
and December 26, 1999........................................................................ 29
Notes to Financial Statements................................................................ 30
</TABLE>
24
<PAGE> 25
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
Il Fornaio (America) Corporation:
We have audited the accompanying balance sheets of Il Fornaio (America)
Corporation (the "Company") as of December 26, 1999 and December 27, 1998, and
the related statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 26, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such financial statements present fairly, in all material
respects, the financial position of Il Fornaio (America) Corporation as of
December 26, 1999 and December 27, 1998, and the results of its operations and
its cash flows for each of the three years in the period ended December 26, 1999
in conformity with generally accepted accounting principles.
/s/ DELOITTE & TOUCHE LLP
- -----------------------------------
DELOITTE & TOUCHE LLP
San Francisco, California
March 8, 2000
25
<PAGE> 26
IL FORNAIO (AMERICA) CORPORATION
BALANCE SHEETS
(in thousands, except share data)
<TABLE>
<CAPTION>
DECEMBER 27, DECEMBER 26,
1998 1999
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 12,296 $ 5,118
Restricted cash ................................................... 378 314
Accounts receivable, net .......................................... 1,495 1,785
Note receivable ................................................... 19 --
Inventories ....................................................... 1,871 2,559
Prepaid expenses and other assets ................................. 920 1,184
Deferred tax assets, net .......................................... 245 218
----------- --------
Total current assets ...................................... 17,224 11,178
----------- --------
Property and equipment, net ......................................... 38,620 52,433
Deferred tax assets, net ............................................ 1,023 1,000
Other assets ........................................................ 487 547
----------- --------
Total assets .............................................. $ 57,354 $ 65,158
=========== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .................................................. $ 3,910 $ 6,982
Accrued expenses .................................................. 6,566 7,587
----------- --------
Total current liabilities ................................. 10,476 14,569
Reserve for store closures .......................................... 244 159
Deferred lease incentives ........................................... 7,125 7,852
Commitments (Note 10)
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; 6,020,961 shares issued and 5,658,561 shares
outstanding at December 27, 1998, and 6,193,119 shares issued
and 5,693,719 shares outstanding at December 26, 1999 .......... 6 6
Additional paid-in-capital ........................................ 37,758 38,751
Retained earnings ................................................. 3,779 6,838
----------- --------
41,543 45,595
Treasury stock, 362,400 shares at December 27, 1998 and 499,400
shares at December 26, 1999, at cost ............................. (2,034) (3,017)
----------- --------
Total stockholders' equity ..................................... 39,509 42,578
----------- --------
Total liabilities and stockholders' equity ................ $ 57,354 $ 65,158
=========== ========
</TABLE>
The accompanying notes are an integral part of
these financial statements
26
<PAGE> 27
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF INCOME
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurants .................................. $ 65,525 $ 75,523 $ 92,266
Wholesale bakeries ........................... 6,284 7,615 8,167
Retail bakeries .............................. 311 -- --
-------- -------- ---------
Total revenues ....................... 72,120 83,138 100,433
-------- -------- ---------
Costs and expenses:
Cost of sales ................................ 16,993 19,594 23,806
Operating expenses ........................... 41,800 47,589 58,011
Depreciation and amortization ................ 3,517 4,258 5,271
Preopening expenses .......................... 432 534 1,077
General and administrative expenses .......... 6,012 6,299 7,728
Provision for store closures ................. (470) -- --
-------- -------- ---------
Total costs and expenses ............. 68,284 78,274 95,893
-------- -------- ---------
Income from operations ......................... 3,836 4,864 4,540
Other income (expenses):
Interest income .............................. 400 844 464
Interest expense ............................. (2) (33) (31)
-------- -------- ---------
Total other income (expenses), net ........ 398 811 433
-------- -------- ---------
Income before income taxes and change in
Accounting principle ......................... 4,234 5,675 4,973
Provision for income taxes ..................... 1,651 2,224 1,914
-------- -------- ---------
Income before change in accounting principle ... 2,583 3,451 3,059
Cumulative effect of change in accounting
Principle (net of taxes) ..................... -- 326 --
-------- -------- ---------
Net income ..................................... $ 2,583 $ 3,125 $ 3,059
======== ======== =========
BASIC EARNINGS PER SHARE
Basic earnings per share before change in
Accounting principle ......................... $ 0.53 $ 0.59 $ 0.54
Cumulative effect of change in accounting
Principle .................................... -- 0.06 --
-------- -------- ---------
Basic earnings per share ....................... $ 0.53 $ 0.53 $ 0.54
======== ======== =========
Basic weighted average shares outstanding ...... 4,908 5,846 5,713
======== ======== =========
DILUTED EARNINGS PER SHARE
Diluted earnings per share before change in
Accounting principle ......................... $ 0.48 $ 0.55 $ 0.50
Cumulative effect of change in accounting
Principle .................................... -- 0.05 --
-------- -------- ---------
Diluted earnings per share ..................... $ 0.48 $ 0.50 $ 0.50
======== ======== =========
Diluted weighted average shares outstanding .... 5,433 6,298 6,097
======== ======== =========
</TABLE>
The accompanying notes are an integral part of
these financial statements
27
<PAGE> 28
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(in thousands, except share data)
<TABLE>
<CAPTION>
RETAINED
PREFERRED STOCK COMMON STOCK ADDITIONAL EARNINGS
---------------------- ------------------- PAID-IN (ACCUMULATED) TREASURY
SHARES AMOUNT SHARES AMOUNT CAPITAL (DEFICIT) STOCK TOTAL
--------- ----------- --------- ------- --------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 29, 1996 ....... 2,308,196 $ 16,885 1,611,766 $ 7,980 $ -- $ (1,929) $ -- $ 22,936
Par value adjustment ............. 1,269,775 (7,978) 7,978 --
Issuance of common stock, net of
offering expenses .............. 1 11,544 11,545
Warrants converted to common ..... 10,362 -- 18 18
Conversion of preferred to common 2,308,196) (16,885) 2,912,906 3 16,882 --
Exercise of common stock options . 13,704 -- 44 44
Net income ....................... 2,583 2,583
--------- ----------- --------- ------- --------- --------- -------- ----------
BALANCE, DECEMBER 28, 1997 ....... -- -- 5,818,513 6 36,466 654 37,126
Issuance of common stock under the
1997 Purchase Plan ............. 119,836 -- 959 959
Exercise of common stock options . 82,612 -- 333 333
Repurchase of treasury stock ..... (362,400) (2,034) (2,034)
Net income ....................... 3,125 3,125
--------- ----------- --------- ------- --------- --------- -------- ----------
BALANCE, DECEMBER 27, 1998 ....... -- -- 5,658,561 6 37,758 3,779 (2,034) 39,509
Issuance of common stock under the
1997 Purchase Plan ............. 104,576 -- 712 712
Exercise of common stock options . 67,582 -- 281 281
Repurchase of treasury stock ..... (137,000) (983) (983)
Net income ....................... 3,059 3,059
--------- ----------- --------- ------- --------- --------- -------- ----------
BALANCE, DECEMBER 26, 1999 ....... -- $ -- 5,693,719 $ 6 $ 38,751 $ 6,838 $ (3,017) $ 42,578
========= =========== ========= ======= ========= ========= ======== ==========
</TABLE>
The accompanying notes are an integral part of
these financial statements
28
<PAGE> 29
IL FORNAIO (AMERICA) CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ...................................... $ 2,583 $ 3,125 $ 3,059
Adjustments to reconcile net income to
net cash provided by operating activities:
Depreciation and amortization ................ 3,517 4,258 5,271
Amortization of preopening expenses .......... 432 -- --
Amortization of deferred lease incentives .... (558) (447) (439)
Change in accounting principle ............... -- 326 --
Provision for store closures ................. 28 (130) (85)
Gain on sale of property and equipment ....... (300) -- --
Retirement of fixed assets ................... 567 -- 206
Deferred income taxes ........................ 502 736 50
Changes in:
Restricted cash .............................. (180) 140 64
Accounts receivable .......................... (20) (204) (290)
Note receivable .............................. (204) -- --
Inventories .................................. (369) (151) (688)
Prepaid expenses and other assets ............ (1,095) 174 (264)
Other assets ................................. (46) 4 (60)
Accounts payable ............................. 793 825 3,072
Accrued expenses ............................. 2,583 279 1,021
-------- -------- --------
Net cash provided by operating activities .. 8,233 8,935 10,917
-------- -------- --------
Cash flows from investing activities:
Construction allowances received ................ 350 2,353 1,166
Capital expenditures ............................ (7,942) (13,623) (19,290)
Proceeds from sale of property and
equipment .................................... 1,081 -- --
Collection of note receivable ................... 391 102 19
-------- -------- --------
Net cash used in investing activities ...... (6,120) (11,168) (18,105)
-------- -------- --------
Cash flows from financing activities:
Payments on debt ................................ (150) -- --
Net proceeds from the issuance of common
stock ........................................ 11,545 959 712
Exercise of stock options ....................... 44 333 281
Warrants converted to common stock .............. 18 -- --
Repurchase of common stock ...................... -- (2,034) (983)
-------- -------- --------
Net cash provided by (used in)
financing activities .................... 11,457 (742) 10
-------- -------- --------
Increase (decrease) in cash and equivalents ....... 13,570 (2,975) (7,178)
Cash and equivalents, beginning of year ........... 1,701 15,271 12,296
-------- -------- --------
Cash and equivalents, end of year ................. $ 15,271 $ 12,296 $ 5,118
======== ======== ========
Interest paid ..................................... $ 3 $ 28 $ 38
======== ======== ========
Income taxes paid ................................. $ 1,730 $ 685 $ 1,747
======== ======== ========
Noncash investing and financing activities:
Issuance of note receivable for retail
bakery and restaurant assets ................. $ 704 $ -- $ --
</TABLE>
The accompanying notes are an integral part of
these financial statements
29
<PAGE> 30
IL FORNAIO (AMERICA) CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
Organization and nature of operations - Il Fornaio (America) Corporation
(the "Company") is engaged in restaurant operations and the production and sale
of Italian bakery products for the wholesale and retail market. At December 26,
1999, the Company owned and operated 21 Italian white tablecloth restaurants and
three wholesale bakeries in California; Portland, Oregon; Las Vegas, Nevada;
Denver, Colorado; Seattle, Washington and Atlanta, Georgia.
Fiscal year - The Company operates on a 52/53-week fiscal year ending on
the last Sunday in December. The fiscal years ended December 28, 1997, December
27, 1998 and December 26, 1999 each contained 52 weeks of operations.
Cash and equivalents - Cash equivalents consist primarily of investments
with maturities of three months or less. Cash equivalents are carried at cost
which approximates market value.
Restricted cash represents cash restricted for the Company's voluntary
disability insurance plan and contributions to the employee stock purchase plan.
Fair value of financial instruments - The carrying amounts of cash and cash
equivalents, restricted cash, accounts receivable, accounts payable and accrued
liabilities are reasonable estimates of the fair values of these financial
instruments.
Accounts receivable consist primarily of amounts due from wholesale
customers, which are net of allowances for doubtful accounts of $217,000 and
$85,000 as of December 27, 1998 and December 26, 1999, respectively.
Inventories, consisting primarily of wine, liquor, grocery products and
operating supplies, are stated at the lower of first-in, first-out method (FIFO)
cost or market.
Property and equipment are stated at cost and include interest on funds
borrowed to finance construction. Depreciation and amortization are computed
using the straight-line method over the following estimated useful lives:
leasehold improvements - lesser of lease term or life of improvements;
furniture, fixtures and equipment - 3 to 10 years. Leasehold improvements
reimbursed by the landlord through construction allowances are capitalized as
leasehold improvements with the construction allowances recorded as deferred
lease incentives. Such leasehold improvements and related deferred lease
incentives are amortized on a straight-line basis over the lease term.
Deferred rent - Certain leases contain fixed escalations of the minimum
annual lease payment during the original term of the lease. For these leases,
the Company recognizes rental expense on a straight-line basis and records the
difference between rent expense and the amount currently payable under the lease
as deferred rent. Deferred rent is included with deferred lease incentives.
Preopening expenses are expensed as incurred. See further discussion in
Note 2.
Advertising costs are expensed as incurred.
Accounting estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of expenses during the
reporting period. Actual amounts could differ from those estimates.
Income taxes are accounted for using the liability method, under which
deferred taxes are provided for the temporary differences between the financial
reporting basis and the tax basis of the Company's assets and liabilities.
Reserve for store closures includes management's best estimates of the net
costs to be incurred on the sale or disposal of a reserved store. The accrual
consists of future payments on leases and other estimated costs directly
associated with the decision to close the stores.
Stock-based compensation - The Company accounts for stock-based awards to
employees using the intrinsic value method in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
30
<PAGE> 31
Revenue recognition - Revenue from restaurant sales is recognized when food
and beverage products are sold. Revenue from bakery sales is recognized when the
bakery products are shipped.
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.
Segments - 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 two business segments consisting of the
restaurants and the wholesale bakeries. See Note 11.
Reclassifications - Certain fiscal 1997 and 1998 amounts have been
reclassified to conform with fiscal 1999 presentations.
2. PREOPENING EXPENSES
Pre-opening costs consist of location setup, employee training and
promotion associated with the opening of new locations. Prior to 1998,
preopening 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 preopening 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 preopening costs as of December 28, 1997. Preopening
costs in 1998 and 1999 were expensed as incurred. The new expense-as-incurred
standard has resulted in the past and may in the future lead to increased
variability in the amount of preopening costs recognized, depending on the
number and timing of restaurant openings.
3. NOTE RECEIVABLE
On February 14, 1997, the Company sold the net assets of its four remaining
free-standing retail bakeries for $815,000 including a promissory note in the
principal amount of $204,000. On February 19, 1999, the note receivable was paid
in full.
4. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
<TABLE>
<CAPTION>
1998 1999
-------- --------
<S> <C> <C>
Leasehold improvements ............................... $ 32,687 $ 45,128
Machinery and equipment .............................. 15,186 17,911
Furniture and fixtures ............................... 6,722 8,340
Construction in progress ............................. 3,063 5,003
-------- --------
Total ...................................... 57,658 76,382
Less -- accumulated depreciation and amortization .... (19,038) (23,949)
-------- --------
Property and equipment -- net ........................ $ 38,620 $ 52,433
======== ========
</TABLE>
31
<PAGE> 32
5. ACCRUED EXPENSES
Accrued expenses consisted of the following (in thousands):
<TABLE>
<CAPTION>
ACCRUED EXPENSES: 1998 1999
------ ------
<S> <C> <C>
Accrued payroll and related benefits .. $1,807 $2,024
Gift certificates ..................... 779 1,041
Accrued rent .......................... 660 831
Accrued income taxes .................. 903 1,009
Accrued sales taxes ................... 1,094 979
Accrued construction costs ............ 678 793
Other ................................. 645 910
------ ------
Total accrued expenses ................ $6,566 $7,587
====== ======
</TABLE>
6. LINE OF CREDIT
The Company has a $5,000,000 revolving line of credit with a letter of
credit sub-facility which expires on June 30, 2000 and bears interest at the
bank's reference rate. There were no amounts outstanding under the credit line
at December 26, 1999. The Company intends to seek to renew the line of credit.
The credit agreement requires compliance with certain financial covenants. As of
December 26, 1999, the Company was not in compliance with one of these
covenants. The bank waived non-compliance with one of these covenants at
December 26, 1999, and provided for waiver of compliance until March 24, 2000.
7. PROVISION FOR STORE CLOSURES
As a result of the disposition of the Costa Mesa restaurant in June 1997,
the Company recorded a $470,000 pre-tax reversal of the provision for store
closures originally recorded in 1993.
8. STOCKHOLDERS' EQUITY
Preferred Stock
On September 24, 1997, each outstanding share of Series B, C, E and F
preferred stock was converted into 1.262 shares of common stock upon the
completion of the Company's initial public offering.
Common Stock
The Company issued and sold an aggregate of 1.0 million shares of common
stock pursuant to an initial public offering at $11.00 per share, which closed
on September 24, 1997. The net proceeds to the Company, after payment of
underwriting fees and offering expenses were approximately $9.0 million. On
October 1, 1997, the Company issued and sold an aggregate of 225,000 shares of
Common Stock at $11.00 per share pursuant to the exercise by the underwriters of
their over-allotment option under the Underwriting Agreement. The net proceeds
to the Company were approximately $2.3 million.
In October 1998, the Board of Directors authorized the repurchase of up to
500,000 shares of the Company's common stock. Repurchases were authorized to be
made in the open market at prevailing prices or in negotiated off-market
transactions. Through December 26, 1999, the Company had repurchased 499,400
shares of common stock in the open market for an aggregate of approximately $3.0
million. On December 9, 1999, the Board of Directors authorized the repurchase
of up to 250,000 additional shares of the Company's common stock.
Stock Plans
The Company maintains several stock option plans under which the Company
may grant incentive stock options and nonqualified stock options to employees
and non-employee directors. Stock options have been granted at prices at or
above the fair market value on the date of the grant. Options vest and expire
according to terms established at the grant date.
In March 1997, the Board of Directors adopted and, in April 1997, the
stockholders approved, an Equity Incentive Plan (the "1997 Incentive Plan")
authorizing the issuance of 1,300,000 shares of common stock, a Non-Employee
Directors' Stock Option Plan (the "1997 Directors Plan") authorizing the
issuance of 100,000 shares of common stock and an Employee Stock Purchase Plan
(the "1997 Purchase Plan," and collectively, the "1997 Plans") authorizing the
issuance of 300,000 shares of common stock. The 1997 Incentive Plan amends and
restates the 1992 Stock Option Plan and 1995 Stock Option Plan. In March 1999,
the Board amended the 1997
32
<PAGE> 33
Incentive Plan to increase the number of shares authorized under the Plan by
500,000 shares. The 1997 Incentive Plan, as amended, was approved by the
shareholders in May 1999. The 1997 Incentive Plan has authorized 1,800,000
shares of common stock for issuance. In March 2000, the Board subject to
shareholder approval, amended the 1997 Incentive Plan and the 1997 Purchase Plan
to increase the number of shares authorized for issuance thereunder by 500,000
shares and 200,000 shares, respectively.
Employee Stock Purchase Plan
During fiscal 1997, the Company implemented the 1997 Purchase Plan. The
Company's 1997 Purchase Plan provides that eligible employees may contribute up
to 15% of their base earnings toward semi-annual purchase of the Company's
common stock with a value up to $25,000 per employee, per year. The employee's
purchase price is 85% of the lesser of the fair market value of the stock on the
date of commencement of the offering or the date of purchase. No compensation
expense is recorded in connection with the plan. The total number of shares
issuable under the plan is 300,000. On April 30, 1998, the first purchase date
under the plan, an aggregate of 60,199 shares were issued under the plan at
$9.35 per share, and on October 30, 1998, an aggregate of 59,267 shares were
issued under the plan at $6.70 per share. On April 30, 1999, an aggregate of
52,308 shares were issued under the plan at $6.80 per share, and on October 29,
1999, an aggregate of 52,268 shares were issued under the plan at $6.81 per
share.
Stock Option Plans
The following table reflects the activity under the Company's stock option
plans:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED
OPTIONS AVERAGE PRICE
--------- -------------
<S> <C> <C>
Balance, December 31, 1996 .. 829,824 $ 4.49
Granted ..................... 169,555 6.15
Exercised ................... (13,704) 3.19
Cancelled ................... (5,890) 5.12
---------
Balance, December 29, 1997 .. 979,785 4.79
Granted ..................... 256,738 13.33
Exercised ................... (82,612) 4.19
Cancelled ................... (11,750) 7.80
---------
Balance, December 28, 1998 .. 1,142,161 6.72
Granted ..................... 461,924 8.70
Exercised ................... (67,582) 4.17
Cancelled ................... (48,172) 7.86
---------
Balance, December 26, 1999 .. 1,488,331 7.38
=========
</TABLE>
The weighted average fair values per share of options granted during 1998
and 1999 were $7.76 and $5.56, respectively.
Additional information regarding options outstanding as of December 26,
1999 was as follows:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
WEIGHTED AVG. OPTIONS EXERCISABLE
REMAINING -----------------------------
RANGE OF NUMBER CONTRACTUAL WEIGHTED AVG. NUMBER WEIGHTED AVG.
EXERCISE PRICES OUTSTANDING LIFE (YRS) EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- -------------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$2.38-4.00 10,485 3.0 $3.15 10,485 $3.15
4.50-4.50 498,159 4.6 4.50 490,485 4.50
4.95-5.50 151,109 6.2 5.05 96,219 5.05
6.00-7.00 210,146 7.9 6.40 60,272 6.11
7.38-7.38 160,000 10.0 7.38 -- --
10.13-10.13 214,602 9.4 10.13 -- --
11.00-11.14 6,950 8.8 11.09 1,000 11.00
13.25-13.25 180,862 8.6 13.25 46,051 13.25
13.50-13.50 40,800 8.3 13.50 8,400 13.50
14.58-14.58 15,218 8.8 14.58 3,805 14.58
--------- -------
2.38-14.58 1,488,331 7.1 7.38 716,717 5.42
========= =======
</TABLE>
At December 28, 1997 and December 27, 1998, options to purchase 451,136 and
557,770 shares of common stock, respectively, were exercisable under the plans.
33
<PAGE> 34
At December 26, 1999, the numbers of shares available for future grants
under the various plans were as follows:
<TABLE>
<CAPTION>
SHARES
AVAILABLE
FOR
GRANT
---------
<S> <C>
1997 Directors Plan................... 74,500
1997 Incentive Plan................... 296,780
1997 Purchase Plan................... 75,958
</TABLE>
Additional Stock Plan Information
As discussed in Note 1, the Company continues to account for its
stock-based awards using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees," and its related interpretations. No compensation expense has been
recognized in the financial statements for employee stock arrangements.
SFAS No. 123, "Accounting for Stock-Based Compensation" (SFAS 123),
requires the disclosure of pro forma net income and earnings per share had the
Company adopted the fair value method as of the beginning of fiscal 1995. In
accordance with SFAS 123, the fair value of stock-based awards to employees is
calculated through the use of option pricing models, even though such models
were developed to estimate the fair value of freely tradeable, fully
transferable options without vesting restrictions, which significantly differ
from the Company's stock option awards. These models also require subjective
assumptions, including future stock price volatility and expected time to
exercise, which greatly affect the calculated values. The Company's calculations
were made using the Black-Scholes option pricing model with the following
weighted average assumptions: expected life, 7.30 years for 1997, 4 years for
1998 and 3 years for 1999, stock volatility, .47%, .62% and .71% in 1997, 1998
and 1999, risk-free interest rates, 5.48% in 1997, 4.57% in 1998 and 6.27% in
1999; and no dividends during the expected term. The Company's calculations are
based on a multiple option valuation approach and forfeitures are recognized as
they occur. Under SFAS 123, the 1997 Purchase Plan would be compensatory due to
the look-back feature, and $289,000 and $589,000 of compensation would have been
recognized in 1998 and 1999, respectively. If the computed fair values of the
1997, 1998 and 1999 awards had been amortized to expense over the vesting period
of the awards, pro forma net income would have been as follows:
<TABLE>
<CAPTION>
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Net income (in thousands):
As reported............... $ 2,583 $ 3,125 $ 3,059
Pro forma................. 2,301 2,190 1,010
Basic earnings per share:
As reported............... $ 0.53 $ 0.53 $ 0.54
Pro forma................. 0.47 0.37 0.18
Diluted earnings per share:
As reported............... $ 0.48 $ 0.50 $ 0.50
Pro forma................. 0.42 0.35 0.17
</TABLE>
However, the impact of outstanding unvested stock options granted prior to
1995 has been excluded from the pro forma calculation; accordingly, the 1996 and
subsequent pro forma adjustments are not indicative of future period pro forma
adjustments, when the calculation will apply to all applicable stock options.
The following is a summary of the calculation of the number of shares used
in calculating basic and diluted EPS:
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Shares used to compute basic EPS .... 4,907,875 5,846,215 5,712,818
Add: effect of dilutive securities .. 525,316 451,295 384,551
--------- --------- ---------
Shares used to compute diluted EPS .. 5,433,191 6,297,510 6,097,369
========= ========= =========
</TABLE>
34
<PAGE> 35
9. INCOME TAXES
The Company provides a deferred tax expense or benefit equal to the change
in the deferred tax liability during the year. Deferred income taxes reflect the
net tax effects of (a) temporary differences between the carrying amounts of
assets and liabilities for financial reporting purposes and the amounts used for
income tax purposes, and (b) tax credit carryforwards. Significant components of
the Company's net deferred tax balances as of December 27, 1998 and December 26,
1999 were as follows (in thousands):
<TABLE>
<CAPTION>
1998 1999
------- ------
<S> <C> <C>
Deferred tax assets:
Compensation related ............... $ 61 $ 72
Fixed assets -- 6
Reserves for store closures ........ 136 100
Deferred rent liability ............ 142 184
Tax credit carryforwards ........... 1,327 701
Other .............................. 146 155
------- ------
Total deferred tax assets ....... 1,812 1,218
------- ------
Deferred tax liabilities:
Fixed assets ....................... (544) --
Pre-opening expenses ............... -- --
------- ------
Total deferred tax liabilities .. (544) --
------- ------
Net deferred tax assets .............. $ 1,268 $1,218
======= ======
</TABLE>
The Company provided no valuation allowance against deferred tax assets
recorded as of December 27, 1998 and December 26, 1999, as the Company believes
it is "more-likely-than-not" that all deferred assets will be fully realized in
future periods.
As of December 26, 1999, the Company has unused investment and general
business tax credits of approximately $54,000 and alternative minimum tax
credits of approximately $647,000. The investment tax credits will begin to
expire in 2003 and the minimum tax credits have an indefinite carryforward
period.
The provision for income taxes consists of the following (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Current provision:
Federal ................... $ 826 $1,147 $1,470
State ..................... 323 340 394
------ ------ ------
Total current .......... 1,149 1,487 1,864
Deferred taxes, net ......... 502 737 50
------ ------ ------
Income tax expense .......... $1,651 $2,224 $1,914
====== ====== ======
</TABLE>
The reconciliation between the Company's effective tax rate on earnings
before income taxes and the statutory federal income tax rate of 34% was as
follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------- ------- -------
<S> <C> <C> <C>
Federal income tax at 34% statutory rate .... $ 1,440 $ 1,930 $ 1,691
State income tax ............................ 243 298 283
FICA tip credit and other business credits .. (159) (119) (325)
Other accrual ............................... 85 82 229
Permanent items and other ................... 42 33 36
------- ------- -------
Total ....................................... $ 1,651 $ 2,224 $ 1,914
======= ======= =======
</TABLE>
35
<PAGE> 36
10. COMMITMENTS AND CONTINGENCIES
The Company leases all restaurant, wholesale bakery and office space under
operating leases, which terminate at various dates between 2001 and 2017.
Certain leases require increased rental payments, generally related to changes
in the Consumer Price Index and increases in property taxes and certain leases
also provide for additional rent based on a percentage of sales. Total rent
expense for all operating leases was as follows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
------ ------ ------
<S> <C> <C> <C>
Minimum rentals ............ $2,339 $2,914 $3,649
Contingent rentals ......... 1,347 1,178 1,396
------ ------ ------
Total rental expense ....... $3,686 $4,092 $5,045
====== ====== ======
</TABLE>
At December 26 1999, future minimum lease payments under long-term
operating leases were as follows (in thousands):
<TABLE>
<CAPTION>
YEAR
ENDING DECEMBER
---------------
<S> <C>
2000.................... $ 4,217
2001.................... 4,172
2002.................... 4,011
2003.................... 3,816
2004.................... 3,754
Thereafter............... 19,993
-------
Total................... $39,963
=======
</TABLE>
At December 26, 1999, fifteen of the Company's 21 restaurants and all three of
the Company's wholesale bakeries are located in California. Because of this
geographic concentration, the Company is susceptible to local and regional
risks, such as increased government regulation, adverse economic conditions,
adverse weather conditions, earthquakes and other natural disasters, any of
which could have a material adverse effect on the Company's business, financial
condition and results of operations. In addition, in light of the Company's
current geographic concentration, adverse publicity relating to the Company's
restaurants could have a more pronounced effect on the Company's overall sales
than might be the case if the Company's restaurants were more broadly dispersed.
