<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARDEN FRESH RESTAURANT CORP.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 5812 33-0028786
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of Classification Code Number) Identification
incorporation or organization) No.)
</TABLE>
17180 BERNARDO CENTER DRIVE
SAN DIEGO, CA 92128
(619) 675-1600
(Address, including zip code, and telephone number, including area code, of
registrant's principal executive offices)
MICHAEL P. MACK
CHIEF EXECUTIVE OFFICER
GARDEN FRESH RESTAURANT CORP.
17180 BERNARDO CENTER DRIVE
SAN DIEGO, CA 92128
(619) 675-1600
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
------------------------------
COPIES TO:
CAMERON JAY RAINS EDWARD S. ROSENTHAL
REBECCA K. SCHMITT FRIED, FRANK, HARRIS, SHRIVER &
NOEL C. HOWE JACOBSON
GRAY CARY WARE & FREIDENRICH LLP 350 Grand Avenue, 32nd Floor
4365 Executive Drive, Suite 1600 Los Angeles, CA 90071
San Diego, CA 92121 (213) 473-2000
(619) 677-1400
------------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
------------------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act,
check the following box. / /
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
- ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
- ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. / /
------------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) OFFERING PRICE(2) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, $0.01 par value.................... 1,840,000 shares $18.8125 $34,615,000 $10,490
</TABLE>
(1) Includes 240,000 shares which the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purposes of computing the registration fee pursuant
to Rule 457(c) under the Securities Act, based upon the average of the high
and low sales prices of the Company's Common Stock as reported by the Nasdaq
National Market on April 27, 1998.
------------------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a)
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 29, 1998
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE>
1,600,000 SHARES
[LOGO]
[LOGO]
GARDEN FRESH RESTAURANT CORP.
COMMON STOCK
OF THE 1,600,000 SHARES OF COMMON STOCK OFFERED HEREBY, 1,300,000 SHARES ARE
BEING SOLD BY GARDEN FRESH RESTAURANT CORP. (THE "COMPANY") AND 300,000 SHARES
ARE BEING SOLD BY CERTAIN STOCKHOLDERS OF THE COMPANY (THE "SELLING
STOCKHOLDERS"). THE COMPANY WILL NOT RECEIVE ANY OF THE PROCEEDS FROM THE SALE
OF SHARES BY THE SELLING STOCKHOLDERS. THE COMMON STOCK IS TRADED ON THE NASDAQ
NATIONAL MARKET UNDER THE SYMBOL "LTUS." ON APRIL 28, 1998, THE LAST SALE PRICE
AS REPORTED BY NASDAQ WAS $19.625 PER SHARE. SEE "PRICE RANGE OF COMMON STOCK."
SEE "RISK FACTORS" BEGINNING ON PAGE 6 FOR A DISCUSSION OF MATERIAL RISKS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE COMMON STOCK OFFERED
HEREBY.
-------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF
THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL
OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO PROCEEDS TO SELLING
PUBLIC DISCOUNT(1) COMPANY(2) STOCKHOLDERS
<S> <C> <C> <C> <C>
PER SHARE.................. $ $ $ $
TOTAL(3)................... $ $ $ $
</TABLE>
(1) SEE "UNDERWRITING" FOR INFORMATION CONCERNING INDEMNIFICATION OF THE
UNDERWRITERS AND OTHER MATTERS.
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY, ESTIMATED AT $300,000.
(3) THE COMPANY HAS GRANTED THE UNDERWRITERS A 30-DAY OPTION TO PURCHASE UP TO
240,000 ADDITIONAL SHARES OF COMMON STOCK AT THE PRICE TO PUBLIC LESS THE
UNDERWRITING DISCOUNT SOLELY TO COVER OVER-ALLOTMENTS, IF ANY. IF THE
UNDERWRITERS EXERCISE THIS OPTION IN FULL, THE PRICE TO PUBLIC WILL TOTAL
$ , THE UNDERWRITING DISCOUNT WILL TOTAL $ AND THE
PROCEEDS TO THE COMPANY WILL TOTAL $ . SEE "UNDERWRITING."
THE SHARES OF COMMON STOCK ARE OFFERED BY THE UNDERWRITERS NAMED HEREIN
SUBJECT TO RECEIPT AND ACCEPTANCE BY THEM AND SUBJECT TO THEIR RIGHT TO REJECT
ANY ORDER IN WHOLE OR IN PART. IT IS EXPECTED THAT DELIVERY OF THE CERTIFICATES
REPRESENTING THE SHARES WILL BE MADE AGAINST PAYMENT THEREFOR AT THE OFFICE OF
NATIONSBANC MONTGOMERY SECURITIES LLC ON OR ABOUT , 1998.
-------------------
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Morgan Keegan & Company, Inc.
, 1998
<PAGE>
GARDEN FRESH
RESTAURANT
[Picture of Salad Bar]
[Picture of Salad Buffet ingredients]
CHOICES. CHOICES. CHOICES.
YOU MAKE THE SALAD, AND WE MAKE IT FRESH!
[SOUPLANTATION LOGO]
[SWEET TOMATOES LOGO]
OUR FOCUS AND CORNERSTONE, A SPARKLING 55 FOOT SALAD BAR HOUSES FRESH TOSSED
SALADS, FRESH CUT PRODUCE AND SPECIALTY PREPARED SALADS.
[Picture of restaurant entry]
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMPANY'S COMMON STOCK ON NASDAQ IN ACCORDANCE
WITH RULE 103 OF REGULATION M. SEE "UNDERWRITING."
Certain persons participating in this offering may engage in transactions
that stabilize, maintain, or otherwise affect the price of the Company's Common
Stock, including entering stabilizing bids, effecting syndicate covering
transactions or imposing penalty bids. For a description of these activities,
see "Underwriting."
2
<PAGE>
PROSPECTUS SUMMARY
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED INFORMATION
APPEARING ELSEWHERE IN THIS PROSPECTUS. EXCEPT AS OTHERWISE SPECIFIED, ALL
INFORMATION IN THIS PROSPECTUS ASSUMES (I) NO EXERCISE OF THE UNDERWRITERS'
OVER-ALLOTMENT OPTION AND (II) THE EXERCISE BY CERTAIN SELLING STOCKHOLDERS OF
OUTSTANDING OPTIONS TO PURCHASE 83,500 SHARES WHICH WILL BE SOLD IN THIS
OFFERING. THE COMPANY'S FISCAL YEAR ENDS SEPTEMBER 30.
THE COMPANY
Garden Fresh Restaurant Corp. (the "Company") was founded in 1983 and
currently operates 52 salad buffet restaurants in California, Florida, Arizona,
New Mexico, Utah and Nevada under the names Souplantation and Sweet Tomatoes.
The Company's restaurants feature fresh, great tasting salads and other
complementary foods. Due to its salad focus, the Company's concept falls within
a segment of the restaurant industry that is distinct from other buffet concepts
in that many of the characteristics of the Company resemble the casual dining
segment rather than the buffet segment. The Company believes that it is a
leading salad buffet restaurant due, in part, to its total revenues and number
of restaurants. The Company also believes that it is well-positioned to maintain
its leadership position and that its opportunities for expansion are attractive
relative to expansion opportunities for many other restaurant concepts.
The restaurants have, as their centerpiece, two approximately 55-foot long
salad bars that feature fresh tossed specialty salads as well as a broad
selection of fresh cut greens, vegetables, toppings and dressings, and other
prepared salads. The restaurants also feature complementary menu offerings that
are presented in a scatter bar format. These offerings consist of a soup bar
with five to six soups made from scratch, an on-site bakery serving hot muffins,
breads and pizza focaccias, a hot pasta bar specializing in freshly made pastas,
a frozen yogurt bar and a fresh fruit bar. The Company seeks to provide its
guests with a level of service not typically associated with a buffet
restaurant.
The Company seeks to provide guests with an excellent value by offering
unlimited access to its entire menu of high quality fresh items at a fixed
price. Depending on the region and time of day, the price ranges from $5.79 to
$6.99 at lunch and from $6.99 to $7.69 at dinner. Discounts are provided to
children under 12 and senior citizens. The Company's restaurants are designed to
appeal to a broad range of guests of all ages, including the nutritionally
conscious. In fiscal 1997, net sales generated from lunch and dinner represented
approximately 45% and 55% of net sales, respectively.
The Company believes it has attractive unit level operating margins and
return on investment. For the twelve month period ended March 31, 1998, the 46
salad buffet restaurants that were open for the entire period had an average of
approximately 298,000 guest visits during the period, generated average net
sales of approximately $2,034,000, average restaurant operating income (net
sales less cost of sales, restaurant operating expenses, depreciation and
amortization) of approximately $328,000 or 16.1% of net sales, and average cash
flow (operating income plus depreciation and amortization) of approximately
$449,000 or 22.1% of net sales. The Company's average cash investment for the
six restaurants opened in the twelve month period ended March 31, 1998,
excluding land purchases and pre-opening costs, was approximately $1.9 million.
Pre-opening costs averaged approximately $205,000 for these restaurants. The
investment to open a new restaurant typically includes the purchase or
installation of furniture, fixtures, equipment and leasehold improvements, and
in the case of an owned site, the purchase of land and a building.
The Company intends to expand in fiscal 1998 and 1999 primarily in new
markets outside of California. In fiscal 1997, the Company opened one restaurant
in Arizona, four restaurants in Florida, one restaurant in New Mexico, and one
restaurant in Utah. In fiscal 1998, the Company has opened three new
restaurants, one each in Florida, Utah and Nevada, and anticipates opening
approximately eight additional salad buffet restaurants outside of California.
The Company has signed one lease, purchased five sites and signed contracts to
purchase two sites to be opened in fiscal 1998. In fiscal 1999, the Company
anticipates opening twelve new restaurants. The Company has signed contracts to
purchase four sites to be opened in fiscal 1999. Expansion will allow the
Company to continue generally utilizing a central kitchen to serve
3
<PAGE>
several restaurants located within a particular region. In addition, as a part
of its expansion strategy, the Company is evaluating the possibility of
developing its concept in alternative formats. The Company currently has no
plans to offer franchises.
The Company was incorporated in California in 1983 and reincorporated in
Delaware in 1987. The Company's executive offices are located at 17180 Bernardo
Center Drive, San Diego, California, 92128, and its telephone number is (619)
675-1600.
THE OFFERING
<TABLE>
<CAPTION>
<S> <C>
Common Stock offered by the Company................................... 1,300,000 shares
Common Stock offered by the Selling Stockholders...................... 300,000 shares
Common Stock outstanding after the offering........................... 5,701,676 shares(1)
Use of proceeds....................................................... To repay indebtedness, to finance the
development of additional restaurants and
for general corporate purposes.
Nasdaq National Market symbol......................................... LTUS
</TABLE>
- ------------------------
(1) Based on the number of shares outstanding as of March 31, 1998. Includes
83,500 shares to be sold by certain selling stockholders after exercise of
outstanding options. Does not include the remaining approximately 722,000
shares of Common Stock issuable upon exercise of options outstanding as of
March 31, 1998 under the Company's Restaurant Management Stock Option Plan
(the "Restaurant Management Plan"), the Company's Key Employee Stock Option
Plan (the "Key Employee Plan"), the Company's 1995 Key Employee Stock Option
Plan (the "1995 Key Employee Plan"), the Company's 1995 Outside Directors
Option Plan (the "Directors Option Plan"), the Company's 1998 Stock Option
Plan (the "1998 Option Plan") and certain non-qualified stock options. Of
these options, options to purchase approximately 515,000 shares of Common
Stock are exercisable as of March 31, 1998. See "Management--Benefit Plans."
NOTE ON FORWARD LOOKING STATEMENTS
The statements contained in this prospectus that are not purely historical
are forward looking statements, including statements regarding the Company's
expectations, hopes, beliefs, intentions or strategies regarding the future.
Statements which use the words "expects," "will," "may," "anticipates,"
"believes," "intends," and "seeks" are forward looking statements. These forward
looking statements, including statements regarding the Company's expansion
efforts and plans to open new restaurants, are based on information available to
the Company on the date hereof, and the Company assumes no obligation to update
any such forward looking statement. It is important to note that the Company's
actual results could differ materially from those in such forward looking
statements. Among the factors that could cause actual results to differ
materially are the factors set forth under the heading "Risk Factors." In
particular, the Company's expansion efforts and plans to open new restaurants
could be affected by the Company's ability to locate suitable restaurants sites,
construct new restaurants in a timely manner and obtain additional funds.
Prospective investors should consider carefully the information discussed under
"Risk Factors."
------------------------
Garden Fresh, Souplantation and Sweet Tomatoes are registered trademarks of
the Company. This Prospectus also contains trademarks of other companies.
4
<PAGE>
SUMMARY OF FINANCIAL AND OPERATING DATA
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
-------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- -------- ----------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 51,380 $ 59,658 $ 61,320 $ 71,373 $ 90,252 $ 42,736 $ 51,739
Operating income........................ 1,781 1,548 3,999 5,544 7,970 3,019 4,139
Income (loss) before extraordinary
item.................................. 209 (335) 4,343(1) 3,004 3,887 1,392 1,904
Extraordinary item--early extinguishment
of debt(2)............................ -- -- (518) -- -- -- --
--------- -------- ----------- -------- -------- -------- --------
Net income (loss)....................... 209 (335) 3,825(1) 3,004 3,887 1,392 1,904
Stock dividend.......................... -- -- (8,298)(3) -- -- -- --
--------- -------- ----------- -------- -------- -------- --------
Net income (loss) available to common
stockholders.......................... $ 209 $ (335) $ (4,473) $ 3,004 $ 3,887 $ 1,392 $ 1,904
--------- -------- ----------- -------- -------- -------- --------
--------- -------- ----------- -------- -------- -------- --------
Net income (loss) per share available to
common stockholders
Basic................................. $ 0.61 $ (0.86) $ (2.47) $ 0.73 $ 0.93 $ 0.34 $ 0.44
--------- -------- ----------- -------- -------- -------- --------
--------- -------- ----------- -------- -------- -------- --------
Diluted............................... $ 0.13 $ (0.86) $ (2.47) $ 0.72 $ 0.88 $ 0.32 $ 0.41
--------- -------- ----------- -------- -------- -------- --------
--------- -------- ----------- -------- -------- -------- --------
Shares used in computing net income (loss) per
share
Basic................................. 342 391 1,810 4,103 4,192 4,150 4,298
Diluted............................... 1,624 391 1,810 4,176 4,402 4,345 4,633
SELECTED OPERATING DATA:
Percentage change in comparable
restaurant sales(4)................... (4.2)% 1.2% %2.0 2.5% 4.7% 1.9% 7.6%
Average price per guest(5).............. $ 6.64 $ 6.66 $ 6.56 $ 6.57 $ 6.75 $ 6.71 $ 6.93
Average net sales for salad buffet
restaurants open for full period (in
thousands)............................ $ 1,748 $ 1,779 $ 1,835 $ 1,902 $ 1,985 $ 953 $ 1,016
Number of salad buffet restaurants open
for full period....................... 27 31 32 35 42 42 49
Number of salad buffet restaurants open
at end of period...................... 33 33 35 42 49 46 52
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1998
--------------------------
ACTUAL AS ADJUSTED(6)
--------- ---------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................................................ $ (7,649) $ (957)
Total assets............................................................................. 71,468 72,987
Long-term debt, including current portion................................................ 23,099 --
Shareholders' equity..................................................................... 36,538 61,156
</TABLE>
- ------------------------------
(1) Fiscal 1995 results include a benefit related to recognition of deferred tax
assets of $2,173.
(2) Represents a charge for previously unamortized issue costs, debt discount,
and prepayment penalty, net of $192 income tax benefit.
(3) Reflects preferential stock dividend of approximately 922 shares of Common
Stock to the holders of the Company's Series B, Series C and Series D
Preferred Stock, which occurred upon completion of the Company's initial
public offering.
(4) Comparable restaurant sales are computed on a monthly basis and then
aggregated to determine comparable restaurant sales on a quarterly or annual
basis. A restaurant is included in this computation after it has been open
for 15 full calendar months. As a result, a restaurant may be included in
this computation for only a portion of a given quarter or year.
(5) Average price per guest is derived from the Company's net sales, which
reflects discounts and coupons.
(6) As adjusted to reflect (i) the sale of 1,300 shares of Common Stock by the
Company at an assumed public offering price of $20.00 per share and (ii) the
exercise of outstanding options to purchase 83.5 shares held by certain
Selling Stockholders, and the application of the estimated net proceeds
therefrom. See "Use of Proceeds" and "Capitalization."
5
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, PROSPECTIVE
INVESTORS SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS IN EVALUATING THE
COMPANY, ITS BUSINESS AND THE SHARES OF COMMON STOCK OFFERED HEREBY.
CERTAIN OPERATING RESULTS AND CONSIDERATIONS
In fiscal 1995, 1996, 1997 and the first six months of fiscal 1998, the
Company experienced an increase of 2.0%, 2.5%, 4.7% and 7.6% respectively, in
comparable restaurant sales. The Company's newer restaurants have not
historically experienced significant increases in guest volume following their
initial opening period. In addition, the Company does not believe it has
significant latitude to achieve comparable restaurant sales growth through price
increases. As a result, the Company does not believe that recent comparable
restaurant sales is indicative of future trends in comparable restaurant sales.
The Company believes that it may from time to time in the future experience
declines in comparable restaurant sales, and that any future increases in
comparable restaurant sales may be modest. See "Selected Financial Data" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
EXPANSION RISKS
The Company opened seven salad buffet restaurants in each of fiscal 1996 and
fiscal 1997 and three restaurants in the first six months of fiscal 1998. The
Company currently intends to open eight additional restaurants in fiscal 1998
and approximately twelve restaurants in fiscal 1999. The Company's ability to
achieve its expansion plans will depend on a variety of factors, many of which
may be beyond the Company's control, including the Company's ability to locate
suitable restaurant sites, negotiate acceptable leases or purchase terms, obtain
required governmental approvals, construct new restaurants in a timely manner,
attract, train and retain qualified and experienced personnel and management,
operate its restaurants profitably and obtain additional capital, as well as
general economic conditions and the degree of competition in the particular
region of expansion. The Company has experienced, and expects to continue to
experience, delays in restaurant openings from time to time. In addition, since
its inception, the Company has closed three non-performing restaurants. Given
the number of restaurants in current operation and the Company's projected
expansion rate, there can be no assurances that the Company will not close
restaurants in the future. Any closure could result in a significant write-off
of assets which could adversely effect the Company's business, financial
condition and results of operations.
The Company incurs substantial costs in opening a new restaurant and, in the
Company's experience, new restaurants experience fluctuating operational levels
for some time after opening. Owned restaurants generally require significantly
more up-front capital than leased restaurants. As a result, an increase in the
percentage of owned restaurant openings as compared to historical practice would
increase the capital required to meet the Company's growth plans. There can be
no assurance that the Company will successfully expand into new regions or that
the Company's existing or new restaurants will be profitable. The Company has
encountered intense competition for restaurant sites, and in many cases has had
difficulty buying or leasing desirable sites on terms that are acceptable to the
Company. In many cases, the Company's competitors are willing and able to pay
more than the Company for sites. The Company expects these difficulties in
obtaining desirable sites to continue for the foreseeable future. See
"--Restaurant Industry and Competition," "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business--Expansion Strategy" and "Business--Competition."
RESTAURANT INDUSTRY AND COMPETITION
The restaurant industry is highly competitive. Key competitive factors in
the industry include the quality and value of the food products offered, quality
of service, price, dining experience, restaurant location and the ambiance of
the facilities. The Company's primary competitors include mid-price, full-
service casual dining restaurants, as well as traditional self-service buffet
and other soup and salad
6
<PAGE>
restaurants and healthful and nutrition-oriented restaurants. The Company
competes with national and regional chains, as well as individually owned
restaurants. The number of buffet and casual restaurants with operations
generally similar to the Company's has grown substantially in the last several
years and the Company believes competition among buffet-style and casual
restaurants has increased and will continue to increase as the Company's
competitors expand operations in various geographic areas. Such increased
competition could increase the Company's operating costs or adversely affect its
revenues. The Company believes it competes favorably in the industry, although
many of the Company's competitors have been in existence longer than the
Company, have a more established market presence and have substantially greater
financial, marketing and other resources than the Company, which may give them
certain competitive advantages. In addition, the restaurant industry has few
non-economic barriers to entry. Therefore, there can be no assurance that third
parties will not be able to successfully imitate and implement the Company's
concept. The Company has encountered intense competition for restaurant sites,
and in many cases has had difficulty buying or leasing desirable sites on terms
that are acceptable to the Company. In many cases, the Company's competitors are
willing and able to pay more than the Company for sites. The Company expects
these difficulties in obtaining desirable sites to continue for the foreseeable
future.
COST SENSITIVITY
The Company's profitability is highly sensitive to increases in food, labor
and other operating costs. The Company's dependence on frequent deliveries of
fresh produce and groceries subjects it to the risk that shortages or
interruptions in supply caused by adverse weather or other conditions could
materially adversely affect the availability, quality and cost of ingredients.
In addition, unfavorable trends or developments concerning factors such as
inflation, food, labor and employee benefit costs (including increases in hourly
wage and minimum unemployment tax rates), rent increases resulting from the rent
escalation provisions in the Company's leases, and the availability of
experienced management and hourly employees may also adversely affect the
Company. The Company believes recent relatively favorable inflation rates and
part-time labor supplies in its principal market area have contributed to
relatively stable food and labor costs in recent years. However, there can be no
assurance that these conditions will continue or that the Company will have the
ability to control costs in the future. See "--Reliance on Key Suppliers and
Distributors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business."
IMPORTANCE OF KEY EMPLOYEES
The Company is heavily dependent upon the services of its officers and key
management personnel involved in restaurant operations, purchasing, expansion
and administration. In particular, the Company is dependent upon the management
and leadership of its three executive officers, Michael Mack, David Qualls and
R. Gregory Keller. The loss of any of these three individuals could have a
material adverse effect on the Company's business, financial condition and
results of operations. The success of the Company and its individual restaurants
depends upon the Company's ability to attract and retain highly motivated,
well-qualified restaurant operations and other management personnel. The Company
faces significant competition in the recruitment of qualified employees. See
"Business--Restaurant Management" and "Business--Customer Service."
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's business experiences seasonal fluctuations as a
disproportionate amount of the Company's net income is generally realized in the
second, third and fourth fiscal quarters due to higher average sales and lower
average costs. Quarterly results have been and are expected to continue to
fluctuate as a result of a number of factors, including the timing of new
restaurant openings. As a result of these factors, net sales and net income on a
quarterly basis may fluctuate and are not necessarily indicative
7
<PAGE>
of the results that may be achieved for a full fiscal year. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Quarterly Results and Seasonality."
GEOGRAPHIC CONCENTRATION IN CALIFORNIA; RESTAURANT BASE
Twenty-eight of the Company's 52 existing salad buffet restaurants are
located in California. Accordingly, the Company is susceptible to fluctuations
in its business caused by adverse economic or other conditions in this region,
including natural disasters or other acts of God that could have a material
adverse effect on the Company's business. The Company's significant investment
in, and long-term commitment to, each of its restaurant sites limits its ability
to respond quickly or effectively to changes in local competitive conditions or
other changes that could affect the Company's operations. In addition, the
Company has a small number of restaurants relative to some of its competitors.
Consequently, a decline in the profitability of an existing restaurant or the
introduction of an unsuccessful new restaurant could have a more significant
effect on the Company's result of operations than would be the case in a company
with a larger number of restaurants. See "Business--Restaurant Facilities" and
"Business--Expansion Strategy."
RELIANCE ON KEY SUPPLIERS AND DISTRIBUTORS
The Company utilizes sole source suppliers for certain produce and grocery
items. In addition, in order to minimize price fluctuations, the Company enters
into two month to one year fixed price supply contracts for some of its foods
with no minimum purchase requirements. However, in the event that the Company's
suppliers are unable to make the required deliveries due to shortages or
interruptions caused by adverse weather or other conditions or are relieved of
their contract obligations due to an invocation of an act of God provision, the
Company would need to renegotiate these contracts or purchase such products and
groceries elsewhere. There can be no assurance that the Company's produce and
grocery costs would not as a result be higher, and such higher costs could have
a material adverse effect on the Company's business and results of operations.
The Company uses one produce distributor and one grocery distributor in each
core region, and all produce and groceries purchased by the Company are
channeled from the growers and other suppliers to the Company's restaurants and
restaurant commissaries through these distributors. In the event that any of
these distributors were to cease distribution on behalf of the Company, the
Company would be required to make alternate arrangements for produce and grocery
distribution. There can be no assurance that the Company's distribution expense
would not be greater under such alternate arrangements. See "--Cost Sensitivity"
and "Business--Restaurant Operations."
COMPUTER SYSTEMS AND YEAR 2000
Many installed computer systems and software products are coded to accept
only two digit entries in the date code field. As the year 2000 approaches,
these code fields will need to accept four digit entries to distinguish years
beginning with "19" from those beginning with "20". As a result, in less than
two years, computer systems and/or software products used by many companies may
need to be upgraded to comply with such year 2000 requirements. The Company's
proprietary accounting and management information software is year 2000
compliant; however, certain standard software used by the Company pursuant to
third party software licenses is not. The Company believes that the cost of
modifying the standard, non-proprietary software will be borne by the licensors,
and accordingly does not believe that it will incur significant costs with
respect to year 2000 compliance. In addition, in the event that the licensors do
not achieve year 2000 compliance in a timely manner, the Company believes that
it can acquire alternative software that is compliant and that performs
substantially the same function as its current software. The Company does not
believe that the cost of acquiring and converting to such alternative software
would be significant or that it would have a material adverse effect on the
Company's business, financial condition or results of operations. However, if
the Company encounters any unanticipated delays in, or costs associate with, the
implementation of such changes, the Company's business, financial condition and
results of operations could be materially adversely affected. There also can be
no assurance that computer systems
8
<PAGE>
operated by third parties, such as vendors and financial institutions, with
which the Company does business will achieve year 2000 compliance in a timely
fashion or that any delays or problems on their part will not have a material
adverse effect on the Company's business.
LEGAL MATTERS
The Company is from time to time the subject of complaints, threat letters
or litigation from guests alleging illness, injury or other food quality, health
or operational concerns. Adverse publicity resulting from such allegations may
materially adversely affect the Company and its restaurants, regardless of
whether such allegations are valid or whether the Company is liable. The Company
also is the subject of complaints or allegations from former or prospective
employees from time to time. Any adverse decision against the Company in a
current or future lawsuit or claim, particularly relating to food quality, could
materially and adversely affect the Company's business or results of operations.
See "Business--Legal Proceedings."
GOVERNMENT REGULATION
The Company's business is subject to and affected by various federal, state
and local laws. Each restaurant must comply with state, county and municipal
licensing and regulation requirements relating to health, safety, sanitation,
building construction and fire prevention. In addition, the Company is required
to comply with the alcohol licensing requirements of the federal government and
the states and municipalities where its restaurants are located. 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 Company's 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. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development of additional restaurants. The Company has not experienced
significant difficulties in obtaining licenses and approvals to date; however,
beer and wine licenses are not always available to the Company as a result of
the location of certain 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 Company's restaurants are subject to federal and state laws governing
wages, working conditions, citizenship requirements and overtime. Congress and
various states (including California) passed proposals that imposed increases in
state or federal minimum wages in 1996, 1997 and 1998. There is no assurance
that the Company will be able to continue to pass increased costs on to its
guests. The Company is subject to the Americans with Disabilities Act of 1990,
which requires certain accommodations to the Company's restaurant designs to
allow access for people with disabilities. In addition, the Company is subject
to the regulations of the Immigration and Naturalization Service ("INS"). Given
the location of many of the Company's restaurants, even if the Company's
operation of those restaurants is in strict compliance with INS requirements,
the Company's employees may not all meet federal citizenship or residency
requirements, which could lead to disruptions in its work force. Additionally,
legislative proposals are currently under consideration by Congress and state
legislators to require employers to pay for health insurance for all employees.
9
<PAGE>
ANTI-TAKEOVER MEASURES
Certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws could have the effect of making it more difficult for a third party
to acquire, or of discouraging a third party from attempting to acquire, control
of the Company. Such provisions could limit the price that investors might be
willing to pay in the future for shares of the Company's Common Stock. Certain
of these provisions allow the Company to issue Preferred Stock with rights
senior to those of the Common Stock without any further vote or action by the
stockholders and impose various procedural and other requirements that could
make it more difficult for stockholders to effect certain corporate actions. The
issuance of Preferred Stock could decrease the amount of earnings and assets
available for distribution to the holders of Common Stock or could adversely
affect the rights and powers, including voting rights, of the holders of the
Common Stock. In certain circumstances, such issuance could have the effect of
decreasing the market price of the Common Stock. See "Description of Capital
Stock."
VOLATILITY OF STOCK PRICE
The market price of the Company's Common Stock has fluctuated since the
initial public offering of the Common Stock in May 1995. Quarterly operating
results of the Company and other restaurant companies, changes in general
conditions in the economy, the financial markets or the restaurant industry,
natural disasters or other developments affecting the Company or its competitors
could cause the market price of the Common Stock to fluctuate substantially. In
addition, in recent years the stock market has experienced extreme price and
volume fluctuations. This volatility has had a significant effect on the market
price of securities issued by many companies for reasons unrelated to the
operating performance of these companies. See "Price Range of Common Stock."
SHARES ELIGIBLE FOR FUTURE SALE
Upon expiration of certain lock-up agreements 120 days after the effective
date of this offering, the Selling Stockholders may be eligible to sell an
aggregate of approximately 900,000 shares in the public market subject to
compliance with Rule 144 under the Securities Act of 1933 (the "Securities Act
of 1933"), as amended. Such sales could have an adverse effect on the price of
the Company's Common Stock.
10
<PAGE>
DIVIDEND POLICY
The Company has never declared or paid cash dividends on its Common Stock
and intends to retain any future earnings for use in its business. Therefore,
the Company does not anticipate paying any cash dividends in the foreseeable
future. Furthermore, the Company may be prohibited from declaring or paying
cash, stock or other dividends or distributions on its capital stock under the
terms of its existing bank credit agreement.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock is traded on the Nasdaq National Market under the
symbol "LTUS." The following table sets forth, for the periods indicated, the
high and low sale prices for the Common Stock as reported on the Nasdaq National
Market.
<TABLE>
<CAPTION>
HIGH LOW
--------- ---------
<S> <C> <C>
FISCAL 1996
First Quarter.............................................................. $ 8.13 $ 6.38
Second Quarter............................................................. 8.38 6.38
Third Quarter.............................................................. 11.00 8.13
Fourth Quarter............................................................. 10.88 9.00
FISCAL 1997
First Quarter.............................................................. $ 10.88 $ 8.25
Second Quarter............................................................. 12.75 9.75
Third Quarter.............................................................. 12.00 9.25
Fourth Quarter............................................................. 15.50 11.13
FISCAL 1998
First Quarter.............................................................. $ 15.25 $ 12.25
Second Quarter............................................................. 18.69 14.50
Third Quarter (through April 28, 1998)..................................... 21.38 18.56
</TABLE>
On April 28, 1998, the last sale price of the Company's Common Stock as
reported on the Nasdaq National Market was $19.625 per share.
11
<PAGE>
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares offered by the
Company, at an assumed public offering price of $20.00 per share, are estimated
to be approximately $24.2 million ($28.8 if the Underwriters' over-allotment
option is exercised in full). The Company intends to use $23.4 million of the
net proceeds of this offering to retire all outstanding debt, which was incurred
primarily to fund the development of new restaurants. The Company intends to use
the balance of the net proceeds, along with additional sources of debt
financing, to finance the development of additional restaurants. As of March 31,
1998, the Company estimates that the aggregate cost of opening the remaining
eight restaurants planned for fiscal 1998 will be approximately $16.5 million of
which $6.6 million has already been incurred. Pending the above uses, the net
proceeds will be invested in short-term, investment-grade, interest-bearing
securities. See "Risk Factors--Expansion Risks," "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Liquidity and Capital
Resources" and Note 3 of Notes to Financial Statements.
CAPITALIZATION
The following table sets forth the Company's actual capitalization as of
March 31, 1998 and as adjusted capitalization to give effect to the sale of the
shares offered by the Company at an assumed public offering price of $20.00 per
share, the exercise of options to purchase 83,500 shares to be sold by certain
Selling Stockholders and the application of the estimated net proceeds
therefrom.
<TABLE>
<CAPTION>
MARCH 31, 1998
----------------------
ACTUAL AS ADJUSTED
--------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt, including current portion............................. $ 23,099 $ --
Shareholders' equity:
Preferred Stock, $.01 par value, 2,500,000 shares authorized, none
outstanding.......................................................
Common Stock, $.01 par value, 12,000,000 shares authorized;
4,318,176 shares issued and outstanding; 5,701,676 shares
outstanding as adjusted(1)........................................ 43 57
Paid-in capital..................................................... 39,260 64,183
Accumulated deficit................................................. (2,765) (3,084)
--------- -----------
Total shareholders' equity........................................ 36,538 61,156
--------- -----------
Total capitalization............................................ $ 59,637 $ 61,156
--------- -----------
--------- -----------
</TABLE>
- ------------------------
(1) Actual outstanding Common Stock excludes 805,945 shares of Common Stock
issuable upon exercise of options outstanding as of March 31, 1998 under the
Restaurant Management Plan, the Key Employee Plan, the 1995 Key Employee
Plan, the Directors Option Plan, the 1998 Option Plan and certain other
nonqualified stock options. As adjusted outstanding Common Stock includes
83,500 shares of Common Stock issuable upon exercise of options to be
exercised immediately prior to the closing of this offering by certain
Selling Stockholders, but excludes the remaining 722,445 shares issuable
upon exercise of outstanding options. See "Management--Benefit Plans" and
"Description of Capital Stock."
12
<PAGE>
SELECTED FINANCIAL DATA
The following historical data for each of the years in the five-year period
ended September 30, 1997, has been derived from the Company's audited financial
statements. Balance sheets at September 30, 1996 and 1997 and the related
statements of operations and of cash flows for the three years ended September
30, 1997 and notes thereto appear elsewhere in this Prospectus. The data for the
six months ended March 31, 1997 and 1998 has been derived from unaudited
financial statements also appearing herein which, in the opinion of management,
include all adjustments, consisting only of normal recurring adjustments,
necessary for a fair statement of the results for the unaudited interim periods.
The operating results for the six months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending September 30, 1998. The selected financial data set forth below
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Financial Statements and
Notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
----------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- -------- ----------- ----------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... $ 51,380 $ 59,658 $ 61,320 $ 71,373 $ 90,252 $ 42,736 $ 51,739
Costs and expenses:
Cost of sales......................... 14,953 16,277 16,721 19,318 23,497 11,183 13,406
Restaurant operating expenses:
Labor............................... 14,592 17,229 17,425 19,870 26,130 12,523 15,245
Occupancy and other................. 13,335 15,710 15,473 16,981 20,836 10,146 12,003
General and administrative expenses... 4,008 4,446 4,098 5,142 5,672 2,804 3,483
Depreciation and amortization
expenses............................ 2,711 3,633 3,604 4,518 6,147 3,061 3,463
Restaurant closure costs.............. -- 815 -- -- -- -- --
--------- -------- ----------- ----------- -------- -------- --------
Total costs and expenses.......... 49,599 58,110 57,321 65,829 82,282 39,717 47,600
--------- -------- ----------- ----------- -------- -------- --------
Operating income........................ 1,781 1,548 3,999 5,544 7,970 3,019 4,139
Interest expense, net................... (1,495) (1,805) (1,092) (529) (1,473) (685) (962)
Other expenses, net..................... -- (60) (210) )(66 (62) (23) (55)
--------- -------- ----------- ----------- -------- -------- --------
Income (loss) before income taxes and
extraordinary item.................... 286 (317) 2,697 4,949 6,435 2,311 3,122
Benefit (provision) for income
taxes(1).............................. (77) (18) 1,646 (1,945) (2,548) (919) (1,218)
--------- -------- ----------- ----------- -------- -------- --------
Income (loss) before extraordinary
item.................................. 209 (335) 4,343 3,004 3,887 1,392 1,904
Extraordinary item--early extinguishment
of debt(2)............................ -- -- (518) -- -- -- --
--------- -------- ----------- ----------- -------- -------- --------
Net income (loss)....................... 209 (335) 3,825 3,004 3,887 1,392 1,904
--------- -------- ----------- ----------- -------- -------- --------
Stock dividend(3)....................... -- -- (8,298) -- -- -- --
--------- -------- ----------- ----------- -------- -------- --------
Net income (loss) available to common
stockholders.......................... $ 209 $ (335) $ (4,473) $ 3,004 $ 3,887 $ 1,392 $ 1,904
--------- -------- ----------- ----------- -------- -------- --------
--------- -------- ----------- ----------- -------- -------- --------
Net income (loss) per share available to
common stockholders
Basic................................. $ 0.61 $ (0.86) $ (2.47) $ 0.73 $ 0.93 $ 0.34 $ 0.44
--------- -------- ----------- ----------- -------- -------- --------
--------- -------- ----------- ----------- -------- -------- --------
Diluted............................... $ 0.13 $ (0.86) $ (2.47) $ 0.72 $ 0.88 $ 0.32 $ 0.41
--------- -------- ----------- ----------- -------- -------- --------
--------- -------- ----------- ----------- -------- -------- --------
Shares used in computing net income
(loss) per share
Basic................................. 342 391 1,810 4,103 4,192 4,150 4,298
Diluted............................... 1,624 391 1,810 4,176 4,402 4,345 4,633
SELECTED OPERATING DATA:
Percentage change in comparable
restaurant sales(4)................... (4.2)% 1.2% %2.0 %2.5 4.7% 1.9% 7.6%
Average price per guest(5).............. $ 6.64 $ 6.66 $ 6.56 $ 6.57 $ 6.75 $ 6.71 $ 6.93
Average sales for salad buffet
restaurants open for full period (in
thousands)............................ $ 1,748 $ 1,779 $ 1,835 $ 1,902 $ 1,985 $ 953 $ 1,016
Number of salad buffet restaurants open
for full period....................... 27 31 32 35 42 42 49
Number of salad buffet restaurants open
at end of period...................... 33 33 35 42 49 46 52
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30, MARCH 31,
---------------------------------------------------------- -------------------
1993 1994 1995 1996 1997 1997 1998
--------- -------- ----------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)............... $ (2,229) $ (938) $ 292 $ (6,677) $ (7,776) $ (4,923) $ (7,649)
Total assets............................ 27,932 29,713 36,709 48,062 62,409 56,062 71,468
Long-term debt and capital lease
obligations,
including current portion............. 11,117 13,263 4,017 9,934 17,421 15,829 23,099
Shareholders' equity.................... 10,522 10,209 25,800 29,257 34,168 30,978 36,538
</TABLE>
- ------------------------------
(1) Fiscal 1995 results include a benefit related to recognition of deferred tax
assets of $2,173.
