<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
For the quarterly period ended June 25, 2000 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)
<TABLE>
<S> <C>
DELAWARE 94-2766571
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
770 TAMALPAIS DRIVE, SUITE 400
CORTE MADERA, CALIFORNIA 94925
(Address of principal executive offices) (Zip Code)
(415) 945-0500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
As of August 3, 2000, there were 5,771,452 shares outstanding of the
Registrant's Common Stock ($.001 par value).
<PAGE> 2
IL FORNAIO (AMERICA) CORPORATION
QUARTERLY REPORT ON FORM 10-Q
INDEX
<TABLE>
<CAPTION>
PAGE
NUMBER
------
<S> <C> <C>
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Balance Sheets - June 25, 2000 and December 26, 1999.................................. 3
Condensed Statements of Income - Three months and six months ended June 25, 2000 and
June 27, 1999................................................................................... 4
Condensed Statements of Cash Flows - Six months ended June 25, 2000 and June 27, 1999........... 5
Notes to Condensed Financial Statements......................................................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations........... 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk...................................... 11
Part II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds....................................................... 11
Item 4. Submission of Matters to a Vote of Security Holders............................................. 11
Item 6. Exhibits and Reports on Form 8-K................................................................ 11
</TABLE>
2
<PAGE> 3
Part I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
IL FORNAIO (AMERICA) CORPORATION
CONDENSED BALANCE SHEETS
(in thousands, except share data)
(unaudited)
<TABLE>
<CAPTION>
JUNE 25, DECEMBER 26,
2000 1999
-------- ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents ..................................... $ 5,217 $ 5,118
Restricted cash ............................................... 338 314
Accounts receivable, net ...................................... 1,667 1,785
Inventories ................................................... 2,852 2,559
Prepaid expenses and other assets ............................. 623 1,184
Deferred tax assets, net ...................................... 245 218
-------- --------
Total current assets .................................. 10,942 11,178
Property and equipment, net ..................................... 55,400 52,433
Deferred tax assets, net ........................................ 973 1,000
Other assets .................................................... 726 547
-------- --------
Total assets .......................................... $ 68,041 $ 65,158
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable .............................................. $ 6,426 $ 6,982
Accrued expenses .............................................. 7,138 7,587
-------- --------
Total current liabilities ............................. 13,564 14,569
Reserve for store closures ...................................... 163 159
Deferred lease incentives ....................................... 9,280 7,852
-------- --------
Total liabilities ..................................... 23,007 22,580
-------- --------
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; 6,270,852 shares issued and 5,771,452 shares
outstanding at June 25, 2000 and 6,193,119 shares issued
and 5,693,719 shares outstanding at December 26, 1999 ...... 6 6
Additional paid-in-capital .................................... 39,214 38,751
Retained earnings ............................................. 8,831 6,838
-------- --------
48,051 45,595
Treasury stock, 499,400 shares, at cost ....................... (3,017) (3,017)
Total stockholders' equity ................................. 45,034 42,578
-------- --------
Total liabilities and stockholders' equity ............ $ 68,041 $ 65,158
======== ========
</TABLE>
See notes to condensed financial statements
3
<PAGE> 4
IL FORNAIO (AMERICA) CORPORATION
CONDENSED STATEMENTS OF INCOME
(in thousands, except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-----------------------------------------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurants ......................................... $ 27,529 $ 21,647 $ 55,006 $ 43,194