11. SEGMENT INFORMATION
The Company classifies its business interests into two reportable
segments: restaurants and wholesale bakeries (which includes retail bakeries for
1997). The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (Note 1). The Company
evaluates performance and allocates resources based on revenues and operating
contribution (income before income taxes), which excludes unallocated corporate
general and administrative costs and income tax expense or benefit. Unallocated
assets include corporate cash and equivalents, the net book value of corporate
facilities and related information systems, deferred tax amounts and other
corporate long-lived assets.
Financial information for the Company's business segments is as follows:
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------------
DECEMBER 28, DECEMBER 27, DECEMBER 26,
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Revenues:
Restaurants ......................... $ 65,525 $ 75,523 $ 92,266
Wholesale bakeries .................. 8,439 9,750 10,598
Intersegment revenues .............. (1,844) (2,135) (2,431)
-------- -------- ---------
Total revenues ...................... $ 72,120 $ 83,138 $ 100,433
======== ======== =========
Operating contribution:
Restaurants ......................... $ 10,218 $ 11,275 $ 12,763
Wholesale bakeries .................. 260 731 909
Unallocated ......................... (6,244) (6,331) (8,699)
-------- -------- ---------
Total operating contribution ........ $ 4,234 $ 5,675 $ 4,973
======== ======== =========
Depreciation and amortization:
Restaurants ......................... $ 2,823 $ 3,457 $ 4,443
Wholesale bakeries .................. 475 491 503
Corporate ........................... 219 310 325
-------- -------- ---------
Total depreciation & amortization .. $ 3,517 $ 4,258 $ 5,271
======== ======== =========
Capital expenditures:
Restaurants ......................... $ 7,350 $ 13,225 $ 17,563
Wholesale bakeries .................. 57 156 1,460
Corporate ........................... 535 242 267
-------- -------- ---------
Total capital expenditures ......... $ 7,942 $ 13,623 $ 19,290
======== ======== =========
Property and equipment, net:
Restaurants ......................... $ 25,731 $ 35,104 $ 48,409
Wholesale bakeries .................. 2,791 2,720 3,326
Corporate ........................... 733 796 698
-------- -------- ---------
Total property and equipment, net .. $ 29,255 $ 38,620 $ 52,433
======== ======== =========
</TABLE>
36
<PAGE> 37
12. QUARTERLY FINANCIAL DATA (UNAUDITED):
Summarized unaudited quarterly financial data (in thousands, except per
share data) for fiscal years 1998 and 1999 are as follows:
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
---------- ------- ------- ----------
<S> <C> <C> <C> <C>
1998 quarter:
Total revenues ......................... $ 19,696 $20,499 $20,095 $ 22,848
Income from operations ................. 1,298 1,591 1,041 934
Income before change in
Accounting principle ................. 949 1,093 741 668
Cumulative effect of change in
Accounting principle (net of taxes) .. 326 -- -- --
Net income ............................. 623 1,093 741 668
Basic net income per share before
Change in accounting principle ....... $ 0.16 $ 0.19 $ 0.12 $ 0.12
Cumulative effect of change in
Accounting principle ................. 0.06 -- -- --
Basic net income per share ............. $ 0.10 $ 0.19 $ 0.12 $ 0.12
Diluted net income per share before
Change in accounting principle ....... $ 0.15 $ 0.17 $ 0.12 $ 0.11
Cumulative effect of change in
Accounting principle ................. 0.05 -- -- --
Diluted net income per share ........... $ 0.10 $ 0.17 $ 0.12 $ 0.11
1999 quarter:
Total revenues ......................... $ 23,533 $23,705 $25,419 $ 27,776
Income from operations ................. 1,380 1,469 579 1,112
Net income ............................. 942 980 414 723
Basic net income per share ............. $ 0.17 $ 0.17 $ 0.07 $ 0.13
Diluted net income per share ........... $ 0.16 $ 0.16 $ 0.07 $ 0.12
</TABLE>
37
<PAGE> 38
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Identification of Directors
The information required by this Item concerning the Company's directors is
incorporated by reference from the sections captioned "Proposal 1: Election of
Directors" contained in the Company's definitive Proxy Statement related to the
Annual Meeting of Stockholders to be held May 3, 2000, to be filed by the
Company with the Securities and Exchange Commission (the "Proxy Statement").
Identification of Executive Officers
The information required by this Item concerning the Company's executive
officers is set forth in Part I of this Report.
Compliance with Section 16(a) of the Exchange Act
The information required by this Item is incorporated by reference from the
section captioned "Compliance with Section 16(a) of the Securities Exchange Act
of 1934" contained in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
section captioned "Executive Compensation" in the Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
section captioned "Security Ownership of Certain Beneficial Owners and
Management" contained in the Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
sections captioned "Certain Transactions" and "Executive Compensation" contained
in the Proxy Statement.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1.
- Index to Financial Statements
- Independent Auditors' Report
- Balance Sheets at December 27, 1998 and December 26, 1999
- Statements of Income for the years ended December 28, 1997, December
27, 1998 and December 26, 1999
- Statements of Stockholders' Equity for the years ended December 28,
1997, December 27, 1998 and December 26, 1999
- Statements of Cash Flows for the years ended December 28, 1997,
December 27, 1998 and December 26, 1999
- Notes to Financial Statements
2. All schedules are omitted because they are not required, are not
applicable or the information is included in the financial
statements or notes thereto.
3. Exhibits
38
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 By-laws, as amended. (7)
3.3 Reference is made to Exhibits 3.1 and 3.2.
4.2 Speciman stock certificate. (4)
10.1* Form of Indemnity Agreement between the Company and each executive
officer and director. (3)
10.2* Summary of Bonus Plan for 1999.
10.3* 1997 Equity Incentive Plan, as amended, and forms of related
agreements.
10.4* 1997 Employee Stock Purchase Plan, as amended, and form of offering
related thereto.
10.5* 1997 Non-Employee Directors' Plan and form of agreement related
thereto. (5)
10.6 Form of Series F Preferred Stock Purchase Agreement with Schedule of
additional Preferred Stock Purchase Agreements attached. (3)
10.7 Form of Warrant to purchase shares of Series F Preferred Stock of the
Registrant. (3)
10.8 Revised License Agreement, dated December 11, 1986 and Stock Purchase
Agreement dated March 6, 1987, between the Company and Vegetti
S.r.1.(3)
10.9 Assignment of Trademark Registrations Nunc Pro Tunc executed by
Vegetti S.r.1.(3)
10.10+ Lease Agreement, dated December 22, 1988, and Amendment, dated
October 4, 1989, between the Company and Cowper Square Partners, for
the Palo Alto restaurant. (3)
10.11+ Lease Agreement, dated November 21, 1991, between the Company and
Hotel Sainte Claire Partners, L.P., for Hotel Sainte Claire, San
Jose. (3)
10.12+ Lease Agreement dated April 15, 1996, between the Company and New
York-New York Hotel, LLC, for the Las Vegas Restaurant. (3)
10.13 Food Service Operations Agreement dated November 21, 1991, between
the Company and Mobedshahi Hotel Group, Inc. (3)
10.15* Employment Agreement dated April 1995, between the Company and
Michael J. Hislop. (3)
10.16* 1991 Incentive Stock Option Plan and form of related agreement. (1)
10.17* 1992 Non-Employee Directors' Stock Option Plan and form of related
agreement. (1)
10.18* 1988 Stock Option Plan and form of related agreement. (1)
10.19 Underwriting Agreement dated September 18, 1997 between the Company
and the Representatives of the Underwriters. (2)
10.20 Revolving Line of Credit Note and Loan Agreement between the Company
and Wells Fargo Bank, N.A., dated March 31, 1998. (6)
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney, Reference is made to the signature page.
27.1 Financial Data Schedule.
</TABLE>
- -------------
(1) Filed as an exhibit to the Registrant's Form S-8 (File No. 333-46421), and
incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1997 (0-29410), and incorporated herein by
reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-23605), on March 19, 1997, and incorporated herein by
reference.
(4) Filed as an exhibit to Amendment No. 1 to the Form S-1 Registration
Statement (File No. 333-23605), on July 1, 1997, and incorporated herein by
reference.
(5) Filed as an exhibit to Amendment No. 2 to the Form S-1 Registration
Statement (File No. 333-23605), on August 22, 1997, and incorporated herein
by reference.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1998 (0-29410), and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 27, 1998.
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
+ Certain confidential information has been deleted from this exhibit
pursuant to a confidential treatment request order that was granted.
39
<PAGE> 40
(b) Reports on Form 8-K
There were no Reports on Form 8-K filed for the quarter ended December 26,
1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
Date: March 23, 2000 Il Fornaio (America) Corporation
By: /s/ LAURENCE B. MINDEL
-------------------------------------
Laurence B. Mindel
Chairman of the Board
By: /s/ MICHAEL J. HISLOP
-------------------------------------
Michael J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Laurence B. Mindel and Peter P. Hausback and each
of them, as his true and lawful attorneys-in-fact and agents, with full power of
substitution, for him, and in his name, place and stead, in any and all
capacities, to sign any and all amendments to this report, and to file the same,
with exhibits thereto and other documents in connection therewith, with the
Securities Exchange Commission, granting unto said attorneys-in-fact and agents,
and each of them, full power and authority to do and perform each and every act
and thing requisite and necessary to be done therewith, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, and any of them, or his substitutes,
may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ LAURENCE B. MINDEL Chairman of the Board March 23, 2000
- ---------------------------------------
Laurence B. Mindel
/s/ MICHAEL J. HISLOP President and Chief Executive Officer March 23, 2000
- --------------------------------------- (Principal Executive Officer)
Michael J. Hislop
/s/ PETER P. HAUSBACK Vice President, Finance and March 23, 2000
- --------------------------------------- Chief Financial Officer
Peter P. Hausback (Principal Financial and Accounting
Officer)
/s/ DEAN A. CORTOPASSI Director March 23, 2000
- ---------------------------------------
Dean A. Cortopassi
</TABLE>
40
<PAGE> 41
<TABLE>
<S> <C> <C>
/s/ W. SCOTT HEDRICK Director March 23, 2000
- ---------------------------------------
W. Scott Hedrick
/s/ F. WARREN HELLMAN Director March 23, 2000
- ---------------------------------------
F. Warren Hellman
/s/ W. HOWARD LESTER Director March 23, 2000
- ---------------------------------------
W. Howard Lester
/s/ LAWRENCE F. LEVY Director March 23, 2000
- ---------------------------------------
Lawrence F. Levy
</TABLE>
41
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------- -----------
<S> <C>
3.1 Amended and Restated Certificate of Incorporation. (1)
3.2 By-laws, as amended. (7)
3.3 Reference is made to Exhibits 3.1 and 3.2.
4.2 Speciman stock certificate. (4)
10.1* Form of Indemnity Agreement between the Company and each executive
officer and director. (3)
10.2* Summary of Bonus Plan for 1999.
10.3* 1997 Equity Incentive Plan, as amended, and forms of related
agreements.
10.4* 1997 Employee Stock Purchase Plan, as amended, and form of offering
related thereto.
10.5* 1997 Non-Employee Directors' Plan and form of agreement related
thereto. (5)
10.6 Form of Series F Preferred Stock Purchase Agreement with Schedule of
additional Preferred Stock Purchase Agreements attached. (3)
10.7 Form of Warrant to purchase shares of Series F Preferred Stock of the
Registrant. (3)
10.8 Revised License Agreement, dated December 11, 1986 and Stock Purchase
Agreement dated March 6, 1987, between the Company and Vegetti
S.r.1.(3)
10.9 Assignment of Trademark Registrations Nunc Pro Tunc executed by
Vegetti S.r.1.(3)
10.10+ Lease Agreement, dated December 22, 1988, and Amendment, dated
October 4, 1989, between the Company and Cowper Square Partners, for
the Palo Alto restaurant. (3)
10.11+ Lease Agreement, dated November 21, 1991, between the Company and
Hotel Sainte Claire Partners, L.P., for Hotel Sainte Claire, San
Jose. (3)
10.12+ Lease Agreement dated April 15, 1996, between the Company and New
York-New York Hotel, LLC, for the Las Vegas Restaurant. (3)
10.13 Food Service Operations Agreement dated November 21, 1991, between
the Company and Mobedshahi Hotel Group, Inc. (3)
10.15* Employment Agreement dated April 1995, between the Company and
Michael J. Hislop. (3)
10.16* 1991 Incentive Stock Option Plan and form of related agreement. (1)
10.17* 1992 Non-Employee Directors' Stock Option Plan and form of related
agreement. (1)
10.18* 1988 Stock Option Plan and form of related agreement. (1)
10.19 Underwriting Agreement dated September 18, 1997 between the Company
and the Representatives of the Underwriters. (2)
10.20 Revolving Line of Credit Note and Loan Agreement between the Company
and Wells Fargo Bank, N.A., dated March 31, 1998. (6)
23.1 Consent of Deloitte & Touche LLP.
24.1 Power of Attorney, Reference is made to the signature page.
27.1 Financial Data Schedule.
</TABLE>
- -------------
(1) Filed as an exhibit to the Registrant's Form S-8 (File No. 333-46421), and
incorporated herein by reference.
(2) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended September 28, 1997 (0-29410), and incorporated herein by
reference.
(3) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
(File No. 333-23605), on March 19, 1997, and incorporated herein by
reference.
(4) Filed as an exhibit to Amendment No. 1 to the Form S-1 Registration
Statement (File No. 333-23605), on July 1, 1997, and incorporated herein by
reference.
(5) Filed as an exhibit to Amendment No. 2 to the Form S-1 Registration
Statement (File No. 333-23605), on August 22, 1997, and incorporated herein
by reference.
(6) Filed as an exhibit to the Registrant's Quarterly Report on Form 10-Q for
the quarter ended March 29, 1998 (0-29410), and incorporated herein by
reference.
(7) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 27, 1998.
* Indicates management contracts or compensatory plans or arrangements filed
pursuant to Item 601(b)(10) of Regulation S-K.