(2) Represents a charge for previously unamortized issue costs, debt discount,
and prepayment penalty, net of $192 income tax benefit.
(3) Reflects preferential stock dividend of approximately 922 shares of Common
Stock to the holders of the Company's Series B, Series C and Series D
Preferred Stock, which occurred upon completion of the Company's initial
public offering.
(4) Comparable restaurant sales are computed on a monthly basis and then
aggregated to determine comparable restaurant sales on a quarterly or annual
basis. A restaurant is included in this computation after it has been open
for 15 full calendar months. As a result, a restaurant may be included in
this computation for only a portion of a given quarter or year.
(5) Average price per guest is derived from the Company's net sales, which
reflects discounts and coupons.
14
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
THE STATEMENTS CONTAINED IN THIS PROSPECTUS THAT ARE NOT PURELY HISTORICAL
ARE FORWARD LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING THE COMPANY'S
EXPECTATIONS, HOPES, BELIEFS, INTENTIONS OR STRATEGIES REGARDING THE FUTURE.
STATEMENTS WHICH USE THE WORDS "EXPECTS," "WILL," "MAY," "ANTICIPATES,"
"BELIEVES," "INTENDS," AND "SEEKS" ARE FORWARD LOOKING STATEMENTS. THESE FORWARD
LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING THE COMPANY'S EXPANSION
EFFORTS AND PLANS TO OPEN NEW RESTAURANTS, ARE BASED ON INFORMATION AVAILABLE TO
THE COMPANY ON THE DATE HEREOF, AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
ANY SUCH FORWARD LOOKING STATEMENT. IT IS IMPORTANT TO NOTE THAT THE COMPANY'S
ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD LOOKING
STATEMENTS. AMONG THE FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY ARE THE FACTORS SET FORTH UNDER THE HEADING "RISK FACTORS." IN
PARTICULAR, THE COMPANY'S EXPANSION EFFORTS AND PLANS TO OPEN NEW RESTAURANTS
COULD BE AFFECTED BY THE COMPANY'S ABILITY TO LOCATE SUITABLE RESTAURANT SITES,
CONSTRUCT NEW RESTAURANTS IN A TIMELY MANNER AND OBTAIN ADDITIONAL FUNDS.
The following should be read in conjunction with the "Selected Financial
Data" and the Company's financial statements and related notes thereto.
GENERAL
The Company has grown from 2 restaurants in 1984 to 52 salad buffet
restaurants as of March 31, 1998. Of the 52 restaurants, 23 are located in
Southern California using the name Souplantation and the balance are located in
Northern California (5), Florida (12), Arizona (7), New Mexico (2), Utah (2) and
Nevada (1), using the name Sweet Tomatoes. The Company's existing restaurants
average approximately 7,585 square feet, with newer restaurants based on the
Company's latest 7,200 sq ft prototype being smaller on average. The Company
currently leases the sites for most of its restaurants, mixed between in-line
locations and stand alone sites, although the Company purchases sites when
necessary to acquire desirable locations.
Net sales reflects discounts and coupons. Cost of sales consists primarily
of food and beverage costs. Food costs can vary significantly depending upon
pricing and availability of produce and grocery items. The Company attempts to
minimize cost fluctuations for some of its foods by entering into two month to
one year fixed price supply contracts with no minimum purchase requirements.
Restaurant operating expenses include all restaurant-level operating costs, the
significant components of which are direct and indirect labor expenses
(including benefits), advertising expenses, occupancy costs and maintenance and
utility expenses. Occupancy and other operating costs include rent, real estate
taxes and insurance. Certain elements of the Company's restaurant operating
expenses and, in particular, occupancy costs, are relatively fixed. However, a
significant majority of the Company's leases provide for periodic escalation of
minimum annual rentals based upon increases in the Consumer Price Index.
Occupancy costs, as well as depreciation and amortization expenses, will vary
between restaurants depending on whether a restaurant site is leased or owned.
See "Risk Factors--Cost Sensitivity" and "Risk Factors--Reliance on Key
Suppliers and Distributors."
Restaurant pre-opening costs incurred in connection with opening new
restaurant locations, including hiring, training and legal costs, are currently
amortized over one year commencing with the opening of the restaurant.
Pre-opening costs averaged approximately $205,000 for the six restaurants opened
in the twelve month period ended March 31, 1998. See "--New Accounting
Standard."
15
<PAGE>
OPERATING RESULTS
The following table sets forth the percentage of net sales of certain items
included in the Company's statements of operations for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, MARCH 31,
--------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Cost of sales......................... 27.3 27.1 26.0 26.2 25.9
Restaurant operating expenses:
Labor............................... 28.4 27.8 29.0 29.3 29.5
Occupancy and other................. 25.2 23.8 23.1 23.7 23.2
General and administrative expenses... 6.7 7.2 6.3 6.6 6.7
Depreciation and amortization
expenses............................ 5.9 6.3 6.8 7.1 6.7
------- ------- ------- ------- -------
Total costs and expenses.......... 93.5 92.2 91.2 92.9 92.0
------- ------- ------- ------- -------
Operating income........................ 6.5 7.8 8.8 7.1 8.0
Interest expense, net................... (1.8) (0.8) (1.6) (1.6) (1.9)
Other expenses, net..................... (0.3) (0.1) (0.1) (0.1) (0.1)
------- ------- ------- ------- -------
Income before income taxes and
extraordinary item.................... 4.4 6.9 7.1 5.4 6.0
Benefit (provision) for income taxes.... 2.7 (2.7) (2.8) (2.1) (2.3)
------- ------- ------- ------- -------
Income before extraordinary item........ 7.1 4.2 4.3 3.3 3.7
Extraordinary item--early extinguishment
of debt............................... (0.9) -- -- -- --
------- ------- ------- ------- -------
Net income.............................. 6.2 4.2 4.3 3.3 3.7
Stock dividend.......................... (13.5) -- -- -- --
------- ------- ------- ------- -------
Net income (loss) available to common
shareholders.......................... (7.3)% 4.2% 4.3% 3.3% 3.7%
------- ------- ------- ------- -------
------- ------- ------- ------- -------
</TABLE>
SIX MONTHS ENDED MARCH 31, 1998 VERSUS SIX MONTHS ENDED MARCH 31, 1997
NET SALES. Net sales for the six months ended March 31, 1998 increased
21.1% to $51.7 million from $42.7 million for the comparable 1997 period. This
was due to the opening of six restaurants since the comparable 1997 period and
the increase in comparable restaurant sales of 7.6%.
COST OF SALES. Cost of sales for the six months ended March 31, 1998
increased 19.6% to $13.4 million from $11.2 million for the comparable 1997
period. As a percentage of net sales, cost of sales decreased 0.3% from 26.2% to
25.9% in the comparable 1997 period due to a higher average meal price per
guest.
LABOR. Labor expense for the six months ended March 31, 1998 increased
21.6% to $15.2 million from $12.5 million for the comparable 1997 period. This
increase was due to the six restaurants opened since the comparable 1997 period.
As a percentage of net sales, the labor expense increased 0.2% from 29.3% in the
comparable 1997 period due to increases in the California minimum wage effective
March 1, 1997 and March 1, 1998, and the addition of six new restaurants which
utilized higher than historical labor hours.
OCCUPANCY AND OTHER. Occupancy and other operating costs for the six months
ended March 31, 1998 increased 18.8% to $12.0 million from $10.1 million for the
comparable 1997 period. This was due mainly to the addition of six new
restaurants, additional advertising to support the increase in same store sales
in
16
<PAGE>
existing markets, increases in professional services due to the change in
minimum wage, and maintenance and repair costs to maintain equipment and
facilities in older buildings. Occupancy and other operating costs as a
percentage of net sales decreased to 23.2% from 23.7% for the comparable 1997
period. This was due primarily to additional sales volume.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the six months ended March 31, 1998 increased 25.0% to $3.5 million from
$2.8 million for the comparable 1997 period. This was due primarily to the
increased personnel and relocation costs associated with opening stores in new
regions. As a percentage of net sales, general and administrative expenses
increased to 6.7% from 6.6% for the comparable 1997 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the six months ended March 31, 1998 increased 12.9% to $3.5 million
from $3.1 million for the comparable 1997 period. This increase was due to
depreciation and amortization for the new restaurants opened since the
comparable 1997 period. Depreciation and amortization as a percentage of net
sales decreased to 6.7%, from 7.1% for the comparable 1997 period due to lower
amortization of preopening costs and high sales volume.
INTEREST EXPENSE, NET. Interest expense, net for the six months ended March
31, 1998 increased 42.9% to $1.0 million from $0.7 million for the comparable
1997 period. Interest expense increased due to the increase in debt incurred for
expansion.
FISCAL 1997 VERSUS FISCAL 1996
NET SALES. Net sales for the fiscal year ended September 30, 1997 increased
26.5% to $90.3 million from $71.4 million for the comparable 1996 period. The
increase was due to a 4.7% increase in comparable restaurant sales which
resulted from an increase in guest volume of 3.1%, and in average meal price of
1.6% and the addition of seven new stores that opened in fiscal 1997.
COST OF SALES. Cost of sales increased 21.8% to $23.5 million for the
fiscal year ended September 30, 1997 from $19.3 million for the comparable 1996
period. As a percentage of net sales, cost of sales decreased 1.1% from 27.1% in
fiscal 1996 to 26.0% for fiscal 1997. This decrease was primarily due to better
menu management and improved purchasing.
LABOR. Labor expense for the fiscal year ended September 30, 1997 increased
31.1% to $26.1 million from $19.9 million for the comparable 1996 period. This
increase was due primarily to an increase in the minimum wage and the associated
benefits based on wages. The remainder of the increase was due to increased
staffing requirements resulting from the increase in guest volume during the
period. As a percentage of net sales, labor expense for the fiscal year ended
September 30, 1997 increased to 29.0% from 27.8% in the comparable 1996 period.
OCCUPANCY AND OTHER. Occupancy and other operating costs for the fiscal
year ended September 30, 1997 increased 22.4% to $20.8 million from $17.0 in the
comparable 1996 period. As a percentage of net sales, occupancy and other
operating costs for the fiscal year ended September 30, 1997 decreased to 23.1%
from 23.8% in the comparable 1996 period. The decrease was due to primarily
lower occupancy costs in the newer regions.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the fiscal year ended September 30, 1997 increased 11.8% to $5.7 million
from $5.1 million for the comparable 1996 period. This increase was primarily
due to the increased personnel costs required to support the increased sales
volume. As a percentage of net sales, general and administrative expenses for
the fiscal year ended September 30, 1997 decreased to 6.3% from 7.2% in the
comparable 1996 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the fiscal years ended September 30, 1997 and 1996 was
approximately $6.1 million and $4.5 million, respectively. As a
17
<PAGE>
percentage of net sales, depreciation and amortization expense for the fiscal
year ended September 30, 1997 increased to 6.8% from 6.3% in the comparable 1996
period. This increase was attributable to the increased amortization of start up
costs associated with the opening of seven new restaurants, four of which were
in new regions. The first store in a new region typically has higher startup
costs than later stores due to extra costs associated with establishing a new
region.
INTEREST EXPENSE, NET. Interest expense, net for the fiscal year ended
September 30, 1997 increased to $1.5 million from $0.5 million for the fiscal
year ended September 30, 1996. This increase was attributable to new debt
incurred for continued expansion.
BENEFIT (PROVISION) FOR INCOME TAXES. Provision for income taxes increased
to $2.5 million in 1997 from $1.9 million in 1996 principally due to higher
pretax income during the fiscal year.
NET OPERATING LOSS CARRYFORWARDS. At September 30, 1996, the Company had
available net operating loss carryforwards for federal income tax purposes of
approximately $1.4 million, which were utilized during fiscal 1997.
FISCAL 1996 VERSUS FISCAL 1995
NET SALES. Net sales for the fiscal year ended September 30, 1996 increased
16.5% to $71.4 million from $61.3 million for the comparable 1995 period. The
increase was due to a 2.5% increase in comparable restaurant sales which
resulted from an increase in guest volume and the addition of seven new salad
buffet restaurants opened in the second half of fiscal 1996.
COST OF SALES. Cost of sales increased 15.6% to $19.3 million in the year
ended September 30, 1996 from $16.7 million in the comparable 1996 period. As a
percentage of net sales, cost of sales decreased 0.2% to 27.1% for the fiscal
year ended September 30, 1996. This decrease was primarily due to better cost
management and improved purchasing.
LABOR. Labor expense for the fiscal year ended September 30, 1996 increased
14.4% to $19.9 million from $17.4 million for the comparable 1995 period. This
increase was due to increased staffing requirements resulting from the increase
in guest volume during the period. As a percentage of net sales, labor expense
for the fiscal year ended September 30, 1996 decreased to 27.8% from 28.4% in
the comparable 1995 period. This decrease was primarily due to a reduction in
workers' compensation insurance premiums.
OCCUPANCY AND OTHER. Occupancy and other operating costs for the fiscal
year ended September 30, 1996 increased 10.4% to $17.0 million from $15.4
million in the comparable 1995 period. As a percentage of net sales, occupancy
and other operating costs for the fiscal year ended September 30, 1996 decreased
to 23.8% from 25.2% in the comparable 1995 period. The decrease was due to
primarily lower occupancy costs in the newer regions, better managed supplies
and services, and lower marketing expense relative to sales.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
for the fiscal year ended September 30, 1996 increased 24.4% to $5.1 million
from $4.1 million for the comparable 1995 period. This increase was primarily
due to the increased cost associated with being a public company and personnel
costs required to support the increased sales volume. As a percentage of net
sales, general and administrative expenses for the fiscal year ended September
30, 1996 increased to 7.2% from 6.7% in the comparable 1995 period.
DEPRECIATION AND AMORTIZATION EXPENSES. Depreciation and amortization
expenses for the fiscal year ended September 30, 1996 and 1995 was approximately
$4.5 million and $3.6 million, respectively. As a percentage of net sales,
depreciation and amortization expense for the fiscal year ended September 30,
18
<PAGE>
1996 increased to 6.3% from 5.9% in the comparable 1995 period. This increase
was attributable to the increased amortization of start up costs associated with
the opening of seven new salad buffet restaurants.
INTEREST EXPENSE, NET. Interest expense, net for the fiscal year ended
September 30, 1996 decreased 54.5% to $0.5 million from $1.1 million for the
fiscal year ended September 30, 1995. This was attributable to the reduction of
debt due to payoff thereof with the proceeds from the Company's initial public
offering in May 1995.
BENEFIT (PROVISION) FOR INCOME TAXES. Provision for income taxes increased
to $1.9 million in 1996 from a benefit of $1.6 million in 1995 principally due
to the recognition of $2,173,000 in deferred tax assets during the fourth
quarter of fiscal year 1995.
EXTRAORDINARY ITEM--EARLY EXTINGUISHMENT OF DEBT. During fiscal year 1995
the Company recognized an extraordinary loss of $518,000, net of an income tax
benefit of $192,000, representing a charge for previously unamortized debt issue
costs, unamortized debt discount, and a prepayment penalty associated with early
extinguishment of debt. There were no extraordinary items in fiscal year 1996.
NET OPERATING LOSS CARRYFORWARDS. At September 30, 1996, the Company had
available net operating loss carryforwards for federal income tax purposes of
approximately $1.4 million.
QUARTERLY RESULTS AND SEASONALITY
The following table sets forth certain unaudited quarterly results and the
percentage that certain items in the Company's statements of operations bear to
net sales for the four quarters of fiscal 1996 and 1997, and the first two
quarters of fiscal 1998. The Company believes that this unaudited quarterly
information includes all adjustments, consisting only of normal recurring
adjustments and accruals, necessary for a fair presentation of the information
shown. The operating results for any quarter are not necessarily indicative of
results for any future period.
<TABLE>
<CAPTION>
FISCAL 1996 FISCAL 1997
--------------------------------------------- ---------------------------------------------
FIRST SECOND THIRD FOURTH FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $14,935 $17,597 $18,712 $20,129 $19,277 $23,459 $23,502 $24,014
Operating income.............. 515 1,384 1,729 1,916 950 2,069 2,391 2,560
Net income.................... 245 771 962 1,026 375 1,017 1,192 1,303
AS A PERCENTAGE OF NET SALES:
Operating income.............. 3.4% 7.9% 9.2% 9.5% 4.9% 8.8% 10.2% 10.7%
Net income.................... 1.6 4.4 5.1 5.1 1.9 4.3 5.1 5.4
SELECTED OPERATING DATA:
Number of salad buffet
restaurants open at end of
period...................... 35 35 39 42 44 46 46 49
Percentage change in
comparable restaurant
sales(1).................... (0.2%) 6.7% 2.2% 0.9% 3.7% 1.6% 5.0% 9.4%
<CAPTION>
FISCAL 1998
---------------------
FIRST SECOND
QUARTER QUARTER
--------- ---------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................... $23,903 $27,836
Operating income.............. 1,387 2,752
Net income.................... 586 1,318
AS A PERCENTAGE OF NET SALES:
Operating income.............. 5.8% 9.9%
Net income.................... 2.5 4.7
SELECTED OPERATING DATA:
Number of salad buffet
restaurants open at end of
period...................... 51 52
Percentage change in
comparable restaurant
sales(1).................... 9.8% 5.8%
</TABLE>
- ------------------------------
(1) Comparable restaurant sales are computed on a monthly basis and then
aggregated to determine comparable restaurant sales on a quarterly or annual
basis. A restaurant is included in this computation after it has been open
for 15 full calendar months. As a result, a restaurant may be included in
this computation for only a portion of a given quarter or year.
The Company's restaurants experience seasonal influences, as a
disproportionate amount of the Company's net income is realized during the
second, third and fourth fiscal quarters due to higher average sales and lower
average costs. Quarterly results have fluctuated and are expected to continue to
fluctuate
19
<PAGE>
as a result of a number of factors, including the timing of new restaurant
openings, and are not necessarily indicative of the results that may be achieved
for a full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
The Company finances its cash requirements principally from cash flow from
operating activities, bank debt and mortgage and capital lease financings. The
Company does not have significant receivables or inventory, and receives trade
credit based upon negotiated terms when purchasing food and supplies. From
October 1, 1996 through March 31, 1998, the Company generated $17.1 million in
cash flow from operating activities, received $13.2 million from bank debt and
mortgage and capital lease financings (net of repayments), and an additional
$1.5 million from the sale of the Company's Common Stock pursuant to stock
options and the Company's Employee Stock Purchase Plan.
As of March 31, 1998, the Company had drawn approximately $4.8 million of
its $5.0 million bank line of credit. Such credit line bears interest at the
bank's reference rate plus 0.75%, which totaled 9.25% per annum as of March 31,
1998. The credit agreement expires on November 1, 1999 and contains various
financial covenants and restrictions, including restrictions on the Company's
ability to pay dividends or to effect mergers or acquisitions without the bank's
approval. Borrowings under the line of credit are collateralized by equipment
and other assets. As of March 31, 1998 the Company was not in technical
compliance with one financial covenant. The breach has been waived by the bank
pending negotiation of an amendment to the covenant.
In connection with the development of new restaurants, the Company has over
time obtained mortgage and capital lease financing from approximately nine
lenders, each of which has financed multiple loans or leases. The outstanding
balance of each loan or lease generally is between $100,000 and $1.1 million.
The loans and leases have varying maturity rates extending through April 2003,
interest rates ranging from 8.1% through 11.7% with an average interest rate of
approximately 10% per annum, and in certain cases, pre-payment penalties of one
to two percent. As of March 31, 1998, the outstanding balances on such loans and
leases aggregated approximately $18.3 million. The Company expects to retire
such debt in full with the proceeds of this offering.
The Company's principal capital requirement has been and will continue to be
funding the development of restaurants. From October 1, 1996 through March 31,
1998, capital expenditures totaled $27.5 million, $23.9 million of which funded
the development of new restaurants. The remaining capital expenditures primarily
funded maintenance at existing restaurants. In addition to budgeted capital
expenditures for the last six months of fiscal 1998 of $10.0 million for new
restaurant openings, the Company has budgeted $1.8 million in expenditures for
fiscal 1998 for capital improvements at existing sites. See "Business--Unit
Economics."
The Company intends to use the net proceeds of this offering to retire all
of its outstanding debt, which was incurred primarily to fund the development of
new restaurants. As a result, substantially all of the Company's assets will be
unencumbered shortly after the completion of this offering and the application
of the net proceeds therefrom. The Company believes that (i) internally
generated funds, (ii) available borrowings under the bank credit line and (iii)
funds that it will be able to borrow pursuant to secured credit facilities
consistent with its past practices, will be sufficient to meet the Company's
cash requirements through at least the end of fiscal 1999. After completion of
this offering and application of the net proceeds therefrom, the Company
believes that it will be able to arrange additional secured credit facilities on
terms at least as favorable to the Company as its current debt financing. If
these sources of financing are insufficient to satisfy the Company's liquidity
requirements, the Company may be required to sell additional equity or debt
securities or obtain additional credit facilities. There is no assurance that
financing will be available to the Company on favorable terms, or at all.
20
<PAGE>
IMPACT OF INFLATION
The primary inflationary factors affecting the Company's operations include
food and beverage and labor costs. The Company does not believe that inflation
has materially affected earnings during the past three years. Substantial
increases in costs and expenses, particularly food, supplies, labor and
operating expenses, could have a significant impact on the Company's operating
results to the extent that such increases cannot be passed along to guests.
NEW ACCOUNTING STANDARD
In April 1998, the Accounting Standards Executive Committee issued Statement
of Position (SOP) 98-5, "Reporting on the Costs of Start-Up Activities." This
SOP requires that the costs of start-up activities, which is inclusive of
pre-opening costs, should be expensed as incurred. This new accounting standard
is effective for financial statements for fiscal years beginning after December
15, 1998. Earlier application is encouraged in fiscal years for which annual
financial statements have not been issued. Restatement of previously issued
financial statements is not permitted.
As is typical in the restaurant industry, the Company defers its restaurant
pre-opening costs and amortizes them over the twelve-month period following the
opening of each respective restaurant. At March 31, 1998, total deferred
pre-opening costs were $1.6 million. For fiscal 1997 and the six months ended
March 31, 1998, preopening expense amortization was approximately $1.1 million
and $0.7 million, respectively. The Company has not yet determined when it will
adopt SOP 98-5. Upon adoption, the Company will recognize the cumulative effect
of a change in accounting principle, net of any related income tax effect.
21
<PAGE>
BUSINESS
GENERAL
Garden Fresh Restaurant Corp. was founded in 1983 and currently operates 52
salad buffet restaurants in California, Florida, Arizona, New Mexico, Utah and
Nevada under the names Souplantation and Sweet Tomatoes. The Company's
restaurants feature fresh, great tasting salads and other complementary foods.
Due to its salad focus, the Company's concept falls within a segment of the
restaurant industry that is distinct from other buffet concepts and moderately
priced casual restaurants. The Company believes that it is well-positioned to
further penetrate this segment and that the opportunity for expansion within
this segment currently is attractive relative to expansion opportunities for
many other restaurant segments.
BUSINESS STRATEGY
The Company's fundamental strategy is to provide a casual restaurant dining
experience that incorporates the variety and choice inherent in a buffet
restaurant but the food quality and service expected in casual chains. The
Company believes that this strategy will create restaurant operating margins not
normally found in the buffet/family dining segment. The key elements of the
Company's strategy are as follows:
COMMITMENT TO HIGH QUALITY FOOD. The Company seeks to provide fresh
wholesome food with a strong emphasis on salads, which are featured on two 55
foot bars that include a wide range of salad offerings featuring three freshly
tossed salads as well as a large assortment of fresh cut produce, dressings and
toppings and several signature prepared salads. Various other offerings include
made from scratch soups, a hot pasta bar, a bakery which serves a variety of hot
muffins, focaccias and other breads and a dessert bar centered around a frozen
yogurt station with toppings complemented by fresh fruits and puddings.
COMMITMENT TO GUEST SERVICE. The Company seeks to provide its guests with a
level of service that exceeds the standards set by other buffet concepts while
not inhibiting the guest from enjoying the benefits of selecting from a virtual
cornucopia of choices offered at the various food bars within the restaurant. In
addition to high service standards the Company has implemented several programs
to maximize guest satisfaction. Included in these is a "zero defect" program
that focuses on the most popular offerings to ensure that each portion is
prepared exactly as specified by the recipes. The Company's high service
standards can only be maintained through intensive recruiting and training
programs designed to employ crew members and management that can sustain a
friendly, enjoyable environment thereby maximizing the guest's meal experience.
EXCELLENT PRICE/VALUE RELATIONSHIP. The Company believes that the pricing
and product mix at each restaurant is maintained at such a high level that the
resulting meal experience can only be duplicated in other casual chains at price
points that average two to three dollars higher than at the Souplantation and
Sweet Tomatoes restaurants.
COST MANAGEMENT. The ability of the Company to maintain the highest
possible quality products combined with what the Company believes to be one of
the lowest cost structures in the casual chain segment is directly attributable
to the Company's ability to manage costs rigorously. This is achievable only
through the use of the Company's fully integrated, proprietary computer
management information system. The precision with which the system operates
allows a manager to review his/her entire cost structure in increments of cents
per guest or minutes per employee if need be. At the same time, every level of
management can review virtually any data in any store as quickly as the store
itself. This allows for rapid problem detection and resolution thereby
minimizing potential cost problems. The Company believes that the system's
sophistication combined with the ability of management to effectively use it are
unequaled in the industry.
22
<PAGE>
EXPANSION STRATEGY
The Company intends to expand in fiscal 1998 and 1999 primarily in new
markets outside of California. In fiscal 1997, the Company opened one restaurant
in Arizona, four restaurants in Florida, one restaurant in New Mexico, and one
restaurant in Utah. In fiscal 1998, the Company has opened three new
restaurants, one each in Florida, Utah and Nevada, and anticipates opening
approximately eight additional salad buffet restaurants outside of California.
The Company has signed one lease, purchased five sites and signed contracts to
purchase two sites to be opened in fiscal 1998. In fiscal 1999, the Company
anticipates opening twelve new restaurants. The Company has signed contracts to
purchase four sites to be opened in fiscal 1999. Expansion will allow the
Company to continue generally utilizing a central kitchen to serve several
restaurants located within a particular region. In addition, as a part of its
expansion strategy, the Company is evaluating the possibility of developing its
concept in alternative formats. The Company currently has no plans to offer
franchises.
The Company's ability to implement an expansion strategy will depend on a
variety of factors, including the Company's ability to locate suitable
restaurant sites, construct new restaurants in a timely manner and obtain
additional funds. See "Risk Factors--Expansion Risks."
UNIT ECONOMICS
For the twelve month period ended March 31, 1998, the 46 salad buffet
restaurants that were open for the entire period had an average of approximately
298,000 guest visits during the period, generated average net sales of
approximately $2,034,000, average restaurant operating income (net sales less
cost of sales, restaurant operating expenses, depreciation and amortization) of
approximately $328,000 or 16.1% of net sales, and average cash flow (operating
income plus depreciation and amortization) of approximately $449,000 or 22.1% of
net sales. The Company's average cash investment for the six restaurants opened
in the twelve month period ended March 31, 1998, excluding land purchases and
pre-opening costs, was approximately $1.9 million. Pre-opening costs averaged
approximately $205,000 for these restaurants. The investment to open a new
restaurant typically includes the purchase or installation of furniture,
fixtures, equipment and leasehold improvements, and in the case of an owned
site, the purchase of land and a building. The Company currently leases the
sites for most of its restaurants, mixed between in-line locations and
stand-alone sites, although the Company purchases sites when necessary to
acquire desirable locations.
CONCEPT AND MENU
The Company's menu is designed to focus on freshly made, great tasting food.
The focal point of the menu is the salad bar, but not to the point of neglecting
other interesting and exciting food offerings at the pasta, soup, bakery, frozen
yogurt and dessert bars. The Company seeks to provide guests with an excellent
value by offering unlimited access to its entire menu of high quality fresh
items at a fixed price. Depending on the region and time of day, the price
ranges from $5.79 to $6.99 at lunch and from $6.99 to $7.69 at dinner. Discounts
are provided to children under 12 and senior citizens.
23
<PAGE>
The following is a description of the Company's menu items in the order they
would appear to a guest walking along the various food bars in a typical
restaurant:
TOSSED SALADS. Upon entering the restaurant, guests are greeted at the door
and begin to walk along either of the salad bars. The initial featured
selections along the salad bars are two to three specialty salads that are
tossed fresh approximately every 20 minutes. The selections are changed weekly
for variety. The following is a partial listing of the Company's specialty salad
recipes:
Antipasto Salad
Barbecue Chicken Chopped Salad
California Cobb Salad
Caribbean Krab Salad
Caesar Salad
Chopped Salad with Smoked Turkey and Roasted Red Pepper
Country French Salad with Bacon
Greek Salad
Ranchero Taco Salad
Roasted Vegetable Salad with Feta & Olives
Roma Tomato, Mozzarella & Basil Salad
Shrimp & Krab Louie Salad
Sonoma Artichoke Salad
Spinach & Pasta Salad with Raspberry Vinaigrette
Spinach Salad with Mandarin Oranges and Caramelized Walnuts
Won Ton Chicken Salad
Following the specialty tossed salads on the salad bar, guests can make
their own salads by choosing from a broad assortment of fresh cut salad
ingredients. The salad bar offers three types of lettuce (romaine, iceberg and
one other rotational lettuce), an assortment of 11 seasonal fresh cut vegetables
(such as grated carrots, sliced mushrooms, chopped bell peppers and diced
jicama), 10 toppings (such as sunflower seeds, fresh bacon bits, grated cheddar
cheese and crumbled eggs), various condiments and 10 dressings. Employees
located between the two salad bars replenish the salad offerings frequently and
assist guests.
Next, the salad bar features prepared signature salads. The following is a
partial list of the Company's signature salad recipes:
Artichoke Rice Salad
Aunt Doris' Red Pepper Slaw
Baja Bean with Cilantro Salad with
Chipotle Vinaigrette
BBQ Potato Salad
Carrot Ginger Salad with Herb Vinaigrette
Carrot Raisin Salad
Chinese Krab Salad
Confetti Pasta Salad with Cheddar & Dill
Cowboy Beans Salad
Cucumber Tomato Salad with Chile Lime
Dijon Potato Salad with Garlic Dill Vinaigrette
Gemelli Pasta Salad with Chicken
German Potato Salad
Greek Couscous with Feta Cheese
Italian White Bean Salad
Jalapeno Potato Salad
Lemon Orzo Salad with Feta & Mint
Mandarin Krab Salad
Mandarin Noodles with Broccoli and Sesame Seeds
Mandarin Shells with Almonds and Snow Peas
Marinated Summer Vegetable Salad
Mazatlan Krab & Pasta Salad
Mediterranean Harvest Salad
Mediterranean Krab & Rotini Salad
Moroccan Marinated Vegetables
Old Fashioned Macaroni Salad
Oriental Ginger Slaw with Krab
Pesto Kashi
Picante Pasta Salad
Picnic Potato Salad
Pineapple Coconut Slaw
Poppyseed Coleslaw
Roasted Potato Salad with Chipotle Vinaigrette
Shrimp Tarragon Salad
Soba Noodles with Chicken
Southern Dill Potato Salad
Spicy Southwestern Pasta
Spinach Krab Salad
Summer Barley with Black Bean Salad
Thai Noodles with Peanut Sauce
Three Bean Marinade Salad
Tortellini Salad
Tortellini Salad with Basil
Tumbleweed Tortellini Salad
Tuna Tarragon Salad
Turkey Chutney Pasta Salad
Zesty Tortellini
24
<PAGE>
BEVERAGES. At the end of the salad bar, the Company offers an assortment of
beverages, including fresh juices, milk, soft drinks, sparkling waters,
lemonades, and in certain locations, beer and wine. Refills of soft drinks,
coffee and tea are provided at no extra cost.
SOUP BAR. The soup bar contains a selection of five to six soups made fresh
daily, featuring three regular offerings of chicken noodle soup, clam chowder
and chili. The Company seeks to offer only the highest quality soups. In making
one of its most popular dishes, chicken noodle soup, the Company cooks its own
chicken broilers, selecting only the white meat for use in the soup and using
some of the remaining portion to create a natural broth. The Company offers
additional soups that are selected from the Company's soup recipes, including
the following:
Albondigas Buenas Soup
Chesapeake Corn Chowder
Chicken Jambalaya
Chunky Potato Cheese Soup
Cream of Broccoli Soup
Cream of Mushroom Soup
Green Chile Stew
Irish Potato Leek Soup
Navy Bean Soup
New England Clam Chowder with Bacon
New Orleans Style Jambalaya
Posole
Santa Fe Black Bean Chile
Shrimp Bisque
Spicy 4-Bean Minestrone
Split Pea Soup with Ham
Sweet Tomato Onion Soup
Texas Red Chili
Turkey Cassoulet
Turkey Noodle Soup
Turkey Vegetable Soup
Vegetable Beef Stew
Vegetable Medley Soup
Vegetarian Harvest Soup
Yucatan Chili
PASTA BAR. At the pasta bar, guests can select from three hot pasta dishes
that are made fresh every 20-30 minutes. Pasta is prepared exhibition style to
order at the pasta station and served in individual servings to ensure that both
the pasta and the sauce remain hot. The Company's pasta sauce recipes include
the following:
Bruschetta
Chipotle Chicken with Cilantro
Creamy Bruschetta
Creamy Pesto with Sundried Tomatoes
Fettucine Alfredo
Garden Vegetable with Italian Sausage
Garden Vegetable with Meatballs
Italian Vegetable Beef
Jalapeno Salsa
Nutty Mushroom
Smoked Salmon & Dill
Vegetarian Marinara with Basil
BAKED GOODS. Each day, the bakery bar offers three different muffins, two
varieties of fresh dough pizza focaccias and a variety of freshly baked breads.
In addition, the Company offers baked potatoes and assorted toppings. All
muffins and other baked goods are baked on site and replenished frequently to
ensure warmth and freshness. The Company's recipes include the following:
Apple Cinnamon Bran Muffin
Apple Raisin Muffin
Apricot Nut Muffin
Banana Nut Muffin
Buttermilk Corn Bread
Carrot Pineapple Muffin with Oat Bran
Cherry Nut Muffin
Chile Corn Muffin
Chocolate Brownie Muffin
Chocolate Chip Mandarin Muffin
Chocolate Chip Muffin
Cranberry Orange Bran Muffin
Fruit Medley Bran Muffin
Garlic Parmesan Focaccia Muffin
Georgia Peach Poppyseed Muffin
Indian Grain Bread
Lemon Muffin
Mandarin Almond Muffin with Oat Bran
Nutty Peanut Butter Muffin
Peanut Butter Chocolate Chip Muffin
Pizza Focaccia
Pumpkin Raisin Muffin
Roasted Potato Focaccia
Strawberry Buttermilk Muffin
Sourdough Bread
Tomatillo Focaccia
Wild Maine Blueberry Muffin
Wild Maine Blueberry Muffin--Large
Zucchini Nut Muffin
25
<PAGE>
DESSERTS. Each restaurant offers several varieties of fresh fruit and other
dessert items. The most popular dessert offering is frozen yogurt. At the yogurt
bar, guests have the choice of two varieties of frozen yogurt, assorted toppings
(such as cookie crumbs, granola, sprinkles and peanuts) and chocolate sauce.