Bakeries ............................................ 2,609 2,058 4,781 4,044
-------- -------- -------- --------
Total revenues ................................ 30,138 23,705 59,787 47,238
-------- -------- -------- --------
Costs and expenses:
Cost of sales ....................................... 7,299 5,549 14,406 11,087
Operating expenses .................................. 17,432 13,416 34,606 27,037
Depreciation and amortization ....................... 1,452 1,155 2,928 2,292
-------- -------- -------- --------
Total restaurant and bakery costs ............. 26,183 20,120 51,940 40,416
-------- -------- -------- --------
Income from restaurant and bakery operations .......... 3,955 3,585 7,847 6,822
Pre-opening expenses ................................ 7 301 245 308
General and administrative expenses ................. 2,226 1,815 4,537 3,665
-------- -------- -------- --------
Operating income ...................................... 1,722 1,469 3,065 2,849
Other income (expenses):
Interest income ..................................... 80 126 161 277
Interest expense .................................... (9) (2) (32) (2)
-------- -------- -------- --------
Total other income (expenses), net ............ 71 124 129 275
-------- -------- -------- --------
Income before income taxes ............................ 1,793 1,593 3,194 3,124
Provision for income taxes ............................ 672 613 1,201 1,202
-------- -------- -------- --------
Net income ............................................ $ 1,121 $ 980 $ 1,993 $ 1,922
======== ======== ======== ========
BASIC EARNINGS PER SHARE
Basic earnings per share .............................. $ 0.19 $ 0.17 $ 0.35 $ 0.34
======== ======== ======== ========
Basic weighted average shares outstanding ............. 5,752 5,705 5,727 5,682
======== ======== ======== ========
DILUTED EARNINGS PER SHARE
Diluted earnings per share ............................ $ 0.19 $ 0.16 $ 0.33 $ 0.32
======== ======== ======== ========
Diluted weighted average shares outstanding ........... 6,028 6,138 6,012 6,077
======== ======== ======== ========
</TABLE>
See notes to condensed financial statements
4
<PAGE> 5
IL FORNAIO (AMERICA) CORPORATION
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 25, JUNE 27,
2000 1999
---------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,993 $ 1,922
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 3,088 2,455
Amortization of deferred lease incentives (273) (245)
Change in accounting principle
Provision for store closures 4 (40)
Retirement of fixed assets -- 6
Changes in:
Restricted cash (24) 29
Accounts receivable 118 188
Inventories (293) (420)
Prepaid expenses 561 230
Other assets (179) (30)
Accounts payable (556) 466
Accrued expenses (449) (1,670)
-------- --------
Net cash provided by operating activities 3,990 2,891
-------- --------
Cash flows from investing activities:
Capital expenditures (6,055) (7,346)
Construction allowance received 1,701 175
Collection of note receivable -- 19
-------- --------
Net cash used in investing activities (4,354) (7,152)
-------- --------
Cash flows from financing activities:
Proceeds from the issuance of common stock, net 314 356
Exercise of stock options 149 94
-------- --------
Net cash provided by financing activities 463 450
-------- --------
Increase/(decrease) in cash and cash equivalents 99 (3,811)
Cash and cash equivalents, beginning of period 5,118 12,296
-------- --------
Cash and cash equivalents, end of period $ 5,217 $ 8,485
======== ========
</TABLE>
See notes to condensed financial statements
5
<PAGE> 6
IL FORNAIO (AMERICA) CORPORATION
Notes to Condensed Financial Statements
(Unaudited)
1. Organization and Basis of Presentation
Il Fornaio (America) Corporation (the "Company") is engaged in restaurant
operations and the production and sale of Italian bakery products for the
wholesale and retail market. As of June 25, 2000, the Company owned and operated
22 Italian, white tablecloth restaurants and three bakeries located primarily in
California, as well as in Portland, Oregon; Las Vegas, Nevada; Denver, Colorado;
Seattle, Washington; Atlanta, Georgia, and Scottsdale, Arizona.