+ Certain confidential information has been deleted from this exhibit
pursuant to a confidential treatment request order that was granted.
<PAGE> 1
EXHIBIT 10.2
SUMMARY OF BONUS PLAN
IL Fornaio (America) Corporation (the Company) has a bonus plan (the Bonus
Plan) pursuant to which certain officers are eligible to receive annual cash
bonuses in amounts ranging from 25% to 50% of their respective base salaries if
certain performance targets established by management and approved by the Board
of Directors are met. Such performance targets may include, among other things,
the overall profitability of the Company and of particular components of the
Company's business, the completion of special projects or the achievements of
certain cost efficiencies. Prior to payment of any bonuses, the Board of
Directors must approve such amounts.
<PAGE> 1
EXHIBIT 10.3
IL FORNAIO (AMERICA) CORPORATION
1997 EQUITY INCENTIVE PLAN
ADOPTED MARCH 17, 1997
APPROVED BY STOCKHOLDERS APRIL 23, 1997
AMENDED BY THE BOARD OF DIRECTORS ON MARCH 11, 1999
APPROVED BY STOCKHOLDERS ON MAY 6, 1999
AMENDED BY THE BOARD OF DIRECTORS ON MARCH 8, 2000
INTRODUCTION.
This Plan is an amendment and restatement of the Company's existing 1992
Stock Option Plan (the "1992 Plan") and the 1995 Stock Option Plan (the "1995
Plan"), and shall become effective on the date of approval of this Plan by the
Board (the "Effective Date"). No options shall be granted under the 1992 Plan or
the 1995 Plan from and after the Effective Date. Notwithstanding anything to the
contrary, prior to the Listing Date all Stock Awards granted under this Plan
shall comply with all of the requirements set forth in Section 25102(o) of the
California Corporate Securities Law of 1968.
1. PURPOSES.
(a) The purpose of the Plan is to provide a means by which selected
Employees and Directors of and Consultants to the Company and its Affiliates may
be given an opportunity to benefit from increases in value of the common stock
of the Company ("Common Stock") through the granting of (i) Incentive Stock
Options, (ii) Nonstatutory Stock Options, (iii) stock bonuses and (iv) rights to
purchase restricted stock, all as defined below.
(b) The Company, by means of the Plan, seeks to retain the services of
persons who are now Employees, Directors or Consultants, to secure and retain
the services of new Employees, Directors and Consultants, and to provide
incentives for such persons to exert maximum efforts for the success of the
Company and its Affiliates.
(c) The Company intends that the Stock Awards issued under the Plan
shall, in the discretion of the Board or any Committee to which responsibility
for administration of the Plan has been delegated pursuant to subsection 3(c),
be either (i) Options granted pursuant to Section 6 hereof, including Incentive
Stock Options and Nonstatutory Stock Options, or (ii) stock bonuses or rights to
purchase restricted stock granted pursuant to Section 7 hereof. All Options
shall be separately designated Incentive Stock Options or Nonstatutory Stock
Options at the time of grant, and a separate certificate or certificates will be
issued for shares purchased on exercise of each type of Option.
2. DEFINITIONS.
<PAGE> 2
(a) "AFFILIATE" means any parent corporation or subsidiary corporation,
whether now or hereafter existing, as those terms are defined in Sections 424(e)
and (f) respectively, of the Code.
(b) "BOARD" means the Board of Directors of the Company.
(c) "CODE" means the Internal Revenue Code of 1986, as amended.
(d) "COMMITTEE" means a Committee appointed by the Board in accordance
with subsection 3(c) of the Plan.
(e) "COMPANY" means Il Fornaio (America) Corporation, a Delaware
corporation.
(f) "CONSULTANT" means any person, including an advisor, engaged by the
Company or an Affiliate to render consulting services and who is compensated for
such services, provided that the term "Consultant" shall not include Directors
who are paid only a director's fee by the Company or who are not compensated by
the Company for their services as Directors.
(g) "CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR CONSULTANT" means the
employment or relationship as a Director or Consultant is not interrupted or
terminated. The Board, in its sole discretion, may determine whether Continuous
Status as an Employee, Director or Consultant shall be considered interrupted in
the case of: (i) any leave of absence approved by the Board, including sick
leave, military leave, or any other personal leave; or (ii) transfers between
locations of the Company or between the Company, Affiliates or their successors.
(h) "DIRECTOR" means a member of the Board.
(i) "EMPLOYEE" means any person, including Officers and Directors,
employed by the Company or any Affiliate of the Company. Neither service as a
Director nor payment of a director's fee by the Company shall be sufficient to
constitute "employment" by the Company.
(j) "EXCHANGE ACT" means the Securities Exchange Act of 1934, as
amended.
(k) "FAIR MARKET VALUE" means, as of any date, the value of the Common
Stock of the Company determined as follows:
(1) If the Common Stock is listed on any established stock
exchange, or traded on the Nasdaq National Market or The Nasdaq Market, the Fair
Market Value of a share of Common Stock shall be the closing sales price for
such stock (or the closing bid, if no sales were reported) as quoted on such
exchange or market (or the exchange or market with the greatest volume of
trading in Common Stock) on the last market trading day prior to determination,
as reported in the Wall Street Journal or such other source as the Board deems
<PAGE> 3
reliable;
(2) In the absence of such markets for the Common Stock, the Fair
Market Value shall be determined in good faith by the Board.
(l) "INCENTIVE STOCK OPTION" means an Option intended to qualify as an
incentive stock option within the meaning of Section 422 of the Code and the
regulations promulgated thereunder.
(m) "LISTING DATE" means the first date upon which any security of the
Company is listed (or approved for listing) upon notice of issuance on any
securities exchange, or designated (or approved for designation) upon notice of
issuance as a national market security on an interdealer quotation system if
such securities exchange or interdealer quotation system has been certified in
accordance with the provisions of Section 25100(o) of the California Corporate
Securities Law of 1968.
(n) "NON-EMPLOYEE DIRECTOR" means a Director who either (i) is not a
current Employee or Officer of the Company or its parent or subsidiary, does not
receive compensation (directly or indirectly) from the Company or its parent or
subsidiary for services rendered as a consultant or in any capacity other than
as a Director (except for an amount as to which disclosure would not be required
under Item 404(a) of Regulation S-K promulgated pursuant to the Securities Act
of 1933 ("Regulation S-K"), does not possess an interest in any other
transaction as to which disclosure would be required under Item 404(a) of
Regulation S-K, and is not engaged in a business relationship as to which
disclosure would be required under Item 404(b) of Regulation S-K; or (ii) is
otherwise considered a "non-employee director" for purposes of Rule 16b-3.
(o) "NONSTATUTORY STOCK OPTION" means an Option not intended to qualify
as an Incentive Stock Option.
(p) "OFFICER" means a person who is an officer of the Company within the
meaning of Section 16 of the Exchange Act and the rules and regulations
promulgated thereunder.
(q) "OPTION" means a stock option granted pursuant to the Plan.
(r) "OPTION AGREEMENT" means a written agreement between the Company and
an Optionee evidencing the terms and conditions of an individual Option grant.
Each Option Agreement shall be subject to the terms and conditions of the Plan.
(s) "OPTIONEE" means a person to whom an Option is granted pursuant to
the Plan.
(t) "OUTSIDE DIRECTOR" means a Director who either (i) is not a current
employee of the Company or an "affiliated corporation" (within the meaning of
Treasury regulations
1
<PAGE> 4
promulgated under Section 162(m) of the Code), is not a former employee of the
Company or an "affiliated corporation" receiving compensation for prior services
(other than benefits under a tax qualified pension plan), was not an officer of
the Company or an "affiliated corporation" at any time, and is not currently
receiving direct or indirect remuneration from the Company or an "affiliated
corporation" for services in any capacity other than as a Director, or (ii) is
otherwise considered an "outside director" for purposes of Section 162(m) of the
Code.
(u) "PLAN" means this 1997 Equity Incentive Plan.
(v) "RULE 16b-3" means Rule 16b-3 of the Exchange Act or any successor
to Rule 16b-3, as in effect when discretion is being exercised with respect to
the Plan.
(w) "STOCK AWARD" means any right granted under the Plan, including any
Option, any stock bonus, and any right to purchase restricted stock.
(x) "STOCK AWARD AGREEMENT" means a written agreement between the
Company and a holder of a Stock Award evidencing the terms and conditions of an
individual Stock Award grant. Each Stock Award Agreement shall be subject to the
terms and conditions of the Plan.
3. ADMINISTRATION.
(a) The Plan shall be administered by the Board unless and until the
Board delegates administration to a Committee, as provided in subsection 3(c).
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(1) To determine from time to time which of the persons eligible
under the Plan shall be granted Stock Awards; when and how each Stock Award
shall be granted; whether a Stock Award will be an Incentive Stock Option, a
Nonstatutory Stock Option, a stock bonus, a right to purchase restricted stock,
or a combination of the foregoing; the provisions of each Stock Award granted
(which need not be identical), including the time or times when a person shall
be permitted to receive stock pursuant to a Stock Award; and the number of
shares with respect to which a Stock Award shall be granted to each such person.
(2) To construe and interpret the Plan and Stock Awards granted
under it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the exercise of this power, may correct any
defect, omission or inconsistency in the Plan or in any Stock Award Agreement,
in a manner and to the extent it shall deem necessary or expedient to make the
Plan fully effective.
(3) To amend the Plan or a Stock Award as provided in Section
12.
<PAGE> 5
(4) Generally, to exercise such powers and to perform such acts
as the Board deems necessary or expedient to promote the best interests of the
Company which are not in conflict with the provisions of the Plan.
(c) The Board may delegate administration of the Plan to a committee or
committees ("Committee") of one or more members of the Board. In the discretion
of the Board, a Committee may consist solely of two (2) or more Outside
Directors, in accordance with Code Section 162(m), or solely of two (2) or more
Non-Employee Directors, in accordance with Rule 16b-3. If administration is
delegated to a Committee, the Committee shall have, in connection with the
administration of the Plan, the powers theretofore possessed by the Board (and
references in this Plan to the Board shall thereafter be to the Committee),
subject, however, to such resolutions, not inconsistent with the provisions of
the Plan, as may be adopted from time to time by the Board. The Board may
abolish the Committee at any time and revest in the Board the administration of
the Plan.
4. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of Section 11 relating to adjustments upon
changes in stock, the stock that may be issued pursuant to Stock Awards shall
not exceed in the aggregate two million three hundred thousand (2,300,000)
shares of Common Stock. Such share reserve shall consist of (i) the options
granted under the 1992 Plan and the 1995 Plan which are outstanding as of the
Effective Date plus (ii) the shares available for grant under the 1992 Plan and
the 1995 Plan as of the Effective Date plus (iii) an additional one million five
hundred four thousand three hundred ninety-five (1,504,395) shares of common
stock. If any Stock Award shall for any reason expire or otherwise terminate, in
whole or in part, without having been exercised in full (or vested in the case
of Restricted Stock), the stock not acquired under such Stock Award shall revert
to and again become available for issuance under the Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
5. ELIGIBILITY.
(a) Incentive Stock Options may be granted only to Employees. Stock
Awards other than Incentive Stock Options may be granted only to Employees,
Directors or Consultants.
(b) No person shall be eligible for the grant of an Incentive Stock
Option if, at the time of grant, such person owns (or is deemed to own pursuant
to Section 424(d) of the Code) stock possessing more than ten percent (10%) of
the total combined voting power of all classes of stock of the Company or of any
of its Affiliates unless the exercise price of such Option is at least one
hundred ten percent (110%) of the Fair Market Value of such stock at the date of
grant and the Option is not exercisable after the expiration of five (5) years
from the date of grant.
<PAGE> 6
(c) Subject to the provisions of Section 11 relating to adjustments upon
changes in stock, no person shall be eligible to be granted Stock Awards
covering more than five hundred thousand (500,000) shares of Common Stock in any
calendar year.
6. OPTION PROVISIONS.
Each Option shall be in such form and shall contain such terms and
conditions as the Board shall deem appropriate. The provisions of separate
Options need not be identical, but each Option shall include (through
incorporation of provisions hereof by reference in the Option or otherwise) the
substance of each of the following provisions:
(a) TERM. No Option shall be exercisable after the expiration of ten
(10) years from the date it was granted.
(b) PRICE. The exercise price of each Incentive Stock Option shall be
not less than one hundred percent (100%) of the Fair Market Value of the stock
subject to the Option on the date the Option is granted, and the exercise price
of each Nonstatutory Stock Option shall be not less than eighty-five percent
(85%) of the Fair Market Value of the stock subject to the Option on the date
the Option is granted. Notwithstanding the foregoing, an Option may be granted
with an exercise price lower than that set forth in the preceding sentence if
such Option is granted pursuant to an assumption or substitution for another
option in a manner satisfying the provisions of Section 424(a) of the Code.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to an
Option shall be paid, to the extent permitted by applicable statutes and
regulations, either (i) in cash at the time the Option is exercised, or (ii) at
the discretion of the Board or Committee, at the time of the grant of the
Option, (A) by delivery to the Company of other Common Stock of the Company, (B)
according to a deferred payment or other arrangement (which may include, without
limiting the generality of the foregoing, the use of other Common Stock of the
Company) with the person to whom the Option is granted or to whom the Option is
transferred pursuant to subsection 6(d), or (C) in any other form of legal
consideration that may be acceptable to the Board. In the case of any deferred
payment arrangement, interest shall be payable at least annually and shall be
charged at the minimum rate of interest necessary to avoid the treatment as
interest, under any applicable provisions of the Code, of any amounts other than
amounts stated to be interest under the deferred payment arrangement.
(d) TRANSFERABILITY. An Incentive Stock Option shall not be transferable
except by will or by the laws of descent and distribution, and shall be
exercisable during the lifetime of the person to whom the Incentive Stock Option
is granted only by such person. A Nonstatutory Stock Option may be transferred
to the extent provided in the Option Agreement; provided that if the Option
Agreement does not expressly permit the transfer of a Nonstatutory Stock Option,
the Nonstatutory Stock Option shall not be transferable except by will, by the
laws of descent and distribution or pursuant to a domestic relations order
satisfying the requirements of Rule 16b-3,
<PAGE> 7
and shall be exercisable during the lifetime of the person to whom the Option is
granted only by such person or any transferee pursuant to a domestic relations
order. Notwithstanding the foregoing, the person to whom the Option is granted
may, by delivering written notice to the Company, in a form satisfactory to the
Company, designate a third party who, in the event of the death of the Optionee,
shall thereafter be entitled to exercise the Option.