RESTAURANT OPERATIONS
COST MANAGEMENT FOCUS. The Company is committed to cost management without
degrading either quality of food or service. To accomplish this the Company has
developed a proprietary management information system which in conjunction with
several other cost related programs allows the Company to provide a cost
structure that the Company believes is superior to any casual or buffet style
restaurant.
COMPUTER INFORMATION SYSTEM. The core component of the Company's cost
management program is the Company's computer information system. The Company has
developed a proprietary computer accounting and management information system
that is fully integrated throughout the Company, including in each restaurant.
The Company believes that, as compared to off-the-shelf software applications,
this system provides significantly greater access to restaurant operating data
and a much shorter management reaction time. The system is used as a critical
planning tool by corporate and restaurant managers in four primary areas:
production, labor, food cost and financial and accounting controls. The system
generates forecasts of estimated guest volumes and other predictive data, which
assist restaurant managers in developing automated production reports that
detail the daily quantity and timing of batch production of various menu
offerings and food preparation requirements. The computerized system also acts
as a scheduling tool for the general managers, producing automated daily labor
reports outlining the restaurant's staffing needs based on changing trends and
guest volume forecasts. Corporate management, through daily information updates,
has complete access to restaurant data and can react quickly to changing trends.
The Company can quickly analyze the cost of its menu and make corporate-wide
menu adjustments to minimize the impact of shifting food prices and food waste.
Weekly computer-generated profit and loss statements and monthly accounting
department-generated profit and loss statements are reviewed at the corporate,
regional and restaurant management levels.
FOOD PURCHASING. Most food items are contracted on a centralized basis in
an effort to achieve uniform quality, adequate supplies and competitive prices.
The Company's food purchasing programs are designed to assist the Company in
minimizing food costs through vendor discounts based upon volume purchases. In
order to minimize price fluctuations, to the extent practical, the Company
purchases certain food items in two month to one year fixed price supply
contracts that are not subject to minimum quantity requirements. Although
contracted directly by the Company, all produce and groceries are delivered to
the Company's regional distributors, who in turn deliver the produce and
groceries to the individual restaurants and central kitchen restaurants
approximately three to five times a week. At each restaurant, the production
assistant manager is responsible for ensuring that all deliveries meet the
Company's guidelines regarding freshness and quality.
CENTRAL KITCHENS. In eleven geographic areas, the Company uses central
kitchens located in existing restaurants to prepare certain menu offerings on a
more efficient scale using the identical food preparation processes as the
restaurants. Each central kitchen generally services between two and seven
restaurants. Items prepared in the central kitchen are delivered daily to the
Company's local restaurants. The Company believes that, where economically
feasible, the use of central kitchens assists the Company in providing
consistently high quality, great tasting food, enhances the freshness of certain
menu offerings and allows the restaurant managers to devote more time and
attention to guests without any additional operating costs.
FOOD PREPARATION AND QUALITY CONTROL. The Company is committed to using
fresh produce and high quality groceries in its menu offerings. The kitchen and
central kitchen staffs prepare food items from scratch daily. Menu offerings are
closely monitored on the food bars and frequently replenished to assure
26
<PAGE>
constant food freshness. Items that are highly sensitive to freshness, such as
tossed salads, muffins, pizza focaccias, and prepared pastas are made on-site in
small batches throughout the day in order to maintain high levels of freshness
and great taste. The Company has developed a wide assortment of recipes that are
used in each restaurant and central kitchen in an effort to achieve consistently
high quality. The Company's food development effort focuses on the creation of
new recipes within existing food product categories. The Company's computer
system assists the restaurant managers in monitoring quality control without
raising costs by providing a detailed analysis of the raw materials used in the
creation of each finished product.
CUSTOMER SERVICE. One of the Company's fundamental strategies is to develop
a strong core of loyal, high frequency guests, in part by providing a level of
customer service not typically associated with a buffet. The Company seeks to
attract and retain friendly, customer-oriented employees. Employees are present
at the food bars and in the dining room to replenish food offerings, answer
questions and assist guests in serving themselves. The Company devotes
substantial attention and resources to maintaining cleanliness and fresh
presentation of the salad and other food bars in order to enhance the visual
appeal of the menu offerings.
The Company actively solicits guest input through the use of comment cards
and attempts to respond in writing to all guest suggestions and complaints.
Restaurant managers evaluate their respective restaurants approximately four
times per day for compliance with Company standards. In addition, the Company
conducts in-house market research through exit interviews and guest focus groups
on an ongoing basis in order to be responsive to changes in guest tastes and
expectations. Each restaurant receives independent evaluations of product
quality, cleanliness and service from secret shoppers approximately three times
per month, as well as a technical shop once a month to ensure strict adherence
to the Company's standards for food quality and service. The results of these
independent evaluations are taken into consideration in determining each
restaurant manager's monthly bonus.
RESTAURANT MANAGEMENT. The Company seeks to attract and retain friendly,
guest-oriented employees for its restaurant management positions. Upon joining
the Company and before assuming management responsibility, each restaurant
management employee completes a two month "hands-on" technical training course
in an existing restaurant that covers day to day restaurant operations. The
Company also selects restaurant management employees for participation in
ongoing management training programs that focus on motivation techniques,
performance reviews, team-building, interviewing and other management skills.
General managers are responsible for managing their respective restaurants
and reporting to District Operations Managers. Each district manager is
responsible for four to eight restaurants. The management staff of a typical
Souplantation/Sweet Tomatoes restaurant consists of one general manager, two or
three assistant managers and several other key employees. The Company recruits
most of its assistant managers from outside the Company, the majority of whom
have prior restaurant management experience. Most of the Company's general
managers have been promoted from assistant manager. The general manager of each
restaurant is principally responsible for the day-to-day operation and
profitability of the restaurant. The Company grants monthly bonuses to
restaurant managers based on actual restaurant performance as compared to
budget, and guest satisfaction. As an additional incentive, restaurant managers
are eligible for stock options.
MARKETING AND PROMOTION
The Company's marketing efforts seek to develop loyal guests for repeat
business, attract new guests and create awareness of existing and new
restaurants. The Company has instituted several programs in an effort to develop
loyal guests for repeat business. Under the Company's "first-time guest"
program, guests are greeted at the door and asked if they have previously eaten
at a Souplantation/Sweet Tomatoes restaurant. After being seated, first-time
guests are typically welcomed by a restaurant manager who
27
<PAGE>
provides them with further information about the restaurant. In addition, the
Company has implemented a "zero defect" program in its restaurants on certain
popular food offerings in an effort to provide consistently high quality
products. The "zero defect" program establishes highly detailed procedures
describing the precise methods under which these certain popular food offerings
are prepared, presented and replenished.
A significant portion of the Company's external marketing effort consists of
attracting new guests through the use of free standing inserts ("FSIs"). FSIs
contain descriptive information regarding the restaurants, as well in some
cases, discount coupons. FSIs are distributed by direct mail and through
newspapers. In addition, the Company has a "Business-to-Business" program under
which it mails discount cards to local businesses for distribution to their
employees. The discount cards entitle the employees to a certain price discount
on each repeat visit during a specified period.
In markets in which the Company has sufficient penetration, the Company uses
radio advertising to stimulate demand. Radio advertising is only used where the
return on investment of the radio campaign is sufficient to justify the cost. In
fiscal 1997, the Company used radio advertising in its San Diego, Tampa Bay and
Phoenix markets. The Company does not currently utilize television advertising
but is considering cable television advertising in markets where appropriate.
In addition, the restaurants periodically co-sponsor fund-raising events in
the restaurants for local charitable and other community organizations. For each
new restaurant, the Company conducts a pre-opening awareness program beginning
approximately two to three weeks prior to, and ending four to six weeks after,
the opening of a restaurant. The program typically includes special promotions,
site signs, sponsorship of a fund-raising event for a local charity to establish
ties to local community leaders and increase awareness of the new restaurant,
and pre-opening trial operations, to which the family and friends of new
employees are invited.
In fiscal 1997, marketing and promotion expenses constituted approximately
2.2% of total net sales.
RESTAURANT FACILITIES
DESIGN. Each Souplantation/Sweet Tomatoes restaurant generally has a
similar appearance. The Company currently uses a standardized design in
constructing restaurants, with modifications for each particular site. The
design and layout of the restaurants are intended to emphasize the fresh, great
tasting salads and other complementary menu offerings and promote a casual,
comfortable and inviting atmosphere. The centerpiece of the restaurants are the
two approximately 55-foot long salad bars located near the entrance of the
restaurants. An aisle between the two salad bars allows employees easy access
for replenishment of fresh food items, preparation of specialty tossed salads
and ongoing clean-up without disturbing guests. The remainder of the menu
offerings are presented in a scatter bar format designed to accommodate a high
volume of traffic while providing guests with unlimited and convenient access to
the food items. The dining area, which seats approximately 220 guests, provides
a warm, comfortable atmosphere that creates a relaxed dining environment similar
to many casual family restaurants. The Company's existing restaurants average
approximately 7,500 square feet (including the dining area, kitchen and food
preparation and storage areas), with new restaurants based on the Company's
latest prototype averaging approximately 7,200 square feet and 240 seats.
Certain of the Company's restaurants provide limited outdoor seating.
28
<PAGE>
LOCATION. The following is a list of the Company's salad buffet restaurants
and their locations by region:
<TABLE>
<CAPTION>
APPROXIMATE
MONTH OPENED SQUARE FOOTAGE(1)
------------------ -----------------
<S> <C> <C> <C>
REGION: SOUTHERN CALIFORNIA(2)
Del Mar (San Diego)............................................. September 1993 6,760
Laguna Niguel................................................... July 1993 6,800
Rancho Bernardo (San Diego)..................................... January 1993 6,760
San Bernardino.................................................. May 1992 6,500
Fountain Valley................................................. January 1990 7,500(3)
Brentwood (Los Angeles)......................................... January 1990 6,580
Beverly (Los Angeles)........................................... September 1989 8,100
Alhambra........................................................ September 1989 7,500
Marina del Rey.................................................. June 1989 8,490
Costa Mesa...................................................... May 1989 10,140
Rancho Cucamonga................................................ April 1989 7,630
Brea............................................................ October 1988 7,630
Arcadia......................................................... October 1988 7,500
Torrance........................................................ July 1988 8,080
Mira Mesa (San Diego)........................................... February 1988 8,210
Pasadena........................................................ November 1987 7,940
Carlsbad........................................................ July 1987 8,210
Lakewood........................................................ July 1987 8,210
Garden Grove.................................................... December 1986 8,210
Tustin.......................................................... August 1986 7,470
La Mesa......................................................... February 1986 8,420(3)
Point Loma (San Diego).......................................... January 1982 7,000
Mission Gorge (San Diego)....................................... March 1978 7,570
REGION: NORTHERN CALIFORNIA
N. Fresno Street (Fresno)....................................... October 1993 6,760
Fremont......................................................... February 1993 6,860
Shaw Avenue (Fresno)............................................ September 1990 6,760
Sunnyvale....................................................... May 1990 7,500
Pleasanton...................................................... March 1990 7,910
REGION: FLORIDA
Coral Springs................................................... December 1997 7,240
Fort Lauderdale................................................. September 1997 7,960
Hollywood....................................................... August 1997 8,000(3)
Altamonte Springs (Orlando)..................................... February 1997 8,740(3)
Fort Myers...................................................... January 1997 7,240
Sarasota........................................................ July 1996 8,500(3)
Plantation...................................................... April 1996 8,030
Brandon (Tampa)................................................. August 1995 8,110
Tampa........................................................... July 1995 8,500
Carrollwood (Tampa)............................................. June 1993 7,020
Largo (Tampa)................................................... September 1992 6,800
Palm Harbor (Tampa)............................................. January 1990 8,000(3)
</TABLE>
29
<PAGE>
<TABLE>
<CAPTION>
APPROXIMATE
MONTH OPENED SQUARE FOOTAGE(1)
------------------ -----------------
<S> <C> <C> <C>
REGION: ARIZONA
Tucson II....................................................... November 1996 6,960
Ahwatukee (Phoenix)............................................. July 1996 6,960
Peoria (Phoenix)................................................ June 1996 6,460
Phoenix......................................................... May 1996 6,940
Tucson I........................................................ May 1996 7,420(3)
Tempe (Phoenix)................................................. February 1995 6,320
Scottsdale (Phoenix)............................................ February 1994 9,000(3)
REGION: NEW MEXICO
Cottonwood Mall (Albuquerque)................................... October 1996 6,300
San Mateo Avenue (Albuquerque).................................. September 1996 7,240(3)
REGION: UTAH
Centennial (Salt Lake City)..................................... November 1997 7,450
Overlook (Salt Lake City)....................................... September 1997 9,000(3)
REGION: NEVADA
Las Vegas....................................................... February 1998 7,240(3)
</TABLE>
The restaurants listed below are under development and have lease or
purchase contracts signed:
<TABLE>
<CAPTION>
ESTIMATED FISCAL APPROXIMATE SQUARE
QUARTER OPENING FOOTAGE(1)
---------------- -------------------
<S> <C> <C> <C>
REGION: FLORIDA
Jacksonville...................................................... Q4 1998 7,240(3)
REGION: GEORGIA
Perimeter (Atlanta)............................................... Q4 1998 8,900(3)
Towncenter (Atlanta).............................................. Q4 1998 7,240
Gwinnett (Atlanta)................................................ Q4 1998 7,240
Northpoint (Atlanta).............................................. Q2 1999 7,240
REGION: TEXAS
Hedwig Village (Houston).......................................... Q4 1998 8,900(3)
Willowbrook (Houston)............................................. Q4 1998 7,240
REGION: PACIFIC NORTHWEST
Beaverton, Oregon................................................. Q4 1998 7,240
Vancouver, Washington............................................. Q4 1998 8,000(3)
REGION: COLORADO
Aurora............................................................ Q1 1999 7,000
Westminster....................................................... Q1 1999 8,900(3)
REGION: NORTH CAROLINA
Raleigh........................................................... Q2 1999 7,240(3)
</TABLE>
- ------------------------
(1) Excludes outdoor patio space, but includes dining area, kitchen and food
preparation and storage areas.
(2) Does not include mini-restaurant located in Los Angeles, California which
opened in fiscal 1996.
(3) Includes central kitchen.
30
<PAGE>
SITE SELECTION AND CONSTRUCTION
The Company's site selection strategy is to open economically viable
restaurants that achieve an appropriate balance between lunch and dinner guest
volumes in each of its target markets. The Company considers the location of
each restaurant to be critical to its long-term success and management devotes
significant effort to the investigation and evaluation of potential sites. The
site selection process focuses on regional and trade area demographics,
population density, household income and education levels, day-time traffic
patterns, as well as specific site characteristics such as visibility,
accessibility, traffic volume and the availability of adequate parking.
The Company also reviews potential competition and customer activity at
other restaurants operating in the area. To date, the Company has located a
majority of its restaurants in strip shopping centers and neighborhood shopping
centers located near business districts.
The Company generally engages outside general contractors for the required
construction or build-out of restaurant sites and expects to continue this
practice for the foreseeable future. The Company's experience to date has been
that obtaining construction permits has taken from two to nine months. The
interior build-out of in-line restaurants and the construction of free-standing
restaurants takes approximately four months and five months, respectively.
The Company may experience delays in opening new restaurants or may not be
able to open new restaurants as a result of a variety of factors including the
Company's ability to locate suitable restaurant sites, construct new restaurants
in a timely manner and obtain additional funds. See "Risks Factors-- Expansion."
COMPETITION
The restaurant industry is highly competitive. Key competitive factors in
the industry include the quality and value of the food products offered, quality
of service, price, dining experience, restaurant location and the ambiance of
the facilities. The Company's primary competitors include mid-price, full-
service casual dining restaurants, as well as traditional self-service buffet
and other soup and salad restaurants and healthful and nutrition-oriented
restaurants. The Company competes with national and regional chains, as well as
individually owned restaurants. The number of buffet and casual restaurants with
operations generally similar to the Company's has grown substantially in the
last several years and the Company believes competition among buffet-style and
casual restaurants has increased and will continue to increase as the Company's
competitors expand operations in various geographic areas. Such increased
competition could increase the Company's operating costs or adversely affect its
revenues. The Company believes it competes favorably in the industry, although
many of the Company's competitors have been in existence longer than the
Company, have a more established market presence and have substantially greater
financial, marketing and other resources than the Company, which may give them
certain competitive advantages. In addition, the restaurant industry has few
non-economic barriers to entry. Therefore, there can be no assurance that third
parties will not be able to successfully imitate and implement the Company's
concept. The Company has encountered intense competition for restaurant sites,
and in many cases has had difficulty buying or leasing desirable sites on terms
that are acceptable to the Company. In many cases, the Company's competitors are
willing and able to pay more than the Company for sites. The Company expects
these difficulties in obtaining desirable sites to continue for the foreseeable
future.
GOVERNMENT REGULATION
The Company's business is subject to and affected by various federal, state
and local laws. Each restaurant must comply with state, county and municipal
licensing and regulation requirements relating to health, safety, sanitation,
building construction and fire prevention. In addition, the Company is required
31
<PAGE>
to comply with the alcohol licensing requirements of the federal government and
the states and municipalities where its restaurants are located. 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 Company's 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. Difficulties in obtaining or
failure to obtain required licenses or approvals could delay or prevent the
development of additional restaurants. The Company has not experienced
significant difficulties in obtaining licenses and approvals to date, however,
beer and wine licenses are not always available to the Company as a result of
the location of certain 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 Company's restaurants are subject to federal and state laws governing
wages, working conditions, citizenship requirements and overtime. Congress and
various states (including California) passed proposals that imposed increases in
state or federal minimum wages in 1996, 1997 and 1998. There is no assurance
that the Company will be able to continue to pass such increased costs on to its
guests. The Company is subject to the Americans with Disabilities Act of 1990,
which requires certain accommodations to the Company's restaurant designs to
allow access for people with disabilities. In addition, the Company is subject
to the regulations of the INS. Given the location of many of the Company's
restaurants, even if the Company's operation of those restaurants is in strict
compliance with INS requirements, the Company's employees may not all meet
federal citizenship or residency requirements, which could lead to disruptions
in its work force. Additionally, legislative proposals are currently under
consideration by Congress and state legislators to require employers to pay for
health insurance for all employees. See "Risks Factors-- Cost Sensitivity."
INSURANCE
The Company carries property, liability, business interruption, crime,
employee benefits, liability, earthquake, directors and officers liability and
workers' compensation insurance policies. However, there can be no assurance
that the Company's insurance coverage will be adequate or that insurance will
continue to be available to the Company at reasonable rates, if at all. In the
event coverage is inadequate or becomes unavailable, the Company could be
materially adversely affected.
TRADE NAMES AND SERVICE MARKS
The Company and its predecessor have used the trademarks and service marks
Souplantation since 1978 and Sweet Tomatoes since 1990. The Souplantation
trademark is used in the Southern California market, while the Sweet Tomatoes
trademark is used in the Northern California, Florida, Arizona, New Mexico, Utah
and Nevada markets. The Company registered both Souplantation and Sweet Tomatoes
trademarks with the United States Patent and Trademark Office.
PROPERTY
The Company currently leases 42 and owns 11 open restaurant sites, including
one mini-restaurant site. The majority of the Company's leases provide for
minimum annual rentals and contain percentage-of-sales rent provisions against
which the minimum rental is applied. A significant majority of the leases also
32
<PAGE>
provide for periodic escalation of minimum annual rentals based upon increases
in the Consumer Price Index. T y pically, the Company's leases are 20 years in
length with two 10-year extension options. Restaurants leased by the Company are
generally leased under "triple net" leases that require the Company to pay real
estate taxes, insurance and maintenance expenses. The Company's executive
offices, a test kitchen and a training facility are located in an approximately
11,000 square foot leased facility near one of the Company's restaurants in San
Diego, California under a lease expiring in July 2002.
In January 1995, the Company opened an experimental "Souplantation To Go!"
mini-restaurant next to one of its restaurants located in San Diego. The
mini-restaurant was a limited menu, quick-service concept which closed in June
1995. The Company has also opened a mini-restaurant in a hospital business
complex located in Los Angeles. The Company is still evaluating the
mini-restaurant concept and there can be no assurance that further expansion of
this concept will occur or that the mini-restaurant will be successful.
LEGAL PROCEEDINGS
The Company is from time to time the subject of complaints, threat letters
or litigation from guests alleging illness, injuries or other food quality,
health or operational concerns. Adverse publicity resulting from such
allegations may materially adversely affect the Company and its restaurants,
regardless of whether such allegations are valid or whether the Company is
liable. The Company also is the subject of complaints or allegations from former
or prospective employees from time to time. The Company believes that the
lawsuits, claims and other legal matters to which it has become subject in the
course of its business are not material to the Company's financial position or
results of operations. Nevertheless, an existing or future lawsuit or claim
could result in an adverse decision against the Company that could adversely
affect the Company or its business.
EMPLOYEES
As of March 31, 1998, the Company had approximately 3,560 employees
including 3,280 hourly restaurant employees (of whom 2,600 were part-time
employees), 230 full-time restaurant management employees and 48 full-time
corporate management and staff employees and 3 part-time corporate employees.
None of the Company's employees is represented by a labor union. The Company
believes that its relationship with its employees is good.
33
<PAGE>
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------------------- --- -----------------------------------------------------
<S> <C> <C>
Michael P. Mack...................................... 46 Chairman of the Board, President and Chief Executive
Officer
David W. Qualls...................................... 52 Executive Vice President-Finance and Real Estate,
Chief Financial Officer and Secretary
R. Gregory Keller.................................... 50 Vice President of Operations
Edgar F. Berner(1)................................... 66 Director
Robert A. Gunst(1)(2)................................ 50 Director
Michael M. Minchin, Jr.(2)........................... 71 Director
John M. Robbins, Jr.(2).............................. 50 Director
</TABLE>
- ------------------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
Michael P. Mack co-founded the Company in 1983 and was the President and
Chief Operating Officer from the Company's inception until April 1991 and the
Chief Executive Officer from September 1990 to April 1991. Mr. Mack assumed the
role of Chairman of the Board of Directors in December 1997. Mr. Mack has also
been a director of the Company since its inception. Since February 1994, Mr.
Mack has been the Company's President and Chief Executive Officer. From April
1991 to February 1994, Mr. Mack served as the President of MPM Management, Inc.,
a consulting firm. Prior to joining the Company, from 1977 to 1983, Mr. Mack
worked for Bain & Company, a management consulting firm, where he specialized in
the development and implementation of business strategies. Mr. Mack received a
B.A. from Brown University and an M.B.A. from Harvard University.
David W. Qualls joined the Company in November 1985 as Chief Financial
Officer and Secretary. Since 1990, Mr. Qualls has also served as the Company's
Executive Vice President in charge of Finance and Real Estate. From 1982 to
1985, Mr. Qualls served as Vice President of Finance and Administration and
Chief Financial Officer of Diatek, Inc., a medical electronics company. Mr.
Qualls received a B.A. from California State University at Fresno and an M.B.A.
from the University of Virginia.
R. Gregory Keller joined the Company in June 1991 as Vice President of
Operations. From January 1991 to June 1991 prior to joining the Company, Mr.
Keller served as a consultant to the Company. From June 1990 to January 1991,
Mr. Keller served as an independent consultant. From June 1971 to June 1990, Mr.
Keller served as a divisional Vice President of Operations of Paragon, Inc., a
restaurant company, where he managed operations for 33 restaurants. Mr. Keller
received a B.S. from Northern Illinois University.
Edgar F. Berner joined the Company's Board of Directors in 1996. Mr. Berner
currently serves as Chairman and was formerly the CEO of Sweet Factory, Inc., a
national candy specialty chain. From 1969 to 1980, Mr. Berner was founder and
President of Fashion Conspiracy, a 280 store junior apparel chain which was sold
to Edison Brothers Stores, Inc. (Nasdaq). He previously served on the Board of
The Clothestime, Inc. (Nasdaq), and Edison Brothers Stores, Inc. In addition to
serving on the Board of the Company, Mr. Berner is a Director of Hot Topic, Inc.
(Nasdaq), a youth oriented specialty retail chain.
Robert A. Gunst joined the Company's Board of Directors in 1996. Mr. Gunst
has more than 25 years of experience of food and retailing. Mr. Gunst has been
President and Chief Executive Officer of The Good Guys, Inc. (Nasdaq) since
1993. In 1990, he became President and Chief Operating Officer of The Good Guys,
Inc. while remaining a member of its board. Prior to The Good Guys, Inc., Gunst
served as
34
<PAGE>
Senior Vice President, Chief Financial Officer and a board member of San
Francisco-based Shaklee Corporation. Previously, he served in several senior
positions with PepsiCo, Inc. (NYSE) including Senior Vice President of
Marketing/Manufacturing and Franchising for La Petite Boulangerie, Inc., and as
Chief Financial Officer and Vice President of Finance and Administration for
PepsiCo Foods International. Prior to PepsiCo, Mr. Gunst was a Senior Vice
President and Chief Financial Officer for Victoria Station Incorporated, a chain
of restaurants. Mr. Gunst holds a Master's Degree in Business Administration
from the University of Chicago's Graduate School of Business and a Bachelor of
Arts Degree from Dartmouth College.
Michael M. Minchin, Jr. joined the Company's Board of Directors in November
1993 and assumed the role of Chairman of the Board from February 1994 to
December 1997. From May 1992 to November 1993, Mr. Minchin served as an
independent consultant to Sizzler International, Inc. (NYSE) a restaurant
company, and several other publicly held restaurant chains. Prior to that, Mr.
Minchin served as the Executive Vice President of Sizzler International from May
1980 to May 1992. Mr. Minchin received a B.A. from Stanford University and an
M.B.A. from Harvard University. Currently, Mr. Minchin serves as Managing
Director of the John Douglas French Alzheimer's Foundation as well as an
independent consultant to several publicly held restaurant chains.
John M. Robbins, Jr. joined the Company's Board of Directors in 1996. Mr.
Robbins currently serves as Chairman of the Board of Directors and CEO of
American Residential Investment Trust, Inc. (NYSE) ("ARIT") and Home Asset
Management Corp. Prior to joining ARIT, Mr. Robbins was Chairman of the Board of
American Residential Mortgage Corporation ("AMRES Mortgage") from 1990 until
1994 and President of AMRES Mortgage from the time he co-founded it in 1983
until 1994. He currently serves as a Director of Pacific Research & Engineering
Corporation (AMEX), National Bankcard and the University of San Diego.
COMMITTEES OF THE BOARD OF DIRECTORS
The Board of Directors has two standing committees: a Compensation Committee
and an Audit Committee. The Audit Committee's function is to review, with the
Company's independent accountants and management, the results of the examination
of the Company's financial statements by the independent accountants and the
independent accounts' opinion. The Compensation Committee's function is to
review and recommend executive compensation, including executive officer salary
levels, incentive compensation programs and stock option grants.
BOARD COMPENSATION
The outside directors of the Company each received $6,000 per year as a cash
compensation for attendance at meetings of the Board of Directors during fiscal
1997. In fiscal 1998, each outside director will receive $10,000 per year.
Additionally, the directors of the Company are reimbursed for expenses incurred
in connection with attendance at Board of Directors or committee meetings. Each
outside director has received automatic option grants pursuant to the Directors
Option Plan. Option grants to outside directors will be made in the future
pursuant to the 1998 Option Plan. See "--Benefit Plans."
BOARD COMPOSITION
The Board of Directors is divided into three classes. Directors serve
staggered three year terms. The Class A Director, who will serve until the
Company's annual meeting of stockholders in 2000, is Michael P. Mack; the Class
B Directors, who will serve until the annual meeting in 1999, are Edgar F.
Berner and John M. Robbins, Jr.; and the Class C Directors, who will serve until
the annual meeting in 2001, are Michael M. Minchin, Jr., and Robert A Gunst. At
each annual meeting of stockholders, directors are elected for a term of three
years.
35
<PAGE>
LIMITATIONS OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, the Company's Restated
Certificate of Incorporation includes a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
the Bylaws of the Company provide that the Company is required to indemnify its
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified, and to provide
liability insurance, if available on reasonable terms. The Company has entered
into indemnification agreements with its officers and directors containing
provisions that are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements require the Company, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities for
which Delaware law prohibits indemnification), to advance their expenses
incurred as a result of any proceedings against them as to which they could be
indemnified, and to provide liability insurance to the extent that the Company's
policies cover directors, officers, employees or agents. The Company has
obtained directors' and officers' liability insurance. At present, the Company
is not aware of any pending or threatened litigation or proceeding involving a
director, officer, employee or agent of the Company in which indemnification
would be required or permitted. The Company believes that its charter provisions
and indemnification agreements are necessary to attract and retain qualified
persons as directors and officers.
The Company is entering into an indemnification agreement with the Selling
Stockholders pursuant to which the Company will indemnify the Selling
Stockholders for certain liabilities that could result from this offering.
EXECUTIVE COMPENSATION
The following table sets forth information for three fiscal years ended
September 30, 1997, 1996 and 1995 concerning the compensation of the Chief
Executive Officer of the Company and the other executive officers of the Company
as of September 30, 1997.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION AWARDS
ANNUAL COMPENSATION -------------------
--------------------- SECURITIES
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS UNDERLYING OPTIONS
- --------------------------------------------------------------- --------- ---------- --------- -------------------
<S> <C> <C> <C> <C>
Michael P. Mack(1)............................................. 1997 $ 256,823 $ 93,000 18,000
Chief Executive Officer, President 1996 208,843 90,000 40,000
1995 179,250 50,000 90,000
David W. Qualls(2)............................................. 1997 176,151 57,000 12,000
Chief Financial Officer, Executive Vice President- 1996 153,175 60,000 30,000
Finance and Real Estate, Secretary 1995 139,826 50,000 75,000
R. Gregory Keller(3)........................................... 1997 153,836 50,000 10,000
Vice President of Operations 1996 131,875 60,000 30,000
1995 115,767 50,000 75,000
</TABLE>
- ------------------------
(1) Mr. Mack was granted an increase in annual salary to $287,500 for fiscal
year 1998.
(2) Mr. Qualls was granted an increase in annual salary to $195,500 for fiscal
year 1998.
(3) Mr. Keller was granted an increase in annual salary to $172,500 for fiscal
year 1998.
36
<PAGE>
The following table provides the specified information concerning grants of
options to purchase the Company's Common Stock made during the year ended
September 30, 1997 to the persons named in the Summary Compensation Table.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS IN FISCAL 1997(1) POTENTIAL REALIZABLE
------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF % OF TOTAL ANNUAL RATES OF STOCK
SECURITIES OPTIONS PRICE APPRECIATION
UNDERLYING GRANTED TO EXERCISE FOR OPTION TERM(3)
OPTIONS EMPLOYEES IN OR BASE EXPIRATION ---------------------
NAME GRANTED(2) FISCAL YEAR PRICE(2) DATE 5% 10%
- ----------------------------------------- ----------- --------------- ----------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Michael P. Mack.......................... 18,000 14.0% $ 8.50 10/15/06 $ 96,221 $ 243,843
David W. Qualls.......................... 12,000 9.4 8.50 10/15/06 64,147 162,562
R. Gregory Keller........................ 10,000 7.8 8.50 10/15/06 53,456 135,468
</TABLE>
- ------------------------
(1) Grants were based on performance for fiscal year 1996.
(2) All options were granted at market value on the date of grant. All options
vest equally at 1/36 per month over 36 months.
(3) Potential gains are net of exercise price, but before taxes associated with
exercise. These amounts represent certain assumed rates of appreciation
only, based on the Securities and Exchange Commission rules. Actual gains,
if any, on stock option exercises are dependent on the future performance of
the Common Stock, overall market conditions and the optionholders' continued
employment through the vesting period. The amounts reflected in this table
may not necessarily be achieved. One share of stock purchased in 1997 at
$8.50 would yield profits of $5.35 per share at 5% appreciation over ten
years, or $13.54 per share at 10% appreciation over the same period.
The following table provides information concerning exercises of options to
purchase the Company's Common Stock in the fiscal year ended September 30, 1997,
and unexercised options held at fiscal year end by the persons named in the
Summary Compensation Table.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED OPTIONS AT IN-THE-MONEY OPTIONS AT
SHARES SEPTEMBER 30, 1997 SEPTEMBER 30, 1997(2)
ACQUIRED ON VALUE -------------------------- --------------------------
NAME EXERCISE REALIZED(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------------- ----------- ----------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Michael P. Mack.................. 34,500 $ 123,510 101,831 46,169 $ 646,856 $ 313,144
David W. Qualls.................. 29,175 146,818 81,896 35,104 516,633 237,118
R. Gregory Keller................ 0 0 99,224 33,776 698,733 228,818
</TABLE>
- ------------------------
(1) Amounts shown represent the value realized upon the exercise of stock
options during fiscal 1997, which equals the difference between the exercise
price of the options and the closing market price of the underlying Common
Stock on the date preceding the exercise date.
(2) Values are net of exercise price. Based on the 1997 year-end market price
per share of $14.75 on September 30, 1997, the last trading date prior to
the end of the Company's fiscal year. The values shown equal the difference
between the exercise price of unexercised in-the-money options and the
closing market price of the underlying Common Stock at September 30, 1997.
Options are in-the-money if the fair market value of the Common Stock
exceeds the exercise price of the option.
37
<PAGE>
BENEFIT PLANS
1998 STOCK OPTION PLAN. A total of 1,080,318 shares of the Company's Common
Stock have been reserved for issuance under the Company's 1998 Stock Option
Plan. However, the number of shares available for issuance under the 1998 Option
Plan, at any time, is reduced by the number of shares which (i) remain subject
to outstanding options granted under certain prior plans, (ii) are issued upon
exercise of such options, or (iii) are issued pursuant to options granted under
such prior plans after December 11, 1997. As of March 31, 1998, no shares of
Common Stock have been issued upon exercise of options and 80,250 shares were
subject to outstanding options (none of which are exercisable). The 1998 Option
Plan provides for discretionary grants of incentive stock options and
nonqualified stock options to the Company's employees (including officers),
directors, consultants, advisors, and/or other independent contractors. The
option price per share for an incentive stock option may not be less than 100%
of the fair market value of a share of Common Stock on the grant date. The
option price per share for a nonstatutory stock option may not be less than 85%
of the fair market value of a share of Common Stock on the grant date. The
option price per share for an incentive stock option granted to a person owning
stock possessing more than 10% of the total combined voting power of all classes
of stock of the Company (or a parent or subsidiary) may not be less than 110% of
the fair market value of a share of Common Stock on the grant date. The
Company's Compensation Committee has the authority to determine the vesting
schedule for each option granted. Generally, options must be exercised within 10
years. The 1998 Option Plan includes an automatic grant program for outside
directors. Pursuant to this program, each outside director will be granted an
option to purchase 10,000 shares of Common Stock at the time he or she is first
elected or appointed a director of the Company. In addition, each outside
director remaining in office will be granted an option to purchase 6,640 shares
on the day following each annual meeting of stockholders.
EMPLOYEE STOCK PURCHASE PLAN. The Company has an Employee Stock Purchase
Plan which is intended to qualify under Section 423 of the Internal Revenue Code
of 1986, as amended (the "Code"). Employees with at least one year of service
and who are employed more than 20 hours per week are eligible subject to certain
limitations; each eligible participant at the beginning of an offering period
(which generally last for one year) has a purchase right equal to the lesser of
a number of whole shares determined by dividing $25,000 by the fair market value
of a share of Common Stock on the first day of the offering period or 5,000
shares, subject to adjustment depending on the length of the offering period.
The purchase price per share will be 85% of the lower of the fair market value
of a share of Common Stock on the first day of the offering period or the fair
market value of a share of Common Stock on the purchase date. A maximum of
250,000 of the Company's authorized, but unissued or re-acquired shares of
Common Stock may be issued under the Purchase Plan.
EMPLOYEE 401(K) SAVINGS PLAN. The Company has an employee savings plan (the
"Savings Plan") as which is intended to qualify under Sections 401(a) and 401(k)
of the Code. Employees who are at least 21 years of age with at least 12 months
of service are entitled to defer a portion of their annual compensation for
deposit in the Savings Plan. The Company may make contributions to the Savings
Plan at the discretion of the Board of Directors on a basis that matches, fully
or partially, employee deferrals. Participants' deferrals are limited to $10,000
per calendar year. Contributions to the Savings Plan are not subject to income
tax until withdrawn from the Saving Plan. The Company has made contributions to
the Savings Plan. Company contributions to the Savings Plan vest at the rate of
25% per year of service.