The accompanying condensed unaudited financial statements of the Company
for the three and six months ended June 25, 2000 and June 27, 1999,
respectively, have been prepared in accordance with accounting principles
generally accepted in the United States of America and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Certain information and footnote
disclosures, normally included in financial statements prepared in accordance
with generally accepted accounting principles, have been condensed or omitted
pursuant to such rules and regulations. It is suggested that these interim
condensed financial statements be read in conjunction with the Company's most
recent audited financial statements and notes thereto included in the Company's
Form 10-K for the fiscal year ended December 26, 1999, filed with the Securities
and Exchange Commission. The balance sheet data presented herein for December
26, 1999 was derived from the Company's audited financial statements for the
fiscal year then ended. In the opinion of management, all adjustments (which
include only normal recurring adjustments) necessary for a fair presentation of
the financial position, results of operations and cash flows for the interim
periods presented have been made. The interim financial information herein is
not necessarily indicative of results for any future interim periods or for the
full fiscal year ending December 31, 2000.
Certain of the prior period amounts have been reclassified to conform to
the current period presentation.
2. Earnings Per Share
Basic EPS is computed as net income divided by the weighted average
number of common shares outstanding for the period. Diluted EPS reflects the
potential dilution that could occur from common shares issuable through stock
options, warrants and other convertible securities.
The following is a summary of the calculation of the number of shares
used in calculating basic and diluted EPS:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------ ------------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Shares used to compute basic EPS 5,752,136 5,704,756 5,726,836 5,681,715
Add: effect of dilutive securities 275,834 433,322 285,082 395,348
--------- --------- --------- ---------
Shares used to compute diluted EPS 6,027,970 6,138,078 6,011,918 6,077,063
========= ========= ========= =========
</TABLE>
3. Segment Information
The Company classifies its business interests into two reportable
segments: restaurants and wholesale bakeries. The accounting policies of the
segments are the same as those described in the summary of significant
accounting policies in Note 1 of the Company's audited financial statements
included within the Company's Form 10-K for the fiscal year ended December 26,
1999. 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.
6
<PAGE> 7
Financial information for the Company's business segments is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------- -----------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Restaurants ............................... $ 27,529 $ 21,647 $ 55,006 $ 43,194
Wholesale bakeries ........................ 3,153 2,672 5,882 5,248
Intersegment revenues .................... (544) (614) (1,101) (1,204)
-------- -------- -------- --------
Total revenues ......................... $ 30,138 $ 23,705 $ 59,787 $ 47,238
======== ======== ======== ========
Operating contribution:
Restaurants ............................... $ 3,467 $ 3,305 $ 6,977 $ 6,274
Wholesale bakeries ........................ 488 280 869 550
Unallocated ............................... (2,162) (1,992) (4,652) (3,700)
-------- -------- -------- --------
Total operating contribution ........... $ 1,793 $ 1,593 $ 3,194 $ 3,124
======== ======== ======== ========
Depreciation and amortization:
Restaurants ............................... $ 1,312 $ 1,024 $ 2,655 $ 2,031
Wholesale bakeries ........................ 140 134 273 261
Corporate ................................. 78 81 160 163
-------- -------- -------- --------
Total depreciation & amortization ..... $ 1,530 $ 1,239 $ 3,088 $ 2,455
======== ======== ======== ========
Capital expenditures:
Restaurants ............................... $ 3,168 $ 4,812 $ 5,543 $ 6,883
Wholesale bakeries ........................ 268 190 456 402
Corporate ................................. 39 33 56 61
-------- -------- -------- --------
Total capital expenditures ............ $ 3,475 $ 5,035 $ 6,055 $ 7,346
======== ======== ======== ========
Property and equipment, net:
Restaurants ............................... $ 51,297 $ 39,950 $ 51,297 $ 39,950
Wholesale bakeries ........................ 3,509 2,860 3,509 2,860
Corporate ................................. 594 695 594 695
-------- -------- -------- --------
Total property and equipment, net ..... $ 55,400 $ 43,505 $ 55,400 $ 43,505
======== ======== ======== ========
</TABLE>
4. Line of Credit
The Company has a $5,000,000 revolving line of credit with a letter of
credit sub-facility, which expires on August 31, 2000 and bears interest at the
bank's reference rate. There were no amounts outstanding under the credit line
at June 25, 2000. The Company intends to seek to renew the line of credit. The
credit agreement requires compliance with certain financial covenants. As of
June 25, 2000, the Company was not in compliance with one of these covenants.