(e) VESTING. The total number of shares of stock subject to an Option
may, but need not, be allotted in periodic installments (which may, but need
not, be equal). The Option Agreement may provide that from time to time during
each of such installment periods, the Option may become exercisable ("vest")
with respect to some or all of the shares allotted to that period, and may be
exercised with respect to some or all of the shares allotted to such period
and/or any prior period as to which the Option became vested but was not fully
exercised. The Option may be subject to such other terms and conditions on the
time or times when it may be exercised (which may be based on performance or
other criteria) as the Board may deem appropriate. The provisions of this
subsection 6(e) are subject to any Option provisions governing the minimum
number of shares as to which an Option may be exercised.
(f) TERMINATION OF EMPLOYMENT OR RELATIONSHIP AS A DIRECTOR OR
CONSULTANT. In the event an Optionee's Continuous Status as an Employee,
Director or Consultant terminates (other than upon the Optionee's death or
disability), the Optionee may exercise his or her Option within such period of
time designated by the Board, which shall in no event be later than the
expiration of the term of the Option as set forth in the Option Agreement (the
"Post-Termination Exercise Period") and only to the extent that the Optionee was
entitled to exercise the Option on the date Optionee's Continuous Status as an
Employee, Director or Consultant terminates. In the case of an Incentive Stock
Option, the Board shall determine the Post-Termination Exercise Period at the
time the Option is granted, and the term of such Post-Termination Exercise
Period shall in no event exceed three (3) months from the date of termination.
In addition, the Board may at any time, with the consent of the Optionee, extend
the Post-Termination Exercise Period and provide for continued vesting; provided
however, that any extension of such period by the Board in excess of three (3)
months from the date of termination shall cause an Incentive Stock Option so
extended to become a Nonstatutory Stock Option, effective as of the date of
Board action. If, at the date of termination, the Optionee is not entitled to
exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to the Plan. If, after termination, the
Optionee does not exercise his or her Option within the time specified in the
Option Agreement or as otherwise determined above, the Option shall terminate,
and the shares covered by such Option shall revert to the Plan. Notwithstanding
the foregoing, the Board shall have the power to permit an Option to continue to
vest during the Post-Termination Exercise Period.
(g) DISABILITY OF OPTIONEE. In the event an Optionee's Continuous Status
as an Employee, Director or Consultant terminates as a result of the Optionee's
disability, the Optionee may exercise his or her Option (to the extent that the
Optionee was entitled to exercise it at the date of termination), but only
within such period of time ending on the earlier of (i) the
<PAGE> 8
date twelve (12) months following such termination (or such longer or shorter
period specified in the Option Agreement, which is no event shall be less than
six (6) months), or (ii) the expiration of the term of the Option as set forth
in the Option Agreement. If, at the date of termination, the Optionee is not
entitled to exercise his or her entire Option, the shares covered by the
unexercisable portion of the Option shall revert to and again become available
for issuance under the Plan. If, after termination, the Optionee does not
exercise his or her Option within the time specified herein, the Option shall
terminate, and the shares covered by such Option shall revert to and again
become available for issuance under the Plan.
(h) DEATH OF OPTIONEE. In the event of the death of an Optionee during,
or within a three (3) month period after the termination of, the Optionee's
Continuous Status as an Employee, Director or Consultant, the Option may be
exercised to the extent vested by the Optionee's estate, by a person who
acquired the right to exercise the Option by bequest or inheritance or by a
person designated to exercise the option upon the Optionee's death pursuant to
subsection 6(d), but only within the period ending on the earlier of (i) the
date eighteen (18) months following the date of death (or such longer or shorter
period specified in the Option Agreement, which in no event shall be less than
six (6) months), or (ii) the expiration of the term of such Option as set forth
in the Option Agreement. If, at the time of death, the Optionee was not entitled
to exercise his or her entire Option, the shares covered by the unexercisable
portion of the Option shall revert to and again become available for issuance
under the Plan. If, after death, the Option is not exercised within the time
specified herein, the Option shall terminate, and the shares covered by such
Option shall revert to and again become available for issuance under the Plan.
(i) EARLY EXERCISE. The Option may, but need not, include a provision
whereby the Optionee may elect at any time while an Employee, Director or
Consultant to exercise the Option as to any part or all of the shares subject to
the Option prior to the full vesting of the Option. Any unvested shares so
purchased may be subject to a repurchase right in favor of the Company or to any
other restriction the Board determines to be appropriate.
7. TERMS OF STOCK BONUSES AND PURCHASES OF RESTRICTED STOCK.
Each stock bonus or restricted stock purchase agreement shall be in such
form and shall contain such terms and conditions as the Board or Committee shall
deem appropriate. The terms and conditions of stock bonus or restricted stock
purchase agreements may change from time to time, and the terms and conditions
of separate agreements need not be identical, but each stock bonus or restricted
stock purchase agreement shall include (through incorporation of provisions
hereof by reference in the agreement or otherwise) the substance of each of the
following provisions as appropriate:
(a) PURCHASE PRICE. The purchase price under each restricted stock
purchase agreement shall be such amount as the Board or Committee shall
determine and designate in such agreement but in no event shall the purchase
price be less than eighty-five percent (85%) of the
<PAGE> 9
stock's Fair Market Value on the date such award is made. Notwithstanding the
foregoing, the Board or Committee may determine that eligible participants in
the Plan may be awarded stock pursuant to a stock bonus agreement in
consideration for past services actually rendered to the Company for its
benefit.
(b) TRANSFERABILITY. No rights under a stock bonus or restricted stock
purchase agreement shall be transferable except by will or the laws of descent
and distribution or, if the agreement so provides, pursuant to a domestic
relations order satisfying the requirements of Rule 16b-3, so long as stock
awarded under such agreement remains subject to the terms of the agreement.
(c) CONSIDERATION. The purchase price of stock acquired pursuant to a
stock purchase agreement shall be paid either: (i) in cash at the time of
purchase; (ii) at the discretion of the Board or Committee, according to a
deferred payment or other arrangement with the person to whom the stock is sold;
or (iii) in any other form of legal consideration that may be acceptable to the
Board or Committee in its discretion. Notwithstanding the foregoing, the Board
or Committee to which administration of the Plan has been delegated may award
stock pursuant to a stock bonus agreement in consideration for past services
actually rendered to the Company or for its benefit.
(d) VESTING. Shares of stock sold or awarded under the Plan may, but
need not, be subject to a repurchase option in favor of the Company in
accordance with a vesting schedule to be determined by the Board or Committee.
(e) TERMINATION OF CONTINUOUS STATUS AS AN EMPLOYEE, DIRECTOR OR
CONSULTANT. In the event a Participant's Continuous Status as an Employee,
Director or Consultant terminates, the Company may repurchase or otherwise
reacquire any or all of the shares of stock held by that person which have not
vested as of the date of termination under the terms of the stock bonus or
restricted stock purchase agreement between the Company and such person.
8. COVENANTS OF THE COMPANY.
(a) During the terms of the Stock Awards, the Company shall keep
available at all times the number of shares of stock required to satisfy such
Stock Awards.
(b) The Company shall seek to obtain from each regulatory commission or
agency having jurisdiction over the Plan such authority as may be required to
issue and sell shares under Stock Awards; provided, however, that this
undertaking shall not require the Company to register under the Securities Act
of 1933, as amended (the "Securities Act") either the Plan, any Stock Award or
any stock issued or issuable pursuant to any such Stock Award. If, after
reasonable efforts, the Company is unable to obtain from any such regulatory
commission or agency the authority which counsel for the Company deems necessary
for the lawful issuance and sale of stock under the Plan, the Company shall be
relieved from any liability for failure to issue
<PAGE> 10
and sell stock upon exercise of such Stock Awards unless and until such
authority is obtained.
9. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to Stock Awards shall
constitute general funds of the Company.
10. MISCELLANEOUS.
(a) The Board shall have the power to accelerate the time at which a
Stock Award may first be exercised or the time during which a Stock Award or any
part thereof will vest, notwithstanding the provisions in the Stock Award
stating the time at which it may first be exercised or the time during which it
will vest.
(b) Neither an Employee, Director nor a Consultant nor any person to
whom a Stock Award is transferred in accordance with the Plan shall be deemed to
be the holder of, or to have any of the rights of a holder with respect to, any
shares subject to such Stock Award unless and until such person has satisfied
all requirements for exercise of the Stock Award pursuant to its terms.
(c) Nothing in the Plan or any instrument executed or Stock Award
granted pursuant thereto shall confer upon any Employee, Consultant or other
holder of Stock Awards any right to continue in the employ of the Company or any
Affiliate, or to continue serving as a Consultant and Director, or shall affect
the right of the Company or any Affiliate to terminate the employment of any
Employee with or without notice and with or without cause, or the right to
terminate the relationship of any Consultant pursuant to the terms of such
Consultant's agreement with the Company or Affiliate or service as a Director
pursuant to the Company's By-Laws.
(d) To the extent that the aggregate Fair Market Value (determined at
the time of grant) of stock with respect to which Incentive Stock Options are
exercisable for the first time by any Optionee during any calendar year under
all plans of the Company and its Affiliates exceeds one hundred thousand dollars
($100,000), the Options or portions thereof which exceed such limit (according
to the order in which they were granted) shall be treated as Nonstatutory Stock
Options.
(e) The Company may require any person to whom a Stock Award is granted,
or any person to whom a Stock Award is transferred in accordance with the Plan,
as a condition of exercising or acquiring stock under any Stock Award, (1) to
give written assurances satisfactory to the Company as to such person's
knowledge and experience in financial and business matters and/or to employ a
purchaser representative reasonably satisfactory to the Company who is
knowledgeable and experienced in financial and business matters, and that he or
she is capable of evaluating, alone or together with the purchaser
representative, the merits and risks of exercising the Stock Award; and (2) to
give written assurances satisfactory to the Company stating that such
<PAGE> 11
person is acquiring the stock subject to the Stock Award for such person's own
account and not with any present intention of selling or otherwise distributing
the stock. The foregoing requirements, and any assurances given pursuant to such
requirements, shall be inoperative if (i) the issuance of the shares upon the
exercise or acquisition of stock under the Stock Award has been registered under
a then currently effective registration statement under the Securities Act, or
(ii) as to any particular requirement, a determination is made by counsel for
the Company that such requirement need not be met in the circumstances under the
then applicable securities laws. The Company may, upon advice of counsel to the
Company, place legends on stock certificates issued under the Plan as such
counsel deems necessary or appropriate in order to comply with applicable
securities laws, including, but not limited to, legends restricting the transfer
of the stock.
(f) To the extent provided by the terms of a Stock Award Agreement, the
person to whom a Stock Award is granted may satisfy any federal, state or local
tax withholding obligation relating to the exercise or acquisition of stock
under a Stock Award by any of the following means or by a combination of such
means: (1) tendering a cash payment; (2) authorizing the Company to withhold
shares from the shares of the Common Stock otherwise issuable to the participant
as a result of the exercise or acquisition of stock under the Stock Award; or
(3) delivering to the Company owned and unencumbered shares of the Common Stock
of the Company.
11. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any Stock Award, without the receipt of consideration by the Company (through
merger, consolidation, reorganization, recapitalization, reincorporation, stock
dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, change in corporate
structure or other transaction not involving the receipt of consideration by the
Company), the Plan will be appropriately adjusted in the class(es) and maximum
number of shares subject to the Plan and the maximum number of shares subject to
award to any person during any calendar year, and the outstanding Stock Awards
will be appropriately adjusted in the class(es) and number of shares and price
per share of stock subject to such outstanding Stock Awards. Such adjustments
shall be made by the Board or Committee, the determination of which shall be
final, binding and conclusive. (The conversion of any convertible securities of
the Company shall not be treated as a "transaction not involving the receipt of
consideration by the Company.")
(b) Except as otherwise provided in the Stock Award Agreement, in the
event of: (1) a dissolution, liquidation or sale of substantially all of the
assets of the Company; (2) a merger or consolidation in which the Company is not
the surviving corporation; or (3) a reverse merger in which the Company is the
surviving corporation but the shares of the Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise, then to the extent
permitted by
<PAGE> 12
applicable law: (i) any surviving corporation (or an Affiliate thereof shall
assume any Stock Awards outstanding under the Plan or shall substitute similar
Stock Awards for those outstanding under the Plan, or (ii) such Stock Awards
shall continue in full force and effect. Except as otherwise provided in the
Stock Award Agreement, in the event any surviving corporation (or an Affiliate)
refuses to assume or continue such Stock Awards, or to substitute similar Stock
Awards for those outstanding under the Plan, then, with respect to Stock Awards
held by persons then performing services as Employees, Directors or Consultants,
the time during which such Stock Awards may be exercised shall be accelerated
and the Stock Awards terminated if not exercised prior to such event.
12. AMENDMENT OF THE PLAN AND STOCK AWARDS.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in Section 11 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company to the extent stockholder approval is necessary for the Plan to
satisfy the requirements of Section 422 of the Code, Rule 16b-3 or any Nasdaq or
securities exchange listing requirements.
(b) The Board may in its sole discretion submit any other amendment to
the Plan for stockholder approval, including, but not limited to, amendments to
the Plan intended to satisfy the requirements of Section 162(m) of the Code and
the regulations thereunder regarding the exclusion of performance-based
compensation from the limit on corporate deductibility of compensation paid to
certain executive officers.
(c) It is expressly contemplated that the Board may amend the Plan in
any respect the Board deems necessary or advisable to provide eligible
Employees, Directors or Consultants with the maximum benefits provided or to be
provided under the provisions of the Code and the regulations promulgated
thereunder relating to Incentive Stock Options and/or to bring the Plan and/or
Incentive Stock Options granted under it into compliance therewith.
(d) Rights and obligations under any Stock Award granted before
amendment of the Plan shall not be impaired by any amendment of the Plan unless
(i) the Company requests the consent of the person to whom the Stock Award was
granted and (ii) such person consents in writing.