DEFERRED COMPENSATION PLAN. The Company maintains the Variable Deferred
Compensation Plan for Executives, which is a nonqualified deferred compensation
plan for a select group of management employees. There are currently 12
participants in the plan. Under the plan, a participant may elect to defer up to
100% of compensation into the plan. For executive officers, the Company makes
matching contributions of up to $20,000. Matching contributions vest over a four
year period (25% per year of service). Deferrals and matching contributions
accrue earnings based upon the investment return of a portfolio selected by each
participant from among portfolio options specified in the plan. The plan also
38
<PAGE>
provides a death benefit to participants who die while employed by the Company.
The death benefit is generally $100,000 but for executive officers is $500,000.
Benefits under the plan are generally payable at retirement or attainment of a
specified age. All contributions and earnings held under the plan remain assets
of the Company and are subject to the claims of general creditors of the
Company. The plan is not intended to be a qualified plan under Section 401(a) of
the Code.
RESTAURANT MANAGEMENT STOCK OPTION PLAN. A total of 267,500 shares of
Common Stock have been reserved for issuance under the Company's Restaurant
Management Stock Option Plan, as amended. As of March 31, 1998, 79,936 shares of
Common Stock had been issued upon exercise of options, and 180,028 shares were
subject to outstanding options (of which options for 109,268 shares of Common
Stock are exercisable). The Restaurant Management Plan provides for grants of
incentive stock options and nonqualified stock options to employees who hold the
position of general manager or assistant manager or a position of similar
importance to the Company. The option price per share for an incentive stock
option or a nonqualified stock option may not be less than 100% of the fair
market value of a share of Common Stock on the grant date. The option price per
share for an incentive stock option granted to a person owning stock possessing
more than 10% of the total combined voting power of all classes of stock of the
Company (or a parent or subsidiary) may not be less than 110% of the fair market
value of a share of Common Stock on the grant date. Generally, options must be
exercised within 10 years. The Company will not issue any additional options
under the Restaurant Management Plan.
KEY EMPLOYEE STOCK OPTION PLAN. The Company's Key Employee Stock Option
Plan was adopted in 1984 and expired on February 1, 1994. As of March 31, 1998,
292,542 shares of Common Stock had been issued upon exercise of options, and
55,667 shares were subject to outstanding options (all of which shares are
exercisable) under the Key Employee Plan.
1995 OUTSIDE DIRECTORS STOCK OPTION PLAN. A total of 130,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1995
Outside Directors Stock Option Plan. As of March 31, 1998, no shares of Common
Stock have been issued upon exercise of options, and 55,000 shares were subject
to outstanding options (all of which are exercisable). The Directors Options
Plan provides for the automatic granting of nonqualified stock options to
directors of the Company who are not (a) at the time of grant employees of (i)
the Company or (ii) any parent or subsidiary of the same; and (b) directors of
the Company as of the effectiveness of the Company's initial public offering
("Eligible Outside Directors"). Each Eligible Outside Director was granted an
option to purchase 10,000 shares of Common Stock on the day immediately
following his election or appointment. Thereafter, through fiscal 1997, each
Eligible Outside Director was granted an option to purchase 5,000 shares of
Common Stock on each Anniversary Date. The "Anniversary Date" is the day
following each annual meeting at which such Eligible Outside Director is
re-elected. The exercise price of the options in all cases will be equal to the
fair market value of Common Stock on the grant date. Except in certain defined
circumstances, the options vest and become exercisable at the end of the year
provided that the Eligible Outside Director has continuously served as a
director of the Company since the date of grant. Except in certain defined
circumstances, options must be exercised within ten years of the grant date. The
Company does not intend to issue any additional options under the Directors
Option Plan.
1995 KEY EMPLOYEE STOCK OPTION PLAN. A total of 435,000 shares of the
Company's Common Stock have been reserved for issuance under the Company's 1995
Key Employee Stock Option Plan as Amended. As of March 31, 1998, no shares of
Common Stock have been issued upon exercise of options and 435,000 shares were
subject to outstanding options (of which options for 378,386 shares of Common
Stock are exercisable). The 1995 Key Employee Plan provides for grants of
incentive stock options and nonqualified stock options to the Company's
employees (including officers), directors, consultants, advisors, and/or other
independent contractors. The option price per share for an incentive stock
option may not be less than 100% of the fair market value of a share of Common
Stock on the grant date. The option price per share for nonqualified stock
option may not be less than 85% of the fair market value of a share of
39
<PAGE>
Common Stock on the grant date. The option price per share for an incentive
stock option granted to a person owning stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company (or a parent
or subsidiary) may not be less than 110% of the fair market value of a share of
Common Stock on the grant date. The Company's Compensation Committee has the
authority to determine the vesting schedule for each option granted. Generally,
options must be exercised within ten years. The Company does not intend to issue
any additional options under the 1995 Key Employee Plan.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE OF CONTROL
ARRANGEMENTS
In July 1997, the Company entered into employment agreements with Michael
Mack, Chief Executive Officer and President, David Qualls, Executive Vice
President and Chief Financial Officer-Finance and Real Estate, and Gregory
Keller, Vice President of Operations, which provides them, upon termination
without cause, with a severance equal to one half of their then current annual
salary and certain other benefits. Additionally, in the event of a termination
without cause following a change of control, their employment agreements provide
for a severance equal to two years of base salary plus two years of bonus. Under
the respective employment agreements, the minimum base annual salary for Mr.
Mack is $250,000, for Mr. Qualls is $170,000, and for Mr. Keller is $150,000.
In the event of a change in control as defined under the Company's 1998
Option Plan, any unexercisable or unvested portion of the outstanding options
will become immediately exercisable and vested in full prior to the change in
control. The Company's other stock option plans also contain provisions that
could lead to the vesting and exercisability of all outstanding options prior to
a change in control of the Company.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During fiscal 1997, the Company's Board of Directors established the levels
of compensation for certain of the Company's executive officers without the
involvement of the Compensation Committee, as the Compensation Committee was not
active during that period. Mr. Michael Mack, the Company's Chairman of the
Board, President and Chief Executive Officer, participated in the deliberations
regarding executive compensation that occurred during fiscal 1997, but did not
take part in the deliberations regarding his own compensation. The current
members of the Company's Compensation Committee, who were also members of the
Compensation Committee in fiscal 1997, are Messrs. Minchin, Robbins and Gunst.
None of these individuals were at any time an officer or employee of the
Company.
CERTAIN TRANSACTIONS
ARRANGEMENTS WITH DIRECTORS AND EXECUTIVE OFFICERS
The Company has entered into employment agreements with the Company's
executive officers. See "Employment Contracts and Termination of Employment and
Change of Control Arrangements."
The Company has entered into indemnification agreements with its executive
officers and directors containing provisions that are in some respects broader
than the specific indemnification provisions contained in the Delaware General
Corporate Law.
The Company's policy has been and continues to be that all transactions
between the Company and its officers, directors and other affiliates must (i) be
approved by a majority of the members of the Company's Board of Directors and by
a majority of the disinterested members of the Company's Board of Directors and
(ii) be on terms no less favorable to the Company than could be obtained from
unaffiliated third parties. In addition, this policy requires that any loans by
the Company to its officers, directors or other affiliates be for bona fide
business purposes only.
40
<PAGE>
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of March 31, 1998, (i) by each person
who is known by the Company to own beneficially more than 5% of the Company's
Common Stock, (ii) by each Selling Stockholder, (iii) by each of the Company's
executive officers and directors, and (iv) by all directors and executive
officers as a group. Except pursuant to applicable community property laws or as
indicated in the footnotes to this table, to the Company's knowledge, each
stockholder identified in the table possesses sole voting and investment power
with respect to all shares of Common Stock shown as beneficially owned by such
stockholder.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY SHARES BENEFICIALLY
OWNED OWNED
PRIOR TO THE OFFERING(2) AFTER THE OFFERING(4)
------------------------ SHARES ----------------------
NAMES AND ADDRESSES(1) NUMBER PERCENT(3) OFFERED NUMBER PERCENT
- ------------------------------------------------------ --------- ------------- --------- --------- -----------
<S> <C> <C> <C> <C> <C>
D3 Family Fund ....................................... 338,325 7.8% -- 338,325 5.9%
19605 NE 8th Street
Camas, CA 98607
St. Paul Venture Capital, Inc. ....................... 595,346 13.8 160,000 435,346 7.6
8500 Normandale Lake Blvd., Ste. 1940
Bloomington, Minnesota 55437
Michael P. Mack(5).................................... 276,181 6.2 56,500 219,681 3.7
David W. Qualls(6) ................................... 106,477 2.4 50,000 56,477 *
R. Gregory Keller(7) ................................. 120,447 2.7 21,000 99,447 1.7
Michael M. Minchin, Jr.(8) ........................... 99,564 2.3 12,500 87,064 1.5
Edgar F. Berner(9) ................................... 19,300 * -- 19,300 *
Robert A. Gunst(9) ................................... 20,000 * -- 20,000 *
John M. Robbins, Jr.(9) .............................. 18,500 * -- 18,500 *
All directors and executive officers as a group (7
persons)(10) ....................................... 660,469 13.7 140,000 520,469 8.5
</TABLE>
- ------------------------
* Less than one percent.
(1) Except as otherwise indicated, the address of each beneficial owner is c/o
the Company, 17180 Bernardo Center Drive, San Diego, CA 92128.
(2) In accordance with Securities and Exchange Commission rules, a person is
deemed to have beneficial ownership of any securities as to which such
person, directly or indirectly, has or shares voting power or investment
power and of any securities with respect to which such person has the right
to acquire such voting or investment power within 60 days. Except as
otherwise noted in the accompanying footnotes, the named persons have sole
voting and investment power.
(3) Percent of the outstanding shares of Common Stock, treating as outstanding
with respect to a beneficial owner all shares of Common Stock issuable on
exercise of stock options within 60 days of March 31, 1998, held by the
particular beneficial owner.
(4) Assumes no exercise of the underwriters over-allotment option.
(5) Includes 132,219 shares issuable upon exercise of stock options and 375
shares held by his wife, Ruth Mack.
(6) Includes 105,817 shares issuable upon exercise of stock options, 50,000 of
which are being sold in this offering.
(7) Includes 118,697 shares issuable upon exercise of stock options, 21,000 of
which are being sold in this offering.
(8) Includes 99,564 shares issuable upon exercise of stock options, 12,500 of
which are being sold in this offering.
(9) Includes 15,000 shares issuable upon exercise of stock options.
(10) Includes 496,297 shares issuable upon exercise of stock options, 83,500 of
which are being sold in this offering.
41
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The following summary of certain provisions of the Common Stock and the
Preferred Stock of the Company does not purport to be complete and is subject
to, and qualified in its entirety by, the Restated Certificate of Incorporation,
as amended, and Bylaws of the Company.
The Company's authorized capital stock consists of 12,000,000 shares of
Common Stock, $.01 par value, and 2,500,000 shares of Preferred Stock, $.01 par
value.
COMMON STOCK
As of March 31, 1998, there were approximately 4.3 million shares of Common
Stock outstanding held of record by approximately 258 stockholders. The holders
of Common Stock are entitled to one vote for each share held of record on all
matters submitted to a vote of the holders of Common Stock. The Restated
Certificate of Incorporation provides for cumulative voting in the election of
directors. Subject to preferences applicable to any outstanding Preferred Stock,
the holders of Common Stock are entitled to receive ratably such dividends as
may be declared by the Board of Directors out of funds legally available
therefor, although the Company has not paid dividends on its Common Stock. See
"Dividend Policy." In the event of a liquidation, dissolution or winding up of
the Company, the holders of Common Stock are entitled to share ratably in all
assets remaining after payment of liabilities and the liquidation preference of
any Preferred Stock. The holders of Common Stock have no preemptive or
subscription rights and there are no redemption or conversion rights with
respect to such shares. All outstanding shares of Common Stock are fully paid
and non-assessable and the shares of Common Stock to be issued upon completion
of this offering will be fully paid and non-assessable. The rights, preferences
and privileges of holders of Common Stock are subject to, and may be adversely
affected by, the rights of the holders of shares of any series of Preferred
Stock which the Company may designate and issue in the future.
PREFERRED STOCK
The Board of Directors is authorized, without further stockholder approval,
to issue up to 2,500,000 shares of Preferred Stock in one or more series and to
fix the rights, preferences, privileges and restrictions granted or imposed upon
any unissued shares of Preferred Stock and to fix the number of shares
constituting any series and the designations of such series. The issuance of
Preferred Stock may have the effect of delaying or preventing a change in
control of the Company. The issuance of Preferred Stock could decrease the
amount of earnings and assets available for distribution to the holders of
Common Stock or could adversely affect the rights and powers, including voting
rights, of the holders of the Common Stock. In certain circumstances, such
issuance could have the effect of decreasing the market price of the Common
Stock. As of the closing of the offering, no shares of Preferred Stock will be
outstanding and the Company currently has no plans to issue any shares of
Preferred Stock.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
The Company is a Delaware corporation and subject to Section 203 of the
Delaware General Corporation Law (the "Delaware Law"), an anti-takeover law. In
general, Section 203 of the Delaware Law prevents an "interested stockholder"
(defined generally as a person owning 15% or more of a corporation's outstanding
voting stock) from engaging in a "business combination" (as defined) with a
Delaware corporation for three years following the date such person became an
interested stockholder, subject to certain exceptions such as the approval of
the board of directors and of the holders of at least two-thirds of the
outstanding shares of voting stock not owned by the interested stockholder. The
existence of this provision would be expected to have an anti-takeover effect,
including attempts that might result in a premium over the market price for the
shares of Common Stock held by stockholders.
42
<PAGE>
The Company's Restated Certificate of Incorporation provides for a Board of
Directors which is divided into three classes of directors, with each class
serving a staggered three-year term. The classification system of electing
directors may tend to discourage a third party from making a tender offer or
otherwise attempting to obtain control of the Company and may maintain the
incumbency of the Board of Directors, as it generally makes it more difficult
for stockholders to replace a majority of the Directors. The Restated
Certificate of Incorporation requires a super majority approval of stockholders
in connection with certain related party transactions. These and other
provisions may have the effect of deferring hostile takeovers or delaying
changes in control or management of the Company and therefore may discourage
another person or entity from making a tender offer for the Company's Common
Stock, including offers at a premium over the market price of the Common Stock,
and might result in a delay in changes in control of management. In addition,
these provisions could have the effect of making it more difficult for proposals
favored by the stockholders to be presented for stockholder consideration. The
amendment of any of these provisions would require approval by holders of
66 2/3% or more of the outstanding Common Stock.
The Company has also included in its Restated Certificate of Incorporation
provisions to eliminate the personal liability of its directors for monetary
damages resulting from breaches of their fiduciary duty to the extent permitted
by the Delaware General Corporation Law, and the Company has included in its
Bylaws provisions to indemnify its directors and officers generally to the
fullest extent permitted by Section 145 of the Delaware General Corporation Law.
See "Risk Factors--Anti-takeover Measures."
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Company's Common Stock is The First
National Bank of Boston.
43
<PAGE>
UNDERWRITING
The Underwriters named below (the "Underwriters") have severally agreed,
subject to the terms and conditions contained in the underwriting agreement (the
"Underwriting Agreement") by and among the Company, the Selling Stockholders and
the Underwriters, to purchase from the Company and the Selling Stockholders the
number of shares of Common Stock indicated below opposite their respective names
at the initial public offering price less the underwriting discount set forth on
the cover page of this Prospectus. The Underwriting Agreement provides that the
obligations of the Underwriters are subject to certain contains precedent and
that the Underwriters are committed to purchase all of the shares if they
purchase any.
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITERS SHARES
- --------------------------------------------------------------------------------- ----------
<S> <C>
NationsBanc Montgomery Securities LLC............................................
BancAmerica Robertson Stephens...................................................
Morgan Keegan & Company, Inc.....................................................
----------
Total.......................................................................... 1,600,000
----------
----------
</TABLE>
The Underwriters have advised the Company and the Selling Stockholders that
the Underwriters propose initially to offer the Common Stock to the public on
the terms set forth on the cover page of this Prospectus. The Underwriters may
allow, and such dealers may reallow, to selected dealers a concession of not
more than $ per share, and the Underwriters may allow a concession of not
more than $ per share to certain other dealers. After the offering, the
public offering price and other selling terms may be changed by the
Underwriters. The Common Stock is offered subject to receipt and acceptance by
the Underwriters and to certain other conditions, including the right to reject
orders in whole or in part.
The Company has granted an option to the Underwriters, exercisable during
the 30-day period after the date of this Prospectus, to purchase up to an
aggregate maximum of 237,525 additional shares of Common Stock, to cover
over-allotments, if any, at the same price per share as the initial shares to be
purchased by the Underwriters. To the extent the Underwriters exercise this
option, the Underwriters will be committed, subject to certain conditions, to
purchase such additional shares in approximately the same proportion as set
forth in the above table. The Underwriters may purchase such shares only to
cover over-allotments made in connection with this offering.
The Underwriting Agreement provides that the Company and the Selling
Stockholders will indemnify the Underwriters and their controlling persons
against certain liabilities, including civil liabilities under the Securities
Act of 1933, as amended, or will contribute to payments the Underwriters may be
required to make in respect hereof.
All of the Company's directors (except the Selling Stockholders) and the
Selling Stockholders have agreed that, for a period of 90 days and 120 days,
respectively, after the date of this Prospectus, they will not, without the
prior written consent of NationsBanc Montgomery Securities LLC, directly or
indirectly sell, offer, contract or grant any option to sell, pledge, transfer,
or otherwise dispose of any shares of Common Stock, options or warrants to
acquired shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock. In addition, the Company has agreed
that, for a period of 120 days after the date of this Prospectus, it will not,
without the prior written consent of NationsBanc Montgomery Securities LLC,
directly or indirectly issue, sell, offer, contract or grant any option to sell,
pledge, transfer, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock, other than (i) the
shares of Common Stock offered by the Company hereby or (ii) shares of Common
Stock issued pursuant to the Company's equity compensation plans described in
this prospectus.
44
<PAGE>
Certain persons participating in this offering may over-allot or effect
transactions which stabilize, maintain or otherwise affect the market price of
the Common Stock at levels above those which might otherwise prevail in the open
market. Such transactions may include stabilizing bids, effecting syndicate
covering transactions or imposing penalty bids. A stabilizing bid means the
placing of any bid or effecting any purchase for the purpose of pegging, fixing
or maintaining the price of the Common Stock. A syndicate covering transaction
means the placing of any bid on behalf of the underwriting syndicate or the
effecting of any purchase to reduce a short position created in connection with
the offering. The Underwriters may also elect to reduce any short position by
exercising all or part of the over-allotment options described above. A penalty
bid means an arrangement that permits the Underwriters to reclaim a selling
concession from a syndicate member in connection with the offering when shares
of Common Stock sold by the syndicate member are purchased in syndicate covering
transactions. Such transactions may be effected on the Nasdaq National Market,
in the over-the-counter market, or otherwise.
In general, the purchase of a security for the purpose of stabilizing or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchase. Neither the Company nor any of the
Underwriters makes any representation or prediction as to the direction or
magnitude of any effect that the transactions described above may have on the
price of the Common Stock. In addition, neither the Company nor any of the
Underwriters makes any representation that the Underwriters will engage in such
transactions or that such transactions, once commenced, will not be discontinued
without notice.
In addition, certain of the Underwriters that currently act as market makers
for the Common Stock may engage in "passive market making" in the Common Stock
on Nasdaq in accordance with Regulation M under the Securities Exchange Act of
1934, as amended. Regulation M permits, upon the satisfaction of certain
conditions, underwriters participating in a distribution that are also Nasdaq
market makers in the security being distributed to engage in limited market
making transactions during the period that such activities would otherwise be
prohibited by Regulation M. However, Regulation M does not permit passive market
making at any time when a stabilizing bid is in effect. Also, Regulation M
prohibits underwriters engaged in passive market making generally from entering
a bid or effecting a purchase at a price that exceeds the highest bid for those
securities displayed on Nasdaq by a market maker that is not participating in
the distribution. Under Regulation M, each underwriter engaged in passive market
making is subject to a daily net purchase limitation generally equal to 30% of
such entity's average daily trading volume during the two full consecutive
calendar months immediately preceding, or any 60 consecutive calendar days
ending within the 10 calendar days preceding, the date of the filing of the
registration statement under the Securities Act of 1933 pertaining to the
securities to be distributed.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Gray Cary Ware & Freidenrich LLP, San Diego, California.
Certain legal matters will be passed upon for the Underwriters by Fried, Frank,
Harris, Shriver & Jacobson, a partnership including professional corporations,
Los Angeles, California.
EXPERTS
The financial statements as of September 30, 1996 and 1997 and for each of
the three years in the period ended September 30, 1997 included in this
Prospectus have been so included in reliance on the report of Price Waterhouse
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
45
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith files reports, proxy statements and other
information with the Securities and Exchange Commission (the "Commission").
Reports, proxy statements and other information filed by the Company and the
Registration Statement and exhibits and schedules thereto can be inspected and
copied at the public reference section of the Commission at Room 1024, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at certain regional offices located at
7 World Trade Center, Suite 1300, New York, New York 10048 and 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials can be
obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Room 1025, Washington, D.C. 20549, at prescribed rates. The
Commission maintains a World Wide Web site at http://www.sec.gov that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission. In addition, such
material can be inspected at the offices of the Nasdaq Stock Market, Inc., 1735
K Street, N.W., Washington, D.C. 20006.
46
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GARDEN FRESH RESTAURANT CORP.
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Report of Independent Accountants.......................................................................... F-2
Balance Sheet as of September 30, 1996 and 1997 and March 31, 1998 (Unaudited)............................. F-3
Statement of Operations for the Years Ended September 30, 1995, 1996 and 1997 and
the Six Months Ended March 31, 1997 and 1998 (Unaudited).................................................. F-4
Statement of Cash Flows for the Years Ended September 30, 1995, 1996 and 1997 and
the Six Months Ended March 31, 1997 and 1998 (Unaudited).................................................. F-5
Statement of Changes in Shareholders' Equity for the Years Ended September 30, 1995,
1996 and 1997 and the Six Months Ended March 31, 1998 (Unaudited)......................................... F-6
Notes to Financial Statements.............................................................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Garden Fresh Restaurant Corp.
In our opinion, the accompanying balance sheet and the related statements of
operations, of cash flows and of changes in shareholders' equity present fairly,
in all material respects, the financial position of Garden Fresh Restaurant
Corp. at September 30, 1996 and 1997, and the results of its operations and its
cash flows for each of the three years in the period ended September 30, 1997,
in conformity with generally accepted accounting principles. 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 of these statements in accordance with
generally accepted auditing standards which 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,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICE WATERHOUSE LLP
San Diego, California
November 7, 1997,
except as to net income (loss)
per share information as reflected
in the Statement of Operations
and Notes 1 and 5 which is as of April 27, 1998
F-2
<PAGE>
GARDEN FRESH RESTAURANT CORP.
BALANCE SHEET
<TABLE>
<CAPTION>
SEPTEMBER 30,
---------------------------
1996 1997 MARCH 31, 1998
------------ ------------ --------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents....................... $ 615,000 $ 2,345,000 $ 2,588,000
Inventories..................................... 2,297,000 2,886,000 3,245,000
Other current assets............................ 530,000 550,000 1,886,000
Deferred income taxes........................... 734,000 322,000 88,000
------------ ------------ --------------
Total current assets.......................... 4,176,000 6,103,000 7,807,000
Property and equipment.......................... 41,552,000 54,257,000 61,381,000
Intangible and other assets..................... 1,572,000 1,472,000 1,811,000
Deferred income taxes........................... 762,000 577,000 469,000
------------ ------------ --------------
$ 48,062,000 $ 62,409,000 $71,468,000
------------ ------------ --------------
------------ ------------ --------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 3,028,000 $ 5,012,000 $ 3,723,000
Current portion of long-term debt............... 3,490,000 4,456,000 4,972,000
Accrued liabilities............................. 4,335,000 4,411,000 6,761,000
------------ ------------ --------------
Total current liabilities..................... 10,853,000 13,879,000 15,456,000
------------ ------------ --------------
Accrued rent...................................... 1,508,000 1,397,000 1,347,000
Long-term debt, net of current portion............ 6,444,000 12,965,000 18,127,000
Shareholders' equity:
Preferred stock, $.01 par value; 2,500,000
shares authorized at September 30, 1996 and
1997 and March 31, 1998 (unaudited),
respectively; no shares issued or outstanding
at September 30, 1996 and 1997 or March 31,
1998 (unaudited), respectively
Common stock, $.01 par value; 12,000,000 shares
authorized at September 30, 1996 and 1997 and
March 31, 1998 (unaudited), respectively;
4,117,227, 4,264,579 and 4,318,176 issued and
outstanding at September 30, 1996 and 1997 and
March 31, 1998 (unaudited), respectively...... 41,000 43,000 43,000
Paid-in capital................................. 37,772,000 38,794,000 39,260,000
Accumulated deficit............................. (8,556,000) (4,669,000) (2,765,000)
------------ ------------ --------------
Total shareholders' equity.................... 29,257,000 34,168,000 36,538,000
------------ ------------ --------------
Commitments and contingencies (Note 7)..........
------------ ------------ --------------
$ 48,062,000 $ 62,409,000 71,468,000
------------ ------------ --------------
------------ ------------ --------------
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Net sales........................................ $ 61,320,000 $ 71,373,000 $ 90,252,000 $ 42,736,000 $ 51,739,000
Costs and expenses:
Cost of sales.................................. 16,721,000 19,318,000 23,497,000 11,183,000 13,406,000
Restaurant operating expenses.................. 32,898,000 36,851,000 46,966,000 22,669,000 27,248,000
General and administrative expenses............ 4,098,000 5,142,000 5,672,000 2,804,000 3,483,000
Depreciation and amortization expenses......... 3,604,000 4,518,000 6,147,000 3,061,000 3,463,000
------------- ------------- ------------- ------------- -------------
Operating income............................... 3,999,000 5,544,000 7,970,000 3,019,000 4,139,000
Other income (expense):
Interest income................................ 221,000 142,000 106,000 103,000 127,000
Interest expense............................... (1,313,000) (671,000) (1,579,000) (788,000) (1,089,000)
Other expenses, net............................ (210,000) (66,000) (62,000) (23,000) (55,000)
------------- ------------- ------------- ------------- -------------
(1,302,000) (595,000) (1,535,000) (708,000) (1,017,000)
------------- ------------- ------------- ------------- -------------
Income before income taxes and extraordinary
item........................................... 2,697,000 4,949,000 6,435,000 2,311,000 3,122,000
Benefit (provision) for income taxes............. 1,646,000 (1,945,000) (2,548,000) (919,000) (1,218,000)
------------- ------------- ------------- ------------- -------------
Income before extraordinary item................. 4,343,000 3,004,000 3,887,000 1,392,000 1,904,000
Extraordinary item--early extinguishment of debt,
net of income taxes............................ (518,000)
------------- ------------- ------------- ------------- -------------
Net income....................................... 3,825,000 3,004,000 3,887,000 1,392,000 1,904,000
Stock dividend................................... (8,298,000)
------------- ------------- ------------- ------------- -------------
Net income (loss) available to common
shareholders................................... $ (4,473,000) $ 3,004,000 $ 3,887,000 $ 1,392,000 $ 1,904,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Net income (loss) per share available to common
shareholders:
Basic.......................................... $ (2.47) $ 0.73 $ 0.93 $ 0.34 $ 0.44
Diluted........................................ $ (2.47) $ 0.72 $ 0.88 $ 0.32 $ 0.41
Shares used in computing net income (loss) per
share available to common shareholders:
Basic.......................................... 1,810,000 4,103,000 4,192,000 4,150,000 4,298,000
Diluted........................................ 1,810,000 4,176,000 4,402,000 4,345,000 4,633,000
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30, SIX MONTHS ENDED MARCH 31,
------------------------------------------- ----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................... $ 3,825,000 $ 3,004,000 $ 3,887,000 $ 1,392,000 $ 1,904,000
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization expenses............. 3,604,000 4,518,000 6,147,000 3,061,000 3,463,000
Loss on property disposal.......................... 220,000 66,000 70,000 31,000 55,000
Deferred income taxes.............................. (2,173,000) 677,000 597,000 189,000 342,000
Tax benefits from exercise of stock options........ 25,000
Changes in assets and liabilities:
Increase in inventories.......................... (149,000) (295,000) (589,000) (295,000) (359,000)
(Increase) decrease in other assets.............. 1,306,000 (100,000) (20,000) (1,109,000) (1,336,000)
Increase (decrease) in accounts payable.......... 720,000 276,000 1,984,000 (260,000) (1,289,000)
Increase (decrease) in accrued liabilities....... (112,000) 1,698,000 76,000 683,000 2,350,000
Increase (decrease) in accrued rent.............. 43,000 5,000 (111,000) (39,000) (50,000)
------------- ------------- ------------- ------------- -------------
Net cash provided by operating activities...... 7,284,000 9,849,000 12,066,000 3,653,000 5,080,000
------------- ------------- ------------- ------------- -------------
Cash flows from investing activities:
Acquisition of property and equipment:
New restaurant development......................... (5,678,000) (16,272,000) (14,516,000) (6,597,000) (9,361,000)
Existing restaurant additions...................... (2,546,000) (1,962,000) (3,036,000) (1,050,000) (600,000)
Increase in intangible and other assets............ (161,000) (1,257,000) (1,270,000) (651,000) (1,020,000)
------------- ------------- ------------- ------------- -------------
Net cash used in investing activities.......... (8,385,000) (19,491,000) (18,822,000) (8,298,000) (10,981,000)
------------- ------------- ------------- ------------- -------------
Cash flows from financing activities:
Proceeds from long-term debt......................... 3,145,000 8,207,000 13,008,000 8,203,000 8,339,000
Change in certificates of deposit restricted to
secure debt........................................ 303,000 125,000
Repayment of long-term debt.......................... (12,390,000) (2,290,000) (5,521,000) (2,308,000) (2,661,000)
Net proceeds from issuance of common stock........... 11,679,000 129,000 999,000 329,000 466,000
Repayment of shareholder notes receivable............ 87,000 324,000
------------- ------------- ------------- ------------- -------------
Net cash provided by financing activities...... 2,824,000 6,495,000 8,486,000 6,224,000 6,144,000
------------- ------------- ------------- ------------- -------------
Net increase (decrease) in cash and cash equivalents... 1,723,000 (3,147,000) 1,730,000 1,579,000 243,000
Cash and cash equivalents at beginning of period....... 2,039,000 3,762,000 615,000 615,000 2,345,000
------------- ------------- ------------- ------------- -------------
Cash and cash equivalents at end of period............. $ 3,762,000 $ 615,000 $ 2,345,000 $ 2,194,000 $ 2,588,000
------------- ------------- ------------- ------------- -------------
------------- ------------- ------------- ------------- -------------
Non-cash financing transactions:
Issuance of common stock upon exercise of warrants... $ 284,000
-------------
-------------
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
GARDEN FRESH RESTAURANT CORP.
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
----------------------- --------------------- PAID-IN
SHARES AMOUNT SHARES AMOUNT CAPITAL
----------- --------- ---------- -------- ------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1994........... 3,676,479 $ 37,000 433,925 $ 4,000 $ 17,666,000
Issuance of common stock.............. 1,500,000 15,000 11,649,000
Conversion of preferred stock......... (3,676,479) (37,000) 1,102,944 11,000 26,000
Stock dividend........................ 921,935 9,000 8,289,000
Exercise of warrants.................. 138,495 2,000 (2,000)
Exercise of common stock options...... 2,048 15,000
Repayment of shareholder notes
receivable..........................
Net income............................
----------- --------- ---------- -------- ------------
Balance at September 30, 1995........... 4,099,347 41,000 37,643,000
Exercise of common stock options...... 17,880 129,000
Repayment of shareholder notes
receivable..........................
Net income............................
----------- --------- ---------- -------- ------------
Balance at September 30, 1996........... 4,117,227 41,000 37,772,000
Exercise of common stock options...... 135,155 2,000 910,000
Issuance of common stock under
employee stock purchase plan........ 12,197 87,000
Tax benefits from exercise of stock
options............................. 25,000
Net income............................
----------- --------- ---------- -------- ------------
Balance at September 30, 1997........... 4,264,579 43,000 38,794,000
----------- --------- ---------- -------- ------------
Exercise of common stock options
(unaudited)......................... 48,156 395,000
Issuance of common stock under
employee stock purchase plan
(unaudited)......................... 5,441 71,000
Net income (unaudited)................
----------- --------- ---------- -------- ------------
Balance at March 31, 1998 (unaudited)... 4,318,176 $43,000 $ 39,260,000
----------- --------- ---------- -------- ------------
----------- --------- ---------- -------- ------------
<CAPTION>
ACCUMULATED COMMON STOCK
DEFICIT NOTES RECEIVABLE TOTAL
------------- ----------------- ------------
<S> <C> <C> <C>
Balance at September 30, 1994........... $ (7,087,000) $ (411,000) $ 10,209,000
Issuance of common stock.............. 11,664,000
Conversion of preferred stock.........
Stock dividend........................ (8,298,000)
Exercise of warrants..................
Exercise of common stock options...... 15,000
Repayment of shareholder notes
receivable.......................... 87,000 87,000
Net income............................ 3,825,000 3,825,000
------------- ----------------- ------------
Balance at September 30, 1995........... (11,560,000) (324,000) 25,800,000
Exercise of common stock options...... 129,000
Repayment of shareholder notes
receivable.......................... 324,000 324,000
Net income............................ 3,004,000 3,004,000
------------- ----------------- ------------
Balance at September 30, 1996........... (8,556,000) 29,257,000
Exercise of common stock options...... 912,000
Issuance of common stock under
employee stock purchase plan........ 87,000
Tax benefits from exercise of stock
options............................. 25,000
Net income............................ 3,887,000 3,887,000
------------- ----------------- ------------
Balance at September 30, 1997........... (4,669,000) 34,168,000
------------- ----------------- ------------
Exercise of common stock options
(unaudited)......................... 395,000
Issuance of common stock under
employee stock purchase plan
(unaudited)......................... 71,000
Net income (unaudited)................ 1,904,000 1,904,000
------------- ----------------- ------------
Balance at March 31, 1998 (unaudited)... $ (2,765,000) $ 36,538,000
------------- ----------------- ------------
------------- ----------------- ------------
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS
NOTE 1-- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
Garden Fresh Restaurant Corp. (the "Company") is a Delaware corporation
which owns and operates restaurants in Arizona, California, Florida, New Mexico
and Utah doing business as Souplantation or Sweet Tomatoes.
USE OF 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 at the
date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
INVENTORIES
Inventories, consisting principally of food, beverages and restaurant
supplies, are valued at the lower of cost (first-in, first-out) or market.
PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost. Depreciation and amortization
are provided using the straight-line method over estimated useful lives of 3 to
30 years or the remaining lease term, whichever is shorter.
Maintenance and repairs are charged to operations as incurred. When assets
are sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any gain or loss is included in the results of
operations.
Impairment of restaurant property and equipment is measured on the basis of
anticipated undiscounted cash flows for each restaurant. Based upon the
Company's analysis, no impairment of such assets was indicated during fiscal
1995, 1996, or 1997.
INTANGIBLE AND OTHER ASSETS
Intangible assets resulting from the 1983 acquisition of the two original
Souplantation restaurants, comprised of leasehold interests and goodwill, are
amortized using the straight-line method over 15 years. Preopening costs
incurred in connection with opening new restaurant locations, including training
and legal costs, are deferred and amortized over a one-year period commencing
with the opening of each respective restaurant. Debt issuance costs are
capitalized and amortized using the straight-line method over the term of the
debt.
INCOME TAXES
Current income tax expense is the amount of income taxes expected to be
payable for the current year. A deferred income tax asset or liability is
established for the expected future consequences resulting from the differences
in the financial reporting and tax bases of assets and liabilities. Deferred
income tax expense (benefit) is the net change during the year in the deferred
income tax asset or liability. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.
F-7
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
ADVERTISING
Advertising costs are expensed as incurred. Advertising expenses were
$1,440,000, $1,467,000 and $1,963,000 in fiscal 1995, 1996 and 1997,
respectively, and are included in restaurant operating expenses.
FAIR VALUE OF FINANCIAL INSTRUMENTS
It is management's belief that the carrying amounts shown for the Company's
financial instruments are reasonable estimates of their related fair value.