The bank has waived non-compliance with this covenant.
5. Employee Plans
On May 3, 2000, the stockholders of the Company approved an amendment to
the 1997 Equity Incentive Plan to increase the number of shares authorized for
issuance under such plan by 500,000 shares. The stockholders also approved an
amendment to the Company's 1997 Employee Stock Purchase Plan to increase the
number of shares authorized under such plan by 200,000 shares.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following Management's Discussion and Analysis of Financial Condition
and Results of Operations contains forward-looking statements that involve risks
and uncertainties. Such forward-looking statements may be deemed to include
information that is not historical, including without limitation, the timing of
and plans for anticipated restaurant openings, the projected investment and
costs required for future restaurants and the adequacy of anticipated sources of
cash to fund the Company's future capital requirements through 2000. Words such
as "believes," "anticipates," "expects," "intends" and similar expressions are
intended to identify forward-looking statements, but are not the exclusive means
of identifying such statements. Readers are cautioned that the forward-looking
statements reflect management's analysis only as of the date hereof, and the
Company assumes no obligation to update these statements. Actual events or
results may differ materially from the results discussed in or implied by the
forward-looking statements. Factors that might cause such a difference include,
but are not limited to, those risks and uncertainties discussed below under
"Factors Affecting Operating Results" and elsewhere in this Quarterly Report on
Form 10-Q, as well as other risks set forth under the caption "Risk Factors" in
the Company's Annual Report on Form 10-K for the fiscal year ended December 26,
1999. The following discussion should be read in conjunction with the Financial
Statements and the Notes thereto included in Item 1 of this Quarterly Report on
Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year
ended December 26, 1999.
7
<PAGE> 8
OVERVIEW
The Company's revenues consist of restaurant sales and bakery sales.
Comparable restaurant sales are calculated to include a new restaurant only
after its first full month following the eighteenth month of its operation.
Comparable restaurant revenues may fluctuate significantly as a result of a
variety of factors. See "Factors Affecting Operating Results" below.
Cost of sales is composed primarily of the cost of food and beverages.
Operating expenses include payroll and fringe benefit costs, occupancy costs,
marketing costs and other store-level costs. The majority of these costs are
variable and are expected to increase with sales volume. Occupancy costs include
both a fixed and percentage portion of rent.
Pre-opening costs consist of direct costs related to hiring and training
the initial workforce and certain other direct costs related to opening new
restaurants. Pre-opening costs in 1999 and 2000 reflect costs that were expensed
as incurred. This expense-as-incurred standard may continue to result in
increased variability in the amount of pre-opening costs recognized, depending
on the number and timing of restaurant openings. As a result, the Company's
operating results may fluctuate from quarter to quarter.
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.