(e) The Board at any time, and from time to time, may amend the terms of
any one or more Stock Award; provided, however, that the rights and obligations
under any Stock Award shall not be impaired by any such amendment unless (i) the
Company requests the consent of the person to whom the Stock Award was granted
and (ii) such person consents in writing.
13. TERMINATION OR SUSPENSION OF THE PLAN.
(a) The Board may suspend or terminate the Plan at any time. Unless
sooner
<PAGE> 13
terminated, the Plan shall terminate ten (10) years from the date the Plan is
adopted by the Board or approved by the stockholders of the Company, whichever
is earlier. No Stock Awards may be granted under the Plan while the Plan is
suspended or after it is terminated.
(b) Rights and obligations under any Stock Award granted while the Plan
is in effect shall not be impaired by suspension or termination of the Plan,
except with the consent of the person to whom the Stock Award was granted.
14. STOCKHOLDER APPROVAL.
No Stock Awards granted under the Plan shall be exercisable in whole or
part unless and until the Plan has been approved by the stockholders of the
Company, which approval shall be within twelve (12) months before or after the
date the Plan is adopted by the Board.
<PAGE> 14
STOCK OPTION AGREEMENT
Pursuant to the Grant Notice and this Stock Option Agreement, the
Company has granted you an option to purchase the number of shares of the
Company's common stock ("Common Stock") indicated in the Grant Notice at the
exercise price indicated in the Grant Notice. Defined terms not explicitly
defined in this Stock Option Agreement but defined in the Plan shall have the
same definitions as in the Plan.
The details of your option are as follows:
1. VESTING. Subject to the limitations contained herein, your option
will vest as provided in the Grant Notice, provided that vesting will cease upon
the termination of your Continuous Status as an Employee, Director or
Consultant.
2. METHOD OF PAYMENT.
(a) PAYMENT OPTIONS. Payment of the exercise price by cash or
check is due in full upon exercise of all or any part of your option, provided
that you may elect, to the extent permitted by applicable law and the Grant
Notice, to make payment of the exercise price under one of the following
alternatives:
(i) Payment pursuant to a program developed under
Regulation T as promulgated by the Federal Reserve Board which, prior to the
issuance of Common Stock, results in either the receipt of cash (or check) by
the Company or the receipt of irrevocable instructions to pay the aggregate
exercise price to the Company from the sales proceeds;
(ii Provided that at the time of exercise the Company's
Common Stock is publicly traded and quoted regularly in the Wall Street Journal,
payment by delivery of already-owned shares of Common Stock, held for the period
required to avoid a charge to the Company's reported earnings, and owned free
and clear of any liens, claims, encumbrances or security interests, which Common
Stock shall be valued at its fair market value on the date of exercise; or
(iii) Payment by a combination of the above methods.
3. WHOLE SHARES. Your option may only be exercised for whole shares.
4. SECURITIES LAW COMPLIANCE. Notwithstanding anything to the contrary
contained herein, your option may not be exercised unless the shares issuable
upon exercise of your option are then registered under the Securities Act or, if
such shares are not then so registered, the Company has determined that such
exercise and issuance would be exempt from the registration requirements of the
Securities Act.
<PAGE> 15
5. TERM. The term of your option commences on the Date of Grant and
expires upon the earliest of:
(i) the Expiration Date indicated in the Grant Notice;
(ii) the tenth (10th) anniversary of the Date of Grant;
(iii) eighteen (18) months after your death, if you die
during, or within three (3) months after the termination of your Continuous
Status as Employee, Director or Consultant;
(iv) twelve (12) months after the termination of your
Continuous Status as Employee, Director or Consultant due to disability;
(v) immediately after the termination of your Continuous
Status as Employee, Director or Consultant for Cause; or
(vi) three (3) months after the termination of your
Continuous Status as an Employee, Director or Consultant for any other reason,
provided that if during any part of such three (3) month period the option is
not exercisable solely because of the condition set forth in paragraph 4
(Securities Law Compliance), in which event the option shall not expire until
the earlier of the Expiration Date or until it shall have been exercisable for
an aggregate period of three (3) months after the termination of Continuous
Status as an Employee, Director or Consultant.
For these purposes, "Cause" shall include, but not be limited to,
the commission of any act of fraud, embezzlement or dishonesty, any unauthorized
use or disclosure of confidential information or trade secrets of the Company,
or any other intentional misconduct adversely affecting the business or affairs
of the Company in a material manner. The foregoing definition shall not be
deemed to be inclusive of all the acts or omissions which the Company may
consider as ground for your dismissal or discharge.
To obtain the federal income tax advantages associated with an
"incentive stock option," the Code requires that at all times beginning on the
grant date of the option and ending on the day three (3) months before the date
of the option's exercise, you must be an employee of the Company, except in the
event of your death or permanent and total disability. The Company cannot
guarantee that your option will be treated as an "incentive stock option" if you
exercise your option more than three (3) months after the date your employment
with the Company terminates.
6. EXERCISE.
(a) You may exercise the vested portion of your option during its
term (and the
2.
<PAGE> 16
unvested portion of your option if the Grant Notice so permits) by delivering a
notice of exercise (in a form designated by the Company) together with the
exercise price to the Secretary of the Company, or to such other person as the
Company may designate, during regular business hours, together with such
additional documents as the Company may then require.
(b) By exercising your option you agree that:
(i) as a condition to any exercise of your option, the
Company may require you to enter an arrangement providing for the payment by you
to the Company of any tax withholding obligation of the Company arising by
reason of (1) the exercise of your option; (2) the lapse of any substantial risk
of forfeiture to which the shares are subject at the time of exercise; or (3)
the disposition of shares acquired upon such exercise;
(ii) you will notify the Company in writing within
fifteen (15) days after the date of any disposition of any of the shares of the
Common Stock issued upon exercise of an incentive stock option that occurs
within two (2) years after the Date of Grant or within one (1) year after such
shares of Common Stock are transferred upon exercise of your option; and
(iii) the Company (or a representative of the
underwriters) may, in connection with the first underwritten registration of the
offering of any securities of the Company under the Act, require that you not
sell or otherwise transfer or dispose of any shares of Common Stock or other
securities of the Company during such period (not to exceed one hundred eighty
(180) days) following the effective date of the registration statement of the
Company filed under the Act as may be requested by the Company or the
representative of the underwriters. You further agree that the Company may
impose stop-transfer instructions with respect to securities subject to the
foregoing restrictions until the end of such period.
7. TRANSFERABILITY. Your option is not transferable, except by will or
by the laws of descent and distribution, and is exercisable during your life
only by you. Notwithstanding the foregoing, by delivering written notice to the
Company, in a form satisfactory to the Company, you may designate a third party
who, in the event of your death, shall thereafter be entitled to exercise your
option.
8. OPTION NOT A SERVICE CONTRACT. Your option is not an employment
contract and nothing in your option shall be deemed to create in any way
whatsoever any obligation on your part to continue in the employ of the Company,
or of the Company to continue your employment with the Company. In addition,
nothing in your option shall obligate the Company, its shareholders, board of
directors, officers or employees to continue any relationship which you might
have as a director or consultant for the Company.
9. NOTICES. Any notices provided for in your option or the Plan shall be
given in writing and shall be deemed effectively given upon receipt or, in the
case of notices delivered by the Company to you, five (5) days after deposit in
the United States mail, postage prepaid, addressed to you at the last address
you provided to the Company.
3.
<PAGE> 17
10. GOVERNING PLAN DOCUMENT. Your option is subject to all the
provisions of the Plan, the provisions of which are hereby made a part of your
option, including without limitation the provisions of the Plan relating to
option provisions, and is further subject to all interpretations, amendments,
rules and regulations which may from time to time be promulgated and adopted
pursuant to the Plan. In the event of any conflict between the provisions of
your option and those of the Plan, the provisions of the Plan shall control.
4.
<PAGE> 18
IL FORNAIO (AMERICA) CORPORATION
STOCK OPTION GRANT NOTICE
(1997 EQUITY INCENTIVE PLAN)
IL FORNAIO (AMERICA) CORPORATION (the "Company"), pursuant to its 1997 Equity
Incentive Plan (the "Plan"), hereby grants to Optionee an option to purchase the
number of shares of the Company's common stock set forth below. This option is
subject to all of the terms and conditions as set forth herein and in
Attachments I, II and III, which are incorporated herein in their entirety.
Optionee: -Optionee-
-------------------------------------------
Date of Grant:
-------------------------------------------
Vesting Commencement Date:
-------------------------------------------
Shares Subject to Option: -Shares-
-------------------------------------------
Exercise Price Per Share:
-------------------------------------------
Expiration Date:
-------------------------------------------
X Incentive Stock Option Nonstatutory Stock Option
- -------- ----------
EXERCISE SCHEDULE: Exercisable as vested.
VESTING SCHEDULE: 4 equal annual installments commencing on the first
anniversary of the Vesting Commencement Date.
PAYMENT: Any or a combination of the following: (i) by cash or check, (ii)
pursuant to a Regulation T program, as set forth in the Stock Option Agreement
or (iii) delivering shares of previously-owned common stock, as set forth in the
Stock Option Agreement.
ADDITIONAL TERMS/ACKNOWLEDGEMENTS: The undersigned Optionee acknowledges receipt
of, and understands and agrees to, this Grant Notice, the Stock Option Agreement
and the Plan. Optionee further acknowledges that as of the Date of Grant, this
Grant Notice, the Stock Option Agreement and the Plan set forth the entire
understanding between Optionee and the Company regarding the acquisition of
stock in the Company and supersedes all prior oral and written agreements on
that subject with the exception of (i) options previously granted and delivered
to Optionee under the Plan, and (ii) the following agreements only:
OTHER AGREEMENTS:
-------------------------------------------------------
-------------------------------------------------------
IL FORNAIO (AMERICA) CORPORATION OPTIONEE:
By:
----------------------------------- ------------------------------------
Signature
Title:
-----------------------------------
Date: Date:
-------------------------------- -------------------------------
Attachment I: Stock Option Agreement
Attachment II: 1997 Equity Incentive Plan
Attachment III: Notice of Exercise
<PAGE> 1
EXHIBIT 10.4
IL FORNAIO (AMERICA) CORPORATION
1997 EMPLOYEE STOCK PURCHASE PLAN
Adopted March 17, 1997
Approved by the Stockholders on April 23, 1997
Amended by the Board of Directors on March 8, 2000
1. PURPOSE.
(a) The purpose of this 1997 Employee Stock Purchase Plan (the "Plan")
is to provide a means by which employees of Il Fornaio (America) Corporation, a
Delaware corporation (the "Company"), and its Affiliates, as defined in
subparagraph 1(b), which are designated as provided in subparagraph 2(b), may be
given an opportunity to purchase stock of the Company.
(b) The word "Affiliate" as used in the Plan means any parent
corporation or subsidiary corporation of the Company, as those terms are defined
in Sections 424(e) and (f), respectively, of the Internal Revenue Code of 1986,
as amended (the "Code").
(c) The Company, by means of the Plan, seeks to retain the services of
its employees, to secure and retain the services of new employees, and to
provide incentives for such persons to exert maximum efforts for the success of
the Company.
(d) The Company intends that the rights to purchase stock of the Company
granted under the Plan be considered options issued under an "employee stock
purchase plan" as that term is defined in Section 423(b) of the Code.
2. ADMINISTRATION.
(a) The Plan shall be administered by the Board of Directors (the
"Board") of the Company unless and until the Board delegates administration to a
Committee, as provided in subparagraph 2(c). Whether or not the Board has
delegated administration, the Board shall have the final power to determine all
questions of policy and expediency that may arise in the administration of the
Plan.
(b) The Board shall have the power, subject to, and within the
limitations of, the express provisions of the Plan:
(i) To determine when and how rights to purchase stock of the
Company shall be granted and the provisions of each offering of such rights
(which need not be identical).
(ii) To designate from time to time which Affiliates of the Company
shall be eligible to participate in the Plan.
(iii) To construe and interpret the Plan and rights granted under
it, and to establish, amend and revoke rules and regulations for its
administration. The Board, in the
<PAGE> 2
exercise of this power, may correct any defect, omission or inconsistency in the
Plan, in a manner and to the extent it shall deem necessary or expedient to make
the Plan fully effective.
(iv) To amend the Plan as provided in paragraph 13.
(v) Generally, to exercise such powers and to perform such acts as
the Board deems necessary or expedient to promote the best interests of the
Company and its Affiliates and to carry out the intent that the Plan be treated
as an "employee stock purchase plan" within the meaning of Section 423 of the
Code.
(c) The Board may delegate administration of the Plan to a Committee
composed of two (2) or more members of the Board (the "Committee"). If
administration is delegated to a Committee, the Committee shall have, in
connection with the administration of the Plan, the powers theretofore possessed
by the Board, subject, however, to such resolutions, not inconsistent with the
provisions of the Plan, as may be adopted from time to time by the Board. The
Board may abolish the Committee at any time and revest in the Board the
administration of the Plan.
3. SHARES SUBJECT TO THE PLAN.
(a) Subject to the provisions of paragraph 12 relating to adjustments
upon changes in stock, the stock that may be sold pursuant to rights granted
under the Plan shall not exceed in the aggregate five hundred thousand (500,000)
shares of the Company's common stock (the "Common Stock"). If any right granted
under the Plan shall for any reason terminate without having been exercised, the
Common Stock not purchased under such right shall again become available for the
Plan.
(b) The stock subject to the Plan may be unissued shares or reacquired
shares, bought on the market or otherwise.
4. GRANT OF RIGHTS; OFFERING.
(a) The Board or the Committee may from time to time grant or provide
for the grant of rights to purchase Common Stock of the Company under the Plan
to eligible employees (an "Offering") on a date or dates (the "Offering
Date(s)") selected by the Board or the Committee. Each Offering shall be in such
form and shall contain such terms and conditions as the Board or the Committee
shall deem appropriate, which shall comply with the requirements of Section
423(b)(5) of the Code that all employees granted rights to purchase stock under
the Plan shall have the same rights and privileges. The terms and conditions of
an Offering shall be incorporated by reference into the Plan and treated as part
of the Plan. The provisions of separate Offerings need not be identical, but
each Offering shall include (through incorporation of the provisions of this
Plan by reference in the document comprising the Offering or otherwise) the
period during which the Offering shall be effective, which period shall not
exceed twenty-seven (27) months beginning with the Offering Date, and the
substance of the provisions contained in paragraphs 5 through 8, inclusive.