CASH EQUIVALENTS
Cash equivalents are highly liquid investments purchased with maturities of
three months or less. Cash equivalents consist of investments in money market
accounts backed by Federal government securities. The carrying amount is
reflected at cost, which approximates the fair value due to the short maturity
of these instruments. The Company's policy is to place its cash and cash
equivalents with high credit quality financial institutions and to limit the
amount of credit exposure.
NET INCOME (LOSS) PER SHARE AVAILABLE TO COMMON SHAREHOLDERS
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share," which
specifies the computation, presentation and disclosure requirements for earnings
per share. In accordance with SFAS No. 128, the Company has presented basic
earnings per share and diluted earnings per share and restated all prior periods
in conformity with SFAS No. 128. Basic earnings per share is computed based on
the weighted average number of common shares outstanding during the period.
Diluted earnings per share is computed based on the weighted average number of
common shares outstanding during the period increased by the effect of dilutive
stock options using the treasury stock method and common shares expected to be
issued under the Company's employee stock purchase plan.
Common stock equivalents of approximately 73,000 and 210,000 shares for the
years ended December 31, 1996 and 1997, respectively, were used to calculate
diluted earnings per share. For the year ended December 31, 1995, common stock
equivalents were not used to calculate diluted loss per share because of their
antidilutive effect. There are no reconciling items in calculating the numerator
for basic and diluted earnings (loss) per share for the periods presented.
INTERIM FINANCIAL INFORMATION (UNAUDITED)
The accompanying balance sheet at March 31, 1998 and the statements of
operations and cash flows for the six month periods ended March 31, 1998 and
1997, and the statement of shareholders' equity for the six month period ended
March 31, 1998 are unaudited. In the opinion of management, these statements
have been prepared on the same basis as the audited financial statements and
include all adjustments, consisting of only normal recurring adjustments,
necessary for the fair statement of the financial position and the results of
operations for the interim periods.
F-8
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 1-- THE COMPANY AND A SUMMARY OF ITS SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
STOCK-BASED COMPENSATION
The Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method and provides pro forma
disclosures of net income and net income per share as if the fair value-based
method had been applied in measuring compensation expense (Note 5).
EXTRAORDINARY ITEM
During fiscal 1995, the Company recognized an extraordinary loss of
$518,000, net of an income tax benefit of $192,000, representing a charge for
previously unamortized debt issue costs, unamortized debt discount, and a
prepayment penalty associated with early extinguishment of debt repaid with
proceeds from the Company's May 1995 initial public offering.
NOTE 2--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
OTHER CURRENT ASSETS
Prepaid taxes..................................................................... $ 298,000 $ 364,000
Prepaid insurance................................................................. 66,000 59,000
Other............................................................................. 166,000 127,000
-------------- --------------
$ 530,000 $ 550,000
-------------- --------------
-------------- --------------
PROPERTY AND EQUIPMENT
Leasehold improvements............................................................ $ 16,821,000 $ 18,796,000
Furniture and fixtures............................................................ 15,151,000 18,915,000
Equipment......................................................................... 12,234,000 14,675,000
Land and buildings................................................................ 13,624,000 21,301,000
Construction in process on new restaurants........................................ 4,103,000 5,605,000
-------------- --------------
61,933,000 79,292,000
Less accumulated depreciation and amortization.................................... (20,381,000) (25,035,000)
-------------- --------------
$ 41,552,000 $ 54,257,000
-------------- --------------
-------------- --------------
INTANGIBLE AND OTHER ASSETS
Intangible assets acquired, net of accumulated amortization of $609,000 and
$659,000, respectively.......................................................... $ 207,000 $ 157,000
Preopening costs, net of accumulated amortization of $334,000 and $472,000,
respectively.................................................................... 913,000 864,000
Deposits and other assets......................................................... 452,000 451,000
-------------- --------------
$ 1,572,000 $ 1,472,000
-------------- --------------
-------------- --------------
</TABLE>
F-9
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 2--COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30,
------------------------------
1996 1997
-------------- --------------
<S> <C> <C>
ACCRUED LIABILITIES
Accrued payroll and related expenses.............................................. $ 1,507,000 $ 1,870,000
Accrued interest.................................................................. 74,000 138,000
Sales taxes payable............................................................... 477,000 576,000
Accrued insurance................................................................. 799,000 871,000
Accrued construction in progress cost............................................. 621,000
Other............................................................................. 857,000 956,000
-------------- --------------
$ 4,335,000 $ 4,411,000
-------------- --------------
-------------- --------------
</TABLE>
NOTE 3--LONG-TERM DEBT
Obligations under long-term debt arrangements are comprised of:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Notes payable to lending institutions, interest at 9.29%-11.38%, due in various
monthly installments aggregating $371,000 (including interest) through 2002.
Secured by property and equipment................................................. $ 9,475,000 $ 10,927,000
Notes payable to lending institutions, interest at 9.54%-11.63%, due in various
monthly installments aggregating $152,000 (including interest) through 2001.
Secured by land, building and property............................................ 459,000 6,494,000
------------- -------------
9,934,000 17,421,000
Less current portion................................................................ (3,490,000) (4,456,000)
------------- -------------
$ 6,444,000 $ 12,965,000
------------- -------------
------------- -------------
</TABLE>
The Company paid an aggregate of $1,811,000, $770,000 and $1,669,000 of
interest on all outstanding debt during fiscal 1995, 1996 and 1997,
respectively. The Company capitalized $92,000, $167,000 and $154,000 in interest
expense during fiscal 1995, 1996 and 1997, respectively, related to construction
of new stores. Interest expense includes $126,000 in fiscal 1995 relating to
amortization of debenture and related warrant costs.
Principal payments due on long-term debt during the five years subsequent to
September 30, 1997 are as follows:
<TABLE>
<S> <C>
1998........................................................ $ 4,456,000
1999........................................................ 4,345,000
2000........................................................ 5,156,000
2001........................................................ 3,150,000
2002........................................................ 314,000
Thereafter..................................................
--------------
$ 17,421,000
--------------
--------------
</TABLE>
F-10
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 4--INCOME TAXES
The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Current tax expense:
Federal.......................................... $ 396,000 $ 968,000 $ 1,395,000
State............................................ 131,000 300,000 556,000
------------- ------------ ------------
Total current.................................. 527,000 1,268,000 1,951,000
Deferred tax expense (benefit)..................... (2,173,000) 677,000 597,000
------------- ------------ ------------
Total tax expense (benefit).................... $ (1,646,000) $ 1,945,000 $ 2,548,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
A reconciliation of the provision for income taxes to the amount computed by
applying the statutory federal income tax rate to income before income taxes is
as follows:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
-----------------------------------------
1995 1996 1997
------------- ------------ ------------
<S> <C> <C> <C>
Amounts computed at statutory federal rate......... $ 917,000 $ 1,683,000 $ 2,188,000
State taxes and other.............................. 281,000 262,000 360,000
Alternative minimum taxes.......................... (253,000)
Changes in deferred tax liabilities (assets)
recorded to valuation allowance.................. (418,000)
Release of valuation allowance..................... (2,173,000)
------------- ------------ ------------
Provision (benefit) for income taxes............... $ (1,646,000) $ 1,945,000 $ 2,548,000
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
The Company paid an aggregate of $59,000, $1,137,000 and $1,985,000 of
income taxes in fiscal 1995, 1996 and 1997, respectively.
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30,
----------------------------
1996 1997
------------- -------------
<S> <C> <C>
Operating loss carryforwards.................................... $ 501,000 $
Depreciation.................................................... (1,195,000) (1,299,000)
Accrued rent.................................................... 633,000 588,000
Alternative minimum tax credit carryforward..................... 1,394,000 1,340,000
Other........................................................... 163,000 270,000
------------- -------------
Deferred taxes................................................ $ 1,496,000 $ 899,000
------------- -------------
------------- -------------
</TABLE>
At September 30, 1997, the Company had available alternative minimum tax
credit carryforwards of $1,340,000. The Internal Revenue Code imposes certain
conditions and possible limitations on the future availability of tax credit
carryforwards, including limitations arising from changes in the Company's
ownership.
F-11
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SHAREHOLDERS' EQUITY
CONVERTIBLE PREFERRED STOCK
All preferred stock issued was convertible, at the option of the holder,
into an equal number of shares of common stock; the preferred shares were
automatically converted to common shares upon the closing of the Company's May
1995 initial public offering. The rights of the preferred shareholders included
rights to receive certain dividends when declared by the Board of Directors,
certain preferential distributions in the event of voluntary dissolution of the
Company, and certain voting rights.
Subsequent to the closing of the Company's initial public offering,
2,500,000 shares of preferred stock are authorized; no shares have been issued.
The Board of Directors is authorized to issue the preferred stock in one or more
series and to fix the rights, preferences, privileges and restrictions
associated with the preferred stock.
COMMON STOCK
In May 1995, the Company completed an initial public offering of 1,500,000
shares of common stock. In connection with the offering, the Company paid a
preferential dividend to the holders of Series B, C and D preferred stock
consisting of 921,935 shares of common stock, as a condition to the automatic
conversion of the preferred stock to common stock in conjunction with the public
offering. Additionally, in connection with the offering, the Company changed the
exercise price of warrants which had been issued in connection with subordinated
notes to $1.67 from $3.33 per share and the warrants were exchanged for 138,495
shares of common stock.
STOCK OPTION PLANS
The Company has four stock option plans under which 1,227,450 options may be
granted to employees, consultants and directors of the Company. The plans
provide for the grant of both incentive stock options and non-qualified stock
options. Under the plans, options to purchase common stock may be granted for
periods up to ten years at a price per share ranging from 85% to 110% of the
fair market value of the Company's common stock at the date of grant. During
fiscal 1995, 1996 and 1997, employee stock options were granted at the fair
market value of the stock at the date of grant. The options generally vest over
periods of up to five years and may be exercised in annual installments ranging
from three to ten years. Under the plans, directors will receive options to
purchase 10,000 shares of common stock upon their election to the Board of
Directors, and options to purchase 5,000 shares annually thereafter.
F-12
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SHAREHOLDERS' EQUITY (CONTINUED)
Activity for fiscal 1995, 1996 and 1997 with respect to these plans is as
follows:
<TABLE>
<CAPTION>
SHARES WEIGHTED-AVERAGE
UNDERLYING OPTIONS EXERCISE PRICE
------------------ -----------------
<S> <C> <C>
OUTSTANDING AT SEPTEMBER 30, 1994....................... 221,741 $ 7.16
Granted................................................. 386,087 $ 9.20
Exercised............................................... (2,160) $ 7.00
Canceled................................................ (11,850) $ 8.44
--------
OUTSTANDING AT SEPTEMBER 30, 1995....................... 593,818 $ 8.35
Granted................................................. 201,950 $ 7.74
Exercised............................................... (17,880) $ 7.24
Canceled................................................ (5,689) $ 8.91
--------
OUTSTANDING AT SEPTEMBER 30, 1996....................... 772,199 $ 7.98
Granted................................................. 148,250 $ 9.04
Exercised............................................... (135,155) $ 6.75
Canceled................................................ (10,375) $ 8.02
--------
OUTSTANDING AT SEPTEMBER 30, 1997....................... 774,919 $ 8.40
--------
--------
</TABLE>
Options to purchase an aggregate of 489,392 shares and 517,769 shares were
exercisable under the plans as of September 30, 1996 and 1997, respectively. The
weighted-average fair value of options granted under the plans during fiscal
1996 and 1997 was $2.82 per share and $4.90 per share, respectively.
The following is a summary of stock options outstanding at September 30,
1997:
<TABLE>
<CAPTION>
OPTIONS EXERCISABLE
OPTIONS OUTSTANDING --------------------------------
--------------------------------------------------- NUMBER
NUMBER EXERCISABLE
OUTSTANDING AT WEIGHTED-AVERAGE AT
SEPTEMBER 30, REMAINING WEIGHTED-AVERAGE SEPTEMBER 30, WEIGHTED-AVERAGE
RANGE OF EXERCISE PRICES 1997 CONTRACTUAL LIFE EXERCISE PRICE 1997 EXERCISE PRICE
- ---------------------------- -------------- ---------------- ----------------- ------------- -----------------
<S> <C> <C> <C> <C> <C>
$ 4.40-$ 6.50............... 177,185 7.7 years $ 6.25 92,825 $ 6.02
$ 7.50-$ 9.13............... 511,609 7.8 years $ 8.78 359,094 $ 8.82
$10.00-$12.50............... 86,125 7.2 years $ 10.58 65,850 $ 10.00
------- -------------
$ 4.40-$12.50............... 774,919 7.7 years $ 8.40 517,769 $ 8.47
------- -------------
------- -------------
</TABLE>
The Company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock-based
compensation. No compensation expense has been recognized for employee stock
option grants, which are fixed in nature, as the options have been granted at
fair market value. No compensation expense has been recognized for the employee
stock purchase plan. Had compensation expense for the Company's stock-based
compensation awards issued during fiscal 1996 and 1997 been determined based on
the fair value at the grant dates consistent with the methodology of Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," the
F-13
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SHAREHOLDERS' EQUITY (CONTINUED)
Company's net income and net income per share would have been reduced to the pro
forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30,
--------------------------
1996 1997
------------ ------------
<S> <C> <C>
NET INCOME:
As reported..................................................... $ 3,004,000 $ 3,887,000
------------ ------------
------------ ------------
Pro forma....................................................... $ 2,776,000 $ 3,386,000
------------ ------------
------------ ------------
</TABLE>
Net income per share available to common shareholders:
<TABLE>
<S> <C> <C>
BASIC:
As reported........................................ $ 0.73 $ 0.93
----- -----
----- -----
Pro forma.......................................... $ 0.68 $ 0.81
----- -----
----- -----
DILUTED:
As reported........................................ $ 0.72 $ 0.88
----- -----
----- -----
Pro forma.......................................... $ 0.66 $ 0.77
----- -----
----- -----
</TABLE>
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in fiscal 1996 and 1997, respectively: dividend yield of
0.0% for both years, expected volatility of 39% and 52%, risk-free interest
rates of 5.50% and 6.28%, and expected lives of 4.6 years and 5.3 years. The
fair value of the employees' purchase rights pursuant to the employee stock
purchase plan is estimated using the Black-Scholes model with the following
assumptions for fiscal 1996 and 1997: dividend yield of 0.0% for both years,
expected volatility of 39% and 52%, risk-free interest rates of 5.16% and 5.46%,
and expected lives of 6 months for both years.
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options which have no vesting restrictions and are
fully transferable. In addition, option valuation models require the input of
highly subjective assumptions including the expected stock price volatility.
Because the Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in subjective input
assumptions can materially affect the fair value estimates, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its employee stock-based compensation plans.
EMPLOYEE STOCK PURCHASE PLAN
During 1996, the Company implemented an employee stock purchase plan for all
eligible employees to purchase shares of common stock at 85% of the lower of the
fair market value on the first or the last day of each six-month offering
period. Employees may authorize the Company to withhold up to 10% of their
compensation during any offering period, subject to certain limitations. During
fiscal 1997, 12,197 shares were issued under the plan. The weighted-average fair
value of those purchase rights granted in fiscal 1996
F-14
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 5--SHAREHOLDERS' EQUITY (CONTINUED)
and 1997 was $2.11 and $3.20, respectively. At September 30, 1997, 237,803
shares were reserved for future issuance.
NOTE 6--401(k) SAVINGS PLAN
The Company has a 401(k) Savings Plan (the "Plan") which allows eligible
employees to contribute from one percent to the maximum percentage as determined
by the Plan administrator (seventeen percent for the plan years ended December
31, 1995, 1996 and 1997) of pre-tax compensation, with the Company making
discretionary matching contributions as determined each year by the Board of
Directors. Employees vest immediately in their contributions and vest in Company
contributions over a four year period of service. Included in general and
administrative expense for fiscal 1995, 1996 and 1997 are Company contributions
of $24,000, $0 and $0, respectively.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company leases certain of its restaurant facilities under noncancelable
operating lease agreements. The leases expire at various dates through 2017 and
contain five to twenty-year renewal options. The leases provide that the Company
pay the taxes, insurance and maintenance expenses related to the leased
facilities, and the monthly rental payments are subject to periodic adjustments.
Certain leases contain fixed escalation clauses and rent under these leases is
charged ratably over the lease term. The majority of the leases also provide for
percentage rentals on sales above a specified minimum.
The aggregate future minimum lease commitments due are as follows:
<TABLE>
<CAPTION>
FOR THE YEAR ENDING SEPTEMBER 30, AMOUNT
- ------------------------------------------------------------------------------- -------------
<S> <C>
1998........................................................................... $ 6,166,000
1999........................................................................... 6,036,000
2000........................................................................... 5,700,000
2001........................................................................... 5,668,000
2002........................................................................... 5,657,000
Thereafter..................................................................... 42,758,000
-------------
Total minimum lease payments................................................. $ 71,985,000
-------------
-------------
</TABLE>
The Company incurred rental expenses under all operating leases of
$5,127,000, $5,037,000 and $5,584,000 in fiscal 1995, 1996 and 1997,
respectively. Rental expense includes percentage rentals of $134,000, $171,000
and $227,000 for fiscal 1995, 1996 and 1997, respectively.
The Company is party to litigation involving a lessor who management
believes breached certain exclusivity clauses in the lease of one of its stores.
Management filed a lawsuit alleging breach of such clauses, and the lessor has
countersued the Company alleging that the Company breached the same lease in
connection with the Company's closing of the store in 1994. While there can be
no assurances, in the opinion of management, after reviewing the information
which is currently available with respect to these matters and consulting with
the Company's counsel, the ultimate resolution of these matters will not
materially affect the financial position or results of operations of the
Company.
The Company is also a party to various legal actions relating to former
employees. In the opinion of management, after reviewing the information which
is currently available with respect to these matters,
F-15
<PAGE>
GARDEN FRESH RESTAURANT CORP.
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
NOTE 7--COMMITMENTS AND CONTINGENCIES (CONTINUED)
and consulting with the Company's counsel, any liability which may ultimately be
incurred will not materially affect the financial position or results of
operations of the Company.
NOTE 8--SUBSEQUENT EVENTS
In November 1997, the Company obtained a $5,000,000 revolving line of
credit. The outstanding principal balance on this line of credit bears interest
at a rate of .75% above the prime rate with interest payable at the beginning of
each month. All outstanding principal and interest amounts are due on November
1, 1999.
F-16
<PAGE>
[Picture of soup and bakery bar]
AT THE HEART OF THE RESTAURANT IS OUR NEW EXHIBITION-STYLE PASTA STATION, ALONG
WITH THE SOUP, BAKERY AND DESSERT BARS.
ONE OF THE NEWEST SWEET TOMATOES OPENED IN UTAH IN NOVEMBER 1997.
[Picture of outside of Sweet Tomatoes Restaurant]
Serving Up
Freshness
For 20 Years
<PAGE>
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING STOCKHOLDERS
OR ANY UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY THE SECURITIES OFFERED HEREBY IN ANY
JURISDICTION TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH
JURISDICTION, OR IN ANY JURISDICTION IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF.
--------------------------------
TABLE OF CONTENTS
------------------------
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PROSPECTUS SUMMARY........................................................ 3
RISK FACTORS.............................................................. 6
DIVIDEND POLICY........................................................... 11
PRICE RANGE OF COMMON STOCK............................................... 11
USE OF PROCEEDS........................................................... 12
CAPITALIZATION............................................................ 12
SELECTED FINANCIAL DATA................................................... 13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS.............................................................. 15
BUSINESS.................................................................. 22
MANAGEMENT................................................................ 34
CERTAIN TRANSACTIONS...................................................... 40
PRINCIPAL AND SELLING STOCKHOLDERS........................................ 41
DESCRIPTION OF CAPITAL STOCK.............................................. 42
UNDERWRITING.............................................................. 44
LEGAL MATTERS............................................................. 45
EXPERTS................................................................... 45
AVAILABLE INFORMATION..................................................... 46
INDEX TO FINANCIAL STATEMENTS............................................. F-1
</TABLE>
1,600,000 SHARES
[LOGO]
[LOGO]
GARDEN FRESH
RESTAURANT CORP.
COMMON STOCK
--------------------
PROSPECTUS
---------------
NationsBanc Montgomery
Securities LLC
BancAmerica Robertson Stephens
Morgan Keegan & Company, Inc.
, 1998
- -------------------------------------------
-------------------------------------------
- -------------------------------------------
-------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
Other expenses in connection with the registration of the securities
hereunder, which will be paid by the Registrant, are estimated to be as follows:
<TABLE>
<CAPTION>
ITEM AMOUNT
- ---------------------------------------------------------------------------------- ----------
<S> <C>
Securities and Exchange Commission registration fee............................... $ 10,381
NASD filing fee................................................................... 3,926
Nasdaq National Market fee........................................................ 17,500
Accounting fees and expenses...................................................... 60,000
Legal fees and expenses........................................................... 135,000
Printing and engraving expenses................................................... 50,000
Transfer agent and registrar fees................................................. 5,000
Miscellaneous expenses............................................................ 18,193
----------
Total........................................................................... $ 300,000
----------
----------
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 145 of the Delaware General Corporation Law ("Delaware Law") permits
indemnification of officers, directors and other corporate agents under certain
circumstances and subject to certain limitations. The Company's Restated
Certificate of Incorporation includes a provision to eliminate the personal
liability of its directors for monetary damages for breach or alleged breach of
their fiduciary duties as directors, subject to certain exceptions. In addition,
the Bylaws of the Company provide that the Company is required to indemnify its
officers and directors under certain circumstances, including those
circumstances in which indemnification would otherwise be discretionary, to
advance expenses to its officers and directors as incurred in connection with
proceedings against them for which they may be indemnified, and to provide
liability insurance if available on reasonable terms. The Company has entered
into indemnification agreements with its officers and directors containing
provisions that are in some respects broader than the specific indemnification
provisions contained in the Delaware General Corporation Law. The
indemnification agreements require the Company, among other things, to indemnify
such officers and directors against certain liabilities that may arise by reason
of their status or service as directors or officers (other than liabilities for
which Delaware law prohibits indemnification), to advance their expenses
incurred as a result of any proceedings against them as to which they could be
indemnified, and to provide liability insurance to the extent that the Company's
policies cover directors, officers, employees or agents. The Company has also
obtained directors' and officers' liability insurance with $3.0 million in
coverage per occurrence. At present, the Company is not aware of any pending or
threatened litigation or proceeding involving a director, officer, employee or
agent of the Company in which indemnification would be required or permitted.
The Company believes that its charter provisions and indemnification agreements
are necessary to attract and retain qualified persons as directors and officers.
These indemnification provisions may be sufficiently broad to permit
indemnification of the Registrant's officers and directors for liabilities
(including reimbursement of expenses incurred) arising under the Securities Act
of 1933.
The Underwriting Agreement provides for indemnification by the Underwriters
of the Registrant and its officers and directors for certain liabilities arising
under the Securities Act of 1933, or otherwise.
II-1
<PAGE>
The Company is entering into an indemnification agreement with the Company's
executive officers and directors who are Selling Stockholders pursuant to which
the Company will indemnify the Selling Stockholders for certain liabilities
which could result from this offering.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
In March 1995, the Board of Directors and the stockholders of the Company
approved an amendment to the Company's Restated Certificate of Incorporation
which provided for the payment of a preferential stock dividend of approximately
922,018 shares of Common Stock payable to the holders of the Company's Series B,
C and D Preferred Stock immediately prior to the closing of the Company's
initial public offering. The shares of Common Stock were issued on May 24, 1995.
The issuance of the securities in this transaction was deemed to be exempt from
registration under the Securities Act pursuant to Section 4(2) as a transaction
by an issuer not involving any public offering.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<C> <S>
1.1 Form of Underwriting Agreement.
3.1 (1) Restated Certificate of Incorporation of Garden Fresh Restaurant Corp., as amended.
3.2 (2) Bylaws of Garden Fresh Restaurant Corp., as amended.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1 (2) Form of Indemnity Agreement for executive officers and directors.
10.2 (2) The Company's Restaurant Management Stock Option Plan, as amended.
10.3 (2) The Company's Key Employee Stock Option Plan, as amended.
10.4 (2) The Company's 1995 Outside Director Stock Option Plan.
10.5 (2) The Company's 1995 Key Employee Stock Option Plan, as amended.
10.6 (3) Form of Executive Employment Agreement.
10.7 (3) Wells Fargo Bank Revolving Line of Credit Note.
10.8 (4) The Company's 1998 Stock Option Plan.
10.9 (4) The Company's Variable Deferred Compensation Plan for Executives.
10.13(2) Park Terrace Office Park Lease between the Company and Park Terrace Partners dated November 1, 1991.
10.14 Indemnification Agreement between the Company and the Selling Stockholders dated April 28, 1998.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on Page II-4).
</TABLE>
- ------------------------
(1) Incorporated by reference from Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-93568) filed June 16, 1995.
II-2
<PAGE>
(2) Incorporated by reference from the Exhibits with corresponding numbers filed
with the Company's Registration Statement on Form S-1 (No. 33-90404), as
amended by Amendment No. 1 to Form S-1 filed on April 19, 1995, Amendment
No. 2 to Form S-1 filed May 8, 1995 and Amendment No. 3 to Form S-1 filed
May 15, 1995, except that Exhibit 10.2 is incorporated by reference from
Exhibits 10.2 and 10.2A, Exhibit 10.3 is incorporated by reference from
Exhibits 10.3 and 10.3A and Exhibit 10.5 is incorporated by reference from
Exhibit 10.5 and 10.5A.
(3) Incorporated by reference from the Exhibits with corresponding numbers filed
with the Company's Form 10Q filed with the SEC on February 13, 1998.
(4) Incorporated by reference from the Exhibit with the corresponding number
filed with the Company's Form 10Q filed with the SEC on April 28, 1998.
(B) FINANCIAL STATEMENT SCHEDULES
Schedule II--Valuation and Qualifying Accounts
All such schedules have been omitted because they are not applicable or not
required under the instructions contained in Regulation S-X or because the
information is included elsewhere in the Financial Statements or the notes
thereto.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
of 1933 and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
Registrant of expenses incurred or paid by a director, office or controlling
person of the Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned Registrant undertakes that:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 4340A and contained in
a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of
this registration statement as of the time it was declared effective; and
(2) For the purpose of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial BONA FIDE offering thereof.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of San Diego, State of
California, on the 28th day of April, 1998.
<TABLE>
<S> <C> <C>
GARDEN FRESH RESTAURANT CORP.
By: /s/ MICHAEL P. MACK
-----------------------------------------
Michael P. Mack
CHIEF EXECUTIVE OFFICER AND PRESIDENT
</TABLE>
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below hereby constitutes and appoints Michael P. Mack and David W. Qualls, and
each of them, their true and lawful attorneys and agents, with full power of
substitution, each with power to act alone, to sign and execute on behalf of the
undersigned (i) any amendment or amendments to this Registration Statement on
Form S-1 and (ii) any registration statement registering additional securities
pursuant to Rule 462(b) under the Securities Act of 1933 and to perform any acts
necessary in order to file such amendments or registration statements, and each
of the undersigned does hereby ratify and confirm all that said attorneys and
agents, or their or his substitutes, shall do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities and on the dates indicated.
SIGNATURES TITLE DATE
- ------------------------------ -------------------------- -------------------
Chairman of the Board,
/s/ MICHAEL P. MACK Chief Executive Officer,
- ------------------------------ President and Director April 28, 1998
Michael P. Mack (PRINCIPAL EXECUTIVE
OFFICER)
Executive Vice President-
Finance and Real Estate,
/s/ DAVID W. QUALLS Chief Financial Officer
- ------------------------------ and Secretary (PRINCIPAL April 28, 1998
David W. Qualls FINANCIAL AND ACCOUNTING
OFFICER)
/s/ EDGAR F. BERNER
- ------------------------------ Director April 28, 1998
Edgar F. Berner
/s/ ROBERT A. GUNST
- ------------------------------ Director April 28, 1998
Robert A. Gunst
/s/ MICHAEL M. MINCHIN, JR.
- ------------------------------ Director April 28, 1998
Michael M. Minchin, Jr.
/s/ JOHN M. ROBBINS, JR.
- ------------------------------ Director April 28, 1998
John M. Robbins, Jr.
II-4
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
EXHIBITS
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GARDEN FRESH RESTAURANT CORP.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ------------- -----------------------------------------------------------------------------------------------------
<S> <C>
1.1 Form of Underwriting Agreement.
3.1(1) Restated Certificate of Incorporation of Garden Fresh Restaurant Corp., as amended.
3.2(2) Bylaws of Garden Fresh Restaurant Corp., as amended.
5.1 Opinion of Gray Cary Ware & Freidenrich LLP.
10.1(2) Form of Indemnity Agreement for executive officers and directors.
10.2(2) The Company's Restaurant Management Stock Option Plan, as amended.
10.3(2) The Company's Key Employee Stock Option Plan, as amended.
10.4(2) The Company's 1995 Outside Director Stock Option Plan.
10.5(2) The Company's 1995 Key Employee Stock Option Plan, as amended.
10.6(3) Form of Executive Employment Agreement.
10.7(3) Wells Fargo Bank Revolving Line of Credit Note.
10.8(4) The Company's 1998 Stock Option Plan.
10.9(4) The Company's Variable Deferred Compensation Plan for Executives
10.13(2) Park Terrace Office Park Lease between the Company and Park Terrace Partners dated November 1, 1991.
10.14 Indemnification Agreement between the Company and the Selling Stockholders dated April 28, 1998.
23.1 Consent of Price Waterhouse LLP, Independent Accountants.
23.2 Consent of Gray Cary Ware & Freidenrich LLP (included in Exhibit 5.1).
24.1 Power of Attorney (included on Page II-4).
</TABLE>
- ------------------------
(1) Incorporated by reference from Exhibit 4.1 filed with the Company's
Registration Statement on Form S-8 (No. 33-93568) filed June 16, 1995.
(2) Incorporated by reference from the Exhibits with corresponding numbers filed
with the Company's Registration Statement on Form S-1 (No. 33-90404), as
amended by Amendment No. 1 to Form S-1 filed on April 19, 1995, Amendment
No. 2 to Form S-1 filed May 8, 1995 and Amendment No. 3 to Form S-1 filed
May 15, 1995, except that Exhibit 10.2 is incorporated by reference from
Exhibits 10.2 and 10.2A, Exhibit 10.3 is incorporated by reference from
Exhibits 10.3 and 10.3A and Exhibit 10.5 is incorporated by reference from
Exhibit 10.5 and 10.5A.
(3) Incorporated by reference from the Exhibits with corresponding numbers filed
with the Company's Form 10Q filed with the SEC on February 13, 1998.
(4) Incorporated by reference from the Exhibit with the corresponding number
filed with the Company's Form 10Q filed with the SEC on April 28, 1998.
<PAGE>
1,600,000 SHARES
GARDEN FRESH RESTAURANT CORP.
COMMON STOCK
UNDERWRITING AGREEMENT
DATED MAY __, 1998
<PAGE>
<TABLE>
TABLE OF CONTENTS
<S> <C>
SECTION 1. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . .2
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY AND THE SIGNIFICANT
SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2
COMPLIANCE WITH REGISTRATION REQUIREMENTS . . . . . . . . . . . . . . . . . . .2
OFFERING MATERIALS FURNISHED TO UNDERWRITERS. . . . . . . . . . . . . . . . . .3
DISTRIBUTION OF OFFERING MATERIAL BY THE COMPANY. . . . . . . . . . . . . . . .3
THE UNDERWRITING AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . .3
AUTHORIZATION OF THE COMMON SHARES. . . . . . . . . . . . . . . . . . . . . . .3
NO APPLICABLE REGISTRATION OR OTHER SIMILAR RIGHTS. . . . . . . . . . . . . . .3
NO MATERIAL ADVERSE CHANGE. . . . . . . . . . . . . . . . . . . . . . . . . . .4
INDEPENDENT ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
PREPARATION OF THE FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . .4
INCORPORATION AND GOOD STANDING OF THE COMPANY. . . . . . . . . . . . . . . . .4
CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS. . . . . . . . . . . . . . . . .5
STOCK EXCHANGE LISTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO FURTHER AUTHORIZATIONS
OR APPROVALS REQUIRED . . . . . . . . . . . . . . . . . . . . . . . . . . . . .5
NO MATERIAL ACTIONS OR PROCEEDINGS. . . . . . . . . . . . . . . . . . . . . . .6
INTELLECTUAL PROPERTY RIGHTS. . . . . . . . . . . . . . . . . . . . . . . . . .6
ALL NECESSARY PERMITS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . .7
TITLE TO PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
TAX LAW COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
COMPANY NOT AN "INVESTMENT COMPANY" . . . . . . . . . . . . . . . . . . . . . .7
INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .7
NO PRICE STABILIZATION OR MANIPULATION. . . . . . . . . . . . . . . . . . . . .8
RELATED PARTY TRANSACTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . .8
NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS . . . . . . . . . . . . . . . . . .8
COMPANY'S ACCOUNTING SYSTEM . . . . . . . . . . . . . . . . . . . . . . . . . .8
COMPLIANCE WITH ENVIRONMENTAL LAWS. . . . . . . . . . . . . . . . . . . . . . .8
ERISA COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING STOCKHOLDERS. . . . . . . . . . 10
THE UNDERWRITING AGREEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 10
THE CUSTODY AGREEMENT AND POWER OF ATTORNEY . . . . . . . . . . . . . . . . . 10
TITLE TO COMMON SHARES TO BE SOLD; ALL AUTHORIZATIONS OBTAINED. . . . . . . . 10
DELIVERY OF THE COMMON SHARES TO BE SOLD. . . . . . . . . . . . . . . . . . . 10
NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED. . . . . . 11
NO REGISTRATION OR OTHER SIMILAR RIGHTS . . . . . . . . . . . . . . . . . . . 11
NO FURTHER CONSENTS, ETC. . . . . . . . . . . . . . . . . . . . . . . . . . . 11
DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN THE PROSPECTUS . . . . . . . . 11
NO PRICE STABILIZATION OR MANIPULATION. . . . . . . . . . . . . . . . . . . . 12
CONFIRMATION OF COMPANY REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . 12
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SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES . . . . . . . . . . . 12
THE FIRM COMMON SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
THE FIRST CLOSING DATE. . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE . . . . . . . . . . . . . 13
PUBLIC OFFERING OF THE COMMON SHARES. . . . . . . . . . . . . . . . . . . . . 14
PAYMENT FOR THE COMMON SHARES . . . . . . . . . . . . . . . . . . . . . . . . 14
DELIVERY OF THE COMMON SHARES . . . . . . . . . . . . . . . . . . . . . . . . 14
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. . . . . . . . . . . . . . . . . . 15
SECTION 3. ADDITIONAL COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . 15
A. COVENANTS OF THE COMPANY. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
UNDERWRITERS' REVIEW OF PROPOSED AMENDMENTS AND SUPPLEMENTS . . . . . . . . . 15
SECURITIES ACT COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . 15
AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS AND OTHER SECURITIES
ACT MATTERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS. . . . . . . . . . 16
BLUE SKY COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
TRANSFER AGENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
EARNINGS STATEMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
PERIODIC REPORTING OBLIGATIONS. . . . . . . . . . . . . . . . . . . . . . . . 17
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. . . . . . . . . . . . . 17
FUTURE REPORTS TO THE UNDERWRITERS. . . . . . . . . . . . . . . . . . . . . . 17
B. COVENANTS OF THE SELLING STOCKHOLDERS . . . . . . . . . . . . . . . . . . . . 18
AGREEMENT NOT TO OFFER OR SELL ADDITIONAL SECURITIES. . . . . . . . . . . . . 18
DELIVERY OF FORMS W-8 AND W-9 . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 4. PAYMENT OF EXPENSES. . . . . . . . . . . . . . . . . . . . . . . . . . 18
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS. . . . . . . . . . . 19
ACCOUNTANTS' COMFORT LETTER . . . . . . . . . . . . . . . . . . . . . . . . . 20
COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO STOP ORDER; NO OBJECTION
FROM NASD . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY CHANGE . . . . . . . . . . . . . 20
OPINION OF COUNSEL FOR THE COMPANY. . . . . . . . . . . . . . . . . . . . . . 21
OPINION OF COUNSEL FOR THE UNDERWRITERS . . . . . . . . . . . . . . . . . . . 21
OFFICERS' CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
BRING-DOWN COMFORT LETTER . . . . . . . . . . . . . . . . . . . . . . . . . . 22
OPINION OF COUNSEL FOR THE SELLING STOCKHOLDERS . . . . . . . . . . . . . . . 22
SELLING STOCKHOLDERS' CERTIFICATE . . . . . . . . . . . . . . . . . . . . . . 22
SELLING STOCKHOLDERS' DOCUMENTS . . . . . . . . . . . . . . . . . . . . . . . 22
LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF THE COMPANY OTHER THAN
SELLING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ADDITIONAL DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. . . . . . . . . . . . . . . . 23
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT. . . . . . . . . . . . . . . . . . . . 24
SECTION 8. INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
INDEMNIFICATION OF THE UNDERWRITERS . . . . . . . . . . . . . . . . . . . . . 24
ii
<PAGE>
INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS AND OFFICERS AND THE SELLING
STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
NOTIFICATIONS AND OTHER INDEMNIFICATION PROCEDURES. . . . . . . . . . . . . . 26
SETTLEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
SECTION 9. CONTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL UNDERWRITERS. . . . . . . . . . 29
SECTION 11. TERMINATION OF THIS AGREEMENT . . . . . . . . . . . . . . . . . . . . 30
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE DELIVERY . . . . . . . . . 30
SECTION 13. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 14. SUCCESSORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
SECTION 15. PARTIAL UNENFORCEABILITY. . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 16. GOVERNING LAW PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING STOCKHOLDERS TO SELL AND
DELIVER COMMON SHARES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
SECTION 18. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . 32
iii
</TABLE>
<PAGE>
UNDERWRITING AGREEMENT
May __, 1998
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
MORGAN KEEGAN & COMPANY, INC.
c/o NATIONSBANC MONTGOMERY SECURITIES LLC
600 Montgomery Street
San Francisco, California 94111
Ladies and Gentlemen:
INTRODUCTORY. Garden Fresh Restaurant Corp., a Delaware
corporation (the "Company), proposes to issue and sell to the several
underwriters named in SCHEDULE A (the "Underwriters") an aggregate of
1,300,000 shares of its Common Stock, par value $0.01 per share (the "Common
Stock"); and the stockholders of the Company named in SCHEDULE B
(collectively, the "Selling Stockholders") severally propose to sell to the
Underwriters an aggregate of 300,000 shares of Common Stock. The 1,300,000
shares of Common Stock to be sold by the Company and the 300,000 shares of
Common Stock to be sold by the Selling Stockholders are collectively called
the "Firm Common Shares." In addition, the Company has granted to the
Underwriters an option to purchase up to an additional 240,000 shares (the
"Optional Common Shares") of Common Stock, as provided in Section 2. The Firm
Common Shares and, if and to the extent such option is exercised, the
Optional Common Shares are collectively called the "Common Shares."