The following table sets forth unaudited operating results for the
three-month and six-month periods ended June 25, 2000 and June 27, 1999,
respectively, as a percentage of sales in each of these periods. This data has
been derived from the unaudited financial statements.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
-------------------- --------------------
JUNE 25, JUNE 27, JUNE 25, JUNE 27,
2000 1999 2000 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Restaurants 91.3% 91.3% 92.0% 91.4%
Bakeries 8.7% 8.7% 8.0% 8.6%
----- ----- ----- -----
Total revenues 100.0% 100.0% 100.0% 100.0%
----- ----- ----- -----
Costs and expenses:
Costs of sales 24.3% 23.4% 24.1% 23.5%
Operating expenses 57.8% 56.6% 57.9% 57.2%
Depreciation and amortization 4.8% 4.9% 4.9% 4.9%
----- ----- ----- -----
Total restaurant and bakery costs 86.9% 84.9% 86.9% 85.6%
----- ----- ----- -----
Income from restaurant and bakery operations 13.1% 15.1% 13.1% 14.4%
Pre-opening expenses 0.0% 1.3% 0.4% 0.7%
General and administrative expenses 7.4% 7.6% 7.6% 7.7%
----- ----- ----- -----
Income from operations 5.7% 6.2% 5.1% 6.0%
Interest income (expense), net 0.2% 0.5% 0.2% 0.6%
----- ----- ----- -----
Income before income taxes 5.9% 6.7% 5.3% 6.6%
Provision for income taxes 2.2% 2.6% 2.0% 2.5%
----- ----- ----- -----
Net income 3.7% 4.1% 3.3% 4.1%
===== ===== ===== =====
</TABLE>
Total restaurant revenues increased by 27.2% to $27.5 million for the
second quarter of 2000 from $21.6 million for the second quarter of 1999 and by
27.3% to $55.0 million for the first six months of 2000 from $43.2 million for
the first six months of 1999. The increases were primarily attributable to (i)
the opening of one new restaurant in 2000 as well as four new restaurants opened
in the third and fourth quarters of 1999 and (ii) a 2.7% increase in comparable
restaurant sales for the second quarter of 2000 and a 3.5% increase in
comparable restaurant sales for the first six months of 2000. 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 26.8% to $2.6 million for the second quarter of 2000 from $2.1
million for the second quarter of 1999 and by 18.2% to $4.8 million for the
first
8
<PAGE> 9
six months of 2000 from $4.0 million for the first six months of 1999. The
increase was attributable to the continued addition of new wholesale accounts as
well as increased sales to existing accounts.
Cost of sales increased as a percentage of revenues to 24.3% for the
second quarter of 2000 and to 24.1% for the first six months of 2000 compared to
23.4% and 23.5% for the respective comparable periods in 1999. These increases
were primarily the result of higher initial cost of sales for the two new
restaurants opened during the fourth quarter of 1999 and the new restaurant
opened during the first quarter of 2000 along with a shift in menu mix.
Operating expenses as a percentage of revenues increased to 57.8% for the
second quarter of 2000 and to 57.9% for the first six months of 2000 compared to
56.6% and 57.2% for the respective comparable periods in 1999. These increases
were primarily attributable to an increase in minimum wage in Washington and the
corresponding indirect pressure on other wages, as well as increased payment of
overtime in California due to the labor law change that took effect January 1,
2000. Depreciation and amortization decreased slightly as a percentage of
revenues to 4.8% for the second quarter of 2000 compared to 4.9% for the second
quarter of 1999 but remained unchanged at 4.9% for the first six months of 2000
compared to the same period in 1999.
Pre-opening costs in 1999 and 2000 were expensed as incurred. Pre-opening
costs expensed in the second quarter of 2000 were $7,000 compared to $301,000 in
the second quarter of 1999. Total pre-opening costs for the first six months of
2000 were $245,000 compared to $308,000 for the same period in 1999. Pre-opening
costs in 2000 were primarily incurred in connection with the opening of the
Scottsdale, Arizona restaurant on February 7, 2000. The pre-opening costs for
the first six months of 1999 were incurred primarily in connection with the
opening of the Company's Canaletto restaurant in Las Vegas, Nevada on June 28,
1999.
General and administrative expenses as a percentage of revenues decreased
to 7.4% for the second quarter of 2000 compared to 7.6% for the second quarter
of 1999 and to 7.6% for the first six months of 2000 versus 7.7% for the same
period in 1999, primarily reflecting stable administrative staffing expense
levels.
Interest income decreased to $80,000 in the second quarter of 2000 from
$126,000 in the corresponding period in 1999, reflecting interest on lower
average cash balances as a result of the use of cash to expand the Company's
operations. Interest expense increased to $9,000 in the second quarter of 2000
from $2,000 in the corresponding period in 1999, as a result of the increased
utilization of the Company's line of credit in connection with the expansion of
operations.