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<PAGE> 3
(b) If an employee has more than one right outstanding under the Plan,
unless he or she otherwise indicates in agreements or notices delivered
hereunder: (1) each agreement or notice delivered by that employee will be
deemed to apply to all of his or her rights under the Plan, and (2) a right with
a lower exercise price (or an earlier-granted right, if two rights have
identical exercise prices), will be exercised to the fullest possible extent
before a right with a higher exercise price (or a later-granted right, if two
rights have identical exercise prices) will be exercised.
5. ELIGIBILITY.
(a) Rights may be granted only to employees of the Company or, as the
Board or the Committee may designate as provided in subparagraph 2(b), to
employees of any Affiliate of the Company. Except as provided in subparagraph
5(b), an employee of the Company or any Affiliate shall not be eligible to be
granted rights under the Plan, unless, on the Offering Date, such employee has
been in the employ of the Company or any Affiliate for such continuous period
preceding such grant as the Board or the Committee may require, but in no event
shall the required period of continuous employment be equal to or greater than
two (2) years. In addition, unless otherwise determined by the Board or the
Committee and set forth in the terms of the applicable Offering, no employee of
the Company or any Affiliate shall be eligible to be granted rights under the
Plan, unless, on the Offering Date, such employee's customary employment with
the Company or such Affiliate is for at least twenty (20) hours per week and at
least five (5) months per calendar year.
(b) The Board or the Committee may provide that each person who, during
the course of an Offering, first becomes an eligible employee of the Company or
designated Affiliate will, on a date or dates specified in the Offering which
coincides with the day on which such person becomes an eligible employee or
occurs thereafter, receive a right under that Offering, which right shall
thereafter be deemed to be a part of that Offering. Such right shall have the
same characteristics as any rights originally granted under that Offering, as
described herein, except that:
(i) the date on which such right is granted shall be the "Offering
Date" of such right for all purposes, including determination of the exercise
price of such right;
(ii) the period of the Offering with respect to such right shall
begin on its Offering Date and end coincident with the end of such Offering; and
(iii) the Board or the Committee may provide that if such person
first becomes an eligible employee within a specified period of time before the
end of the Offering, he or she will not receive any right under that Offering.
(c) No employee shall be eligible for the grant of any rights under the
Plan if, immediately after any such rights are granted, such employee owns stock
possessing five percent (5%) or more of the total combined voting power or value
of all classes of stock of the Company or of any Affiliate. For purposes of this
subparagraph 5(c), the rules of Section 424(d) of the Code shall apply in
determining the stock ownership of any employee, and stock which such
3
<PAGE> 4
employee may purchase under all outstanding rights and options shall be treated
as stock owned by such employee.
(d) An eligible employee may be granted rights under the Plan only if
such rights, together with any other rights granted under "employee stock
purchase plans" of the Company and any Affiliates, as specified by Section
423(b)(8) of the Code, do not permit such employee's rights to purchase stock of
the Company or any Affiliate to accrue at a rate which exceeds twenty-five
thousand dollars ($25,000) of fair market value of such stock (determined at the
time such rights are granted) for each calendar year in which such rights are
outstanding at any time.
(e) Officers of the Company and any designated Affiliate shall be
eligible to participate in Offerings under the Plan, provided, however, that the
Board may provide in an Offering that certain employees who are highly
compensated employees within the meaning of Section 423(b)(4)(D) of the Code
shall not be eligible to participate.
6. RIGHTS; PURCHASE PRICE.
(a) On each Offering Date, each eligible employee, pursuant to an
Offering made under the Plan, shall be granted the right to purchase up to the
number of shares of Common Stock of the Company purchasable with a percentage
designated by the Board or the Committee not exceeding fifteen percent (15%) of
such employee's Earnings (as defined in subparagraph 7(a)) during the period
which begins on the Offering Date (or such later date as the Board or the
Committee determines for a particular Offering) and ends on the date stated in
the Offering, which date shall be no later than the end of the Offering. The
Board or the Committee shall establish one or more dates during an Offering (the
"Purchase Date(s)") on which rights granted under the Plan shall be exercised
and purchases of Common Stock carried out in accordance with such Offering.
(b) In connection with each Offering made under the Plan, the Board or
the Committee may specify a maximum number of shares that may be purchased by
any employee as well as a maximum aggregate number of shares that may be
purchased by all eligible employees pursuant to such Offering. In addition, in
connection with each Offering that contains more than one Purchase Date, the
Board or the Committee may specify a maximum aggregate number of shares which
may be purchased by all eligible employees on any given Purchase Date under the
Offering. If the aggregate purchase of shares upon exercise of rights granted
under the Offering would exceed any such maximum aggregate number, the Board or
the Committee shall make a pro rata allocation of the shares available in as
nearly a uniform manner as shall be practicable and as it shall deem to be
equitable.
(c) The purchase price of stock acquired pursuant to rights granted
under the Plan shall be not less than the lesser of:
(i) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Offering Date; or
(ii) an amount equal to eighty-five percent (85%) of the fair market
value of the stock on the Purchase Date.
4
<PAGE> 5
7. PARTICIPATION; WITHDRAWAL; TERMINATION.
(a) An eligible employee may become a participant in the Plan pursuant
to an Offering by delivering a participation agreement to the Company within the
time specified in the Offering, in such form as the Company provides. Each such
agreement shall authorize payroll deductions of up to the maximum percentage
specified by the Board or the Committee of such employee's Earnings during the
Offering. "Earnings" is defined as an employee's regular salary or wages
(including amounts thereof elected to be deferred by the employee, that would
otherwise have been paid, under any arrangement established by the Company
intended to comply with Section 401(k), Section 402(e)(3), Section 125, Section
402(h), or Section 403(b) of the Code, and also including any deferrals under a
non-qualified deferred compensation plan or arrangement established by the
Company), which shall include or exclude (as provided for each Offering) the
following items of compensation: bonuses, commissions, overtime pay, incentive
pay, profit sharing, other remuneration paid directly to the employee, the cost
of employee benefits paid for by the Company or an Affiliate, education or
tuition reimbursements, imputed income arising under any group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company or an Affiliate under any employee benefit plan, and similar items of
compensation, as determined by the Board or Committee. The payroll deductions
made for each participant shall be credited to an account for such participant
under the Plan and shall be deposited with the general funds of the Company. A
participant may reduce (including to zero) or increase such payroll deductions,
and an eligible employee may begin such payroll deductions, after the beginning
of any Offering only as provided for in the Offering. A participant may make
additional payments into his or her account only if specifically provided for in
the Offering and only if the participant has not had the maximum amount withheld
during the Offering.
(b) At any time during an Offering, a participant may terminate his or
her payroll deductions under the Plan and withdraw from the Offering by
delivering to the Company a notice of withdrawal in such form as the Company
provides. Such withdrawal may be elected at any time prior to the end of the
Offering except as provided by the Board or the Committee in the Offering. Upon
such withdrawal from the Offering by a participant, the Company shall distribute
to such participant all of his or her accumulated payroll deductions (reduced to
the extent, if any, such deductions have been used to acquire stock for the
participant) under the Offering, without interest, and such participant's
interest in that Offering shall be automatically terminated. A participant's
withdrawal from an Offering will have no effect upon such participant's
eligibility to participate in any other Offerings under the Plan but such
participant will be required to deliver a new participation agreement in order
to participate in subsequent Offerings under the Plan.
(c) Rights granted pursuant to any Offering under the Plan shall
terminate immediately upon cessation of a participant's employment with the
Company and any designated Affiliate, for any reason, and the Company shall
distribute to such terminated employee all of his or her accumulated payroll
deductions (reduced to the extent, if any, such deductions have been used to
acquire stock for the terminated employee), under the Offering, without
interest.
5
<PAGE> 6
(d) Rights granted under the Plan shall not be transferable by a
participant otherwise than by will or the laws of descent and distribution, or
by a beneficiary designation as provided in paragraph 14 and, otherwise during
his or her lifetime, shall be exercisable only by the person to whom such rights
are granted.
8. EXERCISE.
(a) On each Purchase Date specified in the relevant Offering, each
participant's accumulated payroll deductions and other additional payments
specifically provided for in the Offering (without any increase for interest)
will be applied to the purchase of whole shares of stock of the Company, up to
the maximum number of shares permitted pursuant to the terms of the Plan and the
applicable Offering, at the purchase price specified in the Offering. No
fractional shares shall be issued upon the exercise of rights granted under the
Plan. The amount, if any, of accumulated payroll deductions remaining in each
participant's account after the purchase of shares which is less than the amount
required to purchase one share of stock on the final Purchase Date of an
Offering shall be held in each such participant's account for the purchase of
shares under the next Offering under the Plan, unless such participant withdraws
from such next Offering, as provided in subparagraph 7(b), or is no longer
eligible to be granted rights under the Plan, as provided in paragraph 5, in
which case such amount shall be distributed to the participant after such final
Purchase Date, without interest. The amount, if any, of accumulated payroll
deductions remaining in any participant's account after the purchase of shares
which is equal to the amount required to purchase whole shares of stock on the
final Purchase Date of an Offering shall be distributed in full to the
participant after such Purchase Date, without interest.
(b) No rights granted under the Plan may be exercised to any extent
unless the shares to be issued upon such exercise under the Plan (including
rights granted thereunder) are covered by an effective registration statement
pursuant to the Securities Act of 1933, as amended (the "Securities Act") and
the Plan is in material compliance with all applicable state, foreign and other
securities and other laws applicable to the Plan. If on a Purchase Date in any
Offering hereunder the Plan is not so registered or in such compliance, no
rights granted under the Plan or any Offering shall be exercised on such
Purchase Date, and the Purchase Date shall be delayed until the Plan is subject
to such an effective registration statement and such compliance, except that the
Purchase Date shall not be delayed more than twelve (12) months and the Purchase
Date shall in no event be more than twenty-seven (27) months from the Offering
Date. If on the Purchase Date of any Offering hereunder, as delayed to the
maximum extent permissible, the Plan is not registered and in such compliance,
no rights granted under the Plan or any Offering shall be exercised and all
payroll deductions accumulated during the Offering (reduced to the extent, if
any, such deductions have been used to acquire stock) shall be distributed to
the participants, without interest.
9. COVENANTS OF THE COMPANY.
(a) During the terms of the rights granted under the Plan, the Company
shall keep available at all times the number of shares of stock required to
satisfy such rights.
6
<PAGE> 7
(b) The Company shall seek to obtain from each federal, state, foreign
or other regulatory commission or agency having jurisdiction over the Plan such
authority as may be required to issue and sell shares of stock upon exercise of
the rights granted under the Plan. If, after reasonable efforts, the Company is
unable to obtain from any such regulatory commission or agency the authority
which counsel for the Company deems necessary for the lawful issuance and sale
of stock under the Plan, the Company shall be relieved from any liability for
failure to issue and sell stock upon exercise of such rights unless and until
such authority is obtained.
10. USE OF PROCEEDS FROM STOCK.
Proceeds from the sale of stock pursuant to rights granted under the
Plan shall constitute general funds of the Company.
11. RIGHTS AS A STOCKHOLDER.
A participant shall not be deemed to be the holder of, or to have any of
the rights of a holder with respect to, any shares subject to rights granted
under the Plan unless and until the participant's shares acquired upon exercise
of rights hereunder are recorded in the books of the Company.
12. ADJUSTMENTS UPON CHANGES IN STOCK.
(a) If any change is made in the stock subject to the Plan, or subject
to any rights granted under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, dividend in property other
than cash, stock split, liquidating dividend, combination of shares, exchange of
shares, change in corporate structure or other transaction not involving the
receipt of consideration by the Company), the Plan and outstanding rights will
be appropriately adjusted in the class(es) and maximum number of shares subject
to the Plan and the class(es) and number of shares and price per share of stock
subject to outstanding rights. Such adjustments shall be made by the Board or
the Committee, the determination of which shall be final, binding and
conclusive. (The conversion of any convertible securities of the Company shall
not be treated as a "transaction not involving the receipt of consideration by
the Company.")
(b) In the event of: (1) a dissolution or liquidation of the Company;
(2) a merger or consolidation in which the Company is not the surviving
corporation; (3) a reverse merger in which the Company is the surviving
corporation but the shares of the Company's Common Stock outstanding immediately
preceding the merger are converted by virtue of the merger into other property,
whether in the form of securities, cash or otherwise; or (4) the acquisition by
any person, entity or group within the meaning of Section 13(d) or 14(d) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act") or any
comparable successor provisions (excluding any employee benefit plan, or related
trust, sponsored or maintained by the Company or any Affiliate of the Company)
of the beneficial ownership (within the meaning of Rule 13d-3 promulgated under
the Exchange Act, or comparable successor rule) of securities of the Company
representing at least fifty percent (50%) of the combined voting power entitled
to vote in the election of directors, then, as determined by the Board in its
sole discretion (i) any surviving or acquiring corporation may assume
outstanding rights or substitute similar rights for those under the Plan, (ii)
such rights may continue in full force and effect, or (iii) participants'
7
<PAGE> 8
accumulated payroll deductions may be used to purchase Common Stock immediately
prior to the transaction described above and the participants' rights under the
ongoing Offering terminated.
13. AMENDMENT OF THE PLAN.
(a) The Board at any time, and from time to time, may amend the Plan.
However, except as provided in paragraph 12 relating to adjustments upon changes
in stock, no amendment shall be effective unless approved by the stockholders of
the Company within twelve (12) months before or after the adoption of the
amendment if such amendment requires stockholder approval in order for the Plan
to obtain employee stock purchase plan treatment under Section 423 of the Code
or to comply with the requirements of Rule 16b-3 promulgated under the Exchange
Act.