The Company has prepared and filed with the Securities and
Exchange Commission (the "Commission") a registration statement on Form S-1
(File No. 333-[___]), which contains a form of prospectus to be used in
connection with the public offering and sale of the Common Shares. Such
registration statement, as amended, including the financial statements,
exhibits and schedules thereto, in the form in which it was declared
effective by the Commission under the Securities Act of 1933 and the rules
and regulations promulgated thereunder (collectively, the "Securities Act"),
including any information deemed to be a part thereof at the time of
effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is
called the "Registration Statement." Any registration statement filed by the
Company pursuant to Rule 462(b) under the Securities Act is called the "Rule
462(b) Registration Statement," and from and after the date and time of
filing of the Rule 462(b) Registration Statement the term "Registration
<PAGE>
Statement" shall include the Rule 462(b) Registration Statement. Such
prospectus, in the form first used by the Underwriters to confirm sales of
the Common Shares, is called the "Prospectus"; PROVIDED, HOWEVER, if the
Company has, with the consent of NationsBanc Montgomery Securities LLC
("NMS"), elected to rely upon Rule 434 under the Securities Act, the term
"Prospectus" shall mean the Company's prospectus subject to completion (a
"preliminary prospectus") dated [___](such preliminary prospectus is called
the "Rule 434 preliminary prospectus"), together with the applicable term
sheet (the "Term Sheet") prepared and filed by the Company with the
Commission under Rules 434 and 424(b) under the Securities Act and all
references in this Agreement to the date of the Prospectus shall mean the
date of the Term Sheet. All references in this Agreement to the Registration
Statement, the Rule 462(b) Registration Statement, a preliminary prospectus,
the Prospectus or the Term Sheet, or any amendments or supplements to any of
the foregoing, shall include any copy thereof filed with the Commission
pursuant to its Electronic Data Gathering, Analysis and Retrieval System
("EDGAR").
The Company and each of the Selling Stockholders hereby
confirm their respective agreements with the Underwriters as follows:
SECTION 1. REPRESENTATIONS AND WARRANTIES.
A. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The
Company hereby represents, warrants and covenants to each Underwriter as
follows:
(a) COMPLIANCE WITH REGISTRATION REQUIREMENTS. The
Registration Statement and any Rule 462(b) Registration Statement have been
declared effective by the Commission under the Securities Act. The Company
has complied to the Commission's satisfaction with all requests of the
Commission for additional or supplemental information. No stop order
suspending the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement is in effect and no proceedings for such purpose have
been instituted or are pending or, to the best knowledge of the Company, are
contemplated or threatened by the Commission.
Each preliminary prospectus and the Prospectus when
filed complied in all material respects with the Securities Act and, if filed
by electronic transmission pursuant to EDGAR (except as may be permitted by
Regulation S-T under the Securities Act), was identical to the copy thereof
delivered to the Underwriters for use in connection with the offer and sale
of the Common Shares. Each of the Registration Statement, any Rule 462(b)
Registration Statement and any post-effective amendment thereto, at the time
it became effective and at all subsequent times up to and including each
Closing Date, complied and will comply in all material respects with the
Securities Act and did not and will not contain any untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading. The Prospectus,
as amended or supplemented, as of its date and at all subsequent times up to
and including each Closing Date, did not and will not contain any untrue
statement of a material fact or omit to state a material fact necessary in
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order to make the statements therein, in the light of the circumstances under
which they were made, not misleading. The representations and warranties set
forth in the two immediately preceding sentences do not apply to statements
in or omissions from the Registration Statement, any Rule 462(b) Registration
Statement, or any post-effective amendment thereto, or the Prospectus, or any
amendments or supplements thereto, made in reliance upon and in conformity
with information relating to any Underwriter furnished to the Company in
writing by the Underwriters expressly for use therein. There are no
contracts or other documents required to be described in the Prospectus or to
be filed as exhibits to the Registration Statement which have not been
described or filed as required.
(b) OFFERING MATERIALS FURNISHED TO UNDERWRITERS.
The Company has delivered to each Underwriter a complete manually signed copy
of the Registration Statement and of each consent and certificate of experts
filed as a part thereof, and the Company will deliver conformed copies of the
Registration Statement (without exhibits) and preliminary prospectuses and
the Prospectus, as amended or supplemented, in such quantities and at such
places as the Underwriters have reasonably requested for each of the
Underwriters.
(c) DISTRIBUTION OF OFFERING MATERIAL BY THE
COMPANY. The Company has not distributed and will not distribute, prior to
the later of the Second Closing Date (as defined below) and the completion of
the Underwriters' distribution of the Common Shares, any offering material in
connection with the offering and sale of the Common Shares other than a
preliminary prospectus, the Prospectus or the Registration Statement.
(d) THE UNDERWRITING AGREEMENT. This Agreement has
been duly authorized, executed and delivered by, and is a valid and binding
agreement of, the Company, enforceable in accordance with its terms, except
as rights to indemnification hereunder may be limited by applicable law and
except as the enforcement hereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting the
rights and remedies of creditors or by general equitable principles.
(e) AUTHORIZATION OF THE COMMON SHARES. The Common
Shares to be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale pursuant to this Agreement and, when issued
and delivered by the Company pursuant to this Agreement against payment
therefor, will be validly issued, fully paid and nonassessable.
(f) NO APPLICABLE REGISTRATION OR OTHER SIMILAR
RIGHTS. There are no persons with registration or other similar rights to
have any equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by this Agreement.
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<PAGE>
(g) NO MATERIAL ADVERSE CHANGE. Except as
otherwise disclosed in the Prospectus, subsequent to the respective dates as
of which information is given in the Prospectus: (i) there has been no
material adverse change, or any development that could reasonably be expected
to result in a material adverse change, in the condition, financial or
otherwise, or in the earnings, business, operations or prospects, whether or
not arising from transactions in the ordinary course of business, of the
Company (any such change is called a "Material Adverse Change"); (ii) the
Company has not incurred any material liability or obligation, indirect,
direct or contingent, not in the ordinary course of business nor entered into
any material transaction or agreement not in the ordinary course of business;
and (iii) there has been no dividend or distribution of any kind declared,
paid or made by the Company on any class of capital stock or repurchase or
redemption by the Company of any class of capital stock.
(h) INDEPENDENT ACCOUNTANTS. Price Waterhouse LLP,
who have expressed their opinion with respect to the financial statements
(which term as used in this Agreement includes the related notes thereto) and
supporting schedules filed with the Commission as a part of the Registration
Statement and included in the Prospectus, are [to the Company's knowledge]
independent public or certified public accountants as required by the Securities
Act and the Securities Exchange Act of 1934 and the rules and regulations
promulgated thereunder (the "Exchange Act").
(i) PREPARATION OF THE FINANCIAL STATEMENTS. The
financial statements filed with the Commission as a part of the Registration
Statement and included in the Prospectus present fairly the financial
position of the Company as of and at the dates indicated and the results of
their operations and cash flows for the periods specified. The supporting
schedules included in the Registration Statement present fairly the
information required to be stated therein.
(j) INCORPORATION AND GOOD STANDING OF THE COMPANY.
The Company has been duly incorporated and is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation and has corporate power and authority to own, lease and operate
its properties and to conduct its business as described in the Prospectus and
to enter into and perform its obligations under this Agreement. The Company
is duly qualified as a foreign corporation to transact business and is in
good standing in the States of California, Florida, Arizona, New Mexico, Utah
and Nevada and each other jurisdiction in which such qualification is
required, whether by reason of the ownership or leasing of property
4
<PAGE>
or the conduct of business, except for such jurisdictions (other than the
States of California, Florida, Arizona, New Mexico, Utah and Nevada) where
the failure to so qualify or to be in good standing would not, individually
or in the aggregate, result in a Material Adverse Change. The Company has no
subsidiaries.
(k) CAPITALIZATION AND OTHER CAPITAL STOCK MATTERS.
The authorized, issued and outstanding capital stock of the Company is as set
forth in the Prospectus under the caption "Capitalization" (other than for
subsequent issuances, if any, pursuant to employee benefit plans described in
the Prospectus or upon exercise of outstanding options described in the
Prospectus). The Common Stock (including the Common Shares) conforms in all
material respects to the description thereof contained in the Prospectus.
All of the issued and outstanding shares of Common Stock (including the
shares of Common Stock owned by Selling Stockholders) have been, or will be
at the First Closing Date, duly authorized and validly issued, are fully paid
and nonassessable and have been issued in compliance with federal and state
securities laws. None of the outstanding shares of Common Stock were issued
in violation of any preemptive rights, rights of first refusal or other
similar rights to subscribe for or purchase securities of the Company. There
are no authorized or outstanding options, warrants, preemptive rights, rights
of first refusal or other rights to purchase, or equity or debt securities
convertible into or exchangeable or exercisable for, any capital stock of the
Company other than those accurately described in the Prospectus. The
description of the Company's stock option, stock bonus and other stock plans
or arrangements, and the options or other rights granted thereunder, set
forth in the Prospectus accurately and fairly presents the information
required to be shown with respect to such plans, arrangements, options and
rights.
(l) STOCK EXCHANGE LISTING. The Common Stock
(including the Common Shares) is registered pursuant to Section 12(g) of the
Exchange Act and is listed on the Nasdaq National Market, and the Company has
taken no action designed to, or likely to have the effect of, terminating the
registration of the Common Stock under the Exchange Act or delisting the
Common Stock from the Nasdaq National Market, nor has the Company received
any notification that the Commission or the National Association of
Securities Dealers LLC (the "NASD") is contemplating terminating such
registration or listing.
(m) NON-CONTRAVENTION OF EXISTING INSTRUMENTS; NO
FURTHER AUTHORIZATIONS OR APPROVALS REQUIRED. The Company is not in
violation of its charter or by-laws or in default (or, with the giving of
notice or lapse of time, would be in default) ("Default") under any
indenture, mortgage, loan or credit agreement, note, contract, franchise,
lease or other instrument to which the Company is a party or by which it may
be bound (including, without limitation, the Company's Revolving Credit
Facility with Wells Fargo Bank, N.A., as lender), or to which any of the
property or assets of the Company is subject (each, an "Existing
Instrument"), except for such Defaults as would not, individually or in the
aggregate, result in a Material Adverse Change. The Company's execution,
delivery and performance of this Agreement and consummation of the
transactions contemplated hereby and by the Prospectus (i) have
5
<PAGE>
been duly authorized by all necessary corporate action and will not result in
any violation of the provisions of the charter or by-laws of the Company,
(ii) will not conflict with or constitute a breach of, or Default under, or
result in the creation or imposition of any lien, charge or encumbrance upon
any property or assets of the Company pursuant to, or require the consent of
any other part to, any Existing Instrument, except for such conflicts,
breaches, Defaults, liens, charges or encumbrances as would not, individually
or in the aggregate, result in a Material Adverse Change and (iii) will not
result in any violation of any law, administrative regulation or
administrative or court decree applicable to the Company. No consent,
approval, authorization or other order of, or registration or filing with,
any court or other governmental or regulatory authority or agency, is
required for the Company's execution, delivery and performance of this
Agreement and consummation of the transactions contemplated hereby and by the
Prospectus, except such as have been obtained or made and are in full force
and effect under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(n) NO MATERIAL ACTIONS OR PROCEEDINGS. Except as
otherwise disclosed in the Prospectus, there are no legal or governmental
actions, suits or proceedings pending or, to the best of the Company's
knowledge, threatened (i) against or affecting the Company, (ii) which has as
the subject thereof any officer or director of, or property owned or leased
by, the Company or (iii) relating to environmental or discrimination matters,
where in any such case (A) there is a reasonable possibility that such
action, suit or proceeding might be determined adversely to the Company and
(B) any such action, suit or proceeding, if so determined adversely, would
reasonably be expected to result in a Material Adverse Change or adversely
affect the consummation of the transactions contemplated by this Agreement.
No material labor dispute with the employees of the Company, or to the
Company's knowledge (and without investigation) with the employees of any
principal supplier of the Company, exists or, to the best of the Company's
knowledge, is threatened or imminent.
(o) INTELLECTUAL PROPERTY RIGHTS. The Company owns
or possesses sufficient trademarks, trade names, patent rights, copyrights,
licenses, approvals, trade secrets and other similar rights (collectively,
"Intellectual Property Rights") reasonably necessary to conduct its business
as now conducted; and the expected expiration of any of such Intellectual
Property Rights would not result in a Material Adverse Change. The Company
has not received any notice of infringement or conflict with asserted
Intellectual Property Rights of others, which infringement or conflict, if
the subject of an unfavorable decision, would result in a Material Adverse
Change.
(p) ALL NECESSARY PERMITS, ETC. The Company
possesses such valid and current certificates, authorizations or permits
issued by the appropriate state, federal or foreign regulatory agencies or
bodies necessary to conduct its business, and the Company has not received
any notice of proceedings relating to the revocation or modification of, or
non-compliance with, any such certificate, authorization or permit which,
singly or in the aggregate, if the subject of an unfavorable decision, ruling
or finding, could result in a Material Adverse Change.
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(q) TITLE TO PROPERTIES. The Company has good and
marketable title to all the properties and assets reflected as owned in the
financial statements referred to in Section 1(A)(i) above, in each case free
and clear of any security interests, mortgages, liens, encumbrances,
equities, claims and other defects, except such as do not materially and
adversely affect the value of such property and do not materially interfere
with the use made or proposed to be made of such property by the Company.
The real property, improvements, equipment and personal property held under
lease by the Company are held under valid and enforceable leases, with such
exceptions as are not material and do not materially interfere with the use
made or proposed to be made of such real property, improvements, equipment or
personal property by the Company.
(r) TAX LAW COMPLIANCE. The Company has filed all
necessary federal, state and foreign income and franchise tax returns and has
paid all taxes required to be paid by it and, if due and payable, any related
or similar assessment, fine or penalty levied against it. The Company has
made adequate charges, accruals and reserves in the applicable financial
statements referred to in Section 1(A)(i) above in respect of all federal,
state and foreign income and franchise taxes for all periods as to which the
tax liability of the Company has not been finally determined.
(s) COMPANY NOT AN "INVESTMENT COMPANY." The
Company has been advised of the rules and requirements under the Investment
Company Act of 1940, as amended (the "Investment Company Act"). The Company
is not, and after receipt of payment for the Common Shares will not be, an
"investment company" within the meaning of Investment Company Act and will
conduct its business in a manner so that it will not become subject to the
Investment Company Act.
(t) INSURANCE. The Company is insured by
recognized, financially sound and reputable institutions with policies in
such amounts and with such deductibles and covering such risks as are
generally deemed adequate and customary for its business including, but not
limited to, policies covering real and personal property owned or leased by
the Company against theft, damage, destruction, acts of vandalism and
earthquakes. The Company has no reason to believe that it will not be able
(i) to renew its existing insurance coverage as and when such policies expire
or (ii) to obtain comparable coverage from similar institutions as may be
necessary or appropriate to conduct its business as now conducted and at a
cost that would not result in a Material Adverse Change. The Company has not
been denied any insurance coverage which it has sought or for which it has
applied.
(u) NO PRICE STABILIZATION OR MANIPULATION. The
Company has not taken and will not take, directly or indirectly, any action
designed to or that might be reasonably expected to cause or result in
stabilization or manipulation of the price of the Common Stock to facilitate
the sale or resale of the Common Shares.
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(v) RELATED PARTY TRANSACTIONS. There are no
business relationships or related-party transactions involving the Company or
any other person required to be described in the Prospectus which have not
been described as required.
(w) NO UNLAWFUL CONTRIBUTIONS OR OTHER PAYMENTS.
Neither the Company nor, to the best of the Company's knowledge, any employee
or agent of the Company, has made any contribution or other payment to any
official of, or candidate for, any federal, state or foreign office in
violation of any law or of the character required to be disclosed in the
Prospectus.
(x) COMPANY'S ACCOUNTING SYSTEM. The Company
maintains a system of accounting controls sufficient to provide reasonable
assurances that (i) transactions are executed in accordance with management's
general or specific authorization; (ii) transactions are recorded as
necessary to permit preparation of financial statements in conformity with
generally accepted accounting principles and to maintain accountability for
assets; (iii) access to assets is permitted only in accordance with
management's general or specific authorization; and (iv) the recorded
accountability for assets is compared with existing assets at reasonable
intervals and appropriate action is taken with respect to any differences.
(y) COMPLIANCE WITH ENVIRONMENTAL LAWS. Except as
would not, individually or in the aggregate, result in a Material Adverse
Change (i) the Company is not in violation of any federal, state, local or
foreign law or regulation relating to pollution or protection of human health
or the environment (including, without limitation, ambient air, surface
water, groundwater, land surface or subsurface strata) or wildlife, including
without limitation, laws and regulations relating to emissions, discharges,
releases or threatened releases of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum and petroleum
products (collectively, "Materials of Environmental Concern"), or otherwise
relating to the manufacture, processing, distribution, use, treatment,
storage, disposal, transport or handling of Materials of Environment Concern
(collectively, "Environmental Laws"), which violation includes, but is not
limited to, noncompliance with any permits or other governmental
authorizations required for the operation of the business of the Company
under applicable Environmental Laws, or noncompliance with the terms and
conditions thereof, nor has the Company received any written communication,
whether from a governmental authority, citizens group, employee or otherwise,
that alleges that the Company is in violation of any Environmental Law; (ii)
there is no claim, action or cause of action filed with a court or
governmental authority, no investigation with respect to which the Company
has received written notice, and no written notice by any person or entity
alleging potential liability for investigatory costs, cleanup costs,
governmental responses costs, natural resources damages, property damages,
personal injuries, attorneys' fees or penalties arising out of, based on or
resulting from the presence, or release into the environment, of any Material
of Environmental Concern at any location owned, leased or operated by the
Company, now or in the past (collectively, "Environmental Claims"), pending
or, to the best of the Company's knowledge, threatened against the Company or
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any person or entity whose liability for any Environmental Claim the Company
has retained or assumed either contractually or by operation of law; and
(iii) to the best of the Company's knowledge, there are no past or present
actions, activities, circumstances, conditions, events or incidents,
including, without limitation, the release, emission, discharge, presence or
disposal of any Material of Environmental Concern, that reasonably could
result in a violation of any Environmental Law or form the basis of a
potential Environmental Claim against the Company or against any person or
entity whose liability for any Environmental Claim the Company has retained
or assumed either contractually or by operation of law.
[(z) ERISA COMPLIANCE. The Company and any
"employee benefit plan" (as defined under the Employee Retirement Income
Security Act of 1974, as amended, and the regulations and published
interpretations thereunder (collectively, "ERISA")) established or maintained
by the Company is in compliance in all material respects with ERISA. No
"reportable event" (as defined under ERISA) has occurred or is reasonably
expected to occur with respect to any "employee benefit plan" established or
maintained by the Company. No "employee benefit plan" established or
maintained by the Company, if such "employee benefit plan" were terminated,
would have any "amount of unfunded benefit liabilities" (as defined under
ERISA). The Company has not incurred or reasonably expects to incur any
liability under (i) Title IV of ERISA with respect to termination of, or
withdrawal from, any "employee benefit plan" or (ii) Sections 412, 4971, 4975
or 4980B of the Code. Each "employee benefit plan" established or maintained
by the Company that is intended to be qualified under Section 401(a) of the
Code is so qualified and nothing has occurred, whether by action or failure
to act, which would cause the loss of such qualification.]
Any certificate signed by an officer of the Company
and delivered to the Underwriters or to counsel for the Underwriters shall be
deemed to be a representation and warranty by the Company to each Underwriter
as to the matters set forth therein.
B. REPRESENTATIONS AND WARRANTIES OF THE SELLING
STOCKHOLDERS. Each Selling Stockholder represents, warrants and covenants to
each Underwriter as follows:
(a) THE UNDERWRITING AGREEMENT. This Agreement has
been duly authorized, executed and delivered by or on behalf of such Selling
Stockholder and is a valid and binding agreement of such Selling Stockholder,
enforceable in accordance with its terms, except as rights to indemnification
hereunder may be limited by applicable law and except as the enforcement
hereof may be limited by bankruptcy, insolvency, reorganization, moratorium
or other similar laws relating to or affecting the rights and remedies of
creditors or by general equitable principles.
(b) THE CUSTODY AGREEMENT AND POWER OF ATTORNEY.
Each of the (i) Custody Agreement signed by such Selling Stockholder and
[The First National Bank of Boston], as custodian (the "Custodian"), relating
to the deposit of the Common
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Shares to be sold by such Selling Stockholder (the "Custody Agreement") and
(ii) Power of Attorney appointing certain individuals named therein as such
Selling Stockholder's attorneys-in-fact (each, an "Attorney-in-Fact") to the
extent set forth therein relating to the transactions contemplated hereby and
by the Prospectus (the "Power of Attorney"), of such Selling Stockholder has
been duly authorized, executed and delivered by such Selling Stockholder and
is a valid and binding agreement of such Selling Stockholder, enforceable in
accordance with its terms, except as rights to indemnification thereunder may
be limited by applicable law and except as the enforcement thereof may be
limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or affecting the rights and remedies of creditors or
by general equitable principles.
(c) TITLE TO COMMON SHARES TO BE SOLD; ALL
AUTHORIZATIONS OBTAINED. Such Selling Stockholder has, and on the First
Closing Date (as defined below) will have, good and valid title to all of the
Common Shares which may be sold by such Selling Stockholder pursuant to this
Agreement on such date and the legal right and power, and all authorizations
and approvals required by law, and, if such Selling Stockholder is a
corporation, under its charter or by-laws, to enter into this Agreement and
its Custody Agreement and Power of Attorney, to sell, transfer and deliver
all of the Common Shares which may be sold by such Selling Stockholder
pursuant to this Agreement and to comply with its other obligations hereunder
and thereunder.
(d) DELIVERY OF THE COMMON SHARES TO BE SOLD. Upon
delivery of the Common Shares which are sold by such Selling Stockholder
pursuant to this Agreement [the Underwriters will be owners of] such Common
Shares, free and clear of any security interest, mortgage, pledge, lien,
encumbrance or other claim.
(e) NON-CONTRAVENTION; NO FURTHER AUTHORIZATIONS OR
APPROVALS REQUIRED. The execution and delivery by such Selling Stockholder
of, and the performance by such Selling Stockholder of its obligations under,
this Agreement, the Custody Agreement and the Power of Attorney will not
contravene or conflict with, result in a breach of, or constitute a Default
under, or require the consent of any other party to, the charter or by-laws,
if such Selling Stockholder is a corporation, of such Selling Stockholder or
any other agreement or instrument to which such Selling Stockholder is a
party or by which it is bound or under which it is entitled to any right or
benefit, any provision of applicable law or any judgment, order, decree or
regulation applicable to such Selling Stockholder of any court, regulatory
body, administrative agency, governmental body or arbitrator having
jurisdiction over such Selling Stockholder. No consent, approval,
authorization or other order of, or registration or filing with, any court or
other governmental authority or agency, is required for the consummation by
such Selling Stockholder of the transactions contemplated in this Agreement,
except such as have been obtained or made and are in full force and effect
under the Securities Act, applicable state securities or blue sky laws and
from the NASD.
(f) NO REGISTRATION OR OTHER SIMILAR RIGHTS. Such
Selling Stockholder does not have any registration or other similar rights to
have any equity or
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debt securities registered for sale by the Company under the Registration
Statement or included in the offering contemplated by this Agreement.
(g) NO FURTHER CONSENTS, ETC. No consent,
approval or waiver is required under any instrument or agreement to which
such Selling Stockholder is a party or by which it is bound or under which it
is entitled to any right or benefit, in connection with the offering, sale or
purchase by the Underwriters of any of the Common Shares which may be sold by
such Selling Stockholder under this Agreement or the consummation by such
Selling Stockholder of any of the other transactions contemplated hereby.
(h) DISCLOSURE MADE BY SUCH SELLING STOCKHOLDER IN
THE PROSPECTUS. All information furnished by or on behalf of such Selling
Stockholder in writing expressly for use in the Registration Statement and
Prospectus is, and on the First Closing Date will be, true, correct, and
complete in all material respects, and does not, and on the First Closing
Date will not, contain any untrue statement of a material fact or omit to
state any material fact necessary to make such information not misleading.
Such Selling Stockholder confirms as accurate the number of shares of Common
Stock set forth opposite such Selling Stockholder's name in the Prospectus
under the caption "Principal and Selling Stockholders" (both prior to and
after giving effect to the sale of the Common Shares).
(i) NO PRICE STABILIZATION OR MANIPULATION. Such
Selling Stockholder has not taken and will not take, directly or indirectly,
any action designed to or that might be reasonably expected to cause or
result in stabilization or manipulation of the price of the Common Stock to
facilitate the sale or resale of the Common Shares.
(j) CONFIRMATION OF COMPANY REPRESENTATIONS AND
WARRANTIES. Such Selling Stockholder, if a Significant Selling Stockholder,
has no reason to believe that the representations and warranties of the
Company contained in Section 1(A) hereof are not true and correct. Each
Selling Stockholder, whether or not a Significant Selling Stockholder, has no
knowledge of any material fact, condition or information not disclosed in the
Prospectus which has had or may have a Material Adverse Effect and is not
prompted to sell shares of Common Stock by any information concerning the
Company which is not set forth in the Registration Statement and the
Prospectus.
Any certificate signed by or on behalf of any Selling
Stockholder and delivered to the Underwriters or to counsel for the
Underwriters shall be deemed to be a representation and warranty by such
Selling Stockholder to each Underwriter as to the matters covered thereby.
SECTION 2. PURCHASE, SALE AND DELIVERY OF THE COMMON SHARES.
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THE FIRM COMMON SHARES. Upon the terms herein set forth, (i)
the Company agrees to issue and sell to the several Underwriters an aggregate
of 1,300,000 Firm Common Shares and (ii) the Selling Stockholders agree to
sell to the several Underwriters an aggregate of 300,000 Firm Common Shares,
each Selling Stockholder selling the number of Firm Common Shares set forth
opposite such Selling Stockholder's name on SCHEDULE B. On the basis of the
representations, warranties and agreements herein contained, and upon the
terms but subject to the conditions herein set forth, the Underwriters agree,
severally and not jointly, to purchase from the Company and the Selling
Stockholders the respective number of Firm Common Shares set forth opposite
their names on SCHEDULE A. The purchase price per Firm Common Share to be
paid by the several Underwriters to the Company and the Selling Stockholders
shall be $[___] per share.
THE FIRST CLOSING DATE. Delivery of certificates for the Firm
Common Shares to be purchased by the Underwriters and payment therefor shall
be made at the offices of NMS, 600 Montgomery Street, San Francisco,
California (or such other place as may be agreed to by the Company and the
Underwriters) at 6:00 a.m. San Francisco time, on [___], or such other time
and date, not later than 10:30 a.m. San Francisco time, on the tenth business
day following such date, as the Underwriters shall designate by notice to the
Company (the time and date of such closing are called the "First Closing
Date"). The Company and the Selling Stockholders hereby acknowledge that
circumstances under which the Underwriters may provide notice to postpone the
First Closing Date as originally scheduled include, but are in no way limited
to, any determination by the Company, the Selling Stockholders or the
Underwriters to recirculate to the public copies of an amended or
supplemented Prospectus or a delay as contemplated by the provisions of
Section 10.
THE OPTIONAL COMMON SHARES; THE SECOND CLOSING DATE. In
addition, on the basis of the representations, warranties and agreements
herein contained, and upon the terms but subject to the conditions herein set
forth, the Company hereby grants an option to the several Underwriters to
purchase, severally and not jointly, up to an aggregate 240,000 Optional
Common Shares from the Company at the purchase price per share to be paid by
the Underwriters for the Firm Common Shares. The option granted hereunder is
for use by the Underwriters solely in covering any over-allotments in
connection with the sale and distribution of the Firm Common Shares. The
option granted hereunder may be exercised at any time (but not more than
once) upon notice by the Underwriters to the Company, which notice may be
given at any time within 30 days from the date of this Agreement. Such
notice shall set forth (i) the aggregate number of Optional Common Shares as
to which the Underwriters are exercising the option, (ii) the names and
denominations in which the certificates for the Optional Common Shares are to
be registered and (iii) the time, date and place at which such certificates
will be delivered (which time and date may be simultaneous with, but not
earlier than, the First Closing Date; and in such case the term "First
Closing Date" shall refer to the time and date of delivery of certificates
for the Firm Common Shares and the Optional Common Shares).
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Such time and date of delivery, if subsequent to the First Closing Date, is
called the "Second Closing Date" and shall be determined by the Underwriters
and shall not be earlier than three nor later than five full business days
after delivery of such notice of exercise. If any Optional Common Shares are
to be purchased, each Underwriter agrees, severally and not jointly, to
purchase the number of Optional Common Shares (subject to such adjustments to
eliminate fractional shares as the Underwriters may determine) that bears the
same proportion to the total number of Optional Common Shares to be purchased
as the number of Firm Common Shares set forth on SCHEDULE A opposite the name
of such Underwriter bears to the total number of Firm Common Shares. The
Underwriters may cancel the option at any time prior to its expiration by
giving written notice of such cancellation to the Company.
PUBLIC OFFERING OF THE COMMON SHARES. The Underwriters hereby
advise the Company and the Selling Stockholders that the Underwriters intend
to offer for sale to the public, as described in the Prospectus, their
respective portions of the Common Shares as soon after this Agreement has
been executed and the Registration Statement has been declared effective as
the Underwriters, in their sole judgment, have determined is advisable and
practicable.
PAYMENT FOR THE COMMON SHARES. Payment for the Common Shares
to be sold by the Company shall be made at the First Closing Date (and, if
applicable, at the Second Closing Date) by wire transfer of immediately
available funds to the order of the Company. Payment for the Common Shares
to be sold by the Selling Stockholders shall be made at the First Closing
Date by wire transfer of immediately available funds to the order of the
Custodian.
NMS, individually and not as the representative of the
Underwriters, may (but shall not be obligated to) make payment for any Common
Shares to be purchased by any Underwriter whose funds shall not have been
received by NMS by the First Closing Date or the Second Closing Date, as the
case may be, for the account of such Underwriter, but any such payment shall
not relieve such Underwriter from any of its obligations under this Agreement.
Each Selling Stockholder hereby agrees that (i) it will pay
all stock transfer taxes, stamp duties and other similar taxes, if any,
payable upon the sale or delivery of the Common Shares to be sold by such
Selling Stockholder to the several Underwriters, or otherwise in connection
with the performance of such Selling Stockholder's obligations hereunder and
(ii) the Custodian is authorized to deduct for such payment any such amounts
from the proceeds to such Selling Stockholder hereunder and to hold such
amounts for the account of such Selling Stockholder with the Custodian under
the Custody Agreement.
DELIVERY OF THE COMMON SHARES. The Company and the Selling
Stockholders shall deliver, or cause to be delivered, to the Underwriters for
the accounts of the several Underwriters certificates for the Firm Common
Shares to be sold by them at the First
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Closing Date, against the irrevocable release of a wire transfer of
immediately available funds for the amount of the purchase price therefor.
The Company shall also deliver, or cause to be delivered, to the Underwriters
for the accounts of the several Underwriters, certificates for the Optional
Common Shares the Underwriters have agreed to purchase at the Second Closing
Date, against the irrevocable release of a wire transfer of immediately
available funds for the amount of the purchase price therefor. The
certificates for the Common Shares shall be in definitive form and registered
in such names and denominations as the Underwriters shall have requested at
least two full business days prior to the First Closing Date (or the Second
Closing Date, as the case may be) and shall be made available for inspection
on the business day preceding the First Closing Date (or the Second Closing
Date, as the case may be) at a location in New York City as the Underwriters
may designate. Time shall be of the essence, and delivery at the time and
place specified in this Agreement is a further condition to the obligations
of the Underwriters.
DELIVERY OF PROSPECTUS TO THE UNDERWRITERS. Not later than
12:00 p.m. on the second business day following the date the Common Shares of
released by the Underwriters for sale to the public, the Company shall
delivery or cause to be delivered copies of the Prospectus in such quantities
and at such places as the Underwriters shall request.
SECTION 3. ADDITIONAL COVENANTS.
A. COVENANTS OF THE COMPANY. The Company further
covenants and agrees with each Underwriter as follows:
(a) UNDERWRITERS' REVIEW OF PROPOSED AMENDMENTS AND
SUPPLEMENTS. During such period beginning on the date hereof and ending on
the later of the First Closing Date or such date, as in the opinion of
counsel for the Underwriters, the Prospectus is no longer required by law to
be delivered in connection with sales by an Underwriter or dealer (the
"Prospectus Delivery Period"), prior to amending or supplementing the
Registration Statement (including any registration statement filed under Rule
462(b) under the Securities Act) or the Prospectus (including any amendment
or supplement through incorporation by reference of any report filed under
the Exchange Act), the Company shall furnish to the Underwriters for review a
copy of each such proposed amendment or supplement, and the Company shall not
file any such proposed amendment or supplement to which the Underwriters
reasonably object.
(b) SECURITIES ACT COMPLIANCE. After the date of
this Agreement, the Company shall promptly advise the Underwriters in writing
(i) of the receipt of any comments of, or requests for additional or
supplemental information from, the Commission, (ii) of the time and date of
any filing of any post-effective amendment to the Registration Statement or
any amendment or supplement to any preliminary prospectus or the Prospectus,
(iii) of the time and date that any post-effective amendment
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to the Registration Statement becomes effective and (iv) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or any post-effective amendment thereto or of any
order preventing or suspending the use of any preliminary prospectus or the
Prospectus, or of any proceedings to remove, suspend or terminate from
listing or quotation the Common Stock from any securities exchange upon which
it is listed for trading or included or designated for quotation, or of the
threatening or initiation of any proceedings for any of such purposes. If
the Commission shall enter any such stop order at any time, the Company will
use its best efforts to obtain the lifting of such order at the earliest
possible moment. Additionally, the Company agrees that it shall comply with
the provisions of Rules 424(b), 430A and 434, as applicable, under the
Securities Act and will use its reasonable efforts to confirm that any
filings made by the Company under such Rule 424(b) were received in a timely
manner by the Commission.
(c) AMENDMENTS AND SUPPLEMENTS TO THE PROSPECTUS
AND OTHER SECURITIES ACT MATTERS. If, during the Prospectus Delivery Period,
any event shall occur or condition exist as a result of which it is necessary
to amend or supplement the Prospectus in order to make the statements
therein, in the light of the circumstances when the Prospectus is delivered
to a purchaser, not misleading, or if in the opinion of the Underwriters or
counsel for the Underwriters it is otherwise necessary to amend or supplement
the Prospectus to comply with law, the Company agrees to promptly prepare
(subject to Section 3(A)(a) hereof), file with the Commission and furnish at
its own expense to the Underwriters and to dealers, amendments or supplements
to the Prospectus so that the statements in the Prospectus as so amended or
supplemented will not, in the light of the circumstances when the Prospectus
is delivered to a purchaser, be misleading or so that the Prospectus, as
amended or supplemented, will comply with law.