The provision for income taxes for the quarter ended June 25, 2000
reflected expected income taxes due at federal statutory rates and state income
tax rates, net of tax benefits. The effective income tax rate was 37.5% for the
second quarter of 2000 compared to 38.5% for the comparable period in 1999. This
decrease in the effective income tax rate was due to the planned use of various
deductible tax assets and other tax credits available to the Company.
Net income for the first quarter of 2000 increased by $141,000, or 14.4%,
to $1,121,000 from $980,000 for the second quarter of 1999 and by $71,000, or
3.7%, to $1,993,000 for the first six months of 2000 from $1,922,000 for the
same period in 1999. Net income per share (diluted) for the second quarter of
2000 was $0.19 versus $0.16 reported for the second quarter of 1999 and $0.33
for the first six months of 2000 compared to $0.32 for the same period in 1999.
FACTORS AFFECTING OPERATING RESULTS
The Company's business is subject to a number of challenges and risks
including, among other things, the risks associated with the Company's pursuit
of its growth strategy, risks related to the Company's relatively small
operations base and the geographic concentration of the Company's restaurants,
uncertainties associated with possible increases in food and labor costs,
potentially adverse weather conditions, the impact of potential governmental
regulation, risks related to the Company's dependence on its key personnel,
uncertainties related to the intensely competitive nature of the restaurant
business, as well as potential liabilities associated with long-term leases. The
Company's plans for new restaurant locations and timing of openings depend upon,
among other things, successful completion of lease negotiations, timely project
development and restaurant construction, obtaining appropriate regulatory
approvals, management of costs and recruitment of qualified operating personnel.
The Company's quarterly operating results may fluctuate significantly as
a result of a variety of factors, including general economic conditions,
consumer confidence in the economy, changes in consumer preferences, competitive
factors, weather conditions, the timing of new restaurant openings and related
costs and 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
9
<PAGE> 10
restaurant revenues. Due to the foregoing factors, results for any one quarter
are not necessarily indicative of results to be expected for any other quarter
or for any year and, from time to time in the future, the Company's results of
operations may be below the expectations of public market analysts and
investors. Comparable restaurant sales results may also vary from period to
period as a result of similar factors. These and other risk factors are
discussed in more detail in the Company's Form 10-K for the fiscal year ended
December 26, 1999 under the caption "Risk Factors."
LIQUIDITY AND CAPITAL RESOURCES
At June 25, 2000, the Company had $5.2 million in cash and cash
equivalents compared to $5.1 million at December 26, 1999.
Cash flow from operations increased by $1.1 million to $4.0 million for
the first six months of 2000 from $2.9 million during the same period in 1999,
primarily due to the net effect of timing differences in the collection and
disbursement of working capital components.
Net cash provided by financing activities was $463,000 for the first six
months of 2000 as compared to $450,000 for the same period in 1999. The
difference is due to the receipt of $314,000 in cash from the issuance of common
stock under the Company's employee stock purchase plan during the first six
months of 2000 compared to $356,000 received under that plan for the same period
in 1999. In addition, the Company received $149,000 in cash from the issuance of
common stock upon the exercise of stock options during the first six months of
2000 compared to $94,000 received from the issuance of common stock upon the
exercise of stock options during the same period in 1999.
The Company has a credit agreement, which provides for a $5.0 million
revolving line of credit. At June 25, 2000, there were no amounts outstanding
under the credit line. The existing credit line is scheduled to expire August
31, 2000. The Company intends to seek to renew the line of credit. The credit
agreement requires compliance with certain financial covenants. As of June 25,
2000, the Company was not in compliance with one of these covenants. The bank
waived non-compliance with this covenant.