(b) The Board may amend the Plan in any respect the Board deems
necessary or advisable to provide eligible employees with the maximum benefits
provided or to be provided under the provisions of the Code and the regulations
promulgated thereunder relating to employee stock purchase plans and/or to bring
the Plan and/or rights granted under it into compliance therewith.
(c) Rights and obligations under any rights granted before amendment of
the Plan shall not be altered or impaired by any amendment of the Plan, except
with the consent of the person to whom such rights were granted, or except as
necessary to comply with any laws or governmental regulations, or except as
necessary to ensure that the Plan and/or rights granted under the Plan comply
with the requirements of Section 423 of the Code.
14. DESIGNATION OF BENEFICIARY.
(a) A participant may file a written designation of a beneficiary who is
to receive any shares and cash, if any, from the participant's account under the
Plan in the event of such participant's death subsequent to the end of an
Offering but prior to delivery to the participant of such shares and cash. In
addition, a participant may file a written designation of a beneficiary who is
to receive any cash from the participant's account under the Plan in the event
of such participant's death during an Offering.
(b) Such designation of beneficiary may be changed by the participant at
any time by written notice. In the event of the death of a participant and in
the absence of a beneficiary validly designated under the Plan who is living at
the time of such participant's death, the Company shall deliver such shares
and/or cash to the executor or administrator of the estate of the participant,
or if no such executor or administrator has been appointed (to the knowledge of
the Company), the Company, in its sole discretion, may deliver such shares
and/or cash to the spouse or to any one or more dependents or relatives of the
participant, or if no spouse, dependent or relative is known to the Company,
then to such other person as the Company may designate.
15. TERMINATION OR SUSPENSION OF THE PLAN.
8
<PAGE> 9
(a) The Board in its discretion, may suspend or terminate the Plan at
any time. No rights may be granted under the Plan while the Plan is suspended or
after it is terminated.
(b) Rights and obligations under any rights granted while the Plan is in
effect shall not be altered or impaired by suspension or termination of the
Plan, except as expressly provided in the Plan or with the consent of the person
to whom such rights were granted, or except as necessary to comply with any laws
or governmental regulation, or except as necessary to ensure that the Plan
and/or rights granted under the Plan comply with the requirements of Section 423
of the Code.
16. EFFECTIVE DATE OF PLAN.
The Plan shall become effective upon the Company's initial public
offering of shares of common stock (the "Effective Date"), but no rights granted
under the Plan shall be exercised unless and until the Plan has been approved by
the stockholders of the Company within twelve (12) months before or after the
date the Plan is adopted by the Board or the Committee, which date may be prior
to the Effective Date.
9
<PAGE> 10
IL FORNAIO (AMERICA) CORPORATION
EMPLOYEE STOCK PURCHASE PLAN OFFERING
Adopted by the Board of Directors on March 17, 1997
Amended by the Board of Directors on April 23, 1997
1. GRANT; OFFERING DATE.
(a) The Board of Directors (the "Board") of Il Fornaio (America)
Corporation (the "Company"), pursuant to the Company's Employee Stock Purchase
Plan (the "Plan"), hereby authorizes the grant of rights to purchase shares of
the common stock of the Company ("Common Stock") to all Eligible Employees (an
"Offering"). The first Offering shall begin on the effective date of the initial
public offering of the Company's Common Stock and end on October 31, 1999 (the
"Initial Offering"). Thereafter, an Offering shall begin on November 1 every two
(2) years, beginning with calendar year 1999, and shall end on the day prior to
the second anniversary of its Offering Date. The first day of an Offering is
that Offering's "Offering Date."
(b) Notwithstanding anything to the contrary, in the event that the fair
market value of a share of Common Stock on any Purchase Date during an Offering
is less than the fair market value of a share of Common Stock on the Offering
Date of the Offering, then following the purchase of Common Stock on such
Purchase Date (i) the Offering shall terminate, (ii) a new Offering shall
commence on the day following the Purchase Date and shall end on the day prior
to the second anniversary of such new Offering's Offering Date, and (iii) all
participants in the just-terminated Offering shall automatically be enrolled in
the new Offering.
(c) Prior to the commencement of any Offering, the Board (or the
committee described in subparagraph 2(c) of the Plan, if any) may change any or
all terms of such Offering and any subsequent Offerings. The granting of rights
pursuant to each Offering hereunder shall occur on each respective Offering Date
unless, prior to such date (a) the Board (or such Committee) determines that
such Offering shall not occur, or (b) no shares remain available for issuance
under the Plan in connection with the Offering.
2. ELIGIBLE EMPLOYEES.
(a) All employees of the Company and each of its Affiliates (as defined
in the Plan) incorporated in the United States shall be granted rights to
purchase Common Stock under each Offering on the Offering Date of such Offering,
provided that each such employee otherwise meets the employment requirements of
subparagraph 5(a) of the Plan (an "Eligible Employee"). Notwithstanding the
foregoing, the following employees shall not be Eligible Employees or be granted
rights under an Offering: (i) any person who has not been continuously employed
by the Company for a period of at least nine (9) months, (ii) part-time or
seasonal employees whose customary employment is less than twenty (20) hours per
week or five (5) months per calendar year or (iii) 5% stockholders (including
ownership through unexercised options) described in subparagraph 5(c) of the
Plan. An Eligible Employee as of the Offering Date who does not
<PAGE> 11
commence participation in the Plan at such time may participate in the Plan
effective any November 1 or May 1 within an Offering. The exercise price for
such Eligible Employee shall be determined with reference to the Offering Date
of such Offering, and not the date such Eligible Employee actually commenced
participation.
(b) Each person who first becomes an Eligible Employee during any
Offering and at least six (6) months prior to the final Purchase Date of the
Offering will, on the next May 1 or November 1 during that Offering, receive a
right under such Offering, which right shall thereafter be deemed to be a part
of the Offering. Such right shall have the same characteristics as any rights
originally granted under the Offering except that:
(1) the date on which such right is granted shall be the
"Offering Date" of such right for all purposes, including determination of the
exercise price of such right; and
(2) the Offering for such right shall begin on its Offering Date
and end coincident with the end of the ongoing Offering.
Such newly-eligible Eligible Employee who does commence participation in the
Plan at such time of initial eligibility may participate in the Plan effective
any November 1 or May 1 within an Offering. The exercise price for such Eligible
Employee shall be determined with reference to such Eligible Employee's deemed
Offering Date (in accordance with subsection (b)(1) above), and not the date
such Eligible Employee actually commenced participation.
3. RIGHTS.
(a) Subject to the limitations contained herein and in the Plan, on each
Offering Date each Eligible Employee shall be granted the right to purchase the
number of shares of Common Stock purchasable with up to fifteen percent (15%) of
such employee's Earnings paid during the period of such Offering beginning after
such Eligible Employee first commences participation; provided, however, that no
employee may purchase Common Stock on a particular Purchase Date that would
result in more than fifteen percent (15%) of such employee's Earnings in the
period from the Offering Date to such Purchase Date having been applied to
purchase shares under all ongoing Offerings under the Plan and all other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Internal Revenue Code of 1986, as amended (the "Code"). For this
Offering, "Earnings" means the total compensation paid to an employee, including
all salary, wages (including amounts elected to be deferred by the employee,
that would otherwise have been paid, under any cash or deferred arrangement
established by the Company), overtime pay, commissions, bonuses, and other
remuneration paid directly to the employee, but excluding profit sharing, the
cost of employee benefits paid for by the Company, education or tuition
reimbursements, imputed income arising under any Company group insurance or
benefit program, traveling expenses, business and moving expense reimbursements,
income received in connection with stock options, contributions made by the
Company under any employee benefit plan, and similar items of compensation.
(b) Notwithstanding the foregoing, the maximum number of shares of
Common Stock an Eligible Employee may purchase on any Purchase Date in an
Offering shall be such number of shares as has a fair market value (determined
as of the Offering Date for such
2
<PAGE> 12
Offering) equal to (x) $25,000 multiplied by the number of calendar years in
which the right under such Offering has been outstanding at any time, minus (y)
the fair market value of any other shares of Common Stock (determined as of the
relevant Offering Date with respect to such shares) which, for purposes of the
limitation of Section 423(b)(8) of the Code, are attributed to any of such
calendar years in which the right is outstanding. The amount in clause (y) of
the previous sentence shall be determined in accordance with regulations
applicable under Section 423(b)(8) of the Code based on (i) the number of shares
previously purchased with respect to such calendar years pursuant to such
Offering or any other Offering under the Plan, or pursuant to any other Company
plans intended to qualify as "employee stock purchase plans" under Section 423
of the Code, and (ii) the number of shares subject to other rights outstanding
on the Offering Date for such Offering pursuant to the Plan or any other such
Company plan.
(c) The maximum aggregate number of shares available to be purchased by
all Eligible Employees under an Offering shall be the number of shares remaining
available under the Plan on the Offering Date. If the aggregate purchase of
shares of Common Stock upon exercise of rights granted under the Offering would
exceed the maximum aggregate number of shares available, the Board shall make a
pro rata allocation of the shares available in a uniform and equitable manner.
4. PURCHASE PRICE.
The purchase price of the Common Stock under the Offering shall be the
lesser of eighty-five percent (85%) of the fair market value of the Common Stock
on the Offering Date or eighty-five percent (85%) of the fair market value of
the Common Stock on the Purchase Date, in each case rounded up to the nearest
whole cent per share. For the Initial Offering, the fair market value of the
Common Stock at the time when the Offering commences shall be the price per
share at which shares of Common Stock are first sold to the public in the
Company's initial public offering as specified in the final prospectus with
respect to that offering.
5. PARTICIPATION.
(a) Except as otherwise provided in this paragraph 5 or in the Plan, an
Eligible Employee may elect to participate in an Offering only at the beginning
of the Offering or as of the day following a Purchase Date during such Offering.
An Eligible Employee shall become a participant in an Offering by delivering an
agreement authorizing payroll deductions. Such deductions must be in whole
percentages of Earnings, with a minimum percentage of one percent (1%) and a
maximum percentage of fifteen percent (15%). A participant may not make
additional payments into his or her account. The agreement shall be made on such
enrollment form as the Company provides, and must be delivered to the Company
prior to the date participation is to be effective, unless a later time for
filing the enrollment form is set by the Company for all Eligible Employees with
respect to a given participation date. For the Initial Offering, the time for
filing an enrollment form and commencing participation for individuals who are
Eligible Employees on the Offering Date for the Initial Offering shall be
determined by the Company and communicated to such Eligible Employees.
(b) A participant may decrease his or her participation level during the
course of a six (6)-month purchase interval one (1) time, and only by delivering
notice to the Company at least
3
<PAGE> 13
ten (10) days in advance of the Purchase Date in such form as the Company
prescribes; provided that a participant may (i) reduce his or her deductions to
zero percent (0%) upon ten (10) days' prior notice by delivering a notice in
such form as the Company provides, (ii) may increase or decrease his or her
participation level at any time to become effective on the day following the
next subsequent Purchase Date or (iii) may withdraw from an Offering and receive
his or her accumulated payroll deductions from the Offering (reduced to the
extent, if any, such deductions have been used to acquire Common Stock for the
participant on any prior Purchase Dates) without interest, at any time prior to
the end of the Offering, excluding only each ten (10) day period immediately
preceding a Purchase Date, by delivering a withdrawal notice to the Company in
such form as the Company provides. A participant who has withdrawn from an
Offering shall not again participate in such Offering, but may participant in
subsequent Offerings under the Plan in accordance with the terms thereof.
6. PURCHASES.
Subject to the limitations contained herein, on each Purchase Date, each
participant's accumulated payroll deductions (without any increase for interest)
shall be applied to the purchase of whole shares of Common Stock, up to the
maximum number of shares permitted under the Plan and the Offering. "Purchase
Date" shall be defined as each April 30 and October 31, except that the first
Purchase Date under this Offering shall be April 30, 1998, and not October 31,
1997.
7. NOTICES AND AGREEMENTS.
Any notices or agreements provided for in an Offering or the Plan shall
be given in writing, in a form provided by the Company, and unless specifically
provided for in the Plan or this Offering shall be deemed effectively given upon
receipt or, in the case of notices and agreements delivered by the Company, five
(5) days after deposit in the United States mail, postage prepaid.
8. EXERCISE CONTINGENT ON STOCKHOLDER APPROVAL.
The rights granted under an Offering are subject to the approval of the
Plan by the stockholders as required for the Plan to obtain treatment as a
tax-qualified employee stock purchase plan under Section 423 of the Code and to
comply with the requirements of exemption from potential liability under Section
16(b) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")
set forth in Rule 16b-3 promulgated under the Exchange Act.
9. OFFERING SUBJECT TO PLAN.
Each Offering is subject to all the provisions of the Plan, and its
provisions are hereby made a part of the Offering, and is further subject to all
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan. In the event of any conflict
between the provisions of an Offering and those of the Plan (including
interpretations, amendments, rules and regulations which may from time to time
be promulgated and adopted pursuant to the Plan), the provisions of the Plan
shall control.
4
<PAGE> 1
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statement No.
333-46421 of Il Fornaio (America) Corporation on Form S-8 of our report dated
March 8, 2000, appearing in this Annual Report on Form 10-K of Il Fornaio
(America) Corporation for the year ended December 26, 1999.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
San Francisco, CA
March 21, 2000
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-26-1999
<PERIOD-START> DEC-28-1998
<PERIOD-END> DEC-26-1999
<CASH> 5,432
<SECURITIES> 0
<RECEIVABLES> 1,870
<ALLOWANCES> 85
<INVENTORY> 2,559
<CURRENT-ASSETS> 11,178
<PP&E> 76,382
<DEPRECIATION> 23,949
<TOTAL-ASSETS> 65,158
<CURRENT-LIABILITIES> 14,569
<BONDS> 0
0
0
<COMMON> 6
<OTHER-SE> 42,572
<TOTAL-LIABILITY-AND-EQUITY> 65,158
<SALES> 100,433
<TOTAL-REVENUES> 100,433
<CGS> 23,806
<TOTAL-COSTS> 95,893
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (6)
<INTEREST-EXPENSE> 31
<INCOME-PRETAX> 4,973
<INCOME-TAX> 1,914
<INCOME-CONTINUING> 3,059
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 3,059
<EPS-BASIC> .54
<EPS-DILUTED> .50
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