(d) COPIES OF ANY AMENDMENTS AND SUPPLEMENTS TO THE
PROSPECTUS. The Company agrees to furnish the Underwriters, without charge,
during the Prospectus Delivery Period, as many copies of the Prospectus and
any amendments and supplements thereto as the Underwriters may request.
(e) BLUE SKY COMPLIANCE. The Company shall
cooperate with the Underwriters and counsel for the Underwriters to qualify
or register the Common Shares for sale under (or obtain exemptions from the
application of) the state securities or blue sky laws or Canadian
provincial Securities laws of those jurisdictions designated by the
Underwriters, shall comply with such laws and shall continue such
qualifications, registrations and exemptions in effect so long as required
for the distribution of the Common Shares. The Company shall not be required
to qualify as a foreign corporation or to take any action that would subject
it to general service of process in any such jurisdiction where it is not
presently qualified or where it would be subject to taxation as a foreign
corporation. The Company will advise the Underwriters promptly of the
suspension of the qualification or registration of (or any such exemption
relating to) the Common Shares for offering, sale or trading in any
jurisdiction or any initiation or threat of any proceeding for any such
purpose, and in the event of the issuance of any order
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suspending such qualification, registration or exemption, the Company shall
use its best efforts to obtain the withdrawal thereof at the earliest
possible moment.
(f) USE OF PROCEEDS. The Company shall apply the
net proceeds from the sale of the Common Shares sold by it in the manner
described under the caption "Use of Proceeds" in the Prospectus.
(g) TRANSFER AGENT. The Company shall maintain, at
its expense, a registrar and transfer agent for the Common Stock.
(h) EARNINGS STATEMENT. As soon as practicable,
the Company will make generally available to its security holders and to the
Underwriters an earnings statement (which need not be audited) covering the
twelve-month period ending June 30, 1998 that satisfies the provisions of
Section 11(a) of the Securities Act.
(j) PERIODIC REPORTING OBLIGATIONS. During the
Prospectus Delivery Period the Company shall file, on a timely basis, with
the Commission and the Nasdaq National Market all reports and documents
required to be filed under the Exchange Act.
(k) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL
SECURITIES. During the period of 120 days following the date of the
Prospectus, the Company will not, without the prior written consent of NMS
(which consent may be withheld at the sole discretion of NMS), directly or
indirectly, sell, offer, contract or grant any option to sell, pledge,
transfer or establish an open "put equivalent position" within the meaning of
Rule 16a-1(h) under the Exchange Act, or otherwise dispose of or transfer, or
announce the offering of, or file any registration statement under the
Securities Act in respect of, any shares of Common Stock, options or warrants
to acquire shares of the Common Stock or securities exchangeable or
exercisable for or convertible into shares of Common Stock (other than as
contemplated by this Agreement with respect to the Common Shares); PROVIDED,
HOWEVER, that the Company may issue shares of its Common Stock or options to
purchase its Common Stock, or Common Stock upon exercise of options, pursuant
to any of the Company's equity compensation plans described in the Prospectus.
(l) FUTURE REPORTS TO THE UNDERWRITERS. During the
period of five years hereafter the Company will furnish to the Underwriters
care of NMS at 600 Montgomery Street, San Francisco, CA 94111, Attention:
Karl L. Matthies: (i) as soon as practicable after the end of each fiscal
year, copies of the Annual Report of the Company containing the balance sheet
of the Company as of the close of such fiscal year and statements of income,
stockholders' equity and cash flows for the year then ended and the opinion
thereon of the Company's independent public or certified public accountants;
(ii) as soon as practicable after the filing thereof, copies of each proxy
statement, Annual Report on Form 10-K, Quarterly Report on Form 10-Q, Current
Report on Form 8-K or other report filed by the Company with the Commission,
the NASD or
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any securities exchange; and (iii) as soon as available, copies of any report
or communication of the Company mailed generally to holders of its capital
stock.
B. COVENANTS OF THE SELLING STOCKHOLDERS. Each Selling
Stockholder further covenants and agrees with each Underwriter:
(a) AGREEMENT NOT TO OFFER OR SELL ADDITIONAL
SECURITIES. Such Selling Stockholder will not, without the prior written
consent of NMS (which consent may be withheld in its sole discretion),
directly or indirectly, sell, offer, contract or grant any option to sell
(including without limitation any short sale), pledge, transfer, establish an
open "put equivalent position" within the meaning of Rule 16a-1(h) under the
Exchange Act, or otherwise dispose of any shares of Common Stock, options or
warrants to acquire shares of Common Stock, or securities exchangeable or
exercisable for or convertible into shares of Common Stock currently or
hereafter owned either of record or beneficially (as defined in Rule 13d-3
under Securities Exchange Act of 1934, as amended) by the undersigned, or
publicly announce the undersigned's intention to do any of the foregoing, for
a period commencing on the date hereof and continuing through the close of
trading on the date 120 days after the date of the Prospectus.
(b) DELIVERY OF FORMS W-8 AND W-9. To deliver to
the Underwriters prior to the First Closing Date a properly completed and
executed United States Treasury Department Form W-8 (if the Selling
Stockholder is a non-United States person) or Form W-9 (if the Selling
Stockholder is a United States Person).
NMS, on behalf of the several Underwriters, may, in
its sole discretion, waive in writing the performance by the Company or any
Selling Stockholder of any one or more of the foregoing covenants or extend
the time for their performance.
SECTION 4. PAYMENT OF EXPENSES. The Company and the Selling
Stockholders, jointly and severally, agree to pay in such proportions as they
may agree upon among themselves all costs, fees and expenses incurred in
connection with the performance of their obligations hereunder and in
connection with the transactions contemplated hereby, including without
limitation (i) all expenses incident to the issuance and delivery of the
Common Shares (including all printing and engraving costs), (ii) all fees and
expenses of the registrar and transfer agent of the Common Stock, (iii) all
necessary issue, transfer and other stamp taxes in connection with the
issuance and sale of the Common Shares to the Underwriters, (iv) all fees and
expenses of the Company's counsel, independent public or certified public
accountants and other advisors, (v) all costs and expenses incurred in
connection with the preparation, printing, filing, shipping and distribution
of the Registration Statement (including financial statements, exhibits,
schedules, consents and certificates of experts), each preliminary prospectus
and the Prospectus, and all amendments and supplements thereto, and this
Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the
Company or the Underwriters in connection with qualifying or registering (or
obtaining exemptions from the qualification or registration
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of) all or any part of the Common Shares for offer and sale under the state
securities or blue sky laws or the provincial securities laws of Canada, and,
if requested by the Underwriters, preparing and printing a "Blue Sky Survey"
or memorandum, and any supplements thereto, advising the Underwriters of such
qualifications, registrations and exemptions, not to exceed $___________,
(vii) the filing fees incident to, and the reasonable fees and expenses of
counsel for the Underwriters in connection with, the NASD's review and
approval of the Underwriters' participation in the offering and distribution
of the Common Shares, (viii) the fees and expenses associated with including
the Common Shares on the Nasdaq National Market, and (ix) all other fees,
costs and expenses referred to in Item 13 of Part II of the Registration
Statement. Except as provided in this Section 4, Section 6, Section 8 and
Section 9 hereof, the Underwriters shall pay their own expenses, including
the fees and disbursements of their counsel.
The Selling Stockholders further agree with each Underwriter
to pay (directly or by reimbursement) all fees and expenses incident to the
performance of their obligations under this Agreement which are not otherwise
specifically provided for herein, including but not limited to (i) fees and
expenses of counsel and other advisors for such Selling Stockholders, (ii)
fees and expenses of the Custodian and (iii) expenses and taxes incident to
the sale and delivery of the Common Shares to be sold by such Selling
Stockholders to the Underwriters hereunder (which taxes, if any, may be
deducted by the Custodian under the provisions of Section 2 of this
Agreement).
This Section 4 shall not affect or modify any separate, valid
agreement relating to the allocation of payment of expenses between the
Company, on the one hand, and the Selling Stockholders, on the other hand.
SECTION 5. CONDITIONS OF THE OBLIGATIONS OF THE UNDERWRITERS.
The obligations of the several Underwriters to purchase and pay for the
Common Shares as provided herein on the First Closing Date and, with respect
to the Optional Common Shares, the Second Closing Date, shall be subject to
the accuracy of the representations and warranties on the part of the Company
and the Selling Stockholders set forth in Sections 1(A) and 1(B) hereof as of
the date hereof and as of the First Closing Date as though then made and,
with respect to the Company only, as of the Second Closing Date as
though then made, to the timely performance by the Company and the Selling
Stockholders of their respective covenants and other obligations hereunder,
and to each of the following additional conditions:
(a) ACCOUNTANTS' COMFORT LETTER. On the date
hereof, the Underwriters shall have received from Price Waterhouse LLP,
independent public or certified public accountants for the Company, a letter
dated the date hereof addressed to the Underwriters, in form and substance
satisfactory to the Underwriters, containing statements and information of
the type ordinarily included in accountant's "comfort letters" to
underwriters, delivered according to Statement of Auditing Standards No. 72
(or any successor bulletin), with respect to the audited and unaudited
financial statements
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and certain financial information contained in the Registration Statement and
the Prospectus (and the Underwriters shall have received additional conformed
copies of such accountants' letter for each of the several Underwriters).
(b) COMPLIANCE WITH REGISTRATION REQUIREMENTS; NO
STOP ORDER; NO OBJECTION FROM NASD. For the period from and after
effectiveness of this Agreement and prior to the First Closing Date and, with
respect to the Optional Common Shares, the Second Closing Date:
(i) the Company shall have filed the
Prospectus with the Commission (including the information required by Rule
430A under the Securities Act) in the manner and within the time period
required by Rule 424(b) under the Securities Act; or the Company shall have
filed a post-effective amendment to the Registration Statement containing the
information required by such Rule 430A, and such post-effective amendment
shall have become effective; or, if the Company elected to rely upon Rule 434
under the Securities Act and obtained the Underwriters' consent thereto, the
Company shall have filed a Term Sheet with the Commission in the manner and
within the time period required by such Rule 424(b);
(ii) no stop order suspending the effectiveness
of the Registration Statement, any Rule 462(b) Registration Statement, or any
post-effective amendment to the Registration Statement, shall be in effect
and no proceedings for such purpose shall have been instituted or threatened
by the Commission; and
(iii) the NASD shall have raised no
objection to the fairness and reasonableness of the underwriting terms and
arrangements.
(c) NO MATERIAL ADVERSE CHANGE OR RATINGS AGENCY
CHANGE. For the period from and after the date of this Agreement and prior
to the First Closing Date and, with respect to the Optional Common Shares,
the Second Closing Date, in the judgment of the Underwriters there shall not
have occurred any Material Adverse Change.
(d) OPINION OF COUNSEL FOR THE COMPANY. On each of
the First Closing Date and the Second Closing Date the Underwriters shall
have received the favorable opinion of Gray Cary Ware & Freidenrich LLP,
counsel for the Company, dated as of such Closing Date, the form of which is
attached as EXHIBIT A (and the
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Underwriters shall have received additional conformed copies of such
counsel's legal opinion for each of the several Underwriters).
(e) OPINION OF COUNSEL FOR THE UNDERWRITERS. On
each of the First Closing Date and the Second Closing Date the Underwriters
shall have received the favorable opinion of Fried, Frank, Harris, Shriver &
Jacobson (a partnership including professional corporations), counsel for the
Underwriters, dated as of such Closing Date, with respect to the matters set
forth in paragraphs (i), (v) through (x), and the next-to-last paragraph of
EXHIBIT A (and the Underwriters shall have received additional conformed
copies of such counsel's legal opinion for each of the several Underwriters).
(f) OFFICERS' CERTIFICATE. On each of the First
Closing Date and the Second Closing Date the Underwriters shall have received
a written certificate executed by the Chairman of the Board, Chief Executive
Officer or President of the Company and the Chief Financial Officer or Chief
Accounting Officer of the Company, dated as of such Closing Date, to the
effect set forth in subsection (b)(ii) of this Section 5, and further to the
effect that:
(i) for the period from and after the date of
this Agreement and prior to such Closing Date, there has not occurred any
Material Adverse Change;
(ii) the representations, warranties and
covenants of the Company set forth in Section 1(A) of this Agreement are true
and correct with the same force and effect as though expressly made on and as
of such Closing Date; and
(iii) the Company has complied with all the
agreements and satisfied all the conditions on its part to be performed or
satisfied at or prior to such Closing Date.
(g) BRING-DOWN COMFORT LETTER. On each of the
First Closing Date and the Second Closing Date the Underwriters shall have
received from Price Waterhouse LLP, independent public or certified public
accountants for the Company, a letter dated such date, in form and substance
satisfactory to the Underwriters, to the effect that they reaffirm the
statements made in the letter furnished by them pursuant to subsection (a) of
this Section 5, except that the specified date referred to therein for the
carrying out of procedures shall be no more than three business days prior to
the First Closing Date or Second Closing Date, as the case may be (and the
Underwriters shall have received additional conformed copies of such
accountants' letter for each of the several Underwriters).
(h) OPINION OF COUNSEL FOR THE SELLING
STOCKHOLDERS. On the First Closing Date the Underwriters shall have received
the favorable opinion of Gray Cary Ware & Freidenrich LLP and certain others,
counsel for the Selling Stockholders, dated as of such Closing Date, the form
of which is
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attached as EXHIBIT B (and the Underwriters shall have received additional
conformed copies of such counsel's legal opinion for each of the several
Underwriters).
(i) SELLING STOCKHOLDERS' CERTIFICATE. On the
First Closing Date the Underwriters shall have received a written certificate
executed by the Attorney-in-Fact of each Selling Stockholder, dated as of
such Closing Date, to the effect that:
(i) the representations, warranties and
covenants of such Selling Stockholder set forth in Section 1(B) of this
Agreement are true and correct with the same force and effect as though
expressly made by such Selling Stockholder on and as of such Closing Date; and
(ii) such Selling Stockholder has complied with
all the agreements and satisfied all the conditions on its part to be
performed or satisfied at or prior to such Closing Date.
(j) SELLING STOCKHOLDERS' DOCUMENTS. On the date
hereof, the Company and the Selling Stockholders shall have furnished for
review by the Underwriters copies of the Powers of Attorney and Custody
Agreements executed by each of the Selling Stockholders and such further
information, certificates and documents as the Underwriters may reasonably
request.
(k) LOCK-UP AGREEMENT FROM CERTAIN STOCKHOLDERS OF
THE COMPANY OTHER THAN SELLING STOCKHOLDERS. On the date hereof, the Company
shall have furnished to the Underwriters an agreement in the form of EXHIBIT
C hereto from each director and executive officer of the Company (other than
the Selling Stockholders), and such agreement shall be in full force and
effect on each of the First Closing Date and the Second Closing Date.
(l) ADDITIONAL DOCUMENTS. On or before each of the
First Closing Date and the Second Closing Date, the Underwriters and counsel
for the Underwriters shall have received such information, documents and
opinions as they may reasonably require for the purposes of enabling them to
pass upon the issuance and sale of the Common Shares as contemplated herein,
or in order to evidence the accuracy of any of the representations and
warranties, or the satisfaction of any of the conditions or agreements,
herein contained.
If any condition specified in this Section 5 is not satisfied
when and as required to be satisfied, this Agreement may be terminated by the
Underwriters by notice to the Company and the Selling Stockholders at any
time on or prior to the First Closing Date and, with respect to the Optional
Common Shares, at any time prior to the Second Closing Date, which
termination shall be without liability on the part of any party to any other
party, except that Section 4, Section 6, Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
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SECTION 6. REIMBURSEMENT OF UNDERWRITERS' EXPENSES. If this
Agreement is terminated by the Underwriters pursuant to Section 5, Section 7,
Section 10, Section 11 or Section 17, or if the sale to the Underwriters of
the Common Shares on the First Closing Date is not consummated because of any
refusal, inability or failure on the part of the Company or the Selling
Stockholders to perform any agreement herein or to comply with any provision
hereof, the Company agrees to reimburse the Underwriters and the other
Underwriters (or such Underwriters as have terminated this Agreement with
respect to themselves), severally, upon demand for all documented
out-of-pocket expenses that shall have been reasonably incurred by the
Underwriters in connection with the proposed purchase and the offering and
sale of the Common Shares, including but not limited to fees and
disbursements of counsel, printing expenses, travel expenses, postage,
facsimile and telephone charges.
SECTION 7. EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall not become effective until the later of
(i) the execution of this Agreement by the parties hereto and (ii)
notification by the Commission to the Company and the Underwriters of the
effectiveness of the Registration Statement under the Securities Act.
Prior to such effectiveness, this Agreement may be terminated
by any party by notice to each of the other parties hereto, and any such
termination shall be without liability on the part of (a) the Company or the
Selling Stockholders to any Underwriter, except that the Company and the
Selling Stockholders shall be obligated to reimburse the expenses of the
Underwriters pursuant to Sections 4 and 6 hereof, (b) of any Underwriter to
the Company or the Selling Stockholders, or (c) of any party hereto to any
other party except that the provisions of Section 8 and Section 9 shall at
all times be effective and shall survive such termination.
SECTION 8. INDEMNIFICATION.
(a) INDEMNIFICATION OF THE UNDERWRITERS BY THE
COMPANY AND SIGNIFICANT SELLING STOCKHOLDERS. Each of the Company and each
of the Significant Selling Stockholders agrees to indemnify and hold harmless
each Underwriter, its officers and employees, and each person, if any, who
controls any Underwriter within the meaning of the Securities Act and the
Exchange Act against any loss, claim, damage, liability or expense, as
incurred, to which such Underwriter or such controlling person may become
subject, under the Securities Act, the Exchange Act or other federal or state
statutory law or regulation, or at common law or otherwise (including in
settlement of any litigation, if such settlement is effected with the written
consent of the Company), insofar as such loss, claim, damage, liability or
expense (or actions in respect thereof as contemplated below) arises out of
or is based (i) upon any untrue statement or alleged
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untrue statement of a material fact contained in the Registration Statement,
or any amendment thereto, including any information deemed to be a part
thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the
omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading; or
(ii) upon any untrue statement or alleged untrue statement of a material fact
contained in any preliminary prospectus or the Prospectus (or any amendment
or supplement thereto), or the omission or alleged omission therefrom of a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading; or (iii) in
whole or in part upon any inaccuracy in the representations and warranties of
the Company or the Selling Stockholders contained herein, PROVIDED that each
Significant Selling Stockholder shall not be liable for any inaccuracy in a
representation or warranty given by any Selling Stockholder other than such
Significant Selling Stockholder; or (iv) in whole or in part upon any failure
of the Company or the Selling Stockholders (with respect to the Company) or
of each Significant Selling Stockholder (with respect to such Significant
Selling Stockholder) to perform their respective obligations hereunder or
under law, PROVIDED that each Significant Selling Stockholder shall not be
liable for any failure to perform by any Selling Stockholder other than such
Significant Selling Stockholder; or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter in connection with, or
relating in any manner to, the Common Shares or the offering contemplated
hereby, and which is included as part of or referred to in any loss, claim,
damage, liability or action arising out of or based upon any matter covered
by clause (i) or (ii) above, PROVIDED that the Company and the Significant
Selling Stockholders shall not be liable under this clause (v) to the extent
that a court of competent jurisdiction shall have determined by a final
judgment that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken by
such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by NMS) as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; PROVIDED,
HOWEVER, that the foregoing indemnity agreement shall not apply to any loss,
claim, damage, liability or expense to the extent, but only to the extent,
arising out of or based upon any untrue statement or alleged untrue statement
or omission or alleged omission made in reliance upon and in conformity with
written information furnished to the Company and the Selling Stockholders by
the Underwriters expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto); and PROVIDED, FURTHER, that with respect to any preliminary
prospectus, the foregoing indemnity agreement shall not inure to the benefit
of any Underwriter from whom the person asserting any loss, claim, damage,
liability or expense purchased Common Shares, or any person controlling such
Underwriter, if copies of the Prospectus were timely delivered to the
Underwriter pursuant to Section 2 and a copy of the Prospectus (as then
amended or supplemented if the Company shall have furnished any amendments or
supplements thereto) was not sent or given by or on behalf of such
Underwriter to such person, if required by law so to have been delivered,
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<PAGE>
at or prior to the written confirmation of the sale of the Common Shares to
such person, and if the Prospectus (as so amended or supplemented) would have
cured the defect giving rise to such loss, claim, damage, liability or
expense; and PROVIDED, FURTHER, that the liability of each Significant
Selling Stockholder under the foregoing indemnity agreement shall be limited
to an amount equal to the [net proceeds]; and PROVIDED, FURTHER, that no
Significant Selling Stockholder shall be required to provide indemnification
under this Section 8(a) until the Underwriter, officer, employee or
controlling person seeking indemnification shall have first made a demand for
payment on the Company with respect to any such loss, claim, damage,
liability or expense and the Company shall have either rejected such demand
or failed to make such requested payment within [90] days after receipt
thereof. The indemnity agreement set forth in this Section 8(a) shall be in
addition to any liabilities that the Company and the Significant Selling
Stockholders may otherwise have.
(b) INDEMNIFICATION OF THE UNDERWRITERS BY THE
OTHER SELLING STOCKHOLDERS. Each of the Selling Stockholders other than the
Significant Selling Stockholders (the "Other Selling Stockholders") agrees to
indemnify and hold harmless each Underwriter, its officers and employees, and
each person, if any, who controls any Underwriter within the meaning of the
Securities Act and the Exchange Act against any loss, claim, damage,
liability or expense, as incurred, to which such Underwriter or such
controlling person may become subject, under the Securities Act, the Exchange
Act or other federal or state statutory law or regulation, or at common law
or otherwise (including in settlement of any litigation, if such settlement
is effected with the written consent of the Company), insofar as such loss,
claim, damage, liability or expense (or actions in respect thereof as
contemplated below) arises out of or is based (i) upon any untrue statement
or alleged untrue statement of a material fact contained in the Registration
Statement, or any amendment thereto, including any information deemed to be a
part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or
the omission or alleged omission therefrom of a material fact required to be
stated therein or necessary to make the statements therein not misleading,
but only if such untrue statement or omission relates to information included
in any of such documents that was provided by or that directly relates to
such Other Selling Stockholder individually; or (ii) upon any untrue
statement or alleged untrue statement of a material fact contained in any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto), or the omission or alleged omission therefrom of a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but only if such
untrue statement or omission relates to information included in any of such
documents that was provided by or that directly relates to such Other Selling
Stockholder individually; or (iii) in whole or in part upon any inaccuracy in
the representations and warranties of such Other Selling Stockholder
individually contained herein; or (iv) in whole or in part upon any failure
of such Other Selling Stockholder individually to perform its respective
obligations hereunder or under law; or (v) any act or failure to act or any
alleged act or failure to act by any Underwriter
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<PAGE>
in connection with, or relating in any manner to, the Common Stock or the
offering contemplated hereby, and which is included as part of or referred to
in any loss, claim, damage, liability or action arising out of or based upon
any matter covered by clause (i) or (ii) above, PROVIDED that the Other
Selling Stockholders shall not be liable under this clause (v) to the extent
that a court of competent jurisdiction shall have determined by a final
judgment that such loss, claim, damage, liability or action resulted directly
from any such acts or failures to act undertaken or omitted to be taken by
such Underwriter through its bad faith or willful misconduct; and to
reimburse each Underwriter and each such controlling person for any and all
expenses (including the fees and disbursements of counsel chosen by NMS) as
such expenses are reasonably incurred by such Underwriter or such controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action; PROVIDED,
HOWEVER, that with respect to any preliminary prospectus, the foregoing
indemnity agreement shall not inure to the benefit of any Underwriter from
whom the person asserting any loss, claim, damage, liability or expense
purchased Common Shares, or any person controlling such Underwriter, if
copies of the Prospectus were timely delivered to the Underwriter pursuant to
Section 2 and a copy of the Prospectus (as then amended or supplemented if
the Company shall have furnished any amendments or supplements thereto) was
not sent or given by or on behalf of such Underwriter to such person, if
required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Common Shares to such person, and if the
Prospectus (as so amended or supplemented) would have cured the defect giving
rise to such loss, claim, damage, liability or expense; and PROVIDED,
FURTHER, that the liability of each Other Selling Stockholder under the
foregoing indemnity agreement shall be limited to an amount equal to the
initial public offering price of the Common Shares sold by such Other Selling
Stockholder, less the underwriting discount, as set forth on the front cover
page of the Prospectus; and PROVIDED, FURTHER, that no Other Selling
Stockholder shall be required to provide indemnification under this Section
8(b) until the Underwriter, officer, employee or controlling person seeking
indemnification shall have first made a demand for payment on the Company
with respect to any such loss, claim, damage, liability or expense and the
Company shall have either rejected such demand or failed to make such
requested payment within 90 days after receipt thereof. The indemnity
agreement set forth in this Section 8(b) shall be in addition to any
liabilities that the Other Selling Stockholders may otherwise have.
(c) INDEMNIFICATION OF THE COMPANY, ITS DIRECTORS
AND OFFICERS AND THE SELLING STOCKHOLDERS. Each Underwriter agrees,
severally and not jointly, to indemnify and hold harmless the Company, each
of its directors, each of its officers who signed the Registration Statement,
the Selling Stockholders and each person, if any, who controls the Company or
any Selling Stockholder within the meaning of the Securities Act or the
Exchange Act, against any loss, claim, damage, liability or expense, as
incurred, to which the Company, or any such director, officer, Selling
Stockholder or controlling person may become subject, under the Securities
Act, the Exchange Act, or other federal or state statutory law or regulation,
or at common law or otherwise (including in settlement of any litigation, if
such settlement is effected with the written
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consent of such Underwriter), insofar as such loss, claim, damage, liability
or expense (or actions in respect thereof as contemplated below) arises out
of or is based upon any untrue or alleged untrue statement of a material fact
contained in the Registration Statement, any preliminary prospectus or the
Prospectus (or any amendment or supplement thereto), or arises out of or is
based upon the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statements therein not
misleading, in each case to the extent, but only to the extent, that such
untrue statement or alleged untrue statement or omission or alleged omission
was made in the Registration Statement, any preliminary prospectus, the
Prospectus (or any amendment or supplement thereto), in reliance upon and in
conformity with written information furnished to the Company and the Selling
Stockholders by the Underwriters expressly for use therein; and to reimburse
the Company, or any such director, officer, Selling Stockholder or
controlling person for any legal and other expense reasonably incurred by the
Company, or any such director, officer, Selling Stockholder or controlling
person in connection with investigating, defending, settling, compromising or
paying any such loss, claim, damage, liability, expense or action. Each of
the Company and each of the Selling Stockholders hereby acknowledges that the
only information that the Underwriters have furnished to the Company and the
Selling Stockholders expressly for use in the Registration Statement, any
preliminary prospectus or the Prospectus (or any amendment or supplement
thereto) are the statements set forth (A) as the last two paragraphs on the
inside front cover page of the Prospectus concerning stabilization and
passive market making by the Underwriters and (B) in the table in the first
paragraph and as the second paragraph and the last three paragraphs under the
caption "Underwriting" in the Prospectus; and the Underwriters confirm that
such statements are correct. The indemnity agreement set forth in this
Section 8(c) shall be in addition to any liabilities that each Underwriter
may otherwise have.
(d) NOTIFICATIONS AND OTHER INDEMNIFICATION
PROCEDURES. Promptly after receipt by an indemnified party under this Section
8 of notice of the commencement of any action, such indemnified party will,
if a claim in respect thereof is to be made against an indemnifying party
under this Section 8, notify the indemnifying party in writing of the
commencement thereof, but the omission so to notify the indemnifying party
will not relieve it from any liability which it may have to any indemnified
party for contribution or otherwise than under the indemnity agreement
contained in this Section 8 or to the extent it is not prejudiced as a
proximate result of such failure. In case any such action is brought against
any indemnified party and such indemnified party seeks or intends to seek
indemnity from an indemnifying party, the indemnifying party will be entitled
to participate in, and, to the extent that it shall elect, jointly with all
other indemnifying parties similarly notified, by written notice delivered to
the indemnified party promptly after receiving the aforesaid notice from such
indemnified party, to assume the defense thereof with counsel reasonably
satisfactory to such indemnified party; PROVIDED, HOWEVER, if the defendants
in any such action include both the indemnified party and the indemnifying
party and the indemnified party shall have reasonably concluded that a
conflict may arise between the positions of the indemnifying party and the
indemnified party in conducting the defense of any such
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action or that there may be legal defenses available to it and/or other
indemnified parties which are different from or additional to those available
to the indemnifying party, the indemnified party or parties shall have the
right to select separate counsel to assume such legal defenses and to
otherwise participate in the defense of such action on behalf of such
indemnified party or parties. Upon receipt of notice from the indemnifying
party to such indemnified party of such indemnifying party's election so to
assume the defense of such action and approval by the indemnified party of
counsel, the indemnifying party will not be liable to such indemnified party
under this Section 8 for any legal or other expenses subsequently incurred by
such indemnified party in connection with the defense thereof unless (i) the
indemnified party shall have employed separate counsel in accordance with the
proviso to the next preceding sentence (it being understood, however, that
the indemnifying party shall not be liable for the expenses of more than one
separate counsel (together with local counsel), approved by the indemnifying
party (NMS in the case of Section 8(c) and Section 9), representing the
indemnified parties who are parties to such action) or (ii) the indemnifying
party shall not have employed counsel satisfactory to the indemnified party
to represent the indemnified party within a reasonable time after notice of
commencement of the action, in each of which cases the fees and expenses of
counsel shall be at the expense of the indemnifying party.
(e) SETTLEMENTS. The indemnifying party under this
Section 8 shall not be liable for any settlement of any proceeding effected
without its written consent, but if settled with such consent or if there be
a final judgment for the plaintiff, the indemnifying party agrees to
indemnify the indemnified party against any loss, claim, damage, liability or
expense by reason of such settlement or judgment. Notwithstanding the
foregoing sentence, if at any time an indemnified party shall have requested
an indemnifying party to reimburse the indemnified party for fees and
expenses of counsel as contemplated by Section 8(d) hereof, the indemnifying
party agrees that it shall be liable for any settlement of any proceeding
effected without its written consent if (i) such settlement is entered into
more than 30 days after receipt by such indemnifying party of the aforesaid
request and (ii) such indemnifying party shall not have reimbursed the
indemnified party in accordance with such request prior to the date of such
settlement. No indemnifying party shall, without the prior written consent
of the indemnified party, effect any settlement, compromise or consent to the
entry of judgment in any pending or threatened action, suit or proceeding in
respect of which any indemnified party is or could have been a party and
indemnity was or could have been sought hereunder by such indemnified party,
unless such settlement, compromise or consent includes an unconditional
release of such indemnified party from all liability on claims that are the
subject matter of such action, suit or proceeding.
SECTION 9. CONTRIBUTION.
If the indemnification provided for in Section 8 is for any
reason held to be unavailable to or otherwise insufficient to hold harmless
an indemnified party in respect of any losses, claims, damages, liabilities
or expenses referred to therein, then each
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indemnifying party shall contribute to the aggregate amount paid or payable
by such indemnified party, as incurred, as a result of any losses, claims,
damages, liabilities or expenses referred to therein (i) in such proportion
as is appropriate to reflect the relative benefits received by the Company
and the Selling Stockholders, on the one hand, and the Underwriters, on the
other hand, from the offering of the Common Shares pursuant to this Agreement
or (ii) if the allocation provided by clause (i) above is not permitted by
applicable law, in such proportion as is appropriate to reflect not only the
relative benefits referred to in clause (i) above but also the relative fault
of the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, in connection with the statements or
omissions or inaccuracies in the representations and warranties herein which
resulted in such losses, claims, damages, liabilities or expenses, as well as
any other relevant equitable considerations. The relative benefits received
by the Company and the Selling Stockholders, on the one hand, and the
Underwriters, on the other hand, in connection with the offering of the
Common Shares pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the
Common Shares pursuant to this Agreement (before deducting expenses) received
by the Company and the Selling Stockholders, and the total underwriting
discount received by the Underwriters, in each case as set forth on the front
cover page of the Prospectus (or, if Rule 434 under the Securities Act is
used, the corresponding location on the Term Sheet) bear to the aggregate
initial public offering price of the Common Shares as set forth on such
cover. The relative fault of the Company and the Selling Stockholders, on
the one hand, and the Underwriters, on the other hand, shall be determined by
reference to, among other things, whether any such untrue or alleged untrue
statement of a material fact or omission or alleged omission to state a
material fact or any such inaccurate or alleged inaccurate representation or
warranty relates to information supplied by the Company or the Selling
Stockholders, on the one hand, or the Underwriters, on the other hand, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
The amount paid or payable by a party as a result of the
losses, claims, damages, liabilities and expenses referred to above shall be
deemed to include, subject to the limitations set forth in Section 8(d), any
legal or other fees or expenses reasonably incurred by such party in
connection with investigating or defending any action or claim. The
provisions set forth in Section 8(d) with respect to notice of commencement
of any action shall apply if a claim for contribution is to be made under
this Section 9; PROVIDED, HOWEVER, that no additional notice shall be
required with respect to any action for which notice has been given under
Section 8(d) for purposes of indemnification.
The Company, the Selling Stockholders and the Underwriters
agree that it would not be just and equitable if contribution pursuant to
this Section 9 were determined by pro rata allocation (even if the
Underwriters were treated as one entity for such purpose) or by any other
method of allocation which does not take account of the equitable
considerations referred to in this Section 9.
28
<PAGE>
Notwithstanding the provisions of this Section 9, no
Underwriter shall be required to contribute any amount in excess of the
underwriting commissions received by such Underwriter in connection with the
Common Shares underwritten by it and distributed to the public, and no
Selling Stockholder shall be required to contribute any amount in excess of
the amount of net proceeds received by such Selling Stockholder from the
Common Shares sold by it hereunder. No person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Securities Act)
shall be entitled to contribution from any person who was not guilty of such
fraudulent misrepresentation. The Underwriters' obligations to contribute
pursuant to this Section 9 are several, and not joint, in proportion to their
respective underwriting commitments as set forth opposite their names in
SCHEDULE A. For purposes of this Section 9, each officer and employee of an
Underwriter and each person, if any, who controls an Underwriter within the
meaning of the Securities Act and the Exchange Act shall have the same rights
to contribution as such Underwriter, and each director of the Company, each
officer of the Company who signed the Registration Statement, and each
person, if any, who controls the Company with the meaning of the Securities
Act and the Exchange Act shall have the same rights to contribution as the
Company.
SECTION 10. DEFAULT OF ONE OR MORE OF THE SEVERAL
UNDERWRITERS. If, on the First Closing Date or the Second Closing Date, as
the case may be, any one or more of the several Underwriters shall fail or
refuse to purchase Common Shares that it or they have agreed to purchase
hereunder on such date, and the aggregate number of Common Shares which such
defaulting Underwriter or Underwriters agreed but failed or refused to
purchase does not exceed 10% of the aggregate number of the Common Shares to
be purchased on such date, the other Underwriters shall be obligated,
severally, in the proportions that the number of Firm Common Shares set forth
opposite their respective names on SCHEDULE A bears to the aggregate number
of Firm Common Shares set forth opposite the names of all such non-defaulting
Underwriters, or in such other proportions as may be specified by the
Underwriters with the consent of the non-defaulting Underwriters, to purchase
the Common Shares which such defaulting Underwriter or Underwriters agreed
but failed or refused to purchase on such date. If, on the First Closing Date
or the Second Closing Date, as the case may be, any one or more of the
Underwriters shall fail or refuse to purchase Common Shares and the aggregate
number of Common Shares with respect to which such default occurs exceeds 10%
of the aggregate number of Common Shares to be purchased on such date, and
arrangements satisfactory to the Underwriters and the Company for the
purchase of such Common Shares are not made within 48 hours after such
default, this Agreement shall terminate without liability of any party to any
other party except that the provisions of Section 4, Section 8 and Section 9
shall at all times be effective and shall survive such termination. In any
such case either the Underwriters or the Company shall have the right to
postpone the First Closing Date or the Second Closing Date, as the case may
be, but in no event for longer than seven days in order that the required
changes, if any, to the Registration Statement and the Prospectus or any
other documents or arrangements may be effected.
29
<PAGE>
As used in this Agreement, the term "Underwriter" shall be
deemed to include any person substituted for a defaulting Underwriter under
this Section 10. Any action taken under this Section 10 shall not relieve
any defaulting Underwriter from liability in respect of any default of such
Underwriter under this Agreement.