Capital expenditures were $6.1 million for the first six months of 2000
as compared to $7.3 million for the first six months of 1999. Construction
allowances received during the first six months of 2000 were $1.7 million as
compared to $175,000 for the same period in 1999. The expenses incurred during
the first six months of 2000 were due to the construction costs for
the Company's Scottsdale, Arizona restaurant opened during the first quarter of
2000 and the three restaurants currently under construction. The Company also
anticipates incurring additional expenditures to enhance some of its existing
restaurants. The Company expects that its planned future restaurants will
require, on average, a total investment by the Company per restaurant, net of
anticipated landlord contributions, of approximately $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 financing. There can be no assurance that such capital will be
available on favorable terms, if at all.
INFLATION
The primary inflationary factors affecting the Company's operations are food and
labor costs. From time to time, the Company 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 and labor law changes) has not
had a material impact on the Company's operations. The minimum wage increased in
Oregon to $6.50 an hour in January 1999. In January 2000, the minimum wage
increased to $6.50 an hour in Washington. Effective January 1, 2000, California
law requires that overtime be paid to California hourly personnel who work
longer than eight hours per day. Prior to this change, the labor law in effect
mandated overtime pay to hourly personnel only to the extent they worked longer
than an average of 40 hours per calendar week.
10
<PAGE> 11
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's cash and cash equivalents are subject to interest rate
risk. The Company invests primarily on a short-term basis. The financial
instrument holdings at quarter-end were analyzed to determine their sensitivity
to interest rate changes. The fair values of these instruments were determined
by net present values. In our sensitivity analysis, the same change in interest
rate was used for all maturities. All other factors were held constant. If
interest rates increased by 10%, the expected effect on net income related to
the Company's financial instruments would be immaterial.
Part II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(c) From March 27, 2000 to June 25, 2000, the Registrant has sold and issued
the following unregistered securities:
1. During the period, the Company granted incentive and non-qualified
stock options to key employees, officers and directors under its
1997 Equity Incentive Plan (the "Plan") covering an aggregate of
223,075 shares of the Company's Common Stock, at exercise prices
ranging from $7.88 to $8.67 per share. These options vest over a
period of time following their respective dates of grant. The
Company claimed exemption from registration under the Securities
Act for these grants in that the Company believes such grants were
not "sales" within the meaning of the Securities Act.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held its Annual Meeting of Stockholders on May 3, 2000
(the "Annual Meeting"). At the Annual Meeting, the Company's stockholders
elected the two directors nominated by the Board by the votes indicated:
<TABLE>
<CAPTION>
Nominee Votes in Favor Votes Withheld
------- -------------- --------------
<S> <C> <C>
Dean A. Cortopassi 5,117,596 3,085
Lawrence F. Levy 5,117,595 3,086
</TABLE>
The proposal to approve the Company's 1997 Equity Incentive Plan, as
amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 500,000 shares was approved
with 2,835,559 affirmative votes, 160,665 negative votes, 32,555
abstentions and 2,091,902 broker non-votes.
The proposal to approve the Company's 1997 Employee Stock Purchase Plan,
as amended, to increase the aggregate number of shares of Common Stock
authorized for issuance under such plan by 200,000 shares was approved
with 2,913,593 affirmative votes, 85,630 negative votes, 29,556
abstentions and 3,091,902 broker non-votes.
The proposal to ratify the selection of Deloitte & Touche LLP as the
Company's independent auditors for the fiscal year ending December 31,
2000 was approved with 5,118,026 affirmative votes, 1,300 negative votes,
1,355 abstentions and no broker non-votes.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27.1 Financial Data Schedules
(b) Reports on Form 8-K. None.
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Il Fornaio (America) Corporation
Date: August 3, 2000 By: /s/ Michael J. Hislop
------------------------------------------
Michael J. Hislop
President and Chief Executive Officer
(Principal Executive Officer)
Date: August 3, 2000 By: /s/Peter P. Hausback
------------------------------------------
Peter P. Hausback
Chief Financial Officer
(Principal Financial and Accounting Officer)
12
<PAGE> 13
EXHIBIT INDEX
EXHIBIT DESCRIPTION
------- -----------
27.1 Financial Data Schedule