SECTION 11. TERMINATION OF THIS AGREEMENT. Prior to the
First Closing Date this Agreement maybe terminated by the Underwriters by
notice given to the Company and the Selling Stockholders if at any time (i)
trading or quotation in any of the Company's securities shall have been
suspended or limited by the Commission or by the Nasdaq Stock Market, or
trading in securities generally on either the Nasdaq Stock Market or the New
York Stock Exchange shall have been suspended or limited, or minimum or
maximum prices shall have been generally established on any of such stock
exchanges by the Commission or the NASD; (ii) a general banking moratorium
shall have been declared by any of federal, New York, Delaware or California
authorities; (iii) there shall have occurred any outbreak or escalation of
national or international hostilities or any crisis or calamity, or any
change in the United States or international financial markets, or any
substantial change or development involving a prospective substantial change
in United States' or international political, financial or economic
conditions, as in the judgment of the Underwriters is material and adverse
and makes it impracticable to market the Common Shares in the manner and on
the terms described in the Prospectus or to enforce contracts for the sale of
securities; (iv) in the judgment of the Underwriters there shall have
occurred any Material Adverse Change; or (v) the Company shall have sustained
a loss by strike, fire, flood, earthquake, accident or other calamity of such
character as in the judgment of the Underwriters may interfere materially
with the conduct of the business and operations of the Company regardless of
whether or not such loss shall have been insured. Any termination pursuant
to this Section 11 shall be without liability on the part of (a) the Company
or the Selling Stockholders to any Underwriter, except that the Company and
the Selling Stockholders shall be obligated to reimburse the expenses of the
Underwriters and the Underwriters pursuant to Sections 4 and 6 hereof, (b)
any Underwriter to the Company or the Selling Stockholders, or (c) of any
party hereto to any other party except that the provisions of Section 8 and
Section 9 shall at all times be effective and shall survive such termination.
SECTION 12. REPRESENTATIONS AND INDEMNITIES TO SURVIVE
DELIVERY. The respective indemnities, agreements, representations,
warranties and other statements of the Company, of its officers, of the
Selling Stockholders and of the several Underwriters set forth in or made
pursuant to this Agreement will remain in full force and effect, regardless
of any investigation made by or on behalf of any Underwriter or the Company
or any of its or their partners, officers or directors or any controlling
person, or the Selling Stockholders, as the case may be, and will survive
delivery of and payment for the Common Shares sold hereunder and any
termination of this Agreement.
30
<PAGE>
SECTION 13. NOTICES. All communications hereunder shall be
in writing and shall be mailed, hand delivered or telecopied and confirmed to
the parties hereto as follows:
If to the Underwriters:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5558
Attention: Richard A. Smith
with a copy to:
NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
Facsimile: (415) 249-5553
Attention: David A. Baylor, Esq.
If to the Company:
Garden Fresh Restaurant Corp.
17180 Bernardo Center Drive
San Diego, California 92128
Facsimile: (619) 675-1617
Attention: Michael P. Mack
If to the Selling Stockholders:
[The First National Bank of Boston]
[address]
Facsimile: [___]
Attention: [___]
Any party hereto may change the address for receipt of communications by
giving written notice to the others.
SECTION 14. SUCCESSORS. This Agreement will inure to the
benefit of and be binding upon the parties hereto, including any substitute
Underwriters pursuant to Section 10 hereof, and to the benefit of the
employees, officers and directors and controlling persons referred to in
Section 8 and Section 9, and in each case their respective successors and
personal representatives, and no other person will have any right or
obligation hereunder. The term "successors" shall not include any purchaser
of
31
<PAGE>
the Common Shares as such from any of the Underwriters merely by reason of
such purchase.
SECTION 15. PARTIAL UNENFORCEABILITY. The invalidity or
unenforceability of any Section, paragraph or provision of this Agreement
shall not affect the validity or enforceability of any other Section,
paragraph or provision hereof. If any Section, paragraph or provision of this
Agreement is for any reason determined to be invalid or unenforceable, there
shall be deemed to be made such minor changes (and only such minor changes)
as are necessary to make it valid and enforceable.
SECTION 16. GOVERNING LAW PROVISIONS. THIS AGREEMENT SHALL
BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE
STATE OF NEW YORK APPLICABLE TO AGREEMENTS MADE AND TO BE PERFORMED IN SUCH
STATE.
SECTION 17. FAILURE OF ONE OR MORE OF THE SELLING
STOCKHOLDERS TO SELL AND DELIVER COMMON SHARES. If one or more of the
Selling Stockholders shall fail to sell and deliver to the Underwriters the
Common Shares to be sold and delivered by such Selling Stockholders at the
First Closing Date pursuant to this Agreement, then the Underwriters may at
their option, by written notice from the Underwriters to the Company and the
Selling Stockholders, either (i) terminate this Agreement without any
liability on the part of any Underwriter or, except as provided in Sections
4, 6, 8 and 9 hereof, the Company or the Selling Stockholders, or (ii)
purchase the shares which the Company and other Selling Stockholders have
agreed to sell and deliver in accordance with the terms hereof, or (iii) to
postpone the First Closing Date but in no event for longer than seven days in
order that the required changes, if any, to the Registration Statement and
the Prospectus or any other documents or arrangements may be effected.
SECTION 18. GENERAL PROVISIONS. This Agreement constitutes
the entire agreement of the parties to this Agreement and supersedes all
prior written or oral and all contemporaneous oral agreements, understandings
and negotiations with respect to the subject matter hereof. This Agreement
may be executed in two or more counterparts, each one of which shall be an
original, with the same effect as if the signatures thereto and hereto were
upon the same instrument. This Agreement may not be amended or modified
unless in writing by all of the parties hereto, and no condition herein
(express or implied) may be waived unless waived in writing by each party
whom the condition is meant to benefit. The Table of Contents and the Section
headings herein are for the convenience of the parties only and shall not
affect the construction or interpretation of this Agreement.
32
<PAGE>
Each of the parties hereto acknowledges that it is a
sophisticated business person who was adequately represented by counsel
during negotiations regarding the provisions hereof, including, without
limitation, the indemnification provisions of Section 8 and the contribution
provisions of Section 9, and is fully informed regarding said provisions.
Each of the parties hereto further acknowledges that the provisions of
Sections 8 and 9 hereto fairly allocate the risks in light of the ability of
the parties to investigate the Company, its affairs and its business in order
to assure that adequate disclosure has been made in the Registration
Statement, any preliminary prospectus and the Prospectus (and any amendments
and supplements thereto), as required by the Securities Act and the Exchange
Act.
33
<PAGE>
If the foregoing is in accordance with your understanding of
our agreement, kindly sign and return to the Company and the Custodian the
enclosed copies hereof, whereupon this instrument, along with all
counterparts hereof, shall become a binding agreement in accordance with its
terms.
Very truly yours,
GARDEN FRESH RESTAURANT CORP.
By:____________________________________
Name:
Title:
SELLING STOCKHOLDERS
By:____________________________________
(Attorney-in-fact)
The foregoing Underwriting Agreement is hereby confirmed and
accepted by the Underwriters in San Francisco, California as of the date
first above written.
NATIONSBANC MONTGOMERY SECURITIES LLC
BANCAMERICA ROBERTSON STEPHENS
MORGAN KEEGAN & COMPANY, INC.
By NATIONSBANC MONTGOMERY SECURITIES LLC
By:_____________________________________
Richard A. Smith
Managing Director
34
<PAGE>
SCHEDULE A
<TABLE>
<CAPTION>
NUMBER OF
FIRM
COMMON SHARES
UNDERWRITERS TO BE PURCHASED
<S> <C>
NationsBanc Montgomery Securities LLC..................... [___]
BancAmerica Robertson Stephens............................ [___]
Morgan Keegan & Company, Inc. ............................ [___]
Total.......................................... [___]
</TABLE>
<PAGE>
SCHEDULE B
<TABLE>
<CAPTION>
NUMBER OF
FIRM
COMMON SHARES
SELLING STOCKHOLDER TO BE SOLD
<S> <C>
St. Paul Venture Capital, Inc.
8500 Normandale Lake Blvd., Suite 1940
Bloomington, Minnesota 55437
Attention: [___] 160,000
Michael P. Mack *
c/o Garden Fresh Restauraunt Corp.
17180 Bernardo Center Drive
San Diego, CA 92128 56,500
David W. Qualls *
c/o Garden Fresh Restauraunt Corp.
17180 Bernardo Center Drive
San Diego, CA 92128 50,000
R. Gregory Keller *
c/o Garden Fresh Restauraunt Corp.
17180 Bernardo Center Drive
San Diego, CA 92128 21,000
Michael M. Minchin, Jr. *
c/o Garden Fresh Restauraunt Corp.
17180 Bernardo Center Drive
San Diego, CA 92128 12,500
Total: 300,000
-------
-------
</TABLE>
* Significant Selling Stockholder
<PAGE>
EXHIBIT A
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT A AT THE TIME
THIS AGREEMENT IS EXECUTED.
Opinion of counsel for the Company to be delivered
pursuant to Section 5(e) of the Underwriting Agreement.
References to the Prospectus in this EXHIBIT A include
any supplements thereto at the Closing Date.
(i) The Company has been duly incorporated and is
validly existing as a corporation in good standing under the laws of the
State of Delaware.
(ii) The Company has corporate power and authority
to own, lease and operate its properties and to conduct its business as
described in the Prospectus and to enter into and perform its obligations
under the Underwriting Agreement.
(iii) The Company is duly qualified as a foreign
corporation to transact business and is in good standing in the States of
California, Florida, Arizona, New Mexico, Utah and Nevada and in each other
jurisdiction in which such qualification is required, whether by reason of
the ownership or leasing of property or the conduct of business, except for
such jurisdictions (other than the States of California, Florida, Arizona,
New Mexico, Utah and Nevada) where the failure to so qualify or to be in good
standing would not, individually or in the aggregate, result in a Material
Adverse Change.
(iv) The authorized, issued and outstanding capital
stock of the Company (including the Common Stock) conform to the descriptions
thereof set forth in the Prospectus. All of the outstanding shares of Common
Stock (including the shares of Common Stock owned by Selling Stockholders)
have been duly authorized and validly issued, are fully paid and
nonassessable and, to the best of such counsel's knowledge, have been issued
in compliance with the registration and qualification requirements of federal
and state securities laws. The form of certificate used to evidence the
Common Stock is in due and proper form and complies with all applicable
requirements of the charter and by-laws of the Company and the General
Corporation Law of the State of Delaware. The description of the Company's
stock option, stock bonus and other stock plans or arrangements, and the
options or other rights granted and exercised thereunder, set forth in the
Prospectus accurately and fairly presents the information required to be
shown with respect to such plans, arrangements, options and rights.
(v) No stockholder of the Company or any other
person has any preemptive right, right of first refusal or other similar
right to subscribe for or purchase securities of the Company arising (i) by
operation of the charter or by-laws of
A-1
<PAGE>
the Company or the General Corporation Law of the State of Delaware or (ii)
to the best knowledge of such counsel, otherwise.
(vi) The Underwriting Agreement has been duly
authorized, executed and delivered by, and is a valid and binding agreement
of, the Company, enforceable in accordance with its terms, except as rights
to indemnification thereunder may be limited by applicable law and except as
the enforcement thereof may be limited by bankruptcy, insolvency,
reorganization, moratorium or other similar laws relating to or affecting
creditors' rights generally or by general equitable principles.
(vii) The Common Shares to be purchased by the
Underwriters from the Company have been duly authorized for issuance and sale
pursuant to the Underwriting Agreement and, when issued and delivered by the
Company pursuant to the Underwriting Agreement against payment of the
consideration set forth therein, will be validly issued, fully paid and
nonassessable.
(viii) Each of the Registration Statement and the
Rule 462(b) Registration Statement, if any, has been declared effective by
the Commission under the Securities Act. To the best knowledge of such
counsel, no stop order suspending the effectiveness of either of the
Registration Statement or the Rule 462(b) Registration Statement, if any, has
been issued under the Securities Act and no proceedings for such purpose have
been instituted or are pending or are contemplated or threatened by the
Commission. Any required filing of the Prospectus and any supplement thereto
pursuant to Rule 424(b) under the Securities Act has been made in the manner
and within the time period required by such Rule 424(b).
(ix) The Registration Statement, including any Rule
462(b) Registration Statement, the Prospectus, and each amendment or
supplement to the Registration Statement and the Prospectus, as of their
respective effective or issue dates (other than the financial statements and
supporting schedules included therein or in exhibits to or excluded from the
Registration Statement, as to which no opinion need be rendered) comply as to
form in all material respects with the applicable requirements of the
Securities Act.
(x) The Common Shares have been approved for
listing on the Nasdaq National Market.
(xi) The statements (i) in the Prospectus under the
captions "Risk Factors--Legal Matters," "Risk Factors--Government
Regulation," "Risk Factors--Anti-takeover Measures," "Risk Factors--Shares
Eligible for Future Sale," "Management's Discussion and Analysis and Results
of Operations--Liquidity and Capital Resources," "Business--Government
Regulation," "Business--Trade Names and
A-2
<PAGE>
Service Marks," "Business--Legal Proceedings," "Management--Limitations of
Liability and Indemnification Matters," "Management--Benefit Plans,"
"Management--Employment Contracts and Termination of Employment and Change of
Control Arrangements," "Certain Transactions," "Description of Capital Stock"
and "Underwriting" and (ii) in Item 14 of the Registration Statement, insofar
as such statements constitute matters of law, summaries of legal matters, the
Company's charter or by-law provisions, documents or legal proceedings, or
legal conclusions, has been reviewed by such counsel and fairly present and
summarize, in all material respects, the matters referred to therein.
(xii) To the best knowledge of such counsel,
there are no legal or governmental actions, suits or proceedings pending or
threatened which are required to be disclosed in the Registration Statement,
other than those disclosed therein.
(xiii) To the best knowledge of such counsel,
there are no Existing Instruments required to be described or referred to in
the Registration Statement or to be filed as exhibits thereto other than
those described or referred to therein or filed or incorporated by reference
as exhibits thereto; and the descriptions thereof and references thereto are
correct in all material respects.
(xiv) No consent, approval, authorization or
other order of, or registration or filing with, any court or other
governmental authority or agency, is required for the Company's execution,
delivery and performance of the Underwriting Agreement and consummation of
the transactions contemplated thereby and by the Prospectus, except as
required under the Securities Act, applicable state securities or blue sky
laws and from the NASD.
(xv) The execution and delivery of the Underwriting
Agreement by the Company and the performance by the Company of its
obligations thereunder (other than performance by the Company of its
obligations under the indemnification section of the Underwriting Agreement,
as to which no opinion need be rendered) (i) have been duly authorized by all
necessary corporate action on the part of the Company; (ii) will not result
in any violation of the provisions of the charter or by-laws of the Company;
(iii) will not constitute a breach of, or Default under, or result in the
creation or imposition of any lien, charge or encumbrance upon any property
or assets of the Company pursuant to, (A) the Company's Revolving Credit
Facility with Wells Fargo Bank, N.A., as lender, or (B) to the best knowledge
of such counsel, any other material Existing Instrument; or (iv) to the best
knowledge of such counsel, will not result in any violation of any law,
administrative regulation or administrative or court decree applicable to the
Company.
A-3
<PAGE>
(xvi) The Company is not, and after receipt of
payment for the Common Shares will not be, an "investment company" within the
meaning of Investment Company Act.
(xvii) To the best knowledge of such counsel,
there are no persons with registration or other similar rights to have any
equity or debt securities registered for sale under the Registration
Statement or included in the offering contemplated by the Underwriting
Agreement, other than the Selling Stockholders.
(xviii) To the best knowledge of such counsel, the
Company is not in violation of its charter or by-laws or any law,
administrative regulation or administrative or court decree applicable to the
Company or is in Default in the performance or observance of any obligation,
agreement, covenant or condition contained in any material Existing
Instrument, except in each such case for such violations or Defaults as would
not, individually or in the aggregate, result in a Material Adverse Change.
In addition, such counsel shall state that they have
participated in conferences with officers and other representatives of the
Company, representatives of the independent public or certified public
accountants for the Company and with representatives of the Underwriters at
which the contents of the Registration Statement and the Prospectus, and any
supplements or amendments thereto, and related matters were discussed and,
although such counsel is not passing upon and does not assume any
responsibility for the accuracy, completeness or fairness of the statements
contained in the Registration Statement or the Prospectus (other than as
specified above), and any supplements or amendments thereto, on the basis of
the foregoing, nothing has come to their attention which would lead them to
believe that either the Registration Statement or any amendments thereto, at
the time the Registration Statement or such amendments became effective,
contained an untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as of its date or
at the First Closing Date or the Second Closing Date, as the case may be,
contained an untrue statement of a material fact or omitted to state a
material fact necessary in order to make the statements therein, in the light
of the circumstances under which they were made, not misleading (it being
understood that such counsel need express no belief as to the financial
statements or schedules or other financial or statistical data derived
therefrom, included in the Registration Statement or the Prospectus or any
amendments or supplements thereto).
In rendering such opinion, such counsel may rely (A) as to matters
involving the application of laws of any jurisdiction other than the General
Corporation Law of the State of Delaware, the General Corporation Law of the
State of California or the federal law of the United States, to the extent
they deem proper and specified in such opinion,
A-4
<PAGE>
upon the opinion (which shall be dated the First Closing Date or the Second
Closing Date, as the case may be, shall be satisfactory in form and substance
to the Underwriters, shall expressly state that the Underwriters may rely on
such opinion as if it were addressed to them and shall be furnished to the
Underwriters) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; PROVIDED,
HOWEVER, that such counsel shall further state that they believe that they
and the Underwriters are justified in relying upon such opinion of other
counsel, and (B) as to matters of fact, to the extent they deem proper, on
certificates of responsible officers of the Company and public officials.
A-5
<PAGE>
EXHIBIT B
THE FINAL OPINION IN DRAFT FORM SHOULD BE ATTACHED AS EXHIBIT B AT THE TIME
THIS AGREEMENT IS EXECUTED.
The opinion of such counsel pursuant to Section 5h shall
be rendered to the Underwriters at the request of the Company and shall so
state therein. References to the Prospectus in this EXHIBIT B include any
supplements thereto at the Closing Date.
(i) The Underwriting Agreement has been duly
authorized, executed and delivered by or on behalf of, and is a valid and
binding agreement of, such Selling Stockholder, enforceable in accordance
with its terms, except as rights to indemnification thereunder may be limited
by applicable law and except as the enforcement thereof may be limited by
bankruptcy, insolvency, reorganization, moratorium or other similar laws
relating to or affecting creditors' rights generally or by general equitable
principles.
(ii) The execution and delivery by such Selling
Stockholder of, and the performance by such Selling Stockholder of its
obligations under, the Underwriting Agreement and its Custody Agreement and
its Power of Attorney will not contravene or conflict with, result in a
breach of, or constitute a default under, the charter or by-laws, if such
Selling Stockholder is a corporation, of such Selling Stockholder, or, to the
best of such counsel's knowledge, violate or contravene any provision of
applicable law or regulation, or violate, result in a breach of or constitute
a default under the terms of any other agreement or instrument to which such
Selling Stockholder is a party or by which it is bound, or any judgment,
order or decree applicable to such Selling Stockholder of any court,
regulatory body, administrative agency, governmental body or arbitrator
having jurisdiction over such Selling Stockholder.
(iii) Such Selling Stockholder has good and
valid title to all of the Common Shares which may be sold by such Selling
Stockholder under the Underwriting Agreement and has the legal right and
power, and, if such Selling Stockholder is a corporation, all authorizations
and approvals required under its charter and by-laws, to enter into the
Underwriting Agreement and its Custody Agreement and its Power of Attorney,
to sell, transfer and deliver all of the Common Shares which may sold by such
Selling Stockholder under the Underwriting Agreement and to comply with its
other obligations under the Underwriting Agreement, its Custody Agreement and
its Power of Attorney.
(iv) Each of the Custody Agreement and Power of
Attorney of such Selling Stockholder has been duly authorized, executed and
delivered by such
B-1
<PAGE>
Selling Stockholder and is a valid and binding agreement of such Selling
Stockholder, enforceable in accordance with its terms, except as rights to
indemnification thereunder may be limited by applicable law and except as the
enforcement thereof may be limited by bankruptcy, insolvency, reorganization,
moratorium or other similar laws relating to or affecting creditors' rights
generally or by general equitable principles.
(v) Assuming that the Underwriters purchase the
Common Shares which are sold by such Selling Stockholder pursuant to the
Underwriting Agreement for value, in good faith and without notice of any
adverse claim, the delivery of such Common Shares pursuant to the
Underwriting Agreement will pass good and valid title to such Common Shares,
free and clear of any security interest, mortgage, pledge, lieu encumbrance
or other claim.
(vi) To the best of such counsel's knowledge, no
consent, approval, authorization or other order of, or registration or filing
with, any court or governmental authority or agency, is required for the
consummation by such Selling Stockholder of the transactions contemplated in
the Underwriting Agreement, except as required under the Securities Act,
applicable state securities or blue sky laws, and from the NASD.
In rendering such opinion, such counsel may rely (A) as to
matters involving the application of laws of any jurisdiction other than the
General Corporation Law of the State of Delaware, the General Corporation Law
of the State of California or the federal law of the United States, to the
extent they deem proper and specified in such opinion, upon the opinion
(which shall be dated the First Closing Date or the Second Closing Date, as
the case may be, shall be satisfactory in form and substance to the
Underwriters, shall expressly state that the Underwriters may rely on such
opinion as if it were addressed to them and shall be furnished to the
Underwriters) of other counsel of good standing whom they believe to be
reliable and who are satisfactory to counsel for the Underwriters; PROVIDED,
HOWEVER, that such counsel shall further state that they believe that they
and the Underwriters are justified in relying upon such opinion of other
counsel, and (B) as to matters of fact, to the extent they deem proper, on
certificates of the Selling Stockholders and public officials.
B-2
<PAGE>
EXHIBIT C
May __, 1998
NationsBanc Montgomery Securities LLC
BancAmerica Robertson Stephens
Morgan Keegan & Company, Inc.
c/o NationsBanc Montgomery Securities LLC
600 Montgomery Street
San Francisco, California 94111
RE: ___________________________ (the "Company")
Ladies & Gentlemen:
The undersigned is an owner of record or beneficially of certain shares of
Common Stock of the Company ("Common Stock") or securities convertible into
or exchangeable or exercisable for Common Stock. The Company proposes to
carry out a public offering of Common Stock (the "Offering") for which you
will act as the underwriters. The undersigned recognizes that the Offering
will be of benefit to the undersigned and will benefit the Company by, among
other things, raising additional capital for its operations. The undersigned
acknowledges that you and the other underwriters are relying on the
representations and agreements of the undersigned contained in this letter in
carrying out the Offering and in entering into underwriting arrangements with
the Company with respect to the Offering.
In consideration of the foregoing, the undersigned hereby agrees that the
undersigned will not, without the prior written consent of NMS (which consent
may be withheld in its sole discretion), directly or indirectly, sell, offer,
contract or grant any option to sell (including without limitation any short
sale), pledge, transfer, establish an open "put equivalent position" within
the meaning of Rule 16a-1(h) under the Securities Exchange Act of 1934, or
otherwise dispose of any shares of Common Stock, options or warrants to
acquire shares of Common Stock, or securities exchangeable or exercisable for
or convertible into shares of Common Stock currently or hereafter owned
either of record or beneficially (as defined in Rule 13d-3 under Securities
Exchange Act of 1934, as amended) by the undersigned, or publicly announce
the undersigned's intention to do any of the foregoing, for a period
commencing on the date hereof and continuing through the close of trading on
the date 90 days after the date of the Prospectus. The undersigned also
agrees and consents to the entry of stop transfer instructions with the
Company's transfer agent and registrar against the transfer of shares of
Common Stock or securities convertible into or exchangeable or exercisable
for Common Stock held by the undersigned except in compliance with the
foregoing restrictions.
C-1
<PAGE>
With respect to the Offering only, the undersigned waives any registration
rights relating to registration under the Securities Act of any Common Stock
owned either of record or beneficially by the undersigned, including any
rights to receive notice of the Offering.
This agreement is irrevocable and will be binding on the undersigned and the
respective successors, heirs, personal representatives, and assigns of the
undersigned.
______________________________________
Printed Name of Holder
By: __________________________________
Signature
______________________________________
Printed Name of Person Signing
(AND INDICATE CAPACITY OF PERSON
SIGNING IF SIGNING AS CUSTODIAN,
TRUSTEE, OR ON BEHALF OF AN ENTITY)
C-2
<PAGE>
EXHIBIT 5.1
Gray Care Ware & Freidenrich
4365 Executive Drive, Suite 1600
San Diego, CA 92121-2189
Phone 619-677-1400
Fax 619-677-1477
www.gcwf.com
April 29, 1998
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: Garden Fresh Restaurant Corp. Registration Statement on Form S-1 filed
with the SEC on April 29, 1998
Ladies and Gentlemen:
As counsel to Garden Fresh Restaurant Corp. (the "Company"), we are rendering
this opinion in connection with a proposed sale of those certain shares of
the Company's newly-issued Common Stock and those certain additional shares
of the Company's Common Stock held by certain stockholders as set forth in
the Registration Statement on Form S-1 to which this opinion is being filed
as Exhibit 5.1 (collectively, the "Shares"). We have examined all
instruments, documents and records which we deemed relevant and necessary for
the basis of our opinion hereinafter expressed. In such examination, we have
assumed the genuineness of all signatures and the authenticity of all
documents submitted to us as originals and the conformity to the originals of
all documents submitted to us as copies.
We express no opinion with respect to (i) the availability of equitable
remedies, including specific performance, or (ii) the effect of bankruptcy,
insolvency, reorganization, moratorium or equitable principles relating to or
limiting creditors' rights generally.
Based on such examination, we are of the opinion that the Shares identified
in the above-referenced Registration Statement will be, upon effectiveness of
the Registration Statement and receipt by the Company of payment therefor,
validly authorized, legally issued, fully paid, and nonassessable.
We hereby consent to the filing of this opinion as an exhibit to the
above-referenced Registration Statement, and to the use of our name wherever
it appears in said Registration Statement, including the Prospectus
constituting a part thereof, as originally filed or as subsequently amended.
Respectfully submitted,
GRAY CARY WARE & FREIDENRICH LLP
<PAGE>
EXHIBIT 10.14
INDEMNIFICATION AGREEMENT
THIS INDEMNIFICATION AGREEMENT (the "Agreement") is entered into as of
this 28th day of April 1998, by and among Garden Fresh Restaurant Corp., a
Delaware corporation (the "Company") and the persons listed on EXHIBIT A
attached hereto (the "Selling Stockholders," and individually, a "Selling
Stockholder").
RECITALS
WHEREAS, the Company contemplates a proposed public offering (the
"Offering") and anticipates filing a registration statement (the
"Registration Statement") pursuant to which it will register and sell
1,300,000 primary shares of its common stock (the "Primary Shares");
WHEREAS, the Company believes that the relatively small number of
shares it has trading in the public market has historically caused it to
be generally ineligible as an investment holding for large institutional
investors which type of investment activity the Company views as important
to the trading liquidity for its Common Stock;
WHEREAS, the underwriters of the Offering (the "Underwriters") have
indicated that increasing the size of the Offering above the Primary
Shares is desirable and in the best interests of Offering and the Company;
WHEREAS, the Underwriters and the Company have had various
discussions regarding dilution and have concluded that the issuance of
significantly more than the Primary Shares, given recent trading prices
for the Common Stock of the Company, is potentially dilutive on an
earnings per share basis to the Company's currently issued and outstanding
stock;
WHEREAS, the persons that have been approached by the Company and its
Board of Directors to sell in the Offering have been advised by the
Underwriters and the Company that any stock sold by them in the Offering
will be subject to the same underwriter's discount as that paid by the
Company, which discount is materially greater than any discounts or
commissions they would incur if they sold their shares of the Company's
stock directly into the public market;
WHEREAS, pursuant to the underwriting agreement by and among the
Company, the Underwriters and the Selling Stockholders (the "Underwriting
Agreement"), the Selling Stockholders will be required to make
representations and warranties to the Underwriters and to provide
indemnification to the Underwriters; and
WHEREAS, the Company desires to increase the size of the Offering by
having the Selling Stockholders sell shares of Common Stock of the Company
in the Offering.
<PAGE>
AGREEMENT
NOW, THEREFORE, in reliance on the foregoing recitals and in and for
the consideration and mutual covenants set forth herein and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties to this Agreement hereby agree as follows:
1. INDEMNIFICATION.
a. To the extent permitted by law, the Company will indemnify and
hold harmless each Selling Stockholder and each person, if any, who controls
such Selling Stockholder within the meaning of the Securities Act of 1933, as
amended (the "Securities Act") or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), against any losses, claims, damages, or
liabilities (joint or several) to which they may become subject under the
Securities Act, the Exchange Act or other federal or state law, insofar as
such losses, claims, damages, or liabilities (or actions in respect thereof)
arise out of or are based upon any of the following statements, omissions or
violations (collectively a "Violation"): (i) any untrue statement or alleged
untrue statement of a material fact contained in the Registration Statement,
including any preliminary prospectus or final prospectus contained therein or
any amendments or supplements thereto, (ii) the omission or alleged omission
to state therein a material fact required to be stated therein, or necessary
to make the statements therein not misleading, (iii) any violation or alleged
violation by the Company of the Securities Act, the Exchange Act, any state
securities law or any rule or regulation promulgated under the Securities
Act, the Exchange Act or any state securities law; or (iv) any breach of any
representation or warranty in or any indemnification provided under the
Underwriting Agreement, and the Company will pay to each such Selling
Stockholder or controlling person, as incurred, any legal or other expenses
reasonably incurred by them in connection with the investigating or defending
any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that
the indemnity agreement contained in this subsection 1.a shall not apply to
amounts paid in settlement of any such loss, claim, damage, liability, or
action if such settlement is effected without the consent of the Company
(which consent shall not be unreasonably withheld), nor shall the Company be
liable to any Selling Stockholder or controlling person for any such loss,
claim, damage, liability, or action to the extent that it arises out of or is
based upon a Violation which occurs in reliance upon and in conformity with
written information furnished expressly for use in connection with such
registration by any such Selling Stockholder or controlling person. Finally,
the Company shall not be liable for indemnity and shall have the right to
recover defense costs previously forwarded under this Section 1.a to the
extent that a court of competent jurisdiction shall have found in a final
non-appealable judgment that the Violation arose primarily from the gross
negligence or willful misconduct of the Selling Stockholder.
b. To the extent permitted by law, each Selling Stockholder will
indemnify and hold harmless the Company, each of its directors and officers
who have signed the Registration Statement, each person, if any, who controls
the Company within the meaning of the Securities Act, the other Selling
Stockholders and any controlling person of any other Selling Stockholder,
against any losses, claims, damages, or liabilities (joint or several) to
which any of
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<PAGE>
the foregoing persons may become subject, under the Securities Act, the
Exchange Act or other federal or state law, insofar as such losses, claims,
damages, or liabilities (or actions in respect thereto) arise out of or are
based upon any Violation, in each case to the extent (and only to the extent)
that such Violation occurs (i) in reliance upon and in conformity with written
information furnished by such Selling Stockholder expressly for use in
connection with the Offering or (ii) as a result of actions or omissions of
such Selling Stockholder which a court of competent jurisdiction finds in a
final non-appealable judgment to constitute gross negligence or willful
misconduct; and each Selling Stockholder will pay, as incurred, any legal or
other expenses reasonably incurred by any person intended to be indemnified
pursuant to this subsection 1.b, in connection with investigating or defending
any such loss, claim, damage, liability, or action; PROVIDED, HOWEVER, that the
indemnity agreement contained in this subsection 1.b shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of the Selling Stockholder, which
consent shall not be unreasonably withheld; PROVIDED, that in no event shall
any indemnity under this subsection 1.b exceed the After Tax Net Proceeds (as
defined in the Underwriting Agreement) from the Offering received by such
Selling Stockholder.
c. Promptly after receipt by an indemnified party under this
Section 1 of notice of the commencement of any action (including any
governmental action), such indemnified party will, if a claim in respect
thereof is to be made against any indemnifying party under this Section 1,
deliver to the indemnifying party a written notice of the commencement
thereof and the indemnifying party shall have the right to participate in,
and, to the extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume the defense thereof with
counsel mutually satisfactory to the parties; PROVIDED, HOWEVER, that an
indemnified party (together with all other indemnified parties which may be
represented without conflict by one counsel) shall have the right to retain
one separate counsel, with the reasonable fees and expenses to be paid by the
indemnifying party, if representation of such indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to
actual or potential differing interests between such indemnified party and
any other party represented by such counsel in such proceeding. The failure
to deliver written notice to the indemnifying party within a reasonable time
of the commencement of any such action, if prejudicial to its ability to
defend such action, shall relieve such indemnifying party of any liability to
the indemnified party under this Section 1, but the omission so to deliver
written notice to the indemnifying party will not relieve it of any liability
that it may have to any indemnified party otherwise than under this Section 1.
d. If the indemnification provided for in this Section 1 is held
by a court of competent jurisdiction to be unavailable to an indemnified
party with respect to any loss, liability, claim, damage or expense referred
to therein, then the indemnifying party, in lieu of indemnifying such
indemnified party hereunder, shall contribute to the amount paid or payable
by such indemnified party as a result of such loss, liability, claim, damage,
or expense in such proportion as is appropriate to reflect the relative fault
of the indemnifying party on the one hand and of the indemnified party on the
other in connection with the statements or omissions that resulted in such
loss, liability, claim, damage or expense as well as any other relevant
equitable considerations; PROVIDED, that in no event shall any contribution
by a Selling Stockholder under
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<PAGE>
this subsection 1.d exceed the After Tax Net Proceeds from the Offering
received by such Selling Stockholder. The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material
fact or the omission to state a material fact relates to information supplied
by the indemnifying party or by the indemnified party and the parties'
relative intent, knowledge, access to information, and opportunity to correct
or prevent such statement or omission.
e. The obligations of the Company and the Selling Stockholders
under this Section 1 shall survive the completion of the Offering.
2. EXPENSES. The Company agrees to pay all expenses incurred by the
Selling Stockholders in connection with the Offering including attorneys'
fees for legal opinions required to be rendered on behalf of the Selling
Stockholders in order for them to be able to participate in the Offering.
Notwithstanding the foregoing, each Selling Stockholder shall pay the
underwriter discounts incurred in connection with the shares sold by such
Selling Stockholder in the Offering.
3. "MARKET STAND OFF" AGREEMENT. Each Selling Stockholder hereby agrees
that, in addition to the lock-up agreement between such Selling Stockholder
and the Underwriters (the "Lock-up"), that such Selling Stockholder will not
directly or indirectly sell, offer to sell, contract to sell (including,
without limitation, any short sale), grant any option to purchase or
otherwise transfer or dispose of (other than donees who agree to be similarly
bound) any securities of the Company held by such Selling Stockholder for 30
days beyond the expiration of the Lock-up.
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<PAGE>
4. MISCELLANEOUS.
a. AMENDMENTS AND WAIVERS. Any term of this Agreement may be
amended or waived only with the unanimous written consent of the Company and
the Selling Stockholders. Any amendment or waiver effected in accordance
with this paragraph shall be binding upon each Selling Stockholder and the
Company.
b. SEVERABILITY. If one or more provisions of this Agreement are
held to be unenforceable under applicable law, the parties agree to
renegotiate such provisions in good faith. In the event that the parties
cannot reach a mutually agreeable and enforceable replacement for such
provision, then (a) such provision shall be excluded from this Agreement, (b)
the balance of the Agreement shall be interpreted as if such provision were
so excluded and (c) the balance of the Agreement shall be enforceable in
accordance with its terms.
c. GOVERNING LAW. This Agreement and all acts and transactions
pursuant thereto shall be governed, construed and interpreted in accordance
with the laws of the State of California, without giving effect to principles
of conflicts of laws.
d. COUNTERPARTS. This Agreement may be executed by facsimile in
two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
e. TITLES AND SUBTITLES. The titles and subtitles used in this
Agreement are used for convenience only and are not to be considered in
construing or interpreting this Agreement.
-5-
<PAGE>
The parties have executed this Agreement as of the date first above
written.
COMPANY: SELLING STOCKHOLDERS:
GARDEN FRESH RESTAURANT CORP. ------------------------------
(print name above)
By: Signature:
------------------------------ -------------------
Michael P. Mack, President and
Chief Executive Officer
Name:
------------------------
(print)
Title:
-----------------------
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<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-1 of our report dated November 7, 1997, except
as to net income (loss) per share information as reflected in the Statement of
Operations and Notes 1 and 5 which is as of April 27, 1998, relating to the
financial statements of Garden Fresh Restaurant Corp., which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
San Diego, California
April 27, 1